NuVasive Announces Third Quarter 2019 Financial Results

2019 Guidance Range ¹

Prior

Current

 GAAP 

 Non-GAAP 

 GAAP 

 Non-GAAP 

Revenue

 $1.14B - $1.16B 

 $1.14B - $1.16B 

 ~$1.16B 

 ~$1.16B 

  % Growth - Reported

3.4% - 5.4%

3.4% - 5.4%

5.1% - 5.8%

5.1% - 5.8%

3.8% - 5.8%

5.6% - 6.3%

Operating margin

9.1% - 9.5%

15.3% - 15.7%

9.4% - 9.8%

15.5% - 15.9%

Earnings per share

 $0.93 - $1.03 

 $2.25 - $2.35 

 $0.95 - $1.00 

 $2.35- $2.40 

EBITDA margin

21.2% - 21.5%

25.5% - 25.9%

20.6% - 21.0%

25.0% - 25.4%

Tax Rate

~24%

~23%

~26%

~23%

     ¹

Prior guidance reflects the range provided July 30, 2019. Current guidance reflects the range provided October 30, 2019.

     ²

Constant currency is a measure that adjusts US GAAP revenue for the impact of currency over the same period in the prior year.

Reconciliation of Full Year EPS Guidance

2019 Guidance Range  ^{1, 2}

2018 Actuals ¹

Prior ³

Current ⁴

GAAP net income per share

 $0.93 - 1.03 

 $0.95- 1.00 

Impact of change to diluted share count

—

—

—

GAAP net income per share, adjusted to diluted Non-GAAP share count

$0.24

 $0.93 - 1.03 

 $0.95 - 1.00 

Business transition costs ⁵

0.22

0.11

0.10

Non-cash purchase accounting adjustments on acquisitions ⁶

0.02

—

—

Non-cash interest expense on convertible notes

0.32

0.34

0.34

Litigation related expenses and settlements ⁷

0.65

0.18

0.19

Non-recurring consulting fees ⁸

0.12

—

—

Net loss on strategic investments

0.07

—

0.09

Amortization of intangible assets

0.97

0.96

0.97

Purchase of in-process research and development ⁹

0.17

—

—

European medical device regulation ¹⁰

0.01

0.11

0.09

Tax effect of adjustments ¹¹

(0.56)

(0.38)

(0.38)

Non-GAAP earnings per share

$2.23

 $2.25 - 2.35 

 $2.35 - 2.40 

GAAP Weighted shares outstanding - basic

51,382

51,954

51,959

GAAP Weighted shares outstanding - diluted

52,355

52,898

52,948

Non-GAAP Weighted shares outstanding - diluted ¹²

52,178

52,586

52,578

Items may not foot due to rounding.

     ²

Prior guidance reflects the range provided July 30, 2019. Current guidance reflects the range provided October 30, 2019.

     ³

Effective tax expense rate of ~24% applied to GAAP earnings and ~23% applied to Non-GAAP earnings.

     ⁴

Effective tax expense rate of ~26% applied to GAAP earnings and ~23% applied to Non-GAAP earnings.

     ⁵

Costs related to acquisition, integration and business transition activities which include severance, relocation, consulting, leasehold exit costs, third party merger and acquisitions costs, contingent consideration fair value adjustments, and other costs directly associated with such activities.

     ⁶

Represents costs associated with non-cash purchase accounting adjustments, such as acquired inventory fair market value adjustments, which are amortized over the period in which underlying products are sold.

     ⁷

Represents the loss recorded in connection with the settlement of the Madsen Medical, Inc. litigation matter, as well as expenses associated with ongoing litigation with a former Board member and his current employer related to various matters, including infringement of the Company's intellectual property.

     ⁸

Non-recurring consulting fees associated with the implementation of our state tax-planning strategy.

     ⁹

Purchase of an in-process research and development asset which had no future alternative use.

     ¹⁰

Costs related to updating our quality system, product labeling, asset write-offs and product remanufacturing to comply with European medical device regulation.

