What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-10-29 compared with 2020-08-10 · 179 added, 151 removed, 278 unchanged (54% of the section changed)

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the risk that the COVID-19 virus disrupts local economies and causes economies in our key markets to enter prolonged recessions.

The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those set forth under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 , and under the heading "Risk Factors" in this report.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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We continue to identify ways of optimizing our portfolio including identifying low-growth, low-margin products and product franchises for discontinuation.

On September 29, 2020, we entered into an agreement to sell our Extremity Orthopedics business to Smith & Nephew USD Limited for approximately $240 million in cash.

The transaction is expected to close at or around the end of 2020, subject to the satisfaction of customary conditions, including regulatory approvals and consultation with employee representative bodies.

See Note 2, Assets and Liabilities Held for Sale , for details.

Upon completion of the transaction, we expect Integra to be a faster growing, more profitable, and more focused company.

This will enable us to increase our investments in our core Neurosurgery and Tissue Technology businesses.Those investments will strengthen our existing leadership positions and fund pipeline opportunities to drive future growth and expand our addressable markets.

We will also significantly reduce the complexity of the organization.

Exiting the Orthopedics business is accretive to our organic growth and EBITDA margins which will enhance shareholder value and keep us on a path toward achieving our long-term growth and profitability targets.

Additionally, this transaction will improve our financial flexibility.

We will have the ability to meaningfully reduce our consolidated total leverage ratio and to pursue strategic M&A from a stronger financial position.

Commercial Channel Investments.

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We now have a strong international sales channel that will deliver our current portfolio as well as position us for expansion.

we continue to build upon our leadership brands across our product franchises to enable us to engage customers through enterprise-wide contracts.

In addition, we continue to build upon our leadership brands across our product franchises to enable us to engage customers through enterprise-wide contracts.

Customer Experience.

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The FDA clearance is based on a wealth of peer-reviewed clinical publications and 40 years of surgical cases involving resection of brain and spinal tumors.

Additionally, the Company continues to reap the benefits of our product launches from the prior year from the Codman Specialty Surgical segment, including our new electrosurgery generator and irrigator system, an innovative customer-centric toolkit for our Certas™ Plus Programmable Valve along with additional shunt configurations.

Additionally, the Company continued to reap the benefits of our product launches from the prior year from the Codman Specialty Surgical segment, including our new electrosurgery generator and irrigator system, an innovative customer-centric toolkit for our Certas™ Plus Programmable Valve along with additional shunt configurations.

In Japan, we are experiencing strong growth as a result of the successful launch of DuraGen® in the prior year, which is the first and only collagen xenograft approved for use as a dural substitute in the country.

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We also continued to benefit from the 2019 U.S.

product launches the Panta® II TTC Arthrodesis Nail System.

product launches, such as, the Panta® II TTC Arthrodesis Nail System.

The Panta II system is our new fusion nail used in ankle fixation.

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In addition, we initiated the limited market release of enhancements to our Salto Talaris® Total Ankle System.

We continue to work on advanced shoulder products and are developing a pyrocarbon shoulder hemiarthroplasty product to add to our orthopedic reconstruction portfolio.

In May 2020, the Company announced positive clinical and economic data on Integra® Bilayer Wound Matrix ("IBWM") in complex lower extremity reconstruction based on two retrospective studies recently published in Plastic and Reconstructive Surgery, the official journal of the American Society of Plastic Surgeons.

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The Company continues to support patients, provide customers with life-saving products, and protect the health and safety of its employees.

The rapid and evolving spread of the virus has resulted in an unprecedented challenge to the global healthcare industry, as medical resources were reallocated to fight COVID-19.

During the first half of 2020, the Company was able to sustain ongoing operations by implementing contingency plans such as enabling its manufacturing and distribution sites around the world to continue operating at levels required to meet demand and to provide for the safety of its employees.

During April of 2020, the Company implemented cost-savings measures, which include the following:

The rapid and evolving spread of the

virus has resulted in an unprecedented challenge to the global healthcare industry, as medical resources were reallocated to fight COVID-19.

During 2020, the Company was able to sustain ongoing operations by implementing contingency plans such as enabling its manufacturing and distribution sites around the world to continue operating at levels required to meet demand and to provide for the safety of its employees.

During April of 2020, the Company implemented cost-savings measures, which included the following:

Reduced executive management compensation through July 2020 and director compensation

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Significant reduction in capital expenditures and discretionary spending including travel, events and marketing programs

The Company remains confident that the underlying markets in which it competes remain attractive over the long term.

These comprehensive spending cuts were necessary to protect our financial strength in the face of near-term challenges.

Despite those challenges, the Company remains focused on managing the business for the long-term, including preserving full time jobs needed to support the rebound in surgical procedure volumes.

The Company restored employee wages and other spending in the third quarter of 2020, as revenues sequentially increased approximately 43.1% as compared to the second quarter of 2020.

The Company also continues to implement programs and strategies to drive sustainable growth, such as partnering with key opinion leaders to increase our customer engagement through educational webinars and improve the clinical components of sales training.

As many surgical procedures in which our products are employed cannot be deferred for more than 90 days, this should contribute to the continued recovery of the Company's business.

We cannot predict with certainty the extent to which the COVID-19 pandemic will impact procedures in the fourth quarter and beyond.

We remain confident that the underlying markets in which the Company competes remain attractive over the long term.

We also remain focused on managing the business for the long-term, including preserving full time jobs needed to support the rebound in surgical procedure volumes.

The Company's adaptability and resiliency in the face of this unprecedented crisis is made possible in part by prior investments in technology infrastructure and operations, as well as our talented and committed global workforce.

Throughout this period, we continued to prioritize and invest in critical R&D and clinical programs.

The Company is also increasing inventory to ensure adequate safety stock of select products as surgical procedures continue to recover from levels experienced in the second quarter.

