NuVasive Reports Fourth Quarter and Full Year 2017 Financial Results

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

 GAAP 

 Non-GAAP 

Revenue

$            1,095

$          1,105

$            1,095

$          1,105

  % Growth - Reported ²

6.4%

7.3%

6.4%

7.3%

5.9%

6.9%

Operating margin

13.0%

13.0%

17.6%

17.6%

Earnings per share

$               1.56

$            1.59

$              2.44

$            2.47

EBITDA margin

23.4%

23.4%

26.9%

26.9%

Tax Rate

~19%

~19%

~24%

~24%

¹ Guidance reflects the range provided February 26, 2018.

² 2017 as reported, does not include adoption of revenue recognition Accounting Standards Codification 606 (ASC 606).

Supplementary Financial Information

For additional financial detail, please visit the Investor Relations section of the Company's website at

www.nuvasive.com to access Supplementary Financial Information.

Reconciliation of Full Year EPS Guidance

2017
Actuals ^{1, 2}

2018 Guidance Range  ^{2, 3, 4}

GAAP net income per share

$           1.50

$         1.56

$         1.59

Impact of change to diluted share count

0.09

0.01

0.01

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

$           1.59

$         1.57

$         1.60

Litigation liability⁵

0.09

-

-

Business transition costs ⁶

0.08

0.04

0.04

Non-cash interest expense on convertible notes

0.33

0.32

0.32

Non-cash purchase accounting adjustments on acquisitions ⁷

0.01

0.02

0.02

Amortization of intangible assets ⁸

0.89

0.88

0.88

Tax effect of adjustments ⁹

(1.08)

(0.39)

(0.39)

Non-GAAP earnings per share

$           1.91

$         2.44

$         2.47

GAAP Weighted shares outstanding - basic

50,874

51,025

51,025

GAAP Weighted shares outstanding - diluted

55,196

52,647

52,647

Non-GAAP Weighted shares outstanding - diluted ¹⁰

52,348

52,185

52,185

¹ 2017 as reported, does not include adoption of revenue recognition ASC 606.

² Items may not foot due to rounding.

³ Guidance reflects the range provided February 26, 2018.

⁴ Effective tax expense rate of ~19% applied to GAAP earnings and ~24% applied to Non-GAAP earnings.

⁵ Represents the settlement of fees associated with the outcome of the Medtronic litigation matter.

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 Excludes the amortization associated with non-controlling interest.

⁹ The impact on results from taxes include tax effecting the adjustments above at the statutory rate, taking into account discrete items and including those discrete items in the annual effective tax rate calculation, as well as the one-time impact of the Tax Cuts and Jobs Act of 2017. 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 ~24% on a non-GAAP basis.

¹⁰ 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 %

2017
Actuals ^{1, 2}

2018
Guidance^{2, 3}

Non-GAAP Gross Margin %[A]

73.9%

74.0%

Non-cash purchase accounting adjustments on acquisitions ⁴

(0.1%)

(0.1%)

GAAP Gross Margin [B]

73.9%

73.9%

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

52.4%

51.1%

Non-GAAP Research & Development Expense [D]

4.9%

5.3%

In-process research & development

0.0%

0.0%

GAAP Research & Development Expense [E]

4.9%

5.3%

Litigation liability [F]⁵

0.4%

0.0%

Amortization of intangible assets [G] ⁶

4.7%

4.3%

Business transition costs [H] ⁷

0.4%

0.2%

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

16.6%

17.6%

GAAP Operating Margin % [B - C - E - F - G - H]

11.0%

13.0%

¹ 2017 as reported, does not include adoption of revenue recognition ASC 606.

² Items may not foot due to rounding.

³ Guidance reflects the range provided February 26, 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 Represents the settlement of fees associated with the outcome of the Medtronic litigation matter.

⁶ Excludes the amortization associated with non-controlling interest.

⁷ 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 %

2017
Actuals ^{1, 2}

2018
Guidance^{2, 3}

Net Income / (Loss)

8.1%

7.5%

Interest (income) / expense, net 

3.7%

3.6%

Provision for income taxes

1.7%

Depreciation and amortization ⁴

11.6%

10.6%

EBITDA Margin

22.7%

23.4%

Non-cash stock based compensation

2.2%

3.2%

Business transition costs ⁵

0.4%

0.2%

Non-cash purchase accounting adjustments on acquisitions ⁶

0.1%

0.1%

Litigation liability ⁷

0.4%

0.0%

Adjusted EBITDA Margin

25.8%

26.9%

1 2017 as reported, does not include adoption of revenue recognition ASC 606.

2 Items may not foot due to rounding.

3 Guidance reflects the range provided February 26, 2018.

4 Excludes 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 Represents the settlement of fees associated with the outcome of the Medtronic litigation matter.

