# LEMAITRE VASCULAR INC (LMAT) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from LEMAITRE VASCULAR INC's 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1158895/000143774925005637/lmat20241231_10k.htm
Accession: 0001437749-25-005637
Filing date: 2025-02-28
Report date: 2024-12-31
Extracted from a substantive MD&A body after the formal Item 7 span was a TOC or reference stub.
Confidence: high

Company profile: /company/LMAT/
All MD&A years: /company/LMAT/mda/
Previous year: /company/LMAT/mda/fy2023/ (FY 2023)
Next year: /company/LMAT/mda/fy2025/ (FY 2025)

Overview

We are a global provider of medical devices and human tissue cryopreservation services largely used in the treatment of peripheral vascular disease, end-stage renal disease, and cardiovascular disease. We develop, manufacture, and market vascular devices to address the needs of vascular surgeons and, to a lesser degree, other specialties such as cardiac surgeons, general surgeons and neurosurgeons. Our diversified portfolio of devices consists of brand name products that are used in arteries and veins and are well known to vascular surgeons. Our principal product offerings are sold globally, primarily in the United States, Europe, Canada and Asia Pacific. We estimate that the annual worldwide market for peripheral vascular devices exceeds $5 billion, within which we estimate that the market for our products is approximately $1 billion. We have grown our business using a three-pronged strategy: 1) pursuing a focused call point, 2) competing for sales of low-rivalry, niche products, and 3) expanding our worldwide direct sales force while acquiring complementary devices. We have used acquisitions as a primary means of further penetrating the peripheral vascular device market, and we expect to continue this strategy in the future. We currently manufacture most of our products in our Burlington, Massachusetts headquarters.

Our products and services are used primarily by vascular surgeons who treat peripheral vascular disease through both open surgical methods and endovascular techniques. In contrast to interventional cardiologists and interventional radiologists, vascular surgeons can perform both open surgical and minimally invasive endovascular procedures, and therefore can provide a wider range of treatment options to their patients. Recently we have also begun to explore adjacent market customers, such as cardiac surgeons and interventional cardiologists.

Our principal product lines include the following: anastomotic clips, biologic vascular and dialysis grafts, biologic vascular and cardiac patches, carotid shunts, embolectomy and occlusion catheters, radiopaque marking tape, synthetic vascular and dialysis grafts, and valvulotomes. Through our RestoreFlow allografts business, we also process and cryopreserve human vascular and cardiac tissue.

Our principal biologic offerings include vascular and cardiac patches as well as vascular and dialysis grafts. In 2024, biologics represented 52% of our worldwide sales. We believe our biologic devices represent differentiated and, in many cases, growing product segments.

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To assist us in evaluating our business strategies, we 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.

Our business opportunities include the following:

[[GREPCENT_TABLE]]
[["","\u2022","growing our direct sales force in North America, Europe, the UK, and Asia Pacific, including replacing distributors with our direct sales personnel;"],["","\u2022","increasing the average selling prices of our devices;"],["","\u2022","introducing our products into new territories upon receipt of regulatory approvals or registrations;"],["","\u2022","acquiring complementary products, and the transition of distributor sales to LeMaitre;"],["","\u2022","updating existing products and introducing new products through research and development, and"],["","\u2022","consolidating product manufacturing into our Burlington, Massachusetts facilities."]]
[[/GREPCENT_TABLE]]

We sell our products and services primarily through a direct sales force. As of December 31, 2024, our sales force comprised 152 sales representatives in North America, Europe, the UK, and Asia Pacific, including four export managers. Our worldwide headquarters is located in Burlington, Massachusetts, and we also have a North American sales office in Vaughan, Canada. Our European headquarters is located in Sulzbach, Germany, and we also have European sales offices in Milan, Italy; Madrid, Spain; Hereford, England; Dublin, Ireland; and Maisons-Alfort, France. Our Asia Pacific headquarters is located in Singapore, and we also have Asia Pacific sales offices in Tokyo, Japan; Shanghai, China; Kensington, Australia; Seoul, Korea; and Bangkok, Thailand. During the year ended December 31, 2024, approximately 95% of our net sales were generated in territories in which we employ direct sales representatives. We sell our products in other countries through distributors.

Historically we have experienced success in lower-rivalry niche segments. In the valvulotome market, for example, our differentiated devices have historically allowed us to increase average selling prices without incurring significant unit share loss. In contrast, we have experienced less success in competitive markets such as the polyester vascular graft market, where we face competition from larger companies with greater resources and lower per unit costs.

We have also experienced success in international markets, such as Europe, where we have a significant sales force, and sometimes offer lower average selling prices than in North America. If we continue to seek growth opportunities outside of North America, we may experience downward pressure on our gross margin.

We obtain regulatory approvals for our devices and services in new product categories and geographies in order to further access the broader peripheral device market and selected other markets. While much of our regulatory effort is focused on maintaining regulatory approvals in various geographies, we will continue to obtain new product approvals in new geographies in order to extend our geographic reach. Recent approvals include the approval to sell the XenoSure patch for carotid indication in Japan in May 2023, the Pruitt Irrigation Occlusion Catheter in China in October 2023, the XenoSure patch for cardiac indication in China in December 2024, and the Artegraft bovine graft in Thailand and Malaysia in August 2024 and in South Africa in October 2024.

Separately, in July 2024, we received MDR CE marks allowing for the continued sale of ten devices into the EU. Previously we had obtained four MDR CE marks. In January 2025, we received MDR CE marks to market Burlington-manufactured CardioCel and VascuCel devices in the EU. In total, we expect to receive 23 MDR CE marks by the end of 2025. The European Commission has designated the end of 2028 as the final MDR CE mark deadline.

