What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-21 compared with 2023-02-21 · 86 added, 67 removed, 236 unchanged (39% of the section changed)

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

With over 230 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:

With numerous products launched since the founding of the Company, including 10 products launched on the market in 2023, we offer a comprehensive portfolio of innovative and differentiated technologies that treat a variety of musculoskeletal conditions.

We separate our products and services into two major categories:

Musculoskeletal Solutions and Enabling Technologies.

We continue to monitor the evolution and impact of COVID-19 and evaluate the guidance from domestic and international authorities, including federal, state and local public health authorities regarding COVID-19, 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, the Company cannot reasonably estimate the ongoing impacts of COVID-19 on our financial condition, results of operations or cash flows in the future.

However, if a resurgence occurs and governments mandate restrictions, including restrictions on elective surgeries, we do expect that it may have a material adverse impact on our sales, results of operations, and cash flows, 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 continuing to navigate the challenges presented by COVID-19 and believe we are in a strong position to continue to sustain and grow our business.

Product Categories

While we group our products into two categories, Musculoskeletal Solutions and Enabling Technologies, they are not limited to a particular technology, platform or surgical approach.

NuVasive Merger

On September 1, 2023, pursuant to that certain Merger Agreement with NuVasive and Merger Sub, Merger Sub, a wholly owned subsidiary of the Company, merged with and into NuVasive, with NuVasive surviving as a wholly owned subsidiary of the Company.

Under the Merger Agreement, each share of common stock, par value $0.001 per share, of NuVasive issued and outstanding immediately prior to the effective time of the Merger (other than certain excluded shares as described in the Merger Agreement) was cancelled and converted into the right to receive 0.75 fully paid and non-assessable shares of Class A common stock of Globus, $0.001 par value per share, and the right to receive cash in lieu of fractional shares.

Product & Service Categories

While we group our products and services into two categories, Musculoskeletal Solutions and Enabling Technologies, they are not limited to a particular technology, platform or surgical approach.

Instead, our goal is to offer a comprehensive product suite that can be used to safely and effectively treat patients based on their specific anatomy and condition, and is customized to the surgeon’s training and surgical preference.

Musculoskeletal Solutions

Our Musculoskeletal Solutions consist primarily of implantable devices, biologics, accessories, and unique surgical instruments used in an expansive range of spinal, orthopedic and neurosurgical procedures.

Our Musculoskeletal Solutions consist primarily of implantable devices, biologics, accessories, unique surgical instruments, and neuromonitoring services, used in an expansive range of spinal, orthopedic and neurosurgical procedures.

Musculoskeletal disorders are a leading driver of healthcare costs worldwide.

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Surgical treatments for musculoskeletal disorders can be instrumented, which include the use of implants, or non-instrumented, which forego the use of hardware but may include biologics.

Neuromonitoring services use proprietary software-driven nerve detection and avoidance technology and include IONM to aid spine surgery.

Enabling Technologies

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Geographic Information

To date, the primary market for our products has been the United States, where we sell our products through a combination of direct sales representatives employed by us and distributor sales representatives employed by exclusive independent distributors, who distribute our products for a commission that is generally based on a percentage of sales.

To date, the primary market for our products has been the U.S.

, where we sell our products through a combination of direct sales representatives employed by us and distributor sales representatives employed by exclusive independent distributors, who distribute our products for a commission that is generally based on a percentage of sales.

We believe there is significant opportunity to strengthen our position in the U.S.

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During the year ended December 31, 2023, international net sales accounted for approximately 18.4% of our total net sales.

We have sold our products in approximately 53 countries other than the United States through a combination of sales representatives employed by us and exclusive international distributors.

We have sold our products in approximately 64 countries other than the U.S.

through a combination of sales representatives employed by us and exclusive international distributors.

We believe there are significant opportunities for us to increase our presence in both existing and new international markets through the continued expansion of our direct and distributor sales forces and through the commercialization of additional products.

Our business is generally not seasonal in nature.

However, sales of Musculoskeletal Solutions products may be influenced by summer vacation and winter holiday periods during which we have experienced fewer surgeries taking place, as well as more surgeries taking place later in the year when patients have met the deductibles under insurance plans.

