Forward-Looking Statements May Prove Inaccurate
This quarterly report on Form 10-Q ("Quarterly 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. In
some cases, you can identify these forward-looking statements by words like
"may", "will", "should", "could", "expect", "plan", "anticipate", "believes",
"estimates", "predicts", "potential", "intends", or "continues" (or the negative
of those words and other comparable words). Forward-looking statements include,
but are not limited to, statements about:
• the value proposition of our products and procedural solutions;
• our intentions, beliefs and expectations regarding our expenses, sales,
operations and future financial performance;
• our operating results;
• our plans for obsoleting our products and our ability to develop future
products and enhancements of existing products;
• anticipated growth and trends in our business;
• third party reimbursement policies and practices;
• the timing of and our ability to maintain and obtain regulatory clearances
or approvals;
• our belief that our cash and cash equivalents and investments will be
sufficient to satisfy our anticipated cash requirements;
• the impact of global economic conditions and public health crises and
epidemics, such as the COVID-19 pandemic, on our business;
• our expectations regarding our net sales, customers and distributors;
• our beliefs and expectations regarding our market penetration and
expansion efforts;
• our expectations regarding the benefits and integration of
recently-acquired businesses and our ability to make future acquisitions
and successfully integrate any such future-acquired businesses;
• our anticipated trends, product pricing pressure, competitive tactics and
other challenges in the markets in which we operate; and
• our expectations and beliefs regarding and the impact of policy changes,
investigations, claims and litigation.
These statements are not guarantees of future performance or events. Our actual
results may differ materially from those discussed here. The potential risks and
uncertainties that could cause actual results to differ materially include, but
are not limited to those set forth under the heading "Risk Factors" in our
Annual Report on Form 10-K for the year ended December 31, 2019, and this
Quarterly Report on Form 10-Q, and similar discussions in our other Securities
and Exchange Commission (the "SEC") filings. We assume no obligation to update
any forward looking statements to reflect new information, future events or
circumstances or otherwise.
This information should be read in conjunction with the Unaudited Consolidated
Financial Statements and the notes thereto included in Part I, Item 1 of this
Quarterly Report and with Management's Discussion and Analysis of Financial
Condition and Results of Operations for the year ended December 31,
2019 contained in our 2019 Annual Report on Form 10-K.
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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.
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
traumatic injury.
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. Selling and leasing of capital
equipment do not make up a material portion of our total net sales.
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.
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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.
In December 2019, a novel strain of coronavirus, which causes COVID-19, was
identified. Due to the rapid and global spread of the virus, on March 11, 2020,
the World Health Organization declared the COVID-19 outbreak a pandemic. To slow
the proliferation of COVID-19, governments domestically and around the world
have implemented extraordinary measures, which include the mandatory closure of
businesses, restrictions on travel and gatherings, and quarantine and physical
distancing requirements. In addition, many government agencies in conjunction
with hospitals and healthcare systems have, to varying degrees, deferred or
suspended elective surgical procedures. While certain spine surgeries are deemed
essential and certain surgeries, like in cases of trauma, cannot be delayed, we
have seen and may continue to see a significant reduction in procedural volumes
as hospital systems and/or patients elect to defer spine surgery procedures. As
a result of these measures, we have experienced substantial reductions in
procedural volumes and anticipate this trend will continue during the pandemic.
Although we cannot predict the specific extent, duration, or scope of the impact
that the COVID19 pandemic will have on our financial results, we have
experienced, and may continue to experience, material declines in our net sales,
cash flow, and/or profitability in one or more quarterly periods in 2020
compared to the corresponding prior-year periods and compared to our
expectations at the beginning of the 2020 fiscal year. Further discussion of the
potential impacts on our business from the COVID-19 pandemic is provided below
under Part II, Item 1A - Risk Factors.
Net Sales and Operations
The majority of our net sales are 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 net sales from 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. Net sales 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. Selling or leasing of capital equipment does
not make up a material portion of our total net sales.
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 selling, general and administrative operating
expense line item within our Unaudited 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.
