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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2024-02-21 compared with 2023-02-21 · 46 added, 18 removed, 6 unchanged (91% of the section changed)

3 unchanged sentences

We do not enter into derivatives or other financial instruments for trading or speculative purposes and do not believe we are exposed to material market risk with respect to our cash, cash equivalents and marketable debt securities.

Market Price Risk

In order to reduce the potential equity dilution associated with our convertible notes, we entered into transactions for convertible notes hedge (the “2025 Hedge”) in connection with the issuance in March 2020 of $450.0 million principal amount of unsecured senior convertible notes with a stated interest rate of 0.375% and a maturity date of March 15, 2025 (the “2025 Notes”), entitling us to purchase our common stock.

Upon conversion of our convertible notes, the 2025 Hedge is expected to reduce the equity dilution if the daily volume-weighted average price per share of our common stock exceeds the strike price of the applicable hedge.

We also entered into warrant transactions with the counterparties of the 2025 Hedge entitling them to acquire shares of our common stock.

The warrant transactions could have a dilutive effect on our earnings per share to the extent that the price of our common stock during a given measurement period (the quarter or year to date period) exceeds the strike price of the warrants.

See Note 11, Debt, in the Notes to Consolidated Financial Statements included in this Annual Report for further discussion.

Interest Rate Risk

Our exposure to interest rate risk relates primarily to our revolving credit facility and our investments in cash equivalents and marketable debt securities.

At December 31, 2022, we had no debt outstanding under our revolving credit facility and therefore were not exposed to interest rate risk with respect to interest payable under that facility.

In general, our investments in cash equivalents and marketable debt securities are governed by our investment policy, which has been approved by our Board of Directors.

Our investment policy seeks to preserve the value of capital, consistent with maximizing return on our investments while maintaining adequate liquidity.

To achieve our investment objectives, we maintain a portfolio of various holdings, types and maturities and invest in securities that meet or exceed our investment policy standards, focusing on high credit quality debt securities.

We continue to be exposed to interest rate risk related to our cash equivalents and marketable securities.

Generally, our interest rate risk with respect to these investments is limited due to yields earned.

Changes in the overall level of interest rates affect the interest income generated by our cash, cash equivalents and marketable securities.

Our investment policy limits the amount of credit exposure to any one issue, issuer or type of security.

Our securities all have effective maturity dates within three years of the date of purchase and are designated as available for sale.

As of December 31, 2022, we believe that a hypothetical 10% change in interest rates would not materially affect the underlying valuation of our marketable securities.

Our exposure to interest rate risk at December 31, 2023 is related to our investment portfolio which consists of municipal bonds, corporate debt securities, commercial paper, asset-backed securities, and securities of government, federal agency, and other sovereign obligations of high quality financial institutions.

Due to the short-term nature of these investments, we have assessed that there is no material exposure to interest rate risk arising from our investments.

Fixed rate investments and borrowings may have their fair market value adversely impacted from changes in interest rates.

Based upon our overall interest rate exposure as of December 31, 2023, a change of 10 percent in interest rates, assuming the amount of our investment portfolio and overall economic environment remains constant, would not have a material effect on interest income.

The primary objective of our investment activities is to preserve the principal while at the same time maximizing yields without significantly increasing the risk.

To achieve this objective, we maintain our portfolio of cash equivalents and investments in instruments that meet high credit quality standards, as specified in our investment policy.

None of our investments are held for trading purposes.

Our policy also limits the amount of credit exposure to any one issue, issuer and type of instrument.

As of December 31, 2023, we only held investments in securities classified as cash equivalents and marketable equity securities.

During the periods presented, we did not hold any investments that were in a significant unrealized loss position and no impairment charges were recorded.

Realized gains and losses and interest income related to cash equivalents were immaterial during all periods presented.

Foreign Exchange Risk

We operate in countries outside of the United States and, therefore, we are exposed to foreign currency risk.

Most of our direct sales outside of the United States are invoiced in local currencies.

We expect the percentage of our sales and operating expenses denominated in foreign currencies will increase in the foreseeable future as we continue to expand into international markets.

When our sales or expenses are not denominated in U.S.

dollars, a fluctuation in exchange rates could affect our net income.

We do not currently hold derivatives to hedge our exposure to foreign currency exchange rate fluctuations;

however, we may choose to hedge our exposure in the future.

We operate in countries outside of the U.S.

and, therefore, we are exposed to foreign currency risk.

Most of our direct sales outside of the U.S.

are invoiced in local currencies.

However, as our business in markets outside of the U.S.

continues to increase, our exposure to foreign currency exchange risk related to our foreign operations will continue to grow.

Fluctuations in the rate of exchange between the U.S.

dollar and foreign currencies, primarily the Australian dollar, the Brazilian real, the British pound sterling, the Colombian peso, the euro, the Japanese yen, and the Singapore dollar, has had and could continue to have an adverse effect on our financial results, including our net sales, net sales growth rates, gross margins, income and losses as well as assets and liabilities.

In particular, as a result of NuVasive’s acquisition of Simplify Medical, we have additional exposure to fluctuations in the Australian dollar.

We established intercompany receivables and payables in Australian dollars as a result of the acquisition of Simplify Medical.

We also have future contingent consideration liabilities denominated in U.S.

dollars, in connection with the acquisition of Simplify Medical, which are the financial obligation of our subsidiary, NuVasive (AUST/NZ) Pty Limited , an Australian dollar denominated company.

In addition, loss of financial stability within these markets could lead to delays in reimbursement or inability to remit payment due to currency controls.

Specifically, we have operations in Puerto Rico, Brazil, and Argentina that have financial instability or currency controls.

We translate the financial statements of our foreign subsidiaries with functional currencies other than the U.S.

dollar into the U.S.

dollar for consolidation using end-of-period exchange rates for assets and liabilities and average exchange rates during each reporting period for results of operations.

Net gains or losses resulting from the translation of foreign financial statements and the effect of exchange rate changes on intercompany receivables and payables of a long-term investment nature are recorded as a separate component of stockholders’ equity.

These adjustments will affect net income only upon sale or liquidation of the underlying investment in foreign subsidiaries.

Exchange rate fluctuations resulting from the translation of all other intercompany balances between domestic

entities and our foreign subsidiaries are recorded as foreign currency transaction gains or losses and are included in other expense, net in the Consolidated Statements of Operations.

For certain intercompany balances, we may enter into foreign currency forward contracts to partially offset the impact from fluctuation of the foreign currency rates.

The notional amount of the outstanding foreign currency forward contracts was $10.0 million as of December 31, 2023, which were settled in January 2024.

During the year ended December 31, 2023, a loss of $0.1 million was recognized in other expense, net due to the change in the fair value of the derivative instruments, and the fair value of the hedge contracts we held was de minimis on our Consolidated Balance Sheets as of December 31, 2023.

The derivative instruments are recorded in other current assets or other current liabilities in the Consolidated Balance Sheets commensurate with the nature of the instrument at period end.

The notional principal amounts provide one measure of the transaction volume outstanding as of period end, but do not represent the amount of our exposure to market loss.

The estimates of fair value are based on applicable and commonly used pricing models using prevailing financial market information.

The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.

The financial exposures by exchange rate fluctuations are monitored and managed by us as an integral part of our overall risk management program, which recognizes the unpredictability of financial markets and seeks to reduce potentially adverse effects on our results.

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 7A. Quantitative and Qualitative Disclosures About Market Risk