Globus Medical, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise noted. Globus designs and sells musculoskeletal implants, principally for spine disorders. The financial statements are unaudited. Q1 2017 results include Alphatec International operations acquired in September 2016.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Sales | $155.8 million | $139.3 million |
| Gross profit / gross margin | $120.2 million / 77.2% | $107.7 million / 77.4% |
| Operating income / margin | $40.3 million / 25.9% | $42.9 million / 30.8% |
| Net income / net margin | $28.7 million / 18.4% | $28.0 million / 20.1% |
| Diluted EPS | $0.30 | $0.29 |
| Operating cash flow | $53.4 million | $55.6 million |
- Adjusted EBITDA, a non-GAAP measure, was $57.8 million, or 37.1% of sales, versus $53.2 million, or 38.2%. Free cash flow, also non-GAAP, was $41.9 million versus $30.5 million.
- Cash and cash equivalents were $182.4 million at March 31, 2017; marketable securities totaled $206.7 million. Working capital was $465.5 million. The company reported no borrowings on its $50.0 million revolving facility and was in compliance with its covenants.
- Total liabilities were $91.5 million, including $15.3 million of contingent acquisition consideration. No funded debt was outstanding under the revolving facility. The $30.0 million note receivable from Alphatec is an asset, not company debt.
- Investing cash flow was an outflow of $1.0 million, including $11.5 million of property and equipment purchases; financing cash flow was an outflow of $3.0 million, including acquisition-liability payments.
Changes and drivers versus prior period
- Sales increased 11.9% reported and 12.1% at constant currency. International sales rose 123.4% to $26.1 million, primarily reflecting Alphatec International; U.S. sales increased 1.6% to $129.7 million. International sales were about 17% of total sales.
- Innovative Fusion sales rose 16.9% to $81.9 million; Disruptive Technology sales rose 6.8% to $73.9 million. Management cited growth in expandable interbody, minimally invasive and regenerative biologics products, while noting pricing pressure on Innovative Fusion products.
- Operating income fell 5.9% despite higher sales, as operating expenses rose 23.1% to $79.9 million. SG&A increased 24.6%, including costs to support Alphatec International and expand salesforces; intangible amortization rose with acquired customer relationships.
- Net income increased modestly, helped by higher other income and a lower effective tax rate (32.3% versus 35.8%). The tax-rate comparison reflected a one-time prior-year charge from a domestic legal-structure reorganization and a current-year benefit from adopting stock-compensation accounting guidance.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expected to begin selling orthopedic trauma and robotic products later in 2017; those products were not FDA-cleared for sale as of the filing.
- Management said available cash, securities, operating cash flow and the fully available credit facility were expected to meet liquidity needs for the foreseeable future. It expected to extend the revolving facility’s May 2017 maturity, but the filing does not confirm that extension had been completed.
- Key risks cited include product demand and reimbursement, pricing and competition, product-development and regulatory challenges, salesforce recruitment and retention, integration of Alphatec International, and litigation. Management also noted potential additional liquidity needs and the possibility that future financing could dilute shareholders.
- The company has a 5% ongoing royalty obligation on certain CALIBER and RISE products for 15 years on sales beginning January 18, 2014, following the Bianco litigation. Other pending matters include appeals in the Flexuspine and Silverstein cases and the Stern patent case; the filing says certain potential losses cannot be estimated. DePuy Synthes litigation was settled in 2016.
- Disclosure controls and procedures were concluded to be ineffective as of March 31, 2017 because of a previously identified material weakness involving calculation of non-cash depreciation and instrument-scrap activity. Remediation was in progress, with completion expected before December 31, 2017.
Important facts for investors to verify
- How much reported international growth is recurring and attributable to Alphatec integration, versus underlying organic growth.
- Whether higher SG&A and amortization continue to pressure operating margins, and how pricing affects gross margin.
- Progress in extending the revolving credit facility and the collectability and covenant status of the $30.0 million Alphatec note receivable.
- Regulatory and commercial milestones for robotic and orthopedic trauma products, and the timing and cost of their launch.
- Remediation and testing of the material weakness, plus developments in litigation and the related royalty obligations.
- Non-GAAP measures are company-defined and should be assessed alongside GAAP results; the filing cautions they may not be comparable with other companies’ measures.