Item 1. Financial Statements
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
|
|
|
|
|
|
|
(In thousands, except par value)
|
September 30,
2017
|
|
December 31,
2016
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
154,855
|
|
|
$
|
132,639
|
|
Restricted cash
|
—
|
|
|
477
|
|
Short-term marketable securities
|
182,804
|
|
|
157,673
|
|
Accounts receivable, net of allowances of $3,725 and $2,771, respectively
|
94,484
|
|
|
91,983
|
|
Inventories
|
111,462
|
|
|
112,692
|
|
Prepaid expenses and other current assets
|
9,430
|
|
|
14,502
|
|
Income taxes receivable
|
10,527
|
|
|
3,800
|
|
Total current assets
|
563,562
|
|
|
513,766
|
|
Property and equipment, net of accumulated depreciation of $191,386 and $166,711, respectively
|
134,214
|
|
|
124,229
|
|
Long-term marketable securities
|
58,884
|
|
|
60,444
|
|
Note receivable
|
29,167
|
|
|
30,000
|
|
Intangible assets, net
|
87,653
|
|
|
61,706
|
|
Goodwill
|
119,273
|
|
|
105,926
|
|
Other assets
|
8,280
|
|
|
928
|
|
Deferred income taxes
|
36,127
|
|
|
30,638
|
|
Total assets
|
$
|
1,037,160
|
|
|
$
|
927,637
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
16,553
|
|
|
$
|
17,472
|
|
Accrued expenses
|
46,609
|
|
|
46,401
|
|
Income taxes payable
|
2,023
|
|
|
1,911
|
|
Business acquisition liabilities
|
9,742
|
|
|
14,108
|
|
Total current liabilities
|
74,927
|
|
|
79,892
|
|
Business acquisition liabilities, net of current portion
|
10,778
|
|
|
5,972
|
|
Deferred income taxes
|
14,405
|
|
|
7,876
|
|
Other liabilities
|
1,786
|
|
|
1,819
|
|
Total liabilities
|
101,896
|
|
|
95,559
|
|
Commitments and contingencies (Note 13)
|
|
|
|
|
|
Equity:
|
|
|
|
Class A common stock; $0.001 par value. Authorized 500,000 shares; issued and outstanding 72,489 and 72,052 shares at September 30, 2017 and December 31, 2016, respectively
|
72
|
|
|
72
|
|
Class B common stock; $0.001 par value. Authorized 275,000 shares; issued and outstanding 23,878 at September 30, 2017 and December 31, 2016, respectively
|
24
|
|
|
24
|
|
Additional paid-in capital
|
229,475
|
|
|
211,725
|
|
Accumulated other comprehensive loss
|
(6,178
|
)
|
|
(8,642
|
)
|
Retained earnings
|
711,871
|
|
|
628,899
|
|
Total equity
|
935,264
|
|
|
832,078
|
|
Total liabilities and equity
|
$
|
1,037,160
|
|
|
$
|
927,637
|
|
See accompanying notes to condensed consolidated financial statements.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In thousands, except per share amounts)
|
September 30,
2017
|
|
September 30,
2016
|
|
September 30,
2017
|
|
September 30,
2016
|
Sales
|
$
|
151,744
|
|
|
$
|
135,651
|
|
|
$
|
459,943
|
|
|
$
|
412,404
|
|
Cost of goods sold
|
36,798
|
|
|
31,453
|
|
|
109,597
|
|
|
95,703
|
|
Gross profit
|
114,946
|
|
|
104,198
|
|
|
350,346
|
|
|
316,701
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Research and development
|
10,887
|
|
|
10,265
|
|
|
32,266
|
|
|
30,889
|
|
Selling, general and administrative
|
63,362
|
|
|
54,207
|
|
|
194,859
|
|
|
161,317
|
|
Provision for litigation
|
2,537
|
|
|
—
|
|
|
2,780
|
|
|
3,056
|
|
Amortization of intangibles
|
2,080
|
|
|
884
|
|
|
5,671
|
|
|
1,673
|
|
Acquisition related costs
|
285
|
|
|
1,192
|
|
|
1,290
|
|
|
1,347
|
|
Total operating expenses
|
79,151
|
|
|
66,548
|
|
|
236,866
|
|
|
198,282
|
|
|
|
|
|
|
|
|
|
Operating income
|
35,795
|
|
|
37,650
|
|
|
113,480
|
|
|
118,419
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
|
|
|
|
|
Interest income, net
|
1,738
|
|
|
795
|
|
|
4,746
|
|
|
1,893
|
|
Foreign currency transaction gain/(loss)
|
(315
|
)
|
|
284
|
|
|
681
|
|
|
83
|
|
Other income
|
139
|
|
|
126
|
|
|
421
|
|
|
407
|
|
Total other income, net
|
1,562
|
|
|
1,205
|
|
|
5,848
|
|
|
2,383
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
37,357
|
|
|
38,855
|
|
|
119,328
|
|
|
120,802
|
|
Income tax provision
|
11,766
|
|
|
12,628
|
|
|
36,356
|
|
|
40,759
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
25,591
|
|
|
$
|
26,227
|
|
|
$
|
82,972
|
|
|
$
|
80,043
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.27
|
|
|
$
|
0.27
|
|
|
$
|
0.86
|
|
|
$
|
0.84
|
|
Diluted
|
$
|
0.26
|
|
|
$
|
0.27
|
|
|
$
|
0.85
|
|
|
$
|
0.83
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
96,318
|
|
|
95,739
|
|
|
96,160
|
|
|
95,575
|
|
Dilutive stock options
|
1,531
|
|
|
753
|
|
|
1,447
|
|
|
829
|
|
Diluted
|
97,849
|
|
|
96,492
|
|
|
97,607
|
|
|
96,404
|
|
|
|
|
|
|
|
|
|
Anti-dilutive stock options excluded from weighted average calculation
|
2,611
|
|
|
5,457
|
|
|
3,462
|
|
|
5,378
|
|
See accompanying notes to condensed consolidated financial statements.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In thousands)
|
September 30,
2017
|
|
September 30,
2016
|
|
September 30,
2017
|
|
September 30,
2016
|
Net income
|
$
|
25,591
|
|
|
$
|
26,227
|
|
|
$
|
82,972
|
|
|
$
|
80,043
|
|
Other comprehensive income/(loss):
|
|
|
|
|
|
|
|
Unrealized gain/(loss) on marketable securities, net of tax
|
7
|
|
|
(165
|
)
|
|
150
|
|
|
119
|
|
Foreign currency translation gain/(loss)
|
(313
|
)
|
|
141
|
|
|
2,314
|
|
|
79
|
|
Total other comprehensive income/(loss)
|
(306
|
)
|
|
(24
|
)
|
|
2,464
|
|
|
198
|
|
Comprehensive income
|
$
|
25,285
|
|
|
$
|
26,203
|
|
|
$
|
85,436
|
|
|
$
|
80,241
|
|
See accompanying notes to condensed consolidated financial statements.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
(In thousands)
|
September 30,
2017
|
|
September 30,
2016
|
Cash flows from operating activities:
|
|
|
|
Net income
|
$
|
82,972
|
|
|
$
|
80,043
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
33,773
|
|
|
21,536
|
|
Amortization of premium on marketable securities
|
2,258
|
|
|
3,067
|
|
Write-down for excess and obsolete inventories
|
8,158
|
|
|
6,919
|
|
Stock-based compensation expense
|
10,659
|
|
|
8,437
|
|
Allowance for doubtful accounts
|
1,135
|
|
|
320
|
|
Change in fair value of business acquisition liabilities
|
1,011
|
|
|
—
|
|
Change in deferred income taxes
|
815
|
|
|
(1,356
|
)
|
(Increase)/decrease in:
|
|
|
|
Restricted cash
|
477
|
|
|
25,642
|
|
Accounts receivable
|
(2,200
|
)
|
|
3,111
|
|
Inventories
|
(6,956
|
)
|
|
(6,609
|
)
|
Prepaid expenses and other assets
|
(974
|
)
|
|
7,332
|
|
Increase/(decrease) in:
|
|
|
|
Accounts payable
|
(344
|
)
|
|
(3,426
|
)
|
Accrued expenses and other liabilities
|
(9,377
|
)
|
|
(30,178
|
)
|
Income taxes payable/receivable
|
(6,709
|
)
|
|
6,643
|
|
Net cash provided by operating activities
|
114,698
|
|
|
121,481
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
Purchases of marketable securities
|
(203,609
|
)
|
|
(223,623
|
)
|
Maturities of marketable securities
|
166,453
|
|
|
211,138
|
|
Sales of marketable securities
|
11,566
|
|
|
47,109
|
|
Purchases of property and equipment
|
(37,878
|
)
|
|
(26,701
|
)
|
Issuance of note receivable
|
—
|
|
|
(25,000
|
)
|
Acquisition of businesses, net of cash acquired
|
(31,501
|
)
|
|
(76,068
|
)
|
Net cash used in investing activities
|
(94,969
|
)
|
|
(93,145
|
)
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
Payment of business acquisition liabilities
|
(5,234
|
)
|
|
(400
|
)
|
Proceeds from exercise of stock options
|
6,943
|
|
|
4,428
|
|
Net cash provided by financing activities
|
1,709
|
|
|
4,028
|
|
|
|
|
|
Effect of foreign exchange rate on cash
|
778
|
|
|
(2,324
|
)
|
|
|
|
|
Net increase in cash and cash equivalents