As many surgical procedures in which our products are employed cannot be deferred for more than 90 days, this should contribute to the continued recovery of the Company's business.

The Company cannot predict with certainty the extent to which the COVID-19 pandemic will impact procedures in the third quarter and beyond.

Capital markets and worldwide economies have also been significantly impacted by the COVID-19 pandemic, and it is possible that it could cause a local and/or global economic recession.

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In addition, the FDA articulated a risk-based approach to enforcement and, while some uses for amniotic membrane tissue-based products would have as much as thirty-six months of enforcement discretion, other high risk uses could be subject to immediate enforcement action.

The revised final guidance extends the discretionary enforcement action to May 31, 2021.

The revised final guidance extends the discretionary enforcement period to May 31, 2021.

The Company does not believe the uses for its amniotic membrane tissue-based products fall into the high-risk category.

As of June 30, 2020 the Company has not received any further notice of enforcement action from the FDA regarding its morselized amniotic tissue-based products.

Nonetheless, we can make no assurances that the FDA will continue to exercise its enforcement discretion with respect to the Company’s morselized amniotic membrane tissue-based products, and any potential action of the FDA could have a financial impact regarding the sales of such products.

As of September 30, 2020 the Company has not received any further notice of enforcement action from the FDA regarding its morselized amniotic tissue-based products.

action of the FDA could have a financial impact regarding the sales of such products.

The Company has been considering and continues to consider regulatory approval pathways for its morselized amniotic membrane tissue-based products.

Revenues from BioD morselized amniotic membrane based products for the six months ended June 30, 2020 were less than 1.0% of consolidated revenues.

Revenues from BioD morselized amniotic membrane based products for the nine months ended September 30, 2020 were less than 1.0% of consolidated revenues.

On March 7, 2019, TEI Biosciences, Inc.

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The letter resulted from an inspection held at that facility in October and November 2018 and did not identify any new observations that were not already provided in the Form 483 that followed the inspection.

The Company has provided detailed responses to the FDA as to its corrective actions on a monthly basis and, since the conclusion of the inspection, has undertaken significant efforts to remediate the observations and continues to do so.

The Company submitted its initial response to the FDA Warning Letter on March 28, 2019 and provides regular progress reports to the FDA as to its corrective actions on a monthly basis and, since the conclusion of the inspection, has undertaken significant efforts to remediate the observations and continues to do so.

The warning letter does not restrict the Company’s ability to manufacture or ship products or require the recall of any products.

Nor does it restrict our ability to seek FDA 510(k) clearance of products.

The letter states that requests for Certificates to Foreign Governments will not be granted until the violations have been corrected.

Additionally, premarket approval applications for Class III devices to which the Quality System regulation violations are reasonably related will not be approved

until the violations have been corrected.

The letter states that requests for Certificates to Foreign Governments will not be granted, however, due to our progress reports, FDA has agreed to resume issuing Certificates to Foreign Governments to TEI due to substantial progress and the length of time it takes to resolve the Warning Letter.

Additionally, premarket approval applications for Class III devices to which the Quality System regulation violations are reasonably related will not be approved until the violations have been corrected.

The TEI Boston facility manufactures extracellular bovine matrix (EBM) products.

The Company does not expect to incur material incremental expense for remediation activities.

The Company submitted its initial response to the FDA Warning Letter on March 28, 2019 and provides regular progress reports to the FDA.

We cannot, however, give any assurances that the FDA will be satisfied with our response to the letter or as to the expected date of the resolution of the matters included in the letter.

We cannot, however, give any assurances that the FDA will be satisfied with our response to the Warning Letter or as to the expected date of the resolution of the matters included in the letter.

Until the issues cited in the letter are resolved to the FDA’s satisfaction, the FDA may initiate additional regulatory action without further notice.

Any adverse regulatory action, depending on its magnitude, may restrict us from effectively manufacturing, marketing and selling our products and could have a material adverse effect on our business, financial condition and results of operations.

Revenues of products manufactured in the TEI Boston facility for the six months ended June 30, 2020 were approximately 4.4% of consolidated revenues.

Revenues of products manufactured in the TEI Boston facility for the nine months ended September 30, 2020 were approximately 4.5% of consolidated revenues.

RESULTS OF OPERATIONS

Executive Summary

Net income (loss) for the three months ended June 30, 2020 was $(0.4) million , or ( $0.00 ) per diluted share, as compared to $29.7 million or $0.34 per diluted share for the three months ended June 30, 2019 .

Net income for the six months ended June 30, 2020 was $8.8 million, or $0.10 per diluted share, as compared to $62.5 million or $0.72 per diluted share for the six months ended June 30, 2019 .

The net income (loss) for the three and six months ended June 30, 2020 was impacted by the COVID-19 pandemic which resulted in lower revenues relative to the level of operating expenses.

Further, the Company also had an increase in interest expense due to the issuance of the Convertible Senior Notes and valuation allowance on certain deferred tax assets as a result of the impact of the COVID-19 pandemic and lower book income in lower-taxed jurisdictions.

For the first half of 2020, total revenues were $ 613.0 million, representing a decline of 17.5% from prior year revenues.

First quarter revenues declined 1.5% which reflects the impact of the COVID-19 pandemic that started mid-March 2020 following two and a half months of revenue trends at the higher end of the Company’s expectations.

Net income (loss) for the three months ended September 30, 2020 was $32.3 million , or $0.38 per diluted share, as compared to $(27.6) million or $(0.32) per diluted share for the three months ended September 30, 2019 .

Net income for the nine months ended September 30, 2020 was $41.1 million, or $0.48 per diluted share, as compared to $34.9 million or $0.40 per diluted share for the nine months ended September 30, 2019 .

The net income for the three and nine months ended September 30, 2020 was impacted by the COVID-19 pandemic which resulted in lower revenues in addition to a decrease in the level of operating expenses due to cost-savings measures implemented by the Company during 2020.

The Company also had an increase in interest expense due to the issuance of the Convertible Senior Notes.

