Globus Medical, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unaudited consolidated results; amounts below are in U.S. dollars unless stated otherwise. Globus develops and sells musculoskeletal medical devices, including implants and surgical robotics, navigation and imaging systems.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $276.7 million | $230.5 million | +20.0% |
| Gross profit / margin | $205.9 million / 74.4% | $171.4 million / 74.3% | Margin +0.1 percentage point |
| Operating income / margin | $56.4 million / 20.4% | $46.4 million / 20.1% | +21.4% income |
| Net income | $49.1 million | $38.1 million | +29.0% |
| Diluted EPS | $0.48 | $0.37 | +$0.11 |
| Operating cash flow | $53.3 million | $44.7 million | +$8.6 million |
- Revenue mix: Musculoskeletal Solutions sales were $251.6 million, up 15.7%; Enabling Technologies sales were $25.1 million, up 90.8%. U.S. sales increased 19.2% to $234.1 million; international sales increased 24.7% to $42.6 million, or about 15.4% of sales.
- Expenses and margins: Cost of goods sold rose 19.7%, broadly in line with sales. R&D increased 21.1% to $21.1 million, primarily on personnel and product-development investment. SG&A increased 21.5% to $122.4 million, reflecting personnel, travel and meetings. No litigation provision was recorded in Q1 2023, versus $2.3 million in Q1 2022.
- Other income and taxes: Net other income was $6.8 million versus $2.5 million, mainly due to higher interest income on securities. The effective tax rate was 22.3%, compared with 22.1%.
- Cash and liquidity: Cash and cash equivalents were $217.7 million at March 31, 2023, up from $150.5 million at year-end. Short- and long-term marketable securities totaled $766.7 million. Operating cash flow was partly offset by a $22.5 million inventory increase and a $9.9 million accounts-receivable increase. Capital expenditures were $16.0 million.
- Debt: No borrowings were outstanding under the $125 million revolving credit facility; it was scheduled to terminate August 2, 2023. The filing reports total liabilities of $234.8 million, including acquisition liabilities, and no other debt balance is identified.
Material changes and notable items
- Sales growth was attributed primarily to spine products, including robotic instruments, increased penetration in existing territories, and higher Enabling Technologies volume. International growth was attributed to spine sales in existing territories.
- Cash provided by investing activities was $11.0 million, compared with $13.9 million used in Q1 2022, reflecting net inflows from marketable-security transactions, partly offset by capital spending and acquisitions. Cash increased by $67.2 million during the quarter.
- Inventory increased to $321.0 million from $299.0 million at year-end. The company recorded $2.1 million of net excess-and-obsolete inventory adjustments in Q1 2023.
- Acquisition-related costs were $1.4 million, including costs related to the proposed NuVasive merger. A small acquisition was completed during the quarter for approximately $1.4 million in cash.
Outlook, risks and contingencies
- NuVasive merger: The February 2023 agreement provides for each eligible NuVasive share to convert into 0.75 Globus Class A shares, plus cash for fractional shares. Stockholders of both companies approved the transaction on April 27, 2023. Globus expected closing in Q3 2023, subject to conditions. After quarter-end, on May 3, the FTC issued a Second Request for information, extending the HSR waiting period until 30 days after substantial compliance, unless extended or terminated sooner. Closing and expected benefits remain uncertain.
- Guidance: The filing provides no specific numerical revenue or earnings guidance. Management states that cash, cash equivalents and short-term securities are expected to meet liquidity needs for the foreseeable future; it may seek additional liquidity if needed.
- Operating risks: Management cautions that a COVID-19 resurgence or renewed restrictions on elective surgeries could materially affect sales, operating profit and cash flow. The company reported slight delays obtaining some production materials but no meaningful sales-order backlog; prolonged disruption could create one. Other risks include merger delay or failure, integration costs and challenges, competition, product development, regulation and litigation.
- Legal contingency: In the Moskowitz patent litigation, the company stated it could not determine the outcome or estimate a potential loss range and had recorded no liability as of March 31, 2023. It notes that costs from legal matters could materially affect earnings, financial position or cash flows.
- Management reported effective disclosure controls as of March 31, 2023 and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track FTC review, HSR compliance, remaining merger conditions, closing timing, transaction costs and any termination risk.
- Assess whether Enabling Technologies’ rapid growth and overall sales growth persist, and how product mix affects gross and operating margins.
- Monitor inventory, receivables and operating cash conversion, alongside ongoing investment in surgical sets and capital equipment.
- Verify the status and terms of the revolving facility as its stated August 2, 2023 termination date approaches.
- Review subsequent disclosures on the Moskowitz litigation and other contingencies, and any changes in supply availability or COVID-related impacts.