Business context and reporting period
Globus Medical, Inc. designs and sells spinal implants and related products, serving hospitals and surgeons. This Form 10-K reports the fiscal year ended December 31, 2014; quarterly figures below cover Q4 2014. Products are grouped as Innovative Fusion and Disruptive Technologies. The company reported one operating segment.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Sales | $474.4 million | $434.5 million | +9.2% |
| Gross profit | $363.5 million | $334.1 million | +8.8% |
| Gross margin | 76.6% | 76.9% | -0.3 percentage points |
| Operating income | $138.4 million | $101.7 million | +36.1% |
| Operating margin | 29.2% | 23.4% | +5.8 percentage points |
| Net income | $92.5 million | $68.6 million | +34.8% |
| Diluted EPS | $0.97 | $0.73 | +$0.24 |
| Operating cash flow | $79.2 million | $93.5 million | -$14.3 million |
FY 2014 net margin was 19.5%, compared with 15.8% in 2013. Adjusted EBITDA, a non-GAAP measure, was $171.4 million (36.1% of sales), versus $150.5 million (34.7%). The company reported non-GAAP diluted EPS of $1.01 after excluding litigation provisions; these measures are not substitutes for GAAP results.
In Q4 2014, sales were $128.8 million versus $115.2 million in Q4 2013; gross profit was $97.5 million versus $88.5 million; and net income was $27.6 million versus $21.0 million. Quarterly diluted EPS was $0.29 versus $0.22. Q4 operating income is not separately provided in the filing text.
At year-end, cash and cash equivalents were $82.3 million, restricted cash $23.4 million, and marketable securities $221.8 million, for total cash, cash equivalents and marketable securities of $304.1 million. Working capital was $380.6 million. There was no revolving-facility borrowing; $50.0 million was available under the facility, which was scheduled to mature in May 2015. Total liabilities were $118.1 million; the filing reports no other outstanding debt. Operating cash flow fell partly because $23.4 million was placed in escrow for litigation. Company-defined free cash flow, which adds back restricted cash and deducts property and equipment purchases, was $77.8 million. Capital expenditures were $24.8 million.
Material changes versus the prior comparable period
- Sales grew 9.2%. Disruptive Technology sales increased 12.8% to $203.5 million; Innovative Fusion sales increased 6.6% to $270.9 million. International sales rose 24.9% to $47.3 million, about 10% of total sales.
- Cost of goods sold increased 10.5%, slightly faster than sales, and gross margin declined to 76.6% from 76.9%. The filing attributes the cost increase mainly to sales volume and mix, freight, and depreciation, partly offset by lower inventory reserves and write-offs.
- Operating income and net income increased substantially as the litigation provision fell to $5.7 million from $23.1 million. The prior year included a major DePuy Synthes litigation charge. SG&A rose 2.9% while sales grew 9.2%; R&D rose 17.9% to $31.7 million.
- Total cash, cash equivalents and marketable securities increased $28.6 million year over year. Investing cash outflow was $100.0 million, including $36.1 million for the TTOT acquisition and property and equipment purchases, as well as net investment in securities.
Outlook, risks and unusual items
- Management expects to launch approximately five to ten products annually over the next three years, and reported more than 30 potential products in development. It also plans to expand U.S. and international sales coverage. No specific revenue, earnings or margin guidance is provided.
- The October 2014 acquisition of Transplant Technologies of Texas (TTOT) cost $36.1 million in cash; up to $15.0 million in additional milestone payments may be payable. A separate agreement to acquire Branch Medical Group for approximately $52.9 million cash was signed in February 2015, with closing expected in March 2015.
- Litigation remains a material uncertainty. At year-end, the company had accrued a combined $26.0 million for DePuy Synthes and Bianco matters and placed $23.4 million in escrow pending appeals. The Bianco judgment also imposed a 5% royalty on net sales of specified products for 15 years, beginning January 18, 2014. NuVasive litigation was settled in February 2015 for an undisclosed amount. Other matters remained unresolved, including N-Spine/DePuy Synthes and Bonutti Skeletal cases.
- The 2.3% U.S. medical device excise tax added $7.1 million of expense in 2014. Key risks include competitive and reimbursement-driven pricing pressure, regulatory clearance and clinical evidence for newer technologies, reliance on a limited number of suppliers and tissue sources, product liability, and the ability to expand sales and integrate acquisitions.
- Globus uses a dual-class share structure and is a controlled company; insiders and affiliates held approximately 78.5% of voting power at year-end. The company does not anticipate paying cash dividends.
Important facts for investors to verify
- Track growth and margins by product category and geography, including whether newer products sustain sales momentum.
- Review operating cash conversion, inventory growth, capital spending and the composition and liquidity of marketable securities.
- Follow litigation appeals, the Bianco royalty exposure, escrow status and any additional legal settlements or accruals.
- Confirm the closing, funding and integration results of the planned BMG acquisition and monitor TTOT milestone payments.
- Check renewal or replacement of the revolving credit facility scheduled to mature in May 2015, and assess reimbursement, regulatory and supplier developments.