Our strategy for growing our business includes the acquisition of complementary product lines and companies, which can be difficult to identify, negotiate, and purchase. There can be no assurance that we will be able to do so in the future.

[[GREPCENT_TABLE]]
[["","\u2022","In June 2020, we entered into an agreement with Artegraft to purchase the assets of their bovine graft business for $72.5 million plus additional payments of up to $17.5 million, contingent upon unit sales."]]
[[/GREPCENT_TABLE]]

Occasionally we discontinue or divest products that are no longer complementary to our business or not commercially viable.

[[GREPCENT_TABLE]]
[["","\u2022","During 2021, we made decisions to wind down the TRIVEX powered phlebectomy systems, remote endarterectomy devices and surgical glue. These product lines totaled approximately $2.2 million in 2021 revenues."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","During 2022, we made the decision to wind down the ProCol graft, AlboSure polyester patch, LeverEdge and Latis graft cleaning catheter product lines. These products totaled approximately $0.7 million in 2022 revenues."]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u2022","During 2024, we made the decision to wind down the PeriVu Angioscope product line. This product totaled approximately $0.9 million in 2024 revenues."]]
[[/GREPCENT_TABLE]]

From time to time we undertake SKU reductions and attempt to transition sales to other SKUs or products with similar features. For example, in 2022, we initiated the transition of sales of our Syntel spring tip catheter to our Syntel regular tip catheter. Any of these actions may result in inventory write-offs and temporary or permanent negative impacts to our sales, gross margin, and customer relationships.

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 country-specific distributors to transition their sales of our medical devices into our direct sales organization: 

[[GREPCENT_TABLE]]
[["","\u2022","In May 2022, we entered into a distribution transition agreement with our Korean distributor to sell products directly in Korea and dissolve the existing distribution arrangement. We have been selling direct-to-hospital in Korea since December 2022. The distribution termination fees totaled approximately $0.5 million."],["","\u2022","In March 2023, we entered into a distribution transition agreement with our Thai distributor to sell products directly in Thailand and dissolve the existing distribution arrangement. We have been selling direct-to-hospital in Thailand since August 2023. The distribution termination fees totaled approximately $0.7 million."]]
[[/GREPCENT_TABLE]]

We also benefit, to a lesser extent, from internal product development efforts to bring differentiated technologies and next-generation products and services to market:

[[GREPCENT_TABLE]]
[["","\u2022","In March 2022, we received FDA clearance to market PhasTIPP, a portable powered phlebectomy device used to remove varicose veins in the leg. The device was launched in the United States in April 2024."]]
[[/GREPCENT_TABLE]]

In addition to our sales growth strategies, we have also executed several operational initiatives designed to consolidate manufacturing into our Burlington facilities. We expect these plant consolidations and manufacturing transfers will result in improved control over production quality as well as reduced costs. Our most recent manufacturing transfers included:

[[GREPCENT_TABLE]]
[["","\u2022","In October 2018, we acquired the Cardial business from Becton Dickinson. Cardial manufactured polyester vascular grafts, valve cutters and surgical glue at its St. Etienne, France facility. In June 2022, we closed the St. Etienne factory to streamline manufacturing operations and to reduce expenses. We are transitioning Cardial graft sales to our Burlington-manufactured AlboGraft product for additional cost savings and improved margins."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","In October 2019, we acquired the CardioCel and VascuCel biologic patch businesses from Anteris. The transfer to Burlington was substantially completed in 2023. In June 2023, the MDR CE mark application for these Burlington-produced devices was submitted and we obtained approval in January 2025. We began distributing these Burlington-produced patches in the United States, Canada and select APAC markets in 2024."]]
[[/GREPCENT_TABLE]]

Finally, from time to time we enter into distribution agreements of complementary product lines with the option to acquire the product line in the future:

[[GREPCENT_TABLE]]
[["","\u2022","In April 2023, we entered into an agreement with Elutia to become the exclusive U.S. distributor of their cardiovascular porcine patches. Under the agreement, we can distribute the products for three years with an option to acquire Elutia\u2019s worldwide cardiovascular porcine patch business during the second and third year of the agreement. Sales through LeMaitre Vascular for the nine months ended December 31, 2023 were $4.1 million. Sales through LeMaitre Vascular for the twelve months ended December 31, 2024 were $5.0 million."]]
[[/GREPCENT_TABLE]]

Our execution of these initiatives may affect the comparability of our financial results and may cause fluctuations from period to period.

In February 2024, we began implementing a new ERP system to replace our financial reporting and planning system. We expect that the new ERP system will be beneficial in a number of areas, including inventory management, pricing programs, financial operations and real-time reporting. We have been preparing for this transition since 2022 and have hired an experienced consulting team to assist in this transition, and, in the U.S., we transitioned from our legacy ERP system to our newly implemented Microsoft Dynamics D365 system in February 2024. We expect to implement this new system in selected countries in Europe in 2025, starting with the UK. As of December 31, 2024, we have capitalized costs on our balance sheet of $4.7 million associated with this ERP system.

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Fluctuations in the exchange rates between the U.S. dollar and foreign currencies, primarily the Euro, affect our financial results. For the year ended December 31, 2024, approximately 41% of our sales took place outside of the United States, largely in currencies other than the U.S. dollar. We expect foreign currencies will represent a significant percentage of future sales. Selling, marketing, and administrative costs related to these sales are also denominated in foreign currencies, thereby partially mitigating our bottom-line exposure to exchange rate fluctuations. However, if there is a decrease 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 record less revenue in U.S. dollars than we did before the exchange rate changed. For 2024, we estimate that the effects of changes in foreign exchange rates decreased our reported sales by approximately $0.4 million, as compared to rates in effect for 2023.

