K2M Group Holdings’ Sales Jumped 9 Percent in 2017

2017 proved to be a very profitable year for K2M Group Holdings Inc. Full-year revenue jumped 9 percent to $258 million and domestic proceeds rose 9 percent as well (to $197.3 million), according to the company’s latest financial report. U.S. complex spine sales grew 8 percent over 2016, while U.S. minimally invasive surgery (MIS) revenue expanded 16 percent year-over-year. In addition, U.S. degenerative sales grew 8 percent in 2017 and international revenue of $60.7 million was up 9 percent (10 percent on a constant currency basis).

Net loss for the year ended Dec. 31, 2017, was $37.1 million, compared to a net loss of $41.7 million in the prior year. Adjusted EBITDA loss in 2017 was $700,000, compared to adjusted EBITDA of $1.4 million in the prior year.

As of Dec. 31, 2017, K2M had cash and cash equivalents of $24 million as compared to $45.5 million as of Dec. 31, 2016. The company reported working capital of $99.6 million compared to $115.9 million the previous year.

“Our financial results for calendar year 2017 reflect total revenue growth above the high-end of our guidance range,” K2M Chairman, President, and CEO Eric Major said. “We delivered approximately 9 percent growth in the United States in 2017—well above-market growth rates—driven by solid execution against our strategic goal of increasing market share by introducing new and innovative spinal implant solutions and expanding our distribution footprint. We have supplemented this organic growth activity with exciting product introductions in both the complex spine and degenerative categories. Looking out to 2018, we are excited about the opportunity of our first-of-its-kind MOJAVE PL 3D Expandable Interbody System featuring Lamellar 3D Titanium Technology and our YUKON OCT Spinal System that can be used with the PALO ALTO Cervical Static Corpectomy Cage System, the first and only static corpectomy cage in the world to receive a cervical 510(k) clearance. We also announced an important strategic collaboration with Brainlab that we believe will represent additional implant sales opportunities in the second half of 2018. Our Brainlab collaboration will complement our recent launches of the BACS platform and the EVERESTMinimally Invasive XT Spinal System.”

Total revenue for the fourth quarter of 2017 increased $6 million, or 9.7 percent, to $67.8 million, compared to $61.8 million for the fourth quarter of 2016. Total revenue increased 9 percent year-over-year on a constant currency basis. The increase in revenue was primarily driven by higher sales volume from domestic new surgeon users and newer product offerings, and increased set investments by K2M’s distribution partners in Australia and Denmark.

U.S. revenue increased $4.2 million, or 8.8 percent in the fourth quarter to $51.9 million, and international revenue increased $1.8 million, or 12.9 percent to $15.9 million. Fourth quarter 2017 international revenue increased 10 percent year-over-year on a constant currency basis. Foreign currency exchange positively impacted fourth quarter international revenue by $400,000, representing approximately 73 basis points of 2017 international growth over 2016.

By procedure category, U.S. revenue in the company’s complex spine, MIS and degenerative categories represented 38.6 percent, 17.2 percent and 44.2 percent of U.S. revenue, respectively, for the three months ended Dec. 31, 2017.

Gross profit for the fourth quarter of 2017 increased 13.6 percent to $43.6 million, compared to $38.4 million for the fourth quarter of 2016. Gross margin was 64.3 percent for the fourth quarter of 2017, compared to 62.1 percent for the prior year period. Gross profit includes amortization expense on investments in surgical instruments of $3.6 million, or 5.3 percent of sales, compared to $3.6 million, or 5.8 percent of sales, for the comparable period in 2016.

Operating expenses for the fourth quarter of 2017 increased $4.7 million, or 9.9 percent, to $52.5 million, compared to $47.7 million for the fourth quarter of 2016. The increase in operating expenses was driven primarily by a $4.9 million increase in sales and marketing expenses, compared to the comparable period last year. The company increased the number of domestic sales agencies who represent K2M products in the United States by nine agencies to a total of 109 independent sales agencies, an increase of 9 percent sequentially. In addition, the company’s U.S. and non-U.S. direct sales employees remained flat at 158 employees, despite active management of this group.

Loss from operations for the fourth quarter of 2017 decreased $500,000 to $8.9 million compared to a loss from operations of $9.4 million for the comparable period in 2016. Loss from operations included intangible amortization of $200,000, compared to $2.6 million in 2016. The company recorded approximately $1.4 million in non-recurring accruals primarily reflecting legal and administrative expenses updated in 2018 and inventory adjustments.

Total other expenses for the fourth quarter of 2017 decreased $1.6 million to $1.5 million, compared to $3.1 million last year. The decrease in other expense, net, was primarily attributable to a unrealized gain of $300,000 from foreign currency remeasurement on intercompany payable balances, compared to unrealized loss of $1.3 million in the comparable period in 2016.

Net loss for the fourth quarter of 2017 was $8.7 million, or 20 cents per diluted share, compared to a loss of $12.5 million, or 30 cents per diluted share, for the fourth quarter of 2016.

“We remain confident in our ability to drive above-market growth in the U.S., fueled by our continued focus on leading the spine market by introducing new and innovative spinal implant solutions to help surgeons care for patients around the world who suffer from debilitating spinal pathologies,” Major said. “We have introduced our 2018 guidance expectations for revenue growth of 9 percent to 10 percent with improved profitability.”

The company expects total revenue on an as reported basis to range from $280 million to $284 million this year, representing growth of 9 percent to 10 percent year-over-year, and U.S. business revenue to expand approximately 10 percent to 11 percent year-over-year in 2018.

K2M expects its international business to grow approximately 5 percent to 7 percent this year. Assuming current currency rates remain similar for the rest of the year, currency should have a $2 million impact on total revenue in 2018.

Total net loss is expected to range between $34 million to $30 million, compared to net loss of $37.1 million in fiscal year 2017. Adjusted EBITDA benefit should range from $4 million to $8 million, compared to adjusted EBITDA loss of $740,000 in fiscal year 2017.

K2M Group Holdings Inc. is a global developer of complex spine and minimally invasive solutions focused on achieving three-dimensional Total Body Balance. The company is based in Leesburg, Va.