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NUVASIVE INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[October 30, 2014]

NUVASIVE INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements May Prove Inaccurate This quarterly report on Form 10-Q, including the following discussion and analysis, may contain forward-looking statements that involve risks, uncertainties, assumptions and other factors which, if they do not materialize or prove correct, could cause our results to differ from historical results or those expressed or implied by such forward-looking statements. In some cases, you can identify these "forward-looking statements" by words like "may", "will", "should", "could" , "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential", "intends" , or "continues" (or the negative of those words and other comparable words). Forward-looking statements include, but are not limited to, statements about: • our intentions, beliefs and expectations regarding our expenses, sales, operations and future financial performance; • our operating results; • our plans for future products and enhancements of existing products; • anticipated growth and trends in our business; • the timing of and our ability to maintain and obtain regulatory clearances or approvals; • our belief that our cash and cash equivalents and investments will be sufficient to satisfy our anticipated cash requirements; • our expectations regarding our revenues, customers and distributors; • our beliefs and expectations regarding our market penetration and expansion efforts; • our expectations regarding the benefits and integration of recently-acquired businesses and our ability to make future acquisitions and successfully integrate any such future-acquired businesses; • our anticipated trends and challenges in the markets in which we operate; and • our expectations and beliefs regarding and the impact of investigations, claims and litigation.



These statements are not guarantees of future performance or events. Our actual results may differ materially from those discussed here. The potential risks and uncertainties that could cause actual results to differ materially include, but are not limited to those set forth under the heading "Risk Factors", and elsewhere in this report, and similar discussions in our other Securities and Exchange Commission filings, including our Annual Report on Form 10-K for the year ended December 31, 2013. We assume no obligation to update any forward looking statements to reflect new information, future events or circumstances or otherwise.

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the unaudited Consolidated Financial Statements and the Notes to those statements included in this quarterly report on Form 10-Q.


Overview We are a medical device company focused on developing minimally-disruptive surgical products and procedurally-integrated solutions for the spine. Our currently-marketed product portfolio is focused on applications for spine fusion surgery, including biologics, a combined market estimated to exceed $8.7 billion globally in 2014. Our 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 our proprietary software-driven nerve detection and avoidance systems, NVM5 and NVJJB, and Intra-Operative Monitoring ("IOM") support; MaXcess®, an integrated split-blade retractor system; and a wide variety of specialized implants. The individual components of our MAS platform, and many of our products, can also be used in open or traditional spine surgery.

Our spine surgery product line offerings, which include products for the thoracolumbar and the cervical spine, are primarily used to enable access to the spine and to perform restorative and fusion procedures in a minimally disruptive fashion. Our biologic product line offerings used to aid the spinal fusion process or bone healing include allograft (donated human tissue), Osteocel® Plus and Osteocel Pro, an allograft cellular matrix containing viable mesenchymal stem cells, or "MSCs", FormaGraft®, a collagen synthetic product, and AttraX®, a synthetic bone graft material, currently available commercially only in select markets outside of the United States. Our subsidiary, Impulse Monitoring, Inc.

provides IOM services for insight into the nervous system during spine and other surgeries. We continue to focus significant research and development efforts to expand our MAS product platform and advance the applications of our unique technology into procedurally integrated surgical solutions. We have dedicated and continue to dedicate significant resources toward training spine surgeons who are new to our MAS product platform as well as surgeons previously trained on our MAS product platform who are attending advanced training courses.

Our MAS platform, with the unique advantages provided by our nerve monitoring systems, enables an innovative lateral procedure known as "eXtreme Lateral Interbody Fusion", or "XLIF®", in which surgeons access the spine for a fusion procedure 24 -------------------------------------------------------------------------------- from the side of the patient's body, rather than from the front or back. Our MaXcess instruments provide access to the spine in a manner that affords direct visualization and our nerve monitoring systems assist surgeons in avoiding critical nerves.

