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GMED > SEC Filings for GMED > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for GLOBUS MEDICAL INC

Form 10-Q for GLOBUS MEDICAL INC


2-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. You should review our prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on August 3, 2012, and our quarterly report filed with the SEC on Form 10-Q on August 22, 2012, particularly in the sections labeled "Risk Factors" and "Cautionary Note Concerning Forward-Looking Statements," for a discussion of certain of the important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described in the following discussion and analysis. Certain amounts and percentages in this discussion and analysis have been rounded for convenience of presentation. Unless otherwise noted, the figures in the following quarterly or year-to-date discussions are unaudited.

Overview
We are a medical device company focused exclusively on the design, development and commercialization of products that promote healing in patients with spine disorders. We are an engineering-driven company with a history of rapidly developing and commercializing products that assist surgeons in effectively treating their patients, respond to evolving surgeon needs and address new treatment options. Since our inception in 2003, we have launched over 100 products and offer a comprehensive product portfolio of innovative and differentiated products addressing a broad array of spinal pathologies, anatomies and surgical approaches.
We sell implants and related disposables to our customers, primarily hospitals, for use by surgeons to treat spine disorders. All of our products fall into one of two categories: innovative fusion or disruptive technologies. Spinal fusion is a surgical procedure to correct problems with the individual vertebrae, the interlocking bones making up the spine, by preventing movement of the affected bones. Our innovative fusion products are used in cervical, thoracolumbar, sacral, and interbody/corpectomy fusion procedures to treat degenerative, deformity, tumor, and trauma conditions.
We define disruptive technologies as those that represent a significant shift in the treatment of spine disorders by allowing for novel surgical procedures, improvements to existing surgical procedures, the treatment of spine disorders by new physician specialties, and surgical intervention earlier in the continuum of care. Our current portfolio of approved and pipeline products includes a variety of disruptive technology products, which we believe offer material improvements to fusion procedures, such as minimally invasive surgical ("MIS") techniques, as well as new treatment alternatives including motion preservation technologies, such as dynamic stabilization, total disc replacement and interspinous process spacer products, and advanced biomaterials technologies, as well as interventional pain management solutions, including treatments for vertebral compression fractures.
To date, the primary market for our products has been the United States, where we sell our products through a combination of direct sales representatives employed by us and distributor sales representatives employed by our exclusive independent distributors, who distribute our products on our behalf for a commission that is generally based on a percentage of sales. We believe there is significant opportunity to strengthen our position in the U.S. market by increasing the size of our U.S. sales force and we intend to add additional direct and distributor sales representatives by the end of 2012. As of September 30, 2012, we had also hired additional sales representatives to market and sell our current and planned interventional pain management products, including our existing AFFIRM kyphoplasty product, which we market under the trade name Algea Therapies. Furthermore, we believe there is a significant opportunity to strengthen our


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position by increasing the size of this separate sales force and intend to recruit additional sales representatives strategically to grow that business. During the nine months ended September 30, 2012, our international sales accounted for approximately 8% of our total sales. Our international distributors purchase our products directly from us and independently sell them. We believe there are significant opportunities for us to increase our presence in both existing and new international markets through the expansion of our direct and distributor sales forces and the commercialization of additional products.
Recent Developments
In late September, we received our first U.S. Food and Drug Administration pre-market approval ("PMA") for the SECUREŽ-C Cervical Artificial Disc. A 380 patient investigational device exemption ("IDE") study conducted over several years demonstrated statistically superiority of SECUREŽ-C to the control anterior cervical discectomy and fusion ("ACDF") in terms of overall success, subsequent surgery at the index level, and patient satisfaction at 24 months. We have since launched the SECUREŽ-C product, and intend to increase our surgeon training program over the coming months. Results of Operations

Three Months Ended September 30, 2012 Compared to the Three Months Ended
September 30, 2011
Sales
The following table sets forth, for the periods indicated, our sales by product
category and geography expressed as dollar amounts and the changes in sales
between the specified periods expressed in dollar amounts and as percentages:
                                           Three Months Ended                  Change
                                    September 30,      September 30,
(In thousands, except percentages)       2012               2011             $         %
Innovative Fusion                  $        57,828    $        55,844    $  1,984     3.6 %
Disruptive Technology                       36,936             28,426       8,510    29.9 %
Total sales                        $        94,764    $        84,270    $ 10,494    12.5 %

The increase in total sales was attributable primarily to an increase in sales of our disruptive technology products, led by new products launched in 2011 and 2012. Innovative fusion sales increased due to strong sales of pedicle screw and interbody systems. Each of these systems increased in international markets.

