NuVasive Announces Second Quarter 2018 Financial Results

2018 Guidance Range ¹

Prior

Current

(in million's; except %'s and EPS)

 GAAP 

 Non-GAAP 

 GAAP 

 Non-GAAP 

Revenue

$    1,095

$    1,105

$ 1,095

$    1,105

$ 1,095

$ 1,105

$ 1,095

$ 1,105

  % Growth - Reported ²

6.7%

7.6%

6.7%

7.6%

6.7%

7.6%

6.7%

7.6%

% Growth - Constant Currency ^{2, 3}

5.7%

6.6%

6.3%

7.3%

Operating margin

9.6%

9.7%

17.6%

17.6%

8.0%

8.1%

16.7%

16.7%

Earnings per share

$      0.71

$      0.74

$   2.44

$      2.47

$   0.45

$   0.48

$   2.37

$   2.40

EBITDA

19.5%

19.5%

26.9%

26.9%

18.7%

18.7%

25.9%

25.9%

Tax Rate

~31%

~31%

~23%

~23%

~33%

~33%

~21%

~21%

1

Prior guidance reflects the range provided May 1, 2018. Current guidance reflects the range provided July 31, 2018.

2

2017 has been recasted and presented based on our full retrospective method of adoption of ASC 606.

3

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

2017
Actuals^{1, 2}

2018 Guidance Range

Prior^{1, 3, 4}

Current  ^{1, 3, 5}

GAAP net income per share

$       1.48

$  0.71

$  0.74

$  0.45

$  0.48

Impact of change to diluted share count

0.08

0.01

0.01

-

-

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

$       1.56

$  0.72

$  0.75

$  0.45

$  0.48

Business transition costs ⁶

0.08

0.07

0.07

0.13

0.13

Non-cash purchase accounting adjustments on acquisitions ⁷

0.01

0.02

0.02

0.02

0.02

Non-cash interest expense on convertible notes

0.33

0.32

0.32

0.32

0.32

Litigation related expenses and settlements ⁸

0.09

0.55

0.55

0.60

0.60

Non-recurring consulting fees ⁹

-

0.12

0.12

0.13

0.13

Impairment of strategic investment

-

0.17

0.17

0.17

0.17

Amortization of intangible assets ¹⁰

0.89

0.89

0.89

0.95

0.95

Tax effect of adjustments ¹¹

(1.08)

(0.42)

(0.42)

(0.40)

(0.40)

Non-GAAP earnings per share

$       1.89

$  2.44

$  2.47

$  2.37

$  2.40

GAAP Weighted shares outstanding - basic

50,874

51,025

51,025

51,397

51,397

GAAP Weighted shares outstanding - diluted

55,193

52,647

52,647

52,131

52,131

Non-GAAP Weighted shares outstanding - diluted ¹²

52,345

52,185

52,185

52,131

52,131

1

Items may not foot due to rounding.

2

2017 has been recasted and presented based on our full retrospective method of adoption of ASC 606 as well as for 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

Prior guidance reflects the range provided May 1, 2018. Current guidance reflects the range provided July 31, 2018.

4

Effective tax expense rate of ~31% applied to GAAP earnings and ~23% applied to Non-GAAP earnings.

5

Effective tax expense rate of ~33% applied to GAAP earnings and ~21% applied to Non-GAAP earnings.

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

Related to the Medtronic litigation matter for fiscal year 2017. Represents the settlement loss in connection with 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 for fiscal year 2018.

9

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

10

2017 results exclude the amortization associated with non-controlling interest.

11

The impact on results from taxes include tax effecting 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 estimated rate of ~33% on a GAAP basis and ~21% on a non-GAAP basis.

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.

2018 Guidance^{2, 3}

(in thousands, except %)

2017
Actuals ^{1, 2}

Prior

Current

Non-GAAP Gross Margin %[A]

73.9%

73.5%

72.6%

Non-cash purchase accounting adjustments on acquisitions ⁴

(0.1%)

(0.1%)

GAAP Gross Margin [B]

73.9%

73.4%

72.5%

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

52.5%

50.6%

50.6%

Non-recurring consulting fees⁵

0.0%

0.6%

0.6%

GAAP Sales, Marketing & Administrative Expense [D]

52.5%

51.2%

51.2%

Non-GAAP Research & Development Expense [E]

4.9%

5.3%

5.3%

In-process research & development

0.0%

0.0%

0.0%

GAAP Research & Development Expense [F]

4.9%

5.3%

5.3%

Litigation related expenses and settlements [G] ⁶

0.5%

2.6%

2.9%

Amortization of intangible assets [H] ⁷

4.7%

4.3%

4.5%

Business transition costs [I] ⁸

0.5%

0.4%

0.6%

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

16.5%

17.6%

16.7%

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

10.9%

9.6%

8.0%

1

2017 has been recasted and presented based on our full retrospective method of adoption of ASC 606 as well as for 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

Items may not foot due to rounding.

