LeMaitre Vascular, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise stated. LeMaitre develops, manufactures and sells vascular surgery devices and implants, and processes and cryopreserves human tissue. It reports as one operating segment.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $29.1 | $24.2 | $87.1 | $77.2 |
| Gross profit | $20.2 | $17.3 | $59.9 | $54.7 |
| Gross margin | 69.3% | 71.4% | 68.9% | 70.9% |
| Operating income | $5.9 | $4.6 | $16.3 | $21.0 |
| Net income | $5.2 | $4.3 | $13.3 | $16.9 |
| Diluted EPS | $0.25 | $0.21 | $0.66 | $0.84 |
| Operating cash flow | Not separately provided | Not separately provided | $8.6 | $12.9 |
Q3 sales rose 20% year over year; nine-month sales rose 13%. Acquired embolectomy catheter and Cardial products contributed to growth. Nine-month foreign exchange movements reduced sales by an estimated $2.1 million. Q3 net income increased 20%, while nine-month net income declined 21%; the prior-year nine-month period included a $5.9 million gain on the Reddick divestiture. Gross margin fell in both comparisons, mainly reflecting lower-margin acquired products and the prior-year presence of higher-margin Reddick products.
Financial position and liquidity
- At September 30, 2019, cash and equivalents were $11.7 million and short-term marketable securities were $33.2 million, totaling approximately $44.9 million, versus $48.0 million at December 31, 2018.
- Current assets were $99.7 million and current liabilities were $19.3 million. Total liabilities were $27.7 million; the filing reports no debt, but includes $6.4 million of lease liabilities.
- Inventory and other deferred costs increased to $36.7 million from $27.4 million at year-end, including a $9.6 million operating cash use during the nine-month period.
- Operating cash flow was $8.6 million, investing cash flow was negative $20.6 million and financing cash flow was negative $2.4 million. Investing outflows included $6.8 million for the Tru-Incise acquisition and net purchases of marketable securities.
- Management stated existing cash, equivalents, investments and interest income should cover anticipated cash requirements for at least 12 months.
Material developments, outlook and risks
- In July 2019, the company acquired the Tru-Incise valve cutter business for approximately $8.0 million, including $6.8 million paid at closing and three future $0.4 million installments. On October 11, after quarter-end, it acquired Admedus’s biologic patch business for $15.5 million, with potential earnouts of up to $7.8 million.
- The company declared a $0.085-per-share quarterly dividend in October 2019, payable in December. A $10 million share repurchase authorization was in place through February 2020; no purchases had been made under that program as of the filing. Shares repurchased during Q3 were for employee tax withholding.
- There was no specific earnings or revenue guidance in the provided filing text. Management cited growth opportunities from direct sales, acquisitions, product development and manufacturing consolidation, while noting that acquisitions and manufacturing transitions can affect comparability and costs.
- EU regulatory risk: Most CE certifications issued by LRQA lapsed September 30, 2019 before transfer to a new notified body was complete. The company expected most certifications to be reissued by year-end, but expected four products’ certifications only in Q4 2020; those products represented about 5% of EU sales. Inventory buffers and possible backorders were identified. Separate certification and MDR requirements also pose sales risks.
- Supply and integration risks: The company relies on sole- or limited-source suppliers and tissue procurement organizations. Admedus was to continue supplying acquired products during transition; the filing highlighted its reported losses and the possibility of supply disruption. Acquired businesses also require integration and manufacturing transitions.
- Other stated risks include foreign currency exposure, product demand and competition, regulatory approvals, and the ability to realize acquisition benefits. Management reported no litigation matters expected to have a material adverse effect and no off-balance-sheet arrangements.
Key facts for investors to verify
- Progress and timing of CE mark reissuance, inventory coverage and any EU backorders, including for the four delayed products.
- Whether inventory growth converts into sales and cash flow, and the drivers of the decline in operating cash flow.
- Acquisition performance, integration costs and manufacturing transfer timelines, including Admedus supply continuity and potential earnouts.
- Gross-margin trends as acquired products expand, and the continuing effects of foreign exchange and competitive pricing.
- Future cash requirements for acquisitions, dividends, leases and capital spending against management’s stated 12-month liquidity expectation.