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LMAT > SEC Filings for LMAT > Form 10-Q on 8-May-2013All Recent SEC Filings

Show all filings for LEMAITRE VASCULAR INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for LEMAITRE VASCULAR INC


8-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are based on our management's beliefs and assumptions and on information currently available to our management. Forward-looking statements include all statements other than statements of historical fact contained in this Quarterly Report, including statements about:
the impact to our gross profit in 2013 and 2014 as a result of our XenoSure acquisition and related manufacturing transfer; and the adequacy of our cash reserves for the next twelve months. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by such forward-looking statements. Moreover, the forward-looking statements represent our estimates and assumptions only as of the date hereof. Forward-looking statements are subject to risks and uncertainties; our failure to manage the anticipated growth of our business; and the unavailability of additional, required capital on acceptable terms. Further information on potential risk factors that could affect our business and financial results is detailed in Part II, Item IA. "Risk Factors" in this Quarterly Report on Form 10-Q. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes included in this report and our other SEC filings, including our audited consolidated financial statements and the related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC on March 27, 2013.

Unless the context requires otherwise, references to "LeMaitre Vascular," "we," "our," and "us" in this Quarterly Report on Form 10-Q refer to LeMaitre Vascular, Inc. and its subsidiaries.

LeMaitre, AlboGraft, LifeSpan, UnBalloon, and XenoSureare registered trademarks of LeMaitre Vascular, and MultiTASC is an unregistered trademark of LeMaitre Vascular. This Quarterly Report on Form 10-Q also includes the registered and unregistered trademarks of other persons.

Overview

We are a medical device company that develops, manufactures, and markets medical devices and implants for the treatment of peripheral vascular disease. Our principal product offerings are sold throughout the world, primarily in the United States, the European Union and, to a lesser extent, Japan. We estimate that the annual worldwide market for all peripheral vascular devices approximates $3 billion, within which our core product lines address roughly $750 million. We have grown our business by using a three-pronged strategy:
competing in niche markets, expanding our worldwide direct sales force, and acquiring and developing complementary vascular devices. We have used acquisitions as a primary means of further accessing the larger peripheral vascular device market, and we expect to continue to pursue this strategy in the future. Additionally, we have increased our efforts to expand our vascular device offerings through new product development efforts. We currently manufacture most of our product lines in our Burlington, Massachusetts, headquarters.

Our products are used by vascular surgeons who treat peripheral vascular disease through both open surgical methods and endovascular techniques. In contrast to interventional cardiologists and interventional radiologists, neither of whom are certified to perform open surgical procedures, vascular surgeons can perform both open surgical and minimally invasive endovascular procedures, and are therefore uniquely positioned to provide a wider range of treatment options to patients.

Our principal product lines include the following: balloon catheters, biologic patches, carotid shunts, a contrast injection device, laparoscopic cholecystectomy devices, non-occlusive modeling catheters, radiopaque marking tape, remote endarterectomy devices, valvulotomes, vascular grafts, and vessel closure systems.

To assist us in evaluating our business strategies, we regularly monitor long-term technology trends in the peripheral vascular device market. Additionally, we consider the information obtained from discussions with the medical community in connection with the demand for our products, including potential new product launches. We also use this information to help determine our competitive position in the peripheral vascular device market and our manufacturing capacity requirements.


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Our business opportunities include the following:

the long-term growth of our sales force in North America, Europe and Japan, sometimes in connection with terminations of certain distributor relationships in order to expand our sales presence in new countries;

the addition of complementary products through acquisitions;

the updating of existing products and introduction of new products through research and development;

the introduction of our products in new markets upon obtainment of regulatory approvals in these markets; and

the consolidation of product manufacturing into our facilities in our Burlington, Massachusetts corporate headquarters.

We sell our products primarily through a direct sales force. As of March 31, 2013 our sales force was comprised of 83 sales representatives in North America, the European Union and Japan. We also sell our products in other countries through distributors. Our worldwide headquarters is located in Burlington, Massachusetts. Our international operations are headquartered in Sulzbach, Germany. We also have sales offices located in Tokyo, Japan; Mississauga, Canada; Madrid, Spain; and Milan, Italy. For the three months ended March 31, 2013 approximately 93% of our net sales were generated in markets in which we employ direct sales representatives.

