nuva-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2018

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      No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

☐  

  

Small reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of October 26, 2018 there were 51,422,448 shares of the registrant’s common stock (par value $0.001 per share) outstanding.

 

 


NuVasive, Inc.

Quarterly Report on Form 10-Q

September 30, 2018

 

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

31

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

40

Item 4.

Controls and Procedures

41

 

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

41

Item 1A.

Risk Factors

41

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

41

Item 3.

Defaults Upon Senior Securities

41

Item 4.

Mine Safety Disclosures

41

Item 5.

Other Information

41

Item 6.

Exhibits

42

 

SIGNATURES

43

 

 

 

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)

 

 

September 30, 2018

 

 

December 31, 2017

 

ASSETS

 

(Unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

75,112

 

 

$

72,803

 

Restricted cash and investments

 

 

 

 

 

3,901

 

Accounts receivable, net of allowances of $16,883 and $13,026, respectively

 

 

191,571

 

 

 

200,220

 

Inventory, net

 

 

271,347

 

 

 

247,138

 

Prepaid income taxes

 

 

18,215

 

 

 

17,209

 

Prepaid expenses and other current assets

 

 

23,408

 

 

 

18,792

 

Total current assets

 

 

579,653

 

 

 

560,063

 

Property and equipment, net

 

 

237,491

 

 

 

215,326

 

Intangible assets, net

 

 

262,945

 

 

 

280,774

 

Goodwill

 

 

560,401

 

 

 

536,926

 

Deferred tax assets

 

 

4,939

 

 

 

6,440

 

Restricted cash and investments

 

 

2,394

 

 

 

1,494

 

Other assets

 

 

27,577

 

 

 

39,117

 

Total assets

 

$

1,675,400

 

 

$

1,640,140

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

100,912

 

 

$

75,767

 

Contingent consideration liabilities

 

 

2,207

 

 

 

18,952

 

Accrued payroll and related expenses

 

 

47,798

 

 

 

55,618

 

Litigation liabilities

 

 

8,316

 

 

 

8,150

 

Short-term borrowings

 

 

5,000

 

 

 

 

Income tax liabilities

 

 

4,002

 

 

 

2,908

 

Total current liabilities

 

 

168,235

 

 

 

161,395

 

Long-term senior convertible notes

 

 

597,518

 

 

 

582,920

 

Deferred and income tax liabilities, non-current

 

 

6,200

 

 

 

18,870

 

Other long-term liabilities

 

 

99,826

 

 

 

77,539

 

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 September 30, 2018 and December 31, 2017, 56,566,654 and 56,164,060 issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

61

 

 

 

60

 

Additional paid-in capital

 

 

1,380,519

 

 

 

1,363,549

 

Accumulated other comprehensive loss

 

 

(10,194

)

 

 

(6,933

)

Retained earnings

 

 

5,084

 

 

 

4,762

 

Treasury stock at cost; 5,114,438 shares and 5,001,886 shares at September 30, 2018 and December 31, 2017, respectively

 

 

(571,849

)

 

 

(565,867

)

Total NuVasive, Inc. stockholders’ equity

 

 

803,621

 

 

 

795,571

 

Non-controlling interest

 

 

 

 

 

3,845

 

Total equity

 

 

803,621

 

 

 

799,416

 

Total liabilities and equity

 

$

1,675,400

 

 

$

1,640,140

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

 

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Table of Contents

 

NUVASIVE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(unaudited)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

$

242,030

 

 

$

227,321

 

 

$

728,232

 

 

$

690,100

 

Service revenue

 

 

29,271

 

 

 

19,730

 

 

 

85,155

 

 

 

65,363

 

Total revenue

 

 

271,301

 

 

 

247,051

 

 

 

813,387

 

 

 

755,463

 

Cost of revenue (excluding below amortization of intangible assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

 

54,741

 

 

 

50,856

 

 

 

168,134

 

 

 

147,292

 