     ¹¹

The impact on results from taxes include tax affecting the adjustments above at the statutory rate as well as taking into account discrete items and including those discrete items in the annual effective tax rate calculation. The Company also includes those adjustments that would have benefited the tax rate in lieu of the above adjustments as part of the Company's tax filings. The impact of the changes to the tax rate results in an annual rate of ~43% benefit on a GAAP basis and ~18% on a non-GAAP basis in 2018.

     ¹²

Adjusted non-GAAP diluted WASO excludes the impact of dilutive convertible notes and warrants for which the Company is economically hedged through its anti-dilutive bond hedge arrangements.

Reconciliation of Non-GAAP Operating Margin %

2019 Guidance Range ^{1, 2}

(in thousands, except %)

2018 Actuals ¹

Prior

Current

Non-GAAP Gross Margin % [A]

71.9%

72.5% - 73.0%

72.8% - 73.2%

Non-cash purchase accounting adjustments on acquisitions ³

0.0%

0.0%

GAAP Gross Margin [B]

71.8%

72.5% - 73.0%

72.8% - 73.2%

Non-GAAP Sales, Marketing & Administrative Expense [C]

51.1%

50.8% - 51.7%

50.9% - 51.7%

Non-recurring consulting fees ⁴

0.6%

0.0%

0.0%

Litigation related expenses ⁵

0.6%

0.8%

0.8%

GAAP Sales, Marketing & Administrative Expense [D]

52.3%

51.6% - 52.5%

51.7% - 52.5%

GAAP and Non-GAAP Research & Development Expense [E]

5.6%

6.0%

6.0%

Litigation related settlements [F] ⁶

2.5%

0.0%

0.0%

Amortization of intangible assets [G]

4.6%

4.4%

4.4%

Purchase of in-process research and development [H] ⁷

0.8%

0.0%

0.0%

European medical device regulation [I] ⁸

0.0%

0.5%

0.4%

Business transition costs [J] ⁹

1.0%

0.5%

0.5%

Non-GAAP Operating Margin % [A - C - E]

15.1%

15.3% - 15.7%

15.5% - 15.9%

GAAP Operating Margin % [B - D - E - F - G - H - I - J]

4.9%

9.1% - 9.5%

9.4% - 9.8%

     ¹

Items may not foot due to rounding.

     ²

Prior guidance reflects the range provided July 30, 2019. Current guidance reflects the range provided October 30, 2019.

     ³

Represents costs associated with non-cash purchase accounting adjustments, such as acquired inventory fair market value adjustments, which are amortized over the period in which underlying products are sold.

     ⁴

Non-recurring consulting fees associated with the implementation of our state tax-planning strategy.

     ⁵

Expenses associated with ongoing litigation with a former Board member and his current employer related to various matters, including infringement of the Company's intellectual property.

     ⁶

Represents the loss recorded in connection with the settlement of the Madsen Medical, Inc. litigation matter.

     ⁷

Purchase of an in-process research and development asset which had no future alternative use.

     ⁸

Costs related to updating our quality system, product labeling, asset write-offs and product remanufacturing to comply with European medical device regulation.

     ⁹

Costs related to acquisition, integration and business transition activities which include severance, relocation, consulting, leasehold exit costs, third party merger and acquisitions costs, contingent consideration fair value adjustments, and other costs directly associated with such activities.

Reconciliation of EBITDA Margin %

2019 Guidance Range ^{1, 5}

(in thousands, except %)

2018 Actuals ^{1, 2}

Prior ³

Current⁴

Net Income

1.1%

4.3% - 4.7%

4.2% - 4.6%

Interest income / expense, net 

3.4%

3.3%

3.2%

Income tax benefit / (expense)

1.5%

1.5%

Depreciation and amortization

11.8%

11.9%

11.7%

EBITDA Margin

16.0%

21.2% - 21.5%

20.6% - 21.0%

Non-cash stock based compensation

2.3%

2.5%

2.3%

Business transition costs ⁶

1.0%

0.5%

0.4%

Non-cash purchase accounting adjustments on acquisitions ⁷

0.1%

0.0%

0.0%

Litigation related expenses and settlements ⁸

3.1%

0.8%

0.9%

Non-recurring consulting fees ⁹

0.6%

0.0%

0.0%

In-process research and development ¹⁰

0.8%

0.0%

0.0%

European medical device regulation ¹¹

0.0%

0.5%

0.4%

Net loss on strategic investments

0.3%

0.0%

0.4%

Adjusted EBITDA Margin

24.3%

25.5% - 25.9%

25.0% - 25.4%

     ¹

Items may not foot due to rounding.