The increase in net income for the three months ended September 30, 2020 from the same period last year resulted from a $59.9 million IPR&D expense attributed to the Rebound transaction which occurred during the third quarter of 2019.

For the nine months ended September 30, 2020 , total revenues were $ 983.2 million, representing a decline of 12.4% from prior year revenues.

First quarter revenues declined 1.5% which reflects the impact of the COVID-19 pandemic on the Company from mid-March 2020 following two and a half months of revenue trends at the higher end of the Company’s expectations.

As a result of the speed and severity of the spread of COVID-19, the Company saw rapid and significant decline in surgical and medical intervention procedures as healthcare providers reallocated resources to address the increasing demands caused by the COVID-19 pandemic.

By reacting swiftly in February and working with customers and distributors, we were largely able to mitigate the first quarter impact of the social and economic shutdowns that took place globally.

Second quarter finished with sales of $258.7 million , representing a decline of 32.6% from the prior year period.

We saw a steady improvement in the rate of sales decline over the three-month period.

In April 2020, revenues were down 45% as compared to the same period in the prior year 2019, as healthcare providers around the world moved rapidly to reallocate resources in order to manage the pandemic.

Revenues improved sequentially in both May 2020 and June 2020, as compared to the April low, as surgical procedure restrictions began to ease.

We exited the quarter in June with a sales decline of 13% compared to the average daily sales rate of the second quarter of 2019.

Despite the revenue decline, the Company believes that our underlying end-markets, especially neurosurgery and regenerative medicine, are not experiencing fundamental changes to the associated disease conditions.

In many cases these conditions can only be deferred for a short period of time, after which an adverse clinical outcome can occur.

In the Codman Specialty Surgical ("CSS") segment, revenue declined 31.9% in the second quarter of 2020 as compared to the prior year.

Both the Neurosurgery and Instruments businesses showed monthly sequential improvement throughout the quarter.

In June 2020, CSS revenues declined 13% as compared to the average daily sales rate of the second quarter of 2019.

The improvement in the rate of sales decline in June as compared to the full quarter was led by products used in our Neurosurgery business including dural access and repair, advanced energy consumables, CSF management, and neuromonitoring.

Sales of Instruments and capital, while still showing monthly sequential improvement, lagged in this June recovery as sales of these products were more closely tied to hospital and operating budgets rather than directly correlated to procedure recovery.

In the Orthopedics and Tissue Technologies ("OTT") segment, revenue declined 33.9% in the second quarter of 2020 as compared to the prior year.

Sales in Wound Reconstruction and Orthopedics businesses showed monthly sequential improvement throughout the quarter.

In June 2020, revenue declined 13% as compared to the average daily sales rate of the second quarter of 2019.

The improvement in the rate of sales decline in June as compared to the full quarter was led by products in our Orthopedics business as well as products used in nerve repair and products to treat chronic wounds.

Across both segments, the Company continues to expect quarterly sequential revenue improvement in the second half of 2020 as compared to the second quarter of 2020.

For the third quarter of 2020, revenues are expected to remain below prior year levels due to the COVID-19 pandemic and the associated reduction of non-emergent surgical procedures.

Additionally, the Company does not expect all markets and product lines to improve at the same rate based on the level of recurrence of

COVID-19 and its associated impact on the pace of procedure recovery and economic normalization.

As an example, the recovery of our Instruments business and advanced energy capital products may be slower to recover compared to other products in our portfolio as the demand of these products are more closely tied to the overall financial health of healthcare institutional customers and will likely lag procedure recovery.

The second quarter finished with sales of $258.7 million , representing a decline of 32.6% from the prior year period.

In April 2020, revenues were down 45% as compared to the same period in the prior year 2019, as healthcare providers around the world began to defer non-urgent medical procedures.

Throughout the remainder of the second quarter of 2020, revenues improved sequentially as compared to lows experienced in April 2020, as surgical procedure restrictions began to ease.

During the third quarter, we experienced strong sequential quarterly revenue improvements across all franchises, representing an increase of 43.1% as compared to the second quarter.

Third quarter revenues finished with sales of $370.2 million, representing a decline of 2.3% from the prior year period.

The Company's performance varied across regions and product lines

based on the severity of the pandemic but continued to demonstrate strong improvement compared to the second quarter, as surgical procedure restrictions continued to ease.

In the Codman Specialty Surgical ("CSS") segment, revenues increased 41% as compared to the second quarter of 2020.

Both the Neurosurgery and Instruments portfolio showed significant sequential quarterly improvement.

During the three months ended September 30, 2020, CSS revenues declined 5.4% compared to the prior year.

Sales in our neuro monitoring and programmable valve products increased low-single digits in the third quarter compared to the prior year.

Despite showing a sequential quarterly improvement, sales in capital products, largely concentrated in our advanced energy franchise, declined mid-double digits in the third quarter compared to the prior year as hospitals and healthcare institutions continued to allocate capital budgets to manage the increase in costs associated with the COVID pandemic.

The Company continues to have a strong pipeline of new capital opportunities and believes the reallocation of capital budgets is only temporary.

Additionally, sales of consumable products used in conjunction with previously sold capital equipment nearly recovered to prior year levels in the third quarter.

Sales of our Instruments portfolio decreased low-double digits as compared to the prior year, as sales of some products are more closely tied to hospital budgets rather than directly correlated to procedure volumes.

In the Orthopedics and Tissue Technologies ("OTT") segment, revenues increased 47.3% as compared to the second quarter of 2020.

Sales in our Wound Reconstruction, Extremity Orthopedics and Private Label portfolios all showed sequential quarterly improvement in revenues.

During the three months ended September 30, 2020, OTT revenues increased 3.8% as compared to the prior year.

Sales in the Wound Reconstruction portfolio remained flat as compared to the prior year led by growth in sales of Integra skin, PriMatrix and amniotic tissue products.

