Globus Medical, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Globus designs and sells musculoskeletal implants, primarily for spine procedures. Figures below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Sales | $131.6 | $114.2 | +15.2% |
| Gross profit / gross margin | $99.5 / 75.6% | $88.9 / 77.9% | Margin down 2.3 percentage points |
| Operating income / margin | $38.5 / 29.3% | $32.2 / 28.2% | Income +19.5% |
| Net income / net margin | $24.6 / 18.7% | $21.1 / 18.5% | Income +16.6% |
| Diluted EPS | $0.26 | $0.22 | Up $0.04 |
| Operating cash flow | $34.7 | $29.2 | +$5.4 |
| Capital expenditures | $7.2 | $6.2 | — |
| Free cash flow, company-defined | $27.4 | $23.1 | +$4.4 |
| Adjusted EBITDA, company-defined | $46.3 | $42.1 | Margin 35.2% vs. 36.8% |
Sales growth was led by Disruptive Technology products, up 29.1% to $61.2 million; Innovative Fusion sales increased 5.4% to $70.4 million. U.S. sales rose 18.0% to $120.0 million, while international sales fell 7.1% to $11.6 million, primarily due to foreign-exchange effects. International sales were 8.8% of total sales.
Cost of goods sold increased 26.8%, faster than sales, reflecting volume and mix, TTOT costs, higher royalties and freight, and inventory reserves and write-offs. R&D rose 16.3% to $8.7 million. SG&A rose 12.0% to $52.3 million, though it declined as a share of sales to 39.7% from 40.9%. Litigation provision was $0.03 million versus $2.5 million in the prior-year quarter, which included the Altus settlement and DePuy Synthes litigation interest adjustment. The effective tax rate was 35.4%, compared with 34.9%.
Financial position and liquidity
- At March 31, cash and cash equivalents were $75.0 million; marketable securities were $209.8 million; and restricted cash was $23.4 million. The company reported $284.8 million of cash, cash equivalents and marketable securities, excluding restricted cash.
- Working capital was $362.4 million, down from $380.6 million at December 31, 2014. Total assets were $744.1 million and equity was $614.2 million.
- No revolving-credit borrowings were outstanding; $50.0 million was available, and the company reported compliance with covenants. The facility was extended after quarter-end from May 2015 to May 2016. The filing reports no other debt balance.
- Cash and cash equivalents declined $7.3 million during the quarter, principally reflecting the BMG acquisition. Investing activities used $43.8 million, including $48.0 million for acquisitions, net of cash acquired.
Material events, outlook and risks
- BMG acquisition: Globus acquired related-party supplier Branch Medical Group on March 11 for $57.0 million cash, $5.3 million deferred consideration and an estimated $0.9 million closing adjustment. The preliminary purchase-price allocation included $40.6 million of goodwill, which is not tax deductible. Final allocation was expected by the end of June 2015. BMG had been a supplier since 2005, and certain Globus-related persons had ownership or board relationships with BMG.
- Other acquisition obligations: TTOT, acquired in 2014, may require milestone payments of up to $15.0 million over three years. Total contingent consideration liabilities were $24.8 million at quarter-end.
- Litigation: The company had appealed the DePuy Synthes patent verdict and the Bianco trade-secret verdict. The Bianco judgment includes a 5% royalty on specified product sales for 15 years beginning January 18, 2014. Globus set aside $23.4 million in restricted escrow cash for a portion of the Synthes and Bianco obligations if appeals are unsuccessful. The filing says the outcomes of several other claims, including Bonutti and a new Flexuspine suit filed in March 2015, could not be determined and potential losses could not be estimated. Two NuVasive matters were settled for undisclosed, immaterial amounts.
- Outlook: No specific revenue or earnings guidance was provided. Management said current liquidity sources should meet foreseeable requirements, while noting potential needs for working capital, R&D and clinical trials, surgical sets, sales-force expansion, international growth and acquisitions. It identified reimbursement changes, pricing pressure, competition, regulation, product-development timing and litigation outcomes as risks to sales, liquidity and results.
- Management reported disclosure controls were effective as of March 31, 2015, with no material change in internal control over financial reporting during the quarter. The filing reported no material change to risk factors from the 2014 Form 10-K.
Important facts for investors to verify
- How much of sales growth and margin performance is attributable to recent product launches, TTOT, and the inclusion of BMG after its acquisition date.
- The final BMG purchase-price allocation, integration costs, and related-party transaction disclosures.
- Potential cash and earnings exposure from the Synthes and Bianco appeals, Bianco’s ongoing royalty, and other pending patent and trade-secret claims.
- Whether inventory growth, product reserves and higher cost of goods sold affect future gross margins and cash conversion.
- Whether international sales recover from currency effects and whether the company’s planned investment and acquisition needs alter liquidity.