LeMaitre Vascular, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods. The company develops, manufactures, and sells medical devices and implants primarily for vascular surgery.
Financial performance
Amounts in $ millions, except per-share data and percentages.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | 14.56 | 13.66 | 44.27 | 41.63 |
| Gross profit / margin | 10.18 / 69.9% | 10.40 / 76.1% | 30.70 / 69.4% | 31.37 / 75.4% |
| Operating income | 1.99 | 2.03 | 2.86 | 5.31 |
| Net income | 1.21 | 1.52 | 1.80 | 4.05 |
| Diluted EPS | $0.08 | $0.09 | $0.11 | $0.25 |
| Operating cash flow | Not reported by quarter | 3.47 | 6.08 |
- Q3 sales rose 7%; nine-month sales rose 6%. Growth reflected higher average selling prices, foreign exchange and sales of LifeSpan vascular grafts and biologic patches.
- Vascular sales grew 12% in both periods; Endovascular sales declined 12% in Q3 and 10% year to date. Other sales were broadly flat.
- Gross margin fell 6.2 percentage points in Q3 and 6.0 points year to date. Management attributed the decline mainly to manufacturing start-up and wind-down costs during production transfers, other manufacturing costs, and sales mix; higher prices partly offset the pressure.
- Nine-month operating income and net income declined despite revenue growth, reflecting lower gross profit and $2.05 million of restructuring charges. Q3 results included a $0.74 million gain on termination of the Endologix distribution agreement and $0.39 million of restructuring charges.
Balance sheet, liquidity and cash flow
- At September 30, cash and cash equivalents were $23.09 million, versus $22.61 million at December 31, 2010; the company reported no marketable securities. Total assets were $63.02 million and stockholders’ equity was $52.65 million.
- Current assets were $42.89 million and current liabilities $9.86 million, for a current ratio of approximately 4.35x. The balance sheet shows no conventional borrowings; an approximately $0.4 million accelerated Italian government loan/grant repayment is included in accrued expenses, with timing determined by the Italian government.
- Nine-month operating cash flow was $3.47 million, down from $6.08 million. Investing used $0.68 million and financing used $2.32 million, including $1.2 million of share repurchases and $0.9 million of dividends. Cash increased $0.47 million during the period.
- Contractual obligations totaled $11.05 million: $4.55 million of operating leases, $5.67 million of inventory purchase commitments, $0.55 million of acquisition-related liabilities and $0.28 million of unrecognized tax benefits. The filing says no off-balance-sheet arrangements existed.
Material changes, outlook and risks
- The company completed its exit from the stent-graft market by divesting TAArget and UniFit products and terminating its European Endologix distribution agreement. These lines generated $4.0 million of revenue in the first nine months of 2011; management expected no further revenue or expenses from them. The Endologix termination generated $1.3 million in proceeds and a $0.7 million recognized gain.
- LeMaitre is moving AlboGraft and LifeSpan graft production to Burlington, Massachusetts, and shifting Spain and Denmark from distributors to direct sales. It reported that the AlboGraft transition had faced delays, constrained supply and caused backorders; the transitions also contributed to lower margins and restructuring costs. Management warned that further delays, cost overruns or quality problems could harm sales, reputation and results.
- Management stated that cash, cash equivalents, investments and interest income should cover anticipated cash requirements for at least 12 months, and that it intends to generate operating profit on an ongoing basis. It cautioned that profitability is not assured and that capital needs depend on sales, manufacturing transitions, market development, R&D, regulatory costs and strategic transactions. No specific revenue or earnings guidance is provided.
- Management expected the effective tax rate to remain fairly constant through the rest of 2011; its estimated annual effective rate was 37.3%. The company carried a $4.3 million valuation allowance against state and foreign deferred tax assets and disclosed $0.28 million of unrecognized tax benefits.
- After quarter-end, the board increased the share repurchase authorization from $5 million to $10 million and extended the program through December 31, 2013. It also approved a $0.02-per-share quarterly dividend payable in December 2011. Future dividends remain subject to quarterly board approval.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It said no pending legal matter was expected to have a material adverse effect. The filing identifies manufacturing-transition execution, competition, foreign exchange, growth management and access to additional capital as risks.
Important facts for investors to verify
- Whether Burlington production transfers resolve supply constraints and backorders, and whether graft product quality and manufacturing costs meet expectations.
- How much of sales growth came from pricing, currency and acquired or transferred products, and whether core demand can offset the lost stent-graft revenue.
- Whether gross margins and operating cash generation recover after transition and restructuring costs.
- The timing and final amount of Italian government repayments, remaining acquisition obligations, and other contractual commitments.
- Whether the expanded buyback and recurring dividend remain consistent with liquidity needs, especially if operating performance or transition costs deteriorate.
Data note: The cash-flow statement and balance sheet report September 30 cash of $23.087 million. A liquidity discussion table in the filing contains a conflicting cash figure; investors should verify against the statements.