Cost of services

 

 

19,419

 

 

 

14,651

 

 

 

56,896

 

 

 

45,844

 

Total cost of revenue

 

 

74,160

 

 

 

65,507

 

 

 

225,030

 

 

 

193,136

 

Gross profit

 

 

197,141

 

 

 

181,544

 

 

 

588,357

 

 

 

562,327

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales, marketing and administrative

 

 

141,211

 

 

 

125,649

 

 

 

433,635

 

 

 

404,984

 

Research and development

 

 

15,254

 

 

 

12,720

 

 

 

44,601

 

 

 

37,706

 

Amortization of intangible assets

 

 

12,349

 

 

 

11,630

 

 

 

37,402

 

 

 

35,040

 

Purchase of in-process research and development

 

 

8,913

 

 

 

 

 

 

8,913

 

 

 

 

Litigation liability loss

 

 

 

 

 

750

 

 

 

27,800

 

 

 

750

 

Business transition costs

 

 

1,443

 

 

 

345

 

 

 

7,694

 

 

 

1,769

 

Total operating expenses

 

 

179,170

 

 

 

151,094

 

 

 

560,045

 

 

 

480,249

 

Interest and other expense, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

130

 

 

 

79

 

 

 

380

 

 

 

355

 

Interest expense

 

 

(9,035

)

 

 

(8,898

)

 

 

(28,458

)

 

 

(28,780

)

Other income (expense), net

 

 

4,239

 

 

 

(139

)

 

 

(7,843

)

 

 

(382

)

Total interest and other expense, net

 

 

(4,666

)

 

 

(8,958

)

 

 

(35,921

)

 

 

(28,807

)

Income (loss) before income taxes

 

 

13,305

 

 

 

21,492

 

 

 

(7,609

)

 

 

53,271

 

Income tax benefit

 

 

2,618

 

 

 

11,604

 

 

 

7,931

 

 

 

3,543

 

Consolidated net income

 

$

15,923

 

 

$

33,096

 

 

$

322

 

 

$

56,814

 

Add back net loss attributable to non-controlling interest

 

$

 

 

$

(432

)

 

$

 

 

$

(1,307

)

Net income attributable to NuVasive, Inc.

 

$

15,923

 

 

$

33,528

 

 

$

322

 

 

$

58,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to NuVasive, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.31

 

 

$

0.66

 

 

$

0.01

 

 

$

1.14

 

Diluted

 

$

0.30

 

 

$

0.64

 

 

$

0.01

 

 

$

1.03

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

51,439

 

 

 

50,747

 

 

 

51,341

 

 

 

50,799

 

Diluted

 

 

53,189

 

 

 

52,794

 

 

 

52,296

 

 

 

56,304

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

 

 

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Table of Contents

 

NUVASIVE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(unaudited)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Consolidated net income

 

$

15,923

 

 

$

33,096

 

 

$

322

 

 

$

56,814

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on marketable securities, net of tax

 

 

 

 

 

 

 

 

 

 

 

(1

)

Translation adjustments, net of tax

 

 

(1,318

)

 

 

1,276

 

 

 

(3,261

)

 

 

3,777

 

Other comprehensive (loss) income

 

 

(1,318

)

 

 

1,276

 

 

 

(3,261

)

 

 

3,776

 

Total consolidated comprehensive income (loss)

 

 

14,605

 

 

 

34,372

 

 

 

(2,939

)

 

 

60,590

 

Net loss attributable to non-controlling interest

 

 

 

 

 

(432

)

 

 

 

 

 

(1,307

)

Comprehensive income (loss) attributable to NuVasive, Inc.