Net Sales and Expense Components

The following is a description of the primary components of our net sales and expenses:

Net sales. We derive our net sales from the sale of our products and services, less discounts and returns. Net sales include the shipping and handling fees paid for by our customers. Most of our sales are generated by our direct sales force and are shipped and billed to hospitals or clinics throughout the world. In countries where we do not have a direct sales force, sales are primarily to distributors, who in turn sell to hospitals and clinics. In certain cases our products are held on consignment at a hospital or clinic prior to purchase; in those instances we recognize revenue at the time the product is used in surgery rather than at shipment.

Cost of sales. We manufacture the majority of the products that we sell. Our cost of sales consists primarily of manufacturing personnel, raw materials and components, depreciation of property and equipment, and other allocated manufacturing overhead, as well as the freight expense we pay to ship products to customers.

Sales and marketing. Our sales and marketing expense consists primarily of salaries, commissions, stock-based compensation, travel and entertainment, sales meetings, attendance at vascular and cardiac congresses, training programs, advertising and product promotions, direct mail, and other marketing costs.

General and administrative. General and administrative expense consists primarily of executive, finance and human resource salaries, stock-based compensation, legal and accounting fees, information technology expense, intangible asset amortization expense, and insurance expense.

Research and development. Research and development expense primarily includes costs associated with obtaining and maintaining regulatory approval of our products, salaries, laboratory testing, and supply costs. It also includes costs associated with the design and execution of clinical studies, costs to register, maintain, and defend our intellectual property, and costs to transfer the manufacturing of acquired product lines to our Burlington facility. Also included are costs associated with the design, development, testing, and enhancement of new or existing products.

Other income (expense). Other income (expense) primarily includes interest income and expense, foreign currency gains (losses), and other miscellaneous gains (losses).

Income tax expense. We are subject to federal and state income taxes for earnings generated in the United States, which include operating losses or profits in certain foreign jurisdictions for certain years depending on tax elections made, and foreign taxes on earnings of our wholly-owned foreign subsidiaries. Our consolidated tax expense is affected by the mix of our taxable income (loss) in the United States and foreign subsidiaries, permanent items, discrete items, unrecognized tax benefits, and amortization of goodwill for U.S. tax reporting purposes.

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Results of Operations

Comparison of the year ended December 31, 2024 to the year ended December 31, 2023

The following table sets forth, for the periods indicated, our net sales by geography, and the change between the specified periods expressed as a percentage increase or decrease:

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","","","Percent"],["","","2024","","","2023","","","$ Change","","","change"],["","","($ in thousands)"],["Net sales","","$","219,863","","","$","193,484","","","$","26,379","","","","14","%"],["Net sales by geography:"],["Americas","","$","144,583","","","$","130,308","","","$","14,275","","","","11","%"],["Europe, Middle East and Africa","","","59,969","","","","51,099","","","","8,870","","","","17","%"],["Asia Pacific","","","15,311","","","","12,077","","","","3,234","","","","27","%"],["Total","","$","219,863","","","$","193,484","","","$","26,379","","","","14","%"]]
[[/GREPCENT_TABLE]]

Net sales. Net sales increased by $26.4 million, or 14%, to $219.9 million for the year ended December 31, 2024, compared to $193.5 million for the year ended December 31, 2023. The increase was driven primarily by higher average selling prices, higher hospital procedure volumes, and additional sales representatives. Graft sales increased $11.1 million, patch sales increased $6.4 million, shunt sales increased $3.7 million and catheter sales increased $3.0 million. We estimate that the stronger U.S. dollar decreased net sales by $0.4 million during the year ended December 31, 2024 as compared to the year ended December 31, 2023.

Direct-to-hospital net sales were 95% and 96% of our total net sales for the years ended December 31, 2024 and 2023, respectively.

Net sales by geography. Net sales in the Americas increased $14.3 million, or 11%, for the year ended December 31, 2024 as compared to the year ended December 31, 2023. The increase was driven primarily by increased sales of grafts of $8.5 million, patches of $3.4 million and valvulotomes of $1.2 million.

EMEA net sales increased $8.9 million, or 17%, for the year ended December 31, 2024 as compared to the year ended December 31, 2023. The increase was driven primarily by increased sales of shunts of $2.9 million, patches of $2.4 million, grafts of $1.6 million and catheters of $1.1 million.

Asia Pacific net sales increased $3.2 million, or 27%, for the year ended December 31, 2024 as compared to the year ended December 31, 2023. The increase was driven primarily by increased sales of catheters of $1.2 million, grafts of $1.1 million and patches of $0.6 million.

Gross Profit. The following table sets forth the change in our gross profit and gross margin for the periods indicated:

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","","","Percent"],["","","2024","","","2023","","","Change","","","change"],["","","($ in thousands)"],["Gross profit","","$","150,901","","","$","127,049","","","$","23,852","","","","19","%"],["Gross margin","","","68.6","%","","","65.7","%","","","2.9","%","","","*"]]
[[/GREPCENT_TABLE]]

* Not applicable

Gross profit increased $23.9 million, or 19%, to $150.9 million for the year ended December 31, 2024, and gross margin increased by 290 basis points to 68.6% in the period. The increase in gross profit was driven primarily by increased sales, particularly from allograft preservation services, bovine vascular patches, carotid shunts and bovine grafts. The increase in gross margin was driven primarily by greater manufacturing efficiencies and sales price increases, which was partially offset by unfavorable product mix, including sales of comparatively lower margin allograft preservation services, and increased excess and obsolescence charges.

