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EX-31.1 - EX-31.1 - NUVASIVE INCnuva-ex311_20150331347.htm
EX-10.5 - EX-10.5 - NUVASIVE INCnuva-ex105_20150331208.htm
EX-31.2 - EX-31.2 - NUVASIVE INCnuva-ex312_20150331348.htm
EX-10.4 - EX-10.4 - NUVASIVE INCnuva-ex104_20150331203.htm
EX-10.3 - EX-10.3 - NUVASIVE INCnuva-ex103_20150331202.htm
EX-32.1 - EX-32.1 - NUVASIVE INCnuva-ex321_20150331207.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                

Commission file number: 000-50744

 

 

NUVASIVE, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

33-0768598

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

7475 Lusk Boulevard,

San Diego, CA 92121

(Address of principal executive offices)

(858) 909-1800

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period than the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

x

 

Accelerated filer

¨

 

Non-accelerated filer

¨

(Do not check if a smaller reporting company)

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of April 24, 2015, there were 48,356,489 shares of the registrant’s common stock (par value $0.001 per share) outstanding.

 

 

 

 

 


Table of Contents

NuVasive, Inc.

Quarterly Report on Form 10-Q

March 31, 2015

 

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

3

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Operations

4

 

Consolidated Statements of Comprehensive Income (Loss)

5

 

Consolidated Statements of Cash Flows

6

 

Notes to Unaudited Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

Item 4.

Controls and Procedures

35

 

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

35

Item 1A.

Risk Factors

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

Item 3.

Defaults Upon Senior Securities

39

Item 4.

Mine Safety Disclosures

39

Item 5.

Other Information

39

Item 6.

Exhibits

40

 

SIGNATURES

41

 

 

 

2

 


Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NUVASIVE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except par values and share amounts)

 

 

 

March 31, 2015

 

 

December 31, 2014

 

ASSETS

 

(Unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

88,494

 

 

$

142,387

 

Short-term marketable securities

 

 

200,809

 

 

 

220,329

 

Accounts receivable, net of allowances of $6,119 and $5,844, respectively

 

 

111,547

 

 

 

118,959

 

Inventory, net

 

 

163,413

 

 

 

154,638

 

Deferred and prepaid taxes

 

 

59,608

 

 

 

59,233

 

Prepaid expenses and other current assets

 

 

8,992

 

 

 

10,325

 

Total current assets

 

 

632,863

 

 

 

705,871

 

Property and equipment, net

 

 

139,541

 

 

 

128,565

 

Long-term marketable securities

 

 

27,501

 

 

 

43,042

 

Intangible assets, net

 

 

92,640

 

 

 

96,555

 

Goodwill

 

 

154,273

 

 

 

154,443

 

Deferred tax assets, non-current

 

 

65,196

 

 

 

65,330

 

Restricted cash and investments

 

 

156,155

 

 

 

123,233

 

Other assets

 

 

27,439

 

 

 

26,420

 

Total assets

 

$

1,295,608

 

 

$

1,343,459

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

71,507

 

 

$

133,324

 

Accrued payroll and related expenses

 

 

27,702

 

 

 

38,032

 

Litigation liability

 

 

14,000

 

 

 

30,000

 

Deferred and income tax liabilities

 

 

750

 

 

 

13,543

 

Total current liabilities

 

 

113,959

 

 

 

214,899

 

Senior Convertible Notes

 

 

364,588

 

 

 

360,746

 

Deferred and income tax liabilities, non-current

 

 

23,517

 

 

 

12,526

 

Non-current litigation liability

 

 

117,430

 

 

 

93,700

 

Other long-term liabilities

 

 

12,633

 

 

 

13,230

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000,000 shares authorized, none outstanding

 

 

 

 

 

 

Common stock, $0.001 par value; 120,000,000 shares authorized at March 31, 2015 and December 31, 2014, 49,674,361 and 47,691,744 issued and outstanding at March 31, 2015 and December 31, 2014, respectively

 

 

50

 

 

 

48

 

Additional paid-in capital

 

 

884,469

 

 

 

847,145

 

Accumulated other comprehensive loss

 

 

(11,722

)

 

 

(9,670

)

Accumulated deficit

 

 

(155,378

)

 

 

(186,938

)

Treasury stock at cost; 1,345,606 shares and 233,369 shares at March 31, 2015 and December 31, 2014, respectively

 

 

(62,085

)

 

 

(10,537

)

