NUVASIVE : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

As noted earlier, this Annual Report, including the following discussion and
analysis, may contain forward-looking statements that involve risks,
uncertainties, assumptions and other factors which, if they do not materialize
or prove correct, could cause our results to differ from historical results or
those expressed or implied by such forward-looking statements. Please review
this Annual Report and the following discussion and analysis in light of the
forward-looking statements provisions outlined at the outset of Part I.

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the Consolidated Financial Statements and the Notes to those statements included in this Annual Report.

Overview

We are a leading medical device company in the global spine surgery market,
focused on developing minimally disruptive surgical products and procedurally
integrated solutions for spine surgery. Our currently marketed product portfolio
is focused on applications for spine fusion surgery, including ancillary
products and services used to aid in the surgical procedure. Our procedurally
integrated solutions use innovative, technological advancements and a minimally
disruptive surgical platform called Maximum Access Surgery, or MAS, to provide
surgical efficiency, operative reliability, and procedural versatility. For the
year ended December 31, 2019, we generated global revenues of $1.17 billion,
including sales in over 50 countries.

Our principal product offering includes the MAS platform which combines three
categories of solutions that collectively minimize soft tissue disruption during
spine fusion surgery, provide maximum visualization and are designed to enable
safe and reproducible outcomes for the surgeon and the patient. The platform
includes our proprietary software-driven nerve detection and avoidance systems,
and Intraoperative Monitoring, or IOM, services and support offered by NuVasive
Clinical Services; MaXcess, an integrated split-blade retractor system; and a
wide variety of specialized implants and biologics. Many of our products,
including the individual components of our MAS platform can also be used in open
or traditional spine surgery. Our spine surgery product line offerings, which
include products for the thoracolumbar and the cervical spine, are primarily
used to enable surgeon access to the spine to perform restorative and fusion
procedures in a minimally disruptive fashion. To assist with surgical
procedures, we offer a platform called Integrated Global Alignment, or iGA, in
which products and computer assisted technology under our MAS platform help
achieve more precise spinal alignment.

Our MAS platform and its related offerings are designed to provide a unique and
comprehensive solution for the safe and reproducible minimally disruptive
surgical treatment of spine disorders by enabling surgeons to access the spine
in a manner that affords both direct visualization and detection and avoidance
of critical nerves along with intraoperative reconciliation. The fundamental
difference between our MAS platform, which is sometimes referred to in the
industry as "minimally invasive surgery" or "MIS", is the ability to customize
safe and reproducible access to the spine while allowing surgeons to continue to
use instruments that are familiar to them and effective during surgery.
Accordingly, the MAS platform does not force surgeons to reinvent or learn new
approaches that add complexity and undermine safety, ease of use and/or
efficacy. We have dedicated and continue to dedicate significant resources
toward training spine surgeons around the world; both those who are new to our
MAS and other product platforms, as well as ongoing education for MAS-trained
surgeons attending advanced courses. An important ongoing objective of ours has
been to maintain a leading position in access and nerve avoidance, as well as to
pioneer and remain the ongoing leader in minimally invasive spine surgery. Our
MAS platform, with the unique advantages provided by our neuromonitoring
systems, enables innovative lateral procedures, including a procedure known as
eXtreme Lateral Interbody Fusion, or XLIF, in which surgeons access the spine
for a fusion procedure from the side of the patient's body, rather than from the
front or back. It has been demonstrated clinically that XLIF and other
procedures facilitated by our MAS platform decrease trauma and blood loss, and
lead to faster overall patient recovery times compared to open spine surgery.

We offer a range of implants for spinal surgery, which include our porous
titanium and porous polyetheretherketone, or PEEK, implants under our Advanced
Materials Science portfolio, fixation products such as customizable rods, plates
and screws, bone allograft in patented saline packaging, allogeneic and
synthetic biologics, and disposables used in IOM. We also design and sell
expandable growing rod implant systems that can be non-invasively lengthened
following implantation with precise, incremental adjustments via an external
remote controller using magnetic technology called MAGnetic External Control, or
MAGEC, which allows for the minimally invasive treatment of early-onset and
adolescent scoliosis. This technology is also the basis for our Precice limb
lengthening system, which allows for the correction of long bone limb length
discrepancy, as well as enhanced bone healing in patients who have experienced
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We believe that offering customers a comprehensive procedural solution for spine
surgery distinguishes us from traditional spine implant companies, and we have
built a procedural solution for spine surgery that includes our IOM services,
iGA and hardware and software technology offerings. We have also invested in the
development of capital equipment designed to further improve clinical and
economic outcomes through proceduralization. Our capital equipment portfolio
currently consists of LessRay and Pulse. LessRay is an image enhancement
platform designed to reduce radiation exposure in the operating room by allowing
surgeons to take low-quality, low-dose images and improve them to look like
conventional full-dose images. Pulse integrates multiple enabling technologies
within a single, expandable platform and is engineered to improve workflow,
reduce variability, and increase the reproducibility of surgical outcomes. The
Pulse platform's modular architecture is designed to incorporate applications
for neuromonitoring, iGA surgical planning, patient-specific rod bending, smart
imaging with LessRay radiation reduction, 2D and 3D imaging navigation, and
integration with robotics and other smart tools. Revenue from the sale or lease
of capital equipment does not make up a material portion of our total revenue.

We intend to continue development on a wide variety of projects intended to
broaden our MAS and other product platforms and advance the applications of our
unique technology into procedurally integrated surgical solutions to improve
clinical and economic outcomes. We also expect to continue to invest in the
Pulse platform to support a full commercial launch of the technology and to
develop and expand its application offerings, including investments related to
surgical automation and robotics.

In addition, we expect to continue to pursue business and technology acquisition
targets and strategic relationships to identify opportunities to broaden
participation along the spine care continuum. Top priorities include
opportunities that complement our technology leadership position in spine,
targeted geographic expansion, technology that makes procedures even safer, as
well as opportunities for surgical automation.

Revenues and Operations

The majority of our revenue is derived from the sale of implants and fixation
products, biologics, disposables and IOM services and we expect this trend to
continue for the foreseeable future. Our implants and fixation products,
biologics, and disposables are currently sold and shipped from our distribution
and warehousing operations. We generally recognize revenue for implants and
fixation products, biologics and disposables upon notice that our products have
been used in a surgical procedure or upon shipment to a third-party customer
assuming control of the products. Revenue from IOM services is recognized in the
period the service is performed for the amount of payment we expect to
receive. We make available MAS surgical instrument sets, MaXcess and
neuromonitoring systems to hospitals to facilitate surgeon access to the spine
to perform restorative and fusion procedures using our implants and fixation
products. We sell MAS surgical instrument sets, MaXcess devices, and our
proprietary software-driven neuromonitoring systems, however this does not make
up a material part of our business. Revenue from the sale or lease of capital
equipment does not make up a material portion of our total revenue.

The majority of our operations are located and the majority of our sales have
been generated in the United States. We sell our products in the United States
through a sales force comprised primarily of independent sales agents and
directly-employed sales representatives. Our sales force provides a delivery and
consultative service to our surgeon and hospital customers and is compensated
based on sales and product placements in their territories. Sales force
commissions are reflected in the sales, marketing and administrative operating
expense line item within our Consolidated Statements of Operations. We continue
to invest in international expansion with a focus on European, Asia-Pacific and
Latin American markets. Our international sales force is comprised of
directly-employed sales personnel, independent sales agents, as well as
exclusive and non-exclusive independent third-party distributors.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations
is based upon our audited Consolidated Financial Statements, which have been
prepared in accordance with generally accepted accounting principles in the
United States (GAAP). The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. On an ongoing basis, we evaluate our
estimates including those related to revenue recognition, bad debts,
inventories, valuation of financial instruments, goodwill, intangibles, property
and equipment, contingent liabilities, stock-based compensation, income taxes,
and legal proceedings. We base our estimates on historical experience and on
various other assumptions we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities not readily apparent from other sources. Actual
results may differ from these estimates.



