What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-17 compared with 2021-02-17 · 48 added, 55 removed, 260 unchanged (28% of the section changed)

5 unchanged sentences

We are an engineering-driven company with a history of rapidly developing and commercializing advanced products and procedures to address treatment challenges.

With 220 products on the market, we offer a comprehensive portfolio of innovative and differentiated technologies that treat a variety of musculoskeletal conditions.

With over 220 products on the market, we offer a comprehensive portfolio of innovative and differentiated technologies that treat a variety of musculoskeletal conditions.

Although we manage our business globally within one operating segment, we separate our products into two major categories:

1 unchanged sentence

COVID-19 Update

We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities, regarding the COVID-19 pandemic, and we may need to make changes to our business based on their recommendations.

We continue to monitor the rapidly evolving situation and guidance from domestic and international authorities, including federal, state and local public health authorities, regarding the COVID-19 pandemic, and we may need to make changes to our business based on their recommendations.

In these circumstances, there may be developments outside our control requiring us to adjust our operating plan.

As such, given the dynamic nature of this situation, the Company cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future.

However, while the government mandated restrictions, including elective surgeries, are in place, we do expect that it could continue to have a material adverse impact on our revenue growth, operating profit and cash flow and may lead to higher than normal inventory levels, revised payment terms with certain of our customers, and a change in effective tax rate driven by changes in the mix of earnings across the Company’s jurisdictions.

We are focused on navigating these recent challenges presented by COVID-19 and believe we are in a strong position to continue to sustain and grow our business once the restrictions are lifted and elective surgeries fully resume.

To date, COVID-19 has not materially affected our supply chain or production schedule, although delays may be possible in the future due to the dynamic nature of the situation.

However, if a resurgence occurs and governments mandate restrictions, including restrictions on elective surgeries, we do expect that it could have a material adverse impact on our revenue growth, operating profit and cash flow, revised payment terms with certain of our customers, and a change in effective tax rate driven by changes in the mix of earnings across the Company’s jurisdictions.

We are focused on navigating these recent challenges presented by COVID-19 and believe we are in a strong position to continue to sustain and grow our business.

Product Categories

32 unchanged sentences

We recognize revenue when the implants and related disposables have been implanted or used in a surgery, or for sets that are sold directly, when title to the goods and risk of loss are transferred to the customer and there are no remaining performance obligations which affect the customer’s final acceptance of the sale.

We completed our first sale of ExcelsiusGPS™ in the fourth quarter of 2017.

We generally recognize revenue when control transfers to the customer, which occurs at the time the product is shipped or delivered.

We generally recognize INR solutions revenue when control transfers to the customer, which occurs at the time the product is shipped or delivered.

Depending on the terms of the arrangement, we may also defer the recognition of a portion of the consideration as we satisfy future performance obligations related to the provision of maintenance and support.

32 unchanged sentences

A valuation allowance is established when it is more likely than not that the future realization of all or some of the deferred tax assets will not be achieved.

See “Note 15.

Income Taxes” below for further discussion on the impact of the U.S.

Tax Cuts and Jobs Act in the current year.

Critical Accounting Policies and Estimates

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Sales and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.

For purposes of disclosure, we disaggregate our revenue into

two categories, Musculoskeletal Solutions and Enabling Technologies.

Our Musculoskeletal Solutions products consist primarily of the implantable devices, disposables, and unique instruments used in an expansive range of spine, orthopedic trauma, hip, knee and extremity procedures.

For purposes of disclosure, we disaggregate our revenue into two categories, Musculoskeletal Solutions and Enabling Technologies.

The majority of our Musculoskeletal Solutions contracts have a single performance obligation and revenue is recognized at a point in time.

37 unchanged sentences

Goodwill is tested for impairment at the reporting unit level by comparing the reporting unit’s carrying amount to the fair value of the reporting unit.

The fair values are estimated

using an income and discounted cash flow approach.

We perform our annual impairment test for goodwill in the fourth quarter of each year.

The fair values are estimated using an income and discounted cash flow approach.

We perform our annual impairment test for goodwill in the fourth quarter of each

We consider qualitative indicators of the fair value of a reporting unit when it is unlikely that a reporting unit has impaired goodwill.

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In these instances, we look to establish reserves.

If we determine that a tax position is more likely than not of being sustained upon audit, based solely on the technical merits of the position, we recognize the benefit.

If we determine that a tax position is more likely than not of being

sustained upon audit, based solely on the technical merits of the position, we recognize the benefit.

We measure the benefit by determining the amount that has likelihood greater than 50% of being realized upon settlement.