In recent years we have experienced comparatively greater success in product markets characterized by low or limited competition, for example the market valvulotome devices. In the valvulotome market, we believe that we have been able to increase selling prices without compromising market share. There can be no assurance that we will not meet resistance to increased selling prices in the future. In contrast, we have experienced comparatively lesser success in highly competitive product markets such as prosthetic polyester and ePTFE grafts, where we face stronger competition from larger companies with greater resources. While we believe that these challenging market dynamics can be mitigated by our strong relationships with our vascular surgeon customers, there can be no assurance that we will be successful in highly competitive markets.

Because we believe that direct-to-hospital sales engender closer customer relationships, and allow for higher selling prices and gross margins, we periodically enter into transactions with our distributors to transition their sales of our medical devices to our direct sales organization:

In October 2012, we entered into a definitive agreement with Schaublin Medica SA (Schaublin) to terminate its distribution of our products in Switzerland effective January 1, 2013. The agreement required us to pay approximately $0.2 million in exchange for the purchase of their customer list for our products, certain customer contracts, sales and marketing transition services, and minimal inventory.

In December 2012, we entered into a definitive agreement with Trytech Corporation to terminate its distribution of our products in a certain Japanese territory effective as of April 1, 2013. The agreement required us to pay approximately $0.1 million in exchange for the purchase of their customer list for our products, certain customer contracts, sales and marketing transition services, and minimal inventory.

In March 2013, we began shipping directly to our Canadian customers from our sales office in Mississauga, Canada.

We anticipate that the expansion of our direct sales organization in Canada and Switzerland will result in increased sales and marketing expenses during 2013.

Our strategy for growing our business includes the acquisition of complementary product lines and companies and occasionally the discontinuance or divestiture of products or activities that are no longer complementary:

In November 2010, we acquired our LifeSpan ePTFE Vascular Graft from Angiotech Pharmaceuticals, Inc. for $2.8 million and related assets from Edwards LifeSciences for $1.2 million.


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In June 2011, we divested our TAArget and UniFit stent grafts to Duke Vascular, Inc. for $0.6 million. In addition, Duke Vascular, Inc. assumed our future obligations for the associated UNITE and ENTRUST clinical trials.

In August 2011, we terminated our distribution of Endologix's aortic stent graft products in Europe in exchange for $1.3 million.

In November 2012, we acquired the manufacturing rights manufacturing and distribution rights of the XenoSure biologic vascular patch from Neovasc, Inc. for $4.6 million, having previously been an exclusive distributor of the XenoSure biologic vascular patch since 2008.

In addition to relying upon acquisitions to grow our business, we also rely on our product development efforts to bring differentiated technology and next-generation products to market. These efforts have led to the following recent product developments:

In December 2011, we launched the Over-The-Wire LeMaitre Valvulotome.

In March 2013, we launched the MultiTASC device.

In April 2013, we launched the 1.5mm LeMaitre Valvulotome.

In addition to our sales growth strategies, we have also executed several operational initiatives designed to consolidate and streamline manufacturing within our Burlington, MA facilities. We expect that these plant consolidations will result in improved control over our production capacity as well as reduced costs over the long-term. Our most recent manufacturing transitions included:

In October 2010, we adopted a reorganization plan that was designed to eliminate redundant costs resulting from our 2007 acquisition of Biomateriali and to improve efficiencies in manufacturing operations. We have completed the transition of AlboGraft vascular graft manufacturing into our existing corporate headquarters in Burlington, Massachusetts.

In May 2011, we adopted a reorganization plan that was designed to eliminate redundant costs resulting from our 2010 acquisition of the LifeSpan vascular graft and to improve efficiencies in manufacturing operations. We have completed the transition of LifeSpan vascular graft manufacturing into our existing corporate headquarters in Burlington, Massachusetts.

