NuVasive, Inc.
Q4 2014 Earnings Call Transcript

Published: 25 Feb 2015

[Operator:]

Greetings. And welcome to the NuVasive, Inc. Fourth Quarter and Full Year 2014 Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now turn the conference over to your host, Carol Cox, Executive Vice President of Corporate Affairs and Human Resources. Thank you. You may begin.

[Carol A. Cox:]

Thank you, Roya. Welcome to NuVasive's Fourth Quarter and Full Year 2014 Earnings Call. Joining me on today's call are Alex Lukianov, our Chairman and Chief Executive Officer, as well as Quentin Blackford, our Executive Vice President and Chief Financial Officer. During our comments and responses to your questions today certain items may be discussed which are not based entirely on historical facts, including, without limitation, those regarding revenues, gross margins, operating expenses, other income and expense, taxes, future products and capital allocation plans. Our actual results or trends could differ materially from our forecast. Any such item should be considered forward-looking statements that are based on current expectations and involve risks and uncertainties, assumptions and other factors which, if they do not materialize or prove correct, could cause NuVasive's results to differ materially from those expressed or implied by such forward-looking statements. These and other risks and uncertainties are more completely described in today's press release, and in our most recent 10-Q and 10-K forms filed with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements or information which speak as of their respective dates. This call will also include a discussion of several financial measures that are not calculated in accordance with Generally Accepted Accounting Principles or GAAP. We refer to these as non-GAAP financial measures. These measures include our cost of goods sold, gross margin, sales, marketing and administrative expenses, research and development expenses, operating margin, non-GAAP earnings per share, free cash flow and EBITDA. Additionally, earlier today we announced that we have updated our non-GAAP definition, which will include the impact of non-cash stock based compensation and certain intellectual property related litigation expenses, beginning in the first quarter of 2015. We will refer to these as updated non-GAAP financial measures in our discussions today. We believe this information is useful to investors because it provides information regarding earnings generation at NuVasive, and is helpful for measuring our progress. We will use these prior and updated non-GAAP financial measures along with the most directly comparable GAAP financial measures in evaluating our actual and forecasted operating performance, capital resources and cash flow. The most directly comparable GAAP financial measures and information reconciling these prior and updated non-GAAP financial measures are included in the news release and the supplementary financial information, which are accessible from the Investor Relations section of NuVasive's website. With that, I would like to turn the call over to Alex.

[Alexis V. Lukianov:]

Thank you, Carol. Good afternoon. And thank you, everyone, for joining us on today's call. We are extremely pleased to report fourth quarter and full year 2014 results that demonstrate our ability to execute against our global market share-taking strategy, drive increased operational efficiencies and deliver outstanding results throughout the business. We finished the year strong, delivering our goal of double-digit revenue growth and expanding our operating margin by more than 100 basis points. We reported full-year revenue of $662.4 million, which represents growth of 11% or 12% on a constant currency basis and non-GAAP earnings per share of $1.16. Revenue growth was driven by strong performance in the U.S. especially in lumbar and biologics and continued strong growth in our international geographies. We also delivered strong free cash flow of $60 million and exited the year with more than $400 million in cash, which adds to our financial flexibility. On the operations side, we continue to make considerable progress and achieve a significant milestone when we exited the fourth quarter with non-GAAP operating margin of over 20%. This is a goal we've been working diligently to achieve over the last several years and I am extremely proud of our team and the multiple initiatives that they have driven to achieve such a longstanding goal. For the full year, we expanded our non-GAAP operating margin to 16.7% which is 180 basis point expansion year-over-year. That's a remarkable 25% increase in operating margin over last year, two times the growth rate of revenue. We were able to drive this growth, thanks to our incredible focus on improving operating efficiencies as we leverage our scale and grow to $1 billion in revenue and beyond. The expansion reflects continued strides in our ongoing efforts to bring manufacturing in-house and drive asset and sales force efficiencies and the operational initiatives that we have underway in all areas of the organization. During the year, our market share-taking strategies continued to fuel industry-leading growth across our U.S. and international businesses. In the U.S. we grew 8% driven by some of our newer surgical solutions like Precept for posterior fixation; ALIF ACR to correct sagittal alignment; Bendini, our customized rod bending solution and MAS PLIF, all of which brings some of the benefits of MIS surgery, mainly reduce disruption through traditional techniques. In the fourth quarter, Precept surpassed more than $100 million cumulative product sales since launch, making it a top 10 product for us in terms of historical revenue. Our international business delivered 40% year-over-year growth on a constant currency basis since 2014 and surpassed $100 million in annual revenue. Our top performing countries were the UK, Italy, Australia, Japan and Brazil. Over the last several years we have made significant investments in key markets throughout the world and are now reaping the benefits. Japan is a great example of that. It's a market that we opened just two years ago and we've now surpassed $20 million in annual revenue. 2014 was a big year for NuVasive. We became the number three player in the global spine market and celebrated 10 years as a public company, but we are just getting started. We are laser focused on bringing the energy and drive of a startup to accomplish our goals of changing, disrupting and improving spine surgery. We believe this mentality will take us to $1 billion and beyond and we already have our sights on taking over the number two position in spine. Our culture is also our competitive advantage. With relentless focus on our speed of innovation and enabling superior patient outcomes, we've been able to attract and retain the very best talent in spine. These are our eight players, those who live our culture every day and drive our firm belief that excellent isn't good enough, only outstanding will do for a NuVasive A-Player. Add to that, our deep commitment to give back and express our attitude of gratitude through our NuVasive Spine Foundation, which supports surgical missions around the globe, together with our work hard and play hard attitude to drive focus on success, and you have a cultural ecosystem that makes us both unique and unstoppable. So looking ahead to 2015, we anticipate a market environment that'll be more positive than in recent years, growing to a total market size of approximately $9 billion, comprised of a stabilizing U.S. backdrop that is showing recovery, along with an international market landscape that is growing. This year we expect the U.S. market to grow in the low-single digits to a total market size of approximately $6.6 billion, while the international market should grow in the mid-single digits to approximately $2.4 billion. Taking into account this outlook and our relative competitive position, we expect to generate top line growth of approximately 6% or 7.5% on a constant currency basis, in line with our expectations of driving mid-to-high single-digit revenue growth in 2015 and toward $1 billion in revenues, while aspiring and driving to achieve higher internal expectations both in 2015 and in the longer term. There are several ongoing influences that we expect will continue to shape the global spine market and our performance this year. Key tailwinds are being driven by favorable demographics, particularly with the aging baby boomer population in the U.S., and a rising middle class outside the United States, as well as a growing international population with increased access to healthcare. We are also seeing better alignment between surgeons and hospitals in the selection of innovative technologies, especially providers strive for the type of improved patient outcomes and attractive economics that NUVA delivers, all of which line up in our favor. We also expect market headwinds to continue to include payor pressure in the U.S., as well as ongoing overall pricing pressure due in part to commoditization. Our pipeline of new product introductions and strong C-suite approach help to minimize the impact of pricing pressure, but is definitely a factor in the market. Our key approach to offsetting pricing pressure has been our differentiated product strategy and that strategy is all about having game-changing innovation. It means a truly unique focus on less disruptive treatments and the unmatched delivery of procedurally integrated solutions. Turning to our strategy, as demonstrated by our 2014 results, we continue to outpace the market as we execute against our market share-taking strategy, which focuses on three main drivers. First, further driving the shift for MIS in less invasive solutions; second, penetrating and converting the traditional spine market with less disruptive solutions; and third, expanding our international footprint. Overall, we are confident in our competitive positioning relative to these dynamics and expect to continue to perform at a high level. I will spend a moment on each of these opportunities to provide a sense of the size of the opportunities and how NuVasive is positioned. NuVasive established a leadership position within MIS by pioneering the lateral approach to spine surgery. We have not stopped there and have continued to innovate resulting in a constantly evolving comprehensive portfolio of highly differentiated less invasive solutions. This opportunity is expanding and today the MIS market represents an approximate $2.6 billion U.S. market opportunity as less disruptive treatments increasingly become the standard of care. This is supported by better patient outcomes and demonstrated MIS cost savings. The traditional market approximates a $4 billion U.S. market opportunity and one which we are increasingly penetrating by applying technology leadership and knowhow to make traditional techniques less invasive, improve surgical outcomes and convert traditional surgeon customers to MIS and less disruptive solutions. Our integrated solutions such as MAS PLIF and TLIF are great examples as they apply the learnings of XLIF to make posterior surgery less disruptive. These are the type of solutions that are driving the shift to more minimally invasive techniques and giving us access to the traditional market. To further accelerate our MAS and traditional market penetration approach, we are getting ready to change spine surgery once again with IGA. Just as XLIF revolutionized spine surgery 10 years ago, the IGA platform is poised to drive the next big shift in spine surgery by applying procedural expertise to increase predictability in spine's greatest challenge, alignment. IGA which stands for Integrated Global Alignment represents the platform we are building to provide the technology needed to achieve proper spine alignment. This platform will include operative planning elements as well as implants that can be customized to achieve the desired correction. Additionally, IGA will include the launch of the Reline portfolio this year which is the evolution of our posterior fixation technology. Reline's seamless and versatile design for both open and MIS applications delivers a highly efficient surgical experience to help drive reproducible patient outcomes. We are very excited about this technology and where it is going to take us and our company as we intend to change spine surgery once again over the next several years. The international market is an estimated $2.4 billion opportunity this year and with only 4% share of the market leaving a tremendous amount of runway for NuVasive. Over the last several years we have made significant investments in key markets throughout the world, with commercial operations in EMEA, Asia Pacific and Latin America. This infrastructure provides the foundation we need to expand more deeply into our existing markets as well as enter and penetrate new markets. Our U.S. biologics business grew 12% in 2014 and we expect it to be another solid contributor for us in 2015. We continue to see strong surge in interest in Osteocel, particularly the new Osteocel Pro. Our ability to adapt and transform to the rapidly shifting and dynamic markets in which we compete is essential to our success and provides us a competitive advantage. Recently we announced meaningful organizational changes implemented to ensure that our structure supports our strategy. In his new position as President and Chief Operating Officer, Pat Miles now leads both Global Operations and Global Products and Services, placing us in an optimal position to scale our business by integrating product development and services with our operational activities. We also named Matt Link to the position of President of U.S. Sales and Service, where he is responsible for fully integrating our procedures with their neurophysiology services offering to enhance the benefits and promote the value of a NuVasive partnership with our surgeon, hospital and healthcare provider customers. This new structure, which allows us to proactively react to market changes and respond to customer needs, coupled with the meaningful momentum already built into the business positions us well for continued revenue growth. From a legal perspective, we continue to work with the OIG on the subpoena we received but have nothing new to report at this time. We will provide further updates if and when they are needed. In sum, our execution in the fourth quarter and full year 2014 was very strong and I am confident that our current portfolio and pipeline position NuVasive well to drive revenue growth and even greater operating profitability in 2015. NUVA 2.0 is all about accelerating both revenue and profitability and changing internal processes. The entire NuVasive management team and shareowner base is laser focused on improving operating profitability. We anticipate that our ongoing efforts to achieve greater efficiencies and streamline our processes will drive strong momentum throughout 2015 as we seek to expand our non-GAAP operating margins by a record 300 basis points and our non-GAAP EBITDA margins 270 basis points, both of which Quentin will provide in more detail in a moment. Before I turn the call over to Quentin, I would like to recognize Keith Valentine and his planned departure from NuVasive at the end of April. As with all professional relationships, there comes a time when team members move onto pursue other career opportunities. With 14 years of service and dedication to NuVasive, Keith has been contemplating this move for a number of months and it is with gratitude for his many contributions to NuVasive that we say good bye. I want to thank Keith for his unwavering loyalty and support of NuVasive, his government advocacy, community support, strong surgeon relationships, marketing and operations expertise along with his cultural zealotry which have been instrumental to our success. Now for more on our performance and outlook I will turn the call over to our CFO, Quentin Blackford.

