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NuVasive Reports Third Quarter 2012 Financial Results

Wed, 10/24/2012 - 7:00am
The Associated Press

NuVasive, Inc. (NASDAQ: NUVA)

Third quarter 2012 total revenue of $148.4 million; up 11.7% from third quarter 2011 GAAP net income of $2.4 million, or $0.05 per share Non-GAAP net income of $10.1 million, or $0.23 per share

NuVasive, Inc. (NASDAQ: NUVA), a medical device company focused on developing minimally disruptive surgical products and procedures for the spine, announced today financial results for the quarter ended September 30, 2012.

Alex Lukianov, Chairman and Chief Executive Officer, said, "Market challenges led third quarter results to fall short of our expectations. We provided early warning of the shortfall and have implemented a plan to address the issues. We are re-engaging with our sales force on a deeper level, accelerating the pace of sales force hiring to more than compensate for losses in the quarter, and increasing executive engagement with our top customers. Our market share taking strategy continues to be intact and we have a number of growth catalysts that will help drive growth for the balance of this year and beyond. We are in a unique position as the spine market continues to shift toward minimally invasive solutions and we intend to fully capitalize upon it."

NuVasive reported third quarter 2012 revenue of $148.4 million, an 11.7% increase over the $132.9 million for the third quarter 2011 and 3.9% decrease compared to the $154.4 million reported for the second quarter 2012.

Gross profit for the third quarter 2012 was $110.6 million and gross margin was 74.6%, compared to a gross profit of $106.9 million and a gross margin of 80.4% for the third quarter 2011. For the second quarter 2012, gross profit was $117.9 million and gross margin was 76.3%.

Total operating expenses for the third quarter 2012 were $98.1 million compared to $198.3 million in the third quarter 2011 and $104.9 million in the second quarter 2012. The lower operating expenses in the third quarter 2012 compared to the prior year were primarily attributable to a $101.2 million charge related to a litigation liability in the prior year.

On a GAAP basis, the Company reported net income of $2.4 million, or $0.05 per share, for the third quarter 2012.

On a Non-GAAP basis, the Company reported net income of $10.1 million, or $0.23 per share, for the third quarter 2012. The Non-GAAP earnings per share calculations for the third quarter exclude, (i) non-cash stock-based compensation of $5.4 million; (ii) certain intellectual property litigation expenses of $751 thousand; (iii) amortization of intangible assets of $3.1 million; (iv) acquisition related items of $387 thousand; and (v) non-cash interest expense on convertible notes of $3.2 million.

Cash, cash equivalents and short and long-term marketable securities were $285.0 million at September 30, 2012.

Updated 2012 Full Year Financial Guidance

Revenue of approximately $601 - $606 million; compared to approximately $625 million previously GAAP EPS of approximately $0.11 to $0.13; compared to approximately $0.16 previously Non-GAAP EPS of approximately $0.88 to $0.90; compared to approximately $0.97 previously Non-GAAP Operating Margin of approximately 14.0%; compared to approximately 14.5% previously GAAP effective tax rate of approximately 60%; compared to approximately 55% previously Non-GAAP effective tax rate of approximately 40% remains unchanged



                 2012 Reconciliation of Full Year EPS Guidance

                                                      Revised Guidance (2)
                                         Prior     -------------------------
                                      Guidance (1)      Low         High
                                      ------------ ------------ ------------
GAAP earnings per share guidance      $       0.16 $       0.11 $       0.13
  Non-cash stock based compensation           0.43         0.37         0.37
  Certain intellectual property
   litigation expenses                        0.03         0.04         0.04
  Amortization of intangible assets           0.16         0.16         0.16
  Acquisition related items (3)               0.02         0.03         0.03
  Non-cash interest expense on
   convertible notes                          0.17         0.17         0.17
                                      ------------ ------------ ------------
Non-GAAP earnings per share guidance  $       0.97 $       0.88 $       0.90
                                      ============ ============ ============

Weighted shares outstanding - basic
 (4)                                        43,500       43,500       43,500
                                      ============ ============ ============
Weighted shares outstanding - diluted
 (4)                                        45,000       44,500       44,500
                                      ============ ============ ============

(1) Effective tax rate of ~55% applied to GAAP earnings and ~40% applied to
 Non-GAAP adjustments
(2) Effective tax rate of ~60% applied to GAAP earnings and ~40% applied to
 Non-GAAP adjustments
(3) Acquisition related items include expenses associated with prior M&A
 activity and as incurred
(4) Weighted shares outstanding shown as pre "if-converted" method


         2012 Guidance Reconciliation of Non-GAAP Operating Margin %

                                                          Prior     Revised
                                                        Guidance   Guidance
                                                       ---------- ----------
                                    Gross Margin % [A]   ~75.5%     ~75.0%