  3

Prior guidance reflects the range provided May 1, 2018. Current guidance reflects the range provided July 31, 2018.

  4

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.

  5

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

  6

Related to the Medtronic litigation matter, settlement loss in connection with 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.

  7

For fiscal year 2017 amortization includes the amortization attributable to non-controlling interest. In January 2018, the Company completed the acquisition of the non-controlling interest.

  8

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.

2018 Guidance^{2, 3}

(in thousands, except %)

2017
Actuals ^{1, 2}

Prior

Current

Net Income / (Loss)

7.9%

3.4%

2.2%

Interest (income) / expense, net 

3.7%

3.6%

3.5%

Provision for income taxes

1.6%

1.1%

Depreciation and amortization ⁴

11.7%

10.9%

11.5%

EBITDA

22.6%

19.5%

18.3%

Non-cash stock based compensation

2.2%

3.0%

2.6%

Business transition costs ⁵

0.4%

0.3%

0.6%

Non-cash purchase accounting adjustments on acquisitions ⁶

0.1%

0.1%

0.1%

Litigation related expenses and settlements ⁷

0.5%

2.6%

2.9%

Non-recurring consulting fees ⁸

0.0%

0.6%

0.6%

Impairment of strategic investment

0.0%

0.8%

0.8%

Adjusted EBITDA

25.7%

26.9%

25.9%

1

2017 has been recasted and presented based on our full retrospective method of adoption of ASC 606 as well as for 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

Items may not foot due to rounding.

3

Prior guidance reflects the range provided May 1, 2018. Current guidance reflects the range provided July 31, 2018.

4

2017 results exclude the amortization associated with non-controlling interest.

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

Related to the Medtronic litigation matter, settlement loss in connection with 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.

For the Three Months Ended June 30, 2018

Reconciliation of Non-GAAP Financial Measures to the Most Directly Comparable GAAP Financial Measures

(Unaudited - in thousands, except per share data)

Gross Profit

Operating
Profit

Net Income 

Diluted EPS

Diluted WASO

Net Income to
Adjusted EBITDA

Reported GAAP

$      204,508

$    28,563

$      11,531

$           0.22

51,956

$                  11,531

% of revenue

72.6%

10.1%

Non-cash purchase accounting adjustments on acquisitions ¹

405

405

405

405

Amortization of intangible assets

12,628

12,628

Litigation related expenses and settlements ²

383

383

383

Business transition costs³

3,998

3,998

3,998

Non-cash interest expense on convertible notes

4,153

Tax effect of adjustments ⁴

(2,775)

Interest expense/(income), net

9,840

Income tax expense

4,813

Depreciation and amortization

32,061

Non-cash stock based compensation

6,860

Adjusted Non-GAAP

$      204,913

$    45,977

$      30,323

$           0.58

51,956

$                  69,891

% of revenue

72.8%

16.3%

24.8%

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 the change in the estimated loss contingency 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.

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

The impact on results from taxes include tax effecting 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 estimated rate of ~32.6% on a GAAP basis and ~21.0% on a non-GAAP basis.

For the Six Months Ended June 30, 2018

Reconciliation of Non-GAAP Financial Measures to the Most Directly Comparable GAAP Financial Measures

(Unaudited - in thousands, except per share data)

Gross Profit

Operating
Profit

Net (Loss)
Income

Diluted EPS

Diluted WASO ⁶

Net Loss to
Adjusted EBITDA

Reported GAAP

$      391,216

$    10,341

$    (15,601)

$          (0.30)

51,292

$                (15,601)

% of revenue

72.2%

1.9%

Non-cash purchase accounting adjustments on acquisitions ¹

810

810

810

810

Non-recurring consulting fees ²

6,084

6,084

6,084

Amortization of intangible assets

25,053

25,053

Litigation related expenses and settlements ³

29,969

29,969

29,969

Business transition costs⁴

6,251

6,251

6,251

Non-cash interest expense on convertible notes

8,252

Impairment of strategic investment

9,004

9,004

Tax effect of adjustments ⁵

(18,884)

Interest expense/(income), net

19,173

Income tax benefit

(5,313)

Depreciation and amortization

64,151

Non-cash stock based compensation

10,994

Adjusted Non-GAAP

$      392,026

$    78,508

$      50,938

$           0.98

51,849

$                125,522

% of revenue

72.3%

14.5%

23.2%

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

The impact on results from taxes include tax effecting 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 estimated rate of ~32.6% on a GAAP basis and ~21.0% on a non-GAAP basis.