[Quentin Blackford:]

Thanks, Alex. And good afternoon everyone. Before we get started with the financials, let me remind you that many of the financial measures covered today will be on a non-GAAP basis. Please refer to the supplementary financial information filed on our website in the Investor Relations section for all of the details covered on today's call, and to reconcile our non-GAAP items to their GAAP counterparts. As we announced this afternoon we are changing our non-GAAP definition on a go-forward basis to now include share-based compensation expenses and certain IP litigation expenses to better reflect the true operating performance of the company. To be clear, this updated definition does not impact the intended improvements and profitability that we identified at our Investor Meeting last November, and now has us working towards a non-GAAP EBITDA margin of approximately 30% as we move beyond $1 billion in annual revenues. For simplicity purposes, 2014 results will be discussed under the prior non-GAAP definition for comparability to prior 2014 guidance, and 2015 forward-looking guidance will reflect the updated non-GAAP definition. Revenue for the fourth quarter of 2014 exceeded our expectations at $204.3 million, or 7% growth year-over-year, including approximately $2 million of FX headwinds. On a constant currency basis, revenue for the quarter would have been $206 million, or approximately 8% growth year-over-year. Full year revenue was $762.4 million, or 11% growth on a reported basis and 12% growth excluding currency impacts. Our performance for Q4 and the full year was driven primarily by strength in our U.S. lumbar, U.S. biologics, and international businesses. Let's walk through the composition of revenue in the quarter and for the full year as we continue to deliver on our guidance to drive mid-to-high single-digit growth on the top line. U.S. lumbar sales growth for the fourth quarter was up approximately 4%, driven by continued momentum of our minimally invasive solutions, and somewhat tempered by a more difficult year-over-year comparisons. We ended 2014 driving more than 7% U.S. lumbar growth for the full year, with the performance of Precept, MAS PLIF, the Decade Plate, and ALIF ACR notably generating significant momentum in the most proprietary portion of our business. U.S. biologic sales showed ongoing momentum during the quarter, growing approximately 9% year-over-year and exceeded our expectations for the full year of 2014, delivering growth of approximately 12%. The strength and demand for our U.S. lumbar solutions and increased procedural pull-through due to the launch of Osteocel Pro in the first half of 2014 generated solid surgeon interest in trialing throughout the second half of the year. U.S. cervical sales increased during the quarter, growing approximately 5% year-over-year with ACDF finishing the year strong and new products such as Archon showing signs of strength in the fourth quarter as well. For 2014 U.S. cervical sales increased approximately 3% year-over-year. U.S. monitoring service sales for the quarter decreased approximately 4% year-over-year primarily due to strong collections in the fourth quarter of 2013, which we had signaled at the time as not being repeatable. Despite the difficult comparison, our IOS product and services business continued to outperform delivering approximately 9% growth year-over-year as case volumes continue to increase as demand and acceptance of this effort continued, exceeding our expectations and pushing annual IOS revenue over the $100 million revenue mark for the year. Our international business which includes Puerto Rico also exceeded our expectations growing approximately 28% in the quarter, or approximately 36% on a constant currency basis with strong contributions from each of our key geographies. During the quarter, Japan once again led our international performance nearly doubling on a constant currency basis, contributing to an overall strong performance for Asia-Pacific. Latin America showed strong performances in Argentina and Brazil while EMEA's growth was led by another strong performance in Italy during the quarter. For the year, total international revenue exceeded our expectations, not only growing by approximately 40% or 43% on a constant currency basis but also surpassing the $100 million mark in annual revenues finishing 2014 at $103 million, including the impact of approximately $2 million of currency headwinds. In summary, we are pleased with our revenue results for the fourth quarter and full year 2014 as we continue to execute our share-taking strategy. Turning to the rest of the P&L and results, non-GAAP gross margin in the fourth quarter was 77.3%, up 310 basis points from the 74.2% reported in Q4 of 2013. The expansion demonstrates continued strong operational gains driven by improved asset efficiencies as we better track the utilization of our assets in the field and manage our product transitions more effectively. In addition our move to insource manufacturing continued to deliver gains in our gross margin from prior-year. Price continued to be consistent with prior period, declining less than 2% and was not a material factor in the quarter. For the year 2014 gross margin was 76.1%, a 130 basis point year-over-year increase driven by improve asset efficiencies and insource manufacturing efforts, which more than offset mixed challenges from the strength of our U.S. biologics and international revenue results, both of which have lower gross margins in our business on average. Non-GAAP sales, marketing and administrative or SM&A expenses totaled $107.3 million in Q4 2014, compared to $103.3 million in Q4 2013. SM&A expense was 52.5% of revenue for Q4 2014, representing 160 basis points of improvement compared to the 54.1% reported in Q4 2013. Further progress with our focused efforts to drive both asset and sales force efficiencies continue to more than offset both planned and opportunistic investments into our international business. Demonstrating the progress made on the SM&A front in 2014, SM&A spending in dollar terms for the second half of the year was identical to the first half of the year, despite nearly $26 million of incremental revenue in the second half of the year. SM&A expenses for 2014 was $418.6 million or 54.9% of revenue for the full year, roughly 100 basis points of improvement versus the prior year. Non-GAAP research and developments, or R&D expenses, totaled $9 million in Q4 2014, compared to $7.1 million in Q4 2013. R&D expense was 4.4% of revenue for the Q4 2014, versus 3.7% in Q4 2013. The planned increase in spending continue to be driven by our investments in game-changing products and solutions, including the build-out of IGA. Additionally, we launched over 10 new products in 2014 and continue to invest in our product and solutions portfolio. R&D spending increased nearly 23% for 2014 and was $34.6 million or 4.5% of revenue for the full year. We are very pleased to report that fourth quarter non-GAAP operating margin reached a record high coming in at 20.3%. We demonstrated an exceptional 400 basis points of operating margin expansion compared to the 16.3% we reported last year. For the year, non-GAAP operating margin was 16.7%, an increase of 180 basis points from prior year, approaching double the 100 basis point improvement year-over-year target that we have identified. Our focused efforts on driving efficiencies through our business are being reflected in our reported results as non-GAAP operating profit dollars grew by 25%, more than two times the rate of revenue growth. Interest and other expense net, on a GAAP basis, totaled $6.9 million in Q4 2014. This compared to $6.4 million in Q4 2013. Interest and other expense for 2014 was $29.4 million. We recorded an income tax expense of $10.4 million in the fourth quarter 2014, compared to $2.8 million in the fourth quarter of 2013. This resulted in a tax expense rate of 58.7% for the quarter, and for the full year tax expense was $6.3 million, despite a pre-tax loss of $11.2 million, the result of our Globalization Initiative efforts. Fourth quarter non-GAAP earnings were $20 million or $0.39 per share, compared to the $17.8 million or $0.37 per share in Q4 2013. For the full year 2014 non-GAAP earnings were $57.5 million or $1.16 per share. Again, please refer to the supplementary financial information filed on our website in order to put the year-over-year EPS comparison into proper context, and to review all of the items that have been excluded for non-GAAP reporting purposes. Cash flow from operating activity totaled $19.1 million in the fourth quarter of 2014, and $115.5 million for the full year. Free cash flow, which reflects the investments made in the capital expenditures, totaled $6.3 million for the fourth quarter and $57.4 million for the full year of 2014. The strong results were driven by strong top line growth and improved operating margin