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Operating Expenses. The following table sets forth the change in our operating expenses for the periods indicated and the change between the specified periods expressed as a percentage increase or decrease:

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","","","Percent","","","2024 as a %","","","2023 as a %"],["","","2024","","","2023","","","$ change","","","change","","","of Net Sales","","","of Net Sales"],["","","($ in thousands)"],["Sales and marketing","","$","46,737","","","$","41,054","","","$","5,683","","","","14","%","","","21","%","","","21","%"],["General and administrative","","","36,258","","","","31,832","","","","4,426","","","","14","%","","","16","%","","","16","%"],["Research and development","","","15,650","","","","16,966","","","","(1,316",")","","","(8","%)","","","7","%","","","9","%"],["Restructuring","","","-","","","","485","","","","(485",")","","","(100","%)","","","0","%","","","0","%"],["","","$","98,645","","","$","90,337","","","$","8,308","","","","9","%","","","45","%","","","47","%"]]
[[/GREPCENT_TABLE]]

Sales and marketing. For the year ended December 31, 2024, sales and marketing expenses increased 14% to $46.7 million. The increase was driven primarily by higher sales representative headcount, which resulted in increased compensation and related expenses of $4.2 million. Additionally, travel, training, and sales meeting expenses increased $1.7 million in 2024. Sales rep headcount was 152 as of December 31, 2024, a 12% increase from December 31, 2023. As a percentage of net sales, sales and marketing expenses remained consistent at 21% for the year ended December 31, 2024 versus the prior period.

General and administrative. For the year ended December 31, 2024, general and administrative expenses increased 14% to $36.3 million. The increase was driven primarily by higher headcount and related recruiting fees, accrued bonus, and stock compensation expenses, which resulted in increased compensation and related expenses of $2.1 million. Additionally, professional fees and outside services expenses increased $1.2 million and facilities expenses increased $0.8 million. As a percentage of sales, general and administrative expenses remained consistent at 16% for the year ended December 31, 2024 versus the prior period.

Research and development. For the year ended December 31, 2024, research and development expenses decreased 8% to $15.7 million. The decrease was driven by comparatively higher costs in 2023 related to outside services, professional fees, and testing related to MDD and MDR approvals, of $1.3 million. Additionally, process engineering expenses decreased $0.7 million as CardioCel device manufacturing was initiated at our Burlington facility in 2024, and related expenses were allocated to cost of sales. The decrease was partially offset by higher compensation and related expenses of $0.7 million. As a percentage of sales, total research and development expenses decreased to 7% for the year ended December 31, 2024, down from 9% in the prior period.

Restructuring. For the year ended December 31, 2024, there were no restructuring expenses. On June 30, 2022, we ceased operations at our St. Etienne, France factory. The closure resulted in a restructuring charge of $3.1 million for the year ended December 31, 2022. These charges consisted primarily of employment termination costs, impairment of fixed assets and inventory, and third-party costs. For the year ended December 31, 2023, we recorded additional restructuring expenses related to this closure of $0.5 million. The additional expenses consisted primarily of employment termination, settlement, legal, and other third-party costs. As a percentage of sales, restructuring expenses was less than 1% for the year ended December 31, 2023.

Income tax expense. We recorded a tax provision of $12.8 million on pre-tax income of $56.9 million for the twelve months ended December 31, 2024, compared to $9.4 million on pre-tax income of $39.5 million for the twelve months ended December 31, 2023.

Our effective income tax rate was 20.2% and 22.6% for the three- and twelve-month periods ended December 31, 2024 respectively. Our tax expense for 2024 is based on an estimated annual effective tax rate of 24.5%, adjusted in the applicable quarterly periods for stock option exercises and other discrete items. Our income tax expense for 2024 varies from the statutory rate mainly due to federal and state tax credits, permanent items, different statutory rates from our foreign entities, and stock option exercises.

Our effective income tax rate was 25.3% and 23.7% for the three- and twelve-month periods ended December 31, 2023, respectively. Our 2023 provision was based on an estimated annual effective tax rate of 26.1%, adjusted in the applicable quarterly period for discrete stock option exercises and other discrete items. Our income tax expense for 2023 varied from the statutory rate mainly due to permanent items, different statutory rates from our foreign entities, and stock option exercises.

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 for any particular tax matter, we believe our tax reserves reflect the probable outcome of known contingencies.

We assess the likelihood that our deferred tax assets will be realized through future taxable income and record a valuation allowance to reduce gross deferred tax assets to an amount we believe is more likely than not to be realized. As of December 31, 2024, we have provided a valuation allowance of $1.7 million for deferred tax assets primarily related to Australian net operating loss and capital loss carry forwards and Massachusetts tax credit carry forwards that are not expected to be realized.

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Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years for tax purposes. This provision resulted in a cash tax liability for the 2024 tax year of approximately $0.8 million. Our net deferred tax assets increased in 2024 by approximately $0.9 million as a result as well. This provision is also expected to increase our 2025 cash tax liability. The actual impact on 2025 cash tax liability will depend on the amount of research and development expenses paid or incurred in 2025 among other factors. The impact will continue over the five-year amortization period, but will decrease ratably over the period.

The Inflation Reduction Act, or IRA, was enacted into law on August 16, 2022. Included in the IRA was a provision to implement a 15% corporate alternative minimum tax on “adjusted financial statement income” for applicable corporations and a 1% excise tax on repurchases of stock. These provisions are effective for tax years beginning after December 31, 2022. We do not currently believe the IRA will have a material impact on our reported results, cash flows, or financial position.