                                           Three Months Ended                  Change
                                    September 30,      September 30,
(In thousands, except percentages)       2012               2011             $         %
United States                      $        87,140    $        78,759    $  8,381    10.6 %
International                                7,624              5,511       2,113    38.3 %
Total sales                        $        94,764    $        84,270    $ 10,494    12.5 %

Sales growth in the United States was due primarily to increased sales of our disruptive technology products and increased market penetration in new and existing territories. We believe there is significant opportunity to strengthen our position in existing markets and in new sales territories by increasing the size of our U.S. sales force.


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The increase in international sales was attributable to increased market penetration in both new and existing territories. We increased our international presence by selling in countries in the three months ended September 30, 2012 in which we had no sales in the three months ended September 30, 2011. We believe there is significant opportunity for us to expand our international presence through increased market penetration in existing territories, expansion into new territories, expansion of our direct and distributor sales force and the commercialization of additional products.

Cost of Goods Sold
                                          Three Months Ended                Change
                                    September 30,     September 30,
(In thousands, except percentages)      2012              2011            $         %

Cost of goods sold $ 18,872 $ 17,141 $ 1,731 10.1 % Percentage of sales 19.9 % 20.3 %

The increase in cost of goods sold was due to $2.1 million of increased sales volume and an increase of $0.6 million in depreciation of surgical instruments and cases, distribution and other costs, partially offset by a $1.0 million decrease in inventory reserves and write-offs.

Research and Development Expenses
                                          Three Months Ended                Change
                                    September 30,     September 30,
(In thousands, except percentages)      2012              2011            $         %

Research and development $ 7,022 $ 5,916 $ 1,106 18.7 % Percentage of sales 7.4 % 7.0 %

The increase in research and development expenses was due to an increase of $0.7 million in employee compensation including taxes, benefits and stock compensation (including $0.1 million of stock compensation costs for the impact of April 2012 grants without a determinable exercise price prior to the IPO date and the change in market value of the stock price for variable stock options since the IPO that were recognized during the quarter (see "Item 1. Financial Statements; Notes to Condensed Financial Statements; Note 8. Stock Based Compensation" above)) and an increase of $0.4 million in supplies, outside services and other costs.

Selling, General and Administrative Expenses

                                           Three Months Ended                Change
                                     September 30,     September 30,
(In thousands, except percentages)       2012              2011            $         %
Selling, general and administrative $      41,780     $      34,762     $ 7,018    20.2 %
Percentage of sales                          44.1 %            41.3 %

The increase in selling, general and administrative expenses was due primarily to an increase of $5.5 million in compensation costs in the United States (including $0.2 million of stock compensation costs for the impact of April 2012 grants without a determinable exercise price prior to the IPO date and the change in market value of the stock price for variable stock options since the IPO that were recognized during the quarter (see "Item 1. Financial Statements; Notes to Condensed Financial Statements; Note 8. Stock Based Compensation" above)) to support increased sales volume and company growth, including hiring of additional sales representatives, inclusive of our Algea Therapies sales representatives, and general administrative personnel; an increase of $0.6 million to support international sales growth and expansion into new international territories; and an increase of $0.7 million in U.S. sales and marketing expenses


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including travel and entertainment, training and other costs. Costs associated with building our Algea Therapies sales force represented $2.5 million of the total $7.0 million change for the quarter.

Provision for Litigation Settlements
                                                Three Months Ended                        Change
                                       September 30,         September 30,
(In thousands, except percentages)          2012                  2011               $              %

Provision for litigation settlements $ 30 $ (78 ) $ 108 (138.5 )% Percentage of sales - % (0.1 )%

The increase in provision for litigation settlements was nominal compared to the prior year quarter.

Other Expense

Other expense in the three months ended September 30, 2012 was attributable
primarily to a loss due to the effect of changes in foreign exchange rates on
payables and receivables held in currencies other than their functional (local)
currency.

Income Tax Provision
                                           Three Months Ended                Change
                                    September 30,      September 30,
(In thousands, except percentages)       2012              2011            $         %

Income tax provision $ 10,528 $ 9,494 $ 1,034 10.9 % Effective income tax rate 39.0 % 36.0 %

The increase was primarily due to a $0.7 million increase in taxable income as a result of increased operating profits. The effective rate for the three months ended September 30, 2012 was unfavorably affected by a research and experimentation credit that was in effect in the prior year which Congress has not yet extended for 2012 and unfavorable return-to-provision adjustments compared to the prior year period.