In November 2012, we initiated a project to build a third clean room for our newly acquired XenoSure biologic patch. We expect this transition to our Burlington facility to continue into the second half of 2013 resulting in a negative impact to our gross profit. Once the transition is complete, we expect the gross margins on our XenoSure biologic vascular patch to improve beginning in 2014; however, there can be no assurance that these results will be achieved, if at all. Further, the production of the XenoSure biological patch will be our first experience in manufacturing biological tissues. There can be no assurance that we will not experience delays or additional expenses associated with the transfer of this patch and there can be no assurance that our current supply agreement with Neovasc will be sufficient to meet sales demand during the transition.

Our execution of these business opportunities may affect the comparability of our financial results from period to period and may cause substantial fluctuations from period to period, as we incur related restructuring and other non-recurring charges, as well as longer term impacts to revenues and operating expenditures. For example, in 2011 we exited the stent graft business, and realized gains of approximately $0.7 million in 2011 and $0.2 million in 2012 in connection with that exit.

Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies, primarily the Euro, affect our financial results. For the three months ended March 31, 2013, approximately 33% of our sales were from outside the Americas. We expect that foreign currencies will continue to represent a similarly significant percentage of our sales in the future. Selling, marketing, and administrative costs related to these sales are largely denominated in the same respective currency, thereby partially mitigating our transaction risk exposure. However, most of our foreign sales are denominated in local currency, and if there is an increase in the rate at which a foreign currency is exchanged for U.S. dollars, it will require more of the foreign currency to equal a specified amount of U.S. dollars than before the rate increase. In such cases we will report less in U.S. dollars than we did before the rate increase went into effect.


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Results of Operations

Comparison of the three months ended March 31, 2013 to the three months ended March 31, 2012.

The following tables set forth, for the periods indicated, our results of operations, net sales by geography, and the change between the specified periods expressed as a percentage increase or decrease:

                                           Three months ended March 31,
                                                                       Percent
          (unaudited)                  2013              2012          change
                                                 ($ in thousands)
          Net sales                 $    15,382       $    13,928            10 %

          Net sales by geography:
          Americas                  $    10,248       $     9,474             8 %
          International                   5,134             4,454            15 %

          Total                     $    15,382       $    13,928            10 %

Net sales. Net sales increased 10% to $15.4 million for the three months ended March 31, 2013, compared to $13.9 million for the three months ended March 31, 2012. Sales increases for the three months ended March 31, 2013 were primarily driven increased sales in biologic patches of $0.6 million, increased sales of valvulotomes of $0.3 million, increased sales of catheters of $0.3 million, and increased sales of vessel closure systems of $0.2 million, and were partially offset by decreased sales of non-occlusive modeling catheters of $0.1 million, and by higher average selling prices across nearly all product lines.

Direct-to-hospital net sales were 93% for the three months ended March 31, 2013, down from 95% for the three months ended March 31, 2012.

Net sales by geography. Net sales in the Americas increased by $0.8 million for the three months ended March 31, 2013. The increase was primarily driven by increased sales of biologic patches, increased sales of valvulotomes, and increased sales of vessel closure systems of $0.2 million and higher average selling prices across nearly all product lines. International net sales increased $0.7 million for the three months ended March 31, 2013. The increase was primarily driven by increased sales of biologic patches of $0.3 million and increased sales of catheters of $0.2 million.

International direct-to-hospital net sales were 87% of total international net sales for the three months ended March 31, 2013 and 2012, respectively.

                                       Three months ended March 31,
                                                                        Percent
            (unaudited)      2013         2012         $ Change         change
                                             ($ in thousands)
            Gross profit   $ 11,206      $ 9,870      $    1,336              14 %

            Gross margin       72.9 %       70.9 %                *          2.0 %

* Not applicable

Gross Profit. Gross profit increased 14% to $11.2 million for the three months ended March 31, 2013, while gross margin increased 2% to 72.9% in the same period. The gross margin increase was largely the result of non-recurring inventory write-offs associated with our Dacron graft manufacturing which occurred in the three months ended March 31, 2012, improved manufacturing efficiencies, and increased selling prices across most of our product


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lines. These increases were partially offset by unfavorable geographic and product mix as well as start-up costs associated with our biologic vascular patch manufacturing. The gross profit increase was a result of higher sales and higher gross margin.

