Globus Medical, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparable periods are 2018. Globus Medical develops and sells musculoskeletal medical devices, including spine and orthopedic products and enabling technologies such as robotic guidance and navigation systems.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Sales | $196.2M (+15.9%) | $169.2M | $573.7M (+11.0%) | $517.0M |
| Gross profit / margin | $150.8M / 76.9% | $131.4M / 77.6% | $442.5M / 77.1% | $403.6M / 78.1% |
| Operating income / margin | $42.1M / 21.4% | $38.3M / 22.6% | $122.0M / 21.3% | $126.1M / 24.4% |
| Net income / margin | $38.3M / 19.5% | $35.2M / 20.8% | $109.7M / 19.1% | $119.7M / 23.2% |
| Diluted EPS | $0.38 | $0.35 | $1.08 | $1.18 |
Q3 sales growth reflected increased spine product sales and INR technology sales in the U.S., and spine sales internationally. For the first nine months, U.S. sales rose 9.3% and international sales 19.0% (21.8% on a constant-currency basis). Musculoskeletal Solutions sales were $182.3M in Q3 and $540.6M year to date; Enabling Technologies sales were $13.9M and $33.1M, respectively.
Year-to-date operating income and net income declined despite higher sales. Cost of goods sold rose faster than sales, lowering gross margin; SG&A increased 15.2%, primarily reflecting sales-force expansion. The prior-year period included a $4.6M asset-sale gain, contributing to the lower 2019 comparison.
Cash, liquidity and debt
- Cash, cash equivalents and restricted cash were $166.2M at September 30, 2019. Marketable securities totaled $494.5M, bringing cash and marketable securities to $660.7M, up from $602.8M at year-end 2018.
- Nine-month operating cash flow was $117.7M, versus $137.4M in 2018. Capital expenditures were $55.0M; reported free cash flow was $62.7M, versus $94.8M.
- Inventory increased to $187.1M from $131.3M at year-end. The filing cites inventory growth as a principal factor in lower operating cash flow.
- No revolving-credit borrowings were outstanding; $125.0M was available under the facility. The company reported compliance with covenants. The facility expires in May 2020. The filing reports no other debt balance.
Changes, outlook and risks
- SG&A increased $34.7M year to date, mainly due to $25.4M of higher selling and marketing costs associated with U.S., orthopedic trauma, INR and international sales-force expansion. Amortization also rose with acquired intangible assets.
- A $1.6M litigation provision was recorded in Q3 and year to date. The L5 dispute was settled in February 2019. Other proceedings remain; management cautions that legal outcomes are uncertain and costs could materially affect earnings, financial position or cash flows.
- The company acquired substantially all StelKast assets in Q2 2019 for approximately $24.1M cash plus potential milestone consideration. The acquisition’s results were not material to the period.
- FDA 510(k) clearance for the AQRate robotic guidance and navigation system led to reclassification of $19.8M of in-process research and development to developed technology, which began amortizing in Q1.
- No quantified earnings or sales guidance is provided. Management expects existing cash, operating cash flows and the available credit facility to meet foreseeable liquidity needs, while anticipating continued investment in surgical sets, product launches, sales-force growth and international expansion.
- Risks highlighted include competition and pricing pressure, reimbursement and procedure demand, regulatory changes and slower product development, litigation, and the possibility that additional funding may be needed. Additional equity financing could dilute shareholders.
Important facts for investors to verify
- Whether sales-force and product investments generate growth sufficient to offset rising SG&A and preserve margins.
- Inventory levels, write-downs and working-capital trends, given the substantial inventory increase and weaker operating cash flow.
- Litigation developments and the possible financial effects of proceedings not fully quantified in the filing.
- Credit-facility renewal or replacement before its May 2020 expiration, and any changes to liquidity needs.
- Performance and contingent-payment obligations associated with StelKast and other acquisitions.