10 unchanged sentences

Total net sales

In the United States, the increase in net sales of $16.8 million was due primarily to increased spine product sales resulting from continued penetration in existing territories .

International net sales decreased by $13.1 million, which was due primarily to the postponement of elective surgeries at hospitals and surgical centers as well as a one-time distributor stocking order in the period ended March 31, 2019.

In the United States, the increase in net sales of $155.1 million was due primarily to increased spine product sales resulting from penetration in existing territories and an increase in sales volume of enabling technologies, both of which were partially attributable to the lower net sales for the year ending December 31, 2020 due to the COVID-19 pandemic .

International net sales increased by $13.9 million, which was due primarily to increased spine product sales resulting from penetration in existing territories and sales volume of enabling technologies, both of which were partially attributable to the lower net sales for the year ending December 31, 2020 due to the COVID-19 pandemic.

Cost of Goods Sold

2 unchanged sentences

Percentage of net sales

The $37.5 million increase in cost of goods sold was primarily due to higher write-downs of excess and obsolete inventory on less frequently used implant product sizes, non-recurring inventory write-offs and other manufacturing expenses, including depreciation.

The increase in cost of goods sold was primarily due to increased volume, and increased depreciation and royalty costs.

These increases were partially offset by favorable production variances driven by manufacturing efficiencies, and lower write-downs of excess and obsolete inventory driven by the impact of the COVID-19 pandemic on operations for the year ending December 31, 2020.

Research and Development Expenses

2 unchanged sentences

Percentage of net sales

The increase in research and development expenses was due primarily to $24.4 million of in-process research and development (“IPR&D”) from the acquisition of Synoste Oy (“Synoste”) which was expensed because we determined that it did not have an alternative future use.

The increase in research and development expenses was due primarily to the $34.3 million of acquired IPR&D for the year ending December 31, 2021, partially offset by the $24.4 million of acquired IPR&D for the year ending December 31, 2020, which were all expensed because we determined that each did not have an alternative future use.

The remaining change is driven by an increase in personnel related expenses due to our continued investment in product development.

Selling, General and Administrative Expenses

2 unchanged sentences

Percentage of net sales

Selling, general and administrative expenses for the year ended December 31, 2020 remained consistent with the previous fiscal year.

The increase in selling, general and administrative expenses was primarily due to an increase in commission and bonus expenses resulting from higher product sales, an increase in travel and training expenses, which are comparable to pre-COVID-19 expenses, and an increase in other personnel related costs due to the continued build out of the spine, INR technology and orthopedic trauma sales forces.

Provision for Litigation

2 unchanged sentences

Percentage of net sales

The decrease in the provision for litigation is due to a one-time legal settlement and verdict costs that did not occur in the year ended December 31, 2020.

The provision for litigation for the year ending December 31, 2021 includes accruals for potential legal settlements.

Amortization of Intangibles

2 unchanged sentences

Percentage of net sales

The increase in the amortization of intangibles was primarily due to the developed technology and customer relationship intangible assets acquired in connection with the Nemaris and StelKast acquisitions, respectively.

The increase in the amortization of intangibles is primarily due to the developed technology intangible asset acquired in connection with the Nemaris acquisition and the intangible assets acquired in the fourth quarter of fiscal 2020 .

Acquisition Related Costs

2 unchanged sentences

Percentage of net sales

The increase in acquisition related costs was primarily due to costs associated with the change in fair value of business acquisition liabilities and business development-related activities.

Other Income, Net

Acquisition related costs increased due to changes in fair value of business acquisition liabilities, driven by changes in market conditions and the achievement of certain performance conditions .

Other Income/(expense), Net

(In thousands, except percentages)

1 unchanged sentence

Percentage of net sales

The decrease in other income, net was due primarily to lower interest income from lower yields on short and long-term investments in marketable securities during the year ended December 31, 2020.

The decrease in other income, net was due primarily to lower interest income from lower yields on marketable securities during the year ended December 31, 2021.

Income Tax Provision

2 unchanged sentences

Effective income tax rate

The change in the effective income tax rates between the current year and prior year was primarily the result of the non-deductible expense of acquired IPR&D of $24.4 million, partially offset by higher tax benefits resulting from an increase in stock option exercises in the current year period.

The decrease in the effective income tax rate was primarily the result of the non-deductible expense of acquired IPR&D in the prior year, partially offset by the lower effect of stock option exercises on higher pretax income in the current year.

A discussion of our Results of Operations for the year ended December 31, 2020 can be found in “ Part II, Item 7.

2 unchanged sentences

Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019.

” on our Form 10-K/A filed on March 2, 2020 .

” on our Form 10-K filed on February 17, 2021 .