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The following accounting policies are critical to the judgments and estimates used in the preparation of our Consolidated Financial Statements.

Revenue Recognition

In accordance with Accounting Standards Codification 606 Revenue from Contracts
with Customers ("ASC 606"), we recognize revenue upon the transfer of goods or
services to a customer at an amount that reflects the expected consideration to
be received in exchange for those goods or services. The principles in ASC 606
are applied using the following five steps: (i) identify the contract with a
customer; (ii) identify the performance obligation(s) in the contract;
(iii) determine the transaction price; (iv) allocate the transaction price to
the performance obligation(s) in the contract; and (v) recognize revenue when
(or as) we satisfy our performance obligation(s). Specifically, revenue from the
sale of implants, fixation products and disposables is generally recognized at
an amount that reflects the expected consideration upon notice that our products
have been used in a surgical procedure or upon shipment to a third-party
customer assuming control of the products. Revenue from IOM services is
recognized in the period the service is performed for the amount of
consideration expected to be received. Revenue from the sale of surgical
instrument sets is generally recognized upon receipt of a purchase order and the
subsequent shipment to a customer who assumes control. In certain cases, we
offer the ability for customers to lease surgical instrumentation primarily on a
non-sales type basis. Revenue from the sale or lease of capital equipment is
generally recognized following the execution of a contract and upon the
installation of the equipment and the acceptance by the customer. Revenue from
sales and leases of surgical instrument sets and capital equipment represent an
immaterial amount of our total revenue in all periods presented. Revenue
associated with products holding rights of return or trade-in are recognized
when we conclude there is not a risk of significant revenue reversal in future
periods for the expected consideration in the transaction. Our costs incurred
associated with sales contracts with customers are deferred over the performance
obligation period and recognized in the same period as the related revenue, with
the exception of contracts that complete within one year or less, in which case
the associated costs are expensed as incurred.

Allowance for Doubtful Accounts, and Sales Return and Pricing Reserves

We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. The allowance for
doubtful accounts is reviewed quarterly and is estimated based on the aging of
account balances, collection history and known trends with current customers and
in the economy in general. As a result of this review, the allowance is adjusted
on a specific identification basis for significant accounts and a general
reserve approach for non-significant accounts. We also review the overall
quality and age of those invoices not specifically identified. In determining
the provision for invoices not specifically reviewed, we analyze historical
collection experience and current economic trends. An increase to the allowance
for doubtful accounts results in a corresponding charge to sales, marketing and
administrative expenses. If the historical data used to calculate the allowance
provided for doubtful accounts does not reflect our future ability to collect
outstanding receivables or if the financial condition of customers were to
deteriorate, resulting in impairment of their ability to make payments, an
increase in the provision for doubtful accounts may be required. We maintain a
relatively large customer base that mitigates the risk of concentration with any
one particular customer. Historically, our reserves have been adequate to cover
losses.

In addition, we establish a liability for estimated sales returns and a reserve
for price adjustments that are recorded as a reduction to revenue. The liability
and reserve are maintained to account for future product returns and price
adjustments of products sold in the current period. This reserve is reviewed
quarterly and is estimated based on an analysis of our historical experience and
expected future trends. Historically, our reserves have been adequate to account
for returns and pricing adjustments.

Inventory

Net inventory as of December 31, 2019 consisted of $298.7 million of finished
goods, $6.4 million of work in progress, and $7.3 million of raw materials. Net
inventory as of December 31, 2018 consisted of $259.4 million of finished goods,
$5.0 million of work in progress, and $8.8 million of raw materials. We
increased our finished goods inventory to support our revenue growth and new
product launches.

Finished goods primarily consists of specialized implants, fixation products and
disposables and are stated at the lower of cost or net realizable value
determined by utilizing a standard cost method, which includes capitalized
variances, which approximates the weighted average cost. Work in progress and
raw materials represent the underlying material, and labor for work in progress,
that ultimately yield finished goods upon completion and are subject to lower of
cost or net realizable value. We review the components of inventory on a
periodic basis for excess and obsolescence and adjust inventory to its net
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Excess and Obsolete Inventory

We provide an inventory reserve for estimated obsolescence and excess inventory
based upon historical turnover and assumptions about future demand for our
products and market conditions. Our allograft products have shelf lives ranging
from two to five years and are subject to demand fluctuations based on the
availability and demand for alternative products. Our inventory, which consists
primarily of disposables, specialized implants and fixation products, is at risk
of obsolescence following the introduction and development of new or enhanced
products. Our estimates and assumptions for excess and obsolete inventory are
reviewed and updated on a quarterly basis. The estimates we use for demand are
also used for near-term capacity planning and inventory purchasing and are
consistent with our revenue forecasts. Increases in the reserve for excess and
obsolete inventory result in a corresponding charge to cost of products sold.
Historically our reserves have been adequate to cover losses.

A stated goal of our business is to focus on continual product innovation and to obsolete our own products. While this provides a competitive edge, it also results in the risk that our products and related surgical instruments will become obsolete prior to sale or to the end of their anticipated useful lives.

Fair Value of Financial Instruments

ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value and
requires us to establish a framework for measuring fair value and disclosure
about fair value measurements. The framework requires the valuation of assets
and liabilities subject to fair value measurements using a three tiered approach
and fair value measurement be classified and disclosed in one of the following
three categories. Inputs to valuation techniques are observable or unobservable.
Observable inputs reflect market data obtained from independent sources, while
unobservable inputs reflect our market assumptions.

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available.

Carrying value of the financial instruments measured and classified within Level 1 is based on quoted prices.

The types of instruments that trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency are generally classified within Level 2 of the fair value hierarchy.

Certain contingent consideration liabilities are classified within Level 3 of
the fair value hierarchy because they use unobservable inputs. For those
liabilities, fair value is determined using a discounted cash flow model or
probability simulation model. The significant inputs of such models that are not
observable in the market include financial metric growth rates, volatility
rates, projections associated with milestones, the discount rate, and the
related probabilities and payment structure in the contingent consideration
arrangement.

Valuation of Goodwill and Intangible Assets with Indefinite Lives

Our goodwill represents the excess of the cost over the fair value of net assets
acquired from our business combinations. The determination of the value of
goodwill and intangible assets arising from business combinations and asset
acquisitions requires extensive use of accounting estimates and judgments to
allocate the purchase price to the fair value of the net tangible and intangible
assets acquired, including capitalized in-process research and development, or
IPR&D. Intangible assets acquired in a business combination that are used for
IPR&D activities are considered indefinite lived until the completion or
abandonment of the associated research and development efforts. Upon
commercialization of the relevant research and development project, we will
amortize the acquired in-process research and development over its estimated
useful life or expense the acquired in-process research and development should
the research and development project be unsuccessful with no future alternative
use.

Goodwill and IPR&D are not amortized; however, they are assessed for impairment
using fair value measurement techniques on an annual basis or more frequently if
facts and circumstance warrant such a review. The goodwill or IPR&D are
considered to be impaired if we determine that the carrying value of the
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We perform our goodwill impairment analysis at the reporting unit level, which
aligns with our reporting structure and availability of discrete financial
information. We perform our annual impairment analysis by either doing a
qualitative assessment of a reporting unit's fair value from the last
quantitative assessment to determine if there is potential impairment, or
comparing a reporting unit's estimated fair value to its carrying amount. We may
do a qualitative assessment when the results of the previous quantitative test
indicated the reporting unit's estimated fair value was significantly in excess
of the carrying value of its net assets and we do not believe there have been
significant changes in the reporting unit's operations that would significantly
decrease its estimated fair value or significantly increase its net assets. If a
quantitative assessment is performed the evaluation includes management
estimates of cash flow projections based on internal future projections and/or
use of a market approach by looking at market values of comparable companies.
Key assumptions for these projections include revenue growth, future gross and
operating margin growth, and its weighted cost of capital and terminal growth
rates. The revenue and margin growth is based on increased sales of new and
existing products as we maintain our investment in research and development.
Additional assumed value creators may include increased efficiencies from
capital spending. The resulting cash flows are discounted using a weighted
average cost of capital. Operating mechanisms and requirements to ensure that
growth and efficiency assumptions will ultimately be realized are also
considered in the evaluation, including timing and probability of regulatory
approvals for our products to be commercialized. Our market capitalization is
also considered as a part of this analysis.

