Business context and reporting period
Globus Medical, Inc. filed this Form 10-K for the fiscal year ended December 31, 2019. The company develops and sells musculoskeletal medical devices, including spine and orthopedic implants and the ExcelsiusGPS robotic guidance and navigation platform. It reports one operating segment. International sales represented approximately 17.5% of 2019 revenue.
The filing also reports fourth-quarter results, but it is an annual report rather than a standalone quarterly filing. In 2019, Globus acquired substantially all assets of StelKast, expanding its hip and knee replacement business.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $785.4 million | $713.0 million |
| Gross profit / margin | $605.4 million / 77.1% | $553.6 million / 77.6% |
| Operating income / margin | $172.0 million / 21.9% | $169.3 million / 23.7% |
| Net income / margin | $155.2 million / 19.8% | $156.5 million / 21.9% |
| Diluted earnings per share | $1.52 | $1.54 |
| Operating cash flow | $172.0 million | $181.6 million |
| Free cash flow (non-GAAP) | $101.2 million | $121.9 million |
Revenue increased 10.2% year over year (10.5% at constant currency). U.S. sales rose 9.1% to $647.7 million; international sales rose 15.6% to $137.7 million. Musculoskeletal Solutions revenue was $738.4 million, up from $666.0 million; Enabling Technologies revenue was $47.0 million, essentially unchanged from $46.9 million.
At year-end, cash, cash equivalents, restricted cash and marketable securities totaled $721.0 million; working capital was $576.1 million. There were no revolving-credit borrowings, and $125.0 million was available under the facility, which was scheduled to expire in May 2020. Total liabilities were $129.6 million; the filing reports no outstanding debt. Capital expenditures were $70.8 million.
Fourth-quarter 2019 revenue was $211.7 million, versus $195.9 million in fourth-quarter 2018; net income was $45.5 million, versus $36.8 million.
Material changes versus the prior year
- Revenue growth was led by U.S. spine sales and international sales, including Japan and increased INR technology sales.
- Operating income increased modestly, but operating margin declined as selling, general and administrative expenses rose 13.9%, primarily from sales-force expansion in orthopedic trauma, INR and international markets.
- Gross margin slipped to 77.1% from 77.6%; cost of goods sold grew 12.9%, faster than revenue, reflecting volume, product mix and depreciation, partly offset by lower inventory write-downs.
- Net income and diluted EPS decreased despite higher revenue. Other income was lower, including because 2018 included a $4.6 million gain on asset sales; the 2019 effective tax rate was 18.3%, versus 17.0%.
- Operating cash flow fell by $9.7 million, and free cash flow fell by $20.7 million, principally reflecting greater cash use by inventory. Inventory increased to $196.3 million from $131.3 million.
- Research and development expense increased 8.2% to $60.1 million. Globus launched 17 products in 2019 and continued investing in product development and sales capacity.
Outlook, risks and unusual items
Management provided no quantified revenue or earnings guidance in the supplied filing text. It expects to expand sales forces, enter or deepen international markets, and continue launching products; it also expects higher R&D and selling, general and administrative spending. Management believes operating cash flows and available liquidity should meet foreseeable operating needs, while noting that additional liquidity may be needed to execute its strategy.
- Regulatory: An FDA warning letter issued in 2018 concerning a human tissue product remained open at December 31, 2019. The company said it was addressing the observations, but could not assure when or whether the FDA would be satisfied.
- Litigation: A November 2019 patent-infringement suit by Moskowitz Family LLC alleges infringement involving multiple product families. The probable outcome and potential loss could not be determined, and no accrual was recorded. The filing notes that legal matters could materially affect earnings, financial position or cash flows.
- Execution and market risks: Adoption of new products and robotic technology, competition and pricing pressure, reimbursement changes, sales-force retention, supplier concentration, inventory obsolescence and long capital-equipment sales cycles may affect results.
- Other: The medical device excise tax was repealed in December 2019, although it had been under a moratorium and did not apply to taxable-device sales after December 31, 2015. The company reported no cash dividends and no off-balance-sheet arrangements.
Key facts for investors to verify
- Track whether revenue growth translates into improved operating and net margins, given faster SG&A growth and the 2019 margin declines.
- Monitor inventory growth, obsolescence provisions and cash conversion; inventory was a major use of operating cash in 2019.
- Check the status and outcome of the open FDA warning letter and the Moskowitz patent litigation, including any financial or commercial consequences.
- Verify renewal or replacement of the $125 million revolving facility, which was scheduled to expire in May 2020.
- Assess the commercial contribution and integration of StelKast, orthopedic trauma products and ExcelsiusGPS, including capital-equipment sales timing.
- Consider governance concentration: the filing states that David C. Paul and family controlled approximately 74.7% of voting power at year-end, and Globus relied on the NYSE controlled-company exemptions.