NuVasive Reports Fourth Quarter And Full Year 2018 Financial Results

2019 Guidance Range ¹

Revenue

 $1.14B - $1.16B 

 $1.14B - $1.16B 

  % Growth - Reported

3.5% - 5.5%

3.5% - 5.5%

 % Growth - Constant Currency²

3.8% - 5.8%

Operating margin

9.5% - 10.0%

15.0% - 15.5%

Earnings per share

 $1.00 - $1.10 

 $2.20 - $2.30 

EBITDA margin

21.2% - 21.7%

25.2% - 25.7%

Tax Rate

~24%

~23%

    ¹

Guidance reflects the range provided on February 20, 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.

2018 Actuals ¹

2019 Guidance Range
^{1, 2, 3}

GAAP diluted net income per share

$    0.24

 $1.00 - 1.10 

Impact of change to diluted share count

—

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

$    0.24

 $1.00 - 1.10 

Business transition costs ⁴

0.22

—

Non-cash purchase accounting adjustments on acquisitions ⁵

0.02

—

Non-cash interest expense on convertible notes

0.32

0.30

Litigation related expenses and settlements ⁶

0.65

0.20

Non-recurring consulting fees ⁷

0.12

—

Net loss on strategic investments

0.07

—

Amortization of intangible assets

0.97

0.90

Purchase of in-process research and development ⁸

0.17

—

European medical device regulation⁹

0.01

0.10

Tax effect of adjustments¹⁰

(0.56)

(0.30)

Non-GAAP earnings per share

$    2.23

 $2.20 - 2.30 

GAAP Weighted shares outstanding - basic

51,382

52,017

GAAP Weighted shares outstanding - diluted

52,355

52,938

Non-GAAP Weighted shares outstanding - diluted ¹¹

52,178

52,714

¹

Items may not foot due to rounding.

²

Guidance reflects the range provided on February 20, 2019.

³

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

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

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.

⁶

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.

⁷

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

⁸

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

⁹

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.

¹⁰

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.

¹¹

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 %

(in thousands, except %)

2018
Actuals ¹

2019
Guidance ^{1, 2}

Non-GAAP Gross Margin % [A]

71.9%

72.5% - 73.0%

Non-cash purchase accounting adjustments on acquisitions ³

GAAP Gross Margin [B]

71.8%

72.5% - 73.0%

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

51.1%

51.0% - 52.0%

Non-recurring consulting fees⁴

0.6%

0.0%

Litigation related expenses⁵

0.6%

0.7%

GAAP Sales, Marketing & Administrative Expense [D]

52.3%

51.7% - 52.7%

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

5.6%

6.0%

Litigation related settlements [F]⁶

2.5%

0.0%

Amortization of intangible assets [G]

4.6%

4.2%

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

0.8%

0.0%

European medical device regulation [I]⁸

0.0%

0.6%

Business transition costs [J] ⁹

1.0%

0.0%

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

15.1%

15.0% - 15.5%

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

4.9%

9.5% - 10.0%

¹

Items may not foot due to rounding.

²

Guidance reflects the range provided on February 20, 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

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.

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 %

(in thousands, except %)

2018 Actuals ^{1, 2}

2019 Guidance Range^{1, 3, 4}

Net Income

1.1%

4.6% - 5.0%

Interest income / expense, net 

3.4%

3.3%

Income tax benefit / (expense)

1.5%

Depreciation and amortization

11.8%

11.7%

EBITDA Margin

16.0%

21.2% - 21.7%

Non-cash stock based compensation

2.3%

2.7%

Business transition costs⁵

1.0%

0.0%

Non-cash purchase accounting adjustments on acquisitions⁶

0.1%

0.0%

Litigation related expenses and settlements ⁷

3.1%

0.7%

Non-recurring consulting fees ⁸

0.6%

0.0%

In-process research and development⁹

0.8%

0.0%

European medical device regulation¹⁰

0.0%

0.6%

Net loss on strategic investments

0.3%

0.0%

Adjusted EBITDA Margin

24.3%

25.2% - 25.7%

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

Guidance reflects the range provided on February 20, 2019.

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

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 December 31, 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 ⁵

Net
Income to
Adjusted
EBITDA

Reported GAAP

$      202,198

$    25,856

$      12,157

$   0.23

52,530

$          12,157

% of revenue

9.0%

Amortization of intangible assets

13,268

13,268

Litigation related expenses and settlements¹

2,750

2,750

2,750

Business transition costs²

3,779

3,779

3,779

European medical device regulation³

373

373

373

Non-cash interest expense on convertible notes

4,262

Net gain on strategic investments

(30)

Tax effect of adjustments ⁴

(444)

Interest expense/(income), net

9,193

Income tax expense

4,175

Depreciation and amortization

33,356

Non-cash stock based compensation

3,699

Adjusted Non-GAAP

$      202,198

$    46,026

$      36,115

$   0.69

52,471

$          69,452

% of revenue

70.1%

16.0%

24.1%

  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

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.

