Musculoskeletal implant manufacturer, Globus Medical Inc. GMED, reported adjusted earnings per share ("EPS") of 30 cents in the fourth quarter of 2014, beating the Zacks Consensus Estimate by 4 cents. Adjusted EPS was also 20% higher than the year-ago quarter.
Globus Medical also announced an agreement to acquire Branch Medical Group – a third-party manufacturer of high precision medical devices.
However, following the earnings release, share price of Globus Medical fell by nearly 3% to close at $24.28 on Feb 27.
Quarter Details
Sales amounted to $129 million, up nearly 12% from the year-ago quarter, and in line with the Zacks Consensus Estimate.
Reported sales in the fourth quarter were marginally higher than the preliminary figure of $128.5 million provided by the company. Sales from the U.S. increased 4.5% on a year-over-year basis, while internationally, sales grew 4.8%.
Gross margin contracted 110 basis points (bps) on a year-over-year basis to 75.7%. The contraction, as per management, was due to certain year-end adjustments.
Research and development (R&D) expenses, as percentage of sales, expanded 90 bps from the year-ago quarter. The increase was primarily due to higher expenses associated with the company’s robotic division. Globus Medical also made certain investments in its research department which led to the rise in R&D expenses.
On the other hand, selling, general and administrative (S&A) expenses, as percentage of sales, contracted 270 bps year over year, on the back of improved SG&A performance of Globus Medical’s oUS and Algea divisions.
Total operating expenses, as percentage of sales, contracted 420 bps from the year-ago quarter to nearly 45%.
Operating margin, as a result, expanded 330 bps on a year-over-year basis.
Financial Outlook
Cash and cash equivalents, as of Dec 31, 2014, was $82.3 million, as compared with $169.4 million as of Sep 30, 2014. Free cash flow for the fourth quarter amounted to $16.2 million, as compared to $32.2 million for the third quarter of 2014.
Guidance
Globus Medical reiterated its guidance for full-year 2015. For 2015, the company expects sales to gross $510 million. Likewise, earnings are expected to be approximately $1.01 per share.
Management expects adjusted EBITDA margins and EPS to remain under pressure due to increased investments.
Our Take
Globus Medical reported a decent fourth quarter, with a bottom-line beat and sales in line with the Zacks Consensus Estimate.
We feel the Branch Medical acquisition will be accretive to the company in the long run. Management expects this acquisition, once successfully completed, to contribute 3–4 cents to EPS in full year 2016.
We are also impressed with the year-over-year top-line growth, which may be primarily attributed to the introduction of innovative products and the expansion of sales footprint.
The acquisition of Transplant Technologies of Texas ("TTOT") has also been a key development for Globus Medical. Notably, the acquisition marks the company’s largest buyout activity to date. The takeover is already allowing Globus Medical to expand business in regenerative biologics. Moreover, it is positioning the company better in existing allograft markets. We expect significant synergies from the TTOT transaction in the long term as well.
However, Globus Medical intends to increase its production capacity this year following the acquisition of TTOT. Also, the company is looking to make some vital investments for accelerated commercialization of its robotic division. We feel these investments might weigh on margins, which may be deemed a weak spot for Globus Medical in 2015.
Zacks Rank
Currently, Globus Medical carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the medical sector are Affymetrix AFFX, Luminex LMNX and Abaxis ABAX. All the three stocks sport a Zacks Rank #1 (Strong Buy).
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