6

The Company had a GAAP net loss for the six months ended June 30, 2018, and therefore the loss per share was calculated using the basic weighted average shares outstanding. The non-GAAP earnings per share for the six months ending June 30, 2018 was calculated using the diluted weighted average shares outstanding.

For the Three Months Ended June 30, 2017

Reconciliation of Non-GAAP Financial Measures to the Most Directly Comparable 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 GAAP¹

$      193,213

$    28,956

$      12,167

$           0.21

58,330

$                  12,167

% of revenue

74.5%

11.2%

Amortization of intangible assets ²

11,349

11,028

Business transition costs ³

1,369

1,369

1,369

Non-cash interest expense on convertible notes

4,665

Tax effect of adjustments ⁴

(5,664)

Interest expense/(income), net

9,944

Income tax expense

6,776

Depreciation and amortization ²

28,856

Non-cash stock based compensation

8,394

Adjusted Non-GAAP

$      193,213

$    41,674

$      23,565

$           0.45

52,743

$                  67,506

% of revenue

74.5%

16.1%

26.0%

1

Reported GAAP figures for 2017 have been recasted and presented based on the full retrospective method of adoption of ASC 606.

2

When reconciling from reported GAAP net income, the adjustment for amortization of intangible assets excludes the amortization associated with non-controlling interest. In January 2018, the Company completed the acquisition of the non-controlling interest.

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

The impact on results from taxes include tax effecting 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 estimated rate of ~32.7% benefit on a GAAP basis and ~35.0% 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 Six Months Ended June 30, 2017

Reconciliation of Non-GAAP Financial Measures to the Most Directly Comparable 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 GAAP¹

$      380,783

$    51,628

$      24,593

$           0.42

58,059

$                  24,593

% of revenue

74.9%

10.2%

Amortization of intangible assets ²

23,410

22,766

Business transition costs ³

1,424

1,424

1,424

Non-cash interest expense on convertible notes

9,264

Tax effect of adjustments ⁴

(14,790)

Interest expense/(income), net

19,606

Income tax expense

8,061

Depreciation and amortization ²

58,014

Non-cash stock based compensation

15,411

Adjusted Non-GAAP

$      380,783

$    76,462

$      43,257

$           0.82

52,713

$                127,109

% of revenue

74.9%

15.0%

25.0%

1

Reported GAAP figures for 2017 have been recasted and presented based on the full retrospective method of adoption of ASC 606.

2

When reconciling from reported GAAP net income, the adjustment for amortization of intangible assets excludes the amortization associated with non-controlling interest. In January 2018, the Company completed the acquisition of the non-controlling interest.

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

The impact on results from taxes include tax effecting 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 estimated rate of ~32.7% benefit on a GAAP basis and ~35.0% 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.

NuVasive, Inc. 

Consolidated Statements of Operations 

(in thousands, except per share data)

Three Months Ended June 30,

Six Months Ended June 30,

(unaudited)

2018

2017

2018

2017

Revenue

Product revenue

$ 252,687

$ 237,824

$ 486,202

$ 462,779

Service revenue

28,877

21,575

55,884

45,633

Total revenue

281,564

259,399

542,086

508,412

Cost of revenue (excluding below amortization of intangible assets)

Cost of products sold 

58,202

50,535

113,393

96,436

Cost of services

18,854

15,651

37,477

31,193

Total cost of revenue

77,056

66,186

150,870

127,629

Gross profit

204,508

193,213

391,216

380,783

Operating expenses:

Sales, marketing and administrative

145,658

138,967

292,424

279,335

Research and development

14,856

12,572

29,347

24,986

Amortization of intangible assets

12,628

11,349

25,053

23,410

Litigation liability (gain) loss

(1,195)

—

27,800

—

Business transition costs

3,998

1,369

6,251

1,424

Total operating expenses

175,945

164,257

380,875

329,155

Interest and other expense, net:

Interest income

116

139

250

276

Interest expense

(9,956)

(10,083)

(19,423)

(19,882)

Other expense, net

(2,379)

(501)

(12,082)

(243)

Total interest and other expense, net

(12,219)

(10,445)

(31,255)

(19,849)

Income (loss) before income taxes

16,344

18,511

(20,914)

31,779

Income tax (expense) benefit

(4,813)

(6,776)

5,313

(8,061)

Consolidated net income (loss)

$   11,531

$   11,735

$ (15,601)

$   23,718

Add back net loss attributable to non-controlling interest

$          —

$      (432)

$          —

$      (875)

Net income (loss) attributable to NuVasive, Inc.

