Globus Medical, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Globus develops and sells musculoskeletal medical devices, including implants and enabling technologies such as imaging, navigation and robotics. It reports as one operating segment.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $251.0 million | $148.9 million | $478.4 million | $339.5 million |
| Gross profit | $187.2 million | $98.3 million | $359.5 million | $240.0 million |
| Gross margin | 74.6% | 66.0% | 75.2% | 70.7% |
| Operating income (loss) | $45.9 million | $(25.6) million | $100.4 million | $2.9 million |
| Net income (loss) | $41.5 million | $(20.8) million | $86.9 million | $5.1 million |
| Diluted EPS | $0.40 | $(0.21) | $0.84 | $0.05 |
- Q2 sales rose 68.6% year over year; six-month sales increased 40.9%. Musculoskeletal Solutions generated $230.3 million in Q2 and $442.7 million in the first half; Enabling Technologies generated $20.8 million and $35.7 million, respectively.
- Q2 operating margin was 18.3%, compared with a 17.2% operating loss margin in Q2 2020. First-half operating margin was 21.0%, versus 0.8% in the prior-year period.
- Management attributed sales growth primarily to spine product penetration in existing territories and higher enabling-technology sales. Comparisons also reflect lower 2020 sales during the COVID-19 disruption to procedures.
- SG&A increased 34.0% in Q2 to $107.3 million, mainly from higher sales commissions and continued sales-force expansion. Acquisition-related costs were $13.9 million, primarily from fair-value changes in contingent acquisition liabilities.
Cash, liquidity and balance sheet
- Six-month operating cash flow was $122.8 million, versus $65.4 million in 2020. Investing activities used $125.3 million, including substantial net purchases of marketable securities; financing provided $32.5 million. Cash, cash equivalents and restricted cash increased $29.4 million to $268.8 million.
- At June 30, cash and marketable securities totaled approximately $914.2 million: cash and restricted cash of $268.8 million, short-term securities of $191.6 million and long-term securities of $453.7 million.
- Total liabilities were $190.9 million and equity was $1.639 billion. The company had not borrowed under its $125 million revolving credit facility. The facility’s stated maturity was August 3, 2022.
- Accounts receivable increased to $165.9 million from $141.7 million at year-end; inventory was $231.2 million, compared with $229.2 million. Management said increased sales contributed to the cash-flow use from receivables.
Material changes, outlook and risks
- The strong year-over-year results partly reflect recovery from pandemic-related reductions in procedures in 2020. Management said a resurgence of COVID-19 or renewed restrictions on elective surgeries could materially affect revenue growth, operating profit and cash flow, and could increase inventory. Future supply-chain delays are also possible, though none had materially affected operations to date.
- No quantified revenue or earnings guidance is provided. Management said operating cash flow should meet foreseeable liquidity needs, while noting potential needs for investment in R&D, surgical sets, sales-force expansion and acquisitions.
- Inventory write-downs for excess and obsolete products were $5.0 million for the first half, compared with $7.2 million in 2020. First-half acquisition-related costs included a $14.1 million fair-value increase in contingent acquisition liabilities.
- A patent-infringement suit brought by Moskowitz Family LLC seeks unspecified damages and injunctive relief. The company had not recorded a liability because the outcome and potential loss range could not be determined.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. The company disclosed no off-balance-sheet arrangements.
- Subsequent matters: on August 4, 2021, the company amended its credit agreement; it also reported a bylaw amendment effective July 31, 2021 selecting federal district courts as the forum, to the extent permitted by law, for Securities Act complaints.
Key facts for investors to verify
- How much of the sales growth reflects sustained procedure demand and market-share gains versus comparison with COVID-affected 2020 results.
- Whether gross-margin improvements and higher sales-force costs persist as volumes and product mix change.
- The assumptions and potential cash or equity impact behind the $48.0 million fair value of business-acquisition liabilities, including the period’s $14.1 million remeasurement expense.
- Trends in receivables, inventory reserves and cash conversion as sales expand.
- Developments in the Moskowitz litigation and any renewed COVID-related disruption to elective surgeries.