Comparison of the year ended December 31, 2023 to the year ended December 31, 2022

The following table sets forth, for the periods indicated, our net sales by geography, and the change between the specified periods expressed as a percentage increase or decrease: 

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","","","Percent"],["","","2023","","","2022","","","$ Change","","","change"],["","","($ in thousands)"],["Net sales","","$","193,484","","","$","161,651","","","$","31,833","","","","20","%"],["Net sales by geography:"],["Americas","","$","130,308","","","$","109,439","","","$","20,869","","","","19","%"],["Europe, Middle East and Africa","","","51,099","","","","41,854","","","","9,245","","","","22","%"],["Asia Pacific","","","12,077","","","","10,358","","","","1,719","","","","17","%"],["Total","","$","193,484","","","$","161,651","","","$","31,833","","","","20","%"]]
[[/GREPCENT_TABLE]]

Net sales. Net sales increased by $31.8 million, or 20%, to $193.5 million for the year ended December 31, 2023, compared to $161.7 million for the year ended December 31, 2022. The increase was driven primarily by higher average selling prices, elevated hospital procedure volumes, additional sales representatives, and sales related to our new porcine patch product line. Graft sales increased $10.5 million, patch sales increased $10.4 million, valvulotome sales increased $6.3 million, and shunt sales increased $3.1 million. We estimate that the weaker U.S. dollar increased net sales by $0.2 million during the year ended December 31, 2023 as compared to the year ended December 31, 2022.

Direct-to-hospital net sales were 96% and 95% of our total net sales for the years ended December 31, 2023 and 2022, respectively.

Net sales by geography. Net sales in the Americas increased $20.9 million, or 19%, for the year ended December 31, 2023 as compared to the year ended December 31, 2022. The increase was driven primarily by increased sales of grafts of $7.5 million, patches of $6.5 million, valvulotomes of $5.2 million, and shunts of $1.0 million.

EMEA net sales increased $9.2 million, or 22%, for the year ended December 31, 2023 as compared to the year ended December 31, 2022. The increase was driven primarily by increased sales of patches of $3.3 million, grafts of $3.0 million, shunts of $1.9 million, and valvulotomes of $1.1 million.

Asia Pacific net sales increased $1.7 million, or 17%, for the year ended December 31, 2023 as compared to the year ended December 31, 2022. The increase was driven primarily by increased sales of catheters of $0.7 million, patches of $0.6 million, grafts of $0.3 million, and shunts of $0.2 million.

Gross Profit. The following table sets forth the change in our gross profit and gross margin for the periods indicated:

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","","","Percent"],["","","2023","","","2022","","","Change","","","change"],["","","($ in thousands)"],["Gross profit","","$","127,049","","","$","104,896","","","$","22,153","","","","21","%"],["Gross margin","","","65.7","%","","","64.9","%","","","0.8","%","","","*"]]
[[/GREPCENT_TABLE]]

* Not applicable

Gross profit increased $22.2 million, or 21%, to $127.0 million for the year ended December 31, 2023, and gross margin increased by 80 basis points to 65.7% in the period. The increase in gross profit was driven primarily by increased sales, particularly from valvulotomes, bovine vascular patches, bovine grafts and porcine patches. The increase in gross margin was driven primarily by favorable product mix, including sales of comparatively higher margin valvulotomes, and manufacturing efficiencies, which were partially offset by increased scrap and excess and obsolescence charges.

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Operating Expenses. The following table sets forth the change in our operating expenses for the periods indicated and the change between the specified periods expressed as a percentage increase or decrease:

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","","","Percent","","","2023 as a %","","","2022 as a %"],["","","2023","","","2022","","","$ change","","","change","","","of Net Sales","","","of Net Sales"],["","","($ in thousands)"],["Sales and marketing","","$","41,054","","","$","32,921","","","$","8,133","","","","25","%","","","21","%","","","20","%"],["General and administrative","","","31,832","","","","28,745","","","","3,087","","","","11","%","","","16","%","","","18","%"],["Research and development","","","16,966","","","","13,294","","","","3,672","","","","28","%","","","9","%","","","8","%"],["Restructuring","","","485","","","","3,107","","","","(2,622",")","","","(84","%)","","","0","%","","","2","%"],["","","$","90,337","","","$","78,067","","","$","12,270","","","","16","%","","","47","%","","","48","%"]]
[[/GREPCENT_TABLE]]

Sales and marketing. For the year ended December 31, 2023, sales and marketing expenses increased 25% to $41.1 million. The increase was driven primarily by higher sales and associated commissions, contest and bonus expenses, increased sales rep and marketing headcounts, and an increase in salaries and wages. Compensation and related expenses increased by $6.1 million, travel and training expenses increased by $0.8 million, and sales meetings and trade show expenses increased by $0.7 million. Sales rep headcount was 136 as of December 31, 2023, a 4% increase from December 31, 2022. As a percentage of net sales, sales and marketing expenses increased to 21% for the year ended December 31, 2023, up from 20% in the prior period.

General and administrative. For the year ended December 31, 2023, general and administrative expenses increased 11% to $31.8 million. The increase was driven primarily by higher compensation and related expenses of $1.7 million due to an increase in personnel. Additionally, professional fees and outside services expenses increased $1.4 million. As a percentage of sales, general and administrative expenses decreased to 16% for the year ended December 31, 2023, down from 18% in the prior period.

