Globus Medical, Inc. — Q3 2016 Form 10-Q
Business and period: Globus Medical designs and sells musculoskeletal implants, primarily for spine procedures. This unaudited report covers the quarter and nine months ended September 30, 2016, compared with the same 2015 periods.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Sales | $135.7m | $137.0m | $412.4m | $402.2m |
| Gross profit / margin | $104.2m / 76.8% | $104.1m / 76.0% | $316.7m / 76.8% | $304.8m / 75.8% |
| Operating income / margin | $37.7m / 27.8% | $40.7m / 29.7% | $118.4m / 28.7% | $116.2m / 28.9% |
| Net income / margin | $26.2m / 19.3% | $26.5m / 19.3% | $80.0m / 19.4% | $75.2m / 18.7% |
| Diluted EPS | $0.27 | $0.28 | $0.83 | $0.78 |
| Adjusted EBITDA (non-GAAP) | $50.1m | $50.5m | $153.6m | $143.8m |
Cash flow and liquidity: Nine-month operating cash flow was $120.0m, versus $77.9m; capital expenditures were $26.7m, versus $36.6m. The company reported non-GAAP free cash flow of $67.7m, versus $43.3m. Cash and marketable securities totaled $322.4m at September 30, 2016, down from $329.8m at year-end 2015; working capital was $412.4m. There were no revolver borrowings and $50.0m of capacity available. The filing reports no outstanding debt, but includes a $25.0m secured note receivable from Alphatec, with a five-year maturity and a high contractual interest rate.
Changes and material developments
- Q3 reported sales decreased 1.0%; nine-month sales increased 2.5%. Nine-month constant-currency growth was 2.9%.
- Disruptive Technology sales rose 4.1% in Q3 and 8.9% year to date, while Innovative Fusion sales declined 5.5% and 3.0%, respectively. Management attributed the declines primarily to U.S. sales-force hiring/onboarding timing and pricing pressure; growth reflected newer expandable interbody, minimally invasive, and regenerative biologics products.
- U.S. sales fell 4.1% in Q3 but grew 1.5% over nine months. International sales rose 34.1% in Q3 and 13.2% year to date, partly reflecting the Alphatec International acquisition; constant-currency international growth was 38.0% and 16.8%, respectively.
- On September 1, Globus acquired Alphatec’s international operations and distribution channel for approximately $80.1m cash. The acquisition added preliminary goodwill of $18.3m and customer-relationship intangibles. Reported results include the acquired business from the acquisition date; pro forma nine-month sales assuming a January 1, 2015 acquisition were $444.1m in 2016 versus $442.4m in 2015.
- Gross margin improved year over year, supported by the U.S. medical-device excise-tax suspension and savings from the BMG acquisition. The tax suspension contributed approximately $6.5m of nine-month cost-of-sales savings. R&D expense rose 15.9% year to date; litigation provision was $3.1m, mainly related to settlements.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management said existing cash, marketable securities, operating cash flow, and the available revolver should meet liquidity needs for the foreseeable future, while noting potential need for additional funding as the strategy is executed.
- Management plans continued investment in R&D, surgical sets, sales-force expansion, and international markets. The company is developing robotic surgical navigation and orthopedic-trauma products, but reported that neither category had products cleared by the FDA for sale.
- The 2.3% medical-device excise tax was suspended for two years beginning January 1, 2016 and is scheduled to resume January 1, 2018 absent further legislation. Management said it planned to direct approximately 40% of the tax benefit toward R&D and manufacturing job creation in 2016.
- Litigation remains a risk. The DePuy Synthes disputes were settled for a $7.9m payment; the filing also reports a $7.6m one-time net-income benefit recognized in Q4 2015 and an approximately $8.4m restricted-cash recovery in Q1 2016. The Bianco judgment includes a 5% ongoing royalty on specified products for 15 years; management said it did not expect a material impact on future revenue. The Flexuspine jury found no infringement, but the plaintiff appealed after quarter-end. The Stern patent case and L5 dispute remained unresolved, with potential losses not estimable for the Stern matter and no accrual recorded.
- Key execution and business risks include integrating Alphatec International and transitioning its customers, pricing and competitive pressures, product development and regulatory requirements, reimbursement changes, and litigation outcomes. Management reported effective disclosure controls as of September 30, 2016.
Important facts for investors to verify
- Whether post-acquisition international sales growth and the transition of Alphatec customers continue as expected.
- Whether U.S. sales-force expansion and newer products can offset pricing pressure and weakness in Innovative Fusion sales.
- The collectability and credit risk of the $25.0m Alphatec note receivable, including compliance with its covenants and collateral value.
- Final Alphatec purchase-price allocations, integration costs, and realized acquisition benefits.
- Developments in the Bianco royalty, Stern and L5 cases, the Flexuspine appeal, and other legal contingencies.
- The 2018 potential reinstatement of the medical-device excise tax and the company’s ability to maintain margins and liquidity.