This was offset by performance in surgical reconstruction which declined by mid-double digits as compared to the prior year.

Sales of our Extremity Orthopedics portfolio increased low single digits as deferred surgical procedures were completed.

Our Private Label portfolio sales also increased by low-double digits over the prior year.

We continue to closely monitor local and regional COVID-19 surges for an impact on procedures in the fourth quarter of 2020 and beyond.

The reallocation of hospital resources to treat COVID-19 may continue to cause a financial strain on healthcare systems.

Additionally, the Company does not expect all markets and product lines to improve at the same rate based on the level of recurrence of COVID-19 and its associated impact on the pace of procedure recovery and economic normalization.

Income before taxes includes the following special charges:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended

September 30,

(In thousands)

Acquisition and integration-related charges

Acquisition, divestiture and integration-related charges (2)

Structural optimization charges

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(1) Charges relate to business interruptions and cost associated from the COVID-19 pandemic which impacted the Company's operations globally, partially offset by Coronavirus government relief programs.

(2) The Company included $59.9 million of IPR&D expense within acquisition, divestiture and integration-related charges as a result of the Rebound transaction in the third quarter of 2019.

The items reported above are reflected in the condensed consolidated statements of operations as follows:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

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Research and development

IPR&D expense

Selling, general and administrative

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Interest expense

Other expense

(1) Amortization and impairment charges related to technology based intangible assets is included in cost of goods sold.

(2) Impairment charges related to non-technology based intangible assets such as customer relationships are included in Intangible asset amortization.

We typically define special charges as items for which the amounts and/or timing of such expenses may vary significantly from period to period, depending upon our acquisition, integration and restructuring activities, and for which the amounts are non-cash in nature, or for which the amounts are not expected to recur at the same magnitude.

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The Company's revenues and gross margin on product revenues were as follows:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Segment Net Sales

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Gross margin as a percentage of total revenues

Three Months Ended June 30, 2020 as Compared to Three Months Ended June 30, 2019

Three Months Ended September 30, 2020 as Compared to Three Months Ended September 30, 2019

Revenues and Gross Margin

For the three months ended June 30, 2020 , total revenues decreased by $125.0 million to $258.7 million from $383.6 million for the same period in 2019 .

Domestic revenues decreased by $91.5 million , or 33.5% , to $181.9 million and were 70.3% of total revenues for the three months ended June 30, 2020 compared to $273.4 million during the same period in the prior year.

International revenues decreased by $33.4 million or 30.3% to $76.8 million for the three months ended June 30, 2020 compared to $110.3 million during the same period in the prior year.

The net decrease of $125.0 million was a result of decline in both segments due to disruption from the COVID-19 pandemic as well as $0.8 million due to unfavorable impact of foreign exchange and $7.8 million due to discontinued and divested products.

Codman Specialty Surgical revenues were $169.8 , a decrease of $79.5 million, or 31.9% from the prior-year period.

Orthopedics and Tissue Technologies revenues were $88.9 million, a decrease of $45.5 million, or 33.9% from the prior-year period.

The decrease in both segments is primarily due to disruption caused by the COVID-19 pandemic across all franchises.

Gross margin decreased to $153.2 million for the three-month period ended June 30, 2020 , a decrease of $86.8 million from $240.0 million for the same period last year.

Gross margin as a percentage of total revenue decrease d to 59.2% for the second quarter of 2020 from 62.6% in the same period last year.

This decrease is primarily attributable to the disruption caused by the COVID-19 pandemic.

For the three months ended September 30, 2020 , total revenues decreased by $8.9 million to $370.2 million from $379.1 million for the same period in 2019 .

Domestic revenues increased by $0.2 million , or 0.1% , to $266.5 million and were 72.0% of total revenues for the three months ended September 30, 2020 compared to $266.3 million during the same period in the prior year.

International revenues decreased by $9.1 million or 8% to $103.8 million for the three months ended September 30, 2020 compared to $112.8 million during the same period in the prior year.

The net decrease of $8.9 million was a result of disruption from the COVID-19 pandemic and $6.0 million due to discontinued and divested products offset by $2.6 million due to favorable impact of foreign exchange.

Codman Specialty Surgical revenues were $239.3 million, a decrease of $13.7 million, or 5.4% from the prior-year period.

Orthopedics and Tissue Technologies revenues were $130.9 million, an increase of $4.8 million, or 3.8% from the prior-year period.

Gross margin was $235.4 million for the three-month period ended September 30, 2020 , a decrease of $1.0 million from $236.5 million for the same period last year.

Gross margin as a percentage of total revenue increased to 63.6% for the third quarter of 2020 from 62.4% in the same period last year.

This increase is primarily attributable to favorable revenue mix and lower costs as a result of cost-savings measures implemented by the Company.

Operating Expenses

The following is a summary of operating expenses as a percent of total revenues:

Three Months Ended June 30,

Three Months Ended September 30,

Research and development

IPR&D expense

Selling, general and administrative

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Total operating expenses

Total operating expenses, which consist of selling, general and administrative expenses, research and development expenses, in-process research and development expense and amortization expenses, decreased by $54.9 million, or 28.3% to $139.1 million in the three months ended June 30, 2020 , compared to $194.0 million in the same period in 2019 .

Research and development expenses for the three months ended June 30, 2020 decreased by $2.7 million as compared to the prior year.

Total operating expenses, which consist of selling, general and administrative expenses, research and development expenses, IPR&D expense and amortization expenses, decreased by $79.2 million, or 30.8% to $177.9 million in the three months ended September 30, 2020 , compared to $257.0 million in the same period in 2019 .

Research and development expenses for the three months ended September 30, 2020 increased by $0.5 million as compared to the prior year.

The increase in research and development was driven by costs related to product development, including product development for the new acquisitions completed in 2019.

The Company continues to invest in R&D programs with spending at prior year levels despite the challenges from the COVID-19 pandemic.