⁴

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.

 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 Year Ended December 31, 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 ⁸

Net
Income to
Adjusted
EBITDA

Reported GAAP

$      790,555

$    54,168

$      12,479

$   0.24

52,355

$          12,479

% of revenue

71.8%

4.9%

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

50,670

50,670

Litigation related expenses and settlements ³

34,052

34,052

34,052

Business transition costs⁴

11,473

11,473

11,473

Purchase of in-process research and development ⁵

8,913

8,913

8,913

European medical device regulation⁶

373

373

373

Non-cash interest expense on convertible notes

16,722

Net loss on strategic investments

3,837

3,837

Tax effect of adjustments⁷

(29,126)

Interest expense/(income), net

37,271

Income tax benefit

(3,756)

Depreciation and amortization

129,765

Non-cash stock based compensation

25,761

Adjusted Non-GAAP

$      791,635

$  166,813

$    116,557

$   2.23

52,178

$        267,332

% of revenue

71.9%

15.1%

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

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.

 ⁷

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.

⁸

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 December 31, 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 ⁶

Net
Income to
Adjusted
EBITDA

Reported GAAP¹

$      195,917

$    29,408

$      23,477

$   0.45

51,857

$          23,477

% of revenue

72.2%

10.8%

Non-cash purchase accounting adjustments on acquisitions ²

404

404

404

404

Amortization of intangible assets ³

12,999

12,677

Litigation related expenses and settlements 

4,133

4,133

4,133

Business transition costs ⁴

2,518

2,518

2,518

Non-cash interest expense on convertible notes

4,046

Tax effect of adjustments ⁵

(18,155)

Interest expense/(income), net

9,156

Income tax benefit

(3,949)

Depreciation and amortization³

32,055

Non-cash stock based compensation

7,407

Adjusted Non-GAAP

$      196,321

$    49,462

$      29,100

$   0.56

51,857

$          75,201

% of revenue

72.4%

18.2%

27.7%

   ¹

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

 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

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.

 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 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 ~10% benefit on a GAAP basis and ~33% 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 Year Ended December 31, 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
WASO⁶

Net
Income to
Adjusted
EBITDA

Reported GAAP¹

$      758,244

$  111,486

$      81,598

$   1.48

55,193

$          81,598

% of revenue

73.9%

10.9%

Non-cash purchase accounting adjustments on acquisitions ²

540

540

540

540

Amortization of intangible assets ³

48,039

46,750

Litigation related expenses and settlements 

4,883

4,883

4,883

Business transition costs ⁴

4,287

4,287

4,287

Non-cash interest expense on convertible notes

17,290

Tax effect of adjustments ⁵

(56,357)

Interest expense/(income), net

37,581

Income tax benefit

(7,492)

Depreciation and amortization³

119,927

Non-cash stock based compensation

22,391

$      758,784

$  169,235

$      98,991

$   1.89

52,345

$        263,715

% of revenue

73.9%

16.5%

25.7%

  ¹

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

 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

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.

 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 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 ~10% benefit on a GAAP basis and ~33% 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.

NuVasive, Inc. 

Consolidated Statements of Operations 

(in thousands, except per share data)

Three Months Ended
December 31,

Year Ended December 31,

2018

2017

2018

2017

(Unaudited)

(Unaudited)

Revenue

Product revenue

$ 258,226

$ 248,881

$  986,458

$  938,981

Service revenue

30,101

22,341

115,256

87,704

Total revenue

288,327

271,222

1,101,714

1,026,685

Cost of revenue (excluding below amortization of intangible assets)

Cost of products sold

66,375

60,015

234,509

207,307

Cost of services

19,754

15,290

76,650

61,134

Total cost of revenue

86,129

75,305

311,159

268,441

Gross profit

202,198

195,917

790,555

758,244

Operating expenses:

   Sales, marketing and administrative

142,201

134,523

575,836

539,507

   Research and development

17,094

12,719

61,695

50,425

   Amortization of intangible assets

13,268

12,999

50,670

48,039

   Purchase of in-process research and development

—

—

8,913

—

   Litigation liability loss

—

3,750

27,800

4,500

   Business transition costs

3,779

2,518

11,473

4,287

Total operating expenses

176,342

166,509

736,387

646,758

Interest and other expense, net:

   Interest income

206

85

586

440

   Interest expense

(9,399)

(9,241)

(37,857)

(38,021)

   Other (expense) income, net

(331)

(1,160)

(8,174)

(1,542)

Total interest and other expense, net

(9,524)

(10,316)

(45,445)

(39,123)

Income before income taxes

16,332

19,092

8,723

72,363

Income tax benefit (expense)

(4,175)

3,949

3,756

7,492

Consolidated net income

$   12,157

$   23,041

$    12,479

$    79,855

Add back net loss attributable to non-controlling interests

—

$       (436)

—

$    (1,743)

Net income attributable to NuVasive, Inc.