Results of Operations
Net Sales
June 30,
(in thousands, except %) 2020 2019 $ Change % Change
Three Months Ended
Net sales
Spinal hardware $ 152,818 $ 212,634 $ (59,816 ) (28 )%
Surgical support 50,794 79,471 (28,677 ) (36 )%
Total net sales $ 203,612 $ 292,105 $ (88,493 ) (30 )%
Six Months Ended
Net sales
Spinal hardware $ 343,687 $ 409,772 $ (66,085 ) (16 )%
Surgical support 119,806 157,109 (37,303 ) (24 )%
Total net sales $ 463,493 $ 566,881 $ (103,388 ) (18 )%
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.
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The continued adoption of minimally invasive procedures for spine surgery has
led to the expansion of our procedure volume. 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. Further, the COVID-19 pandemic has led to a significant
reduction in procedural volumes, and we cannot predict the specific extent,
duration, or scope of the impact or rate of recovery from the pandemic.
Net sales from our spinal hardware product line offerings decreased $59.8
million and $66.1 million, or 28% and 16%, during the three and six months ended
June 30, 2020, respectively, compared to the same periods in 2019. Product
volume in spinal hardware decreased our net sales by approximately 27% and 15%
for the three and six months ended June 30, 2020, respectively, primarily due to
a reduction in elective surgeries as a result of the COVID-19 pandemic.
Additionally, we experienced unfavorable pricing impacts of approximately 1% for
both the three and six months ended June 30, 2020, compared to the same periods
in 2019. Foreign currency fluctuation had an insignificant impact on net sales
from spinal hardware for the periods presented.
Net sales from our surgical support product line offerings decreased $28.7
million and $37.3 million, or 36% and 24%, during the three and six months ended
June 30, 2020, respectively, compared to the same periods in 2019. Product and
service volume in surgical support decreased our net sales by approximately 36%
and 23% for the three and six months ended June 30, 2020, respectively,
primarily due to a reduction in elective surgeries as a result of the COVID-19
pandemic. Additionally, we experienced unfavorable pricing impacts of
approximately 1% for the six months ended June 30, 2020, as compared to the same
period in 2019. Pricing had an insignificant impact on net sales from surgical
support for the three months ended June 30, 2020. Foreign currency fluctuation
had an insignificant impact on net sales from surgical support for the periods
presented.
Cost of Sales, Excluding Below Amortization of Intangible Assets
June 30,
(in thousands, except %) 2020 2019 $ Change % Change
Three Months Ended
Cost of sales $ 80,505 $ 77,579 $ 2,926 4 %
% of total net sales 40 % 27 % 13 %
Six Months Ended
Cost of sales $ 152,370 $ 152,073 $ 297 0 %
% of total net sales 33 % 27 % 6 %
Cost of sales 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 sales.
Cost of sales increased $2.9 million, or 4%, during the three months ended June
30, 2020 and increased $0.3 million during the six months ended June 30, 2020,
compared to the same periods in 2019. However, cost of sales as a percentage of
net sales for the three and six months ended June 30, 2020 increased by 13% and
6%, respectively. The increase in cost of sales for the three and six months
ended June 30, 2020 is primarily attributable to a proportional reduction in
cost of sales associated with lower net sales due to a reduction in elective
surgeries as a result of the COVID-19 pandemic. Offsetting this reduction is an
increase in the reserve for excess and obsolete inventory of $21.9 million and
$24.1 million during the three and six months ended June 30, 2020, respectively,
which is primarily attributable to updates to our estimates and assumptions
about future demand for certain spinal hardware products associated with market
conditions affected by the COVID-19 pandemic.