Nine Months Ended September 30, 2012 Compared to the Nine Months Ended
September 30, 2011

Sales

The following table sets forth, for the periods indicated, our sales by product
category and geography expressed as dollar amounts and the changes in sales
between the specified periods expressed in dollar amounts and as percentages:
                                            Nine Months Ended                  Change
                                    September 30,      September 30,
(In thousands, except percentages)       2012               2011             $         %
Innovative Fusion                  $       180,549    $       167,817    $ 12,732     7.6 %
Disruptive Technology                      104,909             75,668      29,241    38.6 %
Total sales                        $       285,458    $       243,485    $ 41,973    17.2 %

The increase in total sales was attributable primarily to an increase in sales of our disruptive technology products, led by new products launched in 2011 and 2012. Innovative fusion sales increased due to strong sales of pedicle screw and interbody systems. Each of these systems increased in international markets.


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                                            Nine Months Ended                  Change
                                    September 30,      September 30,
(In thousands, except percentages)       2012               2011             $         %
United States                      $       263,710    $       229,340    $ 34,370    15.0 %
International                               21,748             14,145       7,603    53.8 %
Total sales                        $       285,458    $       243,485    $ 41,973    17.2 %

Sales growth in the United States was due primarily to increased sales of our disruptive technology products and increased market penetration in existing territories. We believe there is significant opportunity to strengthen our position in new and existing markets and in new sales territories by increasing the size of our U.S. sales force.

The increase in international sales was attributable to increased market penetration in existing territories and the addition of new sales territories, as we increased our international presence by selling in countries in the nine months ended September 30, 2012 in which we had no sales in the nine months ended September 30, 2011. We believe there is significant opportunity for us to expand our international presence through increased market penetration in existing territories, expansion into new territories, expansion of our direct and distributor sales force and the commercialization of additional products.

Cost of Goods Sold
                                           Nine Months Ended                Change
                                    September 30,     September 30,
(In thousands, except percentages)      2012              2011            $         %

Cost of goods sold $ 55,642 $ 49,309 $ 6,333 12.8 % Percentage of sales 19.5 % 20.3 %

The increase in cost of goods sold was due primarily to $6.2 million of increased sales volume, an increase of $2.3 million in depreciation of surgical instruments and cases, distribution and other costs, partially offset by a $2.2 million decrease in inventory reserves and write-offs.

Research and Development Expenses
                                           Nine Months Ended                Change
                                    September 30,     September 30,
(In thousands, except percentages)      2012              2011            $         %

Research and development $ 20,698 $ 17,691 $ 3,007 17.0 % Percentage of sales 7.3 % 7.3 %

The increase in research and development expenses was due primarily to an increase of $1.9 million in employee compensation including taxes, benefits and stock compensation and an increase of $1.6 million in supplies and outside services, partially offset by a decrease of $0.5 million in clinical trial and other costs.
Selling, General and Administrative Expenses

                                             Nine Months Ended                  Change
                                     September 30,      September 30,
(In thousands, except percentages)        2012               2011             $         %
Selling, general and administrative $      124,236     $      102,529     $ 21,707    21.2 %
Percentage of sales                           43.5 %             42.1 %

The increase in selling, general and administrative expenses was due primarily to an increase of $15.1 million in compensation costs in the United States to support increased sales volume and company growth,


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including hiring of additional sales representatives, inclusive of our Algea Therapies sales representatives, and general administrative personnel; an increase of $3.4 million to support international sales growth and expansion into new international territories; an increase of $2.1 million in U.S. sales and marketing expenses including travel and entertainment, training and other costs; and an increase of $1.1 million in legal and consulting fees, outside services and other related support costs. Costs associated with our Algea Therapies startup represented $5.8 million of the total $21.7 million change for the nine months ending September 30, 2012.

Provision for Litigation Settlements
                                              Nine Months Ended                       Change
                                       September 30,      September 30,
(In thousands, except percentages)         2012                2011              $              %

Provision for litigation settlements $ (801 ) $ 306 $ (1,107 ) (361.8 )% Percentage of sales (0.3 )% 0.1 %

The decrease in provision for litigation settlements was due primarily to the favorable settlement of a lawsuit during the nine months ended September 30, 2012.

Other Expense

Other expense of $0.1 million in the nine months ended September 30, 2012 was
attributable primarily to a loss due to the effect of changes in foreign
exchange rates on payables and receivables held in currencies other than their
functional (local) currency.

