Globus Medical, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. Globus Medical develops and sells medical devices and technologies for musculoskeletal conditions, including implants and surgical instruments (Musculoskeletal Solutions) and imaging, navigation, and robotics systems (Enabling Technologies). This unaudited filing covers the quarter and nine months ended September 30, 2021; comparisons are to the corresponding 2020 periods.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $229.7 million | $216.1 million | $708.1 million | $555.6 million |
| Gross profit / margin | $171.2 million / 74.5% | $159.0 million / 73.6% | $530.7 million / 74.9% | $399.0 million / 71.8% |
| Operating income / margin | $53.3 million / 23.2% | $50.0 million / 23.1% | $153.8 million / 21.7% | $52.9 million / 9.5% |
| Net income | $47.2 million | $44.2 million | $134.1 million | $49.3 million |
| Diluted EPS | $0.45 | $0.44 | $1.30 | $0.49 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $200.0 million | $118.6 million |
- Sales mix and geography: Q3 Musculoskeletal Solutions sales were $209.5 million, up 1.2%; Enabling Technologies sales were $20.2 million, up 124%. U.S. sales rose 8.8% to $198.2 million, while international sales fell 7.2% to $31.5 million. For the nine months, sales rose 27.4%, with U.S. growth of 30.3% and international growth of 12.9%.
- Liquidity and debt: At September 30, cash, cash equivalents, and restricted cash were $361.9 million; short- and long-term marketable securities totaled $623.1 million. Current assets were $980.5 million and current liabilities $122.5 million. Total liabilities were $192.3 million. The company had not borrowed on its $125 million revolving credit facility, which runs to August 3, 2022.
- Cash flows and investment: Nine-month investing cash outflow was $132.1 million, primarily reflecting net purchases of marketable securities; capital expenditures were $39.9 million. Financing cash inflow was $55.2 million, including $59.9 million of stock-option exercise proceeds. No shares were repurchased in the first nine months of 2021.
Changes versus prior period
- Q3 sales increased 6.3% and net income increased 6.8% year over year. Management attributed U.S. growth mainly to Enabling Technologies volume and spine sales; Japan sales were weaker amid a sales-force transition and pandemic effects.
- Nine-month sales increased 27.4% and net income increased to $134.1 million from $49.3 million. The comparison includes $24.4 million of acquired in-process research and development expense in 2020, which contributed to the prior-year earnings and margin base being lower.
- Nine-month gross margin improved to 74.9% from 71.8%, with management citing manufacturing efficiencies and lower inventory write-downs than in 2020. SG&A rose 14.8% as commissions increased with sales and the company expanded sales forces.
- Nine-month acquisition-related costs rose to $14.5 million from $1.9 million, primarily due to changes in the fair value of contingent acquisition liabilities. The company recorded a $14.3 million fair-value change in those liabilities during the period.
Outlook, risks, and unusual items
- The filing provides no numerical revenue or earnings guidance. Management said operating cash flow should fund foreseeable liquidity needs and that it expects no need to draw on the credit facility given cash and marketable securities.
- COVID-19 remains a material uncertainty: renewed restrictions on elective procedures could adversely affect revenue growth, operating profit, cash flow, customer payment terms, and the effective tax rate. The company also reported slight supply delays, not yet causing a meaningful sales backlog, and warned prolonged disruption could affect fulfillment.
- A patent-infringement lawsuit filed by Moskowitz Family LLC seeks unspecified damages and injunctive relief. The company said the outcome and potential loss range could not be estimated and no liability was recorded as of September 30, 2021. Q3 litigation provision included an accrual for a potential settlement.
- Two non-material acquisitions completed in Q3 had combined contingent consideration of approximately $12.6 million. On November 4, 2021, after quarter-end, Globus acquired substantially all assets of Capstone Surgical Technologies for $25 million initially, subject to adjustments, plus up to $25 million contingent consideration.
- Management reported disclosure controls were effective as of September 30, 2021 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Enabling Technologies’ rapid growth continues and translates into broader procedure adoption and durable sales growth.
- How much of the nine-month earnings improvement reflects underlying operations versus the prior-year $24.4 million IPR&D charge and other period-specific items.
- Whether supply constraints, COVID-19 disruptions, and Japan’s sales-force transition affect future sales, margins, or customer fulfillment.
- The assumptions and potential cash or share costs underlying the $57.8 million business-acquisition liability, and the ultimate cost and outcome of the Moskowitz litigation.
- The final terms, purchase-price allocation, and contingent payments related to the Capstone acquisition.