Globus Medical, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. Globus Medical develops and sells musculoskeletal medical devices, including implants and imaging, navigation, and robotic surgery technologies. It reports one operating segment.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $230.5 million | $227.3 million | Up 1.4% |
| Gross profit / margin | $171.4 million / 74.3% | $172.3 million / 75.8% | Margin down 1.5 percentage points |
| Operating income / margin | $46.4 million / 20.1% | $54.5 million / 24.0% | Down 14.9% |
| Net income | $38.1 million | $45.3 million | Down 16.0% |
| Diluted earnings per share | $0.37 | $0.44 | Down $0.07 |
| Operating cash flow | $44.7 million | $63.6 million | Down $18.9 million |
Sales by product category were $217.4 million for Musculoskeletal Solutions, up 2.3%, and $13.1 million for Enabling Technologies, down 11.9%. U.S. sales rose 1.6% to $196.4 million; international sales increased 0.4% to $34.1 million. International sales represented about 14.8% of total sales.
Cost of goods sold increased 7.5%, faster than sales, reflecting higher volume, unfavorable production variances, inventory reserves and write-offs, and freight trends. Research and development expense rose 16.7% to $17.4 million, mainly from personnel costs and product-development investment. Selling, general and administrative expense increased 2.9% to $100.7 million, primarily due to travel and meeting costs. Litigation expense was $2.3 million, compared with a small litigation settlement receipt in the prior-year quarter. The effective tax rate was 22.1%, versus 20.7%.
Financial position and liquidity
- Cash and cash equivalents were $229.8 million at March 31, 2022. Short- and long-term marketable securities totaled $790.4 million, bringing cash and marketable securities to approximately $1.02 billion.
- Total assets were $2.00 billion; total liabilities were $213.3 million and equity was $1.79 billion. Current assets were $916.6 million against current liabilities of $141.5 million.
- The company reported no borrowings under its $125 million revolving credit facility. The facility was scheduled to terminate August 3, 2022; it includes a $25 million letter-of-credit sublimit.
- Operating cash flow was $44.7 million. Investing activities used $13.9 million, including $20.0 million of property and equipment purchases, partly offset by net marketable-security transactions. Financing activities provided $6.0 million, primarily from stock-option exercises.
- Inventory increased to $253.9 million from $237.0 million at year-end 2021. The company cited inventory outflows as a partial offset to operating cash generation.
Changes, outlook and risks
- Despite modest sales growth, gross margin and operating income declined year over year, reflecting cost pressure and higher operating expenses. Net income and diluted EPS also fell.
- Management said cash, cash equivalents and marketable securities should fund liquidity needs for the foreseeable future, while noting potential future needs related to working capital, R&D, surgical sets, sales-force expansion, and acquisitions.
- No numerical full-year revenue or earnings guidance is provided in the filing. Management said results could be materially affected by a COVID-19 resurgence or restrictions on elective surgeries, but believes the company is positioned to sustain and grow its business.
- Management reported delays obtaining materials and components due to COVID-19 and geopolitical supply-chain disruptions. These have extended lead times; the company said they had not caused a meaningful Musculoskeletal Solutions order backlog, but could do so. Component delays could create a backlog for Enabling Technologies.
- A $2.3 million litigation provision included an accrual for a potential settlement. In a separate patent-infringement case brought by Moskowitz Family LLC, the company said the outcome and potential loss range could not be determined and no liability was recorded.
- Unrealized losses on marketable securities and foreign-currency translation reduced other comprehensive income by $10.4 million in the quarter. The filing reports no impairment charges for goodwill or intangible assets.
- The company expanded its stock repurchase authorization by $200 million in March 2022; $295.3 million remained authorized at quarter-end. No shares were repurchased in Q1.
Important facts for investors to verify
- Whether supply-chain constraints, higher production and freight costs, or inventory reserves continue to pressure margins and product availability.
- Whether Enabling Technologies sales recover and whether component delays result in order backlogs.
- Developments in the Moskowitz patent litigation and the potential-settlement accrual, including any change to estimated exposure.
- The status and terms of the revolving credit facility following its stated August 3, 2022 termination date.
- Future cash use for capital expenditures, surgical sets, acquisitions, and any share repurchases.