Globus Medical, Inc. — Q3 2015 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2015. Globus designs and sells musculoskeletal implants, primarily for spine procedures, through direct and distributor sales forces. Its products are reported in Innovative Fusion and Disruptive Technology categories. Amounts below are in millions unless stated otherwise.
Financial performance and position
- Q3 revenue: $137.0, up 16.3% year over year. U.S. sales rose 17.9%; international sales increased 1.2% as reported, or 14.6% on a constant-currency basis. Disruptive Technology sales grew 28.8%, versus 7.0% for Innovative Fusion.
- Q3 earnings: Gross profit was $103.9; gross margin was 75.9%, compared with 76.5% in Q3 2014. Operating income was $40.7 (29.7% margin), and net income was $26.5 (19.3% margin), up 14.8%. Diluted EPS was $0.28, versus $0.24.
- Nine-month results: Revenue was $402.2, up 16.4%; gross profit $304.4; operating income $116.2; and net income $75.2, up 15.9%. Gross, operating, and net margins were 75.7%, 28.9%, and 18.7%, respectively. Diluted EPS was $0.78 versus $0.68.
- Cash flow and investment: Nine-month operating cash flow was $77.9, nearly unchanged from $77.2 a year earlier. Capital expenditures were $36.6, and the company-reported non-GAAP free cash flow was $43.3 versus $61.6. Investing cash outflow was $115.1, including $48.5 for the BMG acquisition and increased purchases of marketable securities.
- Liquidity and debt: Cash, cash equivalents, and marketable securities totaled $300.1 at September 30, compared with $304.1 at year-end 2014; this excludes $25.4 of restricted cash held in escrow for litigation. Working capital was $411.9. No revolving-credit borrowings were outstanding; $50.0 was available under a facility expiring May 2016, and the company reported covenant compliance.
- Balance sheet: Total assets were $800.7 and total liabilities $126.7. Inventories increased to $105.7 from $90.9 at year-end. Nine-month inventory write-downs for excess and obsolete items were $7.1, versus $5.4 in 2014.
Material changes and notable items
- Growth was led by U.S. sales and newer products, including regenerative biologics, expandable interbody products, and minimally invasive products. Nine-month international sales declined 1.7% as reported but grew 11.0% at constant currency.
- Cost of goods sold rose 22.8% for the first nine months, faster than revenue growth; gross margin fell to 75.7% from 77.0%. SG&A rose 14.7%, while R&D rose 16.6%. SG&A as a share of sales improved to 39.9% from 40.5%.
- Litigation provision declined to $0.4 for the first nine months from $3.9, which included prior-year provisions for the Bianco verdict, Altus settlement, and other matters.
- Globus acquired related-party supplier Branch Medical Group (BMG) on March 11 for $57.0 cash, $5.3 deferred consideration, and $0.9 of closing adjustments. The purchase-price allocation included $39.0 of goodwill, which is not tax deductible. BMG results are included from the acquisition date.
Outlook, risks, and contingencies
The filing provides no numerical revenue or earnings guidance. Management said existing liquidity, operating cash flow, and the undrawn credit facility should meet requirements for the foreseeable future. It expects continued investment in R&D, surgical sets, sales-force expansion, and international markets, while noting that additional liquidity may be required to execute its strategy.
Risks cited include reimbursement and coverage changes, competition and pricing pressure, regulatory changes that could slow product development, sales-force and growth execution, and litigation outcomes. The Bianco judgment was affirmed by the Federal Circuit on October 19, 2015, after quarter-end; it includes a 5% ongoing royalty on net sales of specified products for 15 years beginning January 18, 2014. The company is considering further appeal and said it does not expect a material impact on future revenue. Several other patent and securities matters remained unresolved; outcomes and potential losses could not be estimated, and no accruals were recorded for those matters. Restricted cash of $25.4 was escrowed for Synthes and Bianco litigation obligations in the event appeals are unsuccessful.
Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It was evaluating the impact of newly issued revenue-recognition and inventory accounting standards.
Investor verification priorities
- Assess whether product launches and U.S. territory expansion can sustain growth, and whether international growth remains strong after currency effects.
- Track gross-margin pressure, inventory growth and write-downs, and the cash required for capital spending and surgical sets.
- Review BMG integration, acquisition-related costs, and the related-party transaction and purchase-price allocation.
- Monitor the Bianco appeal and royalty exposure, as well as other patent litigation and the securities class action.
- Confirm liquidity and refinancing arrangements before the May 2016 credit-facility expiration; the filing reports no borrowing and $50.0 of availability.