LeMaitre Vascular, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless stated otherwise. LeMaitre develops, manufactures, and sells medical devices and implants primarily for vascular surgery. It operates as one segment and sells mainly through its direct sales force.
Financial performance
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Net sales | $20.3 million | $18.9 million; up 7% |
| Gross profit / margin | $14.4 million / 70.9% | $13.1 million / 69.2%; margin up 1.7 percentage points |
| Operating income / margin | $3.3 million / 16.3% | $2.3 million / 12.2% |
| Net income | $2.2 million | $1.4 million; up about 58% |
| Diluted EPS | $0.11 | $0.08 |
| Operating cash flow | $1.3 million provided | $0.6 million used |
| Investing cash flow | $3.1 million used | $0.5 million used |
| Cash and cash equivalents | $25.9 million at March 31 | $27.5 million at December 31, 2015 |
Gross-margin improvement reflected higher average selling prices and lower per-unit manufacturing costs for biologic patches, partly offset by the larger international sales mix. Sales grew across biologic patches, catheters, valvulotomes, and vessel-closure systems; radiopaque tape sales declined. International sales rose 14% to $8.4 million, while Americas sales increased 3% to $11.9 million. Foreign-exchange movements reduced Q1 2016 sales by approximately $0.2 million year over year.
Operating expenses increased 2% to $11.1 million: sales and marketing rose 7% to $6.3 million, research and development rose 26% to $1.4 million, and general and administrative fell 8% to $3.3 million. The medical-device excise tax was suspended for 2016–2017, eliminating the $0.2 million Q1 2015 charge. The effective tax rate was 34.4%, versus 37.1% in Q1 2015.
Balance sheet, cash flow, and capital allocation
At March 31, 2016, current assets were $59.7 million and current liabilities $10.2 million. Total liabilities were $12.8 million and stockholders’ equity was $80.6 million. The balance sheet reports no borrowings or debt; cash exceeded total liabilities. Inventory increased to $17.9 million from $15.2 million at year-end.
Operating cash flow improved year over year, but working-capital movements used $2.2 million, including higher receivables and inventory and lower payables and other liabilities, primarily from annual compensation payments. Investing outflows included $2.4 million of acquisition-related payments and $0.7 million of capital spending. Cash decreased by $1.5 million during the quarter. The company declared a $0.045-per-share quarterly dividend, payable April 4; after quarter-end, the board approved another $0.045 dividend, expected to total approximately $0.8 million.
Material developments, outlook, and risks
- On March 18, 2016, the company acquired the ProCol biologic vascular graft business for stated consideration of $2.7 million plus 10% of ProCol net sales for three years. Preliminary purchase accounting recorded total consideration of $3.043 million, including a $0.3 million contingent amount, and $304,000 of goodwill. ProCol is used for dialysis access and is approved for sale in the United States.
- Management expects sales-force expansion and China operations to increase selling, marketing, and regulatory costs during 2016. It expects the Tru-Incise manufacturing transition to be completed in Q2 2016 and the ProCol transition in 2017. Management also expects its effective tax rate to remain fairly consistent during 2016 and to be higher for the full year than in 2015.
- No specific full-year revenue or earnings guidance was provided. Management said existing cash and cash equivalents should meet anticipated cash requirements for at least the next 12 months. Cash needs may rise with acquisitions, dividends, expansion, and deferred acquisition payments.
- Key risks include acquisition integration and realizing expected benefits; product demand, market acceptance, pricing, and competition; hiring and retaining sales staff; establishing direct sales in new territories; foreign-exchange exposure; and potentially lower gross margins from international growth. Purchase commitments for inventory were $4.1 million through 2017.
- Disclosure controls were deemed ineffective as of March 31, 2016 because of a previously reported material weakness in revenue-recognition controls, specifically controls validating pricing terms in sales contracts. Management was implementing remediation, including stronger automated and management oversight controls.
- The company reported ordinary-course legal matters but no proceedings expected by management to have a material adverse effect. It reported no off-balance-sheet arrangements and no substantive change in the risk factors disclosed in its 2015 Form 10-K.
Important facts for investors to verify
- Whether revenue-recognition control remediation is completed and independently validated, and whether pricing terms are consistently supported.
- ProCol sales contribution, contingent payments, integration costs, and progress toward the planned 2017 manufacturing transition.
- Whether sales growth and pricing gains continue to offset competitive pressure, foreign-exchange effects, and international mix-related margin pressure.
- Inventory growth, working-capital cash use, and funding needs after acquisitions, capital spending, and recurring dividends.
- Actual 2016 expense and tax-rate trends against management’s commentary; the filing provides no quantified full-year earnings or sales guidance.