                       Non-GAAP Operating Expenses [B]   ~61.0%     ~61.0%
                     Non-cash stock-based compensation    ~5.0%      ~4.5%
     Certain intellectual property litigation expenses    ~0.5%      ~0.5%
                     Amortization of intangible assets    ~2.0%      ~2.0%
                            Acquisition related items*    ~0.2%      ~0.3%
                                                       ---------- ----------
                               GAAP Operating Expenses   ~68.7%     ~68.3%
                                                       ---------- ----------

                     Non-GAAP Operating Margin % [A-B]   ~14.5%     ~14.0%
                                                       ---------- ----------

* Acquisition related items include expenses associated with prior M&A
 activity and as incurred

Reconciliation of Non-GAAP Information Management uses certain Non-GAAP financial measures such as Non-GAAP operating margin and Non-GAAP earnings per share, which exclude such items as non-cash stock-based compensation, certain intellectual property litigation expenses, amortization of intangible assets, acquisition related items, and non-cash interest expense on convertible notes. Management does not consider these costs in evaluating the continuing operations of the Company. Therefore, management calculates the Non-GAAP financial measures provided in this earnings release excluding these costs and uses these Non-GAAP financial measures to enable it to analyze further, and more consistently, the period-to-period financial performance of its core business operations. Management believes that providing investors with these Non-GAAP measures gives them additional important information to enable them to assess, in the same way management assesses, the Company's current and future continuing operations. These Non-GAAP measures are not in accordance with, or an alternative for, GAAP, and may be different from Non-GAAP measures used by other companies. Set forth below are reconciliations of the Non-GAAP financial measures to the comparable GAAP financial measure.


                Reconciliation of Third Quarter 2012 Results

                                           Pre-Tax                 Earnings
(in thousands, except per share data)    Adjustments  Net of Tax  Per Share
                                         ----------- ----------- -----------
GAAP net income                                      $     2,354 $      0.05
  Non-cash stock-based compensation      $     5,434       3,260        0.07
  Certain intellectual property
   litigation expenses                           751         451        0.01
  Amortization of intangible assets            3,081       1,849        0.04
  Acquisition related items                      387         232        0.01
  Non-cash interest expense on
   convertible notes                           3,202       1,921        0.04
                                                     ----------- -----------
Non-GAAP earnings                                    $    10,067 $      0.23
                                                     =========== ===========

Weighted shares outstanding - diluted                                 44,735
                                                                 ===========


                 Reconciliation of Year To Date 2012 Results

                                           Pre-Tax                 Earnings
(in thousands, except per share data)    Adjustments  Net of Tax  Per Share
                                         ----------- ----------- -----------
GAAP net income                                      $     5,890 $      0.13
  Non-cash stock-based compensation      $    20,400      12,240        0.28
  Certain intellectual property
   litigation expenses                         1,567         940        0.02
  Amortization of intangible assets            8,830       5,298        0.12
  Acquisition related items                    1,420         852        0.02
  Non-cash interest expense on
   convertible notes                           9,435       5,661        0.13
                                                     ----------- -----------
Non-GAAP earnings                                    $    30,881 $      0.70
                                                     =========== ===========

Weighted shares outstanding - diluted                                 44,151
                                                                 ===========

Conference Call NuVasive will hold a conference call today at 8:00 a.m. ET / 5:00 a.m. PT to discuss the results. The dial-in numbers are 1-877-407-9039 for domestic callers and 1-201-689-8470 for international callers. A live webcast of the conference call will be available online from the investor relations page of the Company's corporate website at www.nuvasive.com.

After the live webcast, the call will remain available on NuVasive's website, www.nuvasive.com, through November 23, 2012. In addition, a telephonic replay of the call will be available until November 7, 2012. The replay dial-in numbers are 1-877-870-5176 for domestic callers and 1-858-384-5517 for international callers. Please use pin number 399418.

About NuVasive NuVasive is a medical device company focused on developing minimally disruptive surgical products and procedurally integrated solutions for the spine. The Company is the 4th largest player in the $7.9 billion global spine market.

NuVasive's principal product offering is based on its Maximum Access Surgery, or MAS® platform. The MAS platform combines several categories of solutions that collectively minimize soft tissue disruption during spine surgery with maximum visualization and safe, easy reproducibility for the surgeon: a proprietary software-driven nerve avoidance system and intra-operative monitoring support; MaXcess®, a unique split-blade retractor system; a wide variety of specialized implants; and several biologic fusion enhancers. MAS significantly reduces surgery time and returns patients to activities of daily living much faster than conventional approaches. Having redefined spine surgery with the MAS platform's lateral approach, known as eXtreme Lateral Interbody Fusion, or XLIF®, NuVasive has built an entire spine franchise. With over 75 products today spanning lumbar, thoracic and cervical applications, the Company will continue to expand and evolve its offering predicated on its R&D focus and dedication to outstanding service levels supported by a culture of Absolute Responsiveness®.

NuVasive cautions you that statements included in this press release that are not a description of historical facts are forward-looking statements that involve risks, uncertainties, assumptions and other factors which, if they do not materialize or prove correct, could cause NuVasive's results to differ materially from historical results or those expressed or implied by such forward-looking statements. The potential risks and uncertainties that could cause actual growth and results to differ materially include, but are not limited to: the risk that NuVasive's revenue or earnings projections may turn out to be inaccurate because of the preliminary nature of the forecasts and the risk of further adjustment, or unanticipated difficulty in selling products or generating expected profitability; the uncertain process of seeking regulatory approval or clearance for NuVasive's products or devices, including risks that such process could be significantly delayed; the possibility that the FDA may require significant changes to NuVasive's products or clinical studies; the risk that products may not perform as intended and may therefore not achieve commercial success; the risk that competitors may develop superior products or may have a greater market position enabling more successful commercialization; the risk that additional clinical data may call into question the benefits of NuVasive's products to patients, hospitals and surgeons; and other risks and uncertainties more fully described in NuVasive's press releases and periodic filings with the Securities and Exchange Commission. NuVasive's public filings with the Securities and Exchange Commission are available at www.sec.gov. NuVasive assumes no obligation to update any forward-looking statement to reflect events or circumstances arising after the date on which it was made.


                               NuVasive, Inc.
         Unaudited Condensed Consolidated Statements of Operations
                   (in thousands, except per share data)

                                  Three Months Ended     Nine Months Ended
                                     September 30,         September 30,
                                 --------------------  --------------------
                                    2012       2011       2012       2011
                                 ---------  ---------  ---------  ---------

Revenue                          $ 148,391  $ 132,880  $ 454,501  $ 390,312
Cost of goods sold (excluding
 amortization of purchased
 technology)                        37,746     26,015    111,213     75,049
                                 ---------  ---------  ---------  ---------
Gross profit                       110,645    106,865    343,288    315,263

Operating expenses:
  Sales, marketing and
   administrative                   87,052     85,482    273,669    254,025
  Research and development           7,933     10,092     27,932     31,119
  Amortization of intangible
   assets                            3,081      1,504      8,830      4,241
  Litigation award                       -    101,200          -    101,200
                                 ---------  ---------  ---------  ---------
Total operating expenses            98,066    198,278    310,431    390,585

Interest and other expense, net:
  Interest income                      249        257        661        591
  Interest expense                  (6,885)    (7,276)   (20,682)   (10,962)
  Other income, net                    260      1,726        146      2,303
                                 ---------  ---------  ---------  ---------
Total interest and other
 expense, net                       (6,376)    (5,293)   (19,875)    (8,068)
                                 ---------  ---------  ---------  ---------

Income (loss) before income
 taxes                               6,203    (96,706)    12,982    (83,390)
Income tax expense (benefit)         4,064    (29,031)     7,764    (22,715)
                                 ---------  ---------  ---------  ---------
Consolidated net income (loss)   $   2,139  $ (67,675) $   5,218  $ (60,675)
                                 =========  =========  =========  =========
Net loss attributable to
 noncontrolling interests        $    (215) $    (123) $    (672) $    (862)
                                 =========  =========  =========  =========
Net income (loss) attributable
 to NuVasive, Inc.               $   2,354  $ (67,552) $   5,890  $ (59,813)
                                 =========  =========  =========  =========

Net income (loss) per share
 attributable to NuVasive, Inc.:
  Basic                          $    0.05  $   (1.69) $    0.14  $   (1.50)
                                 =========  =========  =========  =========
  Diluted                        $    0.05  $   (1.69) $    0.13  $   (1.50)
                                 =========  =========  =========  =========
Weighted average shares
 outstanding:
  Basic                             43,488     39,892     43,227     39,766
                                 =========  =========  =========  =========
  Diluted                           44,735     39,892     44,151     39,766
                                 =========  =========  =========  =========

Stock-based compensation is included in
 expenses in the following categories:
  Sales, marketing and
   administrative                $   4,844  $   7,497  $  18,723  $  21,956
  Research and development             567        621      1,624      1,833
  Cost of goods sold                    23          -         53          -
                                 ---------  ---------  ---------  ---------
                                 $   5,434  $   8,118  $  20,400  $  23,789
                                 =========  =========  =========  =========


                               NuVasive, Inc.
                   Condensed Consolidated Balance Sheets
                               (in thousands)

