Globus Medical, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results. Globus develops and sells products for musculoskeletal disorders, primarily spinal implants, with newer imaging, navigation, robotics and orthopedic trauma offerings.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Sales | $169.2 million | $151.7 million | $517.0 million | $459.9 million |
| Gross profit / margin | $131.4 million / 77.7% | $114.9 million / 75.8% | $403.6 million / 78.1% | $350.3 million / 76.2% |
| Operating income / margin | $38.3 million / 22.6% | $35.8 million / 23.6% | $126.1 million / 24.4% | $113.5 million / 24.7% |
| Net income / diluted EPS | $35.2 million / $0.35 | $25.6 million / $0.26 | $119.7 million / $1.18 | $83.0 million / $0.85 |
| Adjusted EBITDA / margin | $57.7 million / 34.1% | $53.4 million / 35.2% | $178.9 million / 34.6% | $164.6 million / 35.8% |
| Operating cash flow | $51.8 million | $34.8 million | $137.4 million | $114.2 million |
| Free cash flow | $36.4 million | $22.0 million | $94.8 million | $76.3 million |
Liquidity and debt: At September 30, cash and cash equivalents were $145.3 million and marketable securities totaled $396.3 million, for combined cash and securities of $541.6 million. No revolver borrowings were outstanding; $125 million was available under the facility, which expires in May 2019. Total liabilities were $97.4 million. The company reported no outstanding debt borrowings at quarter-end.
Changes and drivers
- Q3 sales rose 11.5%; nine-month sales rose 12.4%. U.S. sales increased 10.5% in Q3 and 12.6% year to date. International sales increased 16.8% in Q3 and 11.7% year to date, as reported.
- Emerging Technology sales, including imaging, navigation, robotics and trauma products, were $6.3 million in Q3 and $32.9 million for the nine-month period; the 2017 comparison reported no such sales. Growth also reflected spinal products and associated implants and robotic instruments.
- Gross margin improved, partly reflecting higher volume and lower instrument and case depreciation following a useful-life estimate change. Selling, general and administrative expense increased 18.6% in Q3 and 17% year to date, mainly from expansion of sales forces, including INR and trauma. R&D expense increased 42.6% in Q3 and 29.4% year to date.
- Net income growth benefited from lower income taxes: the effective tax rate was 17.3% in Q3 and 15.1% year to date, versus 31.5% and 30.5%, respectively, in 2017. The filing attributes the change chiefly to U.S. tax reform and stock-option exercise benefits.
- Investing cash outflow increased to $140.4 million for nine months, principally due to marketable-security investments and $42.5 million of property and equipment purchases. Financing cash flow benefited from $36.2 million of stock-option exercise proceeds.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects liquidity from cash, investments, operating cash flow and the revolver to meet foreseeable needs, while noting planned spending on surgical sets, product development, sales-force expansion and potential acquisitions.
- Management identifies risks including competition and pricing pressure, reimbursement changes, regulatory requirements, product-development execution, sales-force retention, intellectual-property protection and litigation. It cautions that adverse sales trends or litigation outcomes could harm liquidity and results.
- The estimated useful life of instruments and cases was extended from three to five years effective October 2017. This reduced depreciation by approximately $1.3 million in Q3 and $4.4 million for nine months of 2018; diluted EPS benefited by $0.01 and $0.04, respectively.
- In September, Globus acquired Nemaris, a surgical-planning software company, for $15.2 million, with potential milestone payments of up to $10.0 million. It also recorded a $4.6 million gain on asset sales during the nine-month period.
- On November 7, 2018, after quarter-end, Alphatec repaid $29.3 million of outstanding principal and interest on its note. The company stated the note was not impaired at September 30.
- Legal matters include ongoing L5 litigation, for which the company cannot estimate a potential loss range. The Flexuspine patent matter was resolved in Globus’s favor on appeal; a rehearing petition was denied.
Investor verification points
- Assess whether Emerging Technology and robotic sales can continue growing and support returns on expanding sales and R&D investment.
- Separate reported GAAP results from management’s non-GAAP measures, including Adjusted EBITDA and free cash flow, and review the listed exclusions.
- Evaluate the ongoing effect of the instrument-life estimate on depreciation, margins and earnings.
- Confirm the Alphatec repayment was received and review exposure to acquisition-related contingent payments, including Nemaris milestones.
- Monitor litigation developments, reimbursement and pricing pressures, and the May 2019 revolver renewal or replacement.