Our annual evaluation for impairment of goodwill consists of one reporting unit.
In accordance with our policy, we completed our most recent annual evaluation
for impairment as of October 1, 2019 using the qualitative method and determined
that no impairment existed. In addition, no indicators of impairments were noted
through December 31, 2019 and consequently, no impairment charge was recorded
during the year.

Valuation of Intangible Assets

Our intangible assets are comprised primarily of purchased technology, customer relationships, manufacturing know-how and trade secrets, and trade name and trademarks. We make significant judgments in relation to the valuation of intangible assets resulting from business combinations and asset acquisitions.

Intangible assets are generally amortized on a straight-line basis over their
estimated useful lives of 1 to 17 years. We base the useful lives and related
amortization expense on the period of time we estimate the assets will generate
revenues or otherwise be used. We also periodically review the lives assigned to
our intangible assets to ensure that our initial estimates do not exceed any
revised estimated periods from which we expect to realize cash flows from the
technologies. If a change were to occur in any of the above-mentioned factors or
estimates, the likelihood of a material change in our reported results would
increase.

We evaluate our intangible assets with finite lives for indications of
impairment whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors that could trigger an impairment
review include significant under-performance relative to expected historical or
projected future operating results, significant changes in the manner of our use
of the acquired assets or the strategy for our overall business or significant
negative industry or economic trends. If this evaluation indicates that the
value of the intangible asset may be impaired, we make an assessment of the
recoverability of the net carrying value of the asset over its remaining useful
life. If this assessment indicates that the intangible asset is not recoverable,
based on the estimated undiscounted future cash flows of the technology over the
remaining amortization period, we reduce the net carrying value of the related
intangible asset to fair value and may adjust the remaining amortization period.

Significant judgment is required in the forecasts of future operating results
that are used in the discounted cash flow valuation models. It is possible that
plans may change and estimates used may prove to be inaccurate. If our actual
results, or the plans and estimates used in future impairment analyses, are
lower than the original estimates used to assess the recoverability of these
assets, we could incur additional impairment charges.

Valuation of Stock-Based Compensation

Stock-based compensation expense for equity-classified awards, principally
related to restricted stock units, or RSUs, and performance restricted stock
units, or PRSUs, is measured at the grant date based on the estimated fair value
of the award. The fair value of equity instruments that are expected to vest is
recognized and amortized over the requisite service period. We have granted
awards with up to five year graded or cliff vesting terms (in each case, with
service through the date of vesting being required). No exercise price or other
monetary payment is required for receipt of the shares issued in settlement of
the respective award; instead, consideration is furnished in the form of the
participant's service.

The fair value of RSUs including PRSUs with pre-defined performance criteria is
based on the stock price on the date of grant whereas the expense for PRSUs with
pre-defined performance criteria is adjusted with the probability of achievement
of such performance criteria at each period end. The fair value of the PRSUs
that are earned based on the achievement of pre-defined market conditions for
total shareholder return, is estimated on the date of grant using a Monte Carlo
valuation model. The key assumptions in applying this model are an expected
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Stock-based compensation expense is adjusted from the grant date to exclude
expense for awards that are expected to be forfeited. The forfeiture estimate is
adjusted as necessary through the vesting date so that full compensation cost is
recognized only for awards that vest. We assess the reasonableness of the
estimated forfeiture rate at least annually, with any change to be made on a
cumulative basis in the period the estimated forfeiture rates change. We
considered our historical experience of pre-vesting forfeitures on awards by
each homogenous group of shareowners as the basis to arrive at our estimated
annual pre-vesting forfeiture rates.

We estimate the fair value of stock options issued under our equity incentive
plans and shares issued to shareowners under our employee stock purchase plan,
or ESPP, using a Black-Scholes option-pricing model on the date of grant. The
Black-Scholes option-pricing model incorporates various and highly sensitive
assumptions including expected volatility, expected term and risk-free interest
rates. The expected volatility is based on the historical volatility of our
common stock over the most recent period commensurate with the estimated
expected term of our stock options and ESPP offering period which is derived
from historical experience. The risk-free interest rate for periods within the
contractual life of the option is based on the U.S. Treasury yield in effect at
the time of grant. We have never declared or paid dividends and have no plans to
do so in the foreseeable future.

Accounting for Income Taxes

The asset and liability approach is used to recognize deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities. Tax
law and rate changes are reflected in income in the period such changes are
enacted. We include interest and penalties related to income taxes, including
unrecognized tax benefits, within income tax expense.

Our income tax returns are based on calculations and assumptions that are
subject to examination by the Internal Revenue Service and other tax
authorities. In addition, the calculation of our tax liabilities involves
dealing with uncertainties in the application of complex tax regulations. We
recognize liabilities for uncertain tax positions based on a two-step process.
The first step is to evaluate the tax position for recognition by determining if
the weight of available evidence indicates that it is more likely than not that
the position will be sustained on audit, including resolution of related appeals
or litigation processes, if any. The second step is to measure the tax benefit
as the largest amount that is more than 50% likely of being realized upon
settlement. While we believe we have appropriate support for the positions taken
on our tax returns, we regularly assess the potential outcomes of examinations
by tax authorities in determining the adequacy of our provision for income
taxes. We continually assess the likelihood and amount of potential revisions
and adjust the income tax provision, income taxes payable and deferred taxes in
the period in which the facts that give rise to a revision become known.

Significant judgment is required in determining our provision for income taxes,
our deferred tax assets and liabilities and the valuation allowance recorded
against our net deferred tax assets. Deferred tax assets and liabilities are
determined using the enacted tax rates in effect for the years in which those
tax assets are expected to be realized. A valuation allowance is established
when it is more likely than not the future realization of all or some of the
deferred tax assets will not be achieved. The evaluation of the need for a
valuation allowance is performed on a jurisdiction-by-jurisdiction basis, and
includes a review of all available positive and negative evidence. Factors
reviewed include projections of pre-tax book income for the foreseeable future,
determination of cumulative pre-tax book income after permanent differences,
earnings history, and reliability of forecasting.

Based on our review, we concluded that it was more likely than not that we would
be able to realize the future benefits of our domestic and foreign deferred tax
assets, with the exceptions of California, Malta, Brazil and Colombia. This
conclusion was based on historical and projected operating performance, as well
as our expectation that our operations will generate sufficient taxable income
in future periods to realize the tax benefits associated with the deferred tax
assets well within the statutory carryover periods. Due to low state
apportionment, large net operating losses and the generation of sizeable
research credits in California, we concluded that it is not more likely than not
that we will be able to utilize our California deferred tax assets. Therefore,
we have maintained a full valuation allowance on our California deferred tax
assets as of December 31, 2019. Due to a history of losses in Malta, Brazil and
Colombia, and the lack of alternative sources of future taxable income, we have
established a full valuation allowance against these entities' deferred tax
assets as of December 31, 2019.