Research and development. For the year ended December 31, 2023, research and development expenses increased 28% to $17.0 million. The increase was driven primarily by higher outside services and testing expenses of $2.0 million, due to higher consulting and third-party costs largely associated with European regulatory approvals. Additionally, compensation and related expenses increased $1.4 million due to an increase in personnel. As a percentage of sales, total research and development expenses increased to 9% for the year ended December 31, 2023, up from 8% in the prior period.

Restructuring. For the year ended December 31, 2023, restructuring expenses were $0.5 million. On June 30, 2022, we ceased operations at our St. Etienne, France factory. The closure resulted in a restructuring charge of $3.1 million for the year ended December 31, 2022. These charges consisted primarily of employment termination costs, impairment of fixed assets and inventory, and third-party costs. For the year ended December 31, 2023, we recorded additional restructuring expenses related to this closure of $0.5 million. The additional expenses consisted primarily of employment termination, settlement, legal, and other third-party costs. As a percentage of sales, restructuring expenses was less than 1% for the year ended December 31, 2023, down from 2% in the prior period.

Income tax expense. We recorded a tax provision of $9.4 million on pre-tax income of $39.5 million for the twelve months ended December 31, 2023, compared to $6.9 million on pre-tax income of $27.5 million for the twelve months ended December 31, 2022.

Our effective income tax rate was 25.3% and 23.7% for the three- and twelve-month periods ended December 31, 2023 respectively. Our tax expense for 2023 is based on an estimated annual effective tax rate of 26.1%, adjusted in the applicable quarterly periods for discrete stock option exercises and other discrete items. Our income tax expense for 2023 varies from the statutory rate mainly due to federal and state tax credits, permanent items, different statutory rates from our foreign entities, and stock option exercises.

Our effective income tax rate was 27.8% and 24.9% for the three- and twelve-month periods ended December 31, 2022, respectively. Our 2022 provision was based on an estimated annual effective tax rate of 26.0%, adjusted in the applicable quarterly period for discrete stock option exercises and other discrete items. Our income tax expense for 2022 varied from the statutory rate mainly due to permanent items, different statutory rates from our foreign entities, and stock option exercises.

The Company incurred a cash tax liability for the 2023 tax year of approximately $0.7 million and an increase in our net deferred tax assets for the 2023 tax year by approximately $0.8 million as a result of the Tax Cuts and Jobs Act of 2017.

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Liquidity and Capital Resources

On February 18, 2025, our Board of Directors authorized the repurchase of up to $75.0 million of the Company’s common stock through transactions on the open market, in privately negotiated purchases or otherwise until February 17, 2026. The repurchase program may be suspended or discontinued at any time. To date we have not made any repurchases under this or any prior program.

As of December 31, 2024, our cash and cash equivalents were $25.6 million as compared to $24.3 million as of December 31, 2023. We had $274.1 million in short-term marketable securities as of December 31, 2024, and $80.8 million as of December 31, 2023. Our cash and cash equivalents are liquid investments with maturities of 90 days or less at the date of purchase and consist primarily of operating bank accounts. Our short-term marketable securities consist of a U.S. government money market fund investing mainly in high-quality, short-term securities that are issued or guaranteed by the U.S. government or by U.S. government agencies and instrumentalities, and a short-duration bond fund. As of December 31, 2024 our short-term marketable securities reflected an unrealized loss of $1.0 million as a result of increasing market interest rates.

Convertible Senior Notes

On December 19, 2024, we issued $172.5 million aggregate principal amount of convertible senior notes due 2030, or the Convertible Notes, in a Rule 144A private placement to qualified institutional buyers pursuant to an indenture dated December 19, 2024, by and between us and U.S. Bank Trust Company, National Association, or the Indenture.

The Convertible Notes will mature on February 1, 2030, unless earlier repurchased, redeemed or converted. The proceeds from the issuance of the Convertible Notes were approximately $167.7 million, net of debt issuance costs totaling $4.8 million. The Convertible Notes bear interest at a rate of 2.50% per year and interest is payable semiannually in arrears on August 1 and February 1 of each year. The initial conversion rate is 8.3521 shares of common stock per $1,000 principal amount of the Convertible Notes, which represents an initial conversion price of approximately $119.73 per share of common stock and a premium of approximately 30% over the closing price of our common stock on December 16, 2024. The conversion rate and conversion price are subject to customary adjustments upon the occurrence of certain events as described in the Indenture.

Noteholders may convert all or a portion of their Convertible Notes at their option only in the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2025, if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter; (2) during the five consecutive business days immediately after any five consecutive trading day period in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of the Company’s common stock on such trading day and the conversion rate on such trading day; (3) upon the occurrence of certain corporate events or distributions on the Company’s common stock, as described in the Indenture; (4) if the Company calls (or is deemed to have called) any Convertible Notes for redemption; and (5) at any time from, and including, August 1, 2029 until the close of business on the second scheduled trading day immediately before the maturity date. The Company has the right to elect to settle conversions either in cash, shares of common stock, or in a combination of cash and shares of its common stock.

Prior to February 5, 2028, the Convertible Notes will not be redeemable. On or after February 5, 2028 until the fortieth scheduled trading day immediately before the maturity date, the Company may redeem for cash all or any portion of the Convertible Notes (subject to the partial redemption limitation set forth in the Indenture), at its option, if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption. In addition, calling any Convertible Note for redemption will constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) with respect to that Convertible Note, in which case the conversion rate applicable to the conversion of that Convertible Note will be increased in certain circumstances if it is converted after it is called for redemption. 

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 and long-term borrowings, and funds generated from our operations.