Income Tax Provision
                                           Nine Months Ended                Change
                                    September 30,     September 30,
(In thousands, except percentages)      2012              2011            $         %

Income tax provision $ 32,495 $ 26,243 $ 6,252 23.8 % Effective income tax rate 38.0 % 35.7 %

The increase was due primarily to a $12.1 million increase in taxable income as a result of increased operating profits. The effective rate for the nine months ended September 30, 2012 was unfavorably affected by the lack of a research and experimentation credit that was in effect in the prior year which Congress has not yet extended for 2012 and to a lesser extent, unfavorable return-to-provision adjustments recorded during the three months ended September 30, 2012 compared to prior year. Additionally, the effective rate for the nine months ended September 30, 2011 was favorably affected by the reversal of a $0.9 million tax provision related to a FIN 48 reserve resulting from the completion of IRS examinations with respect to the 2005 through 2008 tax years.

Non-GAAP Financial Measures

Adjusted EBITDA represents net income before interest (income)/expense, net and other non-operating expenses, provision for income taxes, depreciation and amortization, stock-based compensation, changes in the fair value of contingent consideration in connection with business acquisitions and provision for litigation settlements. This financial measure is not calculated in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") within the meaning of Item 10 of Regulation S-K. We present Adjusted EBITDA because we believe it is a useful indicator of our operating


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performance. Our management uses Adjusted EBITDA principally as a measure of our operating performance and believes that Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies in industries similar to ours. We also believe Adjusted EBITDA is useful to our management and investors as a measure of comparative operating performance from period to period and among companies as it is reflective of changes in pricing decisions, cost controls and other factors that affect operating performance, and it removes the effect of our capital structure (primarily interest expense), asset base (primarily depreciation and amortization) and items outside the control of our management (primarily income taxes and interest income and expense). Our management also uses Adjusted EBITDA for planning purposes, including the preparation of our annual operating budget and financial projections.
Adjusted EBITDA should not be considered in isolation or as a substitute for a measure of our liquidity or operating performance prepared in accordance with U.S. GAAP, and is not indicative of net income (loss) from operations as determined under U.S. GAAP. Adjusted EBITDA and other non-GAAP financial measures have limitations that should be considered before using these measures to evaluate our liquidity or financial performance. Adjusted EBITDA does not include certain expenses that may be necessary to review our operating results and liquidity requirements. Our definition and calculation of Adjusted EBITDA may differ from that of other companies.
The following is a reconciliation of Adjusted EBITDA to net income for the periods presented:

                                             Three Months Ended                   Nine Months Ended
                                      September 30,      September 30,     September 30,      September 30,
(In thousands, except percentages)         2012              2011               2012              2011
Net Income                           $       16,487     $      16,863     $       53,064     $      47,214
Interest (income)/expense, net                  (13 )              (5 )              (75 )              52
Provision for income taxes                   10,528             9,494             32,495            26,243
Depreciation and amortization                 4,612             4,326             13,500            12,202
EBITDA                                       31,614            30,678             98,984            85,711
Stock-based compensation                      1,545               765              3,682             2,151
Provision for legal settlements                  30               (78 )             (801 )             306
Change in fair value of contingent
consideration                                    63                30                 23               182
Adjusted EBITDA                      $       33,252     $      31,395     $      101,888     $      88,350
Adjusted EBITDA as a percentage of                                                  35.7 %            36.3 %
sales                                          35.1 %            37.3 %

Liquidity and Capital Resources

The following table highlights certain information related to our liquidity and
capital resources:
                                                               September 30,       December 31,
(In thousands)                                                     2012                2011
Cash and cash equivalents                                    $       195,156     $      142,668
Available borrowing capacity under revolving credit facility          50,000             50,000
Working capital                                              $       299,358     $      229,504

In addition to our existing cash balance, our principal sources of liquidity are cash flow from operating activities and our revolving credit facility, which was fully available as of September 30, 2012. We believe these sources, along with the net proceeds from our initial public offering, will provide sufficient liquidity for us to meet our liquidity requirements for the foreseeable future. Our principal liquidity requirements are to meet our working capital, research and development, including clinical trials, and capital expenditure needs, principally for our surgical sets required to maintain and expand our business. We expect to continue


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to make investments in surgical sets as we launch new products, increase the sizes of our U.S. and Algea Therapies sales forces, and expand into international markets. We may, however, require additional liquidity as we continue to execute our business strategy. Our liquidity may be negatively impacted as a result of a decline in sales of our products, including declines due to changes in our customers' ability to obtain third-party coverage and reimbursement for procedures that use our products, increased pricing pressures . . .

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