performance over the course of the year. Our cash and investment balance at the end of the fourth quarter was $405.8 million, up about $22 million from last quarter and up $80 million annually, primarily driven by nearly $60 million of free cash flow generated throughout 2014. Now turning to 2015 guidance. As announced this afternoon, we are updating our non-GAAP definition, which will begin to include the impact of non-cash share-based compensation and certain IP related litigation expenses beginning in the first quarter of 2015. As NuVasive accelerates to drive beyond $1 billion in revenue with increasing scale and profitability, our business has reached a state of maturity where we believe it's appropriate to adjust our non-GAAP reporting to reflect the ongoing impact of these expenses. Having achieved our long-held goal of delivering a 20% non-GAAP operating margin in the fourth quarter 2014, and demonstrating that we are progressing ahead of plan with 180 basis points of improvement in our non-GAAP operating margin for the full year of 2014, well beyond the 100 basis points of core operational improvements that we target annually, we believe that it is the right time to adopt this change as we continue our work in enhancing shareholder value and respond to investor feedback. Importantly, I want to emphasize that this change does not impact our revenue expectations, nor does it impact our longer term goals of delivering at least 100 basis points in core operating margin expansion annually, and executing against the well-identified opportunity to drive profitability improvements we have previously identified and discussed. In addition to speaking to non-GAAP operating margins, we will begin to reference non-GAAP EBITDA margins, which we expect to move towards 30% as we move beyond $1 billion in annual revenues. Non-GAAP EBITDA margins will continue to exclude share-based compensation expenses, as we believe this provides a good proxy for the cash earnings potential of our business. To assist in understanding this change, the supplementary financial information filed on our website puts year-over-year comparisons into proper context and includes all of the items that will be excluded for non-GAAP reporting purposes going forward. In addition, we have included a presentation that articulates our longer term profitability goals as previously discussed at our investor morning last November under the new non-GAAP definitions for both operating and EBITDA margins. In addition, along with the realignment of management responsibilities that Alex mentioned, we will be changing the categories of revenue reporting to better align with those management changes. As a result, beginning in the first quarter 2015 we plan to consolidate our business revenue reporting around, one, U.S. implants and services, two, U.S. biologics, and three, international. Accordingly, for 2015 we forecast that U.S. implants and services which includes the lumbar, cervical, NeuroVision M5 and services business will continue to grow by approximately 5% for 2015 due to continued strength of Precept, MAS PLIF and ALIF ACR. In addition, we will continue to migrate our neurophysiologist towards more strategic accounts that we believe will have a potential to result in greater hardware pull through into the future. As a result, we anticipate that there will be a $7 million revenue impact from the disruption in our services business as we work through this transition. We expect cervical growth of approximately 3% for 2015 relatively in line with the growth we saw in 2014. As previously discussed, we continue to evaluate the ongoing positive impact of Osteocel Pro to determine what portion of the impact between trialing and stocking orders, if any, will prove to be temporary. However, we are very encouraged by the positive momentum being built in this business. As a result, we currently expect the U.S. biologics business to grow approximately 7% in 2015. Turning to our performance outside the U.S., we expect our international business to grow on a constant currency basis by more than 20% in 2015. Due to the currency headwinds of approximately $10 million, reported growth in our international business is expected to be approximately 11% in 2015 led by European and Asia-Pacific markets. Taken together, we expect our businesses to deliver $810 million in annual revenue and drive approximately 6% growth overall for 2015 or approximately 7.5% on a constant currency basis. This is unchanged from the guidance we issued previously and remains in line with our guidance of driving mid-to-high single-digit revenue growth. As Alex noted, we always aspire to achieve higher internal expectations in 2015 and longer term. Turning to the rest of the P&L for 2015, which as a reminder reflects our updated non-GAAP definition that includes the impact of non-cash share-based compensation in certain IP related litigation expenses. The comparisons to prior year are to adjust the 2014 results to also reflect the updated non-GAAP definition. We expect non-GAAP gross margins for 2015 to improve to approximately 77.6%, a 150 basis points improvement from the prior year primarily driven by the expiring Medtronic royalty related to the 973 Medtronic patent. In addition, we expect continued progress from our in-sourcing efforts to drive approximately 50 basis points of improvement which will be offset by continued mix and pricing pressure. We expect non-GAAP SM&A expense to be approximately 58.2% for 2015, an improvement of 170 basis points from 2014. The significant year-over-year progress will primarily come from continued efforts to drive asset efficiencies, resulting in 130 basis points of improvement and approximately 20 basis points of improvement from sales force efficiencies. We remain committed to investing in innovation in 2015 and anticipate a full-year non-GAAP R&D expense to be approximately 5% of revenues, a slight increase of 20 basis points versus the prior year as we continue to make investments that enable the company to grow at a double-digit pace. For non-GAAP operating margins we are increasing our expansion target to 300 basis points for 2015, up from the 250 basis point expansion we guided to earlier in January. We are now targeting an operating margin of 14.4% for the year, compared to 11.4% in 2014. In addition, we expect non-GAAP EBITDA margin, which excludes the impact of non-cash share-based compensation to approximate 24.6% for 2015. This reflects an improvement of 270 basis points from the prior year which contemplates nearly 150 basis points of improvement from the expiring Medtronic royalty and 120 basis points of core operational improvements. We anticipate full-year 2015 interest and other expense to be approximately $29.5 million, including roughly $16 million of non-cash interest expense. For 2015, we anticipate full-year GAAP tax expense rate of approximately 49% and we continue to expect non-GAAP adjustments for the full-year 2015 to be tax affected at approximately 40%, resulting in a non-GAAP effective tax rate of approximately 46% for 2015. Finally, we anticipate full-year non-GAAP EPS of approximately $1.10 for 2015 compared to $0.67 last year, representing more than a 60% increase from the prior year. The non-GAAP expectations exclude the full-year impact of amortization of intangible assets of approximately $12 million and one-time acquisition in facility related expenses of approximately $7 million, which includes costs associated with the continued transition of our San Diego headquarters, relocating our New Jersey training center and Ireland facility to our international headquarters in Amsterdam and charges as a result of the organizational changes that Alex had mentioned earlier. In addition, we expect non-cash interest expense to be approximately $16 million for 2015. Please refer to the supplementary financial information file on our website in order to put the year-over-year comparisons into their proper context given the update to our non-GAAP definition. In summary, we were extremely pleased with 2014, growing the top line at a double-digit pace and under our prior non-GAAP definition we made tremendous progress in our profitability goal by delivering 180 basis points of profitability improvements, well beyond our stated goal of 100 basis points of core operational improvements per year. In addition, we grew operating profit dollars by approximately 25%, more than two times revenue growth. Demonstrating that we are laser focused on executing to our stated goals of driving profitability improvements in our business and creating incremental shareholder value. The outlook for 2015 is incredibly bright. With a clear line of sight to delivering 300 basis points of improved non-GAAP operating margins, a non-GAAP EBITDA margin approaching 25% and a greater than 60% improvement in non-GAAP EPS. With that, I'll turn the call back over to Alex for closing comments.

