Globus Medical, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited. Globus designs and sells spinal-disorder medical devices, primarily in the United States.
Financial performance
| Metric | Q3 2013 | Q3 2012 | First 9 months 2013 | First 9 months 2012 |
|---|---|---|---|---|
| Sales | $107.2 million | $94.8 million | $319.2 million | $285.5 million |
| Gross profit | $81.9 million | $75.9 million | $245.6 million | $229.8 million |
| Gross margin | 76.4% | 80.1% | 77.0% | 80.5% |
| Operating income | $29.5 million | $27.1 million | $69.9 million | $85.7 million |
| Net income | $20.3 million | $16.5 million | $47.6 million | $53.1 million |
| Diluted EPS | $0.22 | $0.18 | $0.51 | $0.58 |
- Q3 sales rose 13.1%; U.S. sales increased 12.6% and international sales 19.1%. Disruptive Technology sales grew 20.7%, versus 8.3% growth in Innovative Fusion.
- For the first nine months, sales grew 11.8%, led by 26.1% growth in Disruptive Technology. Operating income and net income declined versus 2012, principally reflecting a $19.5 million DePuy Synthes litigation charge.
- Q3 selling, general and administrative expense was $45.7 million (42.6% of sales); R&D was $6.6 million (6.1% of sales). Nine-month SG&A was $136.8 million and R&D was $20.5 million.
- The 2.3% medical device excise tax added $1.9 million to Q3 cost of goods sold and $5.3 million year to date. Management said it reduced adjusted EBITDA margin by 1.8 and 1.7 percentage points, respectively.
Cash, liquidity and capital
- Cash and cash equivalents were $101.9 million at September 30, 2013, down from $212.4 million at year-end 2012. The company held $161.9 million of marketable securities; cash, equivalents and securities totaled $263.8 million.
- Nine-month operating cash flow was $60.8 million, compared with $51.8 million; capital expenditures were $18.5 million, making reported free cash flow $42.3 million, versus $34.7 million.
- Investing cash outflow was $181.2 million, largely due to purchases of marketable securities. Financing cash inflow was $9.7 million. Working capital was $326.3 million.
- No revolver borrowings were outstanding; the full $50.0 million facility was available. The facility expires in May 2015, and the company reported covenant compliance. The filing reports no other debt balance.
Material changes, outlook and risks
- Management attributed growth to stronger sales of newer Disruptive Technology products, broader market penetration and expansion of sales territories, including entry into six additional countries. It plans to continue expanding sales forces and investing in surgical sets and product development.
- Management stated existing liquidity should meet foreseeable needs, while noting additional liquidity could be required. The filing provides no specific revenue or earnings guidance.
- A DePuy Synthes jury verdict found that prior versions of three discontinued products infringed patents and awarded $16.0 million in damages. Globus accrued $19.5 million in damages and related costs, including $1.3 million recorded in cost of goods sold. The company intends to challenge the verdict; it reported no finding of willful infringement and does not expect the verdict to materially affect future revenue.
- Other material unresolved matters include patent litigation involving N-Spine/Synthes, NuVasive and Altus Partners, a NuVasive employee-related suit, and Bianco’s trade-secret claims. Outcomes and potential losses were not estimable in the filing; no accruals were recorded for these matters.
- Accrued expenses rose to $44.4 million from $25.0 million, primarily reflecting legal and settlement accruals of $19.6 million versus $1.9 million at year-end. Other stated risks include reimbursement changes, pricing pressure, competition, regulation, litigation and the medical device excise tax.
- The filing disclosed a $5.3 million error in the 2012 cash-flow classification between operating and financing activities; the comparative statement was revised, with no effect on earnings, financial position or total cash flows.
Facts investors should verify
- Subsequent court rulings, appeals and cash-payment timing related to the DePuy Synthes verdict, and the possible exposure from other litigation.
- Whether Disruptive Technology growth and international expansion continue, and whether margin pressure from the excise tax, product mix and operating costs persists.
- Liquidity and investment portfolio values, including the conversion of marketable securities to cash and compliance with revolver covenants.
- The assumptions behind management’s liquidity outlook and planned spending on sales-force expansion, product launches and surgical instruments.