Globus Medical, Inc. — Q2 2013 Form 10-Q
Business and period: Globus Medical designs and sells medical devices for spinal disorders. This unaudited report covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. The company reported one operating segment; most sales were in the United States.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Sales | $107.0 | $96.0 | $212.0 | $190.7 |
| Gross profit | $82.2 | $77.6 | $163.8 | $153.9 |
| Gross margin | 76.9% | 80.9% | 77.2% | 80.7% |
| Operating income | $11.2 | $30.6 | $40.4 | $58.6 |
| Net income | $7.4 | $19.0 | $27.3 | $36.6 |
| Diluted EPS | $0.08 | $0.21 | $0.29 | $0.40 |
| Adjusted EBITDA (non-GAAP) | $36.3 | $34.7 | $71.8 | $68.6 |
- Sales grew 11.5% in Q2 and 11.2% in the first half. Disruptive Technology sales increased 26.7% and 29.0%, respectively; Innovative Fusion sales grew 2.9% and 1.3%.
- U.S. sales increased 10.8% in Q2 and 10.1% in the first half. International sales grew 20.3% and 25.0%, respectively, but represented about 8% of first-half sales.
- Q2 operating income and net income fell substantially year over year, primarily reflecting the $19.5 million DePuy Synthes litigation accrual. Excluding litigation provisions, reported non-GAAP diluted EPS was $0.21 for Q2 and $0.43 for the first half, versus GAAP diluted EPS of $0.08 and $0.29.
- Cost of goods sold also rose with sales volume and mix, the new 2.3% medical-device excise tax, and higher instrument, distribution and related costs. The company recorded $3.4 million of that tax in the first half.
Cash, liquidity and balance sheet
- At June 30, cash and cash equivalents were $92.3 million; short- and long-term marketable securities totaled $139.4 million. Combined cash and securities were $231.7 million, versus $212.4 million in cash and no marketable securities at year-end 2012.
- First-half operating cash flow was $27.3 million, down from $34.9 million. Investing used $153.1 million, largely because of net purchases of $140.2 million in marketable securities and $13.0 million of property and equipment. Financing provided $5.7 million. Ending cash was $92.3 million.
- Working capital was $281.2 million, compared with $320.6 million at year-end. Current assets were $337.9 million and current liabilities $56.6 million.
- The company had no revolver borrowings and $50.0 million of available capacity under its credit facility, which expires in May 2015. It was in covenant compliance. No other debt balance is reported.
- Inventories rose to $71.4 million from $62.3 million at year-end; accounts receivable increased to $57.5 million from $53.5 million. Accrued expenses rose to $40.4 million from $25.0 million, mainly reflecting legal and settlement accruals.
Material developments, outlook and risks
- DePuy Synthes verdict: A June 14 jury verdict found that prior versions of three products infringed patents and awarded $16.0 million in damages; the jury upheld the patents but made no finding of willful infringement. Globus accrued $19.5 million in damages and related costs, including $1.3 million for inventory write-offs. The company said the products are no longer in its portfolio, expects no material future revenue impact, and plans post-trial motions and, if needed, an appeal.
- Other unresolved proceedings include patent and other claims brought by N-Spine/Synthes, NuVasive, Altus Partners, L5 and Sabatino Bianco. For several matters, the company said the outcome and possible loss range could not be determined and no accrual was recorded. Adverse outcomes could require damages or changes to products or business practices.
- Management cited opportunities to grow through new products, additional U.S. and international sales representatives, expansion into new markets, and investment in surgical sets and clinical trials. It believed existing liquidity and operating cash flow would meet foreseeable needs, while noting that additional liquidity might be required as the strategy is executed.
- Risks highlighted include litigation, reimbursement and coverage changes, pricing and competition, regulation and slower product development, the medical-device excise tax, and fluctuations in sales and cash flow. The business is generally not seasonal, though surgery volumes may be lower around summer vacations and winter holidays.
- No specific numeric revenue, earnings or other financial guidance was provided in the filing. Management stated that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the DePuy Synthes verdict is changed on post-trial motions or appeal, and whether the $19.5 million accrual proves sufficient.
- How much of sales growth and future profitability comes from Disruptive Technology products, and whether margins recover after the litigation charge, excise tax and cost increases.
- Whether inventory, receivables and operating cash flow remain aligned with product launches and sales growth.
- The status, potential exposure and any accrual changes for the other disclosed legal proceedings.
- Liquidity and investment portfolio quality, including the effect of interest rates, and compliance with revolver covenants.