In October 2012, we entered into a definitive agreement with Neovasc, Inc. to acquire the manufacturing and distribution rights of the XenoSure biologic vascular patch, which we expect will negatively affect gross profit in 2013 as we transition production to our Burlington facility. We expect to realize efficiencies which may improve gross margins on our XenoSure biologic vascular patch beginning in 2014.

                                              Three months ended March 31,
                                                                             Percent
       (unaudited)                    2013        2012        $ change       change
                                                    ($ in thousands)
       Sales and marketing          $  5,768     $ 5,213     $      555            11 %
       General and administrative      2,882       2,668            214             8 %
       Research and development        1,273       1,135            138            12 %
       Medical device excise tax         160          -             160                *

       Total                        $ 10,083     $ 9,016     $    1,067            12 %

                                            Three months ended March 31,
                                     2013                  2012
                                 of Net Sales          of Net Sales          Change

    Sales and marketing                     37 %                  37 %                *
    General and administrative              19 %                  19 %                *
    Research and development                 8 %                   8 %                *
    Medical device excise tax                1 %                   0 %             1 %

* Not a meaningful percentage relationship.

Sales and marketing. For the three months ended March 31, 2013, sales and marketing expenses increased 11% to $5.8 million. Selling expenses increased $0.7 million while marketing expenses decreased by $0.1 million. Selling expense increases were driven by increased compensation costs of $0.4 million, partially due to additional sales personnel in Switzerland, and increased sales meetings and related costs of $0.2 million. Marketing expenses decreases were largely driven by a $0.1 million reduction in advertising costs. As a percentage of net sales, sales and marketing expenses were 37% in the three months ended March 31, 2013.

General and administrative. For the three months ended March 31, 2013, general and administrative expenses increased 8% to $2.9 million. The increase was largely the result of our newly formed subsidiaries in Canada and Switzerland and increased compensation costs of $0.1 million. As a percentage of net sales, general and administrative expenses were 19% in the three months ended March 31, 2013.

Research and development. For the three months ended March 31, 2013, research and development expenses increased 12% to $1.3 million. Product development expenses increased $0.1 million primarily due to increased product engineer compensation of $0.1 million. Clinical and regulatory expenses increased $0.1 million mainly due to increased regulatory specialist compensation. As a percentage of net sales, research and development expenses were 8% for the three months ended March 31, 2013.

Medical device excise tax. Commencing in 2013, we are subject to a medical device excise tax of 2.3% on sales within the United States. For the three months ended March 31, 2013, the medical device excise tax was $0.2 million. We estimate this tax to negatively affect income from operations by approximately $0.7 million in 2013.


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Foreign exchange gains / losses. Foreign exchange losses for the three months ended March 31, 2013 was $0.1 million. For the three months ended March 31, 2012, foreign exchange losses were $0.2 million, primarily the result of a cumulative translation adjustment recorded at our Biomateriali subsidiary upon the liquidation and dissolution of that legal entity.

Income tax expense. We recorded a provision for taxes of $0.2 million on pre-tax income of $1.1 million for the three months ended March 31, 2013, compared to $0.3 million on pre-tax income of $0.7 million for the three months ended March 30, 2012. Our 2013 provision was based on the estimated annual effective tax rate of 34.8%, comprised of estimated federal and state income taxes of approximately $1.7 million, as well as foreign income taxes of $0.2 million. Our income tax expense for the current period varies from the statutory rate amounts mainly due to a discrete item for the inclusion of a $0.1 million 2012 research and development tax credit enacted into law in January 2013, lower statutory rates from our foreign entities, offset by certain permanent items. Our 2012 provision for taxes included federal and state income taxes of approximately $0.3 million. Our 2012 provision was based on the estimated annual effective tax rate of 41.0%, which included estimated federal and state income taxes of approximately $0.3 million. Our 2012 income tax expense varied from the statutory rate amounts mainly due to certain permanent items, primarily related to non-deductible foreign branch losses, from lower statutory rates at our foreign German entity, and a discrete item relating to interest on reserves for uncertain tax positions. We monitor the mix of profitability by tax jurisdiction and adjust our annual expected rate on a quarterly basis as needed. While it is often difficult to predict the final outcome or timing of the resolution of any particular tax matter, we believe that our tax reserves reflect the probable outcome of known contingencies.

