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, 2023, which are included in our Annual Report on Form 10-K filed with the SEC on February 21, 2024. 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 and 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. We are an engineering-driven company with a history of rapidly developing and commercializing advanced products and procedures to address treatment challenges. With numerous products launched since the founding of the Company, we offer a comprehensive portfolio of innovative and differentiated technologies that treat a variety of musculoskeletal conditions. We separate our products and services into two major categories: Musculoskeletal Solutions and Enabling Technologies . NuVasive Merger On September 1, 2023, pursuant to that certain merger agreement (the “Merger Agreement”) with NuVasive, Inc. (“NuVasive”) and Zebra Merger Sub Inc. (“Merger Sub”), Merger Sub, a wholly owned subsidiary of the Company, merged with and into NuVasive, with NuVasive surviving as a wholly owned subsidiary of the Company (the “Merger”). Under the Merger Agreement, each share of common stock, par value $0.001 per share, of NuVasive issued and outstanding immediately prior to the effective time (other than certain excluded shares as described in the Merger Agreement) was cancelled and converted into the right to receive 0.75 fully paid and non-assessable shares of Class A common stock of Globus Medical, $0.001 par value per share, and the right to receive cash in lieu of fractional shares. Product & Service Categories While we group our revenue 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, unique surgical instruments, and neuromonitoring services, 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. Our neuromonitoring services use proprietary software-driven nerve detection and avoidance technology and include IONM to aid spine surgery. 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 market for our Enabling Technologies in spine and orthopedic surgery is still in its 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 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, continue to improve patient outcomes. 30 Geographic Information To date, the primary market for our products and services has been within the United States, where we sell our products and services 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 three months ended March 31, 2024, international net sales accounted for approximately 20.4% of our total net sales. We have sold our products and services in approximately 61 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 and Neuromonitoring Services 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 condensed 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 condensed consolidated financial statements, and the reported amounts of sales and expenses during the reporting periods. Except for updates to accounting policies and estimates as a result of the Merger described in Note 2 to the accompanying condensed consolidated financial statements, 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, 2023 . Results of Operations We manage our business globally within two operating segments, which is consistent with how our management reviews our business, makes investment and resource allocation decisions and assesses operating performance. We have concluded that these operating segments are aggregated into one reportable segment, based on the aggregation criteria. Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023 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 March 31, Change (In thousands, except percentages) 2024 2023 $ % United States $ 482,927 $ 234,120 $ 248,807 106.3% International 123,739 42,568 81,171 190.7% Total net sales $ 606,666 $ 276,688 $ 329,978 119.3% In the United States, the increase in net sales of $248.8 million for the three month period ended March 31, 2024 was due primarily to the addition of NuVasive, as well as increased spine product sales, including robotic spine instruments, resulting from penetration in existing territories and an increase in sales volume of enabling technologies. International net sales increased by $81.2 million for the three month period ended March 31, 2024 due to the addition of NuVasive and increased spine product sales resulting from penetration in existing territories. 31 Cost of Sales Three Months Ended March 31, Change (In thousands, except percentages) 2024 2023 $ % Cost of sales $ 241,487 $ 70,825 $ 170,662 241.0% Percentage of net sales 39.8% 25.6% The $170.7 million increase in cost of sales is due to the addition of NuVasive, amortization of inventory fair value step-up, and increased volume and product mix . Research and Development Expenses Three Months Ended March 31, Change (In thousands, except percentages) 2024 2023 $ % Research and development $ 57,268 $ 21,082 $ 36,186 171.6% Percentage of net sales 9.4% 7.6% The $36.2 million increase in research and development expenses was due primarily to the addition of NuVasive, acquired IPR&D and an increase in personnel related expenses due to our continued investment in product development. Selling, General and Administrative Expenses Three Months Ended March 31, Change (In thousands, except percentages) 2024 2023 $ % Selling, general and administrative $ 248,710 $ 122,416 $ 126,294 103.2% Percentage of net sales 41.0% 44.2% The $126.3 million increase in selling, general and administrative expenses was due to the addition of NuVasive, and an increase in personnel related expenses resulting primarily from higher product sales, and meeting expenses. Provision for Litigation, net Three Months Ended March 31, Change (In thousands, except percentages) 2024 2023 $ % Provision for litigation, net $ (31) $ — $ (31) — Percentage of net sales 0.0% 0.0% The provision for litigation, net remains immaterial for the three month periods ended March 31, 2024 and March 31, 2023. Amortization of Intangibles Year Ended March 31, Change (In thousands, except percentages) 2024 2023 $ % Amortization of intangibles $ 29,676 $ 4,601 $ 25,075 545.0% Percentage of net sales 4.9% 1.7% 32 Amortization of intangibles increased for the three month period ended March 31, 2024 compared to the three month period ended March 31, 2023, due to the impact of the acquired intangibles from NuVasive. Acquisition-Related Costs Three Months Ended March 31, Change (In thousands, except percentages) 2024 2023 $ % Acquisition-related costs $ 2,418 $ 1,361 $ 1,057 77.7% Percentage of net sales 0.4% 0.5% The increase in acquisition-related costs is due primarily to unfavorable change in the fair value of business acquisition liabilities, driven by changes in contract terms, market conditions and the achievement of certain performance conditions. Restructuring Costs Three Months Ended March 31, Change (In thousands, except percentages) 2024 2023 $ % Restructuring Costs $ 19,141 $ — $ 19,141 — Percentage of