At various times in the past, certain insurance providers have adopted policies of not providing reimbursement for the XLIF procedure or some of its components.

We have worked with our surgeon customers and the North American Spine Society who, in turn, have worked with these insurance providers to supply the information, explanation and clinical data they require to categorize the XLIF procedure as a procedure entitled to reimbursement under their policies. At present, the majority of insurance companies provide reimbursement for XLIF procedures. However, certain carriers - large and small - may have policies significantly limiting coverage of XLIF, Interlaminar Lumbar Instrumented Fusion, Osteocel Plus and Osteocel Pro, the PCM® Cervical Disc System, and/or other procedures or products we sell. We cannot offer definitive time frames or final outcomes regarding reversal of the coverage-limiting policies, as the process is dictated by the third-party insurance providers.

In recent years, we have significantly expanded our product offerings relating to procedures in the cervical spine. Our cervical product offering now provides a full set of solutions for cervical fusion surgery, including both allograft and CoRoent® implants, as well as cervical plating and posterior fixation products. We also offer PCM, a motion-preserving total disc replacement device for the cervical spine.

Revenue and Operations To date, the majority of our revenues are derived from the sale of implants, biologics and disposables and we expect this trend to continue for the foreseeable future. We loan our proprietary software-driven nerve monitoring systems and surgical instrument sets at no cost to surgeons and hospitals that purchase disposables and implants for use in individual procedures. In addition, we often place our proprietary software-driven nerve monitoring systems, MaXcess and other MAS or cervical surgical instrument sets with hospitals for an extended period at no up-front cost to them. Our implants, biologics and disposables are currently sold and shipped from our primary distribution and warehousing operations facility located in Memphis, Tennessee. We generally recognize revenue for implants, biologics and disposables upon receiving acknowledgement of a purchase order and upon completion of delivery. We sell an immaterial number of MAS instrument sets, MaXcess devices, and our proprietary software-driven nerve monitoring systems.

IOM monitoring service revenue consists of hospital based revenues and net patient service revenues, and is recorded in the period the service is provided.

Hospital based revenues are recorded based upon contracted billing rates. Net patient services are billed to various payers, including Medicare, commercial insurance companies, other directly billed managed healthcare plans, employers, and individuals. We report revenues based on the amount expected to be collected.

In mid-2013, we received a federal administrative subpoena from the Office of the Inspector General of the U.S. Department of Health and Human Services ("OIG") in connection with an investigation into possible false or otherwise improper claims submitted to Medicare and Medicaid. The subpoena seeks discovery of documents for the period January 2007 through April 2013. We are working with the OIG to understand the scope of the subpoena and to provide the requested documents. We intend to fully cooperate with the OIG's request and will provide periodic updates as information becomes available. Responding to the subpoena requires management's attention and results in significant legal expense. Any adverse findings related to this investigation could result in significant financial penalties against us.

The majority of our operations are located in the United States and the majority of our sales have been generated in the United States. We sell our products in the United States through a sales force comprised of exclusive independent sales agents and directly-employed sales shareowners, both engaged to sell only NuVasive products. Our sales force provides a delivery and consultative service to our surgeon and hospital customers and is compensated based on sales and product placements in their territories. Sales force commissions are reflected in our statement of operations in the sales, marketing and administrative expense line. We expect to continue to expand our distribution channels. We are continuing to invest in our expansion of international sales efforts with the focus on European, Asian and Latin American markets. Our international sales force is comprised of directly-employed sales shareowners as well as exclusive distributors and independent sales agents.

25 -------------------------------------------------------------------------------- Results of Operations Revenue September 30, (in thousands) 2014 2013 $ Change % Change Three months ended: Spine Surgery Products $ 146,739 $ 131,137 Biologics 32,632 28,743 Monitoring Service 10,547 9,276 Total revenue $ 189,918 $ 169,156 $ 20,762 12 % Nine months ended: Spine Surgery Products $ 431,379 $ 382,485 Biologics 94,958 83,754 Monitoring Service 31,753 28,119 Total revenue $ 558,090 $ 494,358 $ 63,732 13 % The continued adoption of minimally invasive procedures for spine has led to the expansion of our procedure volume. In addition, increased market acceptance in our international markets contributed to the increase in revenues noted for the periods presented. We expect continued adoption of our innovative minimally invasive procedures and deeper penetration into existing accounts and our newer international markets as our sales force executes on our strategy of selling the full mix of our products. However, the continued consolidation and increased purchasing power of our hospital customers and group purchasing organizations, the continued existence of physician-owned distributorships, recent changes in the public and private insurance markets regarding reimbursement, and ongoing policy and legislative changes in the United States have created less predictability in the lumbar portion of the spine market and have limited the domestic spine market's procedural growth rate. Accordingly, we believe that our growth in revenue in 2014 will come primarily from share gains in the shift toward less invasive spinal surgery and international growth.

Our total revenues increased $20.8 million and $63.7 million during the three and nine months ended September 30, 2014, respectively, representing total revenue growth of 12% and 13% for the three and nine months ended September 30, 2014, respectively, compared to the same periods in 2013.

Revenue from our Spine Surgery Products increased $15.6 million and $48.9 million, or 12% and 13% during the three and nine months ended September 30, 2014, respectively, compared to the same periods in 2013. This increase resulted from an increase in volume of approximately 13% and 15% for the three and nine months ended September 30, 2014, respectively, offset by unfavorable changes in price of approximately 1% and 2% for the three and nine months ended September 30, 2014, respectively, compared to the same periods in 2013.

Revenue from Biologics products increased $3.9 million and $11.2 million, or 14% and 13%, during the three and nine months ended September 30, 2014, respectively, compared to the same periods in 2013, which was primarily due to increases in volume.

Revenue from Monitoring Services increased $1.3 million and $3.6 million, or 14% and 13% during the three and nine months ended September 30, 2014, respectively, compared to the same periods in 2013. The increase was primarily due to increases in volumes for the three months ended September 30, 2014, and increases in medical billing collections, aided by increases in volume, for the nine months ended September 30, 2014 compared to the same periods in 2013.

26 --------------------------------------------------------------------------------Cost of Goods Sold, excluding amortization and impairment of intangible assets September 30, (in thousands) 2014 2013 $ Change % Change Three months ended $ 47,719 $ 43,291 $ 4,428 10 % % of total revenue 25 % 26 % Nine months ended $ 135,849 $ 131,131 $ 4,718 4 % % of total revenue 24 % 27 % Cost of goods sold consists primarily of raw materials, labor and overhead associated with product manufacturing, purchased goods, inventory-related costs and royalty expense, as well as the cost of providing IOM services, which includes personnel and physician oversight costs.

Cost of goods sold as a percentage of revenue decreased during the three and nine months ended September 30, 2014 compared to the same periods in 2013. This decrease was primarily due to a non-recurring royalty charge of $7.9 million recognized during the nine months ended September 30, 2013 related to the Medtronic litigation ruling that determined ongoing royalty rates (see Note 11, Contingencies, for further discussion). In addition, the Company experienced lower reserve requirements as a percentage of revenue due to inventory efficiencies and margin improvements gained from the acquisition of the spine implant manufacturer ANC, LLC in May 2013 (now named "NuVasive Manufacturing Limited"), and increased medical billing collections and volume in monitoring services. These margin improvements were offset by price decreases, incremental royalty charges due to an increased revenue base and a shift of revenue mix towards lower margin products and countries.

For the full fiscal year 2014, we expect cost of goods sold, as a percentage of revenue, to remain relatively consistent with current spending.

