GLOBUS MEDICAL INC 10-Q

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 in conjunction with our unaudited condensed consolidated financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes for the year ended December 31, 2020, which are included in our Annual Report on Form 10-K filed with the SEC on February 17, 2021. Overview Globus Medical, Inc. (together, as applicable, with its consolidated subsidiaries, “Globus,” “we,” “us” or “our”), headquartered in Audubon, Pennsylvania, is a medical device company that develops and commercializes healthcare solutions whose mission is to improve the quality of life of patients with musculoskeletal disorders. Founded in 2003, Globus is committed to medical device innovation and delivering exceptional service to hospitals, ambulatory surgery centers and physicians to advance patient care and improve efficiency. Since inception, Globus has listened to the voice of the surgeon to develop practical solutions and products to help surgeons effectively treat patients and improve lives. Globus is an engineering-driven company with a history of rapidly developing and commercializing advanced products and procedures to address treatment challenges. With over 220 product launches to date, we offer a comprehensive portfolio of innovative and differentiated technologies that are used to treat a variety of musculoskeletal conditions. Although we manage our business globally within one operating segment, we separate our products into two major categories: Musculoskeletal Solutions and Enabling Technologies. COVID-19 Update We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities, regarding the COVID-19 pandemic, and we may need to make changes to our business based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, the Company cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future. However, if a resurgence occurs and governments mandate restrictions, including restrictions on elective surgeries, we do expect that it could have a material adverse impact on our revenue growth, operating profit and cash flow and may lead to higher than normal inventory levels, revised payment terms with certain of our customers, and a change in effective tax rate driven by changes in the mix of earnings across the Company’s jurisdictions. We are focused on navigating these recent challenges presented by COVID-19 and believe we are in a strong position to continue to sustain and grow our business. To date, COVID-19 has not materially affected our supply chain or production schedule, although delays may be possible in the future due to the dynamic nature of the situation. Product Categories While we group our products into two categories, Musculoskeletal Solutions and Enabling Technologies, they are not limited to a particular technology, platform or surgical approach. Instead, our goal is to offer a comprehensive product suite that can be used to safely and effectively treat patients based on their specific anatomy and condition, and is customized to the surgeon’s training and surgical preference. Musculoskeletal Solutions Our Musculoskeletal Solutions consist primarily of implantable devices, biologics, accessories, and unique surgical instruments used in an expansive range of spinal, orthopedic and neurosurgical procedures. Musculoskeletal disorders are a leading driver of healthcare costs worldwide. Disorders range in severity from mild pain and loss of feeling to extreme pain and paralysis. These disorders are primarily caused by degenerative and congenital conditions, deformity, tumors and traumatic injuries. Treatment alternatives for musculoskeletal disorders range from non-operative conservative therapies to surgical interventions depending on the pathology. Conservative therapies include bed rest, medication, casting, bracing, and physical therapy. When conservative therapies are not indicated, or fail to provide adequate quality of life improvements, surgical interventions may be used. Surgical treatments for musculoskeletal disorders can be instrumented, which include the use of implants, or non-instrumented, which forego the use of hardware but may include biologics. Enabling Technologies Our Enabling Technologies are comprised of imaging, navigation and robotics (“INR”) solutions for assisted surgery which are advanced computer-assisted intelligent systems designed to enhance a surgeon’s capabilities, and ultimately improve patient care 24 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES and reduce radiation exposure for all involved, by streamlining surgical procedures to be safer, less invasive, and more accurate. The market for our Enabling Technologies in spine and orthopedic surgery is still in the infancy stage and consists primarily of imaging, navigation and robotic systems. In spine, a majority of these technologies are limited to surgical planning and assistance in implant placement which are designed for increased accuracy and time savings with less intraoperative radiation exposure to the patient and surgical staff. As our Enabling Technologies become more fully integrated with our Musculoskeletal Solutions, a continued rise in adoption is expected. Furthermore, we believe as new technologies such as augmented reality and artificial intelligence are introduced, Enabling Technologies have the potential to transform the way surgery is performed and most importantly, improve patient outcomes. Geographic Information 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 exclusive independent distributors, who distribute our products 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 in the future. During the six months ended June 30, 2021, international net sales accounted for approximately 15% of our total net sales. We have sold our products in approximately 47 countries other than the United States through a combination of sales representatives employed by us and exclusive international distributors. We believe there are significant opportunities for us to increase our presence in both existing and new international markets through the continued expansion of our direct and distributor sales forces and through the commercialization of additional products. Seasonality Our business is generally not seasonal in nature. However, sales of our Musculoskeletal Solutions products may be influenced by summer vacation and winter holiday periods during which we have experienced fewer surgeries taking place, as well as more surgeries taking place later in the year when patients have met the deductibles under insurance plans. Sales of our Enabling Technologies products may be influenced by longer capital purchase cycles and the timing of budget approvals for major capital purchases. Critical Accounting Policies and Estimates The preparation of the consolidated financial statements requires us to make assumptions, estimates and judgments that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of sales and expenses during the reporting periods. There have been no material changes to the critical accounting policies and estimates as previously disclosed in Part II, Item 7 of our Annual Report on Form 10-K for the year-ended December 31, 2020 . Results of Operations Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020 Net Sales The following table sets forth, for the periods indicated, our net sales by geography expressed as dollar amounts and the changes in net sales between the specified periods expressed in dollar amounts and as percentages: Three Months Ended June 30, Change (In thousands, except percentages) 2021 2020 $ % United States $ 215,119 $ 125,154 $ 89,965 71.9% International 35,897 23,768 12,129 51.0% Total net sales $ 251,016 $ 148,922 $ 102,094 68.6% In the United States, the increase in net sales of $90.0 million was due primarily to increased spine product sales resulting from penetration in existing territories and an increase in sales volume of enabling technologies, both of which were partially attributable to the lower net sales for the three month period ending June 30, 2020 due to the COVID-19 pandemic. International net sales increased by $12.1 million due primarily to increased spine product sales resulting from penetration in existing territories, which was partially attributable to the lower net sales for the three month period ending June 30, 2020 due to the 25 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES COVID-19 pandemic. The increase in net sales was partially offset by lower sales in Japan due to the transition of our sales force composition. Cost of Goods Sold Three Months Ended June 30, Change (In thousands, except percentages) 2021 2020 $ % Cost of goods sold $ 63,846 $ 50,643 $ 13,203 26.1% Percentage of net sales 25.4% 34.0% The $13.2 million increase in cost of goods sold was primarily due to increased volume, which was partially offset by favorable production variances driven by improved manufacturing efficiencies, and lower write-downs of excess and obsolete inventory driven by the impact of the COVID-19 pandemic on operations for the three month period ending June 30, 2020. Research and Development Expenses Three Months Ended June 30, Change (In thousands, except percentages) 2021 2020 $ % Research and development $ 15,547 $ 39,455 $ (23,908) -60.6% Percentage of net sales 6.2% 26.5% Research and development expenses for the three month period ending June 30, 2020 includes $24.4 million of acquired in-process research and development (“IPR&D”) assets with no alternative future use, which was partially offset by increased product development spend. Selling, General and Administrative Expenses Three Months Ended June 30, Change (In thousands, except percentages) 2021 2020 $ % Selling, general and administrative $ 107,254 $ 80,019 $ 27,235 34.0% Percentage of net sales 42.7% 53.7% The increase in selling, general and administrative expenses was primarily due to an increase in commission expenses resulting from higher product sales, and by the continued build out of the spine, INR technology and orthopedic trauma sales forces. Provision for Litigation Three Months Ended June 30, Change (In thousands, except percentages) 2021 2020 $ % Provision for litigation $ — $ 197 $ (197) -100.0% Percentage of net sales 0.0% 0.1% The provision for litigation was immaterial for the three month periods ending June 30, 2021 and 2020. Amortization of Intangibles Three Months Ended June 30, Change (In thousands, except percentages) 2021 2020 $ % Amortization of intangibles $ 4,623 $ 4,115 $ 508 12.3% Percentage of net sales 1.8% 2.8% 26 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES The increase in the amortization of intangibles is primarily due to the developed technology intangible asset acquired in connection with the intangible assets acquired in the fourth quarter of fiscal 2020. Acquisition Related Costs Three Months Ended June 30, Change (In thousands, except percentages) 2021 2020 $ % Acquisition related costs $ 13,870 $ 56 $ 13,814 24667.9% Percentage of net sales 5.5% 0.0% Acquisition related costs increased due to changes in fair value of business acquisition liabilities, driven by changes in market conditions and the achievement of certain performance conditions. Other Income/(expense), Net Three Months Ended June 30, Change (In thousands, except percentages) 2021 2020 $ % Other income/(expense), net $ 3,057 $ 3,621 $ (564) -15.6% Percentage of net sales 1.2% 2.4% The decrease in other income/(expense), net was primarily the result of lower interest income from lower yields on marketable securities during the three month period ended June 30, 2021. Income Tax Provision Three Months Ended June 30, Change (In thousands, except percentages) 2021 2020 $ % Income tax provision $ 7,388 $ (1,105) $ 8,493 -768.6% Effective income tax rate 15.1% 5.0% The change in the effective income tax rates for the three month periods ending June 30, 2021 and 2020 is primarily driven by the increase in pretax income and the impact of the non-tax-deductible expense of acquired IPR&D of $24.4 million for the three month period ending June 30, 2020, which were partially offset by tax benefits due to an increase in stock option exercises in the current year. A discussion of our Results of Operations for the three months ended June 30, 2020 can be found in “ Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations: Results of Operations; Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019. ” on our Form 10-Q filed on August 5, 2020 . Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020 Net Sales The following table sets forth, for the periods indicated, our net sales by geography expressed as dollar amounts and the changes in net sales between the specified periods expressed in dollar amounts and as percentages: Six Months Ended June 30, Change (In thousands, except percentages) 2021 2020 $ % United States $ 408,436 $ 283,601 $ 124,835 44.0% International 69,924 55,898 14,026 25.1% Total net sales $ 478,360 $ 339,499 $ 138,861 40.9% 27 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES In the United States, the increase in net sales of $124.8 million was due primarily to increased spine product sales resulting from penetration in existing territories and an increase in sales volume of enabling technologies, both of which were partially attributable to the lower net sales for the six month period ending June 30, 2020 due to the COVID-19 pandemic. International net sales increased by $14.0 million, which was due primarily to increased sales volume of enabling technologies and spine product sales resulting from penetration in existing territories, both of which were partially attributable to the lower net sales for the six month period ending June 30, 2020 due to the COVID-19 pandemic. The increase in net sales was partially offset by lower sales in Japan due to the transition of our sales force composition. Cost of Goods Sold Six Months Ended June 30, Change (In thousands, except percentages) 2021 2020 $ % Cost of goods sold $ 118,873 $ 99,507 $ 19,366 19.5% Percentage of net sales 24.9% 29.3% The $19.4 million increase in cost of goods sold was primarily due to increased volume, which was partially offset by favorable production variances driven by improved manufacturing efficiencies, and lower write-downs of excess and obsolete inventory driven by the impact of the COVID-19 pandemic on operations for the six month period ending June 30, 2020. Research and Development Expenses Six Months Ended June 30, Change (In thousands, except percentages) 2021 2020 $ % Research and development $ 30,471 $ 54,857 $ (24,386) -44.5% Percentage of net sales 6.4% 16.2% Research and development expenses for the six month period ending June 30, 2020 includes $24.4 million of acquired in-process research and development (“IPR&D”) assets with no alternative future use. Selling, General and Administrative Expenses Six Months Ended June 30, Change (In thousands, except percentages) 2021 2020 $ % Selling, general and administrative $ 205,145 $ 173,558 $ 31,587 18.2% Percentage of net sales 42.9% 51.1% The increase in selling, general and administrative expenses was primarily due to an increase in commission expenses resulting from higher product sales, and by the continued build out of the spine, INR technology and orthopedic trauma sales forces. Provision for Litigation Six Months Ended June 30, Change (In thousands, except percentages) 2021 2020 $ % Provision for litigation $ (94) $ 197 $ (291) -147.7% Percentage of net sales 0.0% 0.1% The provision for litigation for the six month period ending June 30, 2021 includes receipt of a settlement. 28 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES Amortization of Intangibles Six Months Ended June 30, Change (In thousands, except percentages) 2021 2020 $ % Amortization of intangibles $ 9,397 $ 7,891 $ 1,506 19.1% Percentage of net sales 2.0% 2.3% The increase in the amortization of intangibles is primarily due to the developed technology intangible asset acquired in connection with the Nemaris acquisition and the intangible assets acquired in the fourth quarter of fiscal 2020. Acquisition Related Costs Six Months Ended June 30, Change (In thousands, except percentages) 2021 2020 $ % Acquisition related costs $ 14,144 $ 604 $ 13,540 2241.7% Percentage of net sales 3.0% 0.2% Acquisition related costs increased due to changes in fair value of business acquisition liabilities, driven by changes in market conditions and the achievement of certain performance conditions. Other Income/(expense), Net Six Months Ended June 30, Change (In thousands, except percentages) 2021 2020 $ % Other income/(expense), net $ 5,703 $ 7,671 $ (1,968) -25.7% Percentage of net sales 1.2% 2.3% The decrease in other income/(expense), net was primarily the result of lower interest income from lower yields on marketable securities during the six month period ended June 30, 2021. Income Tax Provision Six Months Ended June 30, Change (In thousands, except percentages) 2021 2020 $ % Income tax provision $ 19,253 $ 5,444 $ 13,809 253.7% Effective income tax rate 18.1% 51.6% The change in the effective income tax rates for the six month periods ending June 30, 2021 and 2020 is primarily driven by the increase in pretax income and the impact of the non-tax-deductible expense of acquired IPR&D of $24.4 million for the six month period ending June 30, 2020, which were partially offset by tax benefits due to an increase in stock option exercises in the current year. A discussion of our Results of Operations for the three months ended June 30, 2020 can be found in “ Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations: Results of Operations; Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019. ” on our Form 10-Q filed on August 5, 2020 . Liquidity and Capital Resources Our principal source of liquidity is cash flow from operating activities, which we believe will provide sufficient funding for us to meet our liquidity requirements for the foreseeable future. Our principal liquidity requirements are to fund working capital, research and development, including clinical trials, capital expenditures primarily related to investment in surgical sets required to maintain and expand our business, and potential future business or intellectual property acquisitions. We expect to continue to make investments in 29 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES surgical sets as we launch new products, increase the size of our U.S. sales force, and expand into international markets. We may, however, require additional liquidity as we continue to execute our business strategy. To the extent that we require new sources of liquidity, we may consider incurring debt, including borrowing against our existing credit facility, convertible debt instruments, and/or raising additional funds through an equity offering. The sale of additional equity may result in dilution to our stockholders. There is no assurance that we will be able to secure such additional funding on terms acceptable to us, or at all. In August 2020, we entered into a credit agreement with Citizens Bank, N.A. (the “Credit Agreement”) that provides a revolving credit facility permitting borrowings up to $125.0 million (the “Revolving Credit Facility”). As amended, the Credit Agreement has a termination date of August 3, 2022. The Revolving Credit Facility includes up to a $25.0 million sub limit for letters of credit. As of June 30, 2021, we have not borrowed under the Credit Agreement. Cash Flows The following table summarizes, for the periods indicated, cash flows from operating, investing and financing activities: Six Months Ended June 30, Change (In thousands) 2021 2020 $ Net cash provided by operating activities $ 122,759 $ 65,361 $ 57,398 Net cash used in investing activities (125,257) (5,891) (119,366) Net cash provided by/used in by financing activities 32,492 (89,558) 122,050 Effect of foreign exchange rate changes on cash (608) (82) (526) Increase (decrease) in cash, cash equivalents, and restricted cash $ 29,386 $ (30,170) $ 59,556 Cash Provided by Operating Activities The increase in net cash provided by operating activities for the six months ended June 30, 2021 was primarily due to the increase of cash flow from net income and reduced outflows for inventories and liabilities. These were partially offset by an unfavorable change in accounts receivable as a result of increased sales. Cash Used in Investing Activities The increase in net cash used in investing activities for the six months ended June 30, 2021 was due primarily to the net outflows of purchases, maturities and sales of marketable securities, which was partially offset by a decrease of purchases of property and equipment and acquisition activity. Cash Used in Financing Activities The increase in net cash provided by financing activities for the six months ended June 30, 2021 was primarily the result of the increase in proceeds from option exercises which was partially offset by the increased payments of business acquisition liabilities. The six months ended June 30, 2020 included cash used for the repurchase of common stock. A discussion of our Cash Flows for the six months ended June 30, 2020 can be found in “ Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations: Results of Operations; Cash Flows. ” on our Form 10-Q filed on August 5, 2020 . Contractual Obligations and Commitments There have been no material changes to our contractual obligations during the three months ended June 30, 2021. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements. Backlog We work closely with our suppliers to ensure that our inventory needs are met while maintaining high quality and reliability. To date, we have not experienced significant difficulty in locating and obtaining the materials necessary to fulfill our production requirements, and we have not experienced a meaningful backlog of sales orders. We believe our supplier relationships and facilities 30 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES will support our capacity needs for the foreseeable future. A majority of our product inventory is held primarily with our sales representatives and at hospitals throughout the United States. We stock inventory in our warehouse facilities and retain title to consigned inventory which is maintained with our field representatives and hospitals in sufficient quantities so that products are available when needed for surgical procedures. Safety stock levels are determined based on a number of factors, including demand, manufacturing lead times, and quantities required to maintain service levels. Recently Issued Accounting Pronouncements For further details on recently issued accounting pronouncements, please refer to “Part I; Item 1. Financial Statements; Notes to Condensed Consolidated Financial Statements (Unaudited); Note 2. Summary of Significant Accounting Policies; (k) Recently Issued Accounting Pronouncements” above. Cautionary Note Concerning Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are forward-looking statements. We have tried to identify forward-looking statements by using words such as “believe,” “may,” “might,” “could,” “will,” “aim,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “plan” and similar words. These forward-looking statements are based on our current assumptions, expectations and estimates of future events and trends. Forward-looking statements are only predictions and are subject to many risks, uncertainties and other factors that may affect our businesses and operations and could cause actual results to differ materially from those predicted. These risks and uncertainties include, but are not limited to, health epidemics, pandemics and similar outbreaks, including the COVID-19 pandemic, factors affecting our quarterly results, our ability to manage our growth, our ability to sustain our profitability, demand for our products, our ability to compete successfully (including without limitation our ability to convince surgeons to use our products and our ability to attract and retain sales and other personnel), our ability to rapidly develop and introduce new products, our ability to develop and execute on successful business strategies, our ability to comply with changes and applicable laws and regulations that are applicable to our businesses, our ability to safeguard our intellectual property, our success in defending legal proceedings brought against us, trends in the medical device industry, and general economic conditions, and other risks set forth throughout our Annual Report on Form 10-K for the year ended December 31, 2020 , particularly those set forth under “Item 1. Business,” “Item 1A. Risk Factors,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Item 7A. Quantitative and Qualitative Disclosure About Market Risk” , and those discussed in other documents we file with the Securities and Exchange Commission (the “SEC”). Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for us to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements. Forward-looking statements contained in this Quarterly Report speak only as of the date of this Quarterly Report. We undertake no obligation to update any forward-looking statements as a result of new information, events or circumstances or other factors arising or coming to our attention after the date hereof. Item 3. Quantitative and Qualitative Disclosure About Market Risk We have evaluated the information required under this item that was disclosed under Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2020 and there have been no significant changes to this information.