Globus Medical, Inc. — Q2 2015 Form 10-Q
Business and period: Globus Medical designs and sells musculoskeletal implants, primarily for spine procedures. This unaudited report covers the quarter and six months ended June 30, 2015, compared with the corresponding 2014 periods. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Sales | $133.6 | $113.6 | $265.2 | $227.8 |
| Gross profit | $101.0 | $87.0 | $200.5 | $175.9 |
| Gross margin | 75.6% | 76.6% | 75.6% | 77.2% |
| Operating income | $37.0 | $31.6 | $75.6 | $63.8 |
| Operating margin | 27.7% | 27.8% | 28.5% | 28.0% |
| Net income | $24.1 | $20.6 | $48.7 | $41.8 |
| Diluted EPS | $0.25 | $0.22 | $0.51 | $0.44 |
- Sales grew 17.6% in Q2 and 16.4% in the first half. Disruptive Technology sales rose 29.9% and 29.5%, respectively; Innovative Fusion sales grew 8.7% and 7.0%.
- U.S. sales increased 19.5% in Q2 and 18.8% in the first half. International sales rose 1.2% in Q2 but declined 3.0% in the first half as reported; management cited currency effects. On a constant-currency basis, worldwide growth was 19.1% for Q2 and 17.8% for the first half.
- Gross margin declined year over year, with cost of goods sold rising faster than sales. Management attributed higher costs to sales volume and mix, freight, inventory reserves/write-offs, royalties, and acquired TTOT costs.
- Operating expenses increased: first-half R&D rose 17.2% to $17.7 million, and SG&A rose 14.7% to $106.8 million. Litigation provision fell to $0.4 million from $3.9 million in the first half of 2014, when Bianco, Altus, and other matters drove charges.
Cash flow, liquidity, and balance sheet
- First-half operating cash flow was $47.8 million, versus $41.6 million. Capital expenditures were $25.1 million, resulting in company-defined free cash flow of $24.0 million, down from $29.4 million. Q2 free cash flow was negative $3.4 million, mainly reflecting $17.9 million of property and equipment purchases.
- Investing cash outflow was $92.3 million, including $48.0 million for the BMG acquisition and net purchases of marketable securities. Cash and cash equivalents fell to $41.6 million from $82.3 million at year-end.
- At June 30, cash, cash equivalents, and marketable securities totaled $281.2 million, including $24.7 million of restricted cash held for litigation obligations. Working capital was $363.0 million, versus $380.6 million at year-end.
- No revolver borrowings were outstanding; $50.0 million was available under the facility, which expires in May 2016. The company reported covenant compliance. Acquisition liabilities were $32.9 million in total, including current and long-term amounts. No other funded debt balance is reported in the provided filing text.
- Inventory rose to $101.0 million from $90.9 million, and goodwill rose to $93.6 million from $53.2 million, primarily reflecting the BMG acquisition.
Material developments, outlook, and risks
- Globus acquired related-party supplier Branch Medical Group (BMG) on March 11, 2015. Consideration was $63.3 million, including cash, deferred consideration, and estimated closing adjustments; preliminary goodwill was $40.6 million. Purchase-price allocation remained subject to finalization. The related-party relationship and acquisition are notable items for investors.
- Management said product launches, U.S. territory expansion, and deeper penetration supported growth. It expects to keep investing in surgical sets, R&D, sales-force expansion, and international commercialization. It stated existing liquidity and operating cash flow should meet foreseeable needs, while noting additional liquidity could be required; no quantified earnings or revenue guidance is provided.
- Material uncertainties include competition and pricing pressure, product development and regulatory risks, reimbursement changes, sales-force execution, and litigation outcomes. The company warned unfavorable litigation results could materially affect earnings, financial position, or cash flows.
- In the Bianco matter, a 5% ongoing royalty applies to specified CALIBER and RISE products for 15 years on sales beginning January 18, 2014; the company is appealing. The Synthes patent verdict and Bianco matter are among the obligations associated with restricted cash. Other patent matters, including Bonutti and Flexuspine, had uncertain outcomes and no accrual recorded; the company could not estimate potential losses. NuVasive matters settled in February 2015 for undisclosed amounts described as immaterial.
- First-half net income included lower litigation expense than the prior comparable period. Adjusted EBITDA was $93.1 million, or 35.1% of sales, versus $82.2 million, or 36.1%; this is a non-GAAP measure and should not be viewed as a substitute for GAAP results.
- Management reported disclosure controls were effective as of June 30, 2015, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How BMG integration, final purchase-price allocation, and any related-party considerations affect future costs and margins.
- Whether sales growth—particularly in Disruptive Technology—continues, and how international performance develops after currency effects.
- Drivers of the gross-margin decline, inventory growth, and continued investment in surgical sets and capital equipment.
- Status, potential financial impact, and cash requirements of the Bianco appeal and other patent litigation; the filing does not provide a clear estimate for several matters.
- Liquidity needs and the May 2016 revolver maturity, including whether additional funding becomes necessary.