Globus Medical, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Globus designs and sells musculoskeletal implants, primarily for spine procedures, through direct and distributor sales channels. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Sales | $113.6 | $107.0 | $227.8 | $212.0 |
| Gross profit / margin | $87.0 / 76.6% | $82.2 / 76.9% | $175.9 / 77.2% | $163.8 / 77.2% |
| Operating income / margin | $31.6 / 27.8% | $11.2 / 10.5% | $63.8 / 28.0% | $40.4 / 19.1% |
| Net income | $20.6 | $7.4 | $41.8 | $27.3 |
| Diluted EPS | $0.22 | $0.08 | $0.44 | $0.29 |
| Operating cash flow | Not presented quarterly in cash flow statement | Not presented quarterly in cash flow statement | $41.6 | $27.3 |
| Free cash flow (company-defined) | $6.3 | $2.8 | $29.4 | $14.3 |
Q2 sales rose 6.1%; first-half sales rose 7.4%. First-half revenue growth included 6.7% growth in Innovative Fusion products and 8.5% in Disruptive Technology products. U.S. sales grew 4.6% and international sales 38.5% in the first half. Management attributed growth primarily to product launches, sales of pedicle screw systems, and expanded international market penetration.
First-half Adjusted EBITDA, a non-GAAP measure, was $82.2 million (36.1% of sales), versus $71.8 million (33.9%). The filing cautions that non-GAAP measures have limitations and may not be comparable across companies.
Financial position and liquidity
- At June 30, cash and cash equivalents were $136.5 million; marketable securities totaled $176.5 million. Combined cash, cash equivalents and securities were $313.0 million, up from $275.5 million at year-end 2013.
- Working capital was $401.1 million. The company reported no revolver borrowings and $50.0 million of available capacity under its credit facility; it was in compliance with covenants. The facility was extended to May 2015.
- Total liabilities were $89.7 million, including $16.9 million of current and long-term business acquisition liabilities. No debt balance was reported.
- First-half investing cash outflow was $4.8 million, reflecting net cash inflows from securities maturities and sales exceeding purchases, partly offset by $12.2 million of property and equipment purchases. Cash increased by $46.5 million during the half.
Changes, unusual items and risks
- Reported earnings benefited from substantially lower litigation expense than in 2013: first-half litigation provisions were $3.9 million versus $18.3 million. The prior-year period included a $18.2 million DePuy Synthes litigation charge. First-half 2014 included charges related to Bianco, Altus and other matters; the company also recorded a $2.0 million Altus settlement.
- In the Bianco matter, the court awarded a 5% ongoing royalty on net sales of CALIBER, CALIBER-L and RISE (or products not colorably different) for 15 years, on sales from January 18, 2014. The court entered final judgment in July 2014, after quarter-end. Globus said it would seek to overturn the verdict and did not expect it to materially affect future revenues.
- Other legal matters include patent litigation involving DePuy Synthes and NuVasive, and a NuVasive employee-related case scheduled for trial in October 2014. For several cases, the company said outcomes and potential losses could not be estimated; it warned that litigation costs could materially affect earnings, financial position or cash flows.
- The six-month effective tax rate increased to 35.1% from 32.5%, primarily due to litigation-charge effects and the timing of the research and experimentation credit. The credit had not been extended for 2014; the company estimated a $0.5 million tax-provision impact for the first half.
- Management cited reimbursement and procedure demand, competitive pricing pressure, regulatory changes, product development, and litigation outcomes as factors that could affect results and liquidity. It expects current liquidity sources to meet requirements for the foreseeable future, while noting that additional liquidity may be required to execute its strategy.
Outlook and other disclosures
The filing provides no specific sales or earnings guidance. Management expects continued investment in surgical sets, new product launches, sales-force expansion and international markets. The company had no sales backlog and described its business as generally not seasonal, while noting possible lower procedure volumes during summer vacation and winter holidays. It was evaluating a new revenue-recognition standard effective for public companies for annual periods beginning after December 15, 2016; the impact was not yet determined. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Developments, appeals, royalty payments and possible business effects from the Bianco judgment and other material litigation.
- Whether international growth and recent product launches continue, and how sales growth compares with the slower U.S. rate.
- Cash conversion, inventory growth, capital spending and the continued availability and covenant terms of the revolving credit facility.
- Effects of reimbursement coverage, competitive pricing, regulation and the unextended research and experimentation credit on future results.
- Potential changes in acquisition-related contingent consideration, reported at $14.3 million fair value at June 30, 2014, and related payment obligations.