Globus Medical, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also presents unaudited fourth-quarter results. Globus develops and sells musculoskeletal implants, biologics, surgical instruments, and imaging, navigation and robotic technologies. It reports one operating segment.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $789.0 million | $785.4 million | +0.5% |
| Gross profit | $571.6 million | $605.4 million | -5.6% |
| Operating income | $111.4 million | $172.0 million | -35.2% |
| Net income | $102.3 million | $155.2 million | -34.1% |
| Diluted EPS | $1.01 | $1.52 | -33.6% |
| Cash from operations | $198.8 million | $172.0 million | +$26.8 million |
Gross margin fell to 72.4% from 77.1%; operating margin declined to 14.1% from 21.9%, and net margin to 13.0% from 19.8%. Cost of goods sold rose 20.8%, mainly from excess and obsolete inventory write-downs, non-recurring inventory write-offs and other manufacturing expenses. Research and development expense increased 40.7%, including $24.4 million of acquired Synoste in-process research and development. SG&A was unchanged at $354.8 million.
Musculoskeletal Solutions sales rose 1.4% to $748.4 million; Enabling Technologies sales fell 13.6% to $40.6 million. U.S. sales increased 2.6% to $664.5 million, while international sales decreased 9.5% to $124.6 million and represented 15.8% of total sales.
Fourth quarter: Sales were $233.4 million versus $211.7 million in Q4 2019; gross profit was $172.6 million versus $162.9 million; net income was $53.0 million versus $45.5 million. These quarterly figures are unaudited.
Liquidity, debt and capital allocation
At year-end, cash, cash equivalents and restricted cash were $239.4 million. Short- and long-term marketable securities totaled $545.9 million, giving combined cash and marketable securities of approximately $785.3 million. Current assets were $821.8 million and current liabilities $120.8 million. No borrowings were outstanding on the revolving credit facility. The $125 million facility, entered into in August 2020, was fully available and scheduled to terminate August 5, 2021.
Operating cash flow was $198.8 million; investing activities used $117.3 million and financing activities used $38.7 million. The company repurchased 2.691 million shares for approximately $104.7 million at an average $38.91 per share, with $95.3 million remaining under authorization. It does not pay cash dividends.
Material changes, outlook and risks
- Management said COVID-19-related postponements of elective procedures had affected sales and could materially adversely affect FY2021 sales, operating results and cash flows. The duration and severity were not estimable; supply and production had not been materially affected to date.
- Management cited continued product development, sales-force expansion and international growth as strategies, and reported 10 product launches in 2020. No specific financial guidance was provided.
- During 2020, Globus acquired Synoste, whose limb-lengthening-system research was expensed because it had no alternative future use. Two additional acquisitions included $33.2 million of contingent consideration, subject to performance obligations over as long as 10 years.
- Inventory write-downs were a significant unusual expense: net adjustments to cost of sales for excess and obsolete inventory were $17.7 million, versus $2.5 million in 2019. Inventory increased to $229.2 million from $196.3 million.
- The company initiated a voluntary Class II recall in Q3 2020 of specific lots of ALTERA spacers due to use of an incorrect alloy in internal components. It reported no related adverse-event reports and said affected field inventory had been collected and replaced.
- An FDA warning letter concerning a tissue product remained open at year-end. Globus said it believed the issues could be resolved without material financial impact, but could not assure the FDA would be satisfied or specify a resolution date.
- Patent infringement litigation brought by Moskowitz Family LLC was stayed pending inter partes review proceedings. The company could not determine the outcome or estimate a loss range and had recorded no liability for the matter.
- Other principal risks include elective-surgery demand and reimbursement, competitive pricing, dependence on sales representatives and a limited number of suppliers, regulatory approvals and compliance, product safety and adoption, inventory obsolescence, foreign exchange, and cyber and data-security risks.
Important facts for investors to verify
- Whether elective procedure volumes and international sales recover, and how COVID-19 affects subsequent-period results and cash flows.
- Whether the 2020 inventory charges reflect temporary demand disruption or continuing excess-stock and product-obsolescence exposure.
- Progress and potential consequences of the open FDA warning letter and the ALTERA recall.
- Developments in the Moskowitz litigation and other legal contingencies, whose outcomes or loss amounts may not be estimable.
- Availability and terms of the revolving facility after its stated August 2021 termination date.
- Execution and eventual economics of recent acquisitions and contingent consideration obligations.