Penumbra, Inc. — Q1 2017 Form 10-Q
Business and period: Penumbra designs, manufactures and sells interventional medical devices in neuro and peripheral vascular markets. This unaudited report covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016, and the balance sheet date March 31, 2017. Penumbra reports as one operating segment.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Revenue | $73.2 million | $57.9 million | Up 26.4% |
| Gross profit / margin | $47.7 million / 65.2% | $39.9 million / 68.9% | Profit up 19.6%; margin down 3.7 percentage points |
| Operating expenses | $49.8 million | $38.1 million | Up 30.9% |
| Operating income (loss) | $(2.0) million | $1.8 million | Turned to an operating loss |
| Net income (loss) | $(3.1) million | $2.3 million | Basic and diluted loss per share: $(0.10) |
| Operating cash flow | $2.2 million | $(2.1) million | Improved year over year |
| Capital expenditures | $3.2 million | $1.1 million | Cash purchases of property and equipment |
Revenue grew in both markets: neuro revenue was $50.2 million, up 21.7%, and peripheral vascular revenue was $23.0 million, up 38.0%. U.S. revenue rose 23.0% to $48.5 million; international revenue rose 33.6% to $24.7 million and was 33.8% of total revenue.
Gross margin declined primarily because of new product launches, additional personnel costs, and product and geographic sales mix. R&D increased 40.7% to $7.0 million, mainly from product development, testing and clinical trial costs. SG&A increased 29.2% to $42.7 million, primarily reflecting personnel costs and a 55% increase in headcount.
Financial position and liquidity
- Cash and cash equivalents were $109.4 million at March 31, 2017, versus $13.2 million at December 31, 2016; marketable investments were $122.3 million, versus $115.5 million.
- Working capital was $333.8 million, up from $228.0 million at year-end. Current assets were $372.4 million and current liabilities were $38.6 million.
- Total liabilities were $44.9 million, including $38.6 million of current liabilities. The balance sheet presents no borrowings or other debt.
- Financing cash flow of $105.5 million principally reflected a March public offering of 1,495,000 shares at $76 per share, generating approximately $106.3 million net proceeds. Proceeds are intended for general corporate purposes, including product development, clinical trials, working capital and potential acquisitions.
Changes, outlook and risks
- Management said revenue growth reflected deeper market penetration and sales of new products or products with new indications. Prices were substantially unchanged in both product markets.
- Management believes existing cash, investments and receivables will meet liquidity requirements for at least the next 12 months. No specific revenue or earnings guidance was provided. The company expects R&D and SG&A may continue to rise as it develops products, expands operations and grows its salesforce.
- Management cautioned that quarterly revenue, gross profit and margin can vary with selling days, product and geographic mix, customer orders, competition, regulatory timing, product launches, inventory costs, component availability and foreign exchange. It also cited reliance on a single or limited number of suppliers for some inputs and generally no long-term supplier arrangements.
- The company does not hedge foreign-currency exposure; international sales are principally denominated in euros and Japanese yen. Management said a hypothetical 10% adverse currency move was not expected to materially affect net income.
- A domestic deferred-tax valuation allowance of $9.8 million was recorded, contributing to a $1.4 million tax provision despite a pretax loss. Management said future tax rates may be affected by additional valuation allowances and foreign taxes.
- A product-liability lawsuit concerning a Penumbra Coil 400 procedure remains in discovery. Plaintiff’s counsel previously suggested possible damages of $35 million, substantially above the company’s insurance coverage. Penumbra disputes the claim and intends to defend it; the filing says the company cannot assess its merits.
- Management reported no material changes to the risk factors in the prior Form 10-K and no material change in internal control over financial reporting. The 2016 comparative tax and cash-flow figures reflect retrospective adoption of ASU 2016-09.
Most important facts for investors to verify
- Whether revenue growth can continue while gross margin recovers from the 3.7-point year-over-year decline and operating expenses grow.
- How much of the Q1 cash increase came from the share offering, and how offering proceeds are ultimately deployed.
- Whether inventory growth, clinical and development spending, and salesforce expansion translate into sustained sales and operating profitability.
- Developments, potential damages, and insurance coverage in the Coil 400 product-liability case.
- Future deferred-tax valuation allowances and the resulting impact on reported earnings and cash taxes.