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, 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. 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 and reduce radiation exposure for all involved, by streamlining surgical procedures to be safer, less invasive, and more accurate. The 23 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES 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 nine months ended September 30, 2021, international net sales accounted for approximately 14% of our total net sales. We have sold our products in approximately 49 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 September 30, 2021 Compared to the Three Months Ended September 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 September 30, Change (In thousands, except percentages) 2021 2020 $ % United States $ 198,172 $ 182,104 $ 16,068 8.8% International 31,549 33,994 (2,445) -7.2% Total net sales $ 229,721 $ 216,098 $ 13,623 6.3% In the United States, the increase in net sales of $16.1 million for the three month period ending September 30, 2021 was due primarily to an increase in sales volume of enabling technologies and increased spine product sales resulting from penetration in existing territories, partially offset by current period impacts of the COVID-19 pandemic. International net sales decreased by $2.4 million for the three month period ending September 30, 2021 due primarily to lower sales in Japan due to the transition of our sales force composition and impacts of the COVID-19 pandemic, which was partially offset by increased spine product sales resulting from penetration in other existing territories. 24 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES Cost of Goods Sold Three Months Ended September 30, Change (In thousands, except percentages) 2021 2020 $ % Cost of goods sold $ 58,554 $ 57,097 $ 1,457 2.6% Percentage of net sales 25.5% 26.4% The $1.5 million increase in cost of goods sold was primarily due to increased volume, which was partially offset by lower inventory reserves and write-downs and favorable production variances driven by manufacturing efficiencies. Research and Development Expenses Three Months Ended September 30, Change (In thousands, except percentages) 2021 2020 $ % Research and development $ 15,853 $ 14,421 $ 1,432 9.9% Percentage of net sales 6.9% 6.7% The $1.4 million increase in research and development expenses was primarily due to an increase in personnel related expenses due to our continued investment in product development. Selling, General and Administrative Expenses Three Months Ended September 30, Change (In thousands, except percentages) 2021 2020 $ % Selling, general and administrative $ 96,444 $ 89,152 $ 7,292 8.2% Percentage of net sales 42.0% 41.3% The increase in selling, general and administrative expenses was primarily due to an increase in commission expenses resulting from higher product sales, and an increase in travel, meeting and consulting expenses, which are comparable to pre-COVID-19 spending. Provision for Litigation Three Months Ended September 30, Change (In thousands, except percentages) 2021 2020 $ % Provision for litigation $ 605 $ — $ 605 100.0% Percentage of net sales 0.3% 0.0% The provision for litigation for the three month period ending September 30, 2021 includes an accrual for a potential settlement. Amortization of Intangibles Three Months Ended September 30, Change (In thousands, except percentages) 2021 2020 $ % Amortization of intangibles $ 4,573 $ 4,152 $ 421 10.1% Percentage of net sales 2.0% 1.9% 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. 25 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES Acquisition Related Costs Three Months Ended September 30, Change (In thousands, except percentages) 2021 2020 $ % Acquisition related costs $ 363 $ 1,263 $ (900) -71.3% Percentage of net sales 0.2% 0.6% The decrease in acquisition related costs is due to lower acquisition related professional fees and changes in fair value of business acquisition liabilities. Other Income/(expense), Net Three Months Ended September 30, Change (In thousands, except percentages) 2021 2020 $ % Other income/(expense), net $ 1,123 $ 3,117 $ (1,994) -64.0% Percentage of net sales 0.5% 1.4% 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 September 30, 2021. Income Tax Provision Three Months Ended September 30, Change (In thousands, except percentages) 2021 2020 $ % Income tax provision $ 7,241 $ 8,914 $ (1,673) -18.8% Effective income tax rate 13.3% 16.8% The decrease in the effective income tax rate was primarily due to the favorable impact of stock option exercises. A discussion of our Results of Operations for the three months ended September 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 September 30, 2020 Compared to the Three Months Ended September 30, 2019. ” on our Form 10-Q filed on October 28, 2020 . Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 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: Nine Months Ended September 30, Change (In thousands, except percentages) 2021 2020 $ % United States $ 606,608 $ 465,705 $ 140,903 30.3% International 101,473 89,892 11,581 12.9% Total net sales $ 708,081 $ 555,597 $ 152,484 27.4% In the United States, the increase in net sales of $140.9 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 nine month period ending September 30, 2020 due to the COVID-19 pandemic. International net sales increased by $11.6 million, which was due primarily to increased spine product sales resulting from penetration in existing territories and sales volume of enabling technologies, both of which were partially attributable to the lower net sales for the nine month period ending September 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. 