 

$

14,605

 

 

$

34,804

 

 

$

(2,939

)

 

$

61,897

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

 

 

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Table of Contents

 

NUVASIVE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands) 

 

 

 

Nine Months Ended September 30,

 

(unaudited)

 

2018

 

 

2017

 

Operating activities:

 

 

 

 

 

 

 

 

Consolidated net income

 

$

322

 

 

$

56,814

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

96,409

 

 

 

88,922

 

Purchase of in-process research and development

 

 

8,913

 

 

 

 

Amortization of non-cash interest

 

 

14,986

 

 

 

15,676

 

Stock-based compensation

 

 

22,062

 

 

 

14,984

 

Reserves on current assets

 

 

11,116

 

 

 

1,745

 

Net loss on strategic investments

 

 

3,867

 

 

 

 

Other non-cash adjustments

 

 

16,560

 

 

 

11,029

 

Deferred income taxes

 

 

(9,938

)

 

 

(4,277

)

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

8,622

 

 

 

(12,448

)

Inventory

 

 

(33,491

)

 

 

(36,661

)

Contingent consideration liabilities

 

 

(300

)

 

 

(11,200

)

Prepaid expenses and other current assets

 

 

(1,047

)

 

 

169

 

Accounts payable and accrued liabilities

 

 

21,700

 

 

 

(5,974

)

Accrued payroll and related expenses

 

 

(9,566

)

 

 

245

 

Litigation liability

 

 

166

 

 

 

1,000

 

Income taxes

 

 

108

 

 

 

(1,195

)

Net cash provided by operating activities

 

 

150,489

 

 

 

118,829

 

Investing activities:

 

 

 

 

 

 

 

 

Acquisitions and investments

 

 

(52,555

)

 

 

(62,371

)

Purchases of intangible assets

 

 

(7,682

)

 

 

(2,270

)

Purchases of property and equipment

 

 

(78,405

)

 

 

(97,030

)

Net cash used in investing activities

 

 

(138,642

)

 

 

(161,671

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from the issuance of common stock

 

 

5,563

 

 

 

5,517

 

Purchase of treasury stock

 

 

(2,817

)

 

 

(11,709

)

Payment of contingent consideration

 

 

(18,700

)

 

 

(18,800

)

Repurchases of convertible notes

 

 

 

 

 

(63,317

)

Proceeds from revolving line of credit

 

 

82,000

 

 

 

60,000

 

Repayments on revolving line of credit

 

 

(77,000

)

 

 

(20,000

)

Other financing activities

 

 

(236

)

 

 

(2,316

)

Net cash used in financing activities

 

 

(11,190

)

 

 

(50,625

)

Effect of exchange rate changes on cash

 

 

(1,349

)

 

 

1,967

 

Decrease in cash, cash equivalents, restricted cash and investments

 

 

(692

)

 

 

(91,500

)

Cash, cash equivalents, restricted cash and investments at beginning of period

 

 

78,198

 

 

 

161,048

 

Cash, cash equivalents, restricted cash and investments at end of period

 

$

77,506

 

 

$

69,548

 

 

The following table provides a reconciliation of cash, cash equivalents, restricted cash and investments reported on our Unaudited Consolidated Statements of Cash Flows for the periods presented:

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash and cash equivalents

 

$

75,112

 

 

$

62,200

 

Restricted cash and investments, current

 

 

 

 

 

2,402

 

Restricted cash and investments, non-current

 

 

2,394

 

 

 

4,946

 

Total cash, cash equivalents, restricted cash and investments shown in the Unaudited Consolidated Statement of Cash Flows

 

$

77,506

 

 

$

69,548

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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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’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 the Company’s proprietary software-driven nerve detection and avoidance systems and Intraoperative Monitoring (“IOM”) services and support; MaXcess, an integrated split-blade retractor system; and a wide variety of specialized implants and biologics. To assist with surgical procedures the Company offers a technology platform called Integrated Global Alignment (“iGA”); in which products and computer assisted technology under the MAS platform help achieve more precise spinal alignment. The individual components of the MAS platform, and many of the Company’s products, can also be used in open or traditional spine surgery. The Company continues to focus 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 dedicates significant resources toward training spine surgeons on its unique technology and products.

