Globus Medical, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; audited annual results, with unaudited fourth-quarter data also disclosed. Globus Medical designs and sells spinal implants and related products. It reports one operating segment.
Financial results
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Sales | $386.0 million | $331.5 million | +16.4% |
| Gross profit / margin | $310.8 million / 80.5% | $262.7 million / 79.2% | Margin +1.3 pts |
| Operating income / margin | $114.8 million / 29.7% | $97.4 million / 29.4% | Income +17.9% |
| Net income | $73.8 million | $60.8 million | +21.5% |
| Diluted EPS | $0.80 | $0.67 | +19.4% |
| Adjusted EBITDA / margin | $136.6 million / 35.4% | $118.6 million / 35.8% | EBITDA +15.2%; margin -0.4 pts |
| Operating cash flow | $76.5 million | $76.4 million | Broadly flat |
Cash and cash equivalents were $212.4 million at year-end, up from $142.7 million. Working capital was $320.6 million. The company had no revolving-facility borrowings and $50.0 million available under its facility, which matures in May 2014. It reported $60.6 million of total liabilities, including $11.3 million of business-acquisition liabilities; no debt was reported at year-end. Inventory rose to $62.3 million from $47.4 million, principally to support sales and product launches. Capital expenditures were $24.7 million, and investing cash outflow was $30.7 million.
Revenue trends and fourth quarter
- Disruptive Technology sales rose 37.5% to $147.3 million; Innovative Fusion sales increased 6.4% to $238.7 million. Disruptive Technologies accounted for approximately 38% of sales.
- U.S. sales increased 14.3% to $355.6 million. International sales grew 48.6% to $30.4 million, or about 8% of total sales.
- Fourth-quarter sales were $100.5 million versus $88.0 million in Q4 2011; gross profit was $81.0 million versus $68.5 million, and net income was $20.8 million versus $13.6 million. Quarterly cash flow is not provided in the filing text.
Material changes, outlook, and commentary
- The company launched 14 products in 2012 and received its first FDA premarket approval, for the SECURE-C cervical artificial disc. It reported that a 380-patient clinical study showed statistical superiority to anterior cervical discectomy and fusion on specified 24-month outcomes.
- Globus acquired assets related to a vertebral compression fracture product in July 2012 for approximately $6.0 million; potential additional revenue-sharing payments apply. Acquisition-related liabilities and contingent consideration are subject to milestones.
- Management planned to launch approximately five to ten products annually over the following three years and cited more than 30 products in development. It also intended to expand U.S., international, and Algea Therapies sales forces. These are plans, not formal numerical revenue or earnings guidance.
- Management expected 2013 cost of goods sold to rise with sales and the 2.3% medical-device excise tax on certain U.S. sales. R&D and SG&A were also expected to increase with product development, clinical programs, sales-force expansion, and public-company costs.
- SG&A increased 20.3% in 2012, faster than sales, including costs for the Algea Therapies sales force and international expansion. R&D increased 19.0%. Gross margin improved, while Adjusted EBITDA margin edged down.
- The company paid $1.0 million in February 2012 to settle an FDA matter concerning NUBONE; the amount had been accrued in 2011. It had multiple pending patent, trade-secret, and employment-related disputes, generally with unspecified damages. The company said outcomes could not be determined, loss ranges could not be estimated, and no accruals were recorded for those pending matters.
- Key risks include surgeon adoption and clinical evidence for newer products, pricing and reimbursement pressure, regulation and approval delays, dependence on a limited number of suppliers, inventory obsolescence, litigation and product-liability exposure, and execution of sales and international expansion. The filing also notes potential effects of the medical-device tax and healthcare reform.
- Disclosure controls were judged effective; management did not provide an internal-control effectiveness assessment in this filing under the newly public company transition rules. The independent auditor issued an unqualified opinion on the financial statements.
Most important facts for investors to verify
- Whether rapid growth in Disruptive Technology products and international sales continues, and whether sales-force expansion produces returns.
- Whether SG&A growth, inventory accumulation, and investment in instruments and product development remain consistent with revenue and cash generation.
- SECURE-C commercialization and longer-term clinical outcomes, plus progress and regulatory milestones for ACADIA, TRIUMPH, and other pipeline programs.
- Potential exposure from pending litigation, acquisition milestones, supplier concentration, and any changes in reimbursement or regulatory requirements.
- The effects of the 2.3% medical-device excise tax, management’s planned cost increases, and the company’s controlled-company governance structure and concentrated voting power.