Total NuVasive, Inc. stockholders’ equity

 

 

655,334

 

 

 

640,048

 

Non-controlling interests

 

 

8,147

 

 

 

8,310

 

Total equity

 

$

663,481

 

 

$

648,358

 

Total liabilities and equity

 

$

1,295,608

 

 

$

1,343,459

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

 

 

3


Table of Contents

 

NUVASIVE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

 

 

Three Months Ended March 31,

 

(unaudited)

 

2015

 

 

2014

 

Revenue

 

$

192,383

 

 

$

177,496

 

Cost of goods sold (excluding below amortization of intangible assets)

 

 

45,664

 

 

 

43,294

 

Gross profit

 

 

146,719

 

 

 

134,202

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales, marketing and administrative

 

 

116,096

 

 

 

118,104

 

Research and development

 

 

9,264

 

 

 

9,455

 

Amortization of intangible assets

 

 

2,996

 

 

 

3,998

 

Litigation liability (gain) loss

 

 

(42,575

)

 

 

30,000

 

Business transition costs

 

 

5,373

 

 

 

 

Total operating expenses

 

 

91,154

 

 

 

161,557

 

Interest and other expense, net:

 

 

 

 

 

 

 

 

Interest income

 

 

419

 

 

 

217

 

Interest expense

 

 

(7,126

)

 

 

(6,865

)

Other income (expense), net

 

 

424

 

 

 

375

 

Total interest and other expense, net

 

 

(6,283

)

 

 

(6,273

)

Income (loss) before income taxes

 

 

49,282

 

 

 

(33,628

)

Income tax (expense) benefit

 

 

(17,885

)

 

 

15,095

 

Consolidated net income (loss)

 

$

31,397

 

 

$

(18,533

)

Add back net loss attributable to non-controlling interests

 

$

(163

)

 

$

(257

)

Net income (loss) attributable to NuVasive, Inc.

 

$

31,560

 

 

$

(18,276

)

 

 

 

 

 

 

 

 

 

Net income (loss) per share attributable to NuVasive, Inc.:

 

 

 

 

 

 

 

 

Basic

 

$

0.66

 

 

$

(0.40

)

Diluted

 

$

0.61

 

 

$

(0.40

)

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

47,989

 

 

 

45,798

 

Diluted

 

 

51,716

 

 

 

45,798

 

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

 

 

 

4


Table of Contents

 

NUVASIVE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

 

 

 

Three Months Ended March 31,

 

(unaudited)

 

2015

 

 

2014

 

Consolidated net income (loss)

 

$

31,397

 

 

$

(18,533

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Unrealized gain (loss) on marketable securities, net of tax

 

 

133

 

 

 

(12

)

Translation adjustments, net of tax

 

 

(2,185

)

 

 

1,071

 

Other comprehensive (loss) income:

 

 

(2,052

)

 

 

1,059

 

Total consolidated comprehensive income (loss)

 

 

29,345

 

 

 

(17,474

)

Net loss attributable to non-controlling interests

 

 

163

 

 

 

257

 

Comprehensive income (loss) attributable to NuVasive, Inc.

 

$

29,508

 

 

$

(17,217

)

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

 

 

 

5


Table of Contents

 

NUVASIVE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands) 

 

 

 

Three Months Ended March 31,

 

(unaudited)

 

2015

 

 

2014

 

Operating activities:

 

 

 

 

 

 

 

 

Consolidated net income (loss)

 

$

31,397

 

 

$

(18,533

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

16,051

 

 

 

15,363

 

Amortization of non-cash interest

 

 

4,331

 

 

 

4,000

 

Stock-based compensation

 

 

7,611

 

 

 

7,764

 

Deferred income taxes

 

 

11,015

 

 

 

 

Reserves on current assets

 

 

633

 

 

 

1,366

 

Other non-cash adjustments

 

 

6,172

 

 

 

1,661

 

Changes in operating assets and liabilities, net of effects from acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

5,931

 

 

 

(1,194

)

Inventory

 

 

(11,367

)

 

 

(11,743

)

Prepaid expenses and other current assets

 

 

444

 

 

 

(2,807

)

Accounts payable and accrued liabilities

 

 

17,428

 

 

 

17,951

 

Income taxes

 

 

(13,731

)

 

 

(16,751

)

Accrued royalties

 

 

(47,459

)

 

 

3,291

 

Litigation liability

 

 

7,730

 

 

 