net sales 3.2% 0.0% The restructuring costs for the three months ended March 31, 2024 is due to costs associated with the 2024 Synergy Plan. These costs were primarily related to employee termination benefits. Other Income/(expense), Net Three Months Ended March 31, Change (In thousands, except percentages) 2024 2023 $ % Other income/(expense), net $ (16,555) $ 6,786 $ (23,341) -344.0% Percentage of net sales -2.7% 2.5% The decrease in other income/(expense), is due primarily to foreign currency losses and interest expense from a lower average marketable securities portfolio size in the current period. Income Tax Provision Three Months Ended March 31, Change (In thousands, except percentages) 2024 2023 $ % Income tax provision $ (1,441) $ 14,060 $ (15,501) -110.2% Effective income tax rate 16.8% 22.3% The decrease in the effective tax rate is due primarily to lower pretax earnings over the comparative period, and one-time tax adjustments as a percentage of pretax earnings. A discussion of our Results of Operations for the three months ended March 31, 2023 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 March 31, 2023 Compared to the Three Months Ended March 31 2022. ” on our Form 10-Q filed on May 4, 2023 . Liquidity and Capital Resources Our principal source of liquidity is cash flow from operating activities as well as our cash and cash equivalents and marketable securities, 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, service our 2025 Notes, 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. Additionally, we have varying needs for cash in connection with our Senior Convertible Notes, of which $450 million are due March 2025, as well as for certain acquisition-related obligations and contingent consideration achievements. Future litigation or requirements to escrow funds could also materially impact 33 our liquidity and our ability to invest in and operate our business on an ongoing basis. We may, 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. Line of Credit In September 2023, we entered into an unsecured credit agreement with U.S. Bank National Association, as administrative agent, Citizens Bank, N.A., as syndication agent, Royal Bank of Canada, as documentation agent, U.S. Bank National Association and Citizens Bank, N.A., as joint lead arrangers and joint book runners, and the other lenders referred to therein (the “September 2023 Credit Agreement”), that provides a revolving credit facility permitting borrowings up to $400.0 million and has a termination date of September 27, 2028. We may request an increase in the revolving commitments in an aggregate amount not to exceed (i) $200 million or (ii) so long as the Leverage Ratio (as defined in the September 2023 Credit Agreement) is at least 0.25 to 1.00 less than the applicable Leverage Ratio then required under the September 2023 Credit Agreement, an unlimited amount. Revolving Loans under the September 2023 Credit Agreement bear interest at either a base rate or the Term SOFR Rate (as defined in the September 2023 Credit Agreement) plus, in each case, an applicable margin, as determined in accordance with the provisions of the September 2023 Credit Agreement. The Applicable Margin ranges from 0.125% to 0.625% for the Base Rate and 1.125% to 1.625% for the Term SOFR Rate. We may also request Swingline Loans (as defined in the September 2023 Credit Agreement) at either the Base Rate or the Daily Term SOFR Rate. The September 2023 Credit Agreement is guaranteed by certain direct or indirect wholly owned subsidiaries of the Company. The September 2023 Credit Agreement contains financial and other customary covenants, including a funded net indebtedness to adjusted EBITDA ratio. As of March 31, 2024, we have not borrowed under the September 2023 Credit Agreement and we are in compliance with all covenants. Cash Flows The following table summarizes, for the periods indicated, cash flows from operating, investing and financing activities: Three Months Ended 2024-2023 March 31, Change (In thousands) 2024 2023 $ Net cash provided by/(used in) operating activities $ 52,387 $ 53,313 $ (926) Net cash provided by/(used in) investing activities (46,584) 10,992 (57,576) Net cash provided by/(used in) financing activities (115,721) 2,940 (118,661) Effect of foreign exchange rate changes on cash (3,312) (26) (3,286) Increase (decrease) in cash and cash equivalents $ (113,230) $ 67,219 $ (180,449) Cash Provided by Operating Activities The higher net cash provided by operating activities for the three month period ended March 31, 2024 was primarily the result of higher net income after adjusting out non-cash add-backs and non-cash expenses, such as amortization of purchase accounting related fair value step up, amortization, and stock-based compensation, partially offset by unfavorable changes in accounts receivable and accrued expenses and other liabilities. Cash Used in Investing Activities The higher cash used in investing activities for the three month period ended March 31, 2024 was primarily net outflows for acquisition of businesses, net of cash acquired , h igher purchases of property and equipment, and net purchases of marketable securities. Cash Used in Financing Activities The higher net cash used in financing activities for the three month period ended March 31, 2024 was primarily the result of higher repurchases of Class A common stock, payments of business acquisition related liabilities and lower proceeds from exercise of stock options. A discussion of our Cash Flows for the three months ended March 31, 2023 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 May 4, 2023 . 34 Contractual Obligations and Commitments In connection with the NuVasive merger, the Company acquired additional obligations and commitments, including, but not limited to i) the 2025 Notes, with a principal balance of $450.0 million, ii) contingent consideration arrangements associated with certain historical NuVasive acquisitions, and iii) operating lease and finance lease obligations. Refer to the Notes to the condensed consolidated financial statements for further description of our 2025 Notes (Note 11), contingent consideration arrangements (Notes 6 and 12), and lease obligations (Note 15). Recently Adopted and 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; (q) Recently Adopted 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, the risks and costs associated with the integration of the NuVasive business and our ability to successfully integrate and achieve anticipated synergies with the integration, health epidemics, pandemics and similar outbreaks, 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 in this Quarterly Report on Form 10-Q and throughout our Annual Report on Form 10-K for the year-ended December 31, 2023 , 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 U.S. 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, 2023 and there have been no significant changes to this information.