     ²

Effective tax expense rate of ~43% benefit applied to GAAP earnings and ~18% applied to Non-GAAP earnings.

     ³

Effective tax expense rate of ~24% applied to GAAP earnings and ~23% applied to Non-GAAP earnings.

     ⁴

Effective tax expense rate of ~26% applied to GAAP earnings and ~23% applied to Non-GAAP earnings.

     ⁵

Prior guidance reflects the range provided July 30, 2019. Current guidance reflects the range provided October 30, 2019.

     ⁶

Costs related to acquisition, integration and business transition activities which include severance, relocation, consulting, leasehold exit costs, third party merger and acquisitions costs, contingent consideration fair value adjustments, and other costs directly associated with such activities.

     ⁷

Represents costs associated with non-cash purchase accounting adjustments, such as acquired inventory fair market value adjustments, which are amortized over the period in which underlying products are sold.

     ⁸

Represents the loss recorded in connection with the settlement of the Madsen Medical, Inc. litigation matter, as well as expenses associated with ongoing litigation with a former Board member and his current employer related to various matters, including infringement of the Company's intellectual property.

     ⁹

Non-recurring consulting fees associated with the implementation of our state tax-planning strategy.

     ¹⁰

Purchase of an in-process research and development asset which had no future alternative use.

     ¹¹

Charges represent the costs specific to updating our quality system, product labeling, asset write-offs and product remanufacturing to comply with European medical device regulation.

For the Three Months Ended September 30, 2019

Reconciliation of GAAP to Non-GAAP Financial Measures

(Unaudited - in thousands, except per share data)

Gross Profit

Operating
Profit

Net Income 

Diluted
EPS

Diluted
WASO ⁵

Net Income to
Adjusted EBITDA

Reported GAAP

$      213,807

$    30,514

$      11,010

$   0.21

53,056

$                  11,010

% of revenue

73.5%

10.5%

Amortization of intangible assets

12,596

12,596

Litigation related expenses and settlements ¹

1,899

1,899

1,899

Business transition costs ²

(333)

(333)

(333)

European medical device regulation ³

953

953

953

Non-cash interest expense on convertible notes

4,432

Net loss on strategic investments

4,767

4,767

Tax effect of adjustments ⁴

(4,455)

Interest expense/(income), net

9,034

Income tax expense

4,774

Depreciation and amortization

33,631

Non-cash stock based compensation

7,829

Adjusted Non-GAAP

$      213,807

$    45,629

$      30,869

$   0.59

52,590

$                  73,564

% of revenue

73.5%

15.7%

25.3%

     ¹

Represents expenses associated with ongoing litigation with a former Board member and his current employer related to various matters, including infringement of the Company's intellectual property.

     ²

Costs related to acquisition, integration and business transition activities which include severance, relocation, consulting, leasehold exit costs, third party merger and acquisitions costs, contingent consideration fair value adjustments, and other costs directly associated with such activities.

     ³

Represents costs specific to updating our quality system, product labeling, asset write-offs and product remanufacturing to comply with European medical device regulation.

     ⁴

Represents the impact from tax affecting the adjustments above at their statutory tax rate. As of October 30, 2019, the Company estimated an annual tax rate of ~26% on a GAAP basis and ~23% on a non-GAAP basis.

     ⁵

Adjusted non-GAAP diluted WASO excludes the impact of dilutive convertible notes and warrants for which the Company is economically hedged through its anti-dilutive bond hedge arrangements.