The Company’s procedurally integrated solutions use innovative, technological advancements and the MAS platform to provide surgical efficiency, operative reliability, and procedural versatility. The Company offers a range of implants for spinal surgery, which include its branded CoRoent products and porous titanium and polyetheretherketone implants under its Advanced Materials Science portfolio, fixation devices such as customizable rods, plates and screws, bone allograft in patented saline packaging, allogeneic and synthetic biologics, and disposables used in IOM. The Company makes available MAS instrument sets, MaXcess and neuromonitoring systems to hospitals to facilitate surgeon access to the spine to perform restorative and fusion procedures using the Company’s implants and fixation devices. The Company sells MAS instrument sets, MaXcess and neuromonitoring systems to hospitals, however, such sales are immaterial to the Company’s results of operations.

The Company also designs and sells 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 the Company’s PRECICE limb lengthening system, which allows for the correction of long bone limb length discrepancy, as well as enhanced bone healing in patients that have experienced traumatic injury.

The Company intends to continue development on a wide variety of projects intended to broaden surgical applications for greater procedural integration of its MAS techniques and additional applications of the MAGEC technology. Such applications include tumor, trauma, and deformity, as well as increased fixation options, sagittal alignment products, imaging and navigation. The Company also expects to continue expanding its other product and services offerings as it executes on its strategy to offer customers an end-to-end, procedurally integrated solution for spine surgery. The Company intends to continue to pursue business and technology acquisition targets and strategic partnerships.

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 interest at the acquisition date and classifies the amounts attributable to non-controlling interest 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.

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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 generally accepted accounting principles in the United States (“GAAP”). Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for any other interim period or for the full year. These Unaudited Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the SEC. In the opinion of management, the Unaudited Consolidated Financial Statements and notes thereto 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 revenue and cost of revenue to conform to the current year presentation, which now reflects revenue and costs allocated to the Company’s product and service offerings. These reclassifications had no impact on previously reported results of operations. Additionally, as required by Accounting Standards Update 2014-09 Revenue from Contracts with Customers (“ASU 2014-09”), on January 1, 2018 the Company adopted Accounting Standards Codification 606 Revenue from Contracts with Customers (“ASC 606”), electing full retrospective method of adoption.

Use of Estimates

To prepare financial statements in conformity with GAAP, management must make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Recent Accounting Pronouncements Not Yet Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02, Leases, which introduced ASC 842 – Leases, a new comprehensive lease accounting model that supersedes the current lease guidance under ASC 840 – Leases. The new accounting standard requires lessees to recognize right-of-use assets and corresponding lease liabilities for all leases with lease terms of greater than twelve months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new accounting standard will be effective for the Company starting in the first quarter of fiscal 2019. Early adoption is permitted. The Company will adopt ASU 2016-02 on January 1, 2019 and expects to elect the practical expedients permitted under the transition guidance. Additionally, the Company will elect the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and will not restate prior periods. The Company is in the process of determining the impact the adoption will have on its Consolidated Financial Statements and expects significant changes relating to the recognition of right-of-use assets and liabilities associated with its operating leases on its Consolidated Balance Sheet.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses, which changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. The new guidance will be effective for the Company starting in the first quarter of fiscal 2021. Early adoption is permitted starting in the first quarter of fiscal 2020. The Company believes the adoption will modify the way the Company analyzes financial instruments, but it does not anticipate a material impact on results of operations. The Company is in the process of determining the effects the adoption will have on its Consolidated Financial Statements as well as whether to early adopt the new guidance.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles – Goodwill and Other, which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The standard has tiered effective dates, starting in 2020 for calendar-year public business entities that meet the definition of an SEC filer. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is in the process of determining the effects the adoption will have on its Consolidated Financial Statements as well as whether to early adopt the new guidance.

