Globus Medical, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparisons are primarily with fiscal 2016. The company develops and sells medical devices for musculoskeletal disorders, principally spine implants. In 2017 it launched ExcelsiusGPS robotic guidance and navigation (first sale in Q4) and its first orthopedic trauma products.
Financial performance
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Sales | $636.0 million | $564.0 million | Up 12.8% |
| Gross profit / margin | $485.5 million / 76.3% | $429.3 million / 76.1% | Margin broadly stable |
| Operating income / margin | $161.8 million / 25.4% | $154.1 million / 27.3% | Income up 5.0%; margin contracted |
| Net income / diluted EPS | $107.3 million / $1.10 | $104.3 million / $1.08 | Net income up 2.9% |
| Operating cash flow | $159.5 million | $173.5 million | Down $13.9 million, mainly from timing of receivables collections and billing |
| Free cash flow (non-GAAP) | $107.8 million | $106.9 million | After capital expenditures and restricted-cash adjustment |
| Adjusted EBITDA (non-GAAP) | $226.1 million / 35.6% of sales | $210.8 million / 37.4% | Higher dollars, lower margin |
- Sales mix: Innovative Fusion sales were $327.4 million, up 13.8%; Disruptive Technology sales were $308.6 million, up 11.6%.
- Geography: U.S. sales were $529.9 million, up 5.9%; international sales were $106.1 million, up 66.4%. The international increase primarily reflects the full-year contribution from the 2016 Alphatec International acquisition and growth in Japan.
- Costs: SG&A rose 20.6% to $267.8 million, reflecting Alphatec support, expansion of INR and trauma sales teams, and higher U.S. sales-force costs. R&D was $43.7 million, down 1.9%, partly because 2016 included a one-time licensing cost.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $429.8 million, up from $350.8 million. Working capital was $527.3 million. No revolver borrowings were outstanding; $50 million was available under the facility, which was scheduled to expire in May 2018. Total liabilities were $110.7 million.
Material changes and unusual items
- The 2017 effective tax rate was 36.8%, versus 33.7%. The Tax Cuts and Jobs Act resulted in a provisional $11.0 million tax charge, including deferred-tax remeasurement and deemed-repatriation tax.
- Management extended the estimated useful life of surgical instruments, modules and cases from three to five years, reducing 2017 depreciation by about $1.7 million and increasing basic and diluted EPS by approximately $0.01.
- In Q4 2017, the company corrected the prior-year presentation of $65.8 million of variable-rate demand notes as marketable securities rather than cash equivalents; related cash-flow statements were adjusted. Management said the prior-period depreciation and scrap adjustment recorded in 2016 was not material to prior years or 2016.
- 2017 quarterly results included Q4 sales of $176.0 million and net income of $24.4 million, compared with $151.6 million and $24.3 million, respectively, in Q4 2016.
- KB Medical, a robotics developer, was acquired in June 2017 for approximately $31.5 million cash, plus milestone-based contingent consideration. The company recorded $16.2 million of goodwill.
Outlook, risks and contingencies
- Management expects to launch approximately five to ten new products annually over the next three years and plans to expand U.S. and international sales capacity. No specific revenue, earnings or margin guidance is provided.
- Management expects higher R&D and SG&A spending as product development, sales-force expansion and commercialization continue. It believes operating cash flows and available liquidity will meet foreseeable needs, while noting that additional liquidity may be required.
- Principal risks include intense competition and pricing pressure; dependence on surgeon and hospital adoption; reimbursement restrictions; limited suppliers and human-tissue sourcing; regulatory clearance and compliance; product liability and lack of extensive long-term clinical data; inventory obsolescence; foreign-exchange exposure; and execution and integration risks from acquisitions and new product launches.
- Legal matters include the $11.5 million Bianco settlement in September 2017, which reversed a prior $2.5 million accrual and created a $9.0 million asset to be amortized through June 2022. The L5 dispute was expected to proceed to trial in the first half of 2018; the company could not estimate a loss range. Flexuspine filed a rehearing petition after an appellate court affirmed a defense verdict.
- The company reported effective disclosure controls and internal control over financial reporting; the previously disclosed material weakness related to depreciation and scrap accounting was reported remediated. The company does not intend to pay cash dividends.
Key facts for investors to verify
- Whether sales growth and adoption of ExcelsiusGPS and orthopedic trauma products continue, and how much growth reflects acquired international operations.
- Whether rising SG&A and sales-force investment translate into sustainable operating-margin improvement.
- The sustainability and cash-conversion quality of operating cash flow, including receivables collection and inventory levels.
- The final tax effects of the Tax Reform Act and any subsequent adjustments to provisional estimates.
- Outcomes and financial exposure from pending litigation, contingent acquisition payments, and the Alphatec note receivable.
- Renewal or replacement of the revolver scheduled to expire in May 2018, and any changes to liquidity needs or borrowing.