Reconciliation of Fourth Quarter 2017 Results

GAAP Net Income per Share to Non-GAAP Earnings per Share

(in thousands, except per share data)

Adjustments

Diluted Earnings Per
Share

GAAP net income

$                23,960

Business transition costs ¹

2,518

Non-cash purchase accounting adjustments on acquisitions ²

404

Litigation liability ³

3,750

Non-cash interest expense on convertible notes

4,046

Amortization of intangible assets⁴

12,677

Tax effect of adjustments ⁵

(18,273)

Adjustments to GAAP net income

5,122

Non-GAAP earnings

$                29,082

GAAP weighted shares outstanding - diluted

51,857

Non-GAAP weighted shares outstanding - diluted ⁶

51,857

¹ 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.

² 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.

³ Represents the settlement of fees associated with the outcome of the Medtronic litigation matter.

⁴ Excludes the amortization associated with non-controlling interest.

⁵ The impact on results from taxes include tax effecting the adjustments above at the statutory rate, taking into account discrete items and including those discrete items in the annual effective tax rate calculation, as well as the one-time impact of the Tax Cuts and Jobs Act of 2017. 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 ~34% on a non-GAAP basis.

⁶ 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 Year To Date 2017 Results

GAAP Net Income per Share to Non-GAAP Earnings per Share

(in thousands, except per share data)

Adjustments

Diluted Earnings Per 
Share

GAAP net income

$                83,006

$                           1.50

Business transition costs ¹

4,287

Non-cash purchase accounting adjustments on acquisitions ²

540

Litigation liability ³ 

4,500

Non-cash interest expense on convertible notes

17,290

Amortization of intangible assets ⁴

46,750

Tax effect of adjustments ⁵

(56,470)

Adjustments to GAAP net income

16,897

Non-GAAP earnings

$                99,903

$                           1.91

GAAP weighted shares outstanding - diluted

55,193

Non-GAAP weighted shares outstanding - diluted ⁶

52,345

¹ 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.

² 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.

³ Represents the settlement of fees associated with the outcome of the Medtronic litigation matter.

⁴ Excludes the amortization associated with non-controlling interest.

⁵ The impact on results from taxes include tax effecting the adjustments above at the statutory rate, taking into account discrete items and including those discrete items in the annual effective tax rate calculation, as well as the one-time impact of the Tax Cuts and Jobs Act of 2017. 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 ~34% on a non-GAAP basis.

⁶ 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 Fourth Quarter and Twelve Months 2017 Results

GAAP Net Income to Adjusted EBITDA

Three months ended

Twelve months ended

(in thousands, except per share data)

December 31, 2017

December 31, 2017

GAAP net income

$                                          23,960

$                                                    83,006

Interest (income) / expense, net 

9,156

37,581

Provision for income taxes

(4,067)

(7,038)

Depreciation and amortization ¹

32,055

119,927

EBITDA

$                                          61,104

$                                                  233,476

Business transition costs²

2,518

4,287

Non-cash purchase accounting adjustments on acquisitions ³

404

540

Litigation liability ⁴ 

3,750

4,500

Non-cash stock based compensation

7,407

22,391

Adjusted EBITDA

$                                          75,183

$                                                  265,194

As a percentage of revenue

27.7%

25.8%

¹ Excludes the amortization associated with non-controlling interest.

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 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 Represents the settlement of fees associated with the outcome of the Medtronic litigation matter.

NuVasive, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

Three Months Ended December 31,

Year Ended December 31,

2017

2016

2017

2016

(Unaudited)

(Unaudited)

Revenue

$             271,652

$             271,109

$          1,029,520

$             962,072

Cost of goods sold (excluding below amortization of intangible assets)

75,391

66,926

269,008

240,093

Gross profit

196,261

204,183

760,512

721,979

Operating expenses:

   Sales, marketing and administrative

134,502

142,413

539,913

533,624

   Research and development

12,719

12,983

50,425

47,999

   Amortization of intangible assets

12,999

12,089

48,039

42,001

   Litigation liability loss (gain) 

3,750

—

4,500

(43,310)

   Business transition costs

2,518

6,624

4,287

18,138

Total operating expenses

166,488

174,109

647,164

598,452

Interest and other expense, net:

   Interest income

85

167

440

1,091

   Interest expense

(9,241)

(10,532)

(38,021)

(40,520)

Loss on repurchases of convertible notes

—

(1,641)

—

(19,085)

   Other (expense) income, net

(1,160)

(203)

(1,542)

(305)

Total interest and other expense, net

(10,316)

(12,209)

(39,123)

(58,819)

Income before income taxes

19,457

17,865

74,225

64,708

Income tax benefit (expense)

4,067

(11,899)

7,038

(29,282)

Consolidated net income

$               23,524

$                 5,966

$               81,263

$               35,426

Add back net loss attributable to non-controlling interests

$                   (436)

$                   (410)

$                (1,743)

$                (1,721)

Net income attributable to NuVasive, Inc.