[Alexis V. Lukianov:]

I couldn't be more pleased with the substantive progress we have made as we evolve NuVasive into a truly global business. And the future looks even stronger. We intend to drive revenue growth in the mid-to-high single-digit range as we accelerate toward $1 billion in revenues and beyond. At the same time, we plan to continue to execute against the initiatives we have in place, to expand our operating margins to approximately 20% and EBITDA to approximately 30% as we grow beyond $1 billion in revenues. This, in addition to leveraging earnings growth at two times the rate of revenue growth. In all, our initiatives are designed to drive consistent, sustainable improvements throughout the business, maximize our financial performance and deliver enhanced shareholder value, so onward and upward. With that, we'd be pleased to take any questions you might have. Operator?

[Operator:]

Thank you. Thank you. Our first question comes from the line of Matthew O'Brien with Piper Jaffray. Please go proceed.

[Matthew O'Brien:]

Afternoon, thanks for taking the questions. I was hoping to start with one clarifying question. Quentin, I think you mentioned a $7 million disruption you're expecting on the revenue line this year. Can you just describe exactly what that is? I think I missed it.

[Quentin Blackford:]

Sure. And that's contemplated in our forward-looking numbers, Matt, that we've put out there. But what we're attempting to do here, we started this in 2014, but it's better aligning the services business with our hardware business to where we have a better opportunity into the future to continue to really drive synergies and grow the business long-term. So as a result of doing that, there's going to be some potential for disruption in those accounts that aren't necessarily aligned with the hardware accounts today and better aligning them into the future and that's what's contemplated in the forward-looking numbers.

[Matthew O'Brien:]

And you saw something like this in the past when you first implemented this program?

[Quentin Blackford:]

Absolutely. Over the course of 2014, we've utilized this model in several locations and what we've seen is the growth in those locations has been significantly far in advance of what we see from the total company on average, so it's a model that's demonstrated the ability to work well.

[Matthew O'Brien:]

Okay. And then just thinking of the U.S. performance as we look back over the last few years and then into 2015, we've seen it in aggregate come down a couple hundred basis points per year in terms of the growth rate. Alex or Quentin, when do you think we can start to see a stabilization of that decline and then potentially getting back to some growth? I mean does the cervical business need to reaccelerate? Do you need to be monitoring improve to get back to some more growth in the U.S. business?

[Alexis V. Lukianov:]

Well, as you know, we've grown double digits the last two years, in particular. So, we aspire to do the same thing once again, but we make a point of setting guidance that we think is reasonable. So if you look at things on a constant currency basis, it's 7.5%. So we think that's terrific growth and are very pleased with that. As I've talked about over the years, the most important aspect of our growth is lumbar and lumbar has been robust. We've also gotten a lot of pull through with biologics into our lumbar business. So I think we're very pleased with how things are lined up going into this year.

[Matthew O'Brien:]

Okay. Thank you.

[Alexis V. Lukianov:]

You're welcome.

[Operator:]

Thank you. Our next question comes from line of David Roman with Goldman Sachs. Please proceed.

[Chris A. Hammond:]

Hey guys, it's Chris Hammond in for David here. Can you hear me okay?

[Alexis V. Lukianov:]

Yes.

[Quentin Blackford:]

Yes.

[Chris A. Hammond:]

Okay. Wonderful. Thanks for taking the questions. I've got one for Alex and then a follow-up for Quentin. First, in your prepared comments, you talked about the better in market dynamics that you're seeing in the U.S. you talked about your continued share gains. And so when I put that rolled up, everything that we've talked about into the context of your guidance, I'm having a little bit of trouble not thinking that it's conservative. So if I look at – I certainly understand the law of large numbers and you get a decelerating revenue growth rate over time, but even if I add back in the $10 million of FX headwinds and add back in the sales and service disruption that you're expecting on an incremental dollar basis, I'm still getting a much lower incremental growth than what we've seen over I would say quite a number of years. So help me to kind of reconcile where do you feel the need to be conservative and what might I not be thinking about that I should be factoring into my model?

[Quentin Blackford:]

It's Quentin here, Chris. A couple things with regard to the forward-looking guidance. Obviously we're trying to be thoughtful and prudent about contemplating some of the different issues that are out there. When you think down through the model though, certainly on the biologics side we had a great year in 2014, there's no question and Osteocel Pro has done very well for us. But we're only two quarters into the launch of that product. And while we're seeing some great results, we still look at that as potentially being trialing only and not sticking into 2015. Now the underlying data continues to articulate that it's doing well in terms of reorder points. With only being two quarters into it, I think you got to be a bit mindful of how you look at that. So our guidance doesn't fully contemplate that that will continue to stick, although we would hope so and hope to see that come through the results. Similarly on the international side, we had some one-time items in Latin America over the course of 2014. Our forward-looking expectations is not that those are going to continue to grow, depending on what the economic environment ends up being like in Latin America, there could be the potential for some further growth there. But at this point, we're kind of assuming Latin America's tend to be relatively flat in 2015 and that's what's reflected in the guidance as well. And then certainly we talked about the service interruption on the U.S. implants and services line item that we're planning to make with the transition in the business. So contemplating those things, I think you can get into the numbers that we've put out there. Obviously those are things that we hope to do better than over the course of the year, but in terms of setting expectations and thinking about them at this point, we want to be prudent in how we think about those.

