INTEGRA LIFESCIENCES HOLDINGS CORP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes thereto appearing elsewhere in this report and our consolidated financial statements for the year ended December 31, 2019 included in our Annual Report on Form 10-K. We have made statements in this report which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). These forward-looking statements are subject to a number of risks, uncertainties and assumptions about the Company and other matters. These forward-looking statements include, but are not limited to, statements related to the Company's expectations regarding the potential impacts of the COVID-19 pandemic on our business, financial condition, and results of operations. These statements should, therefore, be considered in light of various important factors, including, but not limited to, the following: The Company's ability to obtain accurate procedure volume in the midst of the COVID-19 pandemic; the risk that the COVID-19 pandemic could lead to further material delays and cancellations of, or reduced demand for, procedures; curtailed or delayed capital spending by the Company's customers; disruption to the Company's supply chain; closures of our facilities; delays in gathering clinical evidence; diversion of management and other resources to respond to the COVID-19 outbreak; the impact of global and regional economic and credit market conditions on healthcare spending; 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 31 Table of Contents 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. You can identify these forward-looking statements by forward-looking words such as “believe,” “may,” “might,” “could,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “seek,” “plan,” “expect,” “should,” “would” and similar expressions in this report. GENERAL Integra, headquartered in Princeton, New Jersey, is a world leader in medical technologies. The Company was founded in 1989 with the acquisition of an engineered collagen technology platform used to repair and regenerate tissue. Since then, Integra has developed numerous product lines from this technology for applications ranging from burn and deep tissue wounds, to the repair of dura mater in the brain, and repair of nerves and tendons. The Company has expanded its base regenerative technology business to include surgical instruments, neurosurgical products, advanced wound care, collagen matrix products for hernia and plastic & reconstructive surgery, and orthopedic hardware, through a combination of several global acquisitions and internally developed products to further meet the needs of its customers and impact patient care. We manufacture and sell our products in two reportable global business segments: Codman Specialty Surgical and Orthopedics and Tissue Technologies. Our Codman Specialty Surgical products comprise of specialty surgical implants and instrumentation for a broad range of specialties. This segment includes products and solutions for dural access and repair, instruments, advanced energy, cerebral spinal fluid ("CSF") management and neuro monitoring including market-leading product portfolios used in neurosurgery operation suites and critical care units. Our Orthopedics and Tissue Technologies product portfolios consist of differentiated regenerative technology products for soft tissue repair and tissue regeneration products, surgical reconstruction, and small bone fixation and joint replacement hardware products for both upper extremities and lower extremities. This business also includes private label sales of a broad set of our regenerative and wound care medical technologies. We have key manufacturing and research facilities located in California, Massachusetts, New Jersey, Ohio, Tennessee, Texas, Canada, France, Germany, Ireland, Puerto Rico and Switzerland. We also source most of our handheld surgical instruments, specialty metal and pyrocarbon implants, and dural sealant products through specialized third-party vendors. Codman Specialty Surgical products are sold through a combination of directly employed sales representatives, distributors and wholesalers, depending on the customer call point. Orthopedics and Tissue Technologies products are sold through directly employed sales representatives, distributors focused on their respective surgical specialties, and strategic partners. Integra is committed to delivering high quality products that positively impact the lives of millions of patients and their families. We focus on four key pillars of our strategy: 1) building an execution-focused culture, 2) achieving relevant scale, 3) improving agility and innovation, and 4) leading in customer experience. We believe that by sharpening our focus on these areas through improved planning and communication, optimization of our infrastructure, and strategically aligned tuck-in acquisitions, we can build scale, increase competitiveness and achieve our long-term goals. To this end, the executive leadership team has established the following key priorities aligned to the following areas of focus: Strategic Acquisitions. An important part of the Company's strategy is pursuing strategic transactions and licensing agreements that increase relevant scale in the clinical areas in which Integra competes. We successfully completed the Codman Neurosurgery integration, the most significant acquisition in the Company's history, as we exited 45 transition service agreements, across 90 countries. This acquisition expanded the Company's portfolio of neurosurgery products and established us as the world leader in neurosurgery. It has also enabled us to expand our international footprint and customer reach, thereby providing access to our entire product portfolio globally. In 2020, we continue to invest in our two most recent acquisitions Arkis Biosciences, Inc. and Rebound Therapeutics Corporation, both of which are developing innovative technologies for neurosurgery. Portfolio Optimization and New Product Introductions. We are investing in innovative product development to drive a multi-generational pipeline for our key product franchises. Our product development efforts span across our key global franchises focused on potential for significant returns on investment. In February 2020, we launched the AmnioExcel® Plus Placental Allograft Membrane, the next generation wound care offering to support soft tissue repair. Further in 2020, we continue to reap the benefits of many of our 10 new products launches from 2019. In addition to new product development, we are funding studies to gather clinical evidence to support launches, ensure market access and improve reimbursement for existing products. We continue to identify ways of optimizing our portfolio including identifying low-growth, low-margin products and product franchises for discontinuation. 