In July 2017, the FASB issued Accounting Standards Update No. 2017-11, Earnings Per Share, Distinguishing Liabilities from Equity, Derivatives and Hedging, which changes the accounting treatment and the earnings per share calculation for certain instruments with down round features. The amendments in this update should be applied using a cumulative-effect adjustment as of the beginning of the fiscal year of adoption or retrospective adjustment to each period presented. This update is effective for annual periods beginning after December 15, 2018, and interim periods within those periods and early adoption is permitted. The Company is in the process of determining the impact the adoption will have on its Consolidated Financial Statements as well as whether to early adopt the new guidance.

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In August 2017, the FASB issued Accounting Standards Update No. 2017-12, Derivatives and Hedging, which is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting and increase transparency as to the scope and results of hedging programs. The amendments in this update will be applied using a cumulative-effect adjustment as of the beginning of the fiscal year of adoption. This update is effective for annual periods beginning after December 15, 2018, and interim periods within those periods and early adoption is permitted. The Company is in the process of determining the impact the adoption will have on its Consolidated Financial Statements as well as whether to early adopt the new guidance.

In March 2018, the FASB issued Accounting Standards Update No. 2018-05, Income taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which provides guidance regarding the recording of tax impacts where uncertainty exists, in the period of adoption of the 2017 U.S. Tax Cuts and Jobs Act (the “Act”). To the extent that a company’s accounting for certain income tax effects of the Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate to be included in the condensed financial statements. If a company cannot determine a provisional estimate to be included in the condensed financial statements, it should continue to apply ASC 740 on the basis of the provision of the tax laws that were in effect immediately before the enactment of the Act. See Note 8 to the Unaudited Consolidated Financial Statements for further discussion on the impact of the Act.

In August 2018, the FASB issued Accounting Standards Update No. 2018-13, Fair Value Measurement: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which adds and modifies certain disclosure requirements for fair value measurements. Under the new guidance, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, or valuation processes for Level 3 fair value measurements. However, public companies will be required to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and related changes in unrealized gains and losses included in other comprehensive income. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods, and early adoption is permitted. The Company is in the process of determining the impact the adoption will have on its Consolidated Financial Statements as well as whether to early adopt the new guidance.

In September 2018, the FASB issued Accounting Standards Update No. 2018-15, Intangible – Goodwill and Other – Internal-Use Software, which requires a customer in a cloud computing arrangement to determine which implementation costs to capitalize as assets or expense as incurred. Under the new guidance, capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods, and early adoption is permitted. The Company is in the process of determining the impact the adoption will have on its Consolidated Financial Statements as well as whether to early adopt the new guidance.

Recently Adopted Accounting Standards 

In May 2014, the FASB issued ASU 2014-09, an updated standard on revenue recognition. The standard effectively replaces Accounting Standards Codification 605 Revenue Recognition (“ASC 605”) with ASC 606. In summary, the changes to the guidance in revenue recognition under ASC 606 focuses on the existence of a contract with the customer (whether written, oral, or implied by an entity’s customary business practices), the concept that the performance obligation is fulfilled when the customer obtains control of the asset/service, versus the transfer of risk and reward, and the requirement that variable consideration (including rebates, discounts, etc.) and incremental costs must be estimated and recognized in the amount that is expected or most likely to be realized over the term of the contract fulfillment.

Prior to the adoption of ASC 606, the Company recognized revenue in accordance with ASC 605 when all four of the following criteria were met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured. Specifically, revenue from the sale of implants, biologics and disposables was generally recognized upon a purchase order from the hospital or acknowledgment from the hospital indicating product use or implantation or upon shipment to third-party customers who immediately accepted title. Revenue from the sale of instrument sets was recognized upon receipt of a purchase order and the subsequent shipment to customers who immediately accepted title. Revenue from neuromonitoring services was recognized in the period the service was performed for the amount of payment expected to be received.