[Alexis V. Lukianov:]

Just to add a little color to what Quentin said, which he talked about in his prepared remarks is that the U.S. lumbar business is growing at 8% this year and that's very dynamic growth in a U.S. market that's growing only 2%. So I think when you look at that and the adjustments that we're making which is a minus 17% on U.S. services, we end up with a very robust rate of growth and some significant upside. So we think we've set the guidance appropriately.

[Chris A. Hammond:]

Okay. That's very helpful. I do appreciate that color. And Quentin, I had one follow up. On looking at the balance sheet in the spirit of organizational efficiency that you guys are gunning for here, I can't help but notice that the accounts receivable line continues to grow and I think it grew this quarter, it's up 13.5% year-over-year versus sales up 7.1%. But if I look at that, I think that the accounts receivable growth rate has grown – has surpassed revenue growth for the past eight quarters. So as I start to think about this in the context of your cash conversion cycle, where are there opportunities to improve that line? And is there something that can be – does that reverse and you start increasing operating cash flow in 2015?

[Quentin Blackford:]

Well operating cash flow is up significantly for us in 2015 at $115.5 million. If you look at prior year we've got $97 million so...

[Chris A. Hammond:]

I mean specific to the, you know, specific to that metric.

[Quentin Blackford:]

Yeah. With regard to AR, what you're seeing play through there is in total we got a DSO of about 52 days on average. However, as the mix of the business continues to migrate towards international and that becomes a bigger component for overall business, the payment terms in that international business are much longer. So you're going to naturally see AR probably growing a bit faster than what you do the revenue dollars. And that's just the nature of us continuing to expand into a global company that we are, but there's absolutely a focus on the balance sheet just like there is on the P&L with regard to us speaking of operating margin improvements or EBITDA margin improvements, we're doing the same thing with the working capital profile. So I can tell you, if you look at inventory there's a tremendous opportunity for us to continue to get after inventory as well, as we continue to squeeze there, there's going to be cash, it's going to come back to the business and you're going to see some nice benefits coming out of that working capital profile over the next several years. So this isn't about us solely being focused on the P&L. The balance sheet is as much of a focus for us as anything else and you'll see some benefits come through there.

[Chris A. Hammond:]

Great. That's very helpful. If I can just sneak in one more here. The U.S. lumbar growth, or sorry, total lumbar growth of 4% in the quarter was a little bit light from where we had been there, but I know you called out a more difficult or a difficult comp in the quarter, but it was the same comp that you had last quarter, but it was about 400 bps different in growth rates. So is there any one-time item in there that we should be aware of?

[Quentin Blackford:]

Yeah. Nothing really in the way of one-time items, but the comp was much more difficult in Q4 than it was in Q3 and I know on the surface the Q3 growth rate looks relatively aligned with what the Q4 growth rate was a year ago, so about 14% last year in Q3 and 15% in Q4, but you really got to go back a year before that and understand the underlying business at that point in time and that was a difficult Q3 for us, so it was a very easy comp in Q3 of 2014. We rebounded incredibly well in Q4 of 2013 which made the growth in 2014 even more impressive. So while the growth rates look comparable between the two quarters that we're comparing to, the underlying business was very much stronger in Q4 than the Q3. So it was a much tougher comp than what this numbers on the surface might have indicated.

[Chris A. Hammond:]

Got you. Very helpful. Thanks a lot, guys.

[Operator:]

Thank you. Our next question comes from the line of William Plovanic with Canaccord Genuity. Please proceed.

[Bill J. Plovanic:]

Great. Thanks. Good evening. Can you hear me okay?

[Alexis V. Lukianov:]

Yes, we can.

[Bill J. Plovanic:]

Great. Thanks. So a lot of questions I think are surrounding the lumbar growth here. I think you've answered it pretty well. But looking to the future, outside of the IGA strategy you have, are there any major products that you expect to commercialize in 2015 that could help pick that growth rate back up?

[Alexis V. Lukianov:]

Sure. Well, there's a number of things. So, Reline is obviously the one connected with IGA. We're also launching on the CoRoent side anterior TLIF, so it's another variation of the Interbody that's coming out. There's CoRoent Oblique for TLIF coming out. There's another version of Bendini. Bendini 2 will be launched later this year, then of course NuvaMap which is part of IGA. Then not so much on the lumbar side of course but there's also additional products being launched on the cervical side, Archon-R cervical ACR, so we've got about 10 products launching again this year and so we expect a lot of upside potential there also.

[Bill J. Plovanic:]

Is it front-end loaded, back-end loaded?

[Alexis V. Lukianov:]

It's consistent with our guidance.

[Bill J. Plovanic:]

Okay. And then just on the sales force, I don't think we've had some commentary on that in a while. Just as you look at kind of the growth we saw in 2014 versus 2013, would you say that the growth of the distribution channel domestically has been in line with your top line growth rate, below, above? I mean, how would you qualify that?

[Alexis V. Lukianov:]

It's been actually in line. And I think we talked last quarter that we added a net of over 30 sales heads last year. And so we're expecting to do something similar again this year.

[Bill J. Plovanic:]

Okay, great. That's all I had. Thank you.

[Alexis V. Lukianov:]

Okay. You bet, Bill.

[Operator:]

Thank you. Our next question comes from the line of Rich Newitter with Leerink. Please proceed.

[Richard S. Newitter:]

Hi. Thank you for taking the question. Just wanted to start off on the service disruption, but more importantly, can you just remind me what exactly you're doing with the service model, what that is?

[Quentin Blackford:]

Yeah, sure. Essentially, Rich, what we're trying to do is better align that service business with the hardware business. If you look at the overlap between the two businesses today we've only got about 10% of the business that really overlaps and allows us to synergize the hardware and service offering that we have in place. We believe that the more that we can overlap the two of those that the better results we're going to have long-term, and we've demonstrated that over the course of 2014 where we've continued to roll this out into pocket. So, in 2015 the idea is to take that on a more broad scale. What the guidance contemplates essentially is that there are going to be some accounts that don't have the long-term potential to drive the growth that we want. We're willing to potentially redeploy the resources from those territories into other territories that are going to give us a better opportunity to drive long-term growth, and that's what you're seeing in that service interruption line item. What's not necessarily contemplated is incremental hardware pull-through that will come from that, so we basically assume that there is some revenue disruption as you walk away from some of these potential areas, but not necessarily the pull-through coming back from on the other side. And obviously as we see that play through the numbers, then we'll start to contemplate that in the forward-looking expectations. But that's how we've thought about it at this point.

[Richard S. Newitter:]

Great. Then if I could follow up on Osteocel, Quentin, you say that it's too early to tell whether or not this is going to be sticky or trialing. When do you think – is there a point in 2015 when you think you'll know? And you can...

[Quentin Blackford:]

Yeah...

[Richard S. Newitter:]

Go ahead.

[Quentin Blackford:]

Absolutely. I think we need to get two more quarters underneath our belt, get into the mid part of the year, you've got a full year of launch. And I think by that point in time, we've got a good idea of what's going to stick and what's not. The ordering pattern in this business typically is more of a stocking type of an order pattern where they're placing or putting the Osteocel product into the hospital and stocking it there, so they can pull it for the procedure, so the reorder points aren't as frequent, they're not on a procedural basis. So you need some time to at least see in the data that they're demonstrating the ability to reorder, and sometimes that doesn't happen as frequently as you want within the quarter, so you need a little bit more time to pull that data together. And I think by the mid-part of the year we should have a good understanding of that.

[Richard S. Newitter:]

And just very quickly, the last one for you, Alex, just, we've seen some of the larger competitors in the spine market see their growth rates improve a touch. Just to kind of parse out what the incremental market share gain opportunity for you, is it harder to get incremental share? Or do you just see an underlying improvement in the overall market, and it's just kind of status quo for NuVasive?

[Alexis V. Lukianov:]

I think it's both. So really it's more of the latter, there's more of a status quo in terms of how that share is going to be distributed. But overall, what we do continue to see is there's a lot of opportunity with MIS, so we expect that to continue to grow at – well into the double-digit range. And so we're pretty content with the way we see the market playing out.

[Richard S. Newitter:]

Thanks.

[Alexis V. Lukianov:]

You bet.

[Operator:]

Thank you. Our next question comes from the line of Jeff Johnson with Baird. Please proceed.

[Jeff D. Johnson:]

Thank you. Good evening, guys. Hey, Quentin, wondering if we could start maybe on litigation expense for next year and stock option expense. I don't know if you provided line-item guidance on either of those, if you did, I missed it. But just trying to figure out the change from the 250 basis points to 300 basis points of expansion you're now guiding to off the new definition, is all that because of just the less growth in litigation expense and stock option expense, or has your fundamental view on margins also changed here a little bit over the last month or so?

[Quentin Blackford:]

Certainly part of that is being driven by us levering both of those line items, I think, just like the rest of the P&Ls, where we're driving efficiency gains and we're focused on reducing the expense burden. We're doing the same thing in those areas as well. So we are going to get some leverage out of the two-line items that you called out, as well as a bit ahead on some of the other progress that we've been making over the course of the year that were reflecting in that 300 basis points. And those are – that's progress that we've made decisions on and we're seeing already. So we feel comfortable to go ahead and baking that in.

[Jeff D. Johnson:]

All right. That's helpful. And then my only other question really is on Japan, Brazil, those kind of markets. I mean macro and kind of med-tech in general, those markets looking a little soft right now. But you guys don't seem to be seeing that. Just maybe any updates on kind of those two markets specifically as it reflects on maybe 2015.

[Alexis V. Lukianov:]

Well, the only issue for us that we talked about has to do with currency, right. So that's the same overhang that everybody else has. But those markets are performing very well when it comes to unit volume increases and just overall penetration. So we're really pleased with how things are going in Japan. Expect to have another strong year there, and the same thing with Brazil, as well as parts of Europe.

[Jeff D. Johnson:]

All right. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Chris Pasquale with JPMorgan. Please proceed.

[Chris T. Pasquale:]

Thanks. Alex, you've talked in the past about potentially doing some acquisitions to bolster your presence in certain international markets. Is that something you think is likely to happen this year?

[Alexis V. Lukianov:]

We're certainly active in that area. And I've talked about our interest in doing something in China. So clearly, that's a focal point for us. I don't think it's going to be necessarily a huge deal, but that's an area. We're also looking at other advanced applications and seeing if there's anything else that makes sense to us.

[Chris T. Pasquale:]

And can you remind us what criteria you are looking for with that kind of deal?

[Alexis V. Lukianov:]

So what we're just talking about – yeah. I think what we're looking for is a way to enter the value segment, not just the premium market. So our interest is in manufacturing strategy over there. So as far as size, there's a number of different opportunities that we're cultivating, so I can't really hone in on one in particular. But I don't think it's going to be all that large in all likelihood. But it's hard to say until we finish working through our diligence and negotiating process.

[Chris T. Pasquale:]

Okay. And then one question on the Biologics side. What percentage of your hardware cases today do you think are also using your Biologics products, and how has that ratio changed from where it was maybe a year or two ago? How big a piece has that been for the growth in that business?

[Alexis V. Lukianov:]

Yeah. So that's increased a bit. I mean we've typically been somewhere in the 60% plus range. Now we're pushing into the 70% range with penetration, and so we're really pleased with that. We still think there's some more upside because obviously as we move more into Reline, what starts to happen, and that's what's contemplated into our guidance, is we start being able to do more levels, right, because we're moving into more advanced applications, and obviously there's a greater use of biologics in those types of cases.

[Chris T. Pasquale:]

Great. Thanks.

[Alexis V. Lukianov:]

You bet.

[Operator:]

Thank you. Our next question comes from the line of Ben Andrew with William Blair. Please proceed.

[Ben C. Andrew:]

Good afternoon, guys. Thanks for taking the questions.

[Alexis V. Lukianov:]

Hey Ben.

[Ben C. Andrew:]

How are you?

[Alexis V. Lukianov:]

Good. You're not on the train for a change.

[Ben C. Andrew:]

I'm not.

[Alexis V. Lukianov:]

Of course that was years – that was years ago.

[Ben C. Andrew:]

It doesn't seem that long ago, Alex, I have to tell you. It's been a brief (55

[Quentin Blackford:]

Yeah Ben, this is Quentin here. We've commonly talked about 100 basis points as kind of being the core operational improvement that we target in the business on an annual basis. And that will continue to be the target as we head forward beyond 2015. So nothing changes from that perspective once you get beyond this current year. Obviously this year, we're a bit ahead of that. You've got the Medtronic royalty that's falling off and we're passing that straight through and then some of the leverage we saw on share based compensation and in some of the other areas that are making a bit more progress. But generally speaking, you ought to think about it as roughly 100 basis points a year, once you get beyond 2015. With respect to the cadence in 2015 itself, Q1 is always the low point of the year with respect to operating margin. And you can go back and you'll see that in our quarterly results for quite some time and I don't expect that to be any different than what you're going to see from us again this year. Obviously, we target that 100 basis points of core operational improvements in the business, and we're not going to get the benefit of the Medtronic royalty really until Q2 and beyond. So in Q1, you don't get much of a benefit there. So I think as long as you're thinking about the quarterly sequence similar to prior years in Q1, understanding you're not going to get the Medtronic benefit at all, really I think you're starting to think about it correctly, if that's the way you're looking at it.

[Ben C. Andrew:]

Okay. And then on the U.S. business, obviously you're assuming cervical stays relatively weak versus last year, the numbers kind of came in a little bit softer than maybe you expected. Why wouldn't business in the U.S. get a bit worse given some of the competitive products that are rolling out and what are the risks to that already low number that you gave out? Thank you.

[Alexis V. Lukianov:]

Yeah, I think that when you look at the cervical business, outside of the motion preservation area, we've done relatively well. We believe that we've continued to grow in that area. It's on the motion preserving side where we went backwards a bit over the course of the year. So there's not a whole lot of opportunity to continue to lose business in that segment. I think we'll continue to grow in the others.

[Ben C. Andrew:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Bob Hopkins with Bank of America Merrill Lynch. Please proceed.

[Robert Adam Hopkins:]

Great. Thanks for taking the question. Just a quick one on IGA to start. You mentioned that you're launching sort of the first series of technology there this year, Reline as a posterior fixation system. Have you guys tried to quantify how big the posterior fixation system market is at this point? How big an opportunity just that first piece is for you guys?

[Alexis V. Lukianov:]

Well, the entire posterior fixation space we believe is close to a $1.8 billion market opportunity. That's by far the largest dollar segment of the entire spine market when you consider all the hardware that goes through there. But that's the total market in general. And I think Reline can play across the majority of it.

[Robert Adam Hopkins:]

So how – when does this launch start? And how does it progress over the course of the year?

[Alexis V. Lukianov:]

So it starts more in the third quarter. I think it's something that we'll be talking about at NASS, and it continues to build from there.

[Robert Adam Hopkins:]

Okay. And then lastly, just on the new reporting methodology here, certainly understand the stock comp portion of it. On the litigation side, just curious as to why you're going to be including litigation expenses in ongoing? And I apologize if I missed this in your prepared remarks, but just curious as to why that portion of it would be included?

[Quentin Blackford:]

Yeah. Well, I think Bob, at the end of the day, this has turned out to be you know normal operating expense in a sense for us as it's been in the P&L. We've been absorbing it for a number of years now. And it's a true cash expense as well. It's something that we need to be paying attention to and managing it as well as we do anything else. And from that standpoint, I think it makes sense to bring in. You know what we're trying to do is increase the quality of the earnings that we're reporting on from a non-GAAP versus GAAP basis. And I think when you look at the items that we're now excluding, they're pretty normal in the sense of why they wouldn't be excluded or whether or not they're excluded kind of in a broad sense across the industry. And those are falling right within the range of what you normally would see excluded. So I think we've cleaned it up tremendously. I think that certainly the IP litigation stuff was more along the lines of normal operations and certainly was cash. And it makes sense to pull that in.

[Robert Adam Hopkins:]

No, I think it makes a lot of sense. I'm just curious from an ongoing perspective on the litigation front, what is sort of a normalized level of spend there?

[Quentin Blackford:]

Well, that's historically been anywhere from $5 million to $6 million a year. And I don't see that as necessarily changing at this point in time.

[Robert Adam Hopkins:]

Okay. Great. That's...

[Quentin Blackford:]

About that, just to be clear about that. That was Medtronic- only related litigation expenses that we were calling out, right. And we continue to be engaged with Medtronic. I don't see that going away. At least at this point, it's not coming out of our forward-looking expectations.

[Robert Adam Hopkins:]

Okay.

[Operator:]

Thank you. Our next question comes from the line of Matt Taylor with Barclays Capital. Please, proceed.

[Matt C. Taylor:]

Hi. Thanks for taking the question. I guess I wanted to ask a question about your longer-term operating margin targets in a little bit of a different way. I'm curious in terms of the plan that you're talking about and the great expansion that you have here in front of you, where are incremental opportunities? So what's not in the plan where if things changed, you could have much more opportunity to expand margins? Is that really something that you could drive on the cost of goods front by doing more of your own manufacturing or moving manufacturing? Where are the kind of the cushion points in the mix?

[Quentin Blackford:]

Yeah. Certainly, the manufacturing one is one that we contemplate taking from roughly 28% of what we have the potential to produce and are producing today, taking that closer to 60% to 70% over time. That'll play out over the next several years and that's part of what's in the margin expansion story that we have. But when we talk about that operating margin expansion, we're talking about that as well as a mid single digit grower. And you know and we've talked openly about the fact that we aspire to grow at a faster pace. And I think if you look at the last two years, we've demonstrated the willingness and the ability to deliver more than that 100 basis points when we can. Ultimately, what we're going to do is ensure that we're making the investments necessary to set ourselves up to continue to grow. We had a double-digit pace into the future as well as give back at least 100 basis points per year in operating margin improvements. If we can give back more than that, then we certainly will. And I think you look back at 2014 at 180 basis points, we demonstrated pretty clearly the ability to do that. You could go back into 2013, we exceeded expectations as well there with regard to what we passed through. And we'll continue to look at the future much in the same way. But the way we've set up expectations is to be able to deliver that 100 basis points kind of in that mid-single-digit growth territory. To the extent we can accelerate that, we're going to deliver to the extent of 100 basis points, if more we will.

[Matt C. Taylor:]

Thanks, Quentin. And nobody asked about PODs, are you assuming pretty much stability there, have we seen kind of the heyday of PODs pass and now that dynamic is less of a negative for you?

[Alexis V. Lukianov:]

Well, no. It hasn't changed since we last spoke about it. And so we really haven't provided any color simply because we don't have any more color on it. And that is that they've been pretty consistent, they're still there, they have not completely retreated. And in fact is we talked about less, there's still a few being formed every now and then. So I think it's just going to take a little bit more time, either for DOJ or hospital actions to further catch up with the PODs. But right now, we're expecting that to still be a steady taker of market share.

[Matt C. Taylor:]

Great. Thanks a lot.

[Operator:]

Thank you. Our next question comes from the line of Glenn Novarro with RBC Capital Markets. Please proceed.

[Glenn J. Novarro:]

Hey. Good afternoon guys. Alex, first question for you. When you add up the fourth quarter for all the players, the U.S. spine market came in better, and Alex, you're optimistic, more optimistic about 2015. So can you point to reasons why the fourth quarter came in better and can you point to reasons why you're more optimistic about 2015? Thanks.

[Alexis V. Lukianov:]

So I would – you know it's hard to say for sure why it came in better for the other players. I think there's no reason for us to believe that anything has changed significantly. And that is the continued pattern that we've seen of surgeons dealing with the reimbursement patterns appropriately. That hasn't changed very much. I think the one thing that is starting to change more and more so is just the process of consolidation and moving towards the bigger players, right? And so I think that's where we're benefiting as being in the top three or top four for that matter, two companies benefit from that. So I think it's becoming harder for a lot of the really smaller companies to continue to grow at a fast pace, whereas before I think they had more inroads. As I think we all appreciate now, a lot of the providers are looking to limit the number of companies that they're dealing with. And we're definitely seeing that trend continue to unfold. So it's hard to say for sure that that's what's driving it, but I suspect that it's an important factor.

[Glenn J. Novarro:]

Is there any benefit coming from healthcare reform and just more patients now with insurance or am I really reaching for something here?

[Alexis V. Lukianov:]

Yeah, you know we haven't been able to really prove that. I think every time we reach out, nobody seems to be able to corroborate that point. So it appears to be wishful thinking and I think a lot of it still has to do with the demographic and just the age point, right. If you look at where the sweet spot is for spine surgery, it's still much higher than all of the additional insured lives that are supposed to be in the system.

[Glenn J. Novarro:]

Okay. And then just quickly, Quentin. I think you said in the fourth quarter, pricing was negligible for the company. But I think in 2015, you are assuming some pricing have an impact on the gross margin. So can you quantify what you think pricing will be for 2015 for the company?

[Quentin Blackford:]

Yeah, sure. We're down negative 2%, is what we're assuming, which is relatively consistent with what we saw in 2014.

[Glenn J. Novarro:]

Okay, great. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Larry Biegelsen with Wells Fargo. Please proceed.

[Lawrence Biegelsen:]

Hey guys. Thanks for taking the question. Just one clarification on a question that's been asked a couple times about the change in the operating margins, the non-GAAP reporting. So stock based comp, it looks like you got a better 20 basis point improvement in 2015. The IP litigation it was about an 80 basis point impact in 2014. Quentin, what did – does that – where does that go in 2015? Is it stable? I'm just trying to understanding if the 250 basis points to 300 basis points is underlying or due to that change?

[Quentin Blackford:]

Yeah. No. About half of the 250 basis points to 300 basis points is due to the change. And the other half is underlying. So your stock-based comp you quantify it, you're getting a little bit out of IP lift, but not – the vast majority of it and then the rest is underlying.

[Lawrence Biegelsen:]

Perfect. And then your quarterly seasonality patterns have been relatively tight over the past several years. Would you expect to have sales to follow similar seasonal pattern in 2015? I imagine EPS won't because of the Medtronic royalty going away, but how about sales? And I just had one follow-up for Alex.

[Quentin Blackford:]

Yeah. From a revenue top-line perspective, I think looking at the last couple of years and just looking at the quarters, as a percent of the total year, you ought to be finding – somewhat similar in 2015. There's no reason for us to believe it's going to be much, if anything, different so I would probably look at the last two years and use that as a guide post.

[Lawrence Biegelsen:]

Perfect. Then, Alex, I heard your comments earlier about vendor consolidation. Are you seeing any bundling across orthopedic categories at this point and how would that affect NuVasive? Thanks.

[Alexis V. Lukianov:]

No, Larry, we're not seeing much of that at all. I think what the hospitals do want is they want some level of procedural pricing when they can get it. It's a bit elusive because their IT systems don't comply as well as we'd like, so no, we're not seeing that. You know, I think there's a lot of talk about that from the really large med device companies, but we're not seeing that in terms of hospital behavior.

[Lawrence Biegelsen:]

Thanks for taking the question.

[Alexis V. Lukianov:]

You bet.

[Operator:]

Thank you. Our next question comes from the line of Josh Jennings with Cowen. Please proceed.

[Josh T. Jennings:]

Hi. Good evening, gentlemen. Thanks a lot. I just wanted to follow up on Matt Taylor's question just about operating margin expansion potential and specifically on international business, with that business hitting profitability recently, and it – looking like it's one of the bigger blocks in terms of the path to 20% operating margins here in the new definition of non-GAAP earnings. Can you just talk about outperformance in that business and how leverageable that is to the operating margin or will you take some of that upside and continue to build out that business or the infrastructure?

[Quentin Blackford:]

Well, that's certainly an area that we'll look to continue to make investments as long as the opportunities are there. But at the same time, we'll drive leverage in the business. If you look at that international area, that's been an area where we've invested heavily without revenue necessarily coming from some of the key markets. Now they have Japan on board and revenue contributions from it, and makes it easy to leverage the overall business, and to your point, international has now turned profitable. But it's still less than the corporate average. And we're kind of moving right into the corporate average with our international business as well. But as we move beyond it, that's when we're going to start to drive leverage. And right now, our goal is to have the international business moving into the high 20%s. In terms of an operating margin specific to international, I think you can look at other folks that disclose international margins, and you'll find them in the 35% to 45% range, which has not fully burdened P&L, but neither is ours. So it is an apples-to-apples comparison. And right now, we're targeting to head into the high 20%s. But eventually, we'll look to take them beyond that. So there is potential to continue to run beyond kind of what we've targeted as 200 basis points of improvement to the total company margin from international alone, if we can take them beyond the high 20%s.

[Josh T. Jennings:]

Great. And sorry to go back to U.S. unit guidance, but just to be clear in terms of puts and takes of the guidance, you have a negative headwind coming in from the service disruption. If you can just quantify that for us again, is that about 100 basis points? And then I think Alex commented on maybe some upside from some potential launches. What are your assumptions in terms of new product revenue within that guidance? Or is that all upside? And then it sounds like IGA is just upside even though it's probably a minimal contribution being launched at the end of the year. Thanks a lot.

[Quentin Blackford:]

Yeah. So, in my prepared remarks, I had laid out about a $7 million impact that we're contemplating. That is 100 basis points, roughly, of growth to the total top line for the company. In terms of new products, we launch new products every year. So we're bringing roughly 10 new products to the marketplace every year. The same is going to be the case for 2015, and don't expect anything different than what we've seen historically. Reline will be a big part of IGA this year. That's coming late in the year and probably ends up being a bigger contributor in 2016.

[Operator:]

Thank you. Our next question comes from the line of Mike Matson with Needham & Company. Please proceed.

[Michael Matson:]

Hi. Thanks for taking my question. I guess I wanted to ask you about your cash position. You've got about $400 million, obviously. And you know you're also starting to generate some meaningful amounts of cash here. So is – first, is the cash still M&A? Or would you ever consider using some of the cash for a stock buyback or to return to shareholders somehow?

[Quentin Blackford:]

Yeah. We ended the year with little over $400 million, $406 million. Just to be clear, there is some escrow fund that's going to take place in the first part of this year. So you'll see that move back below $400 million sometime here in the first quarter, most likely as we escrow cash associated with the Medtronic litigation and the NeuroVision litigation that was back in the first part of 2014. So you will see cash move backwards over the first part of the year. But then it'll start to reestablish itself with the free cash flow that we have. Ultimately, M&A is certainly the first and foremost in terms of the use of cash that we haven't paid for. Alex mentioned some of the International expansion that we want to do as well as vertically integrate the business more aggressively if we can. I think the benefits we've seen from the insourcing efforts have been significant. If we can accelerate that, we're going to look to do that. So M&A certainly is one of the things on that at the forefront. One of the things that we are looking to do over the course of 2015 is start to net share settle our equity awards which essentially had us using cash in place of incremental equity. What that ultimately means is less dilution for our shareholders and our investors and start to use some of that excess cash that we have on the balance sheet to address that. That's probably going to run somewhere around $30 million for the course of the year. That will show up in the financing section of the cash flow, it's not an operating cash flow item.

[Michael Matson:]

Okay. Thanks. And then just with the rollout of IGA, I guess it will be probably more in 2016. But it sounds like this is a fairly complex concept and procedure. And I think you said in the past, there's going to be a fair amount of surgeon training required. So I guess number one, is that accurate? And number two, how do you sort of manage the cost of doing all that training at the same time you're trying to leverage your operating costs?

[Alexis V. Lukianov:]

Yeah. You know the training for a scoliosis surgeon is pretty straightforward. And that's where this initially targets. So looking at that group of surgeons, which is just north of about 1,000 from SRS, that's a straightforward process and that's where we're really going to spend the bulk of our time in 2015 and 2016. What we will be doing then is rolling out training programs over the same period of time, more focused on the lumbar spine. And so that's where I think it's going to take a little longer. As we've talked about, the uptake is going to take a few years in order to move in that direction, but we still have a relatively small stake in the scoliosis side of the business. So that gives us some immediate upside. And we believe that that uptake in scoliosis of IGA will tend to drive the Lumbar business over the following years. So it's a longer term plan, but we think it starts to prove out in Lumbar, in let's say, a couple of years from now. More like into 2017.

[Michael Matson:]

All right. Thanks a lot.

[Alexis V. Lukianov:]

You bet.

[Operator:]

Thank you. Our next question comes from the line of Jason Wittes with Brean Capital. Please proceed.

[Jason H. Wittes:]

Hi. Thanks for taking the questions. So just wanted to clarify some of your comments you made on the cervical market. Is PCM going to be a drag in 2015 by your estimates? And if you look at the market away from motion preservation, do you expect it to grow in 2015? And approximately at what rate?

[Alexis V. Lukianov:]

So PCM is essentially producing next to no revenue at all for us, as we've talked about before. So we are, at this point in time at least, not contemplating another product as far as cervical motion preservation. So, all of our growth is coming largely from both anterior and posterior fusion. We, I in particular, we are still somewhat pessimistic about how much faster the motion preservation market will grow. As I've said before, I think certainly it makes sense for those devices, but there's a lot of ongoing reimbursement push-backs. So I hope that that's not the case, just for the outcomes of patients and adjacent-level disease. But we still think as far as our numbers are concerned, 3%-4% growth in cervical is pretty reasonable in that kind of market. And that is the one market, and that has a lot to do with my remarks, it's the one market that has really been pummeled from a pricing standpoint. So it's difficult to contemplate the market now all of a sudden starting to spend large amounts of money on motion preserving devices.

[Jason H. Wittes:]

Okay. And then just to clarify again, that 3% to 4%, that's roughly what's your – that's market growth as you see it. So if I look at your cervical outlook...

[Alexis V. Lukianov:]

Yes.

[Jason H. Wittes:]

...this year, it's market.

[Alexis V. Lukianov:]

That's right.

[Jason H. Wittes:]

Okay.

[Alexis V. Lukianov:]

Correct.

[Jason H. Wittes:]

And maybe just to – also to clarify. Lumbar U.S., what kind of growth rate do you anticipate there?

[Alexis V. Lukianov:]

Well, we talked about it as 8%.

[Jason H. Wittes:]

Okay. Thank you very much.

[Alexis V. Lukianov:]

You bet.

[Operator:]

Thank you, Mr. Lukianov, there are no further questions at this time. I would like to turn the call back over to you for closing remarks.

[Alexis V. Lukianov:]

Okay. I only have one question. What are you going to do on May 1, Keith? Are you going to Disneyland?

[Keith C. Valentine:]

We'll go to Anaheim.

[Alexis V. Lukianov:]

We'll go to Anaheim. So well, that's it. We wish Keith, again, farewell. It's his last call with us. And I know he'll still be here in San Diego and we'll be in touch, obviously. But we'll talk to everybody in two months, in April. Thanks a lot for joining us today.

[Operator:]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.