Globus Medical, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; comparisons are with the same 2021 periods. Globus develops and sells musculoskeletal medical devices and surgical-enabling technologies, including robotics, imaging, and navigation systems. It reports one operating segment.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $263.6 million | $251.0 million | $494.2 million | $478.4 million |
| Gross profit / margin | $195.2 million / 74.0% | $187.2 million / 74.6% | $366.6 million / 74.2% | $359.5 million / 75.1% |
| Operating income / margin | $67.8 million / 25.7% | $45.9 million / 18.3% | $114.2 million / 23.1% | $100.4 million / 21.0% |
| Net income / margin | $54.6 million / 20.7% | $41.5 million / 16.6% | $92.7 million / 18.8% | $86.9 million / 18.2% |
| Diluted EPS | $0.53 | $0.40 | $0.90 | $0.84 |
| Operating cash flow | Not separately presented by quarter | $81.6 million | $122.8 million |
- Q2 sales increased 5.0%; six-month sales increased 3.3%. Musculoskeletal Solutions generated $234.2 million in Q2 and $451.6 million for the first half. Enabling Technologies generated $29.4 million and $42.6 million, respectively.
- U.S. sales rose 4.7% in Q2 and 3.2% for the first half; international sales rose 6.9% and 3.7%. International sales were 14.7% of first-half revenue.
- Q2 operating income benefited from acquisition-related costs turning into a $1.1 million credit, versus $13.9 million of expense in Q2 2021, principally reflecting fair-value changes in acquisition liabilities. First-half acquisition-related costs were a $1.2 million credit versus $14.1 million of expense.
- First-half operating cash flow fell by $41.2 million year over year, mainly reflecting larger outflows for receivables and inventory, partly offset by net income and higher accounts payable. Capital expenditures were $43.7 million, versus $22.1 million.
Liquidity, debt, and balance sheet
At June 30, 2022, cash and cash equivalents were $150.8 million, short- and long-term marketable securities totaled $730.9 million, and current assets were $891.2 million versus current liabilities of $146.0 million. Total liabilities were $215.6 million and equity was $1.70 billion. The company had no borrowings under its $125 million revolving credit facility. The filing states that cash, cash equivalents, and marketable securities are expected to meet liquidity needs for the foreseeable future.
Cash and cash equivalents declined $42.3 million during the first half. Financing cash use was $136.7 million, primarily due to $144.5 million of share repurchases. The company repurchased 2.35 million Class A shares in Q2 at an average $61.45 per share; $150.8 million remained authorized under the repurchase program at quarter-end.
Material changes, outlook, and risks
- Cost of goods sold increased faster than sales: 7.2% in Q2 and 7.4% for the first half. Management cited higher volume, unfavorable freight, and production variances; gross margin declined year over year.
- Research and development expense rose 11.9% in Q2 and 14.2% for the first half, principally from personnel investment in product development. SG&A was nearly flat in Q2 and up 1.1% for the first half.
- The effective tax rate increased to 22.6% in Q2 from 15.1%, and to 22.4% for the first half from 18.1%, primarily due to a lower benefit from stock-option exercises.
- Management provided no specific revenue or earnings guidance. It expects continued investment in R&D, surgical sets, sales-force expansion, and international growth; it considers current liquidity sufficient for foreseeable needs.
- Management reported supplier delays that have extended lead times. It said these had not created a meaningful Musculoskeletal Solutions backlog but warned that supply disruptions could create one; delays for some Enabling Technologies components may cause a backlog. COVID-19 resurgence, elective-surgery restrictions, and geopolitical supply-chain disruption could adversely affect sales, profit, or cash flow.
- A patent-infringement lawsuit brought by Moskowitz Family LLC seeks damages and injunctive relief. The company said it could not determine the outcome or estimate a loss range and recorded no liability. The first half included a $2.3 million litigation provision, described by management as including a legal settlement.
- An immaterial acquisition was completed in Q2, with approximately $0.2 million paid at closing and $4.4 million of contingent consideration. On August 3, 2022, the company amended its credit agreement; the filing describes the facility’s maturity date as August 2, 2023.
Important facts for investors to verify
- Whether revenue growth and Enabling Technologies adoption continue, and whether supply delays or Japan sales-force changes affect future sales.
- Whether higher freight, production costs, and inventory requirements pressure gross margins and operating cash generation.
- The nature, potential financial exposure, and developments in the Moskowitz litigation and other contingencies.
- The impact of market-value declines in available-for-sale securities: first-half other comprehensive loss was $18.6 million, including unrealized securities losses and currency translation losses.
- The amount and timing of future buybacks, contingent acquisition payments, and investment spending; no specific forward guidance is provided in this filing.