|
22,216
|
|
|
30,040
|
|
Cash and cash equivalents, beginning of period
|
132,639
|
|
|
60,152
|
|
Cash and cash equivalents, end of period
|
$
|
154,855
|
|
|
$
|
90,192
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
Interest paid
|
34
|
|
|
23
|
|
Income taxes paid
|
$
|
49,008
|
|
|
$
|
37,009
|
|
See accompanying notes to condensed consolidated financial statements.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) The Company
Globus Medical, Inc., together with its subsidiaries, is a medical device company focused on the design, development and commercialization of musculoskeletal solutions. We are primarily focused on implants that promote healing in patients with spine disorders but recently launched a robotic surgical navigation device and products to treat patients who have experienced orthopedic traumas. We are an engineering-driven company with a history of rapidly developing and commercializing advanced products and procedures 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
180
products and offer a product portfolio addressing a broad array of spinal pathologies, anatomies and surgical approaches.
We are headquartered in Audubon, Pennsylvania, and market and sell our products through our exclusive sales force in the United States, as well as within North, Central & South America, Europe, Asia, Africa and Australia. Our sales force consists of direct sales representatives and distributor sales representatives employed by exclusive independent distributors.
On August 29, 2017, Globus Medical announced that the Board of Directors named David M. Demski as the Company’s Chief Executive Officer, effective immediately. Mr. Demski will report to David C. Paul, the Company’s founder, Chairman of the Board, and Chief Executive Officer since its inception in 2003. Mr. Paul will remain in the role of Executive Chairman.
Mr. Demski has been a Globus Medical senior executive since 2003, serving initially as Chief Financial Officer from 2003 until 2008. In 2008, he became President and Chief Operating Officer of the Company, responsible for all of its domestic and international commercial operations, including sales, marketing, manufacturing, and finance. During Mr. Demski’s tenure as President and COO, Globus Medical consistently delivered above-category growth and profit margins, culminating in the Company’s successful initial public offering in 2012. In 2015, Mr. Demski became President, Emerging Technologies, and assumed responsibility for overseeing the Company’s expansion into the areas of imaging, navigation, and robotics, as well as orthopedic trauma, both of which are expected to contribute to the Company’s growth over the next decade.
Mr. Paul will continue to focus on strategic initiatives and will spend less time on day-to-day operational matters. The timing of this management change was designed to allow Mr. Paul to recover from a health condition. Mr. Paul is expected to make a full recovery over the next several months and plans to remain actively involved with the Company both during his recovery and thereafter.
The terms “the Company,” “Globus,” “we,” “us” and “our” refer to Globus Medical, Inc. and, where applicable, our consolidated subsidiaries.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(b) Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). As such, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying footnotes included in our Annual Report on Form 10-K for the year ended
December 31, 2016
.
In the opinion of management, the statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of our financial position and of the results for the
three- and nine-
month periods presented. The results of operations for any interim period are not indicative of results for the full year. Certain reclassifications have been made to the prior period statements to include amortization of intangibles and acquisition related costs within operating expenses to conform to the current year presentation. In addition, we have recast an immaterial amount from cost of goods sold to amortization of intangibles to be consistent with our presentation for the year ended December 31, 2016.
(c) Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Globus and its wholly-owned subsidiaries. All intercompany balances and transactions are eliminated in consolidation.
(d) Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates, in part, on historical experience that management believes to be reasonable under the circumstances. Actual results could differ from those estimates. Estimates and assumptions are periodically reviewed and the effects of revisions are reflected in the condensed consolidated financial statements in the period they are determined to be necessary.
Significant areas that require management’s estimates include intangible assets, contingent payment liabilities, allowance for doubtful accounts, stock-based compensation, write-down for excess and obsolete inventory, useful lives of assets, the outcome of litigation, recoverability of intangible assets and income taxes. We are subject to risks and uncertainties due to changes in the healthcare environment, regulatory oversight, competition, and legislation that may cause actual results to differ from estimated results.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(e) Restricted Cash
In December 2014, we set aside cash for the payment of a portion of the DePuy Synthes and Bianco litigations. We classified this cash as restricted, as the amount was placed in escrow to be used for payment of the litigation obligations, should we not be successful with our appeals. On January 13, 2016, we settled our litigation with DePuy Synthes and made a payment of
$7.9 million
and recovered approximately
$8.4 million
related to that settlement shortly thereafter. In September 2017, we settled the Bianco matter and shortly thereafter paid
$11.5 million
related to the settlement. As of
September 30, 2017
, we have
no
restricted cash remaining. See
“Note 13. Commitments and Contingencies”
below for more details regarding these litigations.
(f) Marketable Securities
Our marketable securities include municipal bonds, corporate debt securities, commercial paper, securities of U.S. government-sponsored agencies and asset-backed securities, and are classified as available-for-sale as of
September 30, 2017
. Available-for-sale securities are recorded at fair value in both short-term and long-term marketable securities on our condensed consolidated balance sheets. The change in fair value for available-for-sale securities is recorded, net of taxes, as a component of accumulated other comprehensive income or loss on our condensed consolidated balance sheets. Premiums and discounts are recognized over the life of the related security as an adjustment to yield using the straight-line method. Realized gains or losses from the sale of our marketable securities are determined on a specific identification basis. Realized gains and losses, along with interest income and the amortization/accretion of premiums/discounts are included as a component of other income, net, on our condensed consolidated statements of income. Interest receivable is recorded as a component of prepaid expenses and other current assets on our condensed consolidated balance sheets.
We maintain a portfolio of various holdings, types and maturities, though most of the securities in our portfolio could be liquidated at minimal cost at any time. We invest in securities that meet or exceed standards as defined in our investment policy. Our policy also limits the amount of credit exposure to any one issue, issuer or type of security. We review our securities for other-than-temporary impairment at each reporting period. If an unrealized loss for any security is considered to be other-than-temporary, the loss will be recognized in our condensed consolidated statement of income in the period the determination is made.
(g) Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. The majority of our inventories are finished goods and we utilize both in-house manufacturing and third-party suppliers to source our products. We periodically evaluate the carrying value of our inventories in relation to our estimated forecast of product demand, which takes into consideration the estimated life cycle of product releases. When quantities on hand exceed estimated sales forecasts, we record a write-down for such excess inventories.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(h) Property and Equipment
Purchases of property and equipment included in accounts payable were
$4.5 million
and
$3.7 million
during the
nine
months ended
September 30, 2017
and
September 30, 2016
, respectively.
(i) Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, product delivery has occurred, pricing is fixed or determinable, and collection is reasonably assured. A significant portion of our revenue is generated from consigned inventory maintained at hospitals or with sales representatives. For these products, revenue is recognized at the time the product is used or implanted. For all other transactions, we recognize revenue when title to the goods and risk of loss transfer to customers, provided there are no remaining performance obligations that will affect the customer’s final acceptance of the sale. Our policy is to classify shipping and handling costs billed to customers as sales and the related expenses as cost of goods sold.
(j) Recently Issued Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09”)
.
ASU 2014-09 amends the guidance in former Topic 605,
Revenue Recognition
, and most other existing revenue guidances in US GAAP. Under the new standard, an entity will recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the payment to which the entity expects to be entitled in exchange for those goods or services and provide additional disclosures. As amended, the effective date for public entities is annual reporting periods beginning after December 15, 2017 and interim periods therein. Early adoption is not permitted prior to the first quarter of 2017. We will adopt ASU 2014-09 effective January 1, 2018 using the modified retrospective method (retrospective application with the cumulative effect of initially applying the guidance recognized at the date of initial application). This update will not have a material impact on our financial position or results of operations. The updated guidance will require additional disclosure regarding our revenue transactions.
In July 2015, the FASB released ASU 2015-11,
Simplifying the Measurement of Inventory (Topic 330)
(“ASU 2015-11”) as part of the FASB’s Simplification Initiative. This update is intended to more closely align the measurement of inventory under GAAP with the measurement of inventory under International Financial Reporting Standards. Within the scope of the update, an entity is required to measure inventory at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonable and predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for all public entities for fiscal years beginning after December 31, 2016, including interim reporting periods within that period, and is required to be applied prospectively, with early adoption permitted. We adopted ASU 2015-11 on January 1, 2017. This update does not have a material impact on our financial position, results of operations, and disclosures.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In February 2016, the FASB released ASU 2016-02,
Leases (Topic 842)
(“ASU 2016-02”). Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all leases with terms greater than 12 months, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, and requires the use of the modified retrospective method, which will require adjustment to all comparative periods presented in the consolidated financial statements. We are currently evaluating the impact of this update on our financial position, results of operations, and disclosures.
In March 2016, the FASB released ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”), which will simplify the income tax consequences, accounting for forfeitures, and classification on the statements of cash flows. ASU 2016-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, and is required to be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area covered in this update. We adopted ASU 2016-09 effective January 1, 2017.
ASU 2016-09 requires that all excess tax benefits and tax deficiencies are recognized as income tax expense or benefit in the income statement as discrete items in the reporting period in which they occur. The adoption of this provision is required to be applied using a prospective transition method, therefore prior period net income has not been adjusted. Under the provisions of the new guidance, we elected to account for forfeitures as they occur, and using the required modified retrospective adoption, the impact to retained earnings was immaterial. We elected to apply the presentation requirements for cash flows related to excess tax benefits retrospectively to all periods presented. As a result of this retrospective application, our cash provided by operating activities increased by
$1.5 million
for the
nine
months ended
September 30, 2016
, and our cash provided by financing activities decreased by
$1.5 million
for the
nine
months ended
September 30, 2016
.
In October 2016, the FASB released ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
(“ASU 2016-16”). ASU 2016-16 removes the current exception in US GAAP prohibiting entities from recognizing current and deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. This update is effective for public entities for annual reporting periods beginning after December 15, 2017. Early adoption is permitted and should be in the first interim period if an entity issues interim financial statements. We are currently evaluating the impact of this new accounting standard on our financial position, results of operations, and disclosures.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In November 2016, the FASB released ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
(“ASU 2016-18”), which requires that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. Transfers between cash and cash equivalents and restricted cash and restricted cash equivalents will no longer be presented in the statement of cash flows. The amendments in this update should be applied using a retrospective transition method to each period presented. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years; early adoption is permitted, including adoption in an interim period. We will adopt ASU 2016-18 effective January 1, 2018, and this update will not have a material impact on our financial position, results of operations or cash flows. The updated guidance will require additional disclosure regarding the total of our cash and restricted cash.
In January 2017, the FASB released ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
(“ASU 2017-01”), which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The amendments in this ASU should be applied prospectively and are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early application permitted. No disclosures are required at transition. We will adopt ASU 2017-01 effective January 1, 2018, and this update will not have a material impact on our financial position, results of operations or cash flows.
In January 2017, the FASB released ASU 2017-04,
Intangibles - Goodwill and Other (Topic 805): Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”), which eliminates the Step 2 calculation for the implied fair value of goodwill to measure a goodwill impairment charge. Under the updated standard, an entity will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. ASU 2017-04 does not change the guidance on completing Step 1 of the goodwill impairment test and still allows an entity to perform the optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. This update is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted for any impairment test performed on testing dates after January 1, 2017. We are currently evaluating the timing and impact of the new standard on our financial position, results of operations and disclosures.
In May 2017, the FASB released ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
(“ASU 2017-09”), which clarifies the changes to terms or conditions of a share based payment award that requires application of modification accounting under Topic 718. A change to an award should be accounted for as a modification unless the fair value of the modified award is the same as the original award, the vesting conditions do not change, and the classification as an equity or liability instrument does not change. This update is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. Early application is permitted and prospective application is required for awards modified on or after the adoption date. We will adopt ASU 2017-09 effective January 1, 2018, and this update will not have a material impact on our financial position, results of operations or disclosures.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 2. ACQUISITIONS
KB Medical
On June 13, 2017, we acquired KB Medical SA (“KB Medical”), a Swiss-based robotic developer, to further bolster our development team, intellectual property, and product portfolio. We have included the financial results of KB Medical in our condensed consolidated financial statements from the acquisition date, and the results from KB Medical were not material to our condensed consolidated financial statements. The fair value of the consideration for this acquisition was approximately
$31.5 million
of cash paid at closing, plus a potential
$4.9 million
contingent consideration payment based on product development milestones. We recorded
$25.0 million
of identifiable net assets, based on their estimated fair values, and goodwill of
$11.4 million
.
None
of the goodwill is expected to be deductible for tax purposes.
As of
September 30, 2017
, the maximum aggregate undiscounted amount of contingent consideration potentially payable related to this acquisition is
$5.2 million
.
The preliminary fair value estimates for the assets acquired and liabilities assumed for this acquisition are based upon preliminary calculations and valuations, and our estimates and assumptions for this acquisition are subject to change as we obtain additional information during the respective measurement period. The primary areas of those preliminary estimates that are not yet finalized relate to certain tangible assets and liabilities acquired, including the valuation of the contingent consideration, identifiable intangible assets, and goodwill. We expect to complete our final purchase price allocations in late 2017.
Alphatec International
On September 1, 2016 (the “Closing Date”), Globus Medical Ireland, Ltd. (“Globus Ireland”), a private limited company existing under the laws of Ireland and an indirect wholly-owned subsidiary of Globus, acquired from Alphatec Holdings, Inc., a Delaware corporation (“Alphatec”) (i) substantially all of the assets and certain liabilities of Alphatec’s subsidiaries in the United Kingdom, Italy, the Netherlands, Germany and Hong Kong and (ii) all of the outstanding equity interests of Alphatec’s subsidiaries in Japan, Brazil, China, Singapore and Australia (“Alphatec International”) pursuant to a Purchase and Sale Agreement entered into on July 25, 2016 (the “Purchase Agreement” and the “Acquisition”). The aggregate consideration for the transaction was approximately
$77.8 million
in cash, subject to customary adjustment after closing for certain working capital items as provided in the Purchase Agreement.
In addition, in connection with the Acquisition, Globus Ireland entered into a supply agreement with Alphatec, pursuant to which Alphatec will supply products to Globus Ireland and its newly-acquired subsidiaries for up to five years after the Closing Date.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
We accounted for the acquisition under the purchase method of accounting, and as a result, recorded goodwill of approximately
$16.5 million
. The results of operations of Alphatec International have been included in our results of operations from the date of acquisition. Amounts recognized for assets acquired and liabilities assumed are based on our purchase price allocations and on certain management judgments. These allocations are based on an analysis of the estimated fair values of assets acquired and liabilities assumed, including identifiable tangible assets, and estimates of the useful lives of tangible assets. We completed our final purchase price allocations during August 2017. The final valuation adjustments were due primarily to reclassifications for inventory, instruments and cases purchased but not yet received at the closing date, reclassification of fair value adjustments to accrued expenses for inventory, reallocation of the purchase price and certain intangible assets between international jurisdictions, and tax adjustments related to inventory and intangibles. Based on our purchase price allocations, we believe that an immaterial amount of goodwill from the Acquisition is deductible for tax purposes.
As of
September 30, 2017
, we recorded the following purchase price allocation for the identifiable tangible and intangible assets and liabilities of Alphatec International:
|
|
|
|
|
(In thousands)
|
|
Consideration:
|
|
Cash paid at closing
|
$
|
80,000
|
|
Net working capital adjustment due
|
(2,217
|
)
|
Fair value of consideration
|
$
|
77,783
|
|
|
|
Identifiable assets acquired and liabilities assumed:
|
|
Cash acquired
|
$
|
4,010
|
|
Accounts receivable
|
12,352
|
|
Inventory
|
11,002
|
|
Customer relationships
|
38,800
|
|
Property and equipment
|
6,157
|
|
Deferred tax assets
|
1,446
|
|
Other assets
|
8,698
|
|
Accounts payable and accrued expenses
|
(11,847
|
)
|
Deferred tax liabilities
|
(9,359
|
)
|
Total identifiable net assets
|
61,259
|
|
|
|
Goodwill
|
16,524
|
|
Total allocated purchase price
|
$
|
77,783
|
|
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following unaudited pro forma information is based on our historical data and our assumptions for consolidated results of operations, and gives effect to the Acquisition of Alphatec International as if it had occurred on January 1, 2015. These unaudited pro forma results include adjustments having a continuing impact on our condensed consolidated statements of income. These adjustments primarily consist of: adjustments to the fair value of inventory, adjustments to depreciation for the fair value and depreciable lives of property and equipment, amortization of intangibles, interest income and adjustments to tax expense based on condensed consolidated pro forma results. These results have been prepared using assumptions our management believes are reasonable, are not necessarily indicative of the actual results that would have occurred if the acquisition had occurred on January 1, 2015, and are not necessarily indicative of the results that may be achieved in the future, including but not limited to operating synergies that we may realize as a result of the Acquisition.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(pro forma, in thousands, except per share amounts)
|
September 30,
2016
|
|
September 30,
2016
|
Net sales
|
$
|
143,577
|
|
|
$
|
444,109
|
|
Net income
|
27,393
|
|
|
84,101
|
|
|
|
|
|
Earnings per share:
|
|
|
|
Basic
|
$
|
0.29
|
|
|
$
|
0.89
|
|
Diluted
|
$
|
0.28
|
|
|
$
|
0.88
|
|
NOTE 3. NOTE RECEIVABLE
On September 1, 2016, in connection with the Acquisition, we entered into a Credit, Security and Guaranty Agreement (the “Credit Agreement”) with Alphatec and Alphatec Spine, Inc. (“Alphatec Spine” and together with Alphatec, the “Alphatec Borrowers”), pursuant to which we made available to the Alphatec Borrowers a senior secured term loan facility in an amount not to exceed
$30.0 million
. On the Closing Date, we made an initial loan of
$25.0 million
and the Alphatec Borrowers issued a note for such amount to us. On December 20, 2016, the remaining
$5.0 million
was drawn by the Alphatec Borrowers and added to the note.
The Credit Agreement contains customary operational and financial covenants, including a fixed charge coverage ratio to be maintained by the Alphatec Borrowers, and provides us with a security interest in all of the assets of the Alphatec Borrowers. The Credit Agreement has a scheduled maturity date five years from the Closing Date. The term loan interest rate for the first two years following the Closing Date is priced at the London Interbank Offered Rate (“
LIBOR
”) plus
8.0%
, subject to a
9.5%
floor. The term loan interest rate thereafter will be LIBOR plus
13.0%
.
On March 30, 2017, we entered into a First Amendment to the Credit Agreement which modified the time periods during which the Alphatec Borrowers are required to calculate the fixed charge coverage ratio in order to determine compliance with the Credit Agreement.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Interest accrues on the note receivable based on the contractual terms of the note. We consider a note to be impaired when, based on current information or factors (such as payment history, value of collateral and assessment of the borrower’s current creditworthiness), it is probable that the principal and interest payments will not be collected according to the note agreement. As of
September 30, 2017
, we do not consider this note to be impaired. We believe that the note’s carrying value approximates its fair value.
NOTE 4. INTANGIBLE ASSETS
A summary of intangible assets is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
(In thousands)
|
Weighted
Average Amortization
Period
(in years)
|
|
Gross
Carrying
Amount
|
|
Accumulated Amortization
|
|
Intangible
Assets, net
|
In-process research & development
|
—
|
|
|
$
|
25,351
|
|
|
$
|
—
|
|
|
$
|
25,351
|
|
Supplier network
|
10.0
|
|
4,000
|
|
|
(1,167
|
)
|
|
2,833
|
|
Customer relationships & other intangibles
|
6.8
|
|
41,415
|
|
|
(10,095
|
)
|
|
31,320
|
|
Developed Technology
|
14.8
|
|
21,088
|
|
|
(260
|
)
|
|
20,828
|
|
Patents
|
16.9
|
|
8,221
|
|
|
(900
|
)
|
|
7,321
|
|
Total intangible assets
|
|
|
$
|
100,075
|
|
|
$
|
(12,422
|
)
|
|
$
|
87,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
(In thousands)
|
Weighted
Average Amortization
Period
(in years)
|
|
Gross
Carrying
Amount
|
|
Accumulated Amortization
|
|
Intangible
Assets, net
|
In-process research & development
|
—
|
|
|
$
|
20,460
|
|
|
$
|
—
|
|
|
$
|
20,460
|
|
Supplier network
|
10.0
|
|
4,000
|
|
|
(867
|
)
|
|
3,133
|
|
Customer relationships & other intangibles
|
6.8
|
|
40,308
|
|
|
(5,179
|
)
|
|
35,129
|
|
Developed Technology
|
7.0
|
|
628
|
|
|
(22
|
)
|
|
606
|
|
Patents
|
16.1
|
|
3,035
|
|
|
(657
|
)
|
|
2,378
|
|
Total intangible assets
|
|
|
$
|
68,431
|
|
|
$
|
(6,725
|
)
|
|
$
|
61,706
|
|
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 5. MARKETABLE SECURITIES
The composition of our short-term and long-term marketable securities is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
(In thousands)
|
Contractual Maturity
(in years)
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
Short-term:
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
Less than 1
|
|
$
|
64,428
|
|
|
$
|
13
|
|
|
$
|
(18
|
)
|
|
$
|
64,423
|
|
Corporate debt securities
|
Less than 1
|
|
51,368
|
|
|
10
|
|
|
(25
|
)
|
|
51,353
|
|
Commercial paper
|
Less than 1
|
|
61,651
|
|
|
4
|
|
|
(6
|
)
|
|
61,649
|
|
Securities of U.S. government-sponsored agencies
|
Less than 1
|
|
5,001
|
|
|
—
|
|
|
(20
|
)
|
|
4,981
|
|
Asset-backed securities
|
Less than 1
|
|
398
|
|
|
—
|
|
|
—
|
|
|
398
|
|
Total short-term marketable securities
|
|
|
$
|
182,846
|
|
|
$
|
27
|
|
|
$
|
(69
|
)
|
|
$
|
182,804
|
|
|
|
|
|
|
|
|
|
|
|
Long-term:
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
1-2
|
|
$
|
5,993
|
|
|
$
|
7
|
|
|
$
|
(2
|
)
|
|
$
|
5,998
|
|
Corporate debt securities
|
1-2
|
|
33,946
|
|
|
29
|
|
|
(13
|
)
|
|
33,962
|
|
Asset-backed securities
|
1-2
|
|
18,928
|
|
|
—
|
|
|
(4
|
)
|
|
18,924
|
|
Securities of U.S. government-sponsored agencies
|
1-2
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total long-term marketable securities
|
|
|
$
|
58,867
|
|
|
$
|
36
|
|
|
$
|
(19
|
)
|
|
$
|
58,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
(In thousands)
|
Contractual Maturity
(in years)
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
Short-term:
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
Less than 1
|
|
$
|
114,826
|
|
|
$
|
2
|
|
|
$
|
(88
|
)
|
|
$
|
114,740
|
|
Corporate debt securities
|
Less than 1
|
|
36,020
|
|
|
21
|
|
|
(4
|
)
|
|
36,037
|
|
Commercial paper
|
Less than 1
|
|
6,898
|
|
|
—
|
|
|
(2
|
)
|
|
6,896
|
|
Total short-term marketable securities
|
|
|
$
|
157,744
|
|
|
$
|
23
|
|
|
$
|
(94
|
)
|
|
$
|
157,673
|
|
|
|
|
|
|
|
|
|
|
|
Long-term:
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
1-2
|
|
$
|
30,207
|
|
|
$
|
—
|
|
|
$
|
(137
|
)
|
|
$
|
30,070
|
|
Corporate debt securities
|
1-2
|
|
15,278
|
|
|
9
|
|
|
(40
|
)
|
|
15,247
|
|
Asset-backed securities
|
1-2
|
|
10,146
|
|
|
6
|
|
|
(1
|
)
|
|
10,151
|
|
Securities of U.S. government-sponsored agencies
|
1-2
|
|
5,002
|
|
|
—
|
|
|
(26
|
)
|
|
4,976
|
|
Total long-term marketable securities
|
|
|
$
|
60,633
|
|
|
$
|
15
|
|
|
$
|
(204
|
)
|
|
$
|
60,444
|
|
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 6. FAIR VALUE MEASUREMENTS
Under the accounting for fair value measurements and disclosures, fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or the liability in an orderly transaction between market participants on the measurement date. Additionally, a fair value hierarchy was established that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Our assets and liabilities measured at fair value on a recurring basis are classified and disclosed in one of the following three categories:
Level 1—quoted prices (unadjusted) in active markets for identical assets and liabilities;
Level 2—observable inputs other than quoted prices in active markets for identical assets and liabilities; and
Level 3—unobservable inputs in which there is little or no market data available, which require the reporting entity to use significant unobservable inputs or valuation techniques.
The fair value of our assets and liabilities measured at fair value on a recurring basis was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
(In thousands)
|
September 30,
2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
70,713
|
|
|
$
|
—
|
|
|
$
|
70,713
|
|
|
$
|
—
|
|
Municipal bonds
|
70,421
|
|
|
—
|
|
|
70,421
|
|
|
—
|
|
Corporate debt securities
|
85,315
|
|
|
—
|
|
|
85,315
|
|
|
—
|
|
Commercial paper
|
61,649
|
|
|
—
|
|
|
61,649
|
|
|
—
|
|
Asset-backed securities
|
19,322
|
|
|
—
|
|
|
19,322
|
|
|
—
|
|
Securities of U.S. government-sponsored agencies
|
4,981
|
|
|
—
|
|
|
4,981
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Contingent consideration
|
20,521
|
|
|
—
|
|
|
—
|
|
|
20,521
|
|
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
(In thousands)
|
December 31,
2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
76,157
|
|
|
$
|
957
|
|
|
$
|
75,200
|
|
|
$
|
—
|
|
Municipal bonds
|
144,810
|
|
|
—
|
|
|
144,810
|
|
|
—
|
|
Corporate debt securities
|
51,284
|
|
|
—
|
|
|
51,284
|
|
|
—
|
|
Commercial paper
|
6,896
|
|
|
—
|
|
|
6,896
|
|
|
—
|
|
Asset-backed securities
|
10,151
|
|
|
—
|
|
|
10,151
|
|
|
—
|
|
Securities of U.S. government-sponsored agencies
|
4,976
|
|
|
—
|
|
|
4,976
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Contingent consideration
|
19,849
|
|
|
—
|
|
|
—
|
|
|
19,849
|
|
Our marketable securities are classified as Level 2 within the fair value hierarchy, as we measure their fair value using market prices for similar instruments and inputs such as actual trade data, benchmark yields, broker/dealer quotes and other similar data obtained from quoted market prices or independent pricing vendors.
Contingent consideration represents our contingent milestone, performance and revenue-sharing payment obligations related to our acquisitions and is measured at fair value, based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The valuation of contingent consideration uses assumptions we believe would be made by a market participant. We assess these estimates on an ongoing basis as additional data impacting the assumptions is obtained. The balances of the fair value of contingent consideration are recognized within business acquisition liabilities on our condensed consolidated balance sheets, and the changes in the fair value of contingent consideration are recognized within acquisition related costs in the condensed consolidated statements of income. As part of the KB Medical acquisition during the second quarter of 2017, we incurred a milestone-based contingent consideration liability.
The recurring Level 3 fair value measurements of our contingent consideration liabilities include the following significant unobservable inputs, which have not materially changed since December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30,
2017
|
|
Valuation technique
|
|
Unobservable input
|
|
Range
|
|
|
|
|
|
|
Discount rate
|
|
6.7%
|
-
|
8.5%
|
Revenue-based payments
|
|
$
|
10,985
|
|
|
Discounted cash flow
|
|
Probability of payment
|
|
87.0%
|
-
|
100.0%
|
|
|
|
|
|
|
Projected year of payment
|
|
2017
|
-
|
2029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
4.4%
|
-
|
13.5%
|
Milestone-based payments
|
|
$
|
9,536
|
|
|
Discounted cash flow
|
|
Probability of payment
|
|
100.0%
|
|
|
|
|
|
|
Projected year of payment
|
|
2017
|
-
|
2018
|
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table provides a reconciliation of the beginning and ending balances of contingent consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In thousands)
|
September 30,
2017
|
|
September 30,
2016
|
|
September 30,
2017
|
|
September 30,
2016
|
Beginning balance
|
$
|
20,339
|
|
|
$
|
22,531
|
|
|
$
|
19,849
|
|
|
$
|
26,617
|
|
Purchase price contingent consideration
|
—
|
|
|
—
|
|
|
4,871
|
|
|
—
|
|
Currency translation (gain) loss
|
(15
|
)
|
|
—
|
|
|
27
|
|
|
—
|
|
Contingent payments
|
—
|
|
|
(2
|
)
|
|
(5,234
|
)
|
|
(5,003
|
)
|
Non-cash settlement of certain contingent consideration
|
—
|
|
|
(3,110
|
)
|
|
—
|
|
|
(4,632
|
)
|
Changes in fair value of contingent consideration
|
197
|
|
|
259
|
|
|
1,008
|
|
|
2,696
|
|
Ending balance
|
$
|
20,521
|
|
|
$
|
19,678
|
|
|
$
|
20,521
|
|
|
$
|
19,678
|
|
NOTE 7. INVENTORIES
|
|
|
|
|
|
|
|
|
(In thousands)
|
September 30,
2017
|
|
December 31, 2016
|
Raw materials
|
$
|
20,454
|
|
|
$
|
13,257
|
|
Work in process
|
10,494
|
|
|
10,747
|
|
Finished goods
|
80,514
|
|
|
88,688
|
|
Total inventories
|
$
|
111,462
|
|
|
$
|
112,692
|
|
NOTE 8. ACCRUED EXPENSES
|
|
|
|
|
|
|
|
|
(In thousands)
|
September 30,
2017
|
|
December 31,
2016
|
Compensation and other employee-related costs
|
$
|
22,599
|
|
|
$
|
23,214
|
|
Legal
|
4,150
|
|
|
734
|
|
Accrued non-income taxes
|
6,071
|
|
|
6,946
|
|
Royalties
|
2,360
|
|
|
4,671
|
|
Other
|
11,429
|
|
|
10,836
|
|
Total accrued expenses
|
$
|
46,609
|
|
|
$
|
46,401
|
|
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 9. DEBT
Line of Credit
In
May 2011
, we entered into a credit agreement with Wells Fargo Bank related to a revolving credit facility that provides for borrowings up to
$50.0 million
. At our request, and with the approval of the bank, the amount of borrowings available under the revolving credit facility can be increased to
$75.0 million
. The revolving credit facility includes up to a
$25.0 million
sub-limit for letters of credit. As amended to date, the revolving credit facility expires in May 2018. Cash advances bear interest at our option either at a fluctuating rate per annum equal to the daily
LIBOR
in effect for a
one
-month period plus
0.75%
, or a fixed rate for a
one
- or
three
-month period equal to
LIBOR
plus
0.75%
. The credit agreement governing the revolving credit facility also subjects us to various restrictive covenants, including the requirement to maintain maximum consolidated leverage. The covenants also include limitations on our ability to repurchase shares, to pay cash dividends or to enter into a sale transaction. As of
September 30, 2017
, we were in compliance with all financial covenants under the credit agreement, there were
no
outstanding borrowings under the revolving credit facility and available borrowings were
$50.0 million
. We may terminate the credit agreement at any time on
ten
days’ notice without premium or penalty.
NOTE 10. EQUITY
Our amended and restated Certificate of Incorporation provides for a total of
785,000,000
authorized shares of common stock. Of the authorized number of shares of common stock,
500,000,000
shares are designated as Class A common stock (“Class A Common”),
275,000,000
shares are designated as Class B common stock (“Class B Common”) and
10,000,000
shares are designated as Class C common stock (“Class C Common”).
Our issued and outstanding common shares by Class were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Shares)
|
Class A Common
|
|
Class B Common
|
|
Class C Common
|
|
Total
|
September 30, 2017
|
72,488,894
|
|
|
23,877,556
|
|
|
—
|
|
96,366,450
|
|
December 31, 2016
|
72,052,360
|
|
|
23,877,556
|
|
|
—
|
|
95,929,916
|
|
The following table summarizes changes in total equity:
|
|
|
|
|
|
Nine Months Ended
|
(In thousands)
|
September 30,
2017
|
Total equity, beginning of period
|
$
|
832,078
|
|
Net income
|
82,972
|
|
Stock-based compensation cost
|
10,807
|
|
Exercise of stock options
|
6,943
|
|
Other comprehensive income
|
2,464
|
|
Total equity, end of period
|
$
|
935,264
|
|
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The tables below present the changes in each component of accumulated other comprehensive income/(loss), including current period other comprehensive income/(loss) and reclassifications out of accumulated other comprehensive income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Unrealized gain/(loss) on marketable securities, net of tax
|
|
Foreign currency translation adjustments
|
|
Accumulated other comprehensive loss
|
Accumulated other comprehensive loss, net of tax, at December 31, 2016
|
$
|
(167
|
)
|
|
$
|
(8,475
|
)
|
|
$
|
(8,642
|
)
|
Other comprehensive income before reclassifications
|
|
|
152
|
|
|
2,314
|
|
|
2,466
|
|
Amounts reclassified from accumulated other comprehensive income, net of tax
|
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
Other comprehensive income, net of tax
|
|
|
150
|
|
|
2,314
|
|
|
2,464
|
|
Accumulated other comprehensive loss, net of tax, at September 30, 2017
|
$
|
(17
|
)
|
|
$
|
(6,161
|
)
|
|
$
|
(6,178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Unrealized gain/(loss) on marketable securities, net of tax
|
|
Foreign currency translation adjustments
|
|
Accumulated other comprehensive loss
|
Accumulated other comprehensive loss, net of tax, at December 31, 2015
|
$
|
(119
|
)
|
|
$
|
(1,839
|
)
|
|
$
|
(1,958
|
)
|
Other comprehensive income before reclassifications
|
|
|
95
|
|
|
79
|
|
|
174
|
|
Amounts reclassified from accumulated other comprehensive income, net of tax
|
|
24
|
|
|
—
|
|
|
24
|
|
Other comprehensive income, net of tax
|
|
|
119
|
|
|
79
|
|
|
198
|
|
Accumulated other comprehensive loss, net of tax, at September 30, 2016
|
$
|
—
|
|
|
$
|
(1,760
|
)
|
|
$
|
(1,760
|
)
|
NOTE 11. STOCK-BASED COMPENSATION
We have
three
stock plans: our Amended and Restated 2003 Stock Plan, our 2008 Stock Plan, and our 2012 Equity Incentive Plan (the “2012 Plan”). The 2012 Plan is the only remaining active stock plan. The purpose of these stock plans was, and the 2012 Plan is, to provide incentive to employees, directors, and consultants of Globus. The Plans are administered by the Board of Directors of Globus (the “Board”) or its delegates. The number, type of option, exercise price, and vesting terms are determined by the Board or its delegates in accordance with the terms of the Plans. The options granted expire on a date specified by the Board, but generally not more than
ten
years from the grant date. Option grants to employees generally vest in varying installments over a
four
-year period.
