Penumbra, Inc. — Q1 2016 Form 10-Q
Business context and reporting period. Penumbra designs, manufactures and markets medical devices for neurovascular and peripheral vascular procedures. This unaudited report covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015; balance-sheet comparisons are with December 31, 2015. The company reports one operating segment.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior balance date |
|---|---|---|
| Revenue | $57.9 million | $39.0 million; up 48.7% |
| Gross profit / margin | $39.9 million / 68.9% | $26.7 million / 68.6% |
| Operating expenses | $38.1 million | $22.7 million |
| Operating income / margin | $1.8 million / 3.2% | $4.0 million / 10.2% |
| Net income | $0.8 million | $2.5 million |
| Net income attributable to common stockholders per share | $0.03 basic; $0.02 diluted | $0.10 basic; $0.07 diluted |
| Net cash used in operating activities | $3.6 million | $2.7 million |
| Cash and cash equivalents | $17.6 million | $19.5 million at Dec. 31, 2015 |
| Marketable investments | $126.8 million | $129.3 million at Dec. 31, 2015 |
| Working capital | $219.7 million | $216.2 million at Dec. 31, 2015 |
Gross margin was nearly unchanged, but operating margin and net income declined as operating expenses grew faster than revenue. SG&A increased 69.2% to $33.1 million, including higher compensation, public-company-related professional fees, marketing and salesforce travel. R&D rose 56.7% to $5.0 million. The effective tax rate increased to 63.2% from 41.0%, primarily due to nondeductible stock-based compensation. The filing reports no debt balance; total liabilities were $37.1 million at March 31, 2016.
Revenue growth was broad-based: neuro revenue rose 30.4% to $41.3 million, and peripheral vascular revenue rose 127.9% to $16.6 million. U.S. revenue increased 49.6% to $39.4 million; international revenue increased 46.9% to $18.5 million and represented 32.0% of total revenue. One distributor accounted for 11% of revenue in both periods.
Cash flow, liquidity and material changes
Operating cash use increased year over year, principally reflecting a $9.1 million increase in inventory and a $3.2 million increase in prepaid and other assets, partly offset by higher accrued liabilities and accounts payable. Inventory rose to $66.6 million from $56.8 million, largely in finished goods. Investing activities provided $1.6 million, including net proceeds from investment sales and maturities, while capital expenditures were $1.1 million. Financing activities used approximately $0.003 million net. Cash and cash equivalents decreased by $1.9 million during the quarter.
Management stated that cash, marketable investments and receivables should meet liquidity needs for at least the next 12 months. It expects continued investment in R&D, new products, manufacturing capacity and international expansion, and says operating expenses are expected to rise as the salesforce and operations expand. No numeric revenue or earnings guidance was provided. Management cautioned that quarterly revenue and gross profit can vary with product and geographic mix, selling days, competition, regulatory timing, inventory adjustments, product launches, supply availability and foreign exchange.
Risks, contingencies and unusual items
- A product-liability complaint filed in February 2016 alleges injuries involving Penumbra Coil 400 procedures and seeks compensatory and punitive damages. Plaintiff’s counsel indicated a possible jury award of $35 million, substantially above the company’s insurance coverage. The hospital defendant requested indemnification. Penumbra said it could not assess the merits at this stage, intends to defend the case, and had a preliminary motion to dismiss certain claims pending.
- The company relies on a single or limited number of suppliers for some materials and components and generally lacks long-term supply arrangements. It manufactures substantially all products at its Alameda, California campus.
- International sales are primarily denominated in euros and Japanese yen; the company did not hedge foreign-exchange exposure. Management said a hypothetical immediate 10% adverse currency move would not have a material effect, but exposure may rise as international sales expand.
- Stock-based compensation expense increased to $3.0 million from $0.4 million. Unrecognized compensation cost was $29.2 million, expected to be recognized over a weighted-average two years.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It said risk factors were not materially changed from its 2015 Form 10-K.
Key facts for investors to verify
- Whether rapid revenue growth, particularly in peripheral vascular products, continues and translates into operating leverage.
- Whether elevated inventory and working-capital investment convert into sales and operating cash flow.
- The trajectory of salesforce, SG&A, R&D and stock-based compensation costs relative to revenue growth.
- Developments in the Coil 400 litigation, potential indemnification obligations and the adequacy of insurance coverage.
- Exposure to supplier concentration, product transitions, international currencies and quarterly demand variability.