$               23,960

$                 6,376

$               83,006

$               37,147

Net income per share attributable to NuVasive, Inc.:

   Basic

$                   0.47

$                   0.13

$                   1.63

$                   0.74

   Diluted

$                   0.46

$                   0.11

$                   1.50

$                   0.69

Weighted average shares outstanding:

   Basic

51,094

50,394

50,874

50,077

   Diluted

51,857

55,913

55,193

54,102

NuVasive, Inc.

Consolidated Balance Sheets

(in thousands, except par values and share amounts)

December 31,

2017

2016

ASSETS

Current assets:

Cash and cash equivalents

$               72,803

$             153,643

Restricted cash and investments

3,901

—

Accounts receivable, net of allowances of $13,669 and $8,912, respectively

199,040

171,595

Inventory, net

247,245

208,249

Prepaid income taxes

17,209

31,926

Prepaid expenses and other current assets

18,792

10,030

Total current assets

558,990

575,443

Property and equipment, net

215,326

181,524

Intangible assets, net

280,774

291,143

Goodwill

536,926

485,685

Deferred tax assets

6,440

5,810

Restricted cash and investments

1,494

7,405

Other assets

39,117

23,794

Total assets

$          1,639,067

$          1,570,804

LIABILITIES AND EQUITY

Current liabilities:

Accounts payable and accrued liabilities

$               75,076

$               77,585

Contingent consideration liabilities

18,952

49,742

Accrued payroll and related expenses

55,582

51,000

Litigation liability

8,150

—

Income tax liabilities

2,908

2,469

Short-term senior convertible notes

—

61,701

Total current liabilities

160,668

242,497

Long-term senior convertible notes

582,920

564,412

Deferred and income tax liabilities, non-current

18,786

18,607

Other long-term liabilities

77,539

44,764

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 December 31, 2017
and December 31, 2016, 56,164,060 and 55,184,660 issued and outstanding at
December 31, 2017 and December 31, 2016, respectively

60

55

Additional paid-in capital

1,363,549

1,010,238

Accumulated other comprehensive loss

(6,933)

(10,631)

Retained earnings (accumulated deficit)

4,500

(66,859)

Treasury stock at cost; 5,001,886 shares and 4,758,828  shares at December 31, 2017
and December 31, 2016, respectively

(565,867)

(237,867)

Total NuVasive, Inc. stockholders' equity

795,309

694,936

Non-controlling interests

3,845

5,588

Total equity

799,154

700,524

Total liabilities and equity

$          1,639,067

$          1,570,804

NuVasive, Inc.

Consolidated Statements of Cash Flows

(in thousands)

Year Ended December 31,

2017

2016

Operating activities:

Consolidated net income

$               81,263

$               35,426

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

Depreciation and amortization

121,176

102,713

Deferred income tax (benefit) expense

(12,384)

26,265

Loss on repurchases of convertible notes

—

19,085

Amortization of non-cash interest

20,538

22,721

Stock-based compensation

22,391

26,924

Reserves on current assets

5,718

11,408

Other non-cash adjustments

16,561

16,928

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

Accounts receivable

(29,389)

(33,250)

Inventory

(35,300)

(22,636)

Prepaid expenses and other current assets

(10,671)

(5,665)

Contingent consideration liabilities

(11,200)

—

Accounts payable and accrued liabilities

(5,580)

11,854

Accrued royalties

163

471

Accrued payroll and related expenses

4,088

8,849

Litigation liability

8,150

(88,450)

Income taxes

3,455

23,652

Net cash provided by operating activities

178,979

156,295

Investing activities:

Acquisition of Ellipse Technologies, net of cash acquired

—

(380,080)

Other acquisitions and investments

(62,370)

(108,591)

Purchases of intangible assets

(2,270)

(5,918)

Purchases of property and equipment

(110,221)

(88,372)

Purchases of marketable securities

—

(128,956)

Proceeds from sales of marketable securities

—

407,032

Net cash used in investing activities

(174,861)

(304,885)

Financing activities:

Proceeds from the issuance of common stock

9,991

9,492

Payment of contingent consideration

(19,400)

(422)

Purchase of treasury stock

(11,860)

(24,734)

Proceeds from issuance of convertible debt, net of issuance costs

—

634,140

Proceeds from sale of warrants

—

44,850

Purchase of convertible note hedge

—

(111,150)

Repurchases of convertible notes

(63,317)

(439,519)

Proceeds from revolving line of credit

60,000

50,000

Repayments on revolving line of credit

(60,000)

(50,000)

Other financing activities

(2,442)

(1,834)

Net cash (used in) provided by financing activities

(87,028)

110,823

Effect of exchange rate changes on cash

2,070

(929)

(Decrease) in cash and cash equivalents

(80,840)

(38,696)

Cash and cash equivalents at beginning of year

153,643

192,339

Cash and cash equivalents at end of year

$               72,803

$             153,643