26 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES Cost of Goods Sold Nine Months Ended September 30, Change (In thousands, except percentages) 2021 2020 $ % Cost of goods sold $ 177,427 $ 156,604 $ 20,823 13.3% Percentage of net sales 25.1% 28.2% The $20.8 million increase in cost of goods sold was primarily due to increased volume, which was partially offset by favorable production variances driven by manufacturing efficiencies, and lower write-downs of excess and obsolete inventory driven by the impact of the COVID-19 pandemic on operations for the nine month period ending September 30, 2020. Research and Development Expenses Nine Months Ended September 30, Change (In thousands, except percentages) 2021 2020 $ % Research and development $ 46,324 $ 69,278 $ (22,954) -33.1% Percentage of net sales 6.5% 12.5% Research and development expenses for the nine month period ending September 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 an increase in personnel related expenses due to our continued investment in product development. Selling, General and Administrative Expenses Nine Months Ended September 30, Change (In thousands, except percentages) 2021 2020 $ % Selling, general and administrative $ 301,589 $ 262,710 $ 38,879 14.8% Percentage of net sales 42.6% 47.3% The increase in selling, general and administrative expenses was primarily due to an increase in commission expenses resulting from higher product sales, and the continued build out of the spine, INR technology and orthopedic trauma sales forces. Provision for Litigation Nine Months Ended September 30, Change (In thousands, except percentages) 2021 2020 $ % Provision for litigation $ 511 $ 197 $ 314 159.4% Percentage of net sales 0.1% 0.0% The provision for litigation for the nine month period ending September 30, 2021 includes an accrual for a potential settlement. Amortization of Intangibles Nine Months Ended September 30, Change (In thousands, except percentages) 2021 2020 $ % Amortization of intangibles $ 13,970 $ 12,043 $ 1,927 16.0% Percentage of net sales 2.0% 2.2% 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. 27 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES Acquisition Related Costs Nine Months Ended September 30, Change (In thousands, except percentages) 2021 2020 $ % Acquisition related costs $ 14,507 $ 1,867 $ 12,640 677.0% Percentage of net sales 2.0% 0.3% 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 Nine Months Ended September 30, Change (In thousands, except percentages) 2021 2020 $ % Other income/(expense), net $ 6,826 $ 10,788 $ (3,962) -36.7% Percentage of net sales 1.0% 1.9% The decrease in other income/(expense), net was primarily the result of lower interest income from lower yields on marketable securities during the nine month period ended September 30, 2021. Income Tax Provision Nine Months Ended September 30, Change (In thousands, except percentages) 2021 2020 $ % Income tax provision $ 26,494 $ 14,358 $ 12,136 84.5% Effective income tax rate 16.5% 22.5% The decrease in the effective income tax rate was primarily due to the unfavorable impact of non-tax-deductible acquired IPR&D in the nine month period ended September 30, 2020. A discussion of our Results of Operations for the nine months ended September 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; Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019. ” on our Form 10-Q filed on October 28, 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 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 September 30, 2021, we have not borrowed under the Credit Agreement. 28 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES Cash Flows The following table summarizes, for the periods indicated, cash flows from operating, investing and financing activities: Nine Months Ended September 30, Change (In thousands) 2021 2020 $ Net cash provided by/(used in) operating activities $ 200,021 $ 118,609 $ 81,412 Net cash provided by/(used in) investing activities (132,142) 1,770 (133,912) Net cash provided by/(used in) financing activities 55,170 (65,875) 121,045 Effect of foreign exchange rate changes on cash (570) 379 (949) Increase (decrease) in cash, cash equivalents, and restricted cash $ 122,479 $ 54,883 $ 67,596 Cash Provided by Operating Activities The increase in net cash provided by operating activities for the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2021 was primarily the result of the increase in proceeds from option exercises. The nine months ended September 30, 2020 included cash used for the repurchase of common stock. A discussion of our Cash Flows for the nine months ended September 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 October 28, 2020 . Contractual Obligations and Commitments There have been no material changes to our contractual obligations during the three months ended September 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 experienced slight delays in locating and obtaining the materials necessary to fulfill our production requirements, but it has not caused a meaningful backlog of sales orders. Despite the current delays, which we believe are temporary and are driven by the dynamic nature of the COVID-19 impact on the global supply chain, we believe our supplier relationships and facilities will support our capacity needs for the foreseeable future. However, it is possible that a prolonged COVID-19 disruption could cause a backlog of sales orders. 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. 29 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES 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.