Globus Medical, Inc. — Q1 2020 Form 10-Q
Business context and period: The medical-device company develops and sells musculoskeletal implants and enabling technologies, including robotic guidance and navigation systems. This unaudited filing covers the three months ended March 31, 2020, compared with Q1 2019. COVID-19 began affecting sales in mid-March as elective surgeries were postponed.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Sales | $190.6 million | $182.9 million |
| Gross profit / margin | $141.7 million / 74.4% | $141.1 million / 77.1% |
| Operating income / margin | $28.4 million / 14.9% | $37.1 million / 20.3% |
| Net income / diluted EPS | $25.9 million / $0.25 | $33.2 million / $0.33 |
| Operating cash flow | $42.3 million | $39.2 million |
| Capital expenditures | $22.3 million | $28.2 million |
| Free cash flow (company-defined) | $20.0 million | $11.0 million |
| Adjusted EBITDA (company-defined) | $50.5 million; 26.5% of sales | $56.8 million; 31.1% of sales |
Sales increased 4.2% year over year (4.4% on a constant-currency basis). U.S. sales rose 7.4% to $158.4 million; international sales declined 9.3% to $32.1 million. Musculoskeletal Solutions sales were $182.5 million and Enabling Technologies sales were $8.0 million.
Despite higher sales, gross margin contracted from 77.1% to 74.4%, and operating income fell 23.3%. Cost of goods sold increased 16.8%, reflecting volume, product mix and depreciation; operating expenses also rose, particularly sales and marketing costs associated with expanding sales forces. Net income declined 21.9%.
Liquidity, debt and balance sheet
Cash, cash equivalents and marketable securities totaled $657.0 million at March 31, 2020, down from $721.0 million at year-end 2019. Cash and restricted cash were $166.7 million. The company reported no revolver borrowings and $125.0 million available under its credit facility; the filing states that the facility was due to expire in May 2020. Total liabilities were $116.0 million and equity was $1.36 billion. Inventories rose to $208.5 million from $196.3 million.
Cash declined $29.0 million during the quarter, mainly reflecting $73.9 million of share repurchases. Financing cash outflow was $68.7 million; investing cash outflow was $2.6 million, versus $53.8 million in Q1 2019, largely due to lower net purchases of marketable securities.
Outlook, risks and unusual items
- Management expected COVID-19 and postponed elective procedures to materially adversely affect fiscal 2020 sales, operating profit and cash flow. It could not reasonably estimate the pandemic’s duration or full financial impact. The filing reports no material supply-chain or production impact to date, but cautions that delays and elevated inventory could follow.
- No numeric full-year guidance is provided. Management cited strong cash holdings and borrowing capacity and said it believed liquidity was sufficient for foreseeable needs.
- The company repurchased 1.92 million shares for approximately $73.9 million at an average $38.49 per share under a new $200 million authorization; $126.1 million remained authorized at quarter-end.
- A $10.0 million Nemaris acquisition milestone was achieved and recorded as a short-term liability, with a corresponding intangible asset. The company also capitalized $13.0 million of Nemaris developed technology after contractual milestones were completed.
- A patent-infringement suit by Moskowitz Family LLC seeks unspecified damages and injunctive relief. The company could not determine the probable outcome or estimate a loss range and recorded no accrual. Management cautioned that legal matters could materially affect results, financial position or cash flows.
Most important facts for investors to verify
- Subsequent-quarter sales, procedure volumes and margins as COVID-related elective-surgery restrictions affected results.
- Whether the revolving credit facility expiring in May 2020 was extended or replaced, and its availability and terms.
- Inventory levels, customer payment terms and cash conversion as sales and procedures changed.
- Progress and potential financial exposure in the Moskowitz patent litigation and other legal matters.
- Capital allocation after the $73.9 million buyback, including remaining authorization and liquidity needs.