We will continue to assess the need for a valuation allowance on our deferred
tax assets by evaluating both positive and negative evidence that may exist. Any
adjustment to the net deferred tax asset valuation allowance would be recorded
in the statement of operations for the period that the adjustment is determined
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Legal Proceedings

We are involved in a number of legal actions and investigations arising out of
the normal course of our business. The outcomes of these legal actions and
investigations are not within our complete 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 barring the sale of products that are the
subject of the lawsuit, that could require significant expenditures or result in
lost revenues. In accordance with authoritative guidance, we disclose
information regarding each material claim where the likelihood of a loss
contingency is probable or reasonably possible. An estimated loss contingency is
accrued in our financial statements if it is both probable that a liability has
been incurred and the amount of the loss can be reasonably estimated. If a loss
is reasonably possible and can be reasonably estimated, the estimated loss or
range of loss is disclosed in the notes to the Consolidated Financial
Statements. In most cases, significant judgment is required to estimate the
amount and timing of a loss to be recorded. Our significant legal proceedings
and investigations are discussed in Notes 10 and 11 to the Consolidated
Financial Statements included in this Annual Report.

The above listing is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by GAAP. See our Consolidated Financial
Statements and Notes thereto included in this Annual Report, which contain
accounting policies and other disclosures required by GAAP.

Results of Operations

Revenue

                                          Year Ended December 31,                     2018 to 2019                 2017 to 2018
(in thousands, except %)           2019            2018            2017    

    $ Change       % Change      $ Change       % Change
Spinal Hardware                 $   851,440     $   788,649     $   737,524     $  62,791              8 %   $  51,125              7 %
Surgical Support                    316,630         313,065         289,161         3,565              1 %      23,904              8 %
Total revenue                   $ 1,168,070     $ 1,101,714     $ 1,026,685     $  66,356              6 %   $  75,029              7 %


Our spinal hardware product line offerings include our implants and fixation
products. Our surgical support product line offerings include IOM services,
disposables and biologics, and our capital equipment, all of which are used to
aid spine surgery.

The continued adoption of minimally invasive procedures for spine surgery has
led to the expansion of our procedure volume. In addition, increased market
acceptance in our international markets contributed to the increase in revenues
for the periods presented. We expect continued adoption of our innovative
minimally invasive procedures and deeper penetration into existing accounts and
international markets as our sales force executes on our strategy of selling the
full mix of our products and services. However, the continued consolidation and
increased purchasing power of our hospital customers and group purchasing
organizations, the continued existence of physician-owned distributorships,
continued changes in the public and private insurance markets regarding
reimbursement, and ongoing policy and legislative changes in the United States
have created less predictability. Although the market for
procedurally-integrated spine surgery solutions should continue to grow over the
long term, economic, political and regulatory influences are subjecting our
industry to significant changes that may slow the growth rate of the spine
surgery market.

Our total revenues increased $66.4 million in 2019 compared to 2018 and $75.0
million in 2018 compared to 2017, representing total revenue growth of 6% and
7%, respectively. Foreign currency fluctuations did not have a material impact
on our overall revenues as a percentage of growth year over year.

Revenue from our spinal hardware product line offerings increased $62.8 million,
or 8%, in 2019 compared to 2018. Product volume for our spinal hardware business
increased our revenue by approximately 11%, offset by unfavorable pricing
impacts of approximately 2% for the year ended December 31, 2019, as compared to
2018. Foreign currency fluctuation decreased our spinal hardware revenue by
approximately 1% for the year ended December 31, 2019, as compared to 2018.

Revenue from our spinal hardware product line offerings increased $51.1 million,
or 7%, in 2018 compared to 2017. Product volume for our spinal hardware business
increased our revenue by approximately 9%, offset by unfavorable pricing impacts
of approximately 2% for the year ended December 31, 2018, as compared to
2017. Foreign currency fluctuation from 2017 to 2018 did not have a material
impact on spinal hardware revenue.

Revenue from our surgical support product line offerings increased $3.6 million,
or 1%, in 2019 compared to 2018. Product and service volume for our surgical
support business increased our revenue by approximately 2% for the year ended
December 31, 2019, offset by unfavorable pricing impacts of approximately 1% for
the year ended December 31, 2019, as compared to 2018. Foreign currency
fluctuation from 2018 to 2019 did not have a material impact on surgical support
revenue.

Revenue from our surgical support product line offerings increased $23.9
million, or 8%, in 2018 compared to 2017. Revenue associated with our 2018
acquisitions accounted for approximately 7% of the increase in surgical support
revenue for the year ended December 31, 2018, as compared to 2017. Product and
service volume for our surgical support business, excluding the impact from our
2018 acquisitions, increased our revenue by approximately 3% for the year ended
December 31, 2018, offset by unfavorable pricing impacts of approximately 2% for
the year ended December 31, 2018, as compared to 2017. Foreign currency
fluctuation from 2017 to 2018 did not have a material impact on surgical support
revenue.



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Cost of Revenue, Excluding Below Amortization of Intangible Assets

                                       Year Ended December 31,                 2018 to 2019                 2017 to 2018
(in thousands, except %)          2019          2018          2017        $ Change      % Change      $ Change       % Change
Cost of revenue                 $ 312,357     $ 311,159     $ 268,441     $   1,198             0 %   $  42,718             16 %
% of total revenue                     27 %          28 %          26 %


Cost of revenue consists primarily of purchased goods, raw materials, labor and
overhead associated with product manufacturing, inventory-related costs and
royalty expenses, as well as the cost of providing IOM services, which includes
personnel and physician oversight costs. We primarily procure and manufacture
our goods in the United States, and accordingly, foreign currency fluctuations
have not materially impacted our cost of revenue.

Cost of revenue increased $1.2 million during the year ended December 31, 2019,
compared to 2018. Cost of revenue for our business increased primarily due to
growth in volume, changes in product mix, and shifts in production costs, offset
by favorable manufacturing absorption from in-sourced products and improved
throughput and plant efficiencies in 2019, compared to 2018.

Cost of revenue increased $42.7 million, or 16%, during the year ended December
31, 2018, compared to 2017. The cost of revenue associated with the operations
of our 2018 acquisitions accounted for approximately 4% of the total increase
during the year ended December 31, 2018, compared to 2017. Cost of revenue for
our business, excluding our 2018 acquisitions, increased primarily due to growth
in volume, additional excess and obsolete inventory reserve, and production
related costs, for an overall increase of approximately 12% during the year
ended December 31, 2018, compared to 2017.

Operating Expenses

                                       Year Ended December 31,                 2018 to 2019                2017 to 2018
(in thousands, except %)          2019          2018          2017        $ Change      % Change      $ Change      % Change
Sales, marketing, and
administrative                  $ 611,181     $ 575,836     $ 539,507     $  35,345             6 %   $  36,329             7 %
% of total revenue                     52 %          52 %          53 %
Research and development           72,380        61,695        50,425        10,685            17 %      11,270            22 %
% of total revenue                      6 %           6 %           5 %

Amortization of intangibles 51,097 50,670 48,039

    427             1 %       2,631             5 %
Purchase of in-process
research and development                -         8,913             -        (8,913 )         100 %       8,913             *
Litigation liability loss               -        27,800         4,500       (27,800 )         100 %      23,300           518 %
Business transition costs          (1,995 )      11,473         4,287       (13,468 )         117 %       7,186           168 %

Sales, Marketing and Administrative

Sales, marketing and administrative expenses consist primarily of compensation
costs, commissions and training costs for our employees (who we refer to as
"shareowners") engaged in sales, marketing and customer support functions. The
expense also includes commissions to sales representatives, freight expenses,
surgeon training costs, depreciation expense for property and equipment such as
surgical instrument sets, and administrative expenses for both shareowners and
third-party service providers.

Sales, marketing and administrative expenses increased by $35.3 million, or 6%,
during the year ended December 31, 2019 as compared to 2018. The increase in
2019 is primarily due to increased shareowner compensation and expenses
associated with increased headcount, as well as expenses that increased as a
function of the increase in revenue and international expansion, such as
equipment, freight, and facility related expenses, as compared to 2018.
Stock-based compensation expense increased in 2019 as compared to 2018 due to
higher fair value adjustments to certain equity awards that are subject to
revaluation on a recurring basis based on stock price performance. These costs
were partially offset by decreases in non-recurring consulting fees associated
with the implementation of our state tax-planning strategy, which occurred
during 2018. Additionally, during 2019 there was an increase in expenses
associated with our compliance efforts with the EU Medical Device Regulation,
and legal expenses.