For the Nine Months Ended September 30, 2019

Reconciliation of GAAP to Non-GAAP Financial Measures

(Unaudited - in thousands, except per share data)

Gross Profit

Operating
Profit

Net Income

Diluted
EPS

Diluted
WASO ⁵

Net Income to
Adjusted EBITDA

Reported GAAP

$      628,615

$    80,884

$      35,358

$   0.67

52,667

$                  35,358

% of revenue

73.3%

9.4%

Amortization of intangible assets

38,498

38,498

Litigation related expenses and settlements ¹

6,976

6,976

6,976

Business transition costs ²

5,146

5,146

5,146

European medical device regulation ³

2,685

2,685

2,685

Non-cash interest expense on convertible notes

13,125

Net loss on strategic investments

4,767

4,767

Tax effect of adjustments ⁴

(15,269)

Interest expense/(income), net

27,461

Income tax expense

12,012

Depreciation and amortization

101,245

Non-cash stock based compensation

20,447

Adjusted Non-GAAP

$      628,615

$  134,189

$      91,286

$   1.74

52,512

$                216,097

% of revenue

73.3%

15.6%

25.2%

     ¹

Represents expenses associated with ongoing litigation with a former Board member and his current employer related to various matters, including infringement of the Company's intellectual property.

     ²

Costs related to acquisition, integration and business transition activities which include severance, relocation, consulting, leasehold exit costs, third party merger and acquisitions costs, contingent consideration fair value adjustments, and other costs directly associated with such activities.

     ³

Represents costs specific to updating our quality system, product labeling, asset write-offs and product remanufacturing to comply with European medical device regulation.

     ⁴

Represents the impact from tax affecting the adjustments above at their statutory tax rate. As of October 30, 2019, the Company estimated an annual tax rate of ~26% on a GAAP basis and ~23% on a non-GAAP basis.

     ⁵

Adjusted non-GAAP diluted WASO excludes the impact of dilutive convertible notes and warrants for which the Company is economically hedged through its anti-dilutive bond hedge arrangements.

For the Three Months Ended September 30, 2018

Reconciliation of GAAP to Non-GAAP Financial Measures

(Unaudited - in thousands, except per share data)

Gross Profit

Operating
Profit

Net Income

Diluted
EPS

Diluted
WASO ⁶

Net Income to
Adjusted EBITDA

Reported GAAP

$      197,141

$    17,971

$      15,923

$   0.30

53,189

$                  15,923

% of revenue

72.7%

6.6%

Non-cash purchase accounting adjustments on acquisitions ¹

270

270

270

270

Amortization of intangible assets

12,349

12,349

Litigation related expenses and settlements ²

1,333

1,333

1,333

Business transition costs ³

1,443

1,443

1,443

Purchase of in-process research and development ⁴

8,913

8,913

8,913

Non-cash interest expense on convertible notes

4,208

Net gain on strategic investments

(5,137)

(5,137)

Tax effect of adjustments ⁵

(9,798)

Interest expense/(income), net

8,905

Income tax benefit

(2,618)

Depreciation and amortization

32,258

Non-cash stock based compensation

11,068

Adjusted Non-GAAP

$      197,411

$    42,279

$      29,504

$   0.56

52,539

$                  72,358

% of revenue

72.8%

15.6%

26.7%

     ¹

Represents costs associated with non-cash purchase accounting adjustments, such as acquired inventory fair market value adjustments, which are amortized over the period in which underlying products are sold.

     ²

Represents expenses associated with ongoing litigation with a former Board member and his current employer related to various matters, including infringement of the Company's intellectual property.

     ³

Costs related to acquisition, integration and business transition activities which include severance, relocation, consulting, leasehold exit costs, third party merger and acquisitions costs, contingent consideration fair value adjustments, and other costs directly associated with such activities.

     ⁴

Purchase of an in-process research and development asset which had no future alternative use.

     ⁵

Represents the impact from tax affecting the adjustments above at their statutory tax rate. As of October 30, 2018, the Company estimated an annual tax rate of ~18% on a GAAP basis and ~21% on a non-GAAP basis.

     ⁶

Adjusted non-GAAP diluted WASO excludes the impact of dilutive convertible notes and warrants for which the Company is economically hedged through its anti-dilutive bond hedge arrangements.