Operating Expenses Three Months Ended September 30, Three Months Ended September 30, 2014 2013 Operating Operating (in thousands) expense % of total revenue expense % of total revenue $ Change % Change Sales, marketing and administrative $ 113,746 60 % $ 102,085 60 % $ 11,661 11 % Research and development 9,068 5 % 7,248 4 % 1,820 25 % Amortization of intangible assets 3,071 2 % 4,974 3 % (1,903 ) (38 )% Nine Months Ended September 30, Nine Months Ended September 30, 2014 2013 Operating Operating (in thousands) expense % of total revenue expense % of total revenue $ Change % Change Sales, marketing and administrative $ 348,820 63 % $ 306,243 62 % $ 42,577 14 % Research and development 28,590 5 % 24,654 5 % 3,936 16 % Amortization of intangible assets 10,541 2 % 14,263 3 % (3,722 ) (26 )% Impairment of intangible assets 10,708 2 % - - % 10,708 100 % Litigation liability 30,000 5 % - - % 30,000 100 % Sales, Marketing and Administrative Sales, marketing and administrative expenses consist primarily of compensation, commission and training costs for shareowners engaged in sales, marketing and customer support functions. The expense also includes distributor commissions, depreciation expense for property and equipment such as surgical instrument sets, freight expenses, surgeon training costs, and administrative and shared expenses for both shareowners and third party service providers.

27 -------------------------------------------------------------------------------- During the three and nine months ended September 30, 2014, the Company recognized $2.2 million and $9.1 million, respectively, for facility charges related to the New Jersey lease termination and consolidation of San Diego offices as part of a company-wide efficiency effort. Excluding these non-recurring transactions, sales, marketing and administrative expenses decreased as a percentage of revenue during the three and nine months ended September 30, 2014 compared to the same periods in 2013 as a result of increased operating leverage in our expenses.

Costs that tend to vary based on revenue, which include commissions, depreciation expense for loaned surgical instrument sets, domestic sales force headcount, distribution and customer support headcount, freight expenses, and continued investment in the expansion of our international markets, increased by $7.1 million and $26.1 million during the three and nine months ended September 30, 2014, respectively, compared to the same periods in 2013, primarily due to our revenue growth. These increases are primarily driven by the costs to support an expansion of our markets, domestically and internationally, and associated headcount increases, which increased by $6.0 million and $19.5 million during the three and nine months ended September 30, 2014, respectively, compared to the same periods in 2013.

Fixed costs are primarily comprised of compensation and other shareowner related expenses for our marketing and administrative support functions. It also includes facility charges, professional services and legal fees, which are primarily related to costs incurred in response to the OIG subpoena as well as certain intellectual property and litigation related legal matters. Fixed costs increased $4.6 million and $16.5 million during the three and nine months ended September 30, 2014, respectively, compared to the same periods in 2013 which are primarily the result of increases of $3.4 million and $14.4 million relate to added headcount and the aforementioned facility charges recognized during the three and nine months ended September 30, 2014.

For the remainder of 2014 and on a long-term basis, we expect total sales, marketing and administrative costs, as a percentage of revenue, to decrease moderately.

Research and Development Research and development expense consists primarily of product research and development, clinical trial and study costs, regulatory and clinical functions, and compensation and other shareowner related expenses.

In the last several years, we have introduced numerous new products and product enhancements that have significantly expanded our MAS platform, enhanced the applications of the XLIF procedure, and expanded our offering of cervical products. We have also acquired complementary and strategic assets and technology, particularly in the area of biologics. We continue to invest in research and development programs. As a percentage of revenue, research and development expense is consistent for both the three and nine month periods ended September 30, 2014 compared to the same periods in 2013.

The primary increase in research and development expense was related to compensation and other shareowner related expenses due to increased headcount and ongoing development projects during the three and nine months ended September 30, 2014, which was offset by reduced expenses related to in-process research and development assets for the nine months ended September 30, 2014 compared to the same period in 2013.

For the remainder of 2014, as a percentage of revenue, we expect total research and development costs to moderately increase over current levels in support of our ongoing development and 510k product approval efforts.

Amortization of Intangible Assets Amortization expense decreased $1.9 million and $3.7 million during the three and nine months ended September 30, 2014, respectively, compared to the same periods in 2013, primarily due to certain intangible assets reaching the end of their useful lives subsequent to September 30, 2013.

Impairment of Intangible Assets During the nine months ended September 30, 2014, we recorded an impairment charge related to developed technology for the PCM Cervical Disc System acquired from Cervitech in 2009 (see Note 5, Goodwill and Intangible Assets, for further discussion).

Litigation Liability The litigation liability relates to the unfavorable jury verdict that was delivered against us during the nine months ended September 30, 2014 relating to our use of the trade name "NeuroVision". The amount of the jury verdict represents a probable loss that can be reasonably estimated (see Note 11 to the Unaudited Consolidated Financial Statements).

28 -------------------------------------------------------------------------------- Interest and Other Expense, Net Total interest and other expense, net, consists principally of interest expense incurred on our 2013 and 2017 Senior Convertible Notes, and other income (expense), offset by income earned on marketable securities. Total interest and other expense, net, increased by $5.8 million and $5.5 million for the three and nine months ended September 30, 2014, respectively, compared to the same periods in 2013. The interest expense was increased by $0.3 million and $0.4 million during the three and nine months ended September 30, 2014, compared to 2013 for the same periods due to amortization schedule of debt discount offset with lower interest expense incurred due to the 2013 Senior Convertible Notes settlement during March 2013. The increase in other expense during the three and nine months ended September 30, 2014, comparing to 2013 for the same periods are due to the recognition of other income of approximately $2.8 million in connection with the settlement of several lawsuits related to a competitor during the three months ended September 30, 2013, and losses on foreign currency rate changes during the three and nine months ended September 30, 2014 of $2.9 million and $2.8 million, respectively. The loss on foreign currency was primarily due to the fluctuation in the pound sterling, the euro, the Australian dollar and the yen, for the three and nine months ended September 30, 2014.

Income Tax Expense (Benefit) September 30, September 30, (in thousands) 2014 2013 Three months ended $ 9,088 $ 860 Effective income tax rate 128 % 11 % Nine months ended $ (4,065 ) $ 20 Effective income tax rate 14 % 2 % We recorded an income tax expense of $9.1 million and $0.9 million for the three months ended September 30, 2014 and September 30, 2013, respectively. We recorded an income tax benefit of $4.1 million and an income tax expense of $0.0 million for the nine months ended September 30, 2014 and 2013, respectively. The effective income tax rate for the nine months ended September 30, 2014 was 14% compared to an income tax rate of 2% for the nine months ended September 30, 2013. We update our annual effective income tax rate each quarter and if the estimated effective income tax rate changes, a cumulative adjustment is made.

For the nine months ended September 30, 2014, our tax benefits reflects the negative impact of our Global Initiative project and non-deductible expenses primarily relating to stock-based compensation, offset by discrete benefits relating to disqualifying dispositions of qualified stock grants. The income tax provision for the nine months ended September 30, 2013 reflected a discrete tax benefit related to the 2012 federal research and development (R&D) credit which was retrospectively reinstated in the nine months ended September 30, 2013.

The Company's Globalization Initiative, which involves establishing new international operations and entering into new intercompany transfer pricing arrangements, including the licensing of intangibles, was implemented in January 2014. The Company's financial results for the three and nine months ended September 30, 2014 reflects the current impact of this initiative.

29 -------------------------------------------------------------------------------- Liquidity, Cash Flows and Capital Resources Liquidity and Capital Resources Our principal sources of liquidity are our existing cash, cash equivalents and marketable securities, cash generated from operations and proceeds from our convertible debt financing issued in June 2011. We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results and working capital requirements. We have historically invested our cash primarily in U.S.

treasuries and government agencies, corporate debt, and money market funds.

