Globus Medical, Inc. — Q2 2019 Form 10-Q
Business and period: Globus Medical develops and sells musculoskeletal medical devices and surgical technologies, including spine, orthopedic trauma, hip and knee products, and robotic/navigation systems. This unaudited filing covers the three and six months ended June 30, 2019, compared with the same 2018 periods. The company reports one operating segment.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Sales | $194.5 million | $173.4 million | $377.5 million | $347.8 million |
| Gross profit / margin | $150.5 million / 77.4% | $135.7 million / 78.3% | $291.7 million / 77.3% | $272.2 million / 78.3% |
| Operating income / margin | $42.9 million / 22.0% | $42.1 million / 24.3% | $79.9 million / 21.2% | $87.8 million / 25.2% |
| Net income / margin | $38.2 million / 19.6% | $45.0 million / 25.9% | $71.4 million / 18.9% | $84.5 million / 24.3% |
| Diluted EPS | $0.38 | $0.44 | $0.70 | $0.84 |
| Adjusted EBITDA (non-GAAP) | $62.2 million | $59.5 million | $119.0 million | $121.2 million |
Revenue mix and geography: Q2 Musculoskeletal Solutions sales were $182.5 million, up from $159.6 million; Enabling Technologies sales were $12.0 million, down from $13.7 million. U.S. sales rose 10.0% to $160.0 million, while international sales increased 23.3% to $34.6 million (26.7% on a constant-currency basis). For the first half, sales increased 8.5% reported and 9.2% on a constant-currency basis; international sales were 19% of total.
Cash flow and liquidity: First-half operating cash flow was $61.8 million, versus $85.6 million. Capital expenditures were $42.9 million, producing reported free cash flow of $18.9 million, versus $58.4 million. Cash and marketable securities totaled $610.1 million at June 30, 2019, compared with $602.8 million at year-end 2018. Cash, cash equivalents and restricted cash alone were $117.8 million. The company had no borrowings under its $125 million revolving facility and was in covenant compliance; the facility expires in May 2020.
Debt and balance sheet: No revolving-facility borrowings were outstanding. Total liabilities were $103.2 million and total equity was $1.288 billion. Inventories rose to $173.0 million from $131.3 million at December 31, 2018.
Changes and notable developments
- Q2 sales grew 12.2%, but net income declined 15.1%; first-half sales rose 8.5%, while net income fell 15.5%.
- Operating expenses increased faster than first-half sales: SG&A rose 14.0%, driven mainly by sales-force expansion, and R&D rose 14.7%. Management attributed higher cost of goods sold to volume, mix and depreciation; gross margin declined year over year.
- Other income was lower because the 2018 comparative periods included a $4.6 million gain on asset sales. The effective tax rate increased to 19.0% from 10.6% in Q2 and to 19.6% from 14.1% for the first half, primarily due to reduced tax benefits from stock-based compensation exercises.
- In Q2, Globus acquired substantially all assets of StelKast, a hip and knee implant company. Net assets were valued at $28.4 million, including $24.1 million paid at closing and contingent consideration; the maximum contingent amount disclosed was $5.0 million. Acquisition results were not material to the quarter.
- FDA 510(k) clearance for the AQRate robotic guidance and navigation system led to reclassification of $19.8 million of in-process R&D to developed technology, which began amortizing over 8.5 years.
Outlook, risks and contingencies
The filing provides no specific financial guidance. Management said existing cash, investments, operating cash flow and the available credit facility should meet liquidity needs for the foreseeable future. It expects continued investment in surgical sets, product launches, sales-force growth and international expansion, and noted additional liquidity may be needed depending on execution and business conditions.
Management cited risks including weaker product demand, reimbursement changes, pricing pressure and competition, regulatory changes that could raise costs or slow product development, challenges attracting and retaining sales personnel, intellectual-property matters and litigation outcomes. Sales may be affected by holiday and vacation timing; enabling-technology sales can depend on capital-budget cycles. Management reported no meaningful sales backlog and no significant difficulty obtaining materials.
The company remains subject to legal proceedings and says adverse outcomes could materially affect earnings, financial position or cash flows. The L5 dispute was settled in February 2019. The filing also describes the Bianco settlement and the Flexuspine patent case, in which the company prevailed. There were no significant changes disclosed in market-risk information, and management concluded disclosure controls were effective.
Investor verification points
- Assess whether sales-force and R&D investment can support growth while restoring gross and operating margins.
- Track the trajectory and mix of Enabling Technologies sales, including the commercial contribution of robotic products.
- Monitor inventory growth, operating cash conversion, capital spending and free cash flow.
- Review the StelKast integration, contingent consideration and contribution to hip and knee growth.
- Check the revolving credit facility’s May 2020 expiration and any subsequent refinancing or amendments.
- Review subsequent filings for litigation developments, reimbursement or regulatory changes, and any formal outlook updates.