Globus Medical, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. Globus develops and sells musculoskeletal medical devices, including spine and orthopedic trauma products and robotic, navigation, and surgical-planning technologies. It operates as one segment; approximately 17% of 2018 sales were international.
Financial performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Sales | $713.0 million | $636.0 million | +12.1% |
| Gross profit / margin | $553.6 million / 77.6% | $485.5 million / 76.3% | Margin +1.3 percentage points |
| Operating income / margin | $169.3 million / 23.7% | $161.8 million / 25.4% | Income +4.6%; margin declined |
| Net income / diluted EPS | $156.5 million / $1.54 | $107.3 million / $1.10 | Net income +45.7% |
| Operating cash flow | $181.6 million | $159.1 million | +$22.6 million |
| Free cash flow (non-GAAP) | $121.9 million | $107.8 million | +$14.2 million |
U.S. sales increased 12.1% to $593.9 million; international sales rose 12.2% to $119.1 million (10.8% on a constant-currency basis). Musculoskeletal Solutions sales were $666.0 million; Enabling Technologies sales were $46.9 million, up from $10.9 million in 2017, when ExcelsiusGPS sales had only recently begun. Fourth-quarter sales were $195.9 million versus $176.0 million; quarterly net income was $36.8 million versus $24.4 million.
R&D expense rose 27.1% to $55.5 million and SG&A rose 16.3% to $311.6 million, reflecting investment in the INR and trauma sales forces, U.S. sales capacity, and product development. Adjusted EBITDA, a non-GAAP measure, was $245.6 million (34.5% of sales), compared with $226.1 million (35.6%). The effective tax rate fell to 17.0% from 36.8%, primarily reflecting U.S. tax reform and a stock-option exercise benefit; this contributed to net income growth.
Liquidity, debt and financial position
Cash, cash equivalents, restricted cash and marketable securities totaled $602.8 million at year-end, up from $429.8 million. Working capital was $534.6 million; total assets were $1.30 billion and stockholders’ equity was $1.19 billion. The company had no revolving-credit borrowings and reported $125 million available under its facility, which was amended in 2018 and scheduled to expire in May 2019. The filing reports no other conventional debt outstanding. Investing cash outflow was $193.0 million, including $59.7 million of property and equipment purchases and substantial net investment in marketable securities.
Changes, outlook and notable items
- Sales growth was driven mainly by U.S. spine penetration and INR-related sales, including associated implants and instruments; international growth included Japan and existing markets.
- Gross margin improved, while operating margin declined as operating expenses grew faster than sales. Management plans to continue investing in product development, sales-force expansion, international markets, and surgical instrument sets.
- The company launched ten products in 2018, began marketing orthopedic trauma products, and acquired Nemaris, developer of Surgimap surgical-planning software, for $15.2 million plus potential milestone consideration.
- Management provided no specific numerical revenue or earnings guidance. It expects to expand sales operations and commercialize products in development, while noting that new-product sales may be partly offset by declines in earlier-generation products.
- On October 31, 2018, the FDA issued a warning letter concerning regulatory non-conformities involving one allograft tissue product processed by a subsidiary. The company said it was addressing the observations and expected resolution without material financial impact, but gave no assurance of FDA acceptance or timing; further action could restrict the product and materially affect results.
- Litigation provision increased to $5.9 million, primarily reflecting the L5 litigation settlement and other settlement costs. The L5 matter was fully settled on February 6, 2019. The filing cautions that other proceedings could materially affect earnings, financial position, or cash flows, although outcomes are uncertain.
- Other income included a $4.6 million gain on asset sales and higher interest income, including interest related to the Alphatec note; Alphatec repaid the note in November 2018.
- A change in estimated useful lives of instruments and cases reduced 2018 depreciation by approximately $5.7 million and increased diluted EPS by approximately $0.05. Excess and obsolete inventory write-downs were $10.5 million, down from $11.5 million.
Key risks and contingencies
- Adoption of new products and robotics depends on surgeon and hospital acceptance, training, clinical evidence, capital budgets, and reimbursement; capital-equipment sales cycles can be lengthy and variable.
- Intense competition and pricing pressure, changing payer coverage, and lower reimbursement may constrain sales or margins. The company also faces dependence on a limited number of suppliers for some products and allograft materials, alongside inventory obsolescence risk.
- Medical-device and tissue-product regulation is extensive; failure to satisfy FDA or foreign requirements could delay launches, trigger recalls, or restrict sales. The FDA warning letter is a specific outstanding matter.
- Other exposures include product liability, intellectual-property litigation, foreign-exchange movements, cybersecurity and privacy obligations, and execution risks from growth and acquisitions.
- Governance and ownership are concentrated: the company is controlled under NYSE rules and relies on exemptions from certain independence requirements. Class B shares carry ten votes per share; David C. Paul and family controlled approximately 74.7% of voting power at year-end.
Most important facts for investors to verify
- Progress, FDA response, and any sales or operating restrictions related to the allograft warning letter.
- Whether Enabling Technologies and orthopedic trauma sales scale sufficiently to support ongoing investment and improve operating margins.
- Current status and terms of the revolving credit facility, which was scheduled to expire in May 2019.
- Developments in material litigation, settlement costs, and any additional contingencies disclosed after the filing.
- Cash conversion and inventory trends, including the effect of instrument-set investment and excess/obsolete inventory charges.
- Underlying earnings growth after considering the lower tax rate, asset-sale gain, litigation costs, and depreciation-life estimate change; compare GAAP results with management’s non-GAAP measures.