We have assessed the need for a valuation allowance against our deferred tax assets and concluded that as of March 31, 2013, we will continue to carry a valuation allowance against $3.1 million of deferred tax assets, principally foreign net operating loss carry-forwards, which based on the weight of available evidence, we believe it is more likely than not that such assets will not be realized.

For the remainder of 2013, we expect that our effective tax rate will be comparable to the statutory tax rate less the benefits of a discrete item related to the reduction of uncertain tax positions due to the lapse of the statute of limitations in the amount of $0.1 million and the research and development tax credits. We will be able to utilize Federal research and development tax credits in 2013 from both 2012 and 2013 as a result of legislation enacted in January 2013.

Liquidity and Capital Resources

At March 31, 2013, our cash and cash equivalents were $15.3 million as compared to $16.4 million at December 31, 2012. Our cash and cash equivalents are highly liquid investments with maturities of 90 days or less at the date of purchase and consist of money market funds, and are stated at cost, which approximates fair value. We did not hold any marketable securities nor any mortgage asset-backed or auction-rate securities in our investment portfolio as of March 31, 2013. All of our cash held outside of the United States is available for corporate use.

Operating and Capital Expenditure Requirements

We require cash to pay our operating expenses, make capital expenditures, and pay our long-term liabilities. Since our inception, we have funded our operations through public offerings and private placements of equity securities, short-term borrowings, and funds generated from our operations.

We recognized operating income of $1.1 million for the three months ended March 31, 2013. For the year ended December 31, 2012, we recognized operating income of $4.2 million. We expect to fund any increased costs and expenditures from our existing cash and cash equivalents and marketable securities, though our future capital requirements depend on numerous factors. These factors include, but are not limited to, the following:

the revenues generated by sales of our products;

payments associated with the $4.6 million acquisition of the XenoSure biologic patch manufacturing and distribution rights as well as the associated manufacturing transition costs;

payments associated with potential future quarterly cash dividends to our common stockholders;

payments associated with our stock repurchase plan;


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payments associated with U.S income taxes or other taxes, such as the medical device tax which we estimate will be approximately $0.7 million in 2013;

the costs associated with expanding our manufacturing, marketing, sales, and distribution efforts;

the rate of progress and cost of our research and development activities;

the costs of obtaining and maintaining FDA and other regulatory clearances of our existing and future products;

the effects of competing technological and market developments; and

the number, timing, and nature of acquisitions and other strategic transactions.

Our cash balances may decrease as we continue to use cash to fund our operations, make acquisitions, make purchases under our share repurchase program, make payments under our quarterly dividend program, and make deferred payments related to prior acquisitions. We believe that our cash and cash equivalents and the interest we earn on these balances will be sufficient to meet our anticipated cash requirements for at least the next twelve months. If these sources of cash are insufficient to satisfy our liquidity requirements beyond the next twelve months, we may seek to sell additional equity or debt securities or borrow from a financial institution. The sale of additional equity and debt securities may result in dilution to our stockholders. If we raise additional funds through the issuance of debt securities, such securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations. We may require additional capital beyond our currently forecasted amounts. Any such required additional capital may not be available on reasonable terms, if at all.

Stock Repurchase Plan

In July 2009, our Board of Directors authorized a repurchase of our common stock from time to time on the open market or in privately negotiated transactions. In November 2011, our Board of Directors increased this authorization to $10.0 . . .

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