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Operating Expenses
Three Months Ended
June 30,
(in thousands, except %) 2020 2019 $ Change % Change
Selling, general and administrative $ 126,444 $ 152,853 $ (26,409 ) (17 )%
% of total net sales
62 % 52 %
Research and development 19,406 17,553 1,853 11 %
% of total net sales 10 % 6 %
Amortization of intangible assets 12,675 12,277 398 3 %
Purchase of in-process research and
development 1,011 - 1,011 *
Business transition costs 874 1,646 (772 ) (47 )%
Six Months Ended
June 30,
(in thousands, except %) 2020 2019 $ Change % Change
Selling, general and administrative $ 256,675 $ 297,929 $ (41,254 ) (14 )%
% of total net sales
55 % 53 %
Research and development 37,663 35,128 2,535 7 %
% of total net sales 8 % 6 %
Amortization of intangible assets 25,324 25,902 (578 ) (2 )%
Purchase of in-process research and
development 1,011 - 1,011 *
Business transition costs (566 ) 5,479 (6,045 ) (110 )%
Selling, General and Administrative
Selling, general 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.
Selling, general and administrative expenses decreased by $26.4 million and
$41.3 million, or 17% and 14%, during the three and six months ended June 30,
2020, respectively, compared to the same periods in 2019. The decrease during
the three and six months ended June 30, 2020 is primarily due to impacts from
the COVID-19 pandemic reducing compensation costs, including stock-based
compensation subject to fair value adjustments for certain equity awards, as
well as decreases in travel expenses, as compared to the same periods in 2019.
Additionally, during the three months ended June 30, 2020, due to the impacts
from the COVID-19 pandemic we implemented temporary actions to reduce expenses,
including implementing compensation reductions for our Board of Directors and
executive officers, and reducing discretionary spend across the organization.
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 $1.9 million and $2.5 million, or
11% and 7%, during the three and six months ended June 30, 2020, respectively,
compared to the same periods in 2019. The increase in spending is primarily due
to increased headcount and increased cost associated with further enhancement
and functionality of our current and future product offerings, including capital
equipment.
Purchase of In-Process Research and Development
During the three months ended June 30, 2020, we expensed $1.0 million for a
purchased in-process research and development asset which had no future
alternative use.
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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 milestones will be
achieved resulting in payment. If an accrual for contingent consideration
decreases during a particular period, it results in a reduction of costs during
such period.
During the three months ended June 30, 2020, we recorded $0.9 million of costs
related to acquisition, integration and business transition activities, which
included $0.5 million of fair value adjustments on contingent consideration
liabilities associated with our 2017 and 2016 acquisitions. During the six
months ended June 30, 2020, we recorded a reduction of costs of $(0.6) million
related to acquisition, integration and business transition activities, which
included $(1.6) million of fair value adjustments on contingent consideration
liabilities associated with our 2017 and 2016 acquisitions.
During the three and six months ended June 30, 2019, we recorded $1.6 million
and $5.5 million, respectively, of costs related to acquisition, integration and
business transition activities. For the three months ended June 30, 2019, such
costs consisted primarily of fair value adjustments on contingent consideration
liabilities associated with our 2017 and 2016 acquisitions. For the six months
ended June 30, 2019, such costs related to acquisition, integration and business
transition activities, which included $2.0 million of fair value adjustments on
contingent consideration liabilities associated with our 2017 and 2016
acquisitions.
Interest and Other Expense, Net
June 30,
(in thousands, except %) 2020 2019 $ Change % Change
Three Months Ended
Interest income $ 304 $ 327 $ (23 ) (7 )%
Interest expense (16,524 ) (9,650 ) (6,874 ) 71 %
Other (expense) income, net (11,662 ) 9 (11,671 ) (129,678 )%
Total interest and other expense, net $ (27,882 ) $ (9,314 ) $ (18,568 ) 199 %
Six Months Ended
Interest income
$ 1,035 $ 736 $ 299 41 %
Interest expense (28,041 ) (19,163 ) (8,878 ) 46 %
Other expense, net (19,070 ) (357 ) (18,713 ) 5,242 %
Total interest and other expense, net $ (46,076 ) $ (18,784 ) $ (27,292 ) 145 %
Total interest and other expense, net for the periods presented included gains
and losses from strategic investments, gains and losses from changes in the fair
value of derivatives, our pro rata allocation of net income or loss from our
equity method investments, and net foreign currency exchange gains and losses.