IPR&D expense decreased by $59.9 million as compared to the prior year due to the Rebound transaction which occurred during the third quarter of 2019.

Selling, general and administrative costs decreased by $23.0 million as compared to the prior year.

The decrease in research and development was driven by cost reduction in response to the COVID-19 pandemic while continuing to prioritize and invest in critical R&D and clinical programs.

The decrease in selling, general and administrative expenses was driven by overall cost reduction actions along with lower commission and selling costs associated with lower revenue in the quarter.

The Company's spending in the second quarter of 2020 reflected reduction in expense as various activities were restricted by the COVID-19 pandemic, including ceasing of third-party services and temporary contractor relationships as well as reductions in capital expenditures, temporary reductions in employee compensation and lower discretionary spending.

Additionally, the Company also incurred costs associated with the impact of the COVID-19 pandemic, including personal protection equipment,

testing for our employees and extra cleaning of our facilities, partially offset by the benefit of coronavirus government relief programs.

Although expenses were still below prior year levels during the third quarter of 2020, the Company restored employee wages and began to increase other spending in line with the sequential revenue improvements during the period.

Revenues for the third quarter of 2020, sequentially increased approximately 43.1% as compared to the second quarter of 2020.

Non-Operating Income and Expenses

The following is a summary of non-operating income and expenses:

Three Months Ended June 30,

Three Months Ended September 30,

(In thousands)

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Interest expense

Other income(expense), net

Other income, net

Interest Expense

Interest expense for the three months ended June 30, 2020 increased by $2.3 million as compared to the same period last year primarily due to increase in non-cash interest expense due to the issuance of the Convertible Senior Notes.

Three Months Ended June 30,

Interest expense for the three months ended September 30, 2020 increased by $6.8 million as compared to the same period last year primarily due to an increase in non-cash interest expense due to the issuance of the Convertible Senior Notes.

Other Income, net

Other income, net for the three months ended September 30, 2020, decreased by $1.6 million compared to the same period last year primarily driven from a legal settlement received during the three months ended September 30, 2019.

Three Months Ended September 30,

(In thousands)

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Effective tax rate

The Company’s effective income tax rates for the three months ended June 30, 2020 and 2019 were 122.4 % and 18.3 % , respectively.

For the three months ended June 30, 2020 , the higher tax rate is primarily attributable to lower income for the quarter in relation to the updated full year income projection, as impacted by the COVID-19 pandemic.

The Company’s effective income tax rates for the three months ended September 30, 2020 and 2019 were 22.1 % and ( 0.4 )% , respectively.

For the three months ended September 30, 2020 , the primary drivers of the higher tax rate are the jurisdictional mix of income along with a $4.2 million recognition of a deferred tax liability related to an outside tax basis from the sale of the Extremity Orthopedics business, offset by a $3.2 million benefit from a reversal of the French valuation allowance.

For the three months ended September 30, 2019 , the primary driver of the tax rate is the impact of the Rebound transaction, which resulted in a $59.9 million IPR&D expense.

This amount was not deductible for tax purposes.

The effective tax rate may vary from period to period depending on, among other factors, the geographic and business mix of taxable earnings and losses, tax planning and settlements with various taxing authorities.

We consider these factors and others, including the Company's history of generating taxable earnings, in assessing our ability to realize tax assets on a quarterly basis.

While it is often difficult to predict the outcome or the timing of resolution of any particular matter with the various federal, state, and foreign tax authorities, we believe that our reserves reflect the most probable outcome of known tax contingencies.

Settlement of any particular issue would usually require the use of cash.

Favorable resolution would be recognized as a reduction to our annual effective tax rate in the year of resolution.

The tax reserves are presented in the balance sheet within other liabilities, except for amounts relating to items that we expect to pay in the coming year, which would be classified as current income taxes payable.

Six Months Ended June 30, 2020 as Compared to Six Months Ended June 30, 2019

While it is often difficult to predict the outcome or the timing of the resolution of a particular matter with the various federal, state, and foreign tax authorities, we believe that our reserves reflect the most probable outcome of known tax contingencies.

Settlement of a particular issue would usually require the use of cash.

A favorable resolution would be recognized as a reduction to our annual effective tax rate in the year of resolution.

The Company's tax reserves are presented in the balance sheet within other liabilities, except for amounts relating to items that we expect to pay in the coming year, which would be classified as current income taxes payable.

Nine Months Ended September 30, 2020 as Compared to Nine Months Ended September 30, 2019

Revenues and Gross Margin

For the six months ended June 30, 2020 , total revenues decreased by $130.3 million to $613.0 million from $743.3 million for the same period in 2019 .

Domestic revenues decreased by $101.4 million, or 19% , to $428.7 million and were 70% of total revenues for the six months ended June 30, 2020 .

International revenues decreased by $28.9 million, or 14% to $184.3 million for the six months ended June 30, 2020 compared to $213.2 million during the same period in the prior year.

The net decrease of $130.3 million was a result of decline in both segments due to disruption from the COVID-19 pandemic as well as $2.5 million due to unfavorable impact of foreign exchange and $11.3 million due to discontinued and divested products.

For the nine months ended September 30, 2020 , total revenues decreased by $139.2 million to $983.2 million from $1,122.4 million for the same period in 2019 .

Domestic revenues decreased by $101.2 million, or 13% , to $695.2 million and were 71% of total revenues for the nine months ended September 30, 2020 .

International revenues decreased by $38.0 million, or 12% to $288.0 million for the nine months ended September 30, 2020 compared to $326.0 million during the same period in the prior year.

The net decrease of $139.2 million was a result of decline in both segments due to disruption from the COVID-19 pandemic and $17.3 million due to discontinued and divested product offset by $0.2 million due to favorable impact of foreign exchange.

Codman Specialty Surgical revenues were $640.5 million, a decrease of $96.3 million, or 13.1% from the prior-year period.

