Globus Medical, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless noted. Globus Medical designs and sells products for spinal disorders, principally in the United States. Financial statements are unaudited.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Sales | $105.0 million | $94.7 million | +10.9% |
| Gross profit / margin | $81.5 million / 77.6% | $76.3 million / 80.6% | Margin down 3.0 percentage points |
| Operating income / margin | $29.2 million / 27.8% | $28.1 million / 29.6% | Income +4.2%; margin down 1.8 points |
| Net income | $19.9 million | $17.6 million | +13.2% |
| Diluted EPS | $0.21 | $0.19 | +$0.02 |
| Adjusted EBITDA | $35.5 million; 33.8% of sales | $34.0 million; 35.9% of sales | +4.5%; margin down 2.1 points |
Disruptive Technology sales rose 31.5% to $43.7 million, while Innovative Fusion sales were nearly flat at $61.3 million. U.S. sales increased 9.4% to $96.3 million; international sales grew 30.0% to $8.7 million, representing about 8% of total sales.
- Cash flow: Operating cash flow was $18.3 million, down from $22.9 million. Capital expenditures were $6.8 million. Net cash used in investing was $100.0 million, largely reflecting $93.2 million of marketable-security purchases. Cash and equivalents declined $80.9 million to $131.5 million.
- Liquidity: Cash, equivalents and marketable securities totaled $224.1 million at quarter-end; working capital was $278.2 million, versus $320.6 million at December 31, 2012.
- Debt: No borrowings were outstanding on the $50.0 million revolving credit facility; the full amount was available and the company was covenant-compliant. The facility was extended after quarter-end to May 2015.
- Balance sheet: Total assets were $473.6 million and total liabilities $65.3 million at March 31, 2013. No material debt balance is reported.
Material changes and drivers
- Sales growth was led by newer Disruptive Technology products, with increased U.S. market penetration and international expansion, including sales in seven countries where the company had no sales in the prior-year quarter.
- Cost of goods sold increased 27.7%, faster than sales. The company cited volume and mix, $1.8 million of medical device excise tax (MDET), and higher instrument depreciation, distribution and other costs. Gross margin consequently contracted.
- SG&A rose 10.1%, mainly from U.S. compensation and added sales and administrative personnel, including Algea Therapies sales representatives. R&D increased 1.6%.
- The effective tax rate fell to 32.6% from 37.9%. Q1 2013 included a $0.8 million research-credit benefit for 2012 following the January 2013 reinstatement of the credit; the prior-year rate was affected by the credit’s lapse.
Outlook, risks and unusual items
- No quantitative earnings or sales guidance is provided. Management intends to expand U.S. and international sales coverage, launch products and continue investing in surgical sets, R&D and clinical trials. Management believes available liquidity is sufficient for the foreseeable future, while noting additional liquidity could be required as the strategy is executed.
- Management cited potential pressures from reimbursement or coverage changes, competition and pricing, cost increases, slower product development due to regulation, and the MDET. Sales may be affected by fewer surgeries during summer and winter holidays; the business generally has no backlog.
- The company faces multiple patent, trade-secret, employment and other disputes, including a new February 2013 patent suit involving REVERE products. Outcomes and potential losses could not be determined or reasonably estimated for the described cases; no accrual was recorded for those matters. The filing warns that litigation costs could materially affect earnings, financial position or cash flows.
- Available-for-sale marketable securities were newly held following a cash-management change. Management states that a hypothetical 10% interest-rate change would not materially affect their underlying valuation; securities mature within three years of purchase.
- Related-party supplier purchases were $5.1 million in Q1 2013, and $3.9 million was payable to that supplier at quarter-end.
Important facts for investors to verify
- Whether growth in Disruptive Technology products and international markets persists, and how sales-force expansion affects revenue and expenses.
- Whether gross-margin pressure from MDET, product mix and instrument/distribution costs continues.
- Operating cash conversion, inventory and receivables growth, and the liquidity available after investment in marketable securities and surgical sets.
- Developments in the patent and other litigation, especially any injunction risk, damages exposure or change in loss accruals.
- The impact of the reinstated research credit and MDET on subsequent-period tax rates, cash flow and profitability.