Total interest and other expense, net increased by $18.6 million and $27.3
million during the three and six months ended June 30, 2020, respectively, as
compared to the same periods in 2019. The increase during the three and six
months ended June 30, 2020 is primarily due to a net loss of $12.3 million
recognized for the change in fair value derivative assets and liabilities
resulting from the Senior Convertible Notes due 2023 issued in June 2020, as
well as an increase in interest expense associated with the Senior Convertible
Notes due 2025 issued in March 2020 and Senior Convertible Notes due 2023 issued
in June 2020.
Income Tax (Benefit) Expense
June 30,
(in thousands, except %) 2020 2019
Three Months Ended
Income tax (benefit) expense $ (15,170 ) $ 5,921
Effective income tax rate
23 % 28 %
Six Months Ended
Income tax (benefit) expense $ (10,343 ) $ 7,238
Effective income tax rate
19 % 23 %
The provision for income tax expense as a percentage of pre-tax income from
continuing operations was a benefit of 23% for the three months ended June 30,
2020 compared with an expense of 28% for the three months ended June 30, 2019.
The tax benefit during the three months ended June 30, 2020 was primarily due to
a decrease in pre-tax earnings, an increase in losses in jurisdictions where we
receive no tax benefit, an increase in limitations on executive compensation
deductions, an increase in uncertain tax position reserves and decreases in
windfall tax benefits on share-based payments.
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The provision for income tax expense as a percentage of pre-tax income from
continuing operations was a benefit of 19% for the six months ended June 30,
2020 compared with a tax expense of 23% for the six months ended June 30, 2019.
The tax benefit during the six months ended June 30, 2020 was primarily due to a
decrease in pre-tax earnings, offset by an increase in losses in jurisdictions
where we receive no tax benefit, an increase in limitations on executive
compensation deductions, an increase in uncertain tax position reserves and
decreases in windfall tax benefits on share-based payments.
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, which include impacts from the COVID-19 pandemic, 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 growth
rate in net sales, the timing and extent of spending to support development
efforts, the expansion of selling, general 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, international expansions of our business, and impacts
from the COVID-19 pandemic. 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. 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 secure additional credit facilities, term loans, or
other similar arrangements and access the capital markets in light of those
earning levels and general financial market conditions.
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 net sales, growth rates in net sales, 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 June 30, 2020, the cash
balance held by our foreign subsidiaries with currencies other than the United
States dollar was approximately $47.6 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 June 30, 2020, our account receivable balance held by
our foreign subsidiaries with currencies other than the United States dollar was
approximately $39.7 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, other than those matters disclosed in this Quarterly
Report. We have no material accruals for pending litigation or claims for which
accrual amounts are not disclosed in our Unaudited Consolidated Financial
Statements. It is reasonably possible, however, that an unfavorable outcome that
exceeds our accrual estimate, if any, for one or more of the matters described
in our Unaudited Consolidated Financial Statements 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 12 of the Unaudited Consolidated Financial Statements.
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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.
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 by 2024.
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. In the second quarter ended June 30, 2020, we paid
$7.5 million toward the successful achievement of a milestone. We anticipate the
remaining milestones will become payable at varying times between 2021 and 2024,
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 $58.8 million in lease payments over a 15-year term.