Orthopedics and Tissue Technologies revenues were $342.7 million, a decrease of $42.9 million, or 11.1% from the prior-year period.

Gross margin decreased to $374.0 for the six-month period ended June 30, 2020 , a decrease of $96.7 million from $470.8 for the same period last year.

Gross margin as a percentage of total revenue decrease d to 61.0% for the six months ended June 30, 2020 from 63.3% in the same period last year.

This decrease is primarily attributable to the disruption caused by the COVID-19 pandemic.

The decrease in both segments is primarily due to disruption caused by the COVID-19 pandemic across all franchises.

Gross margin was $609.5 million for the nine-month period ended September 30, 2020 , a decrease of $97.8 million from $707.2 million for the same period last year.

Gross margin as a percentage of total revenue decrease d to 62.0% for the nine months ended September 30, 2020 from 63.0% in the same period last year.

This decrease is primarily attributable to the disruption caused by the COVID-19 pandemic partially offset by favorable revenue mix and lower costs as a result of cost-savings measures implemented by the Company during the second quarter of 2020.

Operating Expenses

The following is a summary of operating expenses as a percent of total revenues:

Six Months Ended June 30,

Nine Months Ended September 30,

Research and development

IPR&D expense

Selling, general and administrative

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Total operating expenses

Total operating expenses, which consist of selling, general and administrative expenses, research and development expenses, in-process research and development expense and amortization expenses, decreased by $59.6 million, or 15.2% to $332.9 million in the six months ended June 30, 2020 , compared to $392.5 million in the same period in 2019 .

Research and development expenses for the six months ended June 30, 2020 decreased by $0.2 million when compared to the same period in 2019 primarily driven by cost reduction in response to the COVID-19 pandemic while continuing to prioritize and invest in critical R&D and clinical programs.

Selling, general and administrative costs decreased by $58.2 million as compared to the prior year resulting from less acquisition and integration related charges, lower commissions and selling costs resulting from lower revenue in the quarter and overall cost reduction actions resulting from cost-savings measures associated with actions taken by the Company as a result of the impact of the COVID-19 pandemic.

Total operating expenses, which consist of selling, general and administrative expenses, research and development expenses, IPR&D expense and amortization expenses, decreased by $138.8 million, or 21.4% to $510.7 million in the nine months ended September 30, 2020 , compared to $649.5 million in the same period in 2019 .

Research and development expenses for the nine months ended September 30, 2020 increased by $0.2 million as compared to the prior year.

The Company continues to invest in R&D programs with spending at prior year levels despite the challenges from the COVID-19 pandemic.

IPR&D expense for the nine months ended September 30, 2020 decreased $59.9 million from the same period last year as a result of an IPR&D expense attributed to the Rebound transaction which occurred during the third quarter of 2019.

Selling, general and administrative costs decreased by $81.2 million as compared to the prior year resulting from less acquisition and integration related charges, lower commissions and selling costs resulting from lower revenue during the year and overall cost reduction actions resulting from cost-savings measures associated with actions taken by the Company as a result of the impact of the COVID-19 pandemic.

Non-Operating Income and Expenses

The following is a summary of non-operating income and expenses:

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands)

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Interest expense

Other income(expense), net

Other income, net

Interest Expense

Interest expense for the six months ended June 30, 2020 increased by $6.9 million as compared to the same period last year primarily due to increase in non-cash interest expense due to the issuance of the Convertible Senior Notes and expenses associated with Amended and Restated Senior Credit Agreement.

Other Income (Expense), net

Other income (expense), net for the six months ended June 30, 2020 , decreased by $3.8 million as compared to the same period last year primarily due to unfavorable impact of foreign exchange.

Six Months Ended June 30,

Interest expense for the nine months ended September 30, 2020 increased by $13.7 million as compared to the same period last year primarily due to an increase in non-cash interest expense due to the issuance of the Convertible Senior Notes and expenses associated with Amended and Restated Senior Credit Agreement.

Other Income, net

Other income, net for the nine months ended September 30, 2020 , decreased by $5.5 million as compared to the same period last year primarily due to unfavorable impact of foreign exchange and a legal settlement received during the nine months ended September 30, 2019.

Nine Months Ended September 30,

(In thousands)

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Effective tax rate

The Company’s effective income tax rates for the three months ended June 30, 2020 and 2019 were 32.7% and (2.1)% , respectively.

For the six months ended June 30, 2020 , the increase in the rate is primarily attributable to a $3.4 million valuation allowance on certain foreign deferred tax assets as the Company determined that it is no longer more likely than not that these foreign deferred tax assets would be realized due to the adverse impact of the COVID-19 pandemic.

For the six months ended June 30, 2019, the

primary driver of the lower rate was a tax benefit of $10.8 million related to a federal tax holiday in Switzerland, which was finalized during the quarter ended March 30, 2019.

The Company received a Switzerland federal tax credit of 12.0 million CHF, which can be used over a seven-year period, ending in 2024.

The Company’s effective income tax rates for the nine months ended September 30, 2020 and 2019 were 24.6% and (3.5)% , respectively.

For the nine months ended September 30, 2020 , the primary drivers of the higher tax rate are the jurisdictional mix of income along with a $4.2 million recognition of a deferred tax liability related to an outside tax basis from the sale of the Extremity Orthopedics business.

For the nine months ended September 30, 2019 , the primary driver of the tax rate is the impact of the Rebound transaction, which resulted in a $59.9 million IPR&D expense.

This amount is not deductible for tax purposes.

This was offset by a tax benefit of $10.8 million related to a federal tax holiday in Switzerland, which was finalized during the quarter ended March 31, 2019.

The Company received a federal tax credit in Switzerland of 12 million CHF, which may be used over a seven year period, ending in 2024.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was signed into law.

The CARES Act includes certain income tax provisions for corporations and individuals, among other provisions.

The Company does not expect the CARES Act to have a significant impact on the tax provision.

The Company continues to monitor the issuance of new legislation, regulations, or case law that may impact federal, state, and international tax positions.

The Company expects its effective income tax rate for the full year to be approximately 33.4% driven primarily by the $3.4 million valuation allowance on certain foreign deferred tax assets as the Company determined that it is no longer more likely than not that these foreign deferred tax assets would be realized due to the adverse impact of the COVID-19 pandemic.

This estimate could be revised in the future as additional information is presented to the Company.

The Company does not expect the CARES Act to have a significant impact on the income tax provision.

The Company continues to monitor the issuance of new legislation, regulations, and case law that may impact federal, state, and international tax positions.

The Company expects its effective income tax rate for the full year to be approximately 24.6%, driven primarily by the jurisdictional mix of income and the incremental impact of the $4.2 million expense related to an outside tax basis from the sale of the Extremity Orthopedics business.

We consider these factors and others, including the Company's history of generating taxable earnings, in assessing our ability to realize tax assets on a quarterly basis.

Settlement of any particular issue would usually require the use of cash.

Settlement of a particular issue would usually require the use of cash.

Favorable resolution would be recognized as a reduction to our annual effective tax rate in the year of resolution.

The tax reserves are presented in the balance sheet within other liabilities, except for amounts relating to items we expect to pay in the coming year, which would be classified as current income taxes payable.

GEOGRAPHIC PRODUCT REVENUES AND OPERATIONS

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Total revenue by major geographic area consisted of the following:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

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Local economic conditions, regulatory compliance or political considerations, the effectiveness of our sales representatives and distributors, local competition and changes in local medical practice all may combine to affect our sales into markets outside the U.S.

Domestic revenues decrease d by $91.5 million for the three months ended June 30, 2020 compared to the same period last year.

European sales decreased by $18.8 million for the three months ended June 30, 2020 compared to the same period last year.

Sales to customers in Asia Pacific and the Rest of the World for the three months ended June 30, 2020 decreased by $14.6 million compared to the same period last year.

The decrease in revenues globally was primarily due to disruption from the COVID-19 pandemic across all franchises.

Domestic revenues decrease d by $101.4 million for the six months ended June 30, 2020 compared to the same period last year.

European sales decreased by $21.6 million for the six months ended June 30, 2020 compared to the same period last year.

Sales to customers in Asia Pacific and the Rest of the World for the six months ended June 30, 2020 decreased by $7.3 million compared to the same period last year.

Domestic revenues increased by $0.2 million for the three months ended September 30, 2020 compared to the same period last year.

European sales decreased by $3.2 million for the three months ended September 30, 2020 compared to the same period last year.

Sales to customers in Asia Pacific and the Rest of the World for the three months ended September 30, 2020 decreased by $5.8 million compared to the same period last year.

The revenues globally continue to be impacted by the COVID-19 pandemic across all of the franchises.

Domestic revenues decreased by $101.2 million for the nine months ended September 30, 2020 compared to the same period last year.

European sales decreased by $24.8 million for the nine months ended September 30, 2020 compared to the same period last year.

Sales to customers in Asia Pacific and the Rest of the World for the nine months ended September 30, 2020 decreased by

$13.2 million compared to the same period last year.

The decrease in revenues globally was primarily due to adverse effects of the COVID-19 pandemic across all franchises.

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Cash and Marketable Securities

The Company had cash and cash equivalents totaling approximately $361.0 million and $198.9 million at June 30, 2020 and December 31, 2019 respectively, which are valued based on Level 1 measurements in the fair value hierarchy.

At June 30, 2020 , our non-U.S.

The Company had cash and cash equivalents totaling approximately $396.3 million and $198.9 million at September 30, 2020 and December 31, 2019 respectively, which are valued based on Level 1 measurements in the fair value hierarchy.

At September 30, 2020 , our non-U.S.

subsidiaries held approximately $231.4 million of cash and cash equivalents that are available for use outside the U.S.

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The Company does not anticipate the need to repatriate earnings from foreign subsidiaries as a result of the impact of the COVID-19 pandemic.

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands)

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Net cash used in investing activities

Net cash provided by (used in) financing activities

Net cash provided by financing activities

Effect of exchange rate fluctuations on cash

Cash Flows Provided by Operating Activities

Operating cash flows for the six months ended June 30, 2020 decreased compared to the same period in 2019 .

Net income after non-cash adjustments decreased for the six months ended June 30, 2020 by approximately $37.7 million compared to the same period in 2019 primarily due to adverse effects of the COVID-19 pandemic.

The changes in assets and liabilities, net of business acquisitions, decreased cash flows from operating activities by $36.1 million for the six months ended June 30, 2020 compared to a decrease of $49.8 million for the same period in 2019 .

The decrease in 2020 is attributable to an increase in inventory to ensure adequate safety stock of select products as surgical procedures continue to recover from levels experienced in the second quarter.

Operating cash flows for the nine months ended September 30, 2020 decreased compared to the same period in 2019 .

For the nine months ended September 30, 2020 , net income after non-cash adjustments decreased by approximately $21.3 million to $174.4 million from $195.7 million when compared to the same period in 2019 primarily due to adverse effects of the COVID-19 pandemic.

The changes in assets and liabilities, net of business acquisitions, decreased cash flows from operating activities by $50.8 million for the nine months ended September 30, 2020 compared to a decrease of $53.5 million for the same period in 2019 .

The decrease in 2020 is attributable to an increase in inventory to improve safety stock of select products.

In addition, decreases were also driven by reduced payables offset by decreases in accounts receivable due to lower revenue and continued collection efforts.

Cash Flows Used in Investing Activities

During the six months ended June 30, 2020 , we paid $23.7 million for capital expenditures, most of which were directed to our facilities located in Mansfield, MA;

During the nine months ended September 30, 2020 , we paid $30.5 million for capital expenditures, most of which were directed to our facilities located in Mansfield, MA;

and Princeton, NJ.

During the six months ended June 30, 2019 , the Company paid $33.8 million for capital expenditures, most of which were directed to our Mansfield, Massachusetts facility, and commercial expansion.

During the nine months ended September 30, 2019 , the Company paid $47.3 million for capital expenditures, most of which were directed to our Mansfield, MA facility, Princeton, NJ facility and commercial expansion.

Further, we paid $95.5 million for the Arkis Acquisition and Rebound Transaction, net of cash acquired.

Cash Flows Used in Financing Activities

Our principal sources of cash from financing activities in the six months ended June 30, 2020 were $515.3 million proceeds from the issuance of Convertible Senior Notes including the call and warrant transactions, $127.7 million borrowing under our Senior Credit Facility and Securitization Facility.

Our principal sources of cash from financing activities in the nine months ended September 30, 2020 were $515.3 million proceeds from the issuance of Convertible Senior Notes including the call and warrant transactions, and $151.3 million borrowing under our Senior Credit Facility and Securitization Facility.

These were offset by repayments of $441.0 million on the revolving portion of our Senior Credit Facility and Securitization Facility, $24.3 million debt issuance costs related to the Amended and Restated Senior Credit Agreement and the issuance of Convertible Senior Notes and $100.0 million purchases of treasury stock.

Our principal sources of cash from financing activities in the six months ended June 30, 2019 were $101.2 million from borrowings under our Senior Credit Facility and Securitization Facility.

Our principal sources of cash from financing activities in the nine months ended September 30, 2019 were $215.8 million from borrowings under our Senior Credit Facility and Securitization Facility.

These were offset by repayments of $143.3 million on the revolving portion of our Senior Credit Facility and Securitization Facility.

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We are forecasting that for the next twelve months, sales and earnings will be sufficient to remain in compliance with our financial covenants under the terms of the February 2020 Amendment and July 2020 Amendment to the Senior Credit Facility.

The Company entered into the July 2020 amendment to increase financial flexibility in light of the unprecedented impact and uncertainty of the COVID-19 pandemic on the global economy.

We have undertaken steps to reduce our spending and expenses in light of our expectation that our revenues will be depressed over the next several months.

While we expect that we will be well positioned when surgeries begin to return to their pre-pandemic levels, we are unable to predict with certainty how long the COVID-19 pandemic will last, or how severe its economic impact will be.

Even after the COVID-19 pandemic and government responses thereto have subsided, residual economic and other effects may have an impact on the demand for post-

pandemic surgery levels that are difficult to predict.

The Company entered into the July 2020 amendment to increase financial flexibility in light of the unprecedented impact and

uncertainty of the COVID-19 pandemic on the global economy.

If the downturn is more severe and prolonged than we currently expect, we may need to take further steps to reduce our costs.

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The repurchase authorization expires in December 2020.

During the six months ended June 30, 2020 , the Company repurchased 1.9 million shares of Integra’s common stock as a part of our existing share repurchase authorization.

During the nine months ended September 30, 2020 , the Company repurchased 2.1 million shares of Integra’s common stock as a part of our existing share repurchase authorization.

The Company utilized $100.0 million of net proceeds from the offering of the Convertible Senior Notes to execute the share repurchase transactions.

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Additional sources of liquidity available to us include short term borrowings and the issuance of long term debt and equity securities.

Further, as part of our actions to manage the impacts of the COVID-19 pandemic on our business, we will significantly reduce our capital expenditures for 2020.

As a result of the COVID-19 pandemic, the Company expects to experience reduced cash flow from operations as a result of decreased revenues and earnings.

Moreover, we are focused on ensuring that we have adequate inventory on hand given the potential disruption of the COVID-19 pandemic to our suppliers and their supply chain and, accordingly, may continue to maintain these higher levels of inventory during the third quarter of 2020 and beyond.

Further, as part of our actions to manage the impacts of the COVID-19 pandemic on our business, the Company has significantly reduced our capital expenditures by approximately $16.9 million as compared to the prior year.

We currently do not anticipate disruptions to our suppliers and their supply chains due to the COVID-19 pandemic for the fourth quarter, 2020 and beyond.

Off-Balance Sheet Arrangements

The Company has no off–balance sheet financing arrangements during the six months ended June 30, 2020 that have or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our interests.

The Company has no off–balance sheet financing arrangements during the nine months ended September 30, 2020 that have or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our interests.

Contractual Obligations and Commitments

As of June 30, 2020 , the Company is obligated to pay the following amounts under various agreements:

As of September 30, 2020 , the Company is obligated to pay the following amounts under various agreements:

Payments Due by Calendar Year

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The Company has excluded its contingent consideration obligation related to a prior and current year acquisitions from the contractual obligations table above;

this liability had a total estimated fair value of $13.7 million at June 30, 2020 .

this liability had a total estimated fair value of $14.4 million at September 30, 2020 .

This liability has been excluded because the amount to be paid and the potential payment date is not fixed.

1 unchanged sentence

This liability has been excluded because the amount to be paid and the potential payment date is not fixed.

In connection with the sale of the Company's Extremity Orthopedic business, the Company will pay $41.5 million to CFO pursuant to the terms of certain agreements between Integra and CFO relating to the development of shoulder arthroplasty products.

See Note 2, Assets and Liabilities Held for Sale , for details of the transaction.

The Company has excluded its future pension contribution obligations and deferred compensation obligations from the table above.

This has been excluded because the future amounts to be paid and the potential payment dates are not fixed.

The Company has excluded the liability for uncertain tax benefits from the contractual obligations table above, including interest and penalties, totaling $1.1 million at June 30, 2020 .

The Company has excluded the liability for uncertain tax benefits from the contractual obligations table above, including interest and penalties, totaling $1.0 million at September 30, 2020 .

This liability for uncertain tax benefits has been excluded because we cannot make a reliable estimate of the period in which the uncertain tax benefits may be realized.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis