Globus Medical, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Globus develops and sells medical devices and technologies for musculoskeletal procedures. Financial statements are unaudited and prepared under U.S. GAAP.
Financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Sales | $182.9 million | $174.4 million | +4.9% |
| Gross profit / margin | $141.1 million / 77.1% | $136.4 million / 78.2% | Margin down 1.1 percentage points |
| Operating income / margin | $37.1 million / 20.3% | $45.6 million / 26.2% | Income down 18.7% |
| Net income / diluted EPS | $33.2 million / $0.33 | $39.5 million / $0.39 | Net income down 16.0% |
| Adjusted EBITDA / margin | $56.8 million / 31.1% | $61.7 million / 35.4% | Down 7.9%; non-GAAP |
| Operating cash flow | $39.2 million | $52.3 million | Down $13.1 million |
| Free cash flow | $11.0 million | $39.9 million | Non-GAAP; lower mainly due to higher capital spending |
Sales by product category were $175.8 million for Musculoskeletal Solutions, up from $161.7 million, and $7.2 million for Enabling Technologies, down from $12.7 million. U.S. sales rose 1.3% to $147.5 million; international sales rose 23.0% to $35.4 million, or 27.9% on a constant-currency basis. International growth included distributor stocking orders.
Cost of goods sold rose 10.2%, faster than sales, reflecting higher volume and product mix. R&D increased 12.9%, primarily from headcount and development activity. SG&A rose 13.3%, including $7.8 million of additional selling and marketing costs tied to sales-force expansion and $1.4 million of higher legal fees. Interest income and other income supported results: total other income was $4.6 million versus $2.4 million.
Cash, liquidity and debt
At March 31, 2019, cash, cash equivalents and restricted cash were $130.0 million; marketable securities totaled $491.5 million. Combined cash and marketable securities were $621.5 million, up from $602.8 million at year-end 2018. The company reported no borrowings on its revolving credit facility and $125.0 million available; it was in compliance with financial covenants. The $125.0 million facility was scheduled to expire in May 2019, and the filing does not state whether it was renewed.
Capital expenditures were $28.2 million, versus $12.4 million a year earlier. Cash declined $9.8 million during the quarter. The balance sheet reported total liabilities of $98.7 million and equity of $1.24 billion. Business acquisition liabilities were $5.3 million; these are not presented as borrowings. Management said existing liquidity and operating cash flow should meet foreseeable needs, while noting possible future funding needs to support growth and investment.
Material changes, outlook and risks
- Profitability weakened despite sales growth: operating expenses grew faster than revenue, compressing gross, operating and adjusted EBITDA margins.
- In Q1 2019, the FDA cleared the AQRate robotic guidance and navigation system. The company reclassified $19.8 million of in-process R&D to developed technology and began amortizing it over 8.5 years.
- Management provided no specific quarterly or full-year revenue or earnings guidance in this filing. It intends to continue investing in surgical sets, product launches, sales-force expansion, R&D and international markets.
- Management cited risks including competition and pricing pressure, reimbursement changes, regulatory requirements and slower product development, ability to attract and retain sales personnel, and litigation outcomes. It noted that adverse litigation results could materially affect earnings, financial position or cash flows.
- The L5 litigation was settled and fully resolved on February 6, 2019. Other proceedings remain; outcomes and potential effects may be uncertain. The filing does not provide a clear aggregate estimate of potential losses.
- International sales growth included distributor stocking orders; assess how much reflects sustained end-market demand. The company also notes seasonal influences on surgery volumes and capital-budget timing, though its business is generally not seasonal.
Important facts for investors to verify
- Whether the revolving credit facility expiring in May 2019 was renewed, and on what terms.
- Whether the sharp decline in Enabling Technologies sales persists, and how AQRate clearance affects adoption and revenue.
- Whether international growth is sustained after the distributor stocking orders cited for the quarter.
- Whether operating expense growth and capital spending moderate, and whether margins and free cash flow recover.
- Developments in litigation and other contingencies, along with the amount and timing of any resulting costs.