Cash, cash equivalents and short-term investments were $926.8 million and $213.0
million at June 30, 2020 and December 31, 2019, respectively. While the
unprecedented public health and governmental efforts to contain the spread of
COVID-19 have created significant disruptions to the healthcare system and the
global economy, as of the filing date of this report, we believe our existing
cash, cash equivalents, short-term investments, projected future cash flows from
operations and access to external financing sources are sufficient to satisfy
our current and reasonably anticipated requirements for funds to conduct our
operations in the ordinary course of our business and pay our obligation as they
become due for the next twelve months. Given the impact of the COVID-19 pandemic
on demand for elective surgical procedures, we have taken temporary actions to
reduce operating expenses and preserve liquidity such as reducing compensation
for our directors and executive officers, limiting discretionary spend, and
adjusting manufacturing capacity based on certain government directives and
demand. We may have varying needs for cash in connection with our Senior
Convertible Notes due March 2021, and also as a result of certain
acquisition-related obligations and milestone achievements. Future litigation or
requirements to escrow funds could also materially impact our liquidity and our
ability to invest in and run our business on an ongoing basis. Although we have
no cash borrowings under our existing revolving senior credit facility as of the
date of this report, for the remainder of 2020, we expect to use our cash
resources or cash borrowings under our senior credit facility to support our
business within the context of prevailing market and economic conditions, which,
given the COVID-19 crisis, could rapidly and materially deteriorate or otherwise
change. During this time, we may seek other sources of liquidity through capital
market or bank loan transactions to support our business needs. In addition, we
may seek to further adjust or amend the terms of and/or expand the capacity of
our existing senior credit facility, or enter into additional credit facilities,
term loans, or other similar arrangements. However, with the uncertainty
surrounding the COVID-19 crisis, our ability to engage in such transactions may
be constrained by volatile financial market conditions, reduced investor and/or
lender interest or capacity, as well as our liquidity, leverage, and general
creditworthiness and we can provide no assurance as to successfully completing
such transactions. Furthermore, our ability to borrow under our existing
revolving senior credit facility is subject to remaining in compliance with
underlying financial covenants which may be difficult to satisfy if the COVID-19
pandemic continues to adversely impact the healthcare system and our business.
Further discussion of the potential impacts from the COVID-19 pandemic is
provided below under Part II, Item 1A - Risk Factors.
The increase in liquidity during the six months ended June 30, 2020 of $713.8
million was mainly driven by cash inflows of $874.4 million related to the net
issuance of our Senior Convertible Notes due 2023 and 2025, partially offset by
$79.0 million in cash used for treasury stock purchases, $53.9 million net in
cash used for the call spread on the sale and purchase of our warrants and bond
hedges issued in connection with the Senior Convertible Notes due 2023 and 2025,
and $52.1 million in cash used for purchases of property and equipment. At June
30, 2020, we had cash totaling $1.5 million in restricted accounts which is not
available to us to meet any ongoing capital requirements if and when needed.
Cash Flows from Operating Activities
Cash provided by operating activities was $33.1 million for the six months ended
June 30, 2020, compared to $93.4 million for the same period in 2019. The $60.3
million decrease in cash provided by operating activities was primarily due to
decreased operational cash flows in 2020 related primarily to lower net sales
and cash receipts resulting from the COVID-19 pandemic, as well as an increase
in payments for compensation related accruals and timing of spending.
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Cash Flows from Investing Activities
Cash used in investing activities was $184.7 million for the six months ended
June 30, 2020, compared to $76.3 million used for the same period in 2019. The
$108.3 million increase in cash used in investing activities was primarily due
to $130.1 million in cash used for the purchase of marketable debt securities,
offset by a decrease of $13.3 million in cash used for purchases of property and
equipment, and a decrease of $8.4 million in cash used for business
combinations, strategic investments and intangible assets during the six months
ended June 30, 2020, as compared to the same period in 2019.
Cash Flows from Financing Activities
Cash provided by financing activities was $736.0 million for the six months
ended June 30, 2020, compared to $6.9 million used for the same period in 2019.
The $742.9 million increase in cash provided by financing activities was
primarily due to the net issuances of the Senior Convertible Notes due 2023 and
2025 of $874.4 million, offset by $53.9 million net cash used for the call
spreads on the sales and purchases of our warrants and bond hedges, and an
increase in treasury stock purchases of $67.3 million during the six months
ended June 30, 2020, compared to the same period in 2019.
Treasury stock purchases totaled $79.0 million during the six months ended June
30, 2020, relating to our share repurchase program, equity award vestings and
stock option exercises. In March 2020, in connection with the issuance of the
2025 Notes, we repurchased approximately 1,085,000 shares of our common stock
for $75.0 million. We use net share settlement on stock issuances, which results
in cash tax payments we make on behalf of shareowners and a decrease in the cash
receipt from the issuance of common stock upon the exercising of stock options.
Net share settlement is generally used in lieu of cash payments by shareowners
for minimum tax withholding or exercise costs for equity awards. The net share
settlement is accounted for as a treasury share repurchase transaction, with the
cost of any deemed repurchased shares included in treasury stock and reported as
a reduction in total equity at the time of settlement. Additionally, net share
settlement for tax withholding requires us to fund a significant amount of cash
for certain tax payment obligations from time-to-time with respect to the
shareowner tax obligations for vested equity awards. We anticipate using cash
generated from operating activities to fund 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 June 30, 2020, we are unaware of any current events
or market conditions that would allow 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.
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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
anti-dilutive with respect to the calculation of diluted earnings per share.
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.
1.00% Senior Convertible Notes due 2023
In June 2020, we issued $450.0 million principal amount of unsecured Senior
Convertible Notes with a stated interest rate of 1.00% and a maturity date of
June 1, 2023, which we refer to as the 2023 Notes. The net proceeds from the
offering, after deducting initial purchasers' discounts and costs directly
related to the offering, were approximately $436.2 million. The 2023 Notes will
initially be settled in cash, or, if we have sufficient reserved shares, we may
settle conversions in cash, stock, or a combination thereof, solely at our
discretion. As of June 30, 2020, we did not have sufficient reserved shares with
respect to the 2023 Notes. To the extent we in the future have sufficient
reserved shares, 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 2023 Notes
is 11.8778 shares per $1,000 principal amount, which is equivalent to a
conversion price of approximately $84.19 per share, subject to adjustments. In
addition, following certain corporate events that occur prior to the maturity
date or if we issue a notice of redemption, we will increase the conversion rate
for a holder who elects to convert its 2023 Notes in connection with such a
corporate event or in connection with such redemption in certain circumstances.
Prior to February 1, 2023, holders may convert their 2023 Notes only under the
following conditions: (a) during any calendar quarter commencing after the
calendar quarter ending on September 30, 2020 (and only during such calendar
quarter), if the last reported sale price of our common stock for at least 20
trading days (whether or not consecutive) during a period of 30 consecutive
trading days ending on, and including, the last trading day of the immediately
preceding calendar quarter is greater than or equal to 130% of the conversion
price on each applicable trading day; (b) during the five business day period
after any five consecutive trading day period, referred to as the measurement
period, in which the trading price of the 2023 Notes per $1,000 principal amount
of notes for each trading day of the measurement period was less than 98% of the
product of the last reported sale price of our common stock and the conversion
rate on such trading day; (c) if we call any or all of the 2023 Notes for
redemption, at any time prior to the close of business on the second scheduled
trading day preceding the redemption date; or (d) upon the occurrence of
specified corporate events, as defined in the 2023 Notes. On or after February
1, 2023, until the close of business on the second scheduled trading day
immediately preceding June 1, 2023, holders may convert their 2023 Notes at any
time, regardless of the foregoing conditions. We may not redeem the 2023 Notes
prior to the maturity date. No principal payments are due on the 2023 Notes
prior to maturity. Other than restrictions relating to certain fundamental
changes and consolidations, mergers or asset sales and customary anti-dilution
adjustments, the 2023 Notes do not contain any financial covenants and do not
restrict us from conducting significant restructuring transactions, paying
dividends or issuing or repurchasing any of our other securities. As of June 30,
2020, we are unaware of any current events or market conditions that would allow
holders to convert the 2023 Notes.
In connection with the sale of the 2023 Notes, we entered into transactions for
convertible notes hedge, which we refer to as the 2023 Hedge, and warrants,
which we refer to as the 2023 Warrants. The 2023 Hedge was entered into with
certain dealers, which included affiliates of certain of the initial purchasers
of the 2023 Notes and other financial institutions, which we refer to as the
2023 Counterparties, entitling us to purchase up to 5,345,010 shares of our own
common stock at an initial stock price of $84.19 per share, each of which is
subject to adjustment. The cost of the 2023 Hedge was $69.5 million. The 2023
Hedge will expire on the second scheduled trading day immediately preceding
June 1, 2023. The 2023 Hedge is expected to reduce the potential equity dilution
upon conversion of the 2023 Notes if the daily volume-weighted average price per
share of our common stock exceeds the strike price of the 2023 Hedge.
In addition, we sold the 2023 Warrants to the 2023 Counterparties to acquire up
to 3,093,500 common shares of our stock. The 2023 Warrants will expire on
various dates from September 2023 through November 2023 and may be settled in
net shares or cash, subject to certain conditions. It is our current intent and
policy to settle all conversions in shares of our common stock. We
received $46.8 million in cash proceeds from the sale of the 2023 Warrants. The
2023 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 2023 Warrants, which is $104.84 per share.
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0.375% Senior Convertible Notes due 2025
In March 2020, we issued $450.0 million principal amount of unsecured senior
convertible notes with a stated interest rate of 0.375% and a maturity date
of March 15, 2025, which we refer to as the 2025 Notes. The net proceeds from
the offering, after deducting initial purchasers' discounts and costs directly
related to the offering, were approximately $437.0 million. Interest on the 2025
Notes began accruing upon issuance and is payable semi-annually. The 2025 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 2025 Notes
is 10.7198 shares per $1,000 principal amount, which is equivalent to a
conversion price of approximately $93.29 per share, subject to adjustments. In
addition, following certain corporate events that occur prior to the maturity
date or if we issue a notice of redemption, we will increase the conversion rate
for a holder who elects to convert its 2025 Notes in connection with such a
corporate event or in connection with such redemption in certain circumstances.
Prior to September 15, 2024, holders may convert their 2025 Notes only under the
following conditions: (a) during any calendar quarter commencing after the
calendar quarter ending on June 30, 2020 (and only during such calendar
quarter), if the last reported sale price of our common stock for at least 20
trading days (whether or not consecutive) during a period of 30 consecutive
trading days ending on, and including, the last trading day of the immediately
preceding calendar quarter is greater than or equal to 130% of the conversion
price on each applicable trading day; (b) during the five business day period
after any five consecutive trading day period, referred to as the measurement
period, in which the trading price of the 2025 Notes per $1,000 principal amount
of notes for each trading day of the measurement period was less than 98% of the
product of the last reported sale price of our common stock and the conversion
rate on such trading day; (c) if we call any or all of the 2025 Notes for
redemption, at any time prior to the close of business on the second scheduled
trading day preceding the redemption date; or (d) upon the occurrence of
specified corporate events, as defined in the 2025 Notes. On or after September
15, 2024, until the close of business on the second scheduled trading day
immediately preceding March 15, 2025, holders may convert their 2025 Notes at
any time, regardless of the foregoing conditions. We may not redeem the 2025
Notes prior to March 20, 2023. We may redeem the 2025 Notes, at our option, in
whole or in part, on or after March 20, 2023 until the close of business on the
business day immediately preceding September 15, 2024, 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 2025 Notes to be redeemed plus
accrued and unpaid interest to, but excluding, the redemption date. No principal
payments are due on the 2025 Notes prior to maturity. Other than restrictions
relating to certain fundamental changes and consolidations, mergers or asset
sales and customary anti-dilution adjustments, the 2025 Notes do not contain any
financial covenants and do not restrict us from conducting significant
restructuring transactions, paying dividends or issuing or repurchasing any of
our other securities. As of June 30, 2020, we are unaware of any current events
or market conditions that would allow holders to convert the 2025 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 sale of the 2025 Notes, we entered into transactions for
convertible notes hedge, which we refer to as the 2025 Hedge, and warrants,
which we refer to as the 2025 Warrants. The 2025 Hedge was entered into with
certain dealers, which included affiliates of certain of the initial purchasers
of the 2025 Notes and other financial institutions, which we refer to as the
2025 Counterparties, entitling us to purchase up to 4,823,910 shares of our own
common stock at an initial stock price of $93.29 per share, each of which is
subject to adjustment. The cost of the 2025 Hedge was $78.3 million. The 2025
Hedge will expire on the second scheduled trading day immediately preceding
March 15, 2025. The 2025 Hedge is expected to reduce the potential equity
dilution upon conversion of the 2025 Notes if the daily volume-weighted average
price per share of our common stock exceeds the strike price of the 2025
Hedge. Our assumed exercise of the 2025 Hedge is considered anti-dilutive since
the effect of the inclusion would always be anti-dilutive with respect to the
calculation of diluted earnings per share.
