Globus Medical, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. Globus develops and sells spinal implants and emerging technologies, including robotic, imaging and navigation systems and orthopedic trauma products. Financial amounts below are in U.S. dollars; “Q2” means the three-month period.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Sales | $173.4M | $152.4M | $347.8M | $308.2M |
| Gross profit / margin | $135.7M / 78.3% | $115.2M / 75.6% | $272.2M / 78.3% | $235.4M / 76.4% |
| Operating income / margin | $42.1M / 24.3% | $37.4M / 24.5% | $87.8M / 25.2% | $77.7M / 25.2% |
| Net income / margin | $45.0M / 25.9% | $28.7M / 18.8% | $84.5M / 24.3% | $57.4M / 18.6% |
| Diluted EPS | $0.44 | $0.29 | $0.84 | $0.59 |
| Adjusted EBITDA / margin (non-GAAP) | $59.5M / 34.3% | $53.4M / 35.1% | $121.2M / 34.8% | $111.3M / 36.1% |
Sales grew 13.8% in Q2 and 12.8% in the first half. U.S. sales rose 15.1% and 13.7%, respectively; international sales rose 7.2% and 8.7% (4.3% and 3.9% on a constant-currency basis). Emerging Technology sales were $13.8M in Q2 and $26.6M in the first half, versus none in the comparable 2017 periods; Spine sales were $159.6M and $321.2M. The company attributed much of U.S. growth to emerging-technology products and associated implants and robotic instruments.
First-half operating cash flow was $85.6M, compared with $79.4M; free cash flow, a non-GAAP measure, was $58.4M versus $54.4M. Investing cash outflow was $111.5M, largely reflecting net purchases of marketable securities and $27.2M of property and equipment spending. Financing cash flow was $27.2M, mainly from stock-option exercises. Cash and cash equivalents ended the period at $119.9M; marketable securities totaled $396.8M. Total cash and securities were $516.8M, up from $429.8M at year-end 2017.
At June 30, 2018, the company had no revolver borrowings and $125M available under its revolving credit facility, increased from $50M and expiring in May 2019. Total liabilities were $96.6M; the filing reports no outstanding funded debt under the facility. Current assets were $633.2M and current liabilities $80.3M. The company reported compliance with facility covenants.
Material changes and unusual items
- Gross margin improved year over year, while operating margin was broadly stable. SG&A increased 19.7% in Q2 and 16.2% for the first half, including spending to expand INR/robotics and trauma sales forces and other commercial teams. R&D increased 26.2% and 22.6%, reflecting additional personnel and product-development activity.
- The effective tax rate fell to 10.6% in Q2 and 14.1% for the first half, from 27.5% and 30.0%. The company cited the lower federal tax rate, stock-option exercise benefits and other Tax Act effects.
- Other income included a $4.6M gain on an asset sale. The assets sold for $5.0M; $3.0M was collected at closing and $2.0M recorded as a current asset. This gain boosted reported earnings; adjusted EBITDA excludes it.
- A change in estimated useful lives of instruments and cases, made effective in October 2017, reduced first-half 2018 depreciation by approximately $3.1M and increased diluted EPS by approximately $0.03.
- Stock-based compensation expense was $11.5M for the first half, versus $7.1M. Proceeds from option exercises were $33.1M, versus $5.9M.
- The company adopted the new revenue-recognition standard on January 1, 2018; it reported no material impact on financial position, results or disclosures.
Outlook, risks and contingencies
No numerical revenue or earnings guidance is provided in the filing. Management said cash, operating cash flows and the fully available revolver were expected to support liquidity needs for the foreseeable future, while noting possible need for additional financing as the company invests in R&D, surgical sets, sales-force expansion and potential acquisitions. Identified risks include weaker product demand or reimbursement, pricing pressure and competition, regulatory changes, product-development execution, personnel retention, intellectual-property protection and litigation outcomes.
Globus disclosed ongoing legal matters, including L5 litigation for which the outcome and potential loss range could not be estimated. In the Flexuspine patent case, the appellate court affirmed a no-infringement result and denied a rehearing petition. The company stated that litigation costs could materially affect earnings, financial position or cash flows. It did not consider its $30M secured loan receivable from Alphatec impaired at June 30, 2018. Management reported effective disclosure controls and no material change in internal control over financial reporting during the first half.
Investor verification points
- Assess how much sales growth and future profitability depend on continued adoption of robotic and other Emerging Technology products, and whether commercial expansion costs are translating into sustainable returns.
- Separate the $4.6M asset-sale gain and the depreciation-estimate benefit from recurring earnings; compare GAAP results with the company’s non-GAAP measures and their adjustments.
- Review inventory growth and first-half cash-flow movements, including working-capital needs and continued investment in surgical sets and equipment.
- Monitor litigation developments, the collectability of the Alphatec note, and the timing and terms of the revolver renewal due in May 2019.
- Verify the tax-rate outlook and the durability of the unusually low 2018 effective tax rate, including the effects of stock-option exercises and tax-law changes.