Penumbra, Inc. — Q3 2016 Form 10-Q
Business and period: Penumbra designs, manufactures and sells interventional medical devices in neuro and peripheral vascular markets. This unaudited filing covers the quarter and nine months ended September 30, 2016; comparable periods are 2015.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $67.2 million | $50.4 million | $190.2 million | $131.7 million |
| Gross profit / margin | $42.9 million / 63.8% | $33.5 million / 66.4% | $124.2 million / 65.3% | $87.6 million / 66.5% |
| Operating income (loss) | ($1.4 million) | $2.2 million | ($0.2 million) | $2.4 million |
| Net income (loss) | ($1.1 million) | $0.9 million | ($0.1 million) | $0.7 million |
- Q3 revenue grew 33.3%; nine-month revenue grew 44.5%. Growth reflected increased market penetration and new products or indications. Nine-month neuro revenue rose 31.1% and peripheral vascular revenue rose 91.1%.
- Gross margin fell 2.6 percentage points in Q3 and 1.2 points for the nine months. Management attributed the declines to product launches, hiring and training costs, and geographic and product mix.
- Operating expenses increased 41.3% in Q3 and 46.0% for the nine months, led by SG&A, including personnel costs as headcount increased 59%. R&D also rose with personnel, development and clinical activity.
- Nine-month operating cash flow was negative $10.1 million, versus negative $12.6 million in 2015. Inventory, receivables and prepaid assets absorbed cash; capital expenditures were $7.1 million.
- At September 30, cash and equivalents were $15.9 million, marketable investments $126.0 million, and working capital $229.9 million. Current liabilities were $37.3 million. The balance sheet reports no debt.
Changes, outlook and risks
- International sales were 33.0% of nine-month revenue, versus 32.1% a year earlier. Sales are exposed to foreign currencies, primarily the euro and yen; the company did not hedge.
- Management said available liquidity should meet requirements for at least 12 months, while noting it may seek financing to support growth. It expects R&D and SG&A to rise as it develops products, expands its salesforce and operations, and grows internationally. No quantified revenue or earnings guidance is provided.
- A product-liability suit alleges injury involving the Penumbra Coil 400. The claimant’s counsel indicated a possible $35 million jury award, substantially above insurance coverage. The case was in discovery; the company said it could not assess the merits and intends to defend it.
- Other notable exposures include reliance on limited suppliers without long-term supply arrangements, variable quarterly results, and a distributor that represented 13% of Q3 revenue and 11% of nine-month revenue. Management reported no material changes to previously disclosed risk factors.
- The company recorded a nine-month effective tax rate of 121.8%, which it attributed primarily to the mix of operating income among jurisdictions. It used the discrete effective tax-rate method for interim periods.
Investor facts to verify
- Whether revenue growth can continue while gross margins and operating profitability recover.
- Cash conversion, particularly inventory and receivables growth, alongside planned capital investment.
- Developments, potential exposure and insurance coverage in the Coil 400 litigation.
- Revenue concentration at the distributor and the effects of unhedged currency exposure.
- Future operating costs, share-based compensation and financing needs as the company expands.