Executive Changes Hit NuVasive Hard

Advances in medical science have had a dramatic impact on the quality of care that patients receive. In the area of spinal surgery, NuVasive (NASDAQ: NUVA) has made a lot of headway with its minimally disruptive medical devices, and consistent growth has rewarded shareholders who've had the patience to stick with the company over the long haul.

Coming into Thursday's second-quarter financial report, NuVasive investors were comfortable with their expectations for continued double-digit growth in revenue and earnings per share. NuVasive largely held up its end of the bargain on the financial front, but an announcement of a change in leadership and strategic vision going forward spooked shareholders and led to substantial share-price declines. Let's take a closer look at what just happened with NuVasive, and what it means for the future of the spinal-surgery specialist.

NuVasive keeps growing

NuVasive's second-quarter results were largely consistent with what the company has delivered in the past. Sales rose 10%, to $260.6 million, or just slightly below the 11% growth rate that investors had wanted to see. Adjusted net income was up 17%, to $24.1 million, and that resulted in adjusted earnings of $0.46 per share, topping the consensus forecast among those following the stock by $0.02 per share.

Looking more closely at the report, NuVasive's financial results revealed mixed news. As we've seen in recent quarters, adjusted gross margin was weak, falling more than 3 percentage points from the year-ago period, to 74.5%. NuVasive cushioned the blow with good cost controls, keeping operating expense growth to just 4% on an adjusted basis and preserving a relatively solid adjusted operating margin.

CEO Greg Lucier was pleased with the way the company performed. "NuVasive delivered better than expected operating profitability and earnings per share results in the second quarter of 2017," Lucier said, "along with continued strength across our international business." The CEO went on to say that its results overseas grew at a greater than 20% pace for the third quarter in a row.

Why aren't NuVasive shareholders happy?

NuVasive also has an optimistic assessment of what to expect in the near future. In Lucier's words, "Several of our industry-disrupting technologies completed alpha and beta testing this quarter and will commercially launch over the next few months, giving surgeons and patients access to some of the most innovative technologies to address spine and trauma conditions, as well as radiation reduction in the operating room."

The company repeated its guidance for the full 2017 year, including a call for $1.065 billion in sales and $2 per share in adjusted earnings. Currency effects will have only a minimal downward impact on NuVasive's revenue.

Yet along with the results, NuVasive also announced what it called a "new organization structure to drive growth and profitability goals." The move involves the departure of COO Jason Hannon, who is stepping down to pursue other interests, and also promotes three other executives to expanded roles. Unrelated to the strategic move, CFO Quentin Blackford will also leave the company to pursue another opportunity outside the spine industry.

NuVasive was very clear to state that the departure didn't result from any dispute or disagreement with the company, or from any issues related to accounting or financial practices. Board member Vickie Capps will help NuVasive's finance department during the transition, and she will also help the company look for a successor to the departing CFO.

NuVasive investors seemed to worry about whether there was some unstated subtext behind the organizational changes, and the stock plunged 13% in after-hours trading following the announcement. Fundamentally speaking, however, NuVasive looks healthier than the decline would suggest. As long as the succession plan works to bring in good replacements for the people who are leaving the company, then NuVasive has plenty of potential to stay ahead of its competitors and keep rewarding shareholders for the medical advances that help the company's patients.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends NuVasive. The Motley Fool has a disclosure policy.