The Company adopted ASC 606 as of January 1, 2018, electing full retrospective method of adoption, which resulted in a change in its accounting policy for revenue recognition and related adjustments to the Consolidated Financial Statements for all periods presented. The Company applied the practical expedients permitted under ASC 606 for which (i) contracts with customers originating prior to January 1, 2016 do not require disclosure for the amount of consideration allocated to remaining performance obligations or an explanation of when the Company expects to recognize that amount as revenue; (ii) contracts beginning and completing in the same annual reporting period need not be restated; and (iii) hindsight for estimating variable consideration for completed contracts is permitted.

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The Company recognizes revenue from spinal surgery hardware and ancillary products at a point in time in two types of transactions: (i) procedural based transactions with products used during surgery defined as “charge sheet orders”, and (ii) shipping transactions which represent the stocking of product or the purchase of instrumentation to support future surgeries defined as “stocking and capital orders”. The Company also recognizes revenue at a point in time associated with surgical-related servicing procedures, including neuromonitoring services which are defined as “surgical-related services”. Other sources of revenue, such as leasing revenue and royalties, are immaterial to the Consolidated Financial Statements.

For charge sheet orders, the sale occurs when the surgery is performed and a charge sheet is submitted to the Company by its sales representative identifying the products consumed during the surgery. The charge sheet, as signed by the hospital, serves as a confirmation and acknowledgement of the Company’s products consumed during a surgery. Under ASC 605, persuasive evidence of an arrangement and delivery of product was deemed to have occurred once the charge sheet was processed, and an associated authorization or acknowledgement from the customer was received. Under ASC 606, the Company’s charge sheet orders are considered to be a contract with a customer when a surgery is scheduled with the Company as requested by the hospital or surgeon, and the products are consumed during the surgery or implanted into the patient. Revenue recognition under ASC 606 occurs upon completion of the Company’s performance obligation, which occurs upon consumption of the products during surgery and receipt of the charge sheet. In the event that information related to the surgical event and consumption of product is not readily available the Company recognizes revenue upon a purchase order from the hospital or acknowledgment from the hospital indicating product use.

For stocking and capital orders, under ASC 605, delivery was deemed to have occurred when the title, including all risks and rewards of ownership of the products specified in the sales agreement had passed to the buyer. Accordingly, title, including all risks and rewards of ownership, passed based on the shipping terms. Under ASC 606, the Company’s stocking and capital order performance obligation is considered to be satisfied when the hospital assumes control of the asset, either upon shipment or delivery depending on the terms, and ability to direct the use of the asset as appropriate without the Company’s consent.

Under both ASC 605 and ASC 606, revenue from surgical-related services, such as neuromonitoring services, is recognized in the period the service is performed based on the delivery of a services report to the customer. The Company recognizes revenue for the amount of payment expected to be received. The Company bills either hospitals or insurance companies for different aspects of the service, as applicable. Revenue from hospitals is recognized based on agreed upon pricing. Revenue from insurance companies is recognized using the expected value method, as the Company bills at a gross rate which is generally not the rate ultimately collected.

Under ASC 605, the Company has historically estimated the amounts of returns, trade-ins, discounts, rebates, credits or incentives as offsets to the total transaction price or revenue associated with the sale. In limited situations, when historical information was not available or reliable, the Company would defer revenue recognition until completion of all performance obligations. Under ASC 606, the Company analyzes sales that could include variable consideration, and estimates the expected or most likely amount of revenue after returns, trade-ins, discounts, rebates, credits, and incentives. In making these estimates, the Company considers whether the amount of variable consideration is constrained and is included in revenue only to the extent that it is probable that a significant reversal of the revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

The Company earns sales-based royalty revenue over time from sales of products using existing biologics intellectual property (“IP”) that is out-licensed to certain companies. Under ASC 605, royalty revenue was recognized as earned and when collection was reasonably assured and was generally estimated and recorded in the same period as the sales that generated the royalty obligation. ASC 606 provides an exception for sales or usage-based royalties from the guidance for accounting for variable consideration, allowing the royalty revenue from the license of IP to be recognized when the performance obligation has been satisfied and the subsequent sale has occurred. Therefore, the Company estimates monthly royalty revenue as its performance obligation is satisfied. The Company does not expect a significant impact to royalty revenue under the adoption of ASC 606 as it has historically estimated and accrued royalty revenue in the period earned.

