Penumbra, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited U.S. GAAP results. Penumbra develops and sells interventional medical devices in neuro and peripheral vascular markets.
Key financial results
Amounts in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $83.9 | $67.2 | $237.7 | $190.2 |
| Gross profit / margin | $54.8 / 65.3% | $42.9 / 63.8% | $153.4 / 64.5% | $124.2 / 65.3% |
| Operating expenses | $54.1 | $44.2 | $156.1 | $124.4 |
| Operating income (loss) | $0.7 | $(1.4) | $(2.7) | $(0.2) |
| Net income (loss) | $0.2 | $11.9 | $(4.4) | $17.2 |
| Diluted EPS | $0.01 | $0.35 | $(0.14) | $0.52 |
- Q3 revenue rose 24.9% year over year; neuro revenue increased 23.4% and peripheral vascular revenue 28.4%. For the nine months, revenue rose 25.0%, with neuro up 23.1% and peripheral vascular up 29.6%.
- Q3 gross margin improved 1.5 percentage points, attributed mainly to product and geographic mix. Nine-month gross margin declined 0.8 points, reflecting new product launches, personnel costs, and product and geographic mix.
- Q3 operating income turned positive, but nine-month operating loss widened. Nine-month R&D rose 31.0% and SG&A rose 24.5%, largely from product development, clinical work, and increased headcount.
- Net income comparisons were materially affected by income taxes: 2016 included a substantial tax benefit, while 2017 recorded a $2.3 million nine-month tax provision. Penumbra recorded an $18.6 million partial valuation allowance against domestic deferred tax assets.
- Nine-month operating cash flow was $13.6 million, versus cash used of $2.5 million in 2016. Investing used $61.3 million and financing provided $101.9 million, including $106.3 million net proceeds from a March stock offering. Cash and cash equivalents ended at $65.6 million.
Financial position and liquidity
- At September 30, 2017, cash and cash equivalents were $65.6 million and marketable investments were $153.2 million, versus $13.2 million and $115.5 million, respectively, at December 31, 2016.
- Working capital was $320.7 million, compared with $228.0 million at year-end 2016. Current assets were $371.8 million and current liabilities $51.1 million.
- Total liabilities were $75.3 million; the balance sheet does not present a separate debt balance. The cash-flow statement reports $0.9 million of payments on debt and credit facilities.
- Operating cash flow included a $14.7 million inventory increase to support growth. Inventory rose to $90.5 million from $73.0 million at year-end.
Material changes, outlook, and risks
- Penumbra acquired Italian distributor Crossmed on July 3 for total consideration of $17.5 million, including $4.3 million fair value of contingent milestone payments. Crossmed contributed $2.7 million revenue and $0.3 million net loss in the quarter. Purchase accounting remains preliminary.
- The company entered an exclusive technology license agreement, recording a $15.2 million indefinite-lived intangible asset and a $12.7 million liability for probable future revenue-based milestone payments. Amortization is expected to begin after regulatory approval and commercialization.
- Management said existing cash, investments, and receivables should meet liquidity needs for at least the next 12 months. It expects continued investment in product launches, R&D, manufacturing, and international expansion; no numerical revenue or earnings guidance was provided.
- Management cited competition, product and regulatory execution, salesforce expansion, inventory planning, variable quarterly demand and margins, and foreign exchange as important risks. About 33.7% of nine-month revenue came from outside the U.S.; the company does not currently hedge currency exposure.
- A product-liability case involving the Penumbra Coil 400 had a preliminary confidential settlement agreement reached on November 1, 2017, subject to finalization; the filing said it would not have a material financial impact. If not finalized, litigation could proceed to trial.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether sustained revenue growth translates into operating profitability as R&D and sales and administrative costs continue to rise.
- How the Crossmed integration, earn-out payments, and licensed technology’s regulatory and commercialization milestones develop.
- Whether inventory growth and working-capital needs remain aligned with sales growth and operating cash generation.
- How future tax valuation-allowance decisions affect reported earnings and the usability of deferred tax assets.
- Final resolution and terms of the Coil 400 litigation settlement, and any resulting exposure if it is not finalized.