Globus Medical, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Globus develops and sells musculoskeletal medical devices, including implants and enabling technologies such as imaging, navigation, and robotics. It reports one operating segment.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $254.1 million | $229.7 million | $748.3 million | $708.1 million |
| Gross profit | $188.7 million | $171.2 million | $555.2 million | $530.7 million |
| Operating income | $59.7 million | $53.3 million | $173.9 million | $153.8 million |
| Net income | $47.4 million | $47.2 million | $140.1 million | $134.1 million |
| Diluted EPS | $0.47 | $0.45 | $1.36 | $1.30 |
Sales increased 10.6% in Q3 and 5.7% for the nine-month period. Q3 gross margin was approximately 74.2% versus 74.5%; operating margin was 23.5% versus 23.2%; and net margin was 18.7% versus 20.5%. For the nine months, gross margin was approximately 74.2% versus 74.9%, operating margin 23.2% versus 21.7%, and net margin 18.7% versus 18.9%.
- Product and geography: Q3 Musculoskeletal Solutions sales were $230.1 million, up from $209.5 million; Enabling Technologies sales were $24.1 million, up from $20.2 million. U.S. Q3 sales rose 9.5% and international sales rose 17.7%. For nine months, U.S. sales rose 5.3% and international sales rose 8.0%.
- Cash flow: Nine-month operating cash flow was $114.5 million, down from $200.0 million. Management cited cash outflows from inventory, receivables, and prepaid and other assets, partly offset by income and higher accounts payable. Capital expenditures were $55.7 million.
- Liquidity and debt: Cash and equivalents were $134.2 million, with short- and long-term marketable securities totaling $775.0 million. Current assets were $920.0 million and current liabilities $145.3 million. Total liabilities were $212.4 million. No borrowings were outstanding under the $125 million revolving credit facility.
- Capital returns: The company repurchased 2.35 million Class A shares for $144.5 million in Q2; no repurchases were reported in Q3. Approximately $150.8 million remained authorized at September 30.
Changes and notable items
- Q3 revenue growth reflected spine product sales, including robotic instruments, penetration in existing territories, and enabling-technology sales. International growth was partly offset by lower Japan sales following a sales-force transition.
- Cost of goods sold rose 11.9% in Q3, faster than sales, with higher volume, inventory reserves, and freight costs cited. Nine-month R&D expense rose 15.5%, reflecting personnel investment; SG&A rose 4.1%.
- Nine-month acquisition-related costs were a net credit of $1.8 million, versus $14.5 million of expense in 2021, primarily reflecting favorable changes in the fair value of contingent acquisition liabilities. The nine-month litigation provision was $2.3 million and included a legal settlement.
- The effective tax rate increased to 22.8% for Q3 from 13.3%, and to 22.6% for nine months from 16.5%; management attributed the increase primarily to a lower tax benefit from stock-option exercises.
- Accumulated other comprehensive loss increased to $32.2 million, including unrealized losses on marketable securities and foreign-currency translation. The filing reports $25.5 million of nine-month other comprehensive loss, net of tax.
Outlook, risks, and contingencies
The filing provides no specific revenue or earnings guidance. Management expects cash, investments, and operating cash flow to fund foreseeable liquidity needs and says it may continue investing in surgical sets, product development, sales-force expansion, and international growth. It also notes that supply-chain delays have extended lead times; component constraints could create backlogs, particularly for Enabling Technologies. COVID-19 resurgence, elective-surgery restrictions, geopolitical disruption, and general economic conditions could adversely affect results.
Globus is defending a patent-infringement suit brought by Moskowitz Family LLC seeking damages and injunctive relief. The company says it cannot determine the outcome or estimate a loss range and has recorded no liability for the matter. It states that litigation costs could materially affect earnings, financial position, or cash flows. On October 11, 2022, after quarter-end, the company acquired Harvest Biologics for $30 million in cash, subject to post-closing adjustments.
Key facts for investors to verify
- Whether revenue growth and adoption of enabling technologies continue, and whether Japan sales recover after the sales-force transition.
- Whether inventory, receivables, freight, and supplier constraints continue to pressure cash conversion, costs, or product availability.
- The sustainability of margins and earnings given higher R&D investment, tax rates, and inventory reserves.
- Developments in the Moskowitz litigation and changes in contingent acquisition liabilities or related fair-value gains and losses.
- The impact of the Harvest Biologics acquisition and the company’s remaining repurchase authorization on liquidity and capital allocation.