Sales, marketing and administrative expenses increased by $36.3 million, or 7%
during the year ended December 31, 2018, as compared to 2017. The increase in
2018 is primarily due to increased shareowner compensation and other expenses
resulting from increased headcount, as well as expenses that increased as a
function of the increase in revenue and international expansion included
consulting, travel, equipment and freight, as compared to 2017. Additionally,
during the year ended December 31, 2018, legal expenses increased compared to
2017. Sales, marketing and administrative expenses associated with our 2018
acquisitions, which is included in the results discussed herein, accounted for
approximately 1% of the increase in sales, marketing and administrative expenses
for the year ended December 31, 2018, as compared to 2017.



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Research and Development

Research and development expense consists primarily of product research and
development, clinical trial and study costs, regulatory and clinical functions,
and compensation and other shareowner related expenses. In the last several
years, we have introduced numerous new products and product enhancements that
have significantly expanded our MAS platform and our comprehensive product
portfolio. We have also acquired complementary and strategic assets and
technology, particularly in the area of spinal hardware products. We continue to
invest in research and development programs related to our core product
portfolio, as well as in our capital equipment.

Research and development expense increased by $10.7 million, or 17%, during the year ended December 31, 2019, compared to 2018, and $11.3 million, or 22%, during the year ended December 31, 2018, compared to 2017. The increase in spending is primarily due to increased headcount and increased spending for further enhancement and functionality of our current and future product offerings, including capital equipment.

Amortization of Intangible Assets

Amortization of intangible assets relates to the amortization of finite-lived
intangible assets acquired. Amortization expense remained relatively constant in
2019 compared to 2018. Amortization expense increased $2.6 million in 2018
compared to 2017, primarily due to our 2017 and 2018 acquisitions.

Purchase of In-Process Research and Development

During the year ended December 31, 2018, we expensed $8.9 million for a purchased in-process research and development asset which had no future alternative use.

Litigation Liability Loss

During the year ended December 31, 2018, we settled all outstanding matters with Madsen Medical, Inc. for $27.8 million. We no longer have any remaining liability related to this matter.

During the year ended December 31, 2017, we paid $4.5 million for the settlement
of fees associated with the outcome of the Medtronic litigation matter. We no
longer have any remaining liability related to this matter.

Business Transition Costs

We incur certain costs related to acquisition, integration and business
transition activities, which include severance, relocation, consulting,
leasehold exit costs, third-party merger and acquisition costs, contingent
consideration fair value adjustments and other costs directly associated with
such activities. Contingent consideration is accrued based on the fair value of
the expected payment, and such accruals are subject to increase or decrease
based on assessment of the likelihood that the contingent consideration will be
paid. If an accrual for contingent consideration decreases during a particular
period, it results in a reduction of costs during such period.

We incurred $(2.0) million of such costs during the year ended December 31, 2019, which included $(6.3) million of fair value adjustments on contingent consideration liabilities primarily associated with our 2017 and 2016 acquisitions. The remaining costs consisted primarily of various business transition activities.

We incurred $11.5 million of such costs during the year ended December 31, 2018,
which consisted primarily of various business transition activities, but also
includes $(1.5) million of fair value adjustments on contingent consideration
liabilities associated with our 2017 and 2016 acquisitions.

During the year ended December 31, 2017, we incurred $4.3 million of business transition costs, which consisted primarily of acquisition and integration activities, and $(1.3) million of fair value adjustments on contingent consideration liabilities associated with our 2017 and 2016 acquisitions.

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Interest and Other Expense, Net

                                       Year Ended December 31,                  2018 to 2019                2017 to 2018
(in thousands, except %)          2019          2018          2017         $ Change      % Change      $ Change      % Change
Interest income                 $   1,917     $     586     $     440     $    1,331           227 %   $     146            33 %
Interest expense                  (38,525 )     (37,857 )     (38,021 )         (668 )           2 %         164             0 %

Other (expense) income, net (5,925 ) (8,174 ) (1,542 )

   2,249            28 %      (6,632 )         430 %
Total interest and other
expense, net                    $ (42,533 )   $ (45,445 )   $ (39,123 )   $    2,912             6 %   $  (6,322 )          16 %
% of total revenue                      4 %           4 %           4 %


Total interest and other expense, net for the periods presented included gains
and losses from strategic investments, foreign currency impacts, our pro rata
allocation of net income or loss from our equity method investments, and net
foreign currency exchange gains and losses.

During the years ended December 31, 2019 and 2018, other (expense) income, net
included net losses of $4.8 million and $3.8 million, respectively, recognized
on strategic investments.

Income Tax Expense (Benefit)

                                     Year Ended December 31,                2018 to 2019                 2017 to 2018

(in thousands, except %) 2019 2018 2017 $ Change % Change $ Change % Change Income tax expense (benefit) $ 15,283 $ (3,756 ) $ (7,492 ) $ (19,039 ) 507 % $ (3,736 )

           50 %
Effective income tax rate             19 %         43 %         10 %


The provision for income tax expense as a percentage of pre-tax income from
continuing operations reflected a tax expense of 19% for the year ended December
31, 2019 compared with a tax benefit of 43% on pre-tax income for the year ended
December 31, 2018. The tax expense in 2019 was higher than the tax benefit in
2018 primarily due to reduced tax benefits from expiration of statute of
limitations on uncertain tax positions, less favorable return to provision
adjustments, and an increase in non-deductible officer's compensation expense,
offset by an increase in tax benefits associated with share-based payments,
increase in research and development credit generation, and a decrease in
valuation allowances.

The provision for income tax expense as a percentage of pre-tax income from
continuing operations reflected a tax benefit of 43% for the year ended December
31, 2018 compared with a tax benefit of 10% on pre-tax income for the year ended
December 31, 2017. The tax benefit was higher in 2018 primarily due to permanent
tax benefits from research credits, tax planning related deductions and
reorganization of its intellectual property company structure. While the 2017
permanent tax benefits for worthless stock and U.S. tax reform were
significantly larger than the permanent tax benefits realized in 2018, the
percentage impact of the 2018 tax benefits were larger due to the lower pre-tax
earnings in 2018.

We are subject to audits by federal, state, local, and foreign tax authorities.
We believe that adequate provisions have been made for any adjustments that may
result from tax examinations. However, the outcome of tax audits cannot be
predicted with certainty. Should any issues addressed in our tax audits be
resolved in a manner not consistent with our expectations, we could be required
to adjust our provision for income taxes in the period such resolution occurs.

We continue to streamline our international operations, including procurement,
logistics and customer service functions, in an effort to improve overall
operational efficiencies. U.S. tax reform has lessened the tax benefit
associated with foreign earnings due to a reduced federal corporate tax rate and
the forced U.S. inclusion of certain foreign intangible related earnings. As
international tax rules and regulations change, we may be subjected to higher
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Liquidity, Cash Flows and Capital Resources

Liquidity and Capital Resources

Our principal sources of liquidity are our existing cash, cash equivalents and
marketable securities, cash generated from operations, proceeds from our
convertible notes issuances, and access to our revolving line of credit. We
expect that cash provided by operating activities may fluctuate in future
periods as a result of a number of factors, including fluctuations in our
operating results, working capital requirements and capital deployment
decisions. We have historically invested our cash primarily in the U.S.
treasuries and government agencies, corporate debt, and money market funds.
Certain of these investments are subject to general credit, liquidity and other
market risks. The general condition of the financial markets and the economy may
increase those risks and may affect the value and liquidity of investments and
restrict our ability to access the capital markets.