                                               September 30,   December 31,
                                                    2012           2011
                                               -------------  -------------
                                                (Unaudited)
ASSETS
Current assets:
  Cash and cash equivalents                    $     107,731  $     163,492
  Short-term marketable securities                   134,899        146,228
  Accounts receivable, net                            78,140         87,736
  Inventory                                          132,958        119,313
  Deferred tax assets, current                        54,550         54,550
  Prepaid expenses and other current assets            7,264         20,518
                                               -------------  -------------
Total current assets                                 515,542        591,837
Property and equipment, net                          131,158        124,754
Long-term marketable securities                       42,416         32,503
Intangible assets, net                               105,086        108,140
Goodwill                                             162,333        159,349
Deferred tax assets                                   19,857         19,857
Restricted cash and investments                      182,067         68,600
Other assets                                          26,169         18,522
                                               -------------  -------------
Total assets                                   $   1,184,628  $   1,123,562
                                               =============  =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued liabilities     $      63,498  $      51,744
  Accrued payroll and related expenses                22,527         22,215
  Litigation liability                                     -        101,200
  Acquisition-related liabilities                     32,389         32,221
  Senior Convertible Notes, current                   74,311              -
                                               -------------  -------------
Total current liabilities                            192,725        207,380
Senior Convertible Notes                             329,143        394,019
Deferred tax liabilities                               4,180          3,952
Litigation liability                                 101,200              -
Other long-term liabilities                           15,581         13,461
Commitments and contingencies
Noncontrolling interests                              10,033         10,705
Stockholders' equity:
  Preferred stock                                          -              -
  Common stock                                            44             42
  Additional paid-in capital                         705,931        674,790
  Accumulated other comprehensive income               1,166            477
  Accumulated deficit                               (175,375)      (181,264)
                                               -------------  -------------
Total stockholders' equity                           531,766        494,045
                                               -------------  -------------
Total liabilities and stockholders' equity     $   1,184,628  $   1,123,562
                                               =============  =============


                               NuVasive, Inc.
         Unaudited Condensed Consolidated Statements of Cash Flows
                               (in thousands)

                                                       Nine Months Ended
                                                         September 30,
                                                   ------------------------
                                                       2012         2011
                                                   -----------  -----------

Operating activities:
  Consolidated net income (loss)                   $     5,218  $   (60,675)
  Adjustments to reconcile net income (loss) to
   net cash provided by operating activities:
    Depreciation and amortization                       38,237       24,847
    Amortization of debt discount                        9,435        3,076
    Amortization of debt issuance costs                  1,386        2,588
    Stock-based compensation                            20,400       23,789
    Allowance for excess and obsolete inventory,
     net of write-offs                                   2,000        4,642
    Allowance for doubtful accounts and sales
     return reserve                                        816        1,261
    Accretion of contingent consideration                  708          587
    Gain recognized on change in fair value of
     derivatives                                             -       (2,387)
    Deferred income tax expense                              -        6,238
    Other non-cash adjustments                           4,294        3,545
  Changes in operating assets and liabilities, net
   of effects of acquisitions:
    Accounts receivable                                  8,421       (3,152)
    Inventory                                          (14,222)     (19,933)
    Prepaid expenses and other current assets           13,582       (1,061)
    Accounts payable and accrued liabilities             4,474          504
    Litigation liability                                     -      101,200
    Accrued payroll and related expenses                  (269)         584
    Income taxes payable                                 5,006      (32,237)
                                                   -----------  -----------
  Net cash provided by operating activities             99,486       53,416
Investing activities:
    Cash paid for business and asset acquisitions       (9,838)      (1,100)
    Purchases of property and equipment                (35,706)     (39,435)
    Purchases of marketable securities                (192,759)    (244,209)
    Sales of marketable securities                     193,035      124,205
    Purchases of restricted investments               (113,331)      (4,535)
    Payment for specific rights in connection with
     supply agreement, net of refund received                -       (5,000)
                                                   -----------  -----------
  Net cash used in investing activities               (158,599)    (170,074)
Financing activities:
    Proceeds from the sale of warrants                       -       47,898
    Proceeds from the issuance of convertible
     debt, net of issuance costs                             -      391,334
    Purchase of convertible note hedges                      -      (80,097)
    Repurchase of 2013 Senior Convertible Notes              -     (118,702)
    Proceeds from the issuance of common stock           3,183        4,461
    Other assets                                           132         (349)
    Tax benefits related to stock-based
     compensation awards                                     -          638
                                                   -----------  -----------
  Net cash provided by financing activities              3,315      245,183
Effect of exchange rate changes on cash                     37         (179)
                                                   -----------  -----------
(Decrease) increase in cash and cash equivalents       (55,761)     128,346
Cash and cash equivalents at beginning of period       163,492       92,597
                                                   -----------  -----------
Cash and cash equivalents at end of period         $   107,731  $   220,943
                                                   ===========  ===========

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