The Company historically expensed incremental costs, such as commissions associated with sales contracts, as incurred. Under ASU 2014-09, ASC 340-40, Other Assets and Deferred Costs – Contracts with Customers was added along with ASC 606 to codify accounting guidance for the incremental costs to obtain or fulfill a contract with a customer. Under the guidance, the incremental costs must be deferred and recorded over the period in which the contract revenue is recognized. The Company typically does not associate quarterly or annual sales bonuses directly with a sale or master contract; however, commissions are directly associated with individual sales and expensed in the same period as the related contract revenue. The associated commissionable sales would not typically have a future benefit unless the revenue is recognized over time. The Company does not typically have situations where revenue is deferred in excess of one year. Given the practical expedient for contracts completing within one year, the Company does not expect these capitalized costs to be material in a given period.

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The cumulative effect of the change on retained earnings for the full retrospective method of adoption of ASC 606 was $0.3 million as of December 31, 2017. The following tables summarize in a condensed presentation the impact of the adoption of ASC 606 on the Company’s previously reported Consolidated Balance Sheet as of December 31, 2017, the Unaudited Consolidated Statement of Operations and Comprehensive Income for the three and nine months ended September 30, 2017, and the Unaudited Consolidated Statement of Cash Flows for the nine months ended September 30, 2017.

NUVASIVE, INC.

 

CONSOLIDATED BALANCE SHEET

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

(Unaudited)

 

As of December 31, 2017

 

As reported

 

 

Adjustments

 

 

As Adjusted

 

Accounts receivable, gross

 

$

212,709

 

 

$

537

 

[a]

$

213,246

 

Allowances on accounts receivable

 

 

(13,669

)

 

 

643

 

[b]

 

(13,026

)

Inventory, net

 

 

247,245

 

 

 

(107

)

[c]

 

247,138

 

Other current assets

 

 

112,705

 

 

 

 

 

 

112,705

 

Total current assets

 

 

558,990

 

 

 

1,073

 

 

 

560,063

 

Remaining other assets

 

 

1,080,077

 

 

 

 

 

 

1,080,077

 

Total assets

 

$

1,639,067

 

 

$

1,073

 

 

$

1,640,140

 

Accounts payable and accrued liabilities

 

 

75,076

 

 

 

691

 

[d]

 

75,767

 

Accrued payroll and related expenses

 

 

55,582

 

 

 

36

 

[e]

 

55,618

 

Other current liabilities

 

 

30,010

 

 

 

 

 

 

30,010

 

Total current liabilities

 

 

160,668

 

 

 

727

 

 

 

161,395

 

Deferred and income tax liabilities, non-current

 

 

18,786

 

 

 

84

 

[f]

 

18,870

 

Other long-term liabilities

 

 

660,459

 

 

 

 

 

 

660,459

 

Total NuVasive, Inc. stockholders’ equity

 

 

795,309

 

 

 

262

 

[g]

 

795,571

 

Non-controlling interests

 

 

3,845

 

 

 

 

 

 

3,845

 

Total equity

 

 

799,154

 

 

 

262

 

 

 

799,416

 

Total liabilities and equity

 

$

1,639,067

 

 

$

1,073

 

 

$

1,640,140

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[a]  Represents cumulative impact from January 1, 2016 to the period presented on accounts receivable for the full retrospective method of adoption of ASC 606.

 

[b]  Represents cumulative impact from January 1, 2016 to the period presented on allowances on accounts receivable for the full retrospective method of adoption of ASC 606.

 

[c]  Represents cumulative impact from January 1, 2016 to the period presented on inventory for the full retrospective method of adoption of ASC 606.

 

[d]  Represents cumulative impact from January 1, 2016 to the period presented on commissions payable and accrued returns for the full retrospective method of adoption of ASC 606.

 

[e]  Represents cumulative impact from January 1, 2016 to the period presented on commissions payable for the full retrospective method of adoption of ASC 606.

 

[f]  Represents cumulative impact from January 1, 2016 to the period presented on deferred tax liabilities for the full retrospective method of adoption of ASC 606.

 

[g]  Represents cumulative impact from January 1, 2016 to the period presented on retained earnings for the full retrospective method of adoption of ASC 606.

 

 

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NUVASIVE, INC.

 

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

As reported

 

 

Adjustments

 

 

As adjusted

 

Three months ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

$

227,701

 

 

$

(380

)

[a]

$

227,321

 

Service revenue

 

 

19,730

 

 

 

 

 

 

19,730

 

Total revenue

 

 

247,431

 

 

 

(380

)

 

 

247,051

 

Cost of revenue (excluding amortization of intangible assets)

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

 

50,932

 

 

 

(76

)

[b]

 

50,856

 

Cost of services

 

 

14,651

 

 

 

 

 

 

14,651

 

Total cost of revenue

 

 

65,583

 

 

 

(76

)

 

 

65,507

 

Gross profit

 

 

181,848

 

 

 

(304

)

 

 

181,544

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Sales, marketing and administrative

 

 

125,800

 

 

 

(151

)

[c]

 

125,649

 

Other operating expenses

 

 

25,445

 

 

 

 

 

 

25,445

 

Total operating expenses

 

 

151,245

 

 

 

(151

)

 

 

151,094

 

Total interest and other expense, net

 

 

(8,958

)

 

 

 

 

 

(8,958

)

Income tax benefit

 

 

11,540

 

 

 

64

 

[d]

 

11,604

 

Consolidated net income

 

$

33,185

 

 

$

(89

)

[e]

$

33,096

 

Add back net loss attributable to non-controlling interests

 

$

(432

)

 

$

 

 

$

(432

)

Net income attributable to NuVasive, Inc.

 

$

33,617

 

 

$

(89

)

[e]

$

33,528

 

Net income per share attributable to NuVasive, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.66

 

 

$

(0.00

)

[f]

$

0.66

 

Diluted

 

$

0.64

 

 

$

(0.00

)

[f]

$

0.64

 

Comprehensive income attributable to NuVasive, Inc.

 

$

34,893

 

 

$

(89

)

[e]

$

34,804

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[a]  Represents net change in sales revenue for charge sheet orders recognized under ASC 606.

 

[b]  Represents net change in cost of products sold for charge sheet orders recognized under ASC 606.

 

[c]  Represents net change in accrued sales commissions for charge sheet orders recognized under ASC 606.

 

[d]  Represents deferred income tax liability on net change associated with charge sheet orders recognized under ASC 606.

 

[e]  Represents change in net income and comprehensive income resulting from net change in charge sheet orders recognized under ASC 606.

 

[f]  Represents earnings per share impact resulting from net change in charge sheet orders recognized under ASC 606.

 

 

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NUVASIVE, INC.

 

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

As reported

 

 

Adjustments

 

 

As adjusted

 

Nine months ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

$

692,505

 

 

$

(2,405

)

[a]

$

690,100

 

Service revenue

 

 

65,363

 

 

 

 

 

 

65,363

 

Total revenue

 

 

757,868

 

 

 

(2,405

)

 

 

755,463

 

Cost of revenue (excluding amortization of intangible assets)

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

 

147,773

 

 

 

(481

)

[b]

 

147,292

 

Cost of services

 

 

45,844

 

 

 

 

 

 

45,844

 

Total cost of revenue

 

 

193,617

 

 

 

(481

)

 

 

193,136

 

Gross profit

 

 

564,251

 

 

 

(1,924

)

 

 

562,327

 

Operating expenses: