Business Context and Reporting Period
Globus Medical, Inc. filed this Form 10-K for the fiscal year ended December 31, 2015. The company develops and sells medical devices primarily for spine disorders, including fusion systems and “Disruptive Technology” products such as minimally invasive, motion-preservation and biologics solutions. It reported one operating segment; approximately 91% of 2015 sales were in the United States.
Financial Performance and Liquidity
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Sales | $544.8 million | $474.4 million | +14.8% |
| Gross profit / margin | $412.0 million / 75.6% | $363.5 million / 76.6% | Margin down 1.0 percentage point |
| Operating income / margin | $172.2 million / 31.6% | $138.4 million / 29.2% | +24.5% |
| Net income | $112.8 million | $92.5 million | +21.9% |
| Diluted EPS | $1.17 | $0.97 | +20.6% |
| Operating cash flow | $122.0 million | $79.2 million | +$42.8 million |
| Free cash flow (company-defined) | $73.9 million | $77.8 million | Down $3.8 million |
Q4 2015 sales were $142.6 million versus $128.8 million in Q4 2014. Q4 net income was $37.6 million versus $27.6 million; the fourth-quarter result included a one-time litigation-related net income benefit of approximately $7.6 million.
At year-end, cash and cash equivalents were $60.2 million, restricted cash $26.1 million, and marketable securities $269.6 million, totaling $329.8 million in cash, cash equivalents and securities. Working capital was $462.1 million. There were no borrowings under the $50 million revolving credit facility, which was due to expire in May 2016; the company said it was in compliance with its covenants. No debt balance was reported. Capital expenditures were $50.8 million, up from $24.8 million.
Material Changes Versus the Prior Year
- Disruptive Technology sales rose 26.1% to $256.7 million; Innovative Fusion sales rose 6.4% to $288.1 million.
- U.S. sales increased 16.6% to $498.2 million. International sales declined 1.5% to $46.6 million as reported, but rose 10.2% on a constant-currency basis.
- Cost of goods sold increased 19.8%, faster than sales, and gross margin fell to 75.6%. Management cited volume, pricing pressure, acquisition impacts and higher inventory reserves.
- R&D expense rose 16.7% to $37.0 million; SG&A rose 14.0% to $214.0 million, while SG&A as a share of sales edged down to 39.3%.
- Operating cash flow improved, but free cash flow declined, reflecting increased property and equipment spending. Inventory rose to $105.3 million from $90.9 million.
- The company acquired Branch Medical Group (BMG), a related-party manufacturer, in March for approximately $63.3 million of consideration, including cash, deferred consideration and closing adjustments. It also acquired Transplant Technologies of Texas in 2014 and recorded acquisition-related contingent consideration.
Outlook, Commentary, Risks and Unusual Items
- Management expected to launch approximately five to ten products annually over the next three years; more than 30 potential products were in development. It planned continued U.S. and international sales-force expansion and investment in R&D and manufacturing. No specific revenue or earnings guidance was provided.
- The medical device excise tax was suspended for two years beginning January 1, 2016; the company reported $8.1 million of tax expense in 2015. Management planned to redirect approximately 40% of the tax benefit toward R&D and manufacturing job initiatives. The tax was scheduled to resume in 2018 absent further legislation.
- Four DePuy Synthes patent lawsuits were settled in January 2016 for a $7.9 million payment, with cross-licenses and covenants not to sue. The settlement produced an approximately $7.6 million one-time net income benefit recognized in Q4 2015; approximately $8.4 million was to be transferred from restricted cash in Q1 2016.
- A court judgment in the Bianco trade-secret case includes an ongoing royalty of 5% of net sales of specified products, or products not colorably different, for 15 years from January 2014. The appeal was affirmed in October 2015; the company was considering further appeal.
- Other disclosed proceedings included patent claims by Bonutti Skeletal Innovations and Flexuspine, a securities class action, and a distributor-related dispute. The company stated that outcomes or loss ranges could not be estimated for certain cases and that no accrual was recorded for those matters.
- Key risks include intense competition and pricing pressure; reimbursement and coverage restrictions; reliance on third-party suppliers and tissue supply; product safety, clinical evidence and regulatory clearance; inventory obsolescence; litigation and intellectual-property exposure; foreign exchange; and execution of growth, acquisitions and international expansion.
- International sales were exposed to currency movements, and the company did not hedge foreign-exchange risk. It estimated a hypothetical 10% exchange-rate change would have changed 2015 net income by approximately $1.7 million to $2.1 million, depending on direction.
- The company reported effective disclosure controls and internal control over financial reporting; its auditor issued unqualified opinions on the financial statements and internal controls.
Most Important Facts for Investors to Verify
- How much of earnings growth reflects ongoing operations versus the $7.6 million one-time litigation benefit, and how the litigation provision is presented in reported and adjusted measures.
- The continuing financial and product impact of the Bianco 5% royalty, the DePuy Synthes settlement, and the unresolved patent and securities proceedings.
- Whether recent Disruptive Technology growth can continue, and whether pricing pressure and product mix will further affect gross margin.
- Cash conversion and investment needs: reconcile operating cash flow with company-defined free cash flow, capital expenditures, restricted cash and acquisition spending.
- The terms, governance and integration results of the related-party BMG acquisition, along with remaining acquisition-related contingent obligations.
- The status or renewal of the revolving credit facility that was scheduled to expire in May 2016, and any resulting changes to liquidity or covenant capacity.