However, sales of our Musculoskeletal Solutions products and services may be influenced by summer vacation and winter holiday periods during which we have experienced fewer surgeries taking place, as well as more surgeries taking place later in the year when patients have met the deductibles under insurance plans.

Sales of our Enabling Technologies products may be influenced by longer capital purchase cycles and the timing of budget approvals for major capital purchases.

Components of our Results of Operations

We manage our business globally within one operating segment, which is consistent with how our management reviews our business, makes investment and resource allocation decisions and assesses operating performance.

We manage our business globally within two operating segments, which is consistent with how our management reviews our business, makes investment and resource allocation decisions and assesses operating performance.

We have concluded that these operating segments are aggregated into one reportable segment, based on the aggregation criteria.

We sell implants and related disposables, primarily to hospitals, for use by surgeons to treat musculoskeletal disorders.

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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 generally recognize INR solutions 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 based on the terms of the arrangement, which typically 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.

Cost of Goods Sold

Cost of Sales

While we have increased our in-house implant product manufacturing capacity and assemble our INR systems in-house, we also have products manufactured by third-party suppliers.

Substantially all of our suppliers manufacture our products in the United States.

Our cost of goods sold consists primarily of costs from our in-house manufacturing, costs of products purchased from third-party suppliers, excess and obsolete inventory charges, depreciation of surgical instruments and cases, royalties, shipping, inspection and related costs incurred in making our products available for sale or use.

Substantially all of our suppliers manufacture our products in the U.S.

Our cost of sales consists primarily of costs from our in-house manufacturing, costs of products purchased from third-party suppliers, excess and obsolete inventory charges, depreciation of surgical instruments and cases, royalties, shipping, inspection and related costs incurred in making our products available for sale or use.

Research and Development Expenses

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Acquisition-Related Costs

Acquisition related costs represent:

the change in fair value of business-acquisition-related contingent consideration;

costs related to integrating recently acquired businesses, including but not limited to costs to exit or convert contractual obligations, severance, and information system conversion;

and specific costs related to the consummation of the acquisition process such as banker fees, legal fees, and other acquisition related professional fees.

Acquisition-related costs represent the change in fair value of business acquisition-related contingent consideration and specific costs related to the consummation of the acquisition process such as banker fees, legal fees and other acquisition-related professional fees.

Income Tax Provision

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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

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

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

For our IONM services, revenue is recognized in the period the service is performed for the amount of consideration expected to be received.

Our Enabling Technologies products are advanced hardware and software systems, and related technologies, that are designed to enhance a surgeon’s capabilities and streamline surgical procedures by making them less invasive, more accurate, and more reproducible to improve patient care.

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When contracts have multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract.

Our policy is to classify shipping and handling costs billed to customers as sales and the related expenses as cost of goods sold.

Our policy is to classify shipping and handling costs billed to customers as sales and the related expenses as cost of sales.

Excess and Obsolete Inventory.

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Level 3—unobservable inputs in which there is little or no market data available, which require the reporting entity to use significant unobservable inputs or valuation techniques.

The purchase price of business acquisitions is primarily allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the excess recorded as goodwill.

We utilize Level 3 inputs in the determination of the initial fair value.

Contingent consideration represents contingent milestone, performance and revenue-sharing payment obligations related to acquisitions and is measured at fair value, based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy.

Contingent consideration represents contingent milestone, performance or revenue-sharing payment obligations related to acquisitions and is measured at fair value, based on significant inputs that are not observable in the market, which represents a Level 3 measurement within the fair value hierarchy.

The valuation of contingent consideration uses assumptions we believe would be made by a market participant.

We assess these assumptions on an ongoing basis as additional data impacting the assumptions is obtained.

The fair value of contingent consideration is recorded in business acquisition liabilities on our consolidated balance sheets, and the changes in the fair value of contingent consideration are recognized in acquisition related costs in the consolidated statements of operations and comprehensive income.

The fair value of contingent restricted stock unit (“RSU”) grants are recorded as additional paid-in capital in the consolidated balance sheet on the day of the grant due to the remote likelihood of forfeiture.

The fair value of contingent consideration is recorded in business acquisition liabilities on our consolidated balance sheets, and changes in the fair value of contingent consideration are recognized in acquisition-related costs in the consolidated statements of operations and comprehensive income.

