Globus Medical, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted. Globus develops and sells medical devices for musculoskeletal disorders, principally spine implants, alongside emerging technologies including robotic guidance, navigation and orthopedic trauma products. Amounts below are in U.S. dollars; financial statement amounts are unaudited.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Sales | $174.4 million | $155.8 million | Up 11.9% |
| Gross profit / margin | $136.4 million / 78.2% | $120.2 million / 77.2% | Margin up 1.0 percentage point |
| Operating income / margin | $45.6 million / 26.2% | $40.3 million / 25.9% | Income up 13.2% |
| Net income / margin | $39.5 million / 22.7% | $28.7 million / 18.4% | Up 37.7% |
| Diluted EPS | $0.39 | $0.30 | Up $0.09 |
| Operating cash flow | $52.3 million | $53.4 million | Down $1.2 million |
| Free cash flow (non-GAAP) | $39.9 million | $41.9 million | Down $2.0 million |
| Adjusted EBITDA (non-GAAP) / margin | $61.7 million / 35.4% | $57.8 million / 37.1% | EBITDA up; margin down |
U.S. sales rose 12.3% to $145.6 million; international sales rose 10.1% to $28.8 million, or 3.5% on a constant-currency basis. Emerging Technology products contributed $12.8 million of sales, versus none reported in Q1 2017; management attributed most U.S. sales growth to these products and related implant and robotic instrument sales. Spine product sales were $161.6 million.
Operating expenses increased 13.7% to $90.8 million. R&D rose 19.0% to $12.7 million, primarily with added personnel and development activity in robotics/navigation and orthopedic trauma. SG&A rose 12.9% to $75.7 million, mainly reflecting expansion of those sales forces and U.S. and Japanese sales teams. Cost of goods sold increased 6.7%, slower than sales growth; the company cited higher volumes and a prior-year vendor refund, partly offset by favorable in-house manufacturing impacts.
Liquidity, assets and debt
At March 31, 2018, cash and cash equivalents were $119.8 million and marketable securities totaled $353.7 million, for combined cash and securities of $473.6 million, up from $429.8 million at year-end. Current assets were $614.9 million and current liabilities $82.6 million. Total liabilities were $100.8 million and equity was $1.027 billion. The company had no borrowings under its $50 million revolving credit facility, with the full amount available, and reported compliance with its covenants. The facility was due to expire in May 2018.
Investing cash outflow was $56.1 million, primarily reflecting net purchases of marketable securities and $12.4 million of property and equipment. Cash increased $1.0 million during the quarter. The company also held a $30.0 million secured note receivable from Alphatec; it reported the note was not impaired. The note’s first fixed-charge coverage compliance period was set for April 2019 following an amendment.
Outlook, risks and notable items
- No specific revenue or earnings guidance was provided. Management stated that existing cash, securities, operating cash flow and the available revolver should meet liquidity needs for the foreseeable future, while noting possible need for additional liquidity as it executes its strategy.
- Management expects continued investment in surgical sets, new product launches, sales-force expansion and international markets. It identified reimbursement changes, competitive pricing pressure, regulatory change, slower product development, litigation outcomes and sales declines as factors that could pressure liquidity or results.
- The effective tax rate declined to 17.8% from 32.3%, primarily due to the U.S. tax law reduction in the federal rate and other tax benefits. The company continued evaluating potential GILTI, BEAT and FDII effects and had not recorded estimates for them as of quarter-end.
- A useful-life estimate change for instruments and cases, effective October 2017, reduced Q1 2018 depreciation by approximately $1.6 million and increased basic and diluted EPS by $0.01.
- Legal matters include the L5 Surgical dispute, for which the company said it could not estimate a potential loss range, and other ordinary-course proceedings. Flexuspine’s rehearing petition was denied in March 2018 after an appellate ruling affirmed a defense verdict. The company settled the Bianco litigation in September 2017 for $11.5 million; $9.0 million was recorded as an asset to be amortized through June 2022.
- The Q1 2017 cash-flow statement was revised for the presentation of variable-rate demand notes as marketable securities rather than cash equivalents. The filing says the revision increased reported net cash used in investing activities and reduced period-end cash by $10.0 million.
- Revenue recognition standard Topic 606 was adopted January 1, 2018 using the modified retrospective method; the company reported no material impact.
Important facts for investors to verify
- Whether the revolving credit facility was renewed or replaced when it expired in May 2018.
- How quickly emerging technology products, especially the robotic guidance and navigation system, generate sales and contribute to margins, given the associated selling and development costs.
- Whether operating cash flow and free cash flow improve as the company continues investing in surgical sets and expanding sales capacity.
- Potential tax effects from GILTI, BEAT and FDII provisions, and any developments in the disclosed litigation and contingencies.
- The assumptions and performance obligations underlying the Alphatec note receivable and the contingent acquisition liabilities.