Globus Medical, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. Globus designs and sells musculoskeletal implants, primarily for spine procedures, through direct and distributor sales channels. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Sales | $139.3 | $131.6 |
| Gross profit / gross margin | $107.6 / 77.3% | $99.5 / 75.6% |
| Operating income / operating margin | $42.9 / 30.8% | $38.5 / 29.3% |
| Net income / diluted EPS | $28.0 / $0.29 | $24.6 / $0.26 |
| Net cash from operations | $55.0 | $34.7 |
| Capital expenditures | $9.4 | $7.2 |
| Free cash flow (company-defined, non-GAAP) | $30.0 | $27.4 |
| Adjusted EBITDA (company-defined, non-GAAP) | $53.2; 38.2% of sales | $46.3; 35.2% of sales |
Cost of goods sold was $31.6 million, or 22.7% of sales, versus $32.1 million, or 24.4%. Research and development expense rose 17.8% to $10.2 million; selling, general and administrative expense rose 4.4% to $54.6 million. The effective tax rate was 35.8%, compared with 35.4%.
At March 31, 2016, cash and cash equivalents were $81.3 million, marketable securities totaled $295.8 million, and working capital was $443.2 million. The company had no revolving-credit borrowings and $50.0 million of available capacity; it reported compliance with covenants. Total liabilities were $91.1 million. The filing reports no outstanding funded debt. The credit facility was extended after quarter-end from May 2016 to May 2017.
Changes versus the prior period
- Sales increased 5.8% as reported, or 6.2% on a constant-currency basis. U.S. sales rose 6.3%; international sales grew 0.7% as reported and 5.3% constant currency.
- Disruptive Technology sales rose 13.0% to $69.2 million, led by regenerative biologics, expandable interbody, and minimally invasive products. Innovative Fusion sales declined 0.5% to $70.0 million, which management attributed to U.S. sales-force recruitment timing and onboarding.
- Gross and operating margins improved. Management attributed lower cost of goods sold partly to the medical-device excise-tax suspension and approximately $0.8 million of savings related to Branch Medical Group; volume and product mix partly offset those benefits.
- Operating cash flow increased, but included a $15.7 million cash-flow benefit from restricted cash movements associated with the DePuy Synthes settlement. The company’s free-cash-flow reconciliation removes that restricted-cash impact. Q1 2015 investing cash flow also included the Branch Medical Group acquisition.
Outlook, commentary, risks, and unusual items
- The filing provides no quantified revenue or earnings guidance. Management expects to expand sales forces and international presence, invest in surgical sets and product development, and believes current liquidity and operating cash flows should meet foreseeable needs.
- The medical-device excise tax was suspended for two years beginning January 1, 2016; absent further legislation, it is scheduled to return January 1, 2018. Globus said it planned to direct approximately 40% of the resulting benefit toward job creation in R&D and manufacturing in 2016.
- On January 13, 2016, Globus settled four DePuy Synthes patent lawsuits, paying $7.9 million and receiving approximately $8.4 million from restricted cash shortly afterward. The settlement included cross-licenses and covenants not to sue for specified products. A related approximately $7.6 million net-income benefit was recognized in Q4 2015, not Q1 2016.
- The Bianco matter includes an ongoing royalty of 5% of net sales of specified products, or products not colorably different, for 15 years on sales beginning January 18, 2014. Globus filed a petition for certiorari in March 2016 and said it did not expect the judgment to materially affect future revenue. Other disclosed patent and securities matters remain unresolved; several have no recorded accrual because the outcome or potential loss cannot be estimated. The company cautions that litigation costs could materially affect earnings, financial position, or cash flows.
- Key business risks include competition and pricing pressure, product development and regulatory challenges, surgeon adoption and sales-force retention, reimbursement changes, and litigation outcomes. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of operating-cash-flow growth reflects recurring operations versus the restricted-cash recovery and changes in working capital.
- Whether growth in Disruptive Technology products can continue and offset flat or declining Innovative Fusion sales.
- The status and potential financial exposure of the Bianco royalty and other unresolved legal proceedings.
- The sustainability of margin gains after the excise-tax suspension and the extent of planned R&D, hiring, and surgical-set investment.
- The impact of deferred-tax presentation changes and the eventual adoption of new revenue, inventory, lease, and stock-compensation accounting standards; the filing says impacts were still being evaluated for several standards.