Globus Medical, Inc. — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013. The filing is an annual report, not a standalone quarterly filing. Globus designs and sells spinal implants and related products, principally to hospitals, through direct and distributor sales forces.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 | Change or context |
|---|---|---|---|
| Sales | $434.5 million | $386.0 million | +12.6% |
| Gross profit / margin | $334.1 million / 76.9% | $310.8 million / 80.5% | Margin declined 3.6 percentage points |
| Operating income / margin | $101.7 million / 23.4% | $114.8 million / 29.7% | Operating income fell 11.4% |
| Net income / diluted EPS | $68.6 million / $0.73 | $73.8 million / $0.80 | Net income fell 7.1% |
| Adjusted EBITDA / margin | $150.5 million / 34.7% | $136.6 million / 35.4% | EBITDA rose; margin eased. Non-GAAP measure. |
| Operating cash flow | $93.5 million | $76.5 million | +22.2% |
| Free cash flow | $69.8 million | $51.8 million | Operating cash flow less capital expenditures; non-GAAP measure |
| Cash, cash equivalents and marketable securities | $275.5 million | $212.4 million | Working capital was $348.9 million |
| Debt | No borrowings outstanding | No borrowings outstanding | $50 million revolving facility available; expires May 2015 |
- FY 2013 sales growth was led by Disruptive Technology products: $180.4 million, up 22.5%. Innovative Fusion sales were $254.0 million, up 6.4%.
- U.S. sales rose 11.5% to $396.6 million; international sales rose 24.5% to $37.8 million, or 8.7% of total sales.
- Cost of goods sold increased 33.4%; the filing attributes pressure to the 2.3% medical device excise tax ($7.2 million), product-launch inventory reserves and write-offs, instrument depreciation and litigation-related costs.
- Capital expenditures were $23.7 million. The cash balance declined because the company shifted funds into marketable securities; total cash and securities increased $63.1 million during the year.
- Fourth-quarter sales were $115.2 million versus $100.5 million a year earlier; net income was $21.0 million versus $20.8 million.
Material changes and unusual items
- Sales growth slowed to 12.6% from 16.4% in 2012. Disruptive Technology growth also moderated to 22.5% from 37.5%.
- Reported operating income and net income were affected by $23.1 million of litigation provisions, versus litigation income of $0.8 million in 2012. The company accrued $19.5 million related to the DePuy Synthes verdict and $4.3 million for the Bianco verdict; these matters reduced reported diluted EPS by approximately $0.17, net of tax.
- The medical device excise tax, effective in 2013, added $7.2 million to cost of goods sold. Gross margin fell from 80.5% to 76.9%.
- In December 2013, Globus acquired substantially all assets of a surgical robotics development company for $16.8 million, including in-process research and development. Further milestone and revenue-sharing payments may be due.
- Inventory reserves for excess and obsolete inventory were $8.2 million, up from $6.1 million in 2012. Inventory increased to $70.4 million from $62.3 million.
Outlook, commentary and key risks
- Management expected to launch approximately five to ten products annually over the next three years and reported more than 30 products in development. It planned to expand U.S. and international sales coverage and identified Disruptive Technologies as a continuing growth driver. These are expectations, not formal financial guidance.
- Research and development spending was $26.9 million in 2013. Management expected absolute R&D and selling, general and administrative costs to rise as the product pipeline and sales force expand.
- Clinical and regulatory execution is important: ACADIA and TRIUMPH remained in U.S. clinical development, while SECURE-C was the company’s first PMA-approved product. Delays, trial results or regulatory changes could affect launches.
- Major risks include intense competition and pricing pressure; surgeon adoption and limited long-term clinical evidence; changing reimbursement and coverage; dependence on a limited number of third-party suppliers, including allograft sources; and extensive medical-device regulation and compliance obligations.
- Several intellectual-property and employment-related lawsuits remained unresolved, including NuVasive, DePuy Synthes, N-Spine/DePuy Synthes, L5 and Altus Partners matters. Potential losses in certain cases could not be estimated. Bianco injunctive relief and possible future damages remained for court determination; the company said it would challenge the verdict.
- At year-end, acquisition-related contingent consideration recorded was $14.2 million; the filing also disclosed up to $23.9 million in aggregate undiscounted potential acquisition payments not included in the contractual-obligations table.
- Governance and ownership are concentrated: the CEO controlled approximately 79.3% of voting power at year-end, and the company relied on NYSE controlled-company exemptions. The filing reports effective disclosure controls and internal control over financial reporting, with an unqualified audit opinion.
Important facts for investors to verify
- Track whether sales growth, particularly in Disruptive Technologies and international markets, offsets slower growth in Innovative Fusion.
- Assess whether the excise tax, inventory reserves and ongoing investment continue to pressure gross and operating margins.
- Monitor litigation appeals, possible injunctions or additional damages, and whether recorded accruals prove adequate.
- Review clinical-trial progress, regulatory decisions and commercial adoption for pipeline products, especially ACADIA, TRIUMPH and the acquired robotics technology.
- Evaluate inventory levels, supplier and allograft availability, and the size and terms of contingent acquisition payments.
- Consider liquidity and investment-portfolio quality, the May 2015 revolver expiry, and the implications of concentrated voting control.