$   11,531

$   12,167

$ (15,601)

$   24,593

Net income (loss) per share attributable to NuVasive, Inc.:

Basic

$       0.22

$       0.24

$     (0.30)

$       0.48

Diluted

$       0.22

$       0.21

$     (0.30)

$       0.42

Weighted average shares outstanding:

Basic

51,356

51,082

51,292

50,825

Diluted

51,956

58,330

51,292

58,059

NuVasive, Inc. 

Consolidated Balance Sheets 

(in thousands, except par values and share amounts) 

June 30, 2018

December 31, 2017

ASSETS

(Unaudited)

Current assets:

Cash and cash equivalents

$                    70,078

$                  72,803

Restricted cash and investments

—

3,901

Accounts receivable, net of allowances of $16,782 and $13,026, respectively

199,907

200,220

Inventory, net

259,819

247,138

Prepaid income taxes

18,187

17,209

Prepaid expenses and other current assets

23,588

18,792

Total current assets

571,579

560,063

Property and equipment, net

231,733

215,326

Intangible assets, net

276,318

280,774

Goodwill

560,751

536,926

Deferred tax assets

4,955

6,440

Restricted cash and investments

2,394

1,494

Other assets

24,607

39,117

Total assets

$               1,672,337

$             1,640,140

LIABILITIES AND EQUITY

Current liabilities:

Accounts payable and accrued liabilities

89,534

$                  75,767

Contingent consideration liabilities

12,214

18,952

Accrued payroll and related expenses

51,128

55,618

Litigation liabilities

10,300

8,150

Short-term borrowings

37,000

—

Income tax liabilities

3,825

2,908

Total current liabilities

204,001

161,395

Long-term senior convertible notes

592,581

582,920

Deferred and income tax liabilities, non-current

9,525

18,870

Other long-term liabilities

85,067

77,539

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 June 30, 2018 and December 31, 2017, 56,511,851and 56,164,060 issued and outstanding at June 30, 2018 and December 31, 2017, respectively

61

60

Additional paid-in capital

1,371,436

1,363,549

Accumulated other comprehensive loss

(8,875)

(6,933)

(Accumulated deficit) retained earnings

(10,839)

4,762

Treasury stock at cost; 5,095,290shares and 5,001,886 shares at June 30, 2018 and December 31, 2017, respectively

(570,620)

(565,867)

Total NuVasive, Inc. stockholders' equity

781,163

795,571

Non-controlling interest

—

3,845

Total equity

781,163

799,416

Total liabilities and equity

$               1,672,337

$             1,640,140

NuVasive, Inc. 

Consolidated Statements of Cash Flows 

(in thousands) 

Six Months Ended June 30,

(unaudited)

2018

2017

Operating activities:

Consolidated net (loss) income

$ (15,601)

$   23,718

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Depreciation and amortization

64,151

58,688

Impairment of strategic investment

9,004

—

Amortization of non-cash interest

9,920

10,882

Stock-based compensation

10,994

15,411

Reserves on current assets

9,444

64

Other non-cash adjustments

12,133

7,380

Deferred income taxes

(6,593)

(3,077)

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

Accounts receivable

852

(15,823)

Inventory

(19,615)

(29,417)

Contingent consideration liabilities

(100)

(11,200)

Prepaid expenses and other current assets

(2,141)

(2,543)

Accounts payable and accrued liabilities

9,031

4,868

Accrued payroll and related expenses

(6,358)

(2,059)

Litigation liability

2,150

—

Income taxes

(53)

10,172

Net cash provided by operating activities

77,218

67,064

Investing activities:

Acquisitions and investments

(52,081)

(14,417)

Purchases of intangible assets

(7,682)

(1,695)

Purchases of property and equipment

(53,388)

(68,690)

Net cash used in investing activities

(113,151)

(84,802)

Financing activities:

Proceeds from the issuance of common stock

5,312

5,369

Purchase of treasury stock

(2,222)

(10,844)

Payment of contingent consideration

(8,900)

(18,800)

Proceeds from revolving line of credit

82,000

20,000

Repayments on revolving line of credit

(45,000)

—

Other financing activities

(146)

(2,205)

Net cash provided by (used in) financing activities

31,044

(6,480)

Effect of exchange rate changes on cash

(837)

1,449

Decrease in cash, cash equivalents, restricted cash and investments

(5,726)

(22,769)

Cash, cash equivalents, restricted cash and investments at beginning of period

78,198

161,048

Cash, cash equivalents, restricted cash and investments at end of period

$  72,472