Our future capital requirements will depend on many factors including our rate
of revenue growth, the timing and extent of spending to support development
efforts, the expansion of sales, marketing and administrative activities, the
timing of introductions of new products and enhancements to existing products,
successful insourcing of our manufacturing process, the continuing market
acceptance of our products, the expenditures associated with possible future
acquisitions or other business combination transactions, the outcome of current
and future litigation, and international expansions of our business. We
expect our cash flows from operations to continue to fund the ongoing core
business. As current borrowing sources become due, we may be required to access
the capital markets for additional funding. As we assess inorganic growth
strategies, we may need to supplement our internally generated cash flow with
outside sources. In the event that we are required to access the debt market, we
should be able to secure reasonable borrowing rates. As part of our liquidity
strategy, we will continue to monitor our current level of earnings and cash
flow generation as well as our ability to access the market in light of those
earning levels.

A substantial portion of our operations are located in the United States, and
the majority of our sales and cash generation since inception have been made in
the United States. Accordingly, we do not have material net cash flow exposures
to foreign currency rate fluctuations. However, as our business in markets
outside of the United States continues to increase, we will be exposed to
foreign currency exchange risk related to our foreign operations. Fluctuations
in the rate of exchange between the United States dollar and foreign currencies,
primarily in the pound sterling, the euro, the Australian dollar, the Brazilian
real, the Singapore dollar, and the yen, could adversely affect our financial
results, including our revenues, revenue growth rates, gross margins, income and
losses as well as assets and liabilities. We enter into forward currency
contracts to partially offset the impact from fluctuations of the foreign
currency rates on our third-party and short-term intercompany receivables and
payables between our domestic and international operations. We currently do not
hedge future forecasted transactions but will continue to assess whether that
strategy is appropriate. As of December 31, 2019, the cash balance held by our
foreign subsidiaries with currencies other than the United States dollar was
approximately $44.0 million and it is our intention to indefinitely reinvest all
of current foreign earnings in order to partially support foreign working
capital and to expand our existing operations outside the United States. As
of December 31, 2019, our account receivable balance held by our foreign
subsidiaries with currencies other than the United States dollar was
approximately $44.9 million. We have operations in markets in which there is
governmental financial instability which could impact funds that flow into the
medical reimbursement system. In addition, loss of financial stability within
these markets could lead to delays in reimbursement or inability to remit
payment due to currency controls. Specifically, we have operations and/or sales
in Puerto Rico, Brazil and Argentina. We do not have any material financial
exposure to one customer or one country that would significantly hinder our
liquidity.

We are currently, and in the future could be, involved in legal actions and
investigations arising out of the normal course of our business. Due to the
inherent uncertainties associated with pending legal actions and investigations,
we cannot predict the outcome, and, with respect to certain pending litigation
or claims where no liability has been accrued, to make a meaningful estimate of
the reasonably possible loss or range of loss that could result from an
unfavorable outcome. It is reasonably possible, however, that an unfavorable
outcome that exceeds our accrual estimate, if any, could have a material adverse
effect on our liquidity and access to capital resources. Additionally, it is
possible that in connection with a legal proceeding or investigation we are
required to pay fees and expenses of the other party or set aside funds in an
escrow or purchase a performance bond, regardless of our assessment of the
probability of a loss. These requirements to pay fees and expenses or escrow
funding in connection with a legal proceeding or investigation could have an
adverse impact on our liquidity or affect our access to additional capital
resources. We have disclosed all material accruals for pending litigation or
investigations in Note 10 and 11 of the Consolidated Financial Statements
included in this Annual Report.

On August 31, 2015, we received a civil investigative demand, or CID, issued by
the U.S. Department of Justice, or DOJ, pursuant to the federal False Claims
Act. The CID requires the delivery of a wide range of documents and information
related to an investigation by the DOJ concerning allegations that we assisted a
physician group customer in submitting improper claims for reimbursement and
made improper payments to the physician group in violation of the Anti-Kickback
Statute. We are cooperating with the DOJ in regards to this matter. No assurance
can be given as to the timing or outcome of this investigation, and the probable
outcome of this matter cannot be determined.



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On September 7, 2017, we completed an acquisition of a medical device
company that developed interbody implants for spinal fusion using patented
porous PEEK technology. In connection with the acquisition, we recorded a
purchase accounting fair value estimate of $31.4 million for contingent
consideration liabilities related to the achievement of certain manufacturing
and commercial milestones. We anticipate these milestones will become payable at
varying times between 2020 and 2025, but are subject to change based on the
achievement of those manufacturing and commercial milestones.

In the first quarter of 2020, the lease commenced with respect to the remaining
build-out portion of our corporate headquarters in San Diego, California, which
totals approximately $58.0 million in lease payments over a 15-year term.

On September 12, 2016, we completed an acquisition of an imaging software and
technology platform known as LessRay. In connection with the acquisition, we
recorded a purchase accounting fair value estimate of $34.1 million for
contingent consideration liabilities related to the achievement of certain
regulatory and commercial milestones. In January 2018, we paid $9.0 million of
the outstanding contingent consideration liabilities for the achievement of a
commercial milestone. In July 2018, we paid $10.0 million of the outstanding
contingent consideration liabilities for the achievement of a regulatory
approval milestone. We anticipate the remaining sales-based milestones will
become payable at varying times between 2023 and 2024.

Cash and cash equivalents were $213.0 million and $117.8 million at December 31,
2019 and December 31, 2018, respectively. Our existing cash and cash equivalents
and available liquidity should be sufficient to meet our anticipated cash needs
for the next twelve months. We could have varying needs for cash as a result of
the achievement of certain acquisition related milestones. We anticipate funding
these milestones from cash on hand and operations, however, we have the ability
to fund these from our existing revolving senior credit facility if necessary.
The increase in liquidity during the year ended December 31, 2019 of $95.2
million was mainly driven by $235.3 million in cash provided from operations,
offset by $122.9 million in cash used for purchases of property and
equipment, $14.5 million in cash used on treasury stock purchases, and $11.6
million in cash used for strategic investments and intangible assets. At
December 31, 2019, we have cash totaling $1.5 million in restricted accounts
which is not available to us to meet any ongoing capital requirements if and
when needed. Future litigation or requirements to escrow funds could materially
impact our liquidity and our ability to invest in and run our business on an
ongoing basis.

Cash Flows

The following table summarizes our Consolidated Statements of Cash Flows:

                                        Year Ended December 31,                   2018 to 2019                2017 to 2018
(in thousands, except %)           2019           2018           2017        $ Change      % Change      $ Change      % Change
Cash provided by operating
activities                      $  235,290     $  219,183     $  176,969     $  16,107             7 %   $  42,214            24 %
Cash used in investing
activities                        (134,484 )     (161,285 )     (174,861 )      26,801            17 %      13,576             8 %
Cash used in financing
activities                          (6,644 )      (14,578 )      (87,028 )       7,934            54 %      72,450            83 %
Effect of exchange rate
changes on cash                        131         (1,283 )        2,070         1,414           110 %      (3,353 )         162 %
Increase (decrease) in cash,
cash equivalents and
restricted cash                 $   94,293     $   42,037     $  (82,850 )   $  52,256           124 %   $ 124,887           151 %

Cash Flows from Operating Activities

Cash provided by operating activities was $235.3 million for the year ended December 31, 2019, compared to $219.2 million for the same period in 2018. The $16.1 million increase in cash provided by operating activities was primarily due to the comparable period's payment of $27.8 million for the settlement of the Madsen litigation matter. This was partially offset by increased inventory purchases and general timing of cash receipts and disbursements in 2019.

Cash provided by operating activities was $219.2 million for the year ended
December 31, 2018, compared to $177.0 million for the same period in 2017. The
$42.2 million increase in cash provided by operating activities was primarily
due to increased operational cash flows in 2018 related to timing of cash
receipts and disbursements, partially offset by $27.8 million in cash paid for
the settlement of the Madsen litigation matter in 2018.

Cash Flows from Investing Activities

Cash used in investing activities was $134.5 million in 2019, compared to $161.3
million used in 2018. The $26.8 million decrease in cash used in investing
activities was primarily due to a decrease of $51.3 million in cash used for
business combinations, strategic investments and intangible assets, offset by a
$21.0 million increase in cash used for purchases of property and equipment in
2019 compared to 2018.

Cash used in investing activities was $161.3 million in 2018, compared to $174.9
million used in 2017. The $13.6 million decrease in cash used in investing
activities was primarily due to an $8.3 million decrease in cash used
for purchases of property and equipment and a decrease of $1.7 million in cash
used for business combinations, strategic investments and intangible assets in
2018 as compared to 2017.



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Cash Flows from Financing Activities

Cash used in financing activities was $6.6 million in 2019, compared to $14.6
million cash used in 2018. The $8.0 million decrease in cash used in financing
activities was primarily due to decreased contingent consideration payments of
$18.6 million, offset by increased treasury stock purchases of $11.6 million in
2019 compared to 2018.

Cash used in financing activities was $14.6 million in 2018, compared to $87.0
million cash used in 2017. The $72.4 million decrease in cash used in financing
activities was primarily due to the $63.3 million settlement of the remaining
principal on the Senior Convertible Notes due July 2017 during the third quarter
of 2017, offset by decreased treasury stock purchases of $8.9 million in 2018 as
compared to the same period in 2017.

Our equity incentive plans allow for "net share settlement" of certain equity
awards whereby, in lieu of (i) making cash payments in satisfaction of the
exercise price owed respective to non-qualified stock option awards, or (ii)
open market selling award shares to generate cash proceeds for use in
satisfaction of statutory tax obligations respective to an award's settlement or
exercise, we offset the award shares being settled in a respective transaction
by the number of shares of our common stock with a value equal to the respective
obligation, and, in the case of taxes, making a cash payment to the respective
taxing authority on behalf of the shareowner using our cash on hand. The net
share settlement is accounted for with the cost of any award shares that are net
settled being included in treasury stock and reported as a reduction in total
equity at the time of settlement.

We expect to continue to make such cash tax payments associated with the net
share settlement of equity awards. The actual remittance to the taxing
authorities is determined by our share price at the date of RSU or PRSU release
or option exercises or actual volume of such activities. We anticipate using
cash generated from operating activities and the credit facility to fund all
such payments.

Senior Convertible Notes

2.25% Senior Convertible Notes due 2021

In March 2016, we issued $650.0 million principal amount of unsecured senior
convertible notes with a stated interest rate of 2.25% and a maturity date
of March 15, 2021, which we refer to as the 2021 Notes. The net proceeds from
the offering, after deducting initial purchasers' discounts and costs directly
related to the offering, were approximately $634.1 million. Interest on the 2021
Notes began accruing upon issuance and is payable semi-annually. The 2021 Notes
may be settled in cash, stock, or a combination thereof, solely at our
discretion. It is our current intent and policy to settle all conversions
through combination settlement, which involves satisfying the principal amount
outstanding with cash and any note conversion value over the principal amount in
shares of our common stock. The initial conversion rate of the 2021 Notes
is 16.7158 shares per $1,000 principal amount, which is equivalent to a
conversion price of approximately $59.82 per share, subject to adjustments.
Prior to September 15, 2020, holders may convert their 2021 Notes only under the
following conditions: (a) during any calendar quarter beginning June 30, 2016,
if the reported sale price of our common stock for at least 20 days out
of 30 consecutive trading days ending on the last trading day of the immediately
preceding calendar quarter is greater than 130% of the conversion price on each
applicable trading day; (b) during the five business day period in which the
trading price of the 2021 Notes falls below 98% of the product of (i) the last
reported sale price of our common stock and (ii) the conversion rate on that
date; and (c) upon the occurrence of specified corporate events, as defined in
the 2021 Notes. From September 15, 2020 and until the close of business on the
second scheduled trading day immediately preceding March 15, 2021, holders may
convert their 2021 Notes at any time (regardless of the foregoing
circumstances). Prior to March 20, 2019, we could not redeem the 2021 Notes . We
may redeem the 2021 Notes, at our option, in whole or in part on or after
March 20, 2019 until the close of business on the business day immediately
preceding September 15, 2020 if the last reported sale price of our common stock
has been at least 130% of the conversion price then in effect for at least 20
trading days during any 30 consecutive trading day period ending on, and
including, the trading day immediately preceding the date on which we deliver
written notice of a redemption. The redemption price will be equal to 100% of
the principal amount of such 2021 Notes to be redeemed plus accrued and unpaid
interest to, but excluding, the redemption date. No principal payments are due
on the 2021 Notes prior to maturity. Other than restrictions relating to certain
fundamental changes and consolidations, mergers or asset sales and customary
anti-dilution adjustments, the 2021 Notes do not contain any financial covenants
and do not restrict us from paying dividends or issuing or repurchasing any of
our other securities. As of December 31, 2019, we were unaware of any current
events or market conditions that would have allowed holders to convert the 2021
Notes. The impact of the convertible feature will be dilutive to our earnings
per share when our average stock price for the period is greater than the
conversion price.

In connection with the offering of the 2021 Notes, we entered into transactions
for convertible notes hedge, which we refer to as the 2021 Hedge, and warrants,
which we refer to as the 2021 Warrants. The 2021 Hedge was entered into with the
initial purchasers of the 2021 Notes and/or their affiliates, which we refer to
as the 2021 Counterparties, entitling us to purchase up to 10,865,270 shares of
our own common stock at an initial stock price of $59.82 per share, each of
which is subject to adjustment. The cost of the 2021 Hedge was $111.2 million.
The 2021 Hedge will expire on March 15, 2021. The 2021 Hedge is expected to
reduce the potential equity dilution upon conversion of the 2021 Notes if the
daily volume-weighted average price per share of our common stock exceeds the
strike price of the 2021 Hedge. Our assumed exercise of the 2021 Hedge is
considered anti-dilutive since the effect of the inclusion would always be
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In addition, we sold the 2021 Warrants to the 2021 Counterparties to acquire up
to 10,865,270 common shares of our stock. The 2021 Warrants will expire on
various dates from June 2021 through December 2021 and may be settled in cash or
net shares. It is our current intent and policy to settle all conversions in
shares of our common stock. We received $44.9 million in cash proceeds from the
sale of the 2021 Warrants. The 2021 Warrants could have a dilutive effect on our
earnings per share to the extent that the price of our common stock during a
given measurement period exceeds the strike price of the 2021 Warrants, which is
$80.00 per share.

Revolving Senior Credit Facility

In April 2017, we entered into an Amended and Restated Credit Agreement (the
"2017 Credit Agreement") for a revolving senior credit facility (the "2017
Facility"), which replaced the previous credit agreement we had entered into in
February 2016. The 2017 Credit Agreement provides for secured revolving loans,
multicurrency loan options and letters of credit in an aggregate amount of up to
$500.0 million. The 2017 Credit Agreement also contains an accordion feature,
which allows us to increase the aggregate principal amount of the 2017 Facility
provided we remain in compliance with the underlying financial covenants,
including but not limited to, compliance with the consolidated interest coverage
ratio and certain consolidated leverage ratios. The 2017 Facility matures in
April 2022 (subject to an earlier springing maturity date), and includes a
sublimit of $100.0 million for multicurrency borrowings, a sublimit of $50.0
million for the issuance of standby letters of credit, and a sublimit of $5.0
million for swingline loans. All of our assets including the assets of our
material domestic subsidiaries are pledged as collateral under the 2017 Facility
(subject to customary exceptions) pursuant to the term set forth in the Amended
and Restated Security and Pledge Agreement (the "2017 Security Agreement")
executed in favor of the administrative agent. Each of our material domestic
subsidiaries guarantees the 2017 Facility. In connection with the 2017 Facility,
we incurred issuance costs which will be amortized over the term of the 2017
Facility. We did not carry any outstanding revolving loans under the 2017
Facility as of December 31, 2019 and 2018.

Borrowings under the 2017 Facility bear interest, at our option, at a rate equal
to an applicable margin plus: (a) the applicable Eurocurrency Rate (as defined
in the 2017 Credit Agreement), or (b) a base rate determined by reference to the
highest of (1) the federal funds effective rate plus 0.50%, (2) the Bank of
America prime rate, and (3) LIBOR for an interest period of one month plus
1.00%. The margin for the 2017 Facility ranges, based on our consolidated
leverage ratio, from 0.00% to 1.00% in the case of base rate loans and from
1.00% to 2.00% in the case of Eurocurrency Rate loans. The 2017 Facility
includes an unused line fee ranging, based on our consolidated leverage ratio,
from 0.20% to 0.35% per annum on the revolving commitment.

The 2017 Credit Agreement contains affirmative, negative, permitted acquisition
and financial covenants, and events of default customary for financings of this
type. The financial covenants require us to maintain ratios of consolidated
earnings before interest, taxes, depreciation and amortization (EBITDA) in
relation to consolidated interest expense and consolidated debt, respectively,
as defined in the 2017 Credit Agreement. The 2017 Facility grants the lenders
preferred first priority liens and security interests in capital stock,
intercompany debt and all of our present and future property and assets
including each guarantor. We are currently in compliance with the Credit
Agreement covenants.

Contractual Obligations and Commitments

Contractual obligations and commitments represent future cash commitments and liabilities under agreements with third parties, including our 2021 Notes, operating leases and other contractual obligations.

The following table summarizes our contractual obligations and commitments as of
December 31, 2019:

                                                                            Payments Due by Period
                                                     Less Than
(in thousands)                          Total          1 Year         1 to 3 Years       4 to 5 Years       After 5 Years
Convertible Notes (1)                 $ 671,938     $     14,625     $      657,313     $            -     $             -
Operating leases                        125,266           11,024             20,612             18,353              75,277
Finance leases                            1,695              744                928                 23                   -
Other long-term liabilities              36,661            7,342             13,950             10,369               5,000
Total                                 $ 835,560     $     33,735     $      692,803     $       28,745     $        80,277

(1) Convertible Notes includes the expected coupon interest payments on the

outstanding debt. See Note 5 to the Consolidated Financial Statements

          included in this Annual Report for further discussion of the terms of
          the convertible notes.


Total contractual obligations and commitments listed in the table above excludes
potential contingent consideration payments pursuant to certain merger,
purchase, and product development agreements, other than achieved milestones.
See Note 3 and 6 to the Consolidated Financial Statements included in this
Annual Report for further discussion on the contingent consideration obligations
and product development agreements, respectively.

The expected timing of payments of the obligations discussed above is estimated
based on current information. Timing of payment and actual amounts paid may be
different depending on the time of receipt of services or changes to agreed-upon
amounts for some obligations.



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Off-Balance Sheet Arrangements

As of December 31, 2019, we did not have any off-balance sheet activities.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity and Risk

Our exposure to interest rate risk at December 31, 2019 is related to our
investment portfolio which consists largely of cash equivalents in the form of
debt instruments of high quality corporate issuers and the U.S. government and
its agencies. Due to the short-term nature of these investments, we have
assessed that there is no material exposure to interest rate risk arising from
our investments. Fixed rate investments and borrowings may have their fair
market value adversely impacted from changes in interest rates. At December 31,
2019, we do not hold any material asset-backed investment securities and in
2019, we did not realize any losses related to asset-backed investment
securities. Based upon our overall interest rate exposure as of December 31,
2019, a change of 10 percent in interest rates, assuming the amount of our
investment portfolio and overall economic environment remains constant, would
not have a material effect on interest income.

The primary objective of our investment activities is to preserve the principal
while at the same time maximizing yields without significantly increasing the
risk. To achieve this objective, we maintain our portfolio of cash equivalents
and investments in instruments that meet high credit quality standards, as
specified in our investment policy. None of our investments are held for trading
purposes. Our policy also limits the amount of credit exposure to any one issue,
issuer and type of instrument.

As of December 31, 2019, we only held investments in securities of a short-term
nature classified as cash equivalents. During the periods presented, we did not
hold any investments that were in a significant unrealized loss position and no
impairment charges were recorded. Realized gains and losses and interest income
related to marketable securities were immaterial during all periods presented.

Market Price Sensitive Instruments

In order to reduce the potential equity dilution, we entered into the 2021 Hedge
in connection with the issuance of the 2021 Notes entitling us to purchase our
common stock. Upon conversion of our convertible notes, the 2021 Hedge is
expected to reduce the equity dilution if the daily volume-weighted average
price per share of our common stock exceeds the strike price of the applicable
hedge. We also entered into warrant transactions with the counterparties of the
2021 Hedge entitling them to acquire shares of our common stock. The warrant
transactions could have a dilutive effect on our earnings per share to the
extent that the price of our common stock during a given measurement period (the
quarter or year to date period) exceeds the strike price of the warrants. See
Note 5 to the Consolidated Financial Statements included in this Annual Report
for further discussion.

Foreign Currency Exchange Risk

A substantial portion of our operations are located in the United States, and
the majority of our sales since inception have been made in the United
States dollars. Accordingly, we have assessed that we do not have any material
net exposure to foreign currency rate fluctuations. However, as our business in
markets outside of the United States continues to increase, we will be exposed
to foreign currency exchange risk related to our foreign operations.
Fluctuations in the rate of exchange between the United States dollar and
foreign currencies, primarily the pound sterling the euro, the Australian
dollar, the Brazilian real, the Singapore dollar, and the yen, could adversely
affect our financial results, including our revenues, revenue growth rates,
gross margins, income and losses as well as assets and liabilities. In addition,
loss of financial stability within these markets could lead to delays in
reimbursement or inability to remit payment due to currency
controls. Specifically, we have operations in Puerto Rico, Brazil, and Argentina
that have financial instability or currency controls. We do not have any
material financial exposure to one customer or one country that would
significantly hinder our liquidity.



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We translate the financial statements of our foreign subsidiaries with
functional currencies other than the United States dollar into the United States
dollar for consolidation using end-of-period exchange rates for assets and
liabilities and average exchange rates during each reporting period for results
of operations. Net gains or losses resulting from the translation of foreign
financial statements and the effect of exchange rate changes on intercompany
receivables and payables of a long-term investment nature are recorded as a
separate component of stockholders' equity. These adjustments will affect net
income only upon sale or liquidation of the underlying investment in foreign
subsidiaries. Exchange rate fluctuations resulting from the translation of the
short-term intercompany balances between domestic entities and our foreign
subsidiaries are recorded as foreign currency transaction gains or losses and
are included in other income (expense) in the Consolidated Statement of
Operations. For those short-term intercompany balances, we enter into the
foreign currency forward contracts to partially offset the impact from
fluctuation of the foreign currency rates. The notional amount of the
outstanding foreign currency forward contracts was $26.9 million as of December
31, 2019, which was settled in January 2020. During the year ended December 31,
2019, a gain of $0.4 million was recognized in other (expense) income, net due
to the change in the fair value of the derivative instruments, and the fair
value of the hedge contracts we held was $(0.1) million on our Consolidated
Balance Sheet as of December 31, 2019. The notional principal amounts provide
one measure of the transaction volume outstanding as of period end, but do not
represent the amount of our exposure to market loss. The estimates of fair value
are based on applicable and commonly used pricing models using prevailing
financial market information. The amounts ultimately realized upon settlement of
these financial instruments, together with the gains and losses on the
underlying exposures, will depend on actual market conditions during the
remaining life of the instruments. The financial exposures by exchange rate
fluctuations are monitored and managed by us as an integral part of our overall
risk management program, which recognizes the unpredictability of financial
markets and seeks to reduce potentially adverse effects on our results.



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