We recognized operating income of $52.3 million for the year ended December 31, 2024, $36.7 million for the year ended December 31, 2023, and $26.8 million for the year ended December 31, 2022. We expect to fund any increased costs and expenditures from our existing cash and cash equivalents, though our future capital requirements depend on numerous factors. These factors include, but are not limited to, the following:

[[GREPCENT_TABLE]]
[["","\u2022","revenues generated by sales of our products and services;"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u2022","payments associated with potential future quarterly cash dividends to our common stockholders;"],["","\u2022","future acquisition-related payments;"],["","\u2022","payments associated with income and other taxes;"],["","\u2022","costs associated with expanding our manufacturing, marketing, sales, and distribution efforts;"],["","\u2022","costs associated with our initiatives to sell direct-to-hospital in new countries;"],["","\u2022","costs of obtaining and maintaining FDA and other regulatory clearances;"],["","\u2022","costs associated with obtaining European MDR CE mark approvals;"],["","\u2022","the number, timing, and nature of acquisitions, divestitures and other strategic transactions, and"],["","\u2022","potential future share repurchases."]]
[[/GREPCENT_TABLE]]

We believe that our cash, cash equivalents, investments, and the interest we earn on these balances will enable us to fund our operating expenses, capital expenditures requirements, and Convertible Note payments for at least twelve months following the filing of our annual report on Form 10-K and to meet our known long-term cash requirements.

We may need to raise additional funding, which might not be available on desirable terms or at all. See “Item 1A. Risk Factors” in this Annual Report on Form 10-K.

Cash Flows

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["","","2024","","","2023","","","2022"],["","","(in thousands)"],["Cash and cash equivalents","","$","25,610","","","$","24,269","","","$","19,134"],["Cash flows provided by (used in):"],["Operating activities","","$","44,124","","","$","36,751","","","$","25,378"],["Investing activities","","$","(200,120",")","","$","(24,715",")","","$","(10,371",")"],["Financing activities","","$","158,102","","","$","(7,131",")","","$","(9,234",")"]]
[[/GREPCENT_TABLE]]

Net cash provided by operating activities. Net cash provided by operating activities was $44.1 million for the year ended December 31, 2024, consisting of $44.0 million net income, adjusted for non-cash items of $20.2 million (including primarily depreciation and amortization of $9.7 million, stock-based compensation of $6.6 million, provisions for inventory write-offs and credit losses of $3.9 million, foreign currency transaction effect on income of $0.4 million, and fair value adjustments to contingent consideration obligations of $0.1 million, offset by a provision for deferred income taxes of $0.5 million), as well as cash used for working capital of $20.1 million. The net cash used for working capital was driven by increases in inventory and other deferred costs of $10.6 million, increases in accounts receivable of $6.4 million, increases in prepaid expenses and other assets of $2.3 million, and decreases in accounts payable and other liabilities of $0.8 million.

Net cash provided by operating activities was $36.8 million for the year ended December 31, 2023, consisting of $30.1 million net income, adjusted for non-cash items of $17.9 million (including primarily depreciation and amortization of $9.5 million, stock-based compensation of $5.3 million, provisions for inventory write-offs and credit losses of $2.6 million, provision for deferred income taxes of $0.8 million, and loss on divestitures of $0.5 million, offset by foreign currency transaction effect on income of $0.7 million and fair value adjustments to contingent consideration obligations for acquisitions of $0.1 million), as well as cash used for working capital of $11.3 million. The net cash used for working capital was driven by increases in inventory and other deferred costs of $9.8 million, increases in accounts receivable of $3.1 million, and increases in prepaid expenses and other assets of $2.9 million, offset by increases in accounts payable and other liabilities of $4.6 million.

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Net cash provided by operating activities was $25.4 million for the year ended December 31, 2022, consisting of $20.6 million net income, adjusted for non-cash items of $18.1 million (including primarily depreciation and amortization of $9.4 million, stock-based compensation of $4.2 million, provisions for inventory write-offs and credit losses of $3.2 million, loss on divestitures of $2.0 million, and loss on disposal of fixed assets of $0.1 million, offset by foreign currency transaction effect on income of $0.3 million, benefit for deferred income taxes of $0.2 million, gain on sale of building of $0.1 million, and fair value adjustments to contingent consideration obligations for acquisitions of $0.1 million), as well as cash used for working capital of $13.4 million. The net cash used for working capital was driven by increases in inventory and other deferred costs of $7.4 million, increases in accounts receivable of $3.5 million, and increases in prepaid expenses and other assets of $3.1 million, offset by increases in accounts payable and other liabilities of $0.6 million.

Net cash used in investing activities. Net cash used in investing activities was $200.1 million for the year ended December 31, 2024, consisting of purchases of marketable securities of $277.9 million and purchases of property and equipment of $7.0 million, offset by proceeds from the sale of marketable securities of $84.8 million.

Net cash used in investing activities was $24.7 million for the year ended December 31, 2023, consisting of purchases of marketable securities of $16.6 million, purchases of property and equipment of $7.3 million, and acquisition related payments of $0.9 million.

Net cash used in investing activities was $10.4 million for the year ended December 31, 2022, consisting of purchases of marketable securities of $8.0 million and purchases of property and equipment of $3.2 million, offset by proceeds from the sale of the St. Etienne, France building of $0.9 million.

Net cash provided by (used in) financing activities. Net cash provided by financing activities was $158.1 million for the year ended December 31, 2024, consisting of proceeds from issuance of the Convertible Notes, net of issuance costs paid, of $167.8 million, and proceeds from stock options exercises of $4.7 million, net of shares repurchased used to pay employee payroll taxes. These proceeds of cash were offset by dividend payments of $14.4 million.