Certain of these investments are subject to general credit, liquidity and other market risks. The general condition of the financial markets and the economy has exacerbated those risks and may affect the value of our current investments and restrict our ability to access the capital markets or even our own funds.

Our future capital requirements will depend on many factors including our rate of revenue growth, the timing and extent of spending to support development efforts, the expansion of sales, marketing and administrative activities, the timing of introductions of new products and enhancements to existing products, the continuing market acceptance of our products, the expenditures associated with possible future acquisitions or other business combination transactions, the outcome of current and future litigation, and the evolution of our globalization initiative. We believe our current cash and cash equivalents, investments and cash provided by operations will satisfy our working capital requirements, debt obligations and capital expenditures for the foreseeable future.

In connection with the Medtronic litigation, a jury from the U.S. District Court, Southern District of California delivered an unfavorable verdict to us and awarded monetary damages of approximately $101.2 million to Medtronic. In May 2012, in accordance with an escrow arrangement, we transferred $113.3 million of cash into a restricted escrow account to secure the amount of the judgment, plus prejudgment interest, during pendency of our appeal of the judgment. These funds are included in restricted cash and investments in our September 30, 2014 consolidated balance sheet. Further, as a result of the June 2013 District Court ruling on the ongoing royalty rates, we will be required to escrow funds to secure accrued royalties, estimated at $27.0 million to date, as well as future ongoing royalties.

On April 3, 2014, an unfavorable jury verdict was delivered against us relating to our use of the trade name "NeuroVision". We established a liability of $30.0 million for this matter, which remained unchanged as of September 30, 2014. We anticipate to soon fund an amount of cash equal to such established liability into a restricted escrow account. Such funds will be classified as restricted cash, and held pending the outcome of post-trial motions and the likely appellate process. In the event that we are unable to prevail in future legal action, we could be required to outlay such escrowed cash (and, potentially, more).

A substantial portion of our operations are located in the United States, and the majority of our sales since inception have been made in the United States.

Accordingly, we do not have material cash flow exposure to foreign currency rate fluctuations. However, as our business in markets outside of the United States continues to increase, we will be exposed to foreign currency exchange risk related to our foreign operations. Fluctuations in the rate of exchange between the United State dollar and foreign currencies, primarily in the pound sterling, the euro, the Australian dollar and the yen, could adversely affect our financial results, including our revenues, revenue growth rates, gross margins, income and losses as well as assets and liabilities.

Cash, cash equivalents and marketable securities was $384.2 million and $326.1 million at September 30, 2014 and December 31, 2013, respectively. The increase primarily relates to $96.5 million in cash from operations and proceeds from the issuance of Company common stock of $15.3 million, offset by $45.7 million in capital expenditures and $35.8 million in net changes in marketable securities during the nine months ended September 30, 2014. At September 30, 2014, we have cash and investments totaling $123.2 million including the above-described Medtronic litigation-related restricted escrow account, which are not available to us to meet any ongoing capital requirements if and when needed. We will be required to fund additional cash into escrow due to pending legal cases, however, the Company believes that restriction on the cash expected to be escrowed does not negatively impact our liquidity and/or our ability to invest in, and run, our business on an ongoing basis.

Cash flows from operating activities Cash provided by operating activities was $96.5 million for the nine months ended September 30, 2014, compared to $70.1 million for the same period in 2013.

The $26.4 million increase in cash provided by operating activities was mainly due to an increase in the add-back of non-cash items and an increase in the litigation liability accrual, partially offset by an increase in the net loss and an increase in amounts paid for inventory for the nine months ended September 30, 2014 compared to the same period in 2013.

30 -------------------------------------------------------------------------------- Cash flows from investing activities Cash used in investing activities was $81.6 million for the nine months ended September 30, 2014, compared to $26.6 million for the same period in 2013. The $54.9 million increase in cash used in investing activities was primarily due to net changes in marketable securities during the nine months ended September 30, 2014 compared to the same period in 2013.

Cash flows from financing activities Cash provided by financing activities was $13.5 million for the nine months ended September 30, 2014, compared to cash used in financing activities of $65.6 million for the same period in 2013. The $79.2 million increase in cash provided by financing activities was primarily due to the repayment of the 2013 Senior Convertible Notes during the nine months ended September 30, 2013 as well as an increase in proceeds from the issuance of common stock in connection with exercises of stock options and purchase rights during the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. Our equity incentive plans allow for net share settlement of certain equity awards.

Net share settlement is generally used in lieu of cash payments by shareowners for minimum tax withholding or exercise costs for equity awards. The net share settlement is accounted for as a treasury share repurchase transaction, with the cost of any deemed repurchased shares included in treasury stock and reported as a reduction in total equity at the time of settlement. Additionally, net share settlement for tax withholding requires us to fund a significant amount of cash for certain tax payment obligation from time-to-time with respect to the shareowner tax obligations for vested equity awards. We anticipate using cash generated from operating activities to fund such payments.

Senior Convertible Notes In June 2011, we issued $402.5 million principal amount of Senior Convertible Notes with a stated interest rate of 2.75% and a maturity date of July 1, 2017.

The net proceeds from the offering, after deducting initial purchasers' discounts and costs directly related to the offering, were $359.2 million. The 2017 Notes may be settled in cash, stock, or a combination thereof, solely at our discretion. It is our current intent and policy to settle all conversions through combination settlement, which involves repayment of an amount of cash equal to the principal amount and any excess of the conversion value over the principal amount in shares of the Company's common stock. The initial conversion rate of the 2017 Notes is 23.7344 shares per $1,000 principal amount, or equivalent to conversion price of approximately $42.13 per share, which is subject to adjustment. Interest on the 2017 Notes is payable semi-annually on January 1st and July 1st of each year.

In March 2008, we issued $230.0 million principal amount of 2.25% unsecured Senior Convertible Notes (the "2013 Notes"). During the year ended December 31, 2011, we repurchased approximately $155.7 million in principal of its 2013 Notes in privately negotiated transactions. These repurchases were made using a portion of the net proceeds from the issuance of the 2017 Notes. The remaining balance of the 2013 Notes matured on March 15, 2013, and, accordingly, during the nine months ended September 30, 2013, we repaid the total outstanding principal amount of $74.3 million in cash. In connection with the offering of the 2013 Notes, we sold to the initial purchasers and/or their affiliates warrants to acquire up to 5.1 million shares of our common stock (the "2013 Warrants"). All 2013 Warrants expired unexercised on or before October 8, 2013.

Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations is based upon our unaudited Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates including those related to bad debts, inventories, valuation of goodwill, intangibles, other long-term assets, stock-based compensation, income taxes, and legal proceedings. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results may differ from these estimates. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and there have been no material changes during the nine months ended September 30, 2014.

Off-Balance Sheet Arrangements As of September 30, 2014, we did not have any off-balance sheet arrangements.

31 --------------------------------------------------------------------------------Contractual Obligations and Commitments As of September 30, 2014, there were no material changes, outside of the ordinary course of business in our outstanding contractual obligations from those disclosed within "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Item 3. Quantitative and Qualitative Disclosures About Market Risk There has been no material change in our assessment of our sensitivity to market risk since our presentation set forth in Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Item 4. Controls and Procedures Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended ("Exchange Act") is recorded, processed, summarized and reported within the time lines specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we carried out an evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined in SEC Rules 13a - 15(e) and 15d - 15(e)) as of September 30, 2014. Based on such evaluation, our management has concluded that as of September 30, 2014, the Company's disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we carried out an evaluation of any potential changes in our internal control over financial reporting during the fiscal quarter covered by this quarterly report on Form 10-Q.

There has been no change to our internal control over financial reporting during our most recent fiscal quarter that our certifying officers concluded materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

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