The fair value of contingent restricted stock unit grants (“RSUs”) are recorded as additional paid-in capital in the consolidated balance sheet on the day of the grant due to the remote likelihood of forfeiture.

We utilize Level 3 inputs in the determination of the initial fair value.

Goodwill and Intangible Assets.

Goodwill represents the excess purchase price over the fair values of the identifiable assets acquired less the liabilities assumed.

Goodwill is tested for impairment at least annually.

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

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

During the years ended December 31, 2022, 2021, and 2020, we did not record any impairment charges related to goodwill.

Goodwill represents the excess of purchase price over the fair values of the identifiable assets acquired less the liabilities assumed in the acquisition of a business.

Goodwill is tested for impairment at least annually or whenever events or circumstances indicate that a carrying amount may be impaired.

We perform our goodwill impairment analysis at the reporting unit level.

We perform our annual impairment analysis by either comparing a reporting unit’s estimated fair value to its carrying amount or doing a qualitative assessment of a reporting unit’s fair value from the last quantitative assessment to determine if there is potential impairment.

We may do a qualitative assessment when the results of the previous quantitative test indicated the reporting unit’s estimated fair value was significantly in excess of the carrying value of its net assets and we do not believe there have been significant changes in the reporting unit’s operations that would significantly decrease its estimated fair value or significantly increase its net assets.

If a quantitative assessment is performed, the evaluation includes management estimates of discounted cash flow projections based on internal future projections and/or use of a market approach by looking at market values of comparable companies.

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

Intangible assets consist of purchased in-process research and development (“IPR&D”), developed technology, supplier network, patents, customer relationships, re-acquired rights, and non-compete agreements.

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Fair value is generally determined using a discounted future cash flow analysis.

There were no impairments of finite-lived intangible assets during the years ended December 31, 2022, 2021, or 2020.

IPR&D has an indefinite life and is not amortized until completion of the project at which time the IPR&D becomes an amortizable asset.

If the related project is not completed in a timely manner, we may have an impairment related to the IPR&D, calculated as the excess of the asset’s carrying value over its fair value.

There were no impairments of IPR&D during the years ended December 31, 2022, 2021, or 2020.

During the twelve months ended December 31, 2023, there were no impairments in goodwill, finite-lived intangible assets, or IPR&D.

Long-Lived Assets .

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If quoted market prices are not available, an estimate of fair value is made based on prices of similar assets or other valuation techniques including present value techniques.

During the years ended December 31, 2022, 2021, or 2020 , we did not record any impairment charges related to long-lived assets.

During the years ended December 31, 2023, 2022, and 2021 , we did not record any impairment charges related to long-lived assets.

Stock-Based Compensation Expense.

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The fair value of restricted stock units is estimated on the day of grant based on the closing price of the Company’s common stock.

We expect to continue to grant stock options in the future, and to the extent that we do, our actual stock-based compensation expense recognized may increase.

We assumed equity-classified awards for certain NuVasive RSUs, and performance restricted stock units (“PRSUs”), as part of the Merger.

These RSUs and PRSUs are measured at the grant date based on the estimated fair value of the award.

The fair value of equity instruments that are expected to vest is recognized and amortized over the requisite service period.

The Company has granted awards with up to five year graded or cliff vesting terms (in each case, with service through the date of vesting being required).

No exercise price or other monetary payment is required for receipt of the shares issued in settlement of the respective award;

instead, consideration is furnished in the form of the participant’s service to the Company.

We expect to continue to grant stock-based awards in the future, and to the extent that we do, our actual stock-based compensation expense recognized may increase.

Legal Proceedings.

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Such matters are subject to many uncertainties, and the outcomes of these matters are not within our control and may not be known for prolonged periods of time.

In some actions, the claimants seek damages, as well as other relief, including injunctions prohibiting us from engaging in certain activities, which, if granted, could require significant expenditures and/or result in lost revenues.

In some actions, the claimants seek damages, as well as other relief, including injunctions prohibiting us from engaging in certain activities,

which, if granted, could require significant expenditures and/or result in lost revenues.

We record a liability in the consolidated financial statements for these actions when a loss is considered probable and the amount can be reasonably estimated.

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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.

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Total net sales

In the United States, the increase in net sales of $52.4 million was due primarily to increased spine product sales resulting from penetration in existing territories and an increase in sales volume of enabling technologies .

International net sales increased by $12.4 million, which was due primarily to increased spine product sales resulting from penetration in existing territories and sales volume of enabling technologies, partially offset by lower sales in Japan due to the transition of our sales force composition.

Cost of Goods Sold

In the U.S., the increase in net sales of $407.8 million was due primarily to the addition of NuVasive, as well as increased spine product sales, including robotic spine instruments, resulting from penetration in existing territories and an increase in sales volume of Enabling Technologies.

International net sales increased by $137.8 million, which was due primarily due to the addition of NuVasive and increased spine product sales resulting from penetration in existing territories.

Cost of Sales

(In thousands, except percentages)

Cost of goods sold

Cost of sales

Percentage of net sales

The increase in cost of goods sold was primarily due to increased volume and product mix and unfavorable freight trends.

These increases were partially offset by lower write-downs of excess and obsolete inventory and depreciation costs.

The increase of $284.4 million in cost of sales was primarily due to the addition of NuVasive, amortization of the inventory fair value step up, increased volume and product mix, higher write-downs of excess and obsolete inventory, and higher depreciation.

These increases were partially offset by lower production variances.

Research and Development Expenses

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Percentage of net sales

The decrease in research and development expenses was due primarily to $34.3 million of acquired IPR&D for the year ending December 31, 2021, which was expensed because we determined that it 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.

The increase of $51.0 million in research and development expenses was due primarily to the addition of NuVasive and an increase in personnel-related expenses due to our continued investment in product development.

Selling, General and Administrative Expenses

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Percentage of net sales

The increase in selling, general and administrative expenses was primarily due to an increase in commission expenses resulting from higher product sales and an increase in travel and meeting expenses.

The $211.3 million increase in selling, general and administrative expenses was due to the addition of NuVasive, and an increase in personnel-related expenses resulting primarily from higher product sales, and an increase in bad debt and meeting expenses.

Provision for Litigation

(In thousands, except percentages)

Provision for litigation

Provision for litigation, net

Percentage of net sales

The provision for litigation includes accruals for potential legal settlements for the year ending December 31, 2022 and 2021.

The $1.9 million decrease in provision for litigation is due to a settlement receipt, partially offset by a settlement payment for the year ended December 31, 2023 compared to 2022.

Amortization of Intangibles

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Percentage of net sales

The decrease in the amortization of intangibles is primarily due to individual intangible assets reaching their full amortization .

The increase of $33.3 million in the amortization of intangibles is primarily due to the impact of the recognized intangibles in connection with the Merger.

Acquisition-Related Costs

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Percentage of net sales

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

The increase of $62.3 million in acquisition-related costs is due to costs incurred relating to the closing of the Merger, including investment banking, employee benefit and legal costs.

It also includes an unfavorable change in fair value of business acquisition liabilities, driven by changes in market conditions and the achievement of certain performance conditions.

Other Income/(expense), Net

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Percentage of net sales

The increase in other income, net was due primarily to higher interest income from higher yields on marketable securities from external market factors and a non-recurring recovery related to damaged product during the year ended December 31, 2022.

The increase of $17.2 million in othe r income, was primarily due to foreign currency exchange gains of $14.3 million in the current year compared to $1.0 million of foreign currency losses in the prior year and an increase of $5.9 million related to higher interest income yields on marketable securities from external market factors.

Income Tax Provision

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Effective income tax rate

The increase in the effective income tax rate was primarily the result of the lower effect of windfall tax benefits from stock-based compensation compared to the prior year.

The increase in the effective tax rate is primarily due to non-deductible compensation expenses and other non-deductible Merger-related transaction costs as a percentage of pretax earnings.

A discussion of our Results of Operations for the year ended December 31, 2022 can be found in “ Part II, Item 7.

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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.

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, service our 2025 Notes, and potential future business or intellectual property acquisitions.

We expect to continue to make investments in surgical sets as we launch new products, increase the size of our U.S.

sales force, and expand into international markets.

Additionally, we have varying needs for cash in connection with our Senior Convertible Notes, of which $450 million of Senior Convertible Notes are due March 2025, as well as for certain acquisition-related obligations and contingent consideration achievements.