Liquidity and Capital Resources

Our principal sources of liquidity are cash flow from operating activities and our revolving credit facility, which was fully available as of December 31, 2020.

We believe these sources will provide sufficient funding for us to meet our liquidity requirements for the foreseeable future.

Our principal source of liquidity is cash flow from operating activities as well as our cash and cash equivalents and marketable securities, which we believe will provide sufficient funding for us to meet our liquidity requirements for the foreseeable future.

Our principal liquidity requirements are to fund working capital, research and development, including clinical trials, capital expenditures primarily related to investment in surgical sets required to maintain and expand our business, and potential future business or intellectual property acquisitions.

2 unchanged sentences

We may, however, require additional liquidity as we continue to execute our business strategy.

Our liquidity may be negatively impacted as a result of a decline in sales of our products, including declines due to changes in our customers’ ability to obtain third-party coverage and reimbursement for procedures that use our products, increased pricing pressures resulting from intensifying competition, cost increases and slower product development cycles resulting from a changing regulatory environment;

and unfavorable results from litigation which will affect our cash flow.

We anticipate that to the extent that we require additional liquidity, it will be funded through the incurrence of other indebtedness, additional equity financings or a combination of these potential sources of liquidity.

To the extent that we require new sources of liquidity, we may consider incurring debt, including borrowing against our existing credit facility, convertible debt instruments, and/or raising additional funds through an equity offering.

The sale of additional equity may result in dilution to our stockholders.

1 unchanged sentence

In August 2020, we entered into a credit agreement with Citizens Bank, N.A.

(the “Credit Agreement”) that provides a revolving credit facility permitting borrowings up to $125.0 million (the “Revolving Credit Facility”), and has a termination date of August 5, 2021.

(the “Credit Agreement”) that provides a revolving credit facility permitting borrowings up to $125.0 million (the “Revolving Credit Facility”).

As amended, the Credit Agreement has a termination date of August 3, 2022.

The Revolving Credit Facility includes up to a $25.0 million sub limit for letters of credit.

The following table summarizes, for the periods indicated, cash flows from operating, investing and financing activities:

(In thousands)

Net cash provided by operating activities

Net cash used in investing activities

Net cash used in/provided by financing activities

Effect of foreign exchange rate changes on cash

Increase (decrease) in cash, cash equivalents, and restricted cash

Cash Provided by Operating Activities

The increase in net cash provided by operating activities for the year ended December 31, 2020 was primarily due to the increase of cash flow from the collection of accounts receivable.

Cash Used in Investing Activities

The decrease in net cash used in investing activities for the year ended December 31, 2020 was primarily due to the decrease in net purchases, maturities and sales of marketable securities and a decrease in purchases of property and equipment, partially offset by increases in payments related to asset acquisitions.

Cash Provided by Financing Activities

The increase in net cash used in financing activities for year ended December 31, 2020 was primarily the result of the repurchases of common stock, partially offset by the increase in proceeds from option exercises.

A discussion of our Cash Flows for the year ended December 31, 2019 can be found in “ Part II, Item 7.

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

Results of Operations;

” on our Form 10-K/A filed on March 2, 2020 .

Contractual Obligations and Commitments

As of December 31, 2021, we have not borrowed under the Credit Agreement.

The following table summarizes our outstanding contractual obligations as of December 31, 2021.

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Financial Statements and Supplementary Data.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

The following table summarizes, for the periods indicated, cash flows from operating, investing and financing activities:

(In thousands)

Net cash provided by/(used in) operating activities

Net cash provided by/(used in) investing activities

Net cash provided by/(used in) financing activities

Effect of foreign exchange rate changes on cash

Increase (decrease) in cash, cash equivalents, and restricted cash

Cash Provided by Operating Activities

The increase in net cash provided by operating activities for the year ended December 31, 2021 was primarily due to the increase of cash flow from net income and reduced outflows for inventories and liabilities.

These were partially offset by an unfavorable change in accounts receivable as a result of increased sales.

Cash Used in Investing Activities

The increase in net cash used in investing activities for the year ended December 31, 2021 was due primarily to the net outflows of purchases, maturities and sales of marketable securities, which was partially offset by a decrease in purchases of property and equipment.

Cash Provided by Financing Activities

The increase in net cash provided by financing activities for year ended December 31, 2021 was primarily the result of the cash used for the repurchase of common stock in the year ended December 31, 2020, partially offset by a decrease in proceeds from option exercises.

A discussion of our Cash Flows for the year ended December 31, 2020 can be found in “ Part II, Item 7.

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

Results of Operations;

” on our Form 10-K filed on February 17, 2021 .

Related-Party Transactions

7 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis