Globus Medical, Inc. — Q3 2020 Form 10-Q
Business context and period. Globus Medical develops and sells musculoskeletal medical devices, including implants and enabling technologies such as robotic guidance and navigation systems. This unaudited filing covers the three and nine months ended September 30, 2020, compared with the same 2019 periods. COVID-19 disrupted elective surgeries and sales cycles, particularly earlier in the year.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $216.1M | $196.2M | $555.6M | $573.7M |
| Gross profit | $159.0M | $150.8M | $399.0M | $442.5M |
| Gross margin | 73.6% | 76.9% | 71.8% | 77.1% |
| Operating income | $50.0M | $42.1M | $52.9M | $122.0M |
| Net income | $44.2M | $38.3M | $49.3M | $109.7M |
| Diluted EPS | $0.44 | $0.38 | $0.49 | $1.08 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $118.6M | $117.7M |
| Free cash flow | $35.9M | $43.8M | $69.0M | $62.7M |
Margins and sales mix. Q3 operating margin was 23.1% versus 21.4%; nine-month operating margin was 9.5% versus 21.3%. Q3 sales rose 10.1%, led by U.S. growth of 11.9%; international sales increased 1.4%. For nine months, sales declined 3.2%: U.S. sales fell 1.0% and international sales fell 13.1%. Musculoskeletal Solutions sales were $207.1M in Q3 and $533.1M year to date; Enabling Technologies sales were $9.0M and $22.5M, respectively.
Liquidity, capital resources, and balance sheet
- At September 30, 2020, cash, cash equivalents and restricted cash were $250.6M; short- and long-term marketable securities totaled $434.6M. Combined liquidity was $685.2M, versus $721.0M at December 31, 2019.
- Total liabilities were $124.5M and equity was $1.417B. No credit-facility borrowings are reported. A new revolving facility permits borrowing up to $125M and expires August 5, 2021.
- Operating cash flow was $118.6M; capital expenditures were $49.6M. Cash used for share repurchases was $104.7M during the nine months. The company had $95.3M remaining under its $200M repurchase authorization at quarter-end.
- Inventory increased to $231.9M from $196.3M at year-end. The filing cites inventory cash outflows and warns COVID-related sales weakness could leave inventory above normal levels.
Material changes and unusual items
- Q3 sales and net income improved year over year, but gross margin fell 3.3 percentage points, mainly reflecting higher excess and obsolete inventory charges, inventory write-offs, manufacturing costs and depreciation.
- Nine-month net income declined substantially. Results included a $24.4M Synoste acquired in-process research and development charge, expensed because it had no alternative future use; the charge also contributed to higher R&D expense and the 22.5% year-to-date effective tax rate.
- Net inventory adjustments for excess and obsolete products were $12.4M for the nine months, versus $1.9M in 2019. The company also recorded approximately $1.3M of costs for a voluntary Class II recall of certain ALTERA Spacers; no related adverse reactions had been reported as of the filing.
- The company acquired Synoste in Q2 2020 for limb-lengthening technology. Potential additional consideration of $8M or $4M depends on FDA approval within specified milestone periods and is not recorded unless the milestone is met.
- Q3 Adjusted EBITDA was $75.1M versus $65.5M; nine-month Adjusted EBITDA was $147.6M versus $184.5M. These are non-GAAP measures and exclude specified items, including acquired IPR&D.
Outlook, risks, and contingencies
Management said it could not reasonably estimate COVID-19’s future financial impact. It expected the pandemic and restrictions on elective procedures could materially adversely affect 2020 sales, results and cash flows, and potentially 2021, with possible effects on revenue growth, operating profit, customer payment terms, inventory and the effective tax rate. Management stated it believed the company was positioned to sustain and grow its business as restrictions eased, but gave no specific financial guidance. Supply chain and production had not been materially affected to date, though future delays were possible.
- A patent-infringement case brought by Moskowitz Family LLC was stayed in September 2020 pending earlier Inter Partes Reviews. The company said the outcome and potential loss range could not be determined and recorded no accrual.
- The company cautioned that litigation could materially affect earnings, financial position or cash flows. Other cited risks include competition, product development and regulatory changes, reimbursement and pricing pressures, and the evolving pandemic.
- Management reported effective disclosure controls and procedures as of September 30, 2020, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether elective surgeries and enabling-technology purchasing recovered, and how that affected sales after Q3 and full-year results.
- Whether elevated inventory and obsolescence charges persisted, including the financial and operational effects of the ALTERA recall.
- How much of the year-to-date earnings decline reflects the one-time Synoste IPR&D charge versus ongoing operating trends.
- Progress, regulatory milestones and any contingent payments related to Synoste, as well as the status and potential exposure of the Moskowitz litigation.
- Cash and marketable-securities levels, share repurchases, and compliance with the $125M revolving credit facility’s covenants and August 2021 maturity.