30,000

 

Accrued payroll and related expenses

 

 

(10,163

)

 

 

(7,068

)

Net cash provided by operating activities

 

 

26,023

 

 

 

23,300

 

Investing activities:

 

 

 

 

 

 

 

 

Cash paid for acquisitions and investments

 

 

(1,357

)

 

 

 

Purchase of intangible assets

 

 

(27,389

)

 

 

 

Purchases of property and equipment

 

 

(30,694

)

 

 

(13,390

)

Purchases of marketable securities

 

 

(71,129

)

 

 

(46,126

)

Sales of marketable securities

 

 

105,794

 

 

 

36,257

 

Purchases of restricted investments

 

 

(32,616

)

 

 

 

Net cash used in investing activities

 

 

(57,391

)

 

 

(23,259

)

Financing activities:

 

 

 

 

 

 

 

 

Incremental tax benefits related to stock-based compensation awards

 

 

8,092

 

 

 

 

Proceeds from the issuance of common stock

 

 

1,403

 

 

 

8,749

 

Payment of contingent consideration

 

 

(514

)

 

 

(498

)

Purchase of treasury stock

 

 

(30,944

)

 

 

 

Other financing activities

 

 

(45

)

 

 

(596

)

Net cash (used in) provided by financing activities

 

 

(22,008

)

 

 

7,655

 

Effect of exchange rate changes on cash

 

 

(517

)

 

 

256

 

(Decrease) increase in cash and cash equivalents

 

 

(53,893

)

 

 

7,952

 

Cash and cash equivalents at beginning of period

 

 

142,387

 

 

 

102,825

 

Cash and cash equivalents at end of period

 

$

88,494

 

 

$

110,777

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

 

 

 

6


Table of Contents

NUVASIVE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.    Description of Business and Basis of Presentation

Description of Business

NuVasive, Inc. (the “Company” or “NuVasive”) was incorporated in Delaware on July 21, 1997, and began commercializing its products in 2001. The Company is focused on developing minimally-disruptive surgical products and procedurally-integrated solutions for the spine. NuVasive’s principal product offering includes a minimally-disruptive surgical platform called Maximum Access Surgery, or MAS®. The MAS platform 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 proprietary software-driven nerve detection and avoidance systems, NVM5® and NVJJB®, and Intra-Operative Monitoring (“IOM”) services and support; MaXcess®, an integrated split-blade retractor system; and a wide variety of specialized implants and biologics. Many of the Company’s products, including the individual components of NuVasive’s MAS platform, can also be used in open or traditional spine surgery. The Company’s spine surgery product line offerings, which include thoracolumbar product offerings, cervical product offerings, IOM services, and disposables, are primarily used to enable access to the spine and to perform restorative and fusion procedures in a minimally-disruptive fashion.  The Company’s biologic product line offerings used to aid the spinal fusion process or bone healing process include Osteocel® Plus and Osteocel Pro allograft (donated human tissue) which are cellular matrix products containing viable mesenchymal stem cells (“MSCs”), as well as other allograft offerings, FormaGraft®, a collagen synthetic product, and AttraX®, a synthetic bone graft material that is currently available commercially only in select markets outside of the United States. The Company continues to focus significant research and development efforts to expand its MAS product platform and advance the applications of its unique technology into procedurally-integrated surgical solutions. The Company has dedicated and continues to dedicate significant resources toward training spine surgeons around the world; both those who are new to its MAS product platform as well as previously MAS-trained surgeons attending advanced courses.

The Company’s primary business model is to loan its MAS systems to surgeons and hospitals who use such systems to perform individual procedures, with the hospitals purchasing implants, biologics and disposables in each such case. In addition, for larger customers, the Company’s proprietary nerve monitoring systems, MaXcess and surgical instrument sets are placed with hospitals for an extended period at no up-front cost to them, facilitating the hospital’s purchase of disposables for such machines from the Company. The Company also offers a range of bone allograft in patented saline packaging, disposables and spine implants, which include its branded CoRoent® products and fixation devices such as rods, plates and screws. The Company’s implants, biologics and disposables are currently sold and shipped from its primary distribution and warehousing operations facility located in Memphis, Tennessee. The Company sells MAS instrument sets, MaXcess devices and its proprietary software-driven nerve monitoring systems, however this does not make up a material part of its business.

Basis of Presentation and Principles of Consolidation

The accompanying Unaudited Consolidated Financial Statements include the accounts of the Company and its majority-owned or controlled subsidiaries, collectively referred to as either NuVasive or the Company. The Company translates the financial statements of its foreign subsidiaries using end-of-period exchange rates for assets and liabilities and average exchange rates during each reporting period for results of operations. When there is a portion of equity in an acquired subsidiary not attributable, directly or indirectly, to the respective parent entity, the Company records the fair value of the non-controlling interests at the acquisition date and classifies the amounts attributable to non-controlling interests separately in equity in the Company’s Consolidated Financial Statements. Any subsequent changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary are accounted for as equity transactions. All significant intercompany balances and transactions have been eliminated in consolidation.

7

 


Table of Contents

 

NUVASIVE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The accompanying Unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Pursuant to these rules and regulations, the Company has condensed or omitted certain information and footnote disclosures it normally includes in its annual Consolidated Financial Statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for any other interim period or for the full year. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto for the year ended December 31, 2014 included in the Company’s Annual Report on Form 10-K filed with the SEC. In the opinion of management, the Consolidated Financial Statements include all adjustments that are of a normal and recurring nature that are necessary for the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods presented.

The Company has reclassified historically presented product offerings revenue to conform to the current year presentation. The reclassification had no impact on previously reported results of operations or financial position.

Change in Accounting Estimate

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Business Transition Costs

From time to-time, the Company incurs costs related to integration and business transition activities which include severance, relocation, consulting, and other costs directly associated to such activities. The nature of these costs is that of personnel costs that the Company believes arise and warrant specific disclosure. During the three months ended March 31, 2015, the Company incurred $5.4 million of such costs, which included a $3.4 million charge associated with the resignation of the Company’s former Chief Executive Officer and Chairman of the Board, Alex V. Lukianov. Such resignation occurred in the first quarter 2015 and was announced on April 1, 2015 via filing of a Current Report on Form 8-K with the SEC. The $3.4 million charge includes certain severance and compensation-related charges, net of certain forfeitures of previously recognized equity compensation.

Restructuring Charges

The Company exited its New Jersey location and terminated the respective lease to reduce its footprint on the east coast of the United States as part of a company-wide efficiency effort in order to match its business needs without adversely impacting its ability to deliver surgeon education and local customer fulfillment. As a result of this undertaking, the Company recognized restructuring and associated impairment charges of $2.3 million during the three months ended March 31, 2015 in addition to the $6.4 million recognized during 2014. The restructuring and impairment charges mainly consist of the future rental payments through 2017, net with estimated future sublease income, and elimination of related leasehold improvements and deferred rent liabilities. These charges are recorded in sales, marketing and administrative expense in the Consolidated Statements of Operations.

As of March 31, 2015, the total recorded liability associated with this early lease termination was $4.9 million and consists of future rental payments net of estimated sublease income through 2017. The current portion of the liability is recorded within accounts payable and accrued liabilities and the long-term portion is recorded within other long-term liabilities in the Consolidated Balance Sheets at March 31, 2015.

8


Table of Contents

 

NUVASIVE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income (loss) includes unrealized gains or losses on the Company’s marketable securities and foreign currency translation adjustments. The cumulative translation adjustments included in accumulated other comprehensive income (loss) were a net cumulative loss of $11.7 million and $9.5 million at March 31, 2015 and December 31, 2014, respectively.

Long-Lived Assets

Long-lived assets include surgical instruments, which are loaned to surgeons and hospitals who purchase implants, biologics and disposables for use in individual procedures, leasehold improvements, software, and intangible assets. The Company periodically re-evaluates the original assumptions and rationale utilized in the establishment of the carrying value and estimated lives of its long-lived assets. The criteria used for these evaluations include management’s estimate of the asset’s continuing ability to generate income from operations and positive cash flow in future periods as well as the strategic significance of any intangible asset to the Company’s business objectives. If assets are considered to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets, which is determined by applicable market prices when available or other methods by utilizing unobservable inputs including discounted cash flow models. See Note 3, Financial Instruments and Fair Value Measurements for further discussion.

Inventories

The Company’s inventory consists primarily of purchased finished goods which includes specialized implants and disposables, and is stated at the lower of cost or market determined by a weighted average cost method. The Company reviews the components of its inventory on a periodic basis for excess, obsolete or impaired inventory, and records a reserve for such identified items. The inventory reserve was $23.0 million and $22.7 million at March 31, 2015 and December 31, 2014, respectively.

2.    Net Income (Loss) Per Share

The Company computes basic net income (loss) per share using the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share assumes the conversion, exercise or issuance of all potential common stock equivalents, unless the effect of inclusion would be anti-dilutive. Common stock equivalents include the Company’s stock options, employee stock purchase plan (ESPP), restricted stock units, including those with performance conditions, warrants, and the shares to be issued upon the conversion of the Senior Convertible Notes (see Note 6 to the Unaudited Consolidated Financial Statements).

The following table sets forth the computation of basic and diluted earnings or (loss) per share attributable to the Company:

 

 

 

Three Months Ended March 31,

 

(in thousands, except per share data)

 

2015

 

 

2014

 

Numerator:

 

 

 

 

 

 

 

 

Net income (loss) available to the Company

 

$

31,560

 

 

$

(18,276

)

Denominator for basic and diluted net (loss) income per share:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding for basic

 

 

47,989

 

 

 

45,798

 

Dilutive potential common stock outstanding:

 

 

 

 

 

 

 

 

Stock options and ESPP

 

 

1,528

 

 

 

 

Restricted stock units

 

 

1,308

 

 

 

 

Senior Convertible Notes

 

 

891

 

 

 

 

Weighted average common shares outstanding for diluted

 

 

51,716

 

 

 

45,798

 

Basic net income (loss) per share attributable to the Company

 

$

0.66

 

 

$

(0.40

)

Diluted net income (loss) per share attributable to the Company

 

$

0.61

 

 

$

(0.40

)

9


Table of Contents

 

NUVASIVE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following weighted outstanding common stock equivalents were not included in the calculation of net income (loss) per diluted share because their effects were anti-dilutive:

 

 

 

Three Months Ended March 31,

 

(in thousands)

 

2015

 

 

2014

 

Stock Options, ESPP, and RSUs

 

 

22

 

 

 

7,870

 

Warrants

 

 

9,553

 

 

 

9,553

 

Senior Convertible Notes

 

 

 

 

 

9,553

 

Total

 

 

9,575

 

 

 

26,976

 

 

3.    Financial Instruments and Fair Value Measurements

The Company invests its excess cash in certificates of deposit, corporate notes, commercial paper, U.S. government treasury securities and securities of government-sponsored entities. The Company classifies all such securities as available-for-sale as the sale of such securities may be required prior to maturity to implement management strategies. These securities are carried at fair value with the unrealized gains and losses reported as a component of other comprehensive income in equity until realized. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in other income or expense on the Consolidated Statements of Operations and a new accounting cost basis for the security is established. The Company reviews its investments if there is an indicator of possible other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. As of March 31, 2015, the Company had no investments that were in a significant unrealized loss position and no impairment charges were recorded during the periods presented. Interest and dividends on securities classified as available-for-sale are also included in interest income on the Consolidated Statements of Operations. Realized gains and losses and interest income related to marketable securities were immaterial during all periods presented.

According to the Company’s investment policy, the Company maintains a diversified investment portfolio in terms of types, maturities, and credit exposure, and invests with institutions that have high credit quality. The Company does not currently hold financial instruments for speculative purposes.

10


Table of Contents

 

NUVASIVE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The composition of marketable securities is as follows:

 

(in thousands, except years)

 

Contractual

Maturity

(in years)

 

Amortized Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified as current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate notes

 

Less than 1

 

$

121,761

 

 

$

37

 

 

$

(81

)

 

$

121,717

 

Securities of government-sponsored entities

 

Less than 1

 

 

56,822

 

 

 

12

 

 

 

(2

)

 

 

56,832

 

Commercial paper

 

Less than 1

 

 

21,979

 

 

 

 

 

 

 

 

 

21,979

 

Certificates of deposit

 

Less than 1

 

 

281

 

 

 

 

 

 

 

 

 

281

 

Short-term marketable securities

 

 

 

 

200,843

 

 

 

49

 

 

 

(83

)

 

 

200,809

 

Classified as non-current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities of government-sponsored entities

 

1 to 2

 

 

19,498

 

 

 

2

 

 

 

(1

)

 

 

19,499

 

Corporate notes

 

1 to 2

 

 

7,996

 

 

 

6

 

 

 

 

 

 

8,002

 

Long-term marketable securities

 

 

 

 

27,494

 

 

 

8

 

 

 

(1

)

 

 

27,501

 

Classified as restricted investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities of government-sponsored entities

 

Less than 2

 

 

71,971

 

 

 

9

 

 

 

(21

)

 

 

71,959

 

U.S. government treasury securities

 

Less than 2

 

 

52,223

 

 

 

52

 

 

 

 

 

 

52,275

 

Restricted investments

 

 

 

 

124,194

 

 

 

61

 

 

 

(21

)

 

 

124,234

 

Total marketable securities at March 31, 2015

 

 

 

$

352,531

 

 

$

118

 

 

$

(105

)

 

$

352,544

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified as current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

Less than 1

 

$

282

 

 

$

 

 

$

 

 

$

282

 

Corporate notes

 

Less than 1

 

 

129,037

 

 

 

8

 

 

 

(105

)

 

 

128,940

 

Commercial paper

 

Less than 1

 

 

11,290

 

 

 

 

 

 

 

 

 

11,290

 

U.S. government treasury securities

 

Less than 1

 

 

1,500

 

 

 

1

 

 

 

 

 

 

1,501

 

Securities of government-sponsored entities

 

Less than 1

 

 

78,333

 

 

 

12

 

 

 

(29

)

 

 

78,316

 

Short-term marketable securities

 

 

 

 

220,442

 

 

 

21

 

 

 

(134

)

 

 

220,329

 

Classified as non-current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate notes

 

1 to 2

 

 

14,082

 

 

 

 

 

 

(13

)

 

 

14,069

 

Securities of government-sponsored entities

 

1 to 2

 

 

28,996

 

 

 

 

 

 

(23

)

 

 

28,973

 

Long-term marketable securities

 

 

 

 

43,078

 

 

 

 

 

 

(36

)

 

 

43,042

 

Classified as restricted investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government treasury securities

 

Less than 2

 

 

51,331

 

 

 

13

 

 

 

(13

)

 

 

51,331

 

Securities of government-sponsored entities

 

Less than 2

 

 

42,862

 

 

 

2

 

 

 

(54

)

 

 

42,810

 

Restricted investments

 

 

 

 

94,193

 

 

 

15

 

 

 

(67

)

 

 

94,141

 

Total marketable securities at December 31, 2014

 

 

 

$

357,713

 

 

$

36

 

 

$

(237

)

 

$

357,512

 

11


Table of Contents

 

NUVASIVE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Foreign Currency and Derivative Financial Instruments

The Company translates the financial statements of its foreign subsidiaries using end-of-period exchange rates for assets and liabilities and average exchange rates during each reporting period for results of operations.

Some of the Company’s reporting entities conduct a portion of their business in currencies other than the entity’s functional currency. These transactions give rise to receivables and payables that are denominated in currencies other than the entity’s functional currency. The value of these receivables and payables is subject to changes in currency exchange rates from the point at which the transactions are originated until the settlement in cash. Both realized and unrealized gains and losses in the value of these receivables and payables are included in the determination of net income. Net currency exchange gains recognized on business transactions were $0.3 million, net with hedging transactions, for the three months ended March 31, 2015, and $0.2 million for the three months ended March 31, 2014, and are included in other income (expense) in the Consolidated Statements of Operations.

To manage foreign currency exposure risks, the Company uses derivatives for activities in entities that have short term intercompany receivables and payables denominated in a currency other than the entity’s functional currency. Realized and unrealized gains or losses on the value of financial contracts entered into to hedge the exchange rate exposure of these receivables and payables are also included in the determination of net income as they have not been designated for hedge accounting under ASC Topic 815, Derivatives and Hedging. These contracts, which settle monthly, effectively fix the exchange rate at which these specific receivables and payables will be settled in, so that gains or losses on the forward contracts offset the gains or losses from changes in the value of the underlying receivables and payables. As of March 31, 2015 a notional principal amount of $34.4 million in foreign currency forward contracts was outstanding to hedge currency risk relative to our foreign receivables and payables. The Company did not have this program during the three months ended March 31, 2014.

The Company’s currency exposures vary, but are primarily concentrated in the pound sterling, the euro, the Australian dollar, the Singapore dollar, and the yen. The Company will continuously monitor the costs and the impact of foreign currency risks upon the financial results as part of the Company’s risk management program. The Company does not use derivative financial instruments for speculation or trading purposes or for activities other than risk management. The Company does not require and is not required to pledge collateral for these financial instruments and does not carry any master netting arrangements to mitigate the credit risk.

