LeMaitre Vascular, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The company develops, manufactures, and markets medical devices and implants primarily for vascular surgery. Unless noted, amounts are in millions of dollars.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $18.16 | $15.95 | $34.92 | $31.33 |
| Gross profit / margin | $12.38 / 68.1% | $11.24 / 70.4% | $23.60 / 67.6% | $22.44 / 71.6% |
| Operating income | $1.98 | $1.45 | $1.75 | $2.57 |
| Net income | $1.27 | $0.89 | $1.07 | $1.74 |
| Diluted EPS | $0.08 | $0.06 | $0.07 | $0.11 |
- Q2 sales rose 14%; first-half sales rose 11%. International sales increased 21% in both comparison periods, versus Americas growth of 10% in Q2 and 6% for the first half.
- Q2 operating income and net income improved year over year, but first-half operating income and net income declined. First-half operating expenses rose 10% to $21.85 million.
- Gross margin fell 2.3 percentage points in Q2 and 4.0 points for the first half. Management cited higher manufacturing costs, unfavorable product and geographic mix, and a prior-year inventory valuation benefit. Q2 also included an inventory charge related to the discontinued catheter line.
- At June 30, cash and equivalents were $23.51 million, versus $14.71 million at year-end 2013. Current assets were $53.00 million and current liabilities $9.01 million. Total liabilities were $12.75 million; the balance sheet reports no borrowings or interest-bearing debt.
- First-half operating cash flow was negative $0.07 million, compared with positive $1.64 million a year earlier. Inventory growth ($2.14 million), receivables growth ($0.81 million), and lower accounts payable and other liabilities ($1.25 million) weighed on cash generation.
- Investing cash outflow was $0.75 million. Financing provided $9.61 million, principally reflecting approximately $10.5 million net proceeds from a June share offering, partly offset by $1.09 million in dividends. The offering issued 1,644,500 shares at $7.00 per share before underwriting discounts.
Material changes and notable items
- Sales growth was led by powered phlebectomy devices, including acquisitions’ contributions, and biologic vascular patches. Clinical Instruments and InaVein contributed $1.1 million of Q2 sales and $1.7 million for the first half.
- The company completed the biologic patch manufacturing transition to Burlington in Q2 and transferred Clinical Instruments manufacturing there after closing its Southbridge facility.
- Restructuring charges were $0.49 million for the first half, following workforce reductions of approximately 10% and an additional reduction of about seven employees. A $0.16 million intangible impairment followed discontinuation of the non-occlusive modeling catheter product line; related inventory also generated a $0.3 million cost-of-sales charge.
- The quarterly dividend increased from $0.030 per share in 2013 to $0.035 in 2014. On July 24, 2014, the board approved another $0.035 dividend, payable September 4, 2014, totaling approximately $0.6 million.
- Inventory purchase commitments totaled $3.69 million; operating lease commitments totaled $8.32 million. No off-balance-sheet arrangements were reported.
Outlook, risks, and contingencies
- Management said existing cash and expected cash generation should meet anticipated requirements for at least the next 12 months. No specific revenue, earnings, or margin guidance was provided; management cautioned that first-half results may not indicate full-year results.
- Expected 2014 spending includes expansion of direct sales in Norway and Australia and establishment of a China office. Management also expects the effective tax rate in 2014 to exceed the 2013 rate.
- Key risks cited include realizing savings from restructuring, acquisition integration and performance, product demand and market acceptance, XenoSure margins and manufacturing transition, sales-force productivity and retention, regulatory clearances, and foreign-currency effects. International markets and biologic patches can pressure gross margin through lower selling prices or mix.
- Potential InaVein contingent consideration is tied to sales performance and Chinese regulatory timing; the recorded liability was $0.33 million at June 30. German and French tax audits were underway or expected to begin; management did not expect material tax-liability changes. Unrecognized tax benefits were $0.16 million.
- Management reported no legal proceeding expected to materially affect financial position, results, or cash flows. Disclosure controls were deemed effective at a reasonable-assurance level; no material change in internal control was reported.
Investor verification points
- Check whether sales growth converts into stronger operating cash flow, particularly as inventory and receivables rise.
- Track gross-margin recovery after manufacturing transitions and the effects of product/geographic mix and acquired products.
- Assess whether restructuring and facility consolidation deliver savings without disrupting production, quality, or growth.
- Verify the outcome of tax audits, InaVein contingent payments, and remaining acquisition-related obligations.
- Monitor the impact of the share issuance and ongoing dividends on per-share results, cash, and future capital needs.