Globus Medical, Inc. — Q3 2012 Form 10-Q
Business context and period. Globus designs and sells spinal disorder products, grouped as innovative fusion and disruptive technology products. This unaudited report covers the quarter and nine months ended September 30, 2012, compared with the same 2011 periods. The company completed its IPO in August 2012.
Financial performance and position
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Sales | $94.8 | $84.3 | $285.5 | $243.5 |
| Gross profit / margin | $75.9 / 80.1% | $67.1 / 79.7% | $229.8 / 80.5% | $194.2 / 79.7% |
| Operating income / margin | $27.1 / 28.6% | $26.5 / 31.5% | $85.7 / 30.0% | $73.7 / 30.2% |
| Net income / margin | $16.5 / 17.4% | $16.9 / 20.0% | $53.1 / 18.6% | $47.2 / 19.4% |
| Diluted EPS | $0.18 | $0.19 | $0.58 | $0.52 |
| Adjusted EBITDA / margin | $33.3 / 35.1% | $31.4 / 37.3% | $101.9 / 35.7% | $88.4 / 36.3% |
- Revenue mix: Q3 disruptive technology sales grew 29.9% to $36.9 million; innovative fusion sales increased 3.6% to $57.8 million. U.S. sales rose 10.6% to $87.1 million and international sales rose 38.3% to $7.6 million. Nine-month sales grew 17.2%, with disruptive technology up 38.6%.
- Cash flow: Nine-month operating cash flow was $57.1 million, versus $53.8 million. Capital spending was $17.0 million and acquisition payments were $6.0 million. Cash increased $52.5 million to $195.2 million; the increase includes $21.0 million of net IPO proceeds.
- Liquidity and debt: Working capital was $299.4 million. The $50 million revolving facility had no borrowings and was fully available at quarter-end; the facility expires in May 2014. The prior mortgage had been repaid in 2011. Current debt outstanding was not reported.
- Balance sheet: Total assets were $416.0 million, total liabilities $51.8 million and equity $364.3 million at September 30, 2012. Inventories were $57.0 million, up from $47.4 million at year-end 2011.
Material changes and management commentary
- Q3 sales rose 12.5%, led by newer disruptive technology products and sales-force penetration. Despite higher sales, Q3 net income declined 2.2%; SG&A increased 20.2%, faster than sales, and the effective tax rate rose to 39.0% from 36.0%.
- Nine-month operating income rose 16.3% and net income rose 12.4%. SG&A increased 21.2%, including $5.8 million of Algea Therapies startup costs; R&D increased 17.0%.
- Management cited sales-force expansion, new product launches and international growth as opportunities, while expecting continued investment in surgical sets, R&D, clinical trials and sales capacity. It said current cash, operating cash flow, IPO proceeds and the revolving facility should meet foreseeable liquidity needs, but additional liquidity could be required as the business strategy is executed.
- In late September, Globus received its first U.S. FDA premarket approval, for the SECURE-C cervical artificial disc, and had launched the product. Management planned to expand surgeon training.
Outlook, risks and unusual items
- The filing provides no quantified revenue, earnings or margin guidance. Management cautioned that interim results are not necessarily indicative of full-year results; sales are generally not seasonal, though holidays and summer vacations may reduce procedures.
- Risks discussed include reimbursement and coverage changes, pricing pressure and competition, regulatory changes and slower product development, foreign-exchange exposure, and litigation. The company did not hedge foreign-currency exposure and said international sales were expected to increase.
- Several patent, trade-secret and employment-related cases remained unresolved; some claimants seek injunctions and unspecified damages. The company said it could not estimate reasonably possible losses for the identified cases and noted litigation costs could materially affect results, financial position or cash flows.
- The $1.0 million FDA settlement concerning NUBONE was accrued in 2011 and paid in February 2012; the settlement was not an admission of liability or fault. The nine-month litigation line was an $0.8 million benefit, primarily attributed to a favorable lawsuit settlement.
- Purchases from a supplier with management and significant-stockholder connections were $15.4 million for the first nine months; related-party accounts payable was $4.8 million at quarter-end. The company reported no off-balance-sheet arrangements and said disclosure controls were effective.
Key facts for investors to verify
- Whether disruptive technology growth and SECURE-C adoption continue, and whether the new product supports sustainable revenue and margins.
- Whether rising SG&A, sales-force expansion and Algea Therapies investment translate into sales growth; Q3 net income and adjusted EBITDA margins declined year over year.
- Inventory and receivables growth, including the reported increase in U.S. days sales outstanding, and the cash impact of future product launches and surgical-set spending.
- Developments in the pending litigation, potential injunctions or damages, and any resulting changes in accruals or disclosures.
- The effects of the expired research and experimentation tax credit, related-party supplier terms, and any use of the revolving credit facility or need for additional financing.