The following table summarizes the fair values of derivative instruments at March 31, 2015 and December 31, 2014:

 

 

 

Asset Derivatives

 

 

Liability Derivatives

 

 

 

 

Fair Value

 

 

 

 

Fair Value

 

 

Balance Sheet

 

March 31,

 

 

December 31,

 

 

Balance Sheet

 

March 31,

 

 

December 31,

(in thousands)

 

Location

 

2015

 

 

2014

 

 

Location

 

2015

 

 

2014

Derivative instruments not designated as cash flow

   hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward exchange contracts

 

Other current

assets

 

$

268

 

 

$

 

 

Other current

liabilities

 

$

 

 

*

Total derivatives

 

 

 

$

268

 

 

$

 

 

 

 

$

 

 

*

 

*De minimus amount recognized in the hedge relationship.

 

12


Table of Contents

 

NUVASIVE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table summarizes the effect of derivative instruments on the Consolidated Statements of Operations for the three months ended March 31, 2015 and March 31, 2014:   

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

March 31, 2015

 

 

March 31, 2014

 

 

 

Location of

 

Amount of

 

 

Location of

 

Amount of

 

 

 

(Gain)/Loss

 

(Gain)/Loss

 

 

(Gain)/Loss

 

(Gain)/Loss

 

 

 

Recognized in

 

Recognized in

 

 

Recognized  in

 

Recognized in

 

(in thousands)

 

Income

 

Income

 

 

Income

 

Income

 

Derivative instruments not designated as cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

Forward exchange contracts

 

Other (income)

expense

 

$

(2,165

)

 

Other (income)

expense

 

$

 

Total derivatives

 

 

 

$

(2,165

)

 

 

 

$

 

Fair value measurements

The Company measures certain assets and liabilities in accordance with authoritative guidance which requires fair value measurements be classified and disclosed in one of the following three categories:

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

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

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

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain assets or liabilities within the fair value hierarchy. The Company did not have any transfers of assets and liabilities between the Levels of the fair value measurement hierarchy during the three months ended March 31, 2015 or March 31, 2014.

The carrying amounts of certain financial instruments such as cash equivalents, accounts receivable, prepaid expenses, other current assets, accounts payable, accrued expenses, and other current liabilities as of March 31, 2015 and December 31, 2014 approximate their related fair values due to the short-term maturities of these instruments. The carrying values of the Company’s capital lease obligations approximate their related fair values as of March 31, 2015 and December 31, 2014.

The fair value, based on a quoted market price (Level 1), of the Company’s outstanding Senior Convertible Notes due 2017 at March 31, 2015 and December 31, 2014 was approximately $503.1 million and $516.1 million, respectively. The carrying value of the Company’s Senior Convertible Notes is discussed in Note 6, Senior Convertible Notes.

13


Table of Contents

 

NUVASIVE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The fair values of the Company’s assets and liabilities, including cash equivalents, marketable securities, restricted investments, derivatives, and contingent considerations are measured at fair value on a recurring basis, and are determined using the following inputs: 

 

 

 

 

 

 

Quoted Price in

 

 

Significant Other

 

 

Significant

 

 

 

 

 

 

 

Active Market

 

 

Observable Inputs

 

 

Unobservable

 

(in thousands)

 

Total

 

 

(Level 1)

 

 

(Level 2)

 

 

Inputs (Level 3)

 

March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

30,464

 

 

$

30,464

 

 

$

 

 

$

 

Certificates of deposit

 

 

281

 

 

 

281

 

 

 

 

 

 

 

Corporate notes

 

 

129,719

 

 

 

 

 

 

129,719

 

 

 

 

Commercial paper

 

 

21,979

 

 

 

 

 

 

21,979

 

 

 

 

U.S. government treasury securities

 

 

52,275

 

 

 

52,275

 

 

 

 

 

 

 

Securities of government-sponsored entities

 

 

148,290

 

 

 

 

 

 

148,290

 

 

 

 

Derivative forward exchange contracts

 

 

268

 

 

 

 

 

 

268

 

 

 

 

Total assets

 

$

383,276

 

 

$

83,020

 

 

$

300,256

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

39,963

 

 

$

39,963

 

 

$

 

 

$

 

Certificates of deposit

 

 

282

 

 

 

282

 

 

 

 

 

 

 

Corporate notes

 

 

143,009

 

 

 

 

 

 

143,009

 

 

 

 

Commercial paper

 

 

11,290