The 2012 Plan was approved by our Board in March 2012, and by our stockholders in June 2012. Under the 2012 Plan, the aggregate number of shares of Class A Common stock that may be issued subject to options and other awards is equal to the sum of (i)
3,076,923
shares, (ii) any shares available for issuance under the 2008 Plan as of March 13, 2012, (iii) any shares underlying awards outstanding under the 2008 Plan as of March 13, 2012 that, on or after that date, are forfeited, terminated, expired or lapse for any reason, or are settled for cash without delivery of shares and (iv) starting January 1, 2013, an annual increase in the number of shares available under the 2012 Plan equal to up to
3%
of the number of shares of our common and preferred stock outstanding at the end of the previous year, as determined by our Board. The number of shares that may be issued or transferred pursuant to incentive stock options under the 2012 Plan is limited to
10,769,230
shares. The shares of Class A Common stock issuable under the 2012 Plan include authorized but unissued shares, treasury shares or shares of common stock purchased on the open market.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
As of
September 30, 2017
, pursuant to the 2012 Plan, there were
14,889,882
shares of Class A Common stock reserved and
5,786,178
shares of Class A Common stock available for future grants.
The weighted average grant date fair value per share of the options awarded to employees were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
2017
|
|
September 30,
2016
|
|
September 30,
2017
|
|
September 30,
2016
|
Weighted average grant date fair value per share
|
$
|
9.66
|
|
|
$
|
7.40
|
|
|
$
|
8.81
|
|
|
$
|
7.76
|
|
Stock option activity during the
nine
months ended
September 30, 2017
is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Shares (thousands)
|
|
Weighted average exercise price
|
|
Weighted average remaining contractual life (years)
|
|
Aggregate intrinsic value (thousands)
|
Outstanding at December 31, 2016
|
7,741
|
|
|
$
|
21.08
|
|
|
|
|
|
Granted
|
2,223
|
|
|
27.62
|
|
|
|
|
|
Exercised
|
(437
|
)
|
|
16.07
|
|
|
|
|
|
Forfeited
|
(410
|
)
|
|
23.79
|
|
|
|
|
|
Outstanding at September 30, 2017
|
9,117
|
|
|
$
|
22.79
|
|
|
7.5
|
|
$
|
63,708
|
|
Exercisable at September 30, 2017
|
4,269
|
|
|
$
|
19.46
|
|
|
6.1
|
|
$
|
43,821
|
|
Expected to vest at September 30, 2017
|
4,849
|
|
|
$
|
25.73
|
|
|
8.7
|
|
$
|
19,887
|
|
The intrinsic value of stock options exercised and the compensation cost related to stock options granted to employees and non-employees under our stock plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In thousands)
|
September 30,
2017
|
|
September 30,
2016
|
|
September 30,
2017
|
|
September 30,
2016
|
Intrinsic value of stock options exercised
|
$
|
1,264
|
|
|
$
|
2,760
|
|
|
$
|
6,024
|
|
|
$
|
7,386
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
$
|
3,596
|
|
|
$
|
2,747
|
|
|
$
|
10,659
|
|
|
$
|
8,437
|
|
Net stock-based compensation capitalized into inventory
|
50
|
|
|
65
|
|
|
148
|
|
|
205
|
|
Total stock-based compensation cost
|
$
|
3,646
|
|
|
$
|
2,812
|
|
|
$
|
10,807
|
|
|
$
|
8,642
|
|
As of
September 30, 2017
, there was
$34.5 million
of unrecognized compensation expense related to unvested employee stock options that are expected to vest over a weighted average period of
three
years.
NOTE 12. INCOME TAXES
In computing our income tax provision, we make certain estimates and management judgments, such as estimated annual taxable income or loss, annual effective tax rate, the nature and timing of permanent and temporary differences between taxable income for financial reporting and tax reporting, and the recoverability of deferred tax assets. Our estimates and assumptions may change as new events occur, additional information is obtained, or as the tax environment changes. Should facts and circumstances change during a quarter causing a material change to the estimated effective income tax rate, a cumulative adjustment is recorded.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table provides a summary of our effective tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
2017
|
|
September 30,
2016
|
|
September 30,
2017
|
|
September 30,
2016
|
Effective income tax rate
|
31.5
|
%
|
|
32.5
|
%
|
|
30.5
|
%
|
|
33.7
|
%
|
The period over period change in the effective income tax rate for the three and nine months ended
September 30, 2017
is primarily driven by a benefit derived from the recording of historical foreign tax credits and the adoption of ASU 2016-09 in the period ended September 30, 2017. Additionally for the nine months ended September 30, 2016, a one-time charge from the reorganization of our domestic legal structure impacted the overall rate.
NOTE 13. COMMITMENTS AND CONTINGENCIES
We are involved in a number of proceedings, legal actions, and claims. Such matters are subject to many uncertainties, and the outcomes of these matters are not within our control and may not be known for prolonged periods of time. In some actions, the claimants seek damages, as well as other relief, including injunctions prohibiting us from engaging in certain activities, which, if granted, could require significant expenditures and/or result in lost revenues. We record a liability in the condensed consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded. While it is not possible to predict the outcome for most of the matters discussed, we believe it is possible that costs associated with them could have a material adverse impact on our condensed consolidated earnings, financial position or cash flows.
N-Spine, Synthes and DePuy Synthes Litigation
In April 2010, N-Spine, Inc. and Synthes USA Sales, LLC filed suit against us in the U.S. District Court for the District of Delaware for patent infringement. N-Spine, the patent owner, and Synthes USA, a licensee of the subject patent, alleged that we infringed
one
or more claims of the patent by making, using, offering for sale or selling our TRANSITION
®
stabilization system product. This matter was one of the
four
patent infringement lawsuits concerning spinal implant technologies between Globus Medical, Inc. and DePuy Synthes settled on January 13, 2016 for
$7.9 million
.
In a related matter, on January 8, 2014, DePuy Synthes Products, LLC (“DePuy Synthes”) filed suit against us in the U.S. District Court for the District of Delaware for patent infringement. DePuy Synthes alleged that we infringed one or more claims of the asserted patent by making, using, offering for sale or selling our TRANSITION
®
stabilization system product. This matter was one of the four patent infringement lawsuits concerning spinal implant technologies between Globus Medical, Inc. and DePuy Synthes settled on January 13, 2016 for
$7.9 million
.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Synthes USA, LLC, Synthes USA Products, LLC and Synthes USA Sales, LLC Litigation
In July 2011, Synthes USA, LLC, Synthes USA Products, LLC and Synthes USA Sales, LLC filed suit against us in the U.S. District Court for the District of Delaware for patent infringement. Synthes USA LLC, the patent owner, Synthes USA Products, LLC, a licensee to manufacture products of the subject patents, and Synthes USA Sales LLC, a licensee to sell products of the subject patents, alleged that we infringed
one
or more claims of
three
patents by making, using, offering for sale or selling our COALITION
®
, INDEPENDENCE
®
and INTERCONTINENTAL
®
products. This matter was one of the four patent infringement lawsuits concerning spinal implant technologies between Globus Medical, Inc. and DePuy Synthes settled on January 13, 2016 for
$7.9 million
.
L5 Litigation
In December 2009, we filed suit in the Court of Common Pleas of Montgomery County, Pennsylvania against our former exclusive independent distributor L5 Surgical, LLC and its principals, seeking an injunction and declaratory judgment concerning certain restrictive covenants made to L5 by its sales representatives. L5 brought counterclaims against us alleging tortious interference, unfair competition and conspiracy. The injunction phase was resolved in September 2010, and this matter is now in the pre-trial phase of litigation on the underlying damages claims. We intend to defend our rights vigorously. The probable outcome of this litigation cannot be determined, nor can we estimate a range of potential loss. Therefore, in accordance with authoritative guidance on the evaluation of loss contingencies, we have not recorded an accrual related to this litigation.
Bianco Litigation
On March 21, 2012, Sabatino Bianco filed suit against us in the Federal District Court for the Eastern District of Texas claiming that we misappropriated his trade secret and confidential information and improperly utilized it in developing our CALIBER
®
product. Bianco alleged that we engaged in misappropriation of trade secrets, breach of contract, unfair competition, fraud and theft. On October 1, 2013, Bianco amended his complaint to claim that his trade secrets and confidential information were also used improperly in developing our RISE
®
and CALIBER-L
®
products.
On January 17, 2014, the jury in this case returned a verdict in favor of Bianco on a claim of misappropriation of trade secret and awarded past damages of
$4.3 million
. We accrued the damages amount of
$4.3 million
as of December 31, 2013. On July 2, 2014, the court awarded Bianco an ongoing royalty of
5%
of the net sales made by the Company between January 18, 2014 and June 30, 2022 of the CALIBER
®
, CALIBER-L
®
, and RISE
®
products, or products that are not colorably different from those products. The court entered final judgment on the jury verdict on July 17, 2014. On October 19, 2015, the United States Federal Circuit Court of Appeals affirmed the judgment without opinion. On March 22, 2016, we filed a Petition for a Writ of Certiorari with the United States Supreme Court and on June 20, 2016 the Writ was denied. On September 13, 2017, we settled this matter with Bianco for
$11.5 million
in cash, which resulted in the reversal of a previously recorded accrual of
$2.5 million
and the recording of
$9.0 million
in other assets that will be amortized through June 30, 2022, as a component of cost of goods sold.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Bonutti Skeletal Innovations, LLC Litigation
On November 19, 2014, Bonutti Skeletal Innovations, LLC (“Bonutti Skeletal”) filed suit against us in the U.S. District Court for the Eastern District of Pennsylvania for patent infringement. Bonutti Skeletal, a non-practicing entity, alleged that Globus willfully infringed
one
or more claims of
six
patents by making, using, offering for sale or selling the CALIBER
®
, CALIBER
®
-L, COALITION
®
, CONTINENTAL
®
, FORGE
®
, FORTIFY
®
, INDEPENDENCE
®
, INTERCONTINENTAL
®
, MONUMENT
®
, NIKO
®
, RISE
®
, SIGNATURE
®
, SUSTAIN
®
, and TRANSCONTINENTAL
®
products. Globus Medical, Inc. and Bonutti Skeletal settled this matter on June 9, 2016.
Flexuspine, Inc. Litigation
On March 11, 2015, Flexuspine, Inc. filed suit against us in the U.S. District Court for the Eastern District of Texas for patent infringement. Flexuspine, Inc. alleged that Globus willfully infringed
one
or more claims of
five
patents by making, using, offering for sale or selling the CALIBER
®
, CALIBER
®
-L, and ALTERA
®
products. On August 19, 2016, a jury returned a verdict in our favor finding no infringement of the asserted patents by the CALIBER
®
, CALIBER
®
-L, and ALTERA
®
products. On November 1, 2016, plaintiff filed a notice of appeal to the United States Court of Appeals for the Federal Circuit.
Silverstein Litigation
On September 28, 2015, a putative securities class action lawsuit was filed against us and certain of our officers in the U.S. District Court for the Eastern District of Pennsylvania. Plaintiff in the lawsuit purported to represent a class of our stockholders who purchased shares between February 26, 2014 and August 5, 2014. The complaint purported to assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and sought damages in an unspecified amount, attorney’s fees and other relief. This matter was dismissed with prejudice on August 26, 2016. On September 9, 2016, plaintiff’s motion for reconsideration was denied, and on September 13, 2016 plaintiff filed an appeal in the United States Court of Appeals for the Third Circuit. On August 23, 2017, the Third Circuit affirmed the trial court’s dismissal of this matter with prejudice, and on September 20, 2017, plaintiff’s petition for rehearing was denied.
In addition, we are subject to legal proceedings arising in the ordinary course of business.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 14. SEGMENT AND GEOGRAPHIC INFORMATION
Operating segments are defined as components of an enterprise for which separate discrete financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. We globally manage the business within
one
reportable segment. Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance. Products are sold principally in the United States.
The following table represents total sales by geographic area, based on the location of the customer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In thousands)
|
September 30,
2017
|
|
September 30,
2016
|
|
September 30,
2017
|
|
September 30,
2016
|
United States
|
$
|
125,933
|
|
|
$
|
120,473
|
|
|
$
|
381,870
|
|
|
$
|
372,749
|
|
International
|
25,811
|
|
|
15,178
|
|
|
78,073
|
|
|
39,655
|
|
Total sales
|
$
|
151,744
|
|
|
$
|
135,651
|
|
|
$
|
459,943
|
|
|
$
|
412,404
|
|
We classify our products into
two
categories: innovative fusion products and disruptive technology products. The following table represents total sales by product category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In thousands)
|
September 30,
2017
|
|
September 30,
2016
|
|
September 30,
2017
|
|
September 30,
2016
|
Innovative Fusion
|
$
|
80,202
|
|
|
$
|
68,498
|
|
|
$
|
241,940
|
|
|
$
|
207,985
|
|
Disruptive Technology
|
71,542
|
|
|
67,153
|
|
|
218,003
|
|
|
204,419
|
|
Total sales
|
$
|
151,744
|
|
|
$
|
135,651
|
|
|
$
|
459,943
|
|
|
$
|
412,404
|
|