Net cash used in financing activities was $7.1 million for the year ended December 31, 2023, consisting of dividend payments of $12.4 million, offset by proceeds from stock option exercises of $5.3 million, net of shares repurchased to cover employee payroll taxes.

Net cash used in financing activities was $9.2 million for the year ended December 31, 2022, consisting of dividend payments of $11.0 million and deferred payments for acquisitions of $1.1 million, offset by proceeds from stock option exercises of $2.8 million, net of shares repurchased to cover employee payroll taxes.

Dividends

In February 2011, our Board of Directors approved a policy for the payment of quarterly cash dividends on our common stock. Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to approval by our Board of Directors on a quarterly basis. The dividend activity for the periods presented is as follows:

[[GREPCENT_TABLE]]
[["Record Date","","Payment Date","","Per Share Amount","","","Dividend Payment"],["","","","","","","","","(in thousands)"],["Fiscal Year 2024"],["March 14, 2024","","March 28, 2024","","$","0.16","","","$","3,589"],["May 16, 2024","","May 30, 2024","","$","0.16","","","$","3,593"],["August 15, 2024","","August 29, 2024","","$","0.16","","","$","3,596"],["November 21, 2024","","December 5, 2024","","$","0.16","","","$","3,600"],["Fiscal Year 2023"],["March 9, 2023","","March 23, 2023","","$","0.14","","","$","3,099"],["May 17, 2023","","June 1, 2023","","$","0.14","","","$","3,116"],["August 17, 2023","","August 31, 2023","","$","0.14","","","$","3,117"],["November 16, 2023","","November 30, 2023","","$","0.14","","","$","3,117"]]
[[/GREPCENT_TABLE]]

On February 18, 2025, our Board of Directors approved a quarterly cash dividend on our common stock of $0.20 per share payable on March 27, 2025, to stockholders of record at the close of business on March 13, 2025, which will total approximately $4.5 million.

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Critical Accounting Policies and Use of Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of our consolidated financial statements and related disclosures require us to make estimates, assumptions and judgements that affect the reported amounts of assets, liabilities, sales, costs and expenses, and related disclosures. We evaluate our estimates on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 1 to our consolidated financial statements included in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgements and estimates used in the preparation of our consolidated financial statements.

Inventory and Other Deferred Costs

Inventory and Other Deferred Costs consists of finished products, work-in-process, raw materials, and costs deferred in connection with human tissue cryopreservation services of our RestoreFlow allograft business. We value inventory and other deferred costs at the lower of cost or market value. Cost includes materials, labor and manufacturing overhead and is determined using the first-in, first-out, or FIFO, method. On a quarterly basis, we review inventory quantities on hand and analyze the provision for excess and obsolete inventory based primarily on product expiration date and our estimated sales forecast, which is based on sales history and anticipated future demand. Our estimates of future product demand may not be accurate, and we may understate or overstate the provision required for excess and obsolete inventory. Accordingly, any significant unanticipated changes in demand could have a significant impact on the value of our inventory and results of operations.

Valuation of Intangible Assets and Goodwill

Intangible assets consist primarily of purchased developed technology, patents, customer relationships, and trademarks, and are amortized over their estimated useful lives, ranging from 2 to 16 years. Goodwill represents the amount of consideration paid in connection with business acquisitions in excess of the fair value of assets acquired and liabilities assumed. We generally calculate the fair value of our intangible assets as the present value of estimated future cash flows we expect to generate from the asset using a risk-adjusted discount rate. In determining our estimated future cash flows associated with our intangible assets, we use estimates and assumptions about future revenue contributions, cost structures, and remaining useful lives of the asset. These estimates and assumptions require significant judgment, and actual results may differ from assumed or estimated amounts. Other intangible assets, net of accumulated amortization, were $35.8 million as of December 31, 2024 and $41.7 million as of December 31, 2023. Goodwill was $65.9 million as of December 31, 2024 and 2023.

Contingencies

In the normal course of business, we are subject to proceedings, lawsuits, and other claims and assessments for matters related to, among other things, business acquisitions, employment, commercial matters, intellectual property matters, product liability, and product recalls. We assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters. We record charges for the costs we anticipate incurring in connection with litigation and claims against us when we determine a loss is probable and we can reasonably estimate these costs. During the years ended December 31, 2024, 2023, and 2022, we were not subject to any material litigation, claims, or assessments.

In connection with certain of our acquisitions, we may enter into agreements to pay additional future consideration upon the satisfaction of certain agreed-upon criteria. We record liabilities for these arrangements at estimated fair value reflecting management’s assumptions of the likelihood of achieving the specified criteria at the time of the closing, which may require significant judgment. These amounts are remeasured each reporting period, with any adjustments recorded in income from operations.

Income Taxes

We account for income taxes under the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred taxes are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The provision for income taxes includes taxes currently payable and deferred taxes resulting from the tax effects of temporary differences between the financial statement and tax bases of assets and liabilities. We maintain valuation allowances where it is more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in the valuation allowances are included in our tax provision in the period of change. In determining whether a valuation allowance is warranted, we evaluate factors such as prior earnings history, expected future earnings, carry-back and carry-forward periods, and tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset.

We recognize, measure, present and disclose in our financial statements uncertain tax positions that we have taken or expect to take on a tax return. We recognize in our financial statements the impact of tax positions that meet a “more likely than not” threshold, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.

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Recent Accounting Pronouncements

See Note 1 “Significant Accounting Policies and Related Matters” of the Notes to the Consolidated Financial Statements in Item 8 “Financial Statements and Supplementary Data” for additional information regarding recent accounting pronouncements, including the respective expected dates of adoption and estimated effects, if any, on our Consolidated Financial Statements.