For the Nine Months Ended September 30, 2018

Reconciliation of GAAP to Non-GAAP Financial Measures

(Unaudited - in thousands, except per share data)

Gross Profit

Operating
Profit

Net Income

Diluted EPS

Diluted
WASO ⁷

Net Income to
Adjusted EBITDA

Reported GAAP

$      588,357

$    28,312

$           322

$   0.01

52,296

$                       322

% of revenue

72.3%

3.5%

Non-cash purchase accounting adjustments on acquisitions ¹

1,080

1,080

1,080

1,080

Non-recurring consulting fees ²

6,084

6,084

6,084

Amortization of intangible assets

37,402

37,402

Litigation related expenses and settlements ³

31,302

31,302

31,302

Business transition costs ⁴

7,694

7,694

7,694

Purchase of in-process research and development ⁵

8,913

8,913

8,913

Non-cash interest expense on convertible notes

12,460

Net loss on strategic investments

3,867

3,867

Tax effect of adjustments ⁶

(28,682)

Interest expense/(income), net

28,078

Income tax benefit

(7,931)

Depreciation and amortization

96,409

Non-cash stock based compensation

22,062

$      589,437

$  120,787

$      80,442

$   1.54

52,079

$                197,880

% of revenue

72.5%

14.8%

24.3%

     ¹

Represents costs associated with non-cash purchase accounting adjustments, such as acquired inventory fair market value adjustments, which are amortized over the period in which underlying products are sold.

     ²

Non-recurring consulting fees associated with the implementation of our state tax-planning strategy.

     ³

Represents the loss recorded in connection with the settlement of the Madsen Medical, Inc. litigation matter, as well as expenses associated with ongoing litigation with a former Board member and his current employer related to various matters, including infringement of the Company's intellectual property.

     ⁴

Costs related to acquisition, integration and business transition activities which include severance, relocation, consulting, leasehold exit costs, third party merger and acquisitions costs, contingent consideration fair value adjustments, and other costs directly associated with such activities.

     ⁵

Purchase of an in-process research and development asset which had no future alternative use.

     ⁶

Represents the impact from tax affecting the adjustments above at their statutory tax rate. As of October 30, 2018, the Company estimated an annual tax rate of ~18% on a GAAP basis and ~21% on a non-GAAP basis.

     ⁷

Adjusted non-GAAP diluted WASO excludes the impact of dilutive convertible notes and warrants for which the Company is economically hedged through its anti-dilutive bond hedge arrangements.

NuVasive, Inc. 

Consolidated Statements of Operations 

(in thousands, except per share data)

Three Months Ended September 30,

Nine Months Ended September 30,

(unaudited)

2019

2018

2019

2018

Revenue

Product revenue

$ 260,173

$ 242,030

$ 765,377

$ 728,232

Service revenue

30,662

29,271

92,339

85,155

Total revenue

290,835

271,301

857,716

813,387

Cost of revenue (excluding below amortization of intangible assets)

Cost of products sold 

57,164

54,741

169,263

168,134

Cost of services

19,864

19,419

59,838

56,896

Total cost of revenue

77,028

74,160

229,101

225,030

Gross profit

213,807

197,141

628,615

588,357

Operating expenses:

Sales, marketing and administrative

152,887

141,211

450,816

433,635

Research and development

18,143

15,254

53,271

44,601

Amortization of intangible assets

12,596

12,349

38,498

37,402

Purchase of in-process research and development

—

8,913

—

8,913

Litigation liability loss

—

—

—

27,800

Business transition costs

(333)

1,443

5,146

7,694

Total operating expenses

183,293

179,170

547,731

560,045

Interest and other expense, net:

Interest income

620

130

1,356

380

Interest expense

(9,654)

(9,035)

(28,817)

(28,458)

Other (expense) income, net

(5,696)

4,239

(6,053)

(7,843)

Total interest and other expense, net

(14,730)

(4,666)

(33,514)

(35,921)

Income (loss) before income taxes

15,784

13,305

47,370

(7,609)

Income tax (expense) benefit

(4,774)

2,618

(12,012)

7,931

Consolidated net income

$   11,010

$   15,923

$   35,358

$        322

Net income per share:

Basic

$       0.21

$       0.31

$       0.68

$       0.01

Diluted

$       0.21

$       0.30

$       0.67

$       0.01

Weighted average shares outstanding:

Basic

52,057

51,439

51,901

51,341

Diluted

53,056

53,189

52,667

52,296

NuVasive, Inc. 

