Penumbra, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Penumbra designs, manufactures, and sells interventional medical devices in neuro and peripheral vascular markets. Financial statements are unaudited.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $80.6 million | $65.1 million | $153.8 million | $123.0 million |
| Gross margin | 63.2% | 63.7% | 64.1% | 66.1% |
| Operating income (loss) | ($1.3) million | ($0.7) million | ($3.4) million | $1.2 million |
| Net income (loss) | ($1.6) million | $3.0 million | ($4.7) million | $5.3 million |
| Diluted EPS | ($0.05) | $0.09 | ($0.14) | $0.16 |
- Q2 revenue grew 23.8% year over year; neuro revenue increased 23.9% and peripheral vascular revenue 23.5%. For the first half, revenue grew 25.0%, with neuro up 22.9% and peripheral vascular up 30.2%. Management attributed growth to market penetration, new products or indications, and increased procedure volumes; prices were substantially unchanged.
- Gross margin declined 0.5 percentage points in Q2 and 2.0 points for the first half. Management cited new product launches, hiring-related costs, and product and geographic mix.
- Operating expenses rose: first-half R&D increased 34.3% to $15.1 million, and SG&A increased 26.0% to $86.9 million, principally reflecting product development and clinical costs, increased headcount, and marketing events.
- First-half operating cash flow was $2.8 million, versus cash use of $8.2 million in 2016. Cash and cash equivalents were $76.6 million at June 30; marketable investments were $142.1 million and working capital was $327.2 million. No interest-bearing debt is reported on the balance sheet.
- Investing activities used $39.2 million in the first half, including net purchases of marketable investments, $5.4 million of capital expenditures, and a $5.1 million non-marketable investment. Financing provided $102.6 million, largely from the March equity offering, which generated $106.3 million net proceeds.
Changes, outlook, and risks
- Despite revenue growth, the company moved from first-half operating and net income in 2016 to losses in 2017. A $1.8 million income-tax provision in first-half 2017 compared with a $3.6 million tax benefit in 2016 contributed to the net-income comparison. The company recorded a $16.8 million partial valuation allowance against domestic deferred tax assets; it expects future effective tax rates to reflect valuation allowances, foreign taxes, and intra-entity asset-transfer effects.
- Management said existing liquidity should meet requirements for at least the next 12 months. It expects R&D and SG&A to continue increasing with product development, clinical work, salesforce and international expansion. No specific revenue or earnings guidance was provided. Management cautioned that quarterly revenue and margins can vary with selling days, product and geographic mix, competition, product launches, inventory, and foreign exchange.
- On July 3, 2017, Penumbra acquired Italian distributor Crossmed for an initial €8.2 million (approximately $9.3 million), subject to customary adjustments, with potential additional milestone and revenue-based consideration. Purchase accounting and pro forma disclosures were not yet complete.
- A product-liability case involving Penumbra Coil 400 remained in discovery, with trial set for January 2018. Plaintiffs claimed $4–6 million in economic damages and at least $20 million in non-economic damages, amounts the company said substantially exceed insurance coverage. Penumbra disputes causation, liability, and damages; the outcome is uncertain.
- International sales represented 33.7% of first-half revenue. Sales are principally denominated in euros and Japanese yen; the company did not hedge foreign-exchange exposure. Management stated that a hypothetical immediate 10% adverse currency move was not expected to materially affect net income.
Important facts for investors to verify
- Whether revenue growth can continue while margins recover and operating expenses grow.
- The size and timing of further tax valuation allowances and their effect on reported earnings.
- Crossmed’s final purchase-price allocation, pro forma impact, and any contingent consideration.
- Developments and potential exposure in the Coil 400 product-liability litigation, including insurance coverage.
- Cash generation, inventory and receivables growth, and the impact of equity issuance and stock-based compensation on dilution.