Future litigation or requirements to escrow funds could also materially impact our liquidity and our ability to invest in and operate our business on an ongoing basis.

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

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There is no assurance that we will be able to secure such additional funding on terms acceptable to us, or at all .

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 (as amended, the “Revolving Credit Facility”), and has a termination date of August 2, 2023.

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

As of December 31, 2022, we have not borrowed under the Revolving Credit Facility.

Line of Credit

In September 2023, we entered into an unsecured credit agreement with U.S.

Bank National Association, as administrative agent, Citizens Bank, N.A., as syndication agent, Royal Bank of Canada, as documentation agent, U.S.

Bank National Association and Citizens Bank, N.A., as joint lead arrangers and joint book runners, and the other lenders referred to therein (the “September 2023 Credit Agreement”), that provides a revolving credit facility permitting borrowings up to $400.0 million and has a termination date of September 27, 2028.

We may request an increase in the revolving commitments in an aggregate amount not to exceed (i) $200 million or (ii) so long as the Leverage Ratio (as defined in the September 2023 Credit Agreement) is at least 0.25 to 1.00 less than the applicable Leverage Ratio then required under the September 2023 Credit Agreement, an unlimited amount.

Revolving Loans under the September 2023 Credit Agreement bear interest at either a base rate or the Term SOFR Rate (as defined in the Revolving Credit Facility) plus, in each case, an applicable margin, as determined in accordance with the provisions of the September 2023 Credit Agreement.

The Applicable Margin ranges from 0.125% to 0.625% for the Base Rate and 1.125% to 1.625% for the Term SOFR Rate.

We may also request Swingline Loans (as defined in the September 2023 Credit Agreement) at either the Base Rate or the Daily Term SOFR Rate.

The September 2023 Credit Agreement is guaranteed by certain direct or indirect wholly owned subsidiaries of the Company.

The September 2023 Credit Agreement contains financial and other customary covenants, including a funded net indebtedness to adjusted EBITDA ratio.

As of December 31, 2023, we have not borrowed under the September 2023 Credit Agreement and we are in compliance with all covenants.

Contractual Obligations and Commitments

In connection with the Merger, the Company acquired additional obligations and commitments, including, but not limited to (i) the 2025 Notes, with a principal balance of $450.0 million, (ii) contingent consideration arrangements associated with certain historical NuVasive acquisitions, and (iii) operating lease and finance lease obligations.

Refer to the Notes to the consolidated financial statements for further description of our 2025 Notes (Note 11), contingent consideration arrangements (Notes 6 and 15), and lease obligations (Note 16).

The following table summarizes our outstanding contractual obligations as of December 31, 2023.

There have been no material changes in our remaining contractual obligations since that time.

Payments Due by Period

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More than 5 Years

Convertible Notes

Operating leases

Financing Leases

Contingent consideration

Purchase obligations

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Cash Provided by Operating Activities

The net cash provided by operating activities for the year ended December 31, 2022 was primarily cash flow from net income, partially offset by outflows for inventories and unfavorable changes in accounts receivable.

The higher net cash provided by operating activities for the year ended December 31, 2023 was primarily the result of higher net income after adjusting out non-cash add-backs and non-cash expenses, such as amortization of purchase accounting related fair value step up, amortization, and stock based compensation, partially offset by unfavorable change in deferred income taxes.

Cash Used in Investing Activities

The cash used in investing activities for the year ended December 31, 2022 was primarily from purchases of property and equipment and the acquisition of businesses, net of cash acquired and purchases of intangible and other assets.

The higher cash provided by investing activities for the year ended December 31, 2023 was primarily from net inflows of purchases, maturities, and sales of marketable securities, partially offset by acquisition of businesses net of cash acquired and higher purchases of property and equipment.

Cash Provided by Financing Activities

The net cash used in financing activities for the year ended December 31, 2022 was primarily the result of the repurchase of Class A common stock, partially offset by inflows from proceeds from exercise of stock options.

The higher net cash used in financing activities for the year ended December 31, 2023 was primarily the result of higher repurchases of Class A common stock and lower proceeds from exercise of stock options.

A discussion of our cash flows for the year ended December 31, 2022 can be found in “ Part II, Item 7.

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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