In addition, we sold the 2025 Warrants to the 2025 Counterparties to acquire up
to 4,823,910 common shares of our stock. The 2025 Warrants will expire on
various dates from June 2025 through October 2025 and may be settled in net
shares or cash, subject to certain conditions. It is our current intent and
policy to settle all conversions in shares of our common stock. We
received $47.1 million in cash proceeds from the sale of the 2025 Warrants. The
2025 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 2025 Warrants, which is $127.84 per share.
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Revolving Senior Credit Facility
In February 2020, we entered into a Second Amended and Restated Credit
Agreement, or the 2020 Credit Agreement, for a revolving senior credit facility,
referred to as the 2020 Facility, which replaced the previous Amended and
Restated Credit Agreement we had entered into in April 2017. The 2020 Credit
Agreement was further amended in May 2020 to, among other things, provide
additional flexibility in determining the financial covenant leverage ratios for
the second and third fiscal quarters of 2020 and to adjust certain margin and
benchmark rates used to determine interest under the 2020 Facility. The 2020
Credit Agreement provides for secured revolving loans, multicurrency loan
options and letters of credit in an aggregate amount of up to $550.0 million.
The 2020 Credit Agreement also contains an expansion feature, which allows us to
increase the aggregate principal amount of the 2020 Facility provided we remain
in compliance with the underlying financial covenants on a pro forma basis,
including but not limited to, compliance with the consolidated interest coverage
ratio and certain consolidated leverage ratios. The 2020 Facility matures in
February 2025 (subject to an earlier springing maturity date), and includes a
sublimit of $50.0 million for standby letters of credit, a sublimit of $250.0
million for multicurrency borrowings, and a sublimit of $5.0 million for
swingline loans. All of our assets including the assets of our material domestic
subsidiaries continue to be pledged as collateral under the 2020 Facility
(subject to customary exceptions) pursuant to the terms set forth in the Second
Amended and Restated Security and Pledge Agreement executed in favor of the
administrative agent. Each of our material domestic subsidiaries guarantee the
2020 Facility. In connection with the 2020 Facility, we incurred issuance costs
which will be amortized over the term of the 2020 Facility. We did not carry any
outstanding revolving loans under the 2020 Facility as of June 30, 2020 and
December 31, 2019.
Borrowings under the 2020 Facility bear interest, at our option, at a rate equal
to an applicable margin plus: (a) the applicable Eurocurrency Rate (as defined
in the 2020 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) the Eurocurrency Rate for an interest period of one
month plus 1.00%. The margin for the 2020 Facility ranges, based on our
consolidated total net leverage ratio, from 0.50% to 1.25% in the case of base
rate loans and from 1.50% to 2.25% in the case of Eurocurrency Rate loans. The
2020 Facility includes an unused line fee ranging, based on our consolidated
total net leverage ratio, from 0.35% to 0.50% per annum on the revolving
commitment.
The 2020 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 a consolidated interest
coverage ratio and certain consolidated leverage ratios, which are measured on a
quarterly basis. The 2020 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. As of June 30,
2020, we are in compliance with the 2020 Credit Agreement covenants.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
is based upon our Unaudited Consolidated Financial Statements, which have been
prepared in accordance with generally accepted accounting principles in the
United States, or 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 credit losses, inventories, valuation of
goodwill, intangibles, other long-term assets, 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. Our critical accounting
policies and estimates are discussed in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2019 and there have been no material changes
during the six months ended June 30, 2020.
Off-Balance Sheet Arrangements
As of June 30, 2020, we did not have any off-balance sheet arrangements.
Contractual Obligations and Commitments
As of June 30, 2020, other than the aforementioned corporate headquarters
operating lease commitment commencing in the first quarter 2020 and the
issuances of the 2023 Notes and 2025 Notes, there were no material changes,
outside of the ordinary course of business, in our outstanding contractual
obligations from those disclosed within "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2019.
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