Globus Medical, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Globus Medical designs and sells musculoskeletal medical devices, primarily spine implants, and is expanding into robotics, navigation, and orthopedic trauma. The financial statements are unaudited.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Sales | $151.7 million | $135.7 million | $459.9 million | $412.4 million |
| Sales growth | 11.9% | 11.5% | ||
| Gross profit / gross margin | $114.9 million / 75.8% | $104.2 million / 76.8% | $350.3 million / 76.2% | $316.7 million / 76.8% |
| Operating income | $35.8 million | $37.7 million | $113.5 million | $118.4 million |
| Net income | $25.6 million | $26.2 million | $83.0 million | $80.0 million |
| Diluted EPS | $0.26 | $0.27 | $0.85 | $0.83 |
| Adjusted EBITDA (non-GAAP) | $53.4 million | $50.1 million | $164.6 million | $153.6 million |
Q3 GAAP operating margin was approximately 23.6%, versus 27.8% a year earlier; nine-month operating margin was approximately 24.7%, versus 28.7%. Adjusted EBITDA margin was 35.2% for Q3 and 35.8% for the nine-month period, compared with 37.0% and 37.2%, respectively. Q3 net margin was 16.9%, versus 19.3%; nine-month net margin was 18.0%, versus 19.4%.
- Cash flow: Nine-month operating cash flow was $114.7 million, down from $121.5 million. Capital expenditures were $37.9 million, compared with $26.7 million. Company-defined free cash flow was $76.3 million, versus $69.1 million.
- Liquidity: Cash and cash equivalents were $154.9 million; marketable securities totaled $241.7 million. Combined cash, cash equivalents, and securities were $396.5 million, up from $350.8 million at year-end 2016. Working capital was $488.6 million.
- Debt and obligations: No borrowings were outstanding on the $50 million revolving credit facility, which was fully available; the company reported compliance with its covenants. The balance sheet reports no conventional debt balance, but includes acquisition liabilities. A $29.2 million note receivable from Alphatec was outstanding and was not considered impaired.
Material changes versus the prior comparable period
- Sales grew 11.9% in Q3 and 11.5% year to date. International sales rose 70.1% in Q3 and 96.9% for the first nine months, principally reflecting the Alphatec International acquisition; U.S. sales grew 4.5% and 2.4%, respectively.
- Innovative Fusion sales increased 17.1% in Q3 and 16.3% year to date; Disruptive Technology sales rose 6.5% and 6.6%, respectively. Management cited Alphatec-related sales, market penetration, and newer expandable interbody, minimally invasive, and biologics products.
- Q3 net income declined despite higher sales, as operating expenses grew faster than revenue. SG&A increased 16.9% in Q3 and 20.8% year to date, reflecting support for Alphatec operations and expanded sales teams. Higher volume and mix also lifted cost of goods sold; gross margin contracted.
- Nine-month net income increased 3.7%, while operating income declined. The effective tax rate fell to 30.5% from 33.7% for the nine-month period, benefiting from historical foreign tax credits and stock-compensation accounting changes; the prior period included a one-time charge related to domestic legal-structure reorganization.
Outlook, commentary, risks, and unusual items
- The FDA cleared the Excelsius GPS robotic guidance and navigation system during Q3. Globus expected to begin selling robotic products in Q4 2017. The company also launched its first orthopedic trauma products in Q3.
- No numerical revenue or earnings guidance was provided. Management said existing liquidity and operating cash flows should meet foreseeable requirements, while noting possible need for additional liquidity to support growth, capital spending, R&D, and acquisitions.
- Globus acquired Swiss robotics developer KB Medical in June for approximately $31.5 million cash, plus contingent milestone consideration. Purchase-price allocations remained preliminary. Alphatec International integration and the transition of its customers to Globus products were identified as execution risks.
- In September, the company settled the Bianco litigation for $11.5 million cash. It reversed a prior $2.5 million accrual and recorded a $9.0 million asset to be amortized through June 2022 as cost of goods sold. The quarter also included $2.5 million of litigation provision.
- David M. Demski became CEO in August; founder David C. Paul became Executive Chairman and was expected to recover from a health condition and remain involved.
- Management concluded disclosure controls and procedures were ineffective as of September 30, 2017, due to an unremediated material weakness involving depreciation and scrap accounting for surgical instruments and cases. Remediation was in progress, with completion expected before year-end 2017.
- Risks highlighted include pricing pressure, competition, reimbursement changes, regulatory requirements, litigation, product-development execution, and successful integration of Alphatec International. The filing states the business is generally not seasonal, although surgery volumes may be lower around summer vacations and winter holidays.
Important facts for investors to verify
- Whether international growth and Alphatec customer/product transitions are sustainable, and how much growth is organic versus acquisition-related.
- Whether operating expenses and sales-force investment can be controlled as new robotics and trauma products launch, and whether margins stabilize.
- Excelsius GPS commercialization timing, adoption, and associated costs following FDA clearance.
- Progress in remediating the disclosed material weakness and whether controls are subsequently judged effective.
- Final KB Medical purchase-price allocation and the potential amount and timing of contingent acquisition payments.
- Developments in remaining legal matters, including L5 and the Flexuspine appeal, and their potential financial impact.