Consolidated Balance Sheets 

(in thousands, except par values and share amounts) 

September 30, 2019

December 31, 2018

ASSETS

(Unaudited)

Current assets:

Cash and cash equivalents

$                 163,399

$                117,840

Accounts receivable, net of allowances of $16,444 and $16,171, respectively

203,611

196,487

Inventory, net

308,893

273,244

Prepaid income taxes

20,328

16,905

Prepaid expenses and other current assets

14,610

13,733

Total current assets

710,841

618,209

Property and equipment, net

263,135

238,841

Intangible assets, net

214,492

252,048

Goodwill

560,744

561,366

Operating lease right-of-use assets

67,128

—

Deferred tax assets

4,023

5,263

Restricted cash and investments

2,395

2,395

Other assets

17,094

29,737

Total assets

$              1,839,852

$             1,707,859

LIABILITIES AND EQUITY

Current liabilities:

Accounts payable and accrued liabilities

$                 105,944

$                105,877

Contingent consideration liabilities

7,774

7,560

Accrued payroll and related expenses

66,044

59,960

Operating lease liabilities

5,792

—

Litigation liabilities

2,065

1,415

Income tax liabilities

5,496

4,648

Total current liabilities

193,115

179,460

Senior convertible notes

617,992

602,526

Deferred and income tax liabilities

13,491

4,964

Operating lease liabilities

72,713

—

Other long-term liabilities

65,927

86,384

Commitments and contingencies

Stockholders' equity:

Preferred stock, $0.001 par value; 5,000,000 shares authorized, none outstanding

—

—

Common stock, $0.001 par value; 120,000,000 shares authorized at September 30, 2019 and December 31, 2018, 57,420,854 and 56,648,077 issued and outstanding at September 30, 2019 and December 31, 2018, respectively

62

61

Additional paid-in capital

1,421,235

1,397,829

Accumulated other comprehensive loss

(11,332)

(8,628)

Retained earnings

52,599

17,241

Treasury stock at cost; 5,354,355 shares and 5,116,496 shares at September 30, 2019 and December 31, 2018, respectively

(585,950)

(571,978)

Total equity

876,614

834,525

Total liabilities and equity

$              1,839,852

$             1,707,859

NuVasive, Inc. 

Consolidated Statements of Cash Flows 

(in thousands) 

Nine Months Ended September 30,

(unaudited)

2019

2018

Operating activities:

Consolidated net income

$   35,358

$       322

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

101,245

96,409

Purchase of in-process research and development

—

8,913

Amortization of non-cash interest

15,853

14,986

Stock-based compensation

20,447

22,062

Reserves on current assets

11,539

11,116

Net loss on strategic investments

4,767

3,867

Other non-cash adjustments

8,733

16,560

Deferred income taxes

9,810

(9,938)

Changes in operating assets and liabilities, net of effects from acquisitions:

Accounts receivable

(8,645)

8,622

Inventory

(45,571)

(33,491)

Prepaid expenses and other current assets

(2,499)

(1,047)

Accounts payable and accrued liabilities

7,378

21,400

Accrued payroll and related expenses

4,108

(9,566)

Litigation liability

650

166

Income taxes

(2,588)

108

Net cash provided by operating activities

160,585

150,489

Investing activities:

Acquisitions and investments

(4,100)

(52,555)

Purchases of intangible assets

(7,501)

(7,682)

Purchases of property and equipment

(94,430)

(78,405)

Net cash used in investing activities

(106,031)

(138,642)

Financing activities:

Proceeds from the issuance of common stock

3,888

5,563

Purchases of treasury stock

(13,343)

(2,817)

Payment of contingent consideration

(809)

(18,700)

Proceeds from revolving line of credit

—

100,000

Repayments on revolving line of credit

—

(95,000)

Other financing activities

2,283

(236)

Net cash used in financing activities

(7,981)

(11,190)

Effect of exchange rate changes on cash

(1,014)

(1,349)

Increase (decrease) in cash, cash equivalents and restricted cash

45,559

(692)

Cash, cash equivalents and restricted cash at beginning of period

120,235

78,198

Cash, cash equivalents and restricted cash at end of period

$ 165,794

$  77,506