$   12,157

$   23,477

$    12,479

$    81,598

Net income per share attributable to NuVasive, Inc.:

   Basic

$       0.24

$       0.46

$        0.24

$        1.60

   Diluted

$       0.23

$       0.45

$        0.24

$        1.48

Weighted average shares outstanding:

   Basic

51,504

51,094

51,382

50,874

   Diluted

52,530

51,857

52,355

55,193

NuVasive, Inc. 

Consolidated Balance Sheets 

(in thousands, except par values and share amounts) 

December 31,

2018

2017

ASSETS

Current assets:

Cash and cash equivalents

$          117,840

$            72,803

Restricted cash and investments

—

3,901

Accounts receivable, net of allowances of $16,171 and $13,026, respectively

196,487

200,220

Inventory, net

273,244

247,138

Prepaid income taxes

16,905

17,209

Prepaid expenses and other current assets

13,733

18,792

Total current assets

618,209

560,063

Property and equipment, net

238,841

215,326

Intangible assets, net

252,048

280,774

Goodwill

561,366

536,926

Deferred tax assets

5,263

6,440

Restricted cash and investments

2,395

1,494

Other assets

29,737

39,117

Total assets

$       1,707,859

$       1,640,140

LIABILITIES AND EQUITY

Current liabilities:

Accounts payable and accrued liabilities

$          105,877

$            75,767

Contingent consideration liabilities

7,560

18,952

Accrued payroll and related expenses

59,960

55,618

Litigation liabilities

1,415

8,150

Income tax liabilities

4,648

2,908

Total current liabilities

179,460

161,395

Long-term senior convertible notes

602,526

582,920

Deferred and income tax liabilities, non-current

4,964

18,870

Other long-term liabilities

86,384

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 December 31, 2018 and December 31, 2017, 56,648,077 and 56,164,060 issued and outstanding at December 31, 2018 and December 31, 2017, respectively

61

60

Additional paid-in capital

1,397,829

1,363,549

Accumulated other comprehensive loss

(8,628)

(6,933)

Retained earnings

17,241

4,762

Treasury stock at cost; 5,116,496 shares and 5,001,886  shares at December 31, 2018 and December 31, 2017, respectively

(571,978)

(565,867)

Total NuVasive, Inc. stockholders' equity

834,525

795,571

Non-controlling interests

—

3,845

Total equity

834,525

799,416

Total liabilities and equity

$ 1,707,859

$ 1,640,140

NuVasive, Inc. 

Consolidated Statements of Cash Flows 

(in thousands) 

Year Ended December 31,

2018

2017

Operating activities:

Consolidated net income

$   12,479

$  79,855

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

Depreciation and amortization

129,765

121,176

Purchase of in-process research and development

8,913

—

Deferred income taxes

(11,396)

(12,838)

Amortization of non-cash interest

20,123

20,538

Stock-based compensation

25,673

22,391

Net loss on strategic investments

4,421

—

Reserves on current assets

14,834

5,622

Other non-cash adjustments

23,703

16,561

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

Accounts receivable

4,562

(26,610)

Inventory

(38,646)

(35,867)

Prepaid expenses and other current assets

(1,280)

(12,681)

Accounts payable and accrued liabilities

20,518

(5,558)

Contingent consideration liabilities

(300)

(11,200)

Accrued payroll and related expenses

2,595

3,975

Litigation liability

1,165

8,150

Income taxes

2,054

3,455

Net cash provided by operating activities

219,183

176,969

Investing activities:

Other acquisitions and investments

(55,266)

(62,370)

Proceeds from other investments

3,584

—

Purchases of intangible assets

(7,682)

(2,270)

Purchases of property and equipment

(101,921)

(110,221)

Net cash used in investing activities

(161,285)

(174,861)

Financing activities:

Proceeds from the issuance of common stock

8,127

9,991

Payment of contingent consideration

(19,450)

(19,400)

Purchase of treasury stock

(2,928)

(11,860)

Repurchases of convertible notes

—

(63,317)

Proceeds from revolving line of credit

100,000

60,000

Repayments on revolving line of credit

(100,000)

(60,000)

Other financing activities

(327)

(2,442)

Net cash used in financing activities

(14,578)

(87,028)

Effect of exchange rate changes on cash

(1,283)

2,070

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

42,037

(82,850)

Cash, cash equivalents and restricted cash at beginning of period

78,198

161,048

Cash, cash equivalents and restricted cash at end of period

$ 120,235

$  78,198