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 future product developments 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 and industry;
• our expectations regarding our customers and the adoption of our products
and procedures;
• 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, 2020, 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,
2020 contained in our 2020 Annual Report on Form 10-K.
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Overview
We are a global medical technology company focused on developing, manufacturing,
selling and providing procedural solutions for spine surgery, with a guiding
purpose to transform surgery, advance care and change lives. We offer a
comprehensive portfolio of procedurally integrated spine surgery solutions,
including surgical access instruments, spinal implants, fixation systems,
biologics, and enabling technologies, as well as systems and services for
intraoperative neuromonitoring. In addition, we develop and sell magnetically
adjustable implant systems for spine and specialized orthopedic procedures.
Since our incorporation in 1997, we have grown from a small developer of
specialty spinal implants into a leading medical technology company delivering
procedurally integrated solutions for spine surgery. A key driver of our growth
has been our focus on innovative products and technologies that drive
reproducible outcomes for patients, surgeons and providers. In 2003, we
introduced the eXtreme Lateral Interbody Fusion procedure, or XLIF, a lateral
access spine surgery technique that is less-invasive than traditional, open
surgical procedures and clinically proven to enable better patient outcomes.
Building off the success of XLIF, we have continued to develop innovative
less-invasive techniques and technologies for spine surgery, and we have
broadened our portfolio of solutions for traditional, open surgical procedures.
Our comprehensive portfolio of solutions can be utilized in procedures for the
cervical, thoracic and lumbar spine, supporting surgical approaches from the
anterior, including lateral, and posterior. Our solutions are used to
treat degenerative conditions and for complex spinal surgery, including adult
and pediatric deformities, as well as trauma and tumors.
Underlying our procedurally integrated solutions for spine surgery are
innovative technologies designed to enable better clinical, financial, and
operational outcomes, including:
• our differentiated surgical access instruments, including our Maxcess
integrated split-blade retractor system, designed to enable less-invasive
surgical techniques by minimizing soft tissue disruption during spine
surgery;
• our neuromonitoring systems, which use proprietary software-driven nerve
detection and avoidance technology, and our intraoperative
neuromonitoring, or IONM, services and support;
• our Advanced Materials Science portfolio of specialized spinal implants,
designed to advance spinal fusion by enhancing the osseointegration and
biomechanical properties of implant materials, including porous titanium
and porous polyetheretherketone, or PEEK;
• our comprehensive Reline fixation system, designed to facilitate the
preservation and restoration of patient alignment, while addressing a vast
array of spinal pathologies from an open or less-invasive approach across
all spinal procedures; and
• our Integrated Global Alignment platform, or iGA, which is comprised of
procedurally-based technologies that help increase the predictability of
achieving global alignment in spinal procedures, including our Bendini
spinal rod bending system that expedites manual rod manipulation for
spinal fixation.
We have also invested in enabling technologies, including the development of
capital equipment designed to further improve clinical, financial, and
operational outcomes of spine surgery. Our capital equipment portfolio currently
consists of Lessray and the Pulse platform. 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, which has received CE certification in
Europe and regulatory clearance in the U.S., 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, surgical planning, patient-specific rod
bending, smart imaging, navigation, and integration with robotics and other
smart tools in the future.
In addition to our procedurally integrated solutions for spine surgery, 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 other products for treating
specialized orthopedic procedures.
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We intend to continue development on a wide variety of innovation projects to
advance our leadership position in less-invasive spine surgery, increase
our product offerings and solutions for traditional spine surgery procedures,
and further our enabling technologies portfolio. We expect to continue to invest
in the Pulse platform to support a full global 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.
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 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. The cumulative
effect of these disruptions had a significant impact on our business during the
year ended December 31, 2020 and the nine months ended September 30, 2021, and
it is not possible for us to accurately predict the length or severity of the
COVID-19 pandemic or the timing for a broad and sustained resumption of elective
surgical procedures. During the three months ended September 30, 2021,
procedural volumes for elective surgeries were negatively affected in the U.S.
and certain international regions primarily due to the impact of the COVID-19
Delta variant as well as U.S. healthcare worker shortages. The COVID-19 pandemic
continues to evolve and its impact on our business will depend on several
factors that are highly uncertain and unpredictable, including, the efficacy and
adoption of vaccines, future resurgences of the virus and its variants, the
speed at which government restrictions are lifted, patient capacity at hospitals
and healthcare systems, the duration and severity of U.S. healthcare worker
shortages, and the willingness and ability of patients to seek care and
treatment due to safety concerns or financial hardship. Further discussion of
the potential impacts on our business from the COVID-19 pandemic is provided
under Item 1A of Part I of our Annual Report on Form 10-K for the year ended
December 31, 2020.
Net Sales and Operations
The majority of our net sales are derived from the sale of implants and fixation
products, biologics, disposables and IONM 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 who
has assumed control of the products. Net sales from IONM services are recognized
in the period the service is performed for the amount of payment we expect to
receive. We make available surgical instrument sets 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 surgical
instrument sets and our proprietary software-driven neuromonitoring systems,
however this does not make up a material part of our business. While selling or
leasing of capital equipment has not historically made up a material portion of
our total net sales, capital equipment selling and leasing activity will likely
increase over time as a result of our commercialization of the Pulse platform.
A substantial portion of our operations are located in the United States, and
the majority of our net sales and cash generation have been made in the United
States. We sell our products in the United States through a sales force
comprised primarily of directly-employed and independent sales representatives.
Our sales force provides a delivery and consultative service to 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 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
representatives, as well as exclusive and non-exclusive independent third-party
distributors.
During the three months ended September 30, 2021, we made a determination to
withdraw certain Precice biodur products manufactured by our NuVasive
Specialized Orthopedics (NSO) subsidiary from the market and discontinue sales
of the products. As a result, we recorded a charge of $14.2 million in the
quarter for an increase to our inventory reserves and related liabilities. The
withdrawn products did not include the Precice titanium device system or MAGEC
system, and did not make up a material portion of our net sales.
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Results of Operations
Net Sales
September 30,
(in thousands, except %) 2021 2020 $ Change % Change
Three Months Ended
Net sales
Spinal hardware $ 204,250 $ 220,933 $ (16,683 ) (8 )%
Surgical support 66,586 74,349 (7,763 ) (10 )%
Total net sales $ 270,836 $ 295,282 $ (24,446 ) (8 )%
Nine Months Ended
Net sales
Spinal hardware $ 630,052 $ 564,620 $ 65,432 12 %
Surgical support 206,861 194,155 12,706 7 %
Total net sales $ 836,913 $ 758,775 $ 78,138 10 %
Our spinal hardware product line offerings include our implants and fixation
products. Our surgical support product line offerings include IONM services,
disposables and biologics, and our capital equipment, all of which are used to
aid spine surgery.
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, 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 is expected to 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. Additionally,
the COVID-19 pandemic has had, and may continue to have, an adverse effect on
our business. While procedural volume rates for elective surgeries did recover
during the second quarter of 2021, they declined in the U.S. and certain
international regions during the three months ended September 30, 2021 primarily
due to the impact of the COVID-19 Delta variant along with shortages in U.S.
healthcare workers. The COVID-19 pandemic continues to evolve and it is not
possible to accurately predict the length or severity of the COVID-19 pandemic
or the timing for a broad and sustained resumption of elective surgical
procedures.
Net sales from our spinal hardware product line offerings decreased $16.7
million, or 8%, during the three months ended September 30, 2021, compared to
the same period in 2020. Product volume within spinal hardware decreased our net
sales by approximately 7% during the three months ended September 30, 2021,
compared to the same period in 2020, primarily due to COVID-19 pandemic impacts
and NSO product availability. There were unfavorable pricing changes of
approximately 1% during the three months ended September 30, 2021, compared to
the same period in 2020. Foreign currency fluctuation had an insignificant
impact on net sales from spinal hardware for the three months ended September
30, 2021, compared to the same period in 2020.
Net sales from our spinal hardware product line offerings increased $65.4
million, or 12%, during the nine months ended September 30, 2021, compared to
the same period in 2020. Product volume within spinal hardware increased our net
sales by approximately 12% during the nine months ended September 30, 2021,
compared to the same period in 2020, primarily due to improved recovery rates of
certain elective surgeries as a result of COVID-19 pandemic impacts. There were
unfavorable pricing changes of approximately 1% during the nine months ended
September 30, 2021, compared to the same period in 2020. Foreign currency
fluctuation increased our spinal hardware net sales by approximately 1% during
the nine months ended September 30, 2021, compared to the same period in 2020.
Net sales from our surgical support product line offerings decreased $7.8
million, or 10%, during the three months ended September 30, 2021, compared to
the same period in 2020. Product and service volume within surgical support
decreased our net sales by approximately 9% during the three months ended
September 30, 2021, compared to the same period in 2020, primarily due to a
reduction in elective surgeries as a result of COVID-19 pandemic impacts. There
were unfavorable pricing changes of approximately 1% during the three months
ended September 30, 2021, compared to the same period in 2020. Foreign currency
fluctuation had an insignificant impact on net sales from surgical support for
the three months ended September 30, 2021, compared to the same period in 2020.
Net sales from our surgical support product line offerings increased $12.7
million, or 7%, during the nine months ended September 30, 2021, compared to the
same period in 2020. Product and service volume within surgical support
increased our net sales by approximately 8% during the nine months ended
September 30, 2021, compared to the same period in 2020, primarily due to
improved recovery rates of certain elective surgeries as a result of COVID-19
pandemic. There were unfavorable pricing changes of approximately 1% during nine
months ended September 30, 2021, compared to the same period in 2020. Foreign
currency fluctuation had an insignificant impact on net sales from surgical
support for the nine months ended September 30, 2021, compared to the same
period in 2020.
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Cost of Sales, Excluding Below Amortization of Intangible Assets
September 30,
(in thousands, except %) 2021 2020 $ Change % Change
Three Months Ended
Cost of sales $ 88,652 $ 84,633 $ 4,019 5 %
% of total net sales 33 % 29 % 4 %
Nine Months Ended
Cost of sales $ 238,743 $ 237,003 $ 1,740 1 %
% of total net sales 29 % 31 % (2 )%
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 IONM 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 $4.0 million, or 5%, during the three months ended
September 30, 2021, compared to the same period in 2020. Cost of sales as a
percentage of net sales for the three months ended September 30, 2021 increased
by 4%, compared to the same period in 2020. The increase in cost of sales for
the three months ended September 30, 2021 is primarily attributable to an
increase in our inventory reserves of $4.7 million. During the three months
ended September 30, 2021, we recorded a $14.2 million inventory reserve
associated with a withdrawal of certain products from the market. Separately,
offsetting this increase is a reduction in the change in the amount of our
reserve for excess and obsolete inventory of $9.5 million during the three
months ended September 30, 2021 as compared to the three months ended September
30, 2020. This reduction 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.
Additionally, we observed a proportional reduction in cost of sales associated
with lower net sales due to a reduction in elective surgeries from pandemic
impacts in the three months ended September 30, 2021 when compared to the same
period in 2020.
Cost of sales increased $1.7 million, or 1%, during the nine months ended
September 30, 2021, compared to the same period in 2020. Cost of sales as a
percentage of net sales for the nine months ended September 30, 2021 decreased
by 2%, compared to the same period in 2020. The increase in cost of sales for
the nine months ended September 30, 2021 is primarily associated with
proportional higher net sales, compared to the same period in 2020. Offsetting
this increase is a decrease in the change in the amount of our excess and
obsolete inventory reserves of $17.8 million as compared to the nine months
ended September 30, 2020. This reduction in our excess and obsolete inventory
reserves is primarily attributable to the $14.2 million inventory reserve
recorded in the third quarter of 2021 associated with the withdrawal of certain
products from the market. Separately, offsetting this increase is a reduction in
the change in the amount of our reserve for excess and obsolete inventory of
$32.0 million during the nine months ended September 30, 2021 as compared to the
nine months ended September 30, 2020. This reduction 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
September 30,
(in thousands, except %) 2021 2020 $ Change % Change
Selling, general and administrative $ 146,056 $ 146,260 $ (204 ) (0 )%
% of total net sales 54 % 50 %
Research and development 23,405 20,404 3,001 15 %
% of total net sales 9 % 7 %
Amortization of intangible assets 14,805 13,826 979 7 %
Business transition costs 4,551 3,107 1,444 46 %
Nine Months Ended
September 30,
(in thousands, except %) 2021 2020 $ Change % Change
Selling, general and administrative $ 449,407 $ 402,935 $ 46,472 12 %
% of total net sales 54 % 53 %
Research and development 67,393 58,067 9,326 16 %
% of total net sales 8 % 8 %
Amortization of intangible assets 43,230 39,150 4,080 10 %
Purchase of in-process research and
development - 1,011 (1,011 ) *
Business transition costs 21,688 2,541 19,147 (754 )%
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of compensation
costs, commissions and training costs for our employees 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 employees and third-party service providers.
Selling, general and administrative expenses decreased by $0.2 million during
the three months ended September 30, 2021, compared to the same period in 2020.
The decrease during the three months ended September 30, 2021 is primarily due
to reduction in compensation costs, including stock-based compensation,
commissions, legal expenses associated with certain ongoing litigation matters,
and partially offset by an increase in travel expenses, compared to the same
period in 2020.
Selling, general and administrative expenses increased by $46.5 million, or 12%,
during the nine months ended September 30, 2021, compared to the same period in
2020. The increase during the nine months ended September 30, 2021 is primarily
due to increased compensation costs, including stock-based compensation,
commissions and freight expenses, compared to the same period in 2020. During
the nine months ended September 30, 2020, we implemented temporary actions to
reduce expenses, including compensation reductions for our Board of Directors
and executive officers and reducing discretionary spend across the organization,
due to the impacts from the COVID-19 pandemic. These increases were partially
offset by reduced legal expenses during the nine months ended September 30,
2021, associated with certain ongoing litigation matters.
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 employee related expenses. In the last several years,
we have introduced numerous new products and product enhancements that have
significantly expanded our technology platforms 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 $3.0 million and $9.3 million, or
15% and 16%, during the three and nine months ended September 30, 2021,
respectively, compared to the same periods in 2020. The increase in spending is
primarily due to higher headcount and headcount-related costs and further
development, enhancement and functionality of our current and future product
offerings, including capital equipment and the Simplify Cervical Artificial Disc
acquired during the first quarter of 2021. Over the course of the COVID-19
pandemic, we have stayed committed to our investment in research and development
in order to further advance our leadership position in spine surgery and our
enabling technologies portfolio.
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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 and amount of contingent milestone
achievement, 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 September 30, 2021, we recorded $4.6 million of
costs related to acquisition, integration and business transition activities,
which included $0.7 million of fair value adjustments on contingent
consideration liabilities associated with our 2021, 2017 and 2016 acquisitions.
During the nine months ended September 30, 2021, we recorded $21.7 million of
costs related to acquisition, integration and business transition activities,
which included $6.6 million of fair value adjustments on contingent
consideration liabilities associated with our 2021, 2017 and 2016 acquisitions.
We incurred $4.0 million of costs associated with the acquisition of Simplify
Medical during the nine months ended September 30, 2021.
During the three months ended September 30, 2020, we recorded $3.1 million of
costs related to acquisition, integration and business transition activities,
which included $1.2 million of fair value adjustments on contingent
consideration liabilities associated with our 2017 and 2016 acquisitions. During
the nine months ended September 30, 2020, we recorded $2.5 million of costs
related to acquisition, integration and business transition activities, which
included $(0.4) million of fair value adjustments on contingent consideration
liabilities associated with our 2017 and 2016 acquisitions.
Interest and Other Expense, Net
September 30,
(in thousands, except %) 2021 2020 $ Change % Change
Three Months Ended
Interest income $ 23 $ 271 $ (248 ) (92 )%
Interest expense (4,320 ) (21,123 ) 16,803 (80 )%
Other (expense) income, net (13,082 ) 251 (13,333 ) (5,312 )%
Total interest and other expense, net $ (17,379 ) $ (20,601 ) $ 3,222 (16 )%
Nine Months Ended
Interest income $ 119 $ 1,306 $ (1,187 ) (91 )%
Interest expense (16,738 ) (49,164 ) 32,426 (66 )%
Other expense, net (24,339 ) (18,819 ) (5,520 ) 29 %
Total interest and other expense, net $ (40,958 ) $ (66,677 ) $ 25,719 (39 )%
Total interest and other expense, net for the periods presented included gains
and losses from strategic investments and net foreign currency exchange gains
and losses. Total interest and other expense, net decreased by $3.2 million
during the three months ended September 30, 2021 as compared to the same period
in 2020. Interest expense decreased by $16.8 million primarily due to the
discontinuation of accretion of the debt discount for our Senior Convertible
Notes due 2023 and 2025 resulting from our adoption of ASU 2020-06 on January 1,
2021, as well as a reduction in interest expense relating to the 2021 Senior
Convertible Notes which were settled in March 2021. Other (expense) income, net
increased by ($13.3) million during the three months ended September 30, 2021
due to an increase in net foreign currency exchange losses of $12.2 million. We
established intercompany receivables and payables and contingent consideration
liabilities in connection with the acquisition of Simplify Medical which are
subject to foreign currency remeasurement. See Note 1 to the Unaudited
Consolidated Financial Statements for further discussion on the adoption of ASU
2020-06.
Total interest and other expense, net decreased by $25.7 million during the nine
months ended September 30, 2021 as compared to the same period in 2020. Interest
expense decreased by $32.4 million primarily due to the discontinuation of
accretion of the debt discount for our Senior Convertible Notes due 2021, 2023
and 2025 resulting from our adoption of ASU 2020-06 on January 1, 2021, as well
as a reduction in interest expense relating to the 2021 Senior Convertible Notes
which were settled in March 2021. Other expense, net increased by $5.5 million
primarily due to an increase in net foreign currency exchange losses of $20.4
million during the nine months ended September 30, 2021, compared to the same
period in 2020. Offsetting this increase, is a net loss of $12.3 million
recognized during the nine months ended September 30, 2020 for the change in
fair value of derivative assets and liabilities corresponding to the Senior
Convertible Notes due 2023, and an increase in the net gain from strategic
investments of $2.4 million recorded during the nine months ended September 30,
2021.
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Income Tax (Benefit) Expense
September 30,
(in thousands, except %) 2021 2020
Three Months Ended
Income tax (benefit) expense $ (2,373 ) $ 579
Effective income tax rate 10 % 9 %
Nine Months Ended
Income tax expense (benefit) $ 2,844 $ (9,764 )
Effective income tax rate (12 )% 20 %
The provision for income tax expense as a percentage of pre-tax loss was a
benefit of 10% for the three months ended September 30, 2021, compared with an
expense of 9% on pre-tax income for the three months ended September 30, 2020.
The increased rate during the three months ended September 30, 2021 was
primarily due to increased valuation allowances and a decrease in uncertain tax
position releases, offset by a reduced foreign income inclusion and a reduced
limitation on officer's compensation deductions.
The provision for income tax expense as a percentage of pre-tax loss was (12%)
for the nine months ended September 30, 2021, compared with a benefit of 20% on
pre-tax losses for the nine months ended September 30, 2020. The increased
expense during the nine months ended September 30, 2021 was primarily due to
increased valuation allowances and a decrease in uncertain tax position
releases, offset by a reduced foreign income inclusion and an increase 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 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 borrowings become due, we may be required
to access the capital markets or draw upon our line of credit 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.
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A substantial portion of our operations are located in the United States, and
the majority of our net sales and cash generation have been made in the United
States. Accordingly, we do not have material net cash flow exposures to foreign
currency rate fluctuations from operations. 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,
gains and losses as well as assets and liabilities. In particular, as a result
of our acquisition of Simplify Medical, we have additional exposure to
fluctuations in the Australian dollar. We established intercompany receivables
and payables in Australian dollars in connection with the acquisition of
Simplify Medical, a proprietary limited company registered in Australia.
Additionally, we have future contingent consideration liabilities denominated in
United States dollars, in connection with the acquisition of Simplify Medical,
which are the financial obligation of NuVasive (AUST/NZ) Pty Limited, an
Australian dollar denominated company. Both the intercompany receivables and
payables and contingent consideration liabilities are subject to foreign
currency remeasurement. While we enter into forward currency contracts for
certain currencies 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
have not entered into hedges with respect to the Australian dollar. In addition,
we currently do not hedge future forecasted transactions but will continue to
assess whether that strategy is appropriate. As of September 30, 2021, the cash
balance held by our foreign subsidiaries with currencies other than the United
States dollar was approximately $51.3 million and it is our intention to
indefinitely reinvest all of our current foreign earnings to increase working
capital within our international business and to expand our existing operations
outside the United States. As of September 30, 2021, our account
receivable balance held by our foreign subsidiaries with currencies other than
the United States dollar was approximately $52.8 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 that are
not disclosed in our Unaudited Consolidated Financial Statements. It is
reasonably possible, however, that an unfavorable outcome that exceeds our
accrual estimate for a particular legal proceeding or investigation 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.
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 May 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 2022 and 2024, but are subject to
change based on the achievement of those manufacturing and commercial
milestones.
On February 24, 2021, we completed the acquisition of Simplify Medical, a
developer of cervical artificial disc technology for cervical total disc
replacement procedures. In connection with the acquisition, we recorded a
purchase accounting fair value estimate of $103.4 million for contingent
consideration liabilities related to the achievement of milestones related to
regulatory approval and net sales from products incorporating the Simplify
Medical cervical artificial disc technology. On April 1, 2021, the Simplify
Cervical Artificial Disc received approval from the U.S. Food and Drug
Administration for two-level cervical total disc replacement, resulting in the
achievement of the regulatory milestone. We made a payment of $45.8 million on
April 20, 2021 for the regulatory milestone using available cash. Additional
milestone payments, which are contingent upon net sales from products
incorporating the Simplify Medical cervical artificial disc technology, will
become payable in calendar years 2023, 2024 and 2025.
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Cash, cash equivalents and short-term investments were $234.6 million and $1.03
billion at September 30, 2021 and December 31, 2020, 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 the COVID-19 pandemic
has had on demand for elective surgical procedures, we took temporary actions
during 2020 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 upon demand.
Additionally, we have varying needs for cash in connection with our Senior
Convertible Notes, 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 operate 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, 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 continued unpredictability of
the COVID-19 pandemic, 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 pandemic, 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 our
business experiences additional disruptions as a result of the COVID-19
pandemic. Further discussion of the potential impacts on our business from the
COVID-19 pandemic is provided under Item 1A of Part I of our Annual Report on
Form 10-K for the year ended December 31, 2020.
The decrease in liquidity during the nine months ended September 30, 2021 of
$795.4 million was primarily a result of cash outflows of $649.4 million related
to the settlement of our Senior Convertible Notes due 2021, the acquisition of
Simplify Medical for $149.5 million (net of cash acquired) and the payment of
$45.8 million for the achievement of the Simplify Medical regulatory milestone.
At September 30, 2021, 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 $144.8 million for the nine months
ended September 30, 2021, compared to $113.2 million for the same period in
2020. The $31.6 million increase in cash provided by operating activities was
primarily due to a reduction in payments for compensation related accruals and
inventory partially offset by timing of payments for accounts payable during the
nine months ended September 30, 2021, compared to the same period in 2020.
Cash Flows from Investing Activities
Cash used in investing activities was $110.4 million for the nine months ended
September 30, 2021, compared to $288.2 million used for the same period in 2020.
The $177.8 million decrease in cash used in investing activities was primarily
due to a net increase of $380.7 million relating to purchase, sale and maturity
activity from our marketable security portfolio during the first nine months of
2021 and 2020. This was partially offset by payments of $195.3 million
associated with the acquisition of Simplify Medical and the associated
regulatory milestone being met during the nine months ended September 30, 2021.
Cash Flows from Financing Activities
Cash used in financing activities was $654.0 million for the nine months ended
September 30, 2021, compared to $735.7 million provided from financing
activities for the same period in 2020. The $1.4 billion increase in cash used
in financing activities was due to the $649.4 million payment to settle our
Senior Convertible Notes due 2021 during the nine months ended September 30,
2021. Additionally, in the nine months ended September 30, 2020, we issued
$450.0 million of Senior Convertible Notes due 2025, and $450.0 million of
Senior Convertible Notes due 2023, receiving proceeds of $437.0 million and
$436.9 million, respectively. These proceeds were offset by $53.9 million of net
cash used for the call spreads on the sales and purchases of our warrants and
bond hedges issued in connection with these Senior Convertible Notes. Treasury
stock purchases decreased by $72.4 million during the nine months ended
September 30, 2021, compared to the same period in 2020.
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Treasury stock purchases related to equity award vesting totaled $7.3 million
during the nine months ended September 30, 2021. We use net share settlement on
stock issuances, which results in cash tax payments. Net share settlement is
generally used in lieu of cash payments by employees for minimum tax withholding
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 employee 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 was payable semi-annually. Prior to
September 14, 2020, the 2021 Notes provided for settlement in cash, stock, or a
combination thereof, solely at our discretion. As of September 14, 2020,
combination settlement was deemed to have been elected by us and the 2021 Notes
will be settled by 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 was 16.7158 shares per $1,000
principal amount, which was equivalent to a conversion price of
approximately $59.82 per share, subject to adjustments. Prior to September 15,
2020, holders could have converted 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 was 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 fell 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 could
have converted their 2021 Notes at any time (regardless of the foregoing
circumstances). The 2021 Notes can no longer be redeemed by us. We previously
had the ability to redeem the 2021 Notes, at our option, in whole or in part
beginning on 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 had 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. No principal payments were 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 did not contain any financial
covenants and did not restrict us from paying dividends or issuing or
repurchasing any of our other securities. As of September 15, 2020, holders
could have converted their 2021 Notes at any time prior to the close of business
on the second scheduled trading day immediately preceding the maturity date.
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 was subject to adjustment. The cost of the 2021 Hedge was $111.2 million.
The 2021 Hedge expired on March 15, 2021 and was put in place to reduce the
potential equity dilution upon conversion of the 2021 Notes when the daily
volume-weighted average price per share of our common stock exceeded the strike
price of the 2021 Hedge. Prior to its expiration, an assumed exercise of the
2021 Hedge was considered anti-dilutive since the effect of the inclusion is
always anti-dilutive with respect to the calculation of diluted earnings per
share. On March 15, 2021, we exercised our rights under certain convertible note
hedge transactions and received 842 shares of our common stock.
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. As of September 30, 2021, 6,881,290 warrants expired unexercised. 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.
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On March 15, 2021, the 2021 Notes reached maturity and we settled in full the
2021 Notes. We received conversion notices from the holders of 1.4% of the 2021
Notes, representing $9.1 million outstanding principal amount thereof, which we
refer to as the Conversions. We paid an aggregate of $649.4 million in cash for
the settlement of the 2021 Notes, which included $640.9 million in satisfaction
of the outstanding principal of the 2021 Notes and $8.5 million in cash in
connection with the settlement of the Conversions. Additionally, in satisfaction
of the Conversions, and pursuant to combination settlement, we issued 837 shares
of common stock in the aggregate to the holders who elected to convert their
outstanding notes. We funded the repayment of the outstanding principal amount
of the 2021 Notes, accrued interest thereon, and the cash component of the
Conversions using available cash on hand.
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 $436.7 million. The 2023 Notes were
initially required to be settled in cash as we did not have enough available
shares and were unable to reserve the maximum number of shares issuable under
the 2023 Notes ("sufficient reserved shares"). On September 10, 2020, we held a
Special Meeting of Stockholders and received stockholder approval to amend our
Restated Certificate of Incorporation to increase the number of shares of our
common stock authorized for issuance from 120,000,000 shares to 150,000,000
shares. As a result of the increase in the number of shares of our common stock
authorized for issuance, we currently have sufficient reserved shares and
therefore may settle conversions of the 2023 Notes 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 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 restructurings, paying dividends or
issuing or repurchasing any of our other securities. As of September 30, 2021,
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. Our
assumed exercise of the 2023 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.
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In addition, we sold the 2023 Warrants to the 2023 Counterparties to acquire up
to 5,345,010 common shares of our stock. The 2023 Warrants initially limited the
amount of shares we were required to reserve for issuance under the 2023
Warrants to an aggregate of 3,093,500 shares of our common stock, subject to
adjustment upon having a sufficient amount of authorized and unissued shares
which are not reserved for other transactions. As a result of receiving
stockholder approval to increase the number of shares of our common stock
authorized for issuance on September 10, 2020, we subsequently entered into
amendment agreements with each of the 2023 Counterparties to increase the number
of authorized shares of our common stock required to be reserved under the 2023
Warrants to the aggregate amount of 6,948,512 shares. 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.
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
restructurings, paying dividends or issuing or repurchasing any of our other
securities. As of September 30, 2021, we are unaware of any current events or
market conditions that would allow holders to convert the 2025 Notes.
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.
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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.
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 September 30, 2021 and
December 31, 2020.
Any borrowings under the 2020 Facility are intended to be used to provide
financing for working capital and other general corporate purposes, including
potential mergers and acquisitions and to refinance indebtedness. 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 September
30, 2021, 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, 2020 and there have been no material changes
during the nine months ended September 30, 2021.
Off-Balance Sheet Arrangements
As of September 30, 2021, we did not have any off-balance sheet arrangements.
Contractual Obligations and Commitments
As of September 30, 2021, other than the aforementioned settlement of the 2021
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, 2020.
48
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