LeMaitre Vascular, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; comparisons are with the same 2012 periods. The company develops, manufactures, and sells vascular-surgery medical devices and implants, primarily through a direct sales force. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $15.3 | $13.6 | $46.6 | $41.9 |
| Gross profit | $10.7 | $10.0 | $33.2 | $30.4 |
| Gross margin | 70.0% | 73.4% | 71.1% | 72.6% |
| Operating income | $0.8 | $1.0 | $3.3 | $3.3 |
| Net income | $0.7 | $0.7 | $2.5 | $1.9 |
| Diluted EPS | $0.05 | $0.04 | $0.16 | $0.12 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $4.0 | $4.3 |
- Q3 sales rose 12%; nine-month sales rose 11%. International sales increased 18% in Q3 and 17% year to date, versus Americas growth of 10% and 8%, respectively.
- Gross profit increased, but margins contracted. Management cited product and geographic mix, biologic-patch manufacturing start-up costs, and transition costs at the acquired Clinical Instruments operation. Operating expenses rose 10% year to date, including $0.5 million of medical device excise tax.
- At September 30, cash and cash equivalents were $13.6 million, down from $16.4 million at December 31, 2012. Current assets were $39.0 million and current liabilities $9.3 million. The balance sheet lists no borrowings or debt; interest expense was $0.018 million year to date.
- Year-to-date investing cash use was $5.9 million, including $3.2 million of acquisition payments and $2.4 million for property and equipment. Financing cash use was $1.0 million, chiefly dividends. Cash fell $2.8 million from year-end, to $13.6 million.
- Total assets were $66.6 million and stockholders’ equity $55.4 million. Inventory increased to $13.1 million from $10.9 million at year-end.
Material changes and notable items
- Sales growth reflected higher average selling prices and unit volumes, with gains in biologic vascular patches, valvulotomes, catheters, and Dacron grafts. The Clinical Instruments and InaVein acquisitions contributed $0.3 million of Q3 sales.
- In 2013 the company acquired Clinical Instruments for $1.1 million and InaVein for $2.5 million, plus up to $1.4 million of contingent consideration tied to business performance and Chinese regulatory approval. The acquisitions added goodwill and intangibles.
- The company corrected a historical inventory valuation error in Q2 2013. It says the correction reduced nine-month 2013 cost of sales by $0.4 million and increased net income by $0.3 million; management concluded the error was not material to the prior-year statements or expected 2013 results.
- A $60,000 additional Q3 tax provision, identified after preliminary results were reported, reduced Q3 net income by the same amount.
- Quarterly dividends increased to $0.03 per share from $0.025 in 2012. The board approved another $0.03-per-share dividend for payment in December 2013.
Outlook, risks, and contingencies
- Management expected XenoSure manufacturing transition costs to weigh on gross margin through Q2 2014, with potential margin improvement beginning in the second half of 2014. It cautioned that efficiencies were not assured and that production transfer could bring delays, added costs, or quality difficulties.
- The company expected the 2.3% U.S. medical device excise tax to reduce 2013 operating income by approximately $0.7 million. It also anticipated higher selling, marketing, and administrative costs as it moves Norway and Australia to direct sales in 2014.
- Management believed cash and cash equivalents would cover anticipated requirements for at least 12 months. Cash needs include acquisition payments, direct-sales expansion, dividends, repurchases, capital spending, and taxes. The company reported $6.97 million in contractual obligations, including operating leases and inventory purchase commitments, and no off-balance-sheet arrangements.
- Key stated risks include acquisition integration and realization of benefits, product demand and market acceptance, sales-force productivity and retention, transition to direct selling, foreign-exchange movements, and XenoSure margins and manufacturing execution. The filing reported no legal matter believed to have a material adverse effect as of November 7, 2013; it reported no substantive changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether sales growth and higher pricing continue, and whether the recently acquired businesses contribute as expected.
- Whether gross margins recover as XenoSure production transitions to Burlington, and whether transition costs or quality issues exceed expectations.
- How inventory growth, acquisition payments, capital expenditures, dividends, and direct-sales expansion affect cash and working capital.
- The effect of the device excise tax, changing tax items, and foreign-exchange movements on future earnings.
- The final acquisition-related contingent consideration for InaVein and progress toward the expected regulatory approval in China.