Penumbra, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparative results are for Q1 2017. Penumbra designs, manufactures and sells medical devices in neuro and peripheral vascular markets. It reports as one operating segment. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $102.7 million | $73.2 million; up 40.3% |
| Gross profit / margin | $66.6 million / 64.8% | $47.7 million / 65.2% |
| Operating income (loss) | $4.0 million | $(2.0) million |
| Net income (loss) | $5.5 million; diluted EPS $0.15 | $(3.1) million; diluted EPS $(0.10) |
| Operating cash flow | $10.7 million | $2.2 million |
- Revenue grew across both product categories: Neuro rose 42.2% to $71.4 million; Peripheral Vascular rose 36.2% to $31.3 million. Management attributed growth to market penetration, new products, and increased procedures; prices were substantially unchanged.
- International revenue increased 49.2% to $36.9 million and was 35.9% of total revenue, versus 33.8% a year earlier. The United States contributed $65.8 million; Japan, $10.7 million.
- Gross margin decreased 0.4 percentage points. R&D expense rose 13.9% to $8.0 million; SG&A rose 27.6% to $54.5 million, primarily from personnel and travel costs. SG&A declined as a share of revenue to 53.1% from 58.4%.
- The company reported a $1.9 million income tax benefit, versus $1.4 million of tax expense in Q1 2017. The effective tax rate was negative 43.0%; the change was primarily attributed to a domestic deferred-tax valuation allowance recorded in the prior-year period.
- At March 31, cash and cash equivalents were $52.8 million and marketable investments were $162.6 million. Working capital was $337.7 million; total assets were $489.7 million and total liabilities $74.8 million. No borrowings are separately presented on the balance sheet.
- Operating cash flow benefited from net income and noncash items, partly offset by a $6.1 million increase in receivables. Investing activities used $2.2 million; financing activities used $6.7 million, including $4.3 million of acquisition-related payments and $3.5 million of employee tax payments on vested equity awards.
Changes, outlook, and notable items
- Management said growth reflected existing-product penetration and new products, notably the Penumbra System and neuro access products, and the Indigo System. It expects R&D and SG&A to continue increasing as it expands product development, personnel, sales, and operations. No specific revenue or earnings guidance was provided.
- Management believed available liquidity would meet requirements for at least the next 12 months. It also noted that future equity or debt financing may be considered and could be unavailable on favorable terms or dilute shareholders.
- Penumbra adopted ASC 606 using the modified retrospective method. The cumulative opening retained-earnings impact was $0.3 million; Q1 2018 revenue was $0.1 million higher than it would have been without adoption. Prior-year figures remain under ASC 605 and are not directly restated.
- The company recognized a $1.0 million share of losses from MVI Health, in which it owns 50%; MVI had no revenue and a $1.9 million net loss for the quarter.
- A royalty buyout was settled with company shares valued at $5.3 million; the amount was recorded as an intangible asset to be amortized over its estimated useful life. Fair-value contingent consideration included $14.2 million of liabilities, primarily tied to Crossmed and a technology license. Crossmed milestone payments are based on revenue and are not capped.
- Risks highlighted include intense competition, dependence on successful product launches and clinical acceptance, salesforce growth and product supply, variable quarterly results, and foreign-currency exposure. Most international sales are in euros and yen; the company does not currently hedge. Management said a 10% adverse currency move was not expected to materially affect net income.
- Management noted the medical device excise tax suspension runs for two years from January 1, 2018 and, absent further legislative action, the tax would return in 2020. The company expects most lease commitments to be recognized as lease liabilities and right-of-use assets upon adoption of the new lease standard.
- The filing reports no material litigation, no material changes to previously disclosed risk factors, and effective disclosure controls as of March 31, 2018. Management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue momentum and procedure growth persist, particularly in Neuro and international markets, and how product launches affect sales and supply.
- Whether rising personnel and other operating costs can be managed while sustaining margins; Q1 gross margin was slightly lower year over year.
- The assumptions and potential payment range for Crossmed earn-outs and technology-license milestones, including the uncapped Crossmed payments.
- The sustainability of reported net income given the tax benefit and the $1.0 million equity-method loss from MVI.
- Foreign-exchange sensitivity, the future effect of lease accounting, and any change to management’s liquidity assessment or financing needs.