32 Table of Contents 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. With acquisitions, new product introductions and a broader portfolio of products, investing in our sales channels is a core part of our strategy to create specialization and greater focus on reaching new and existing customers and addressing their needs. Internationally, we have increased our commercial resources significantly in many markets and are making investments to support our sales organization and maximize our commercial opportunities. We now have a strong international sales channel that will deliver our current portfolio as well as position us for expansion. 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. We aspire to be ranked as a best-in-class provider and are committed to strengthen our relationships with all customers. We strive to consistently deliver outstanding customer service and continue to invest in technologies, systems and processes to improve the way our customers do business with us. Additionally, we expect to build on the success of our professional education programs to drive continued customer familiarity with our growing portfolio of medical technologies globally. Clinical and Product Development Activities We continue to invest in collecting clinical evidence to support the Company's existing products and new product launches, and to ensure that we obtain market access for broader and more cost-effective solutions. Within our Codman Specialty Surgical segment, the Company received FDA clearance in July 2020 to treat malignant and benign tumors, but not limited to meningiomas and gliomas, for its CUSA ® Clarity Ultrasonic Surgical Aspirator System, the first and only ultrasonic tissue ablation system with this specific indication. 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 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. We are focused on the development of core clinical applications in our electromechanical technologies portfolio. Also, we updated our CUSA Clarity platform to incorporate a new ultrasonic handpiece, surgical tips and integrated electrosurgical capabilities. We continue to work with several instrument partners to bring new surgical instrument platforms to the market. This enables us to add new instruments with minimal expense and invest in ongoing development, such as our next generation of LED technology with our DUO LED Surgical Headlight System. Within our Orthopedic and Tissue Technologies segment, we launched AmnioExcel® Plus Placental Allograft Membrane, a human placental tissue product for treatment of wounds during February 2020. We also continued to benefit from the 2019 U.S. product launches, such as, the Panta® II TTC Arthrodesis Nail System. The Panta II system is our new fusion nail used in ankle fixation. We also launched a small post baseplate in our reverse shoulder system that accommodates smaller patients. In addition, we initiated the limited market release of enhancements to our Salto Talaris® Total Ankle System. 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. As surgeons looks for ways to efficiently and effectively repair and close wounds during these challenging times, IBWM helps address the efficiency needed in operating rooms by reducing both the operating time and costs to hospitals and patients. COVID-19 Pandemic The Company's focus during this global crisis remains unchanged. 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 33 Table of Contents 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 • Reduced cash compensation for all other employees through reduced commissions, reduction in hours through July 2020 and/or furloughs • Hiring freeze, elimination of overtime, reduction in certain employee benefit costs, cessation of third-party services and temporary contractor relationships • Significant reduction in capital expenditures and discretionary spending including travel, events and marketing programs 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. 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. Any such economic recession could have a material adverse effect on the Company's long-term business as hospitals curtail and reduce capital as well as overall spending. The COVID-19 pandemic and local actions, such as “shelter-in-place” orders and restrictions on travel and access to our customers or temporary closures of our facilities or the facilities of our suppliers and their contract manufacturers, could further significantly impact our sales and our ability to ship our products and supply our customers. Any of these events could negatively impact the number of surgical and medical intervention procedures performed and have a material adverse effect on our business, financial condition, results of operations, or cash flows. Information pertaining to additional risk factors as it relates to the COVID-19 pandemic can be found in Item 1A. Risk Factors. FDA Matters On June 22, 2015, the FDA (the “FDA”) issued an Untitled Letter (the "Untitled Letter") alleging that BioD LLC's ("BioD") morselized amniotic membrane tissue based products do not meet the criteria for regulation as HCT/Ps solely under Section 361 of the Public Health Services Act ("Section 361") and that, as a result, BioD would need a biologics license to lawfully market those morselized products. Since the issuance of the Untitled Letter, BioD and more recently the Company have been in discussions with the FDA to communicate their disagreement with the FDA’s assertion that certain products are more than minimally manipulated. The FDA has not changed its position that certain of the BioD acquired products are not eligible for marketing solely under Section 361. In July, 2020, the FDA issued the final guidance document related to human tissue titled, “Regulatory Considerations for Human Cells, Tissues, and Cellular and Tissue-Based Products: Minimal Manipulation and Homologous Use” (the “HCT/PFinal Guidance”). This Guidance document supersedes the November, 2017 guidance. The HCT/P Final Guidance maintains the FDA’s position that products such as the Company’s morselized amniotic membrane tissue-based products do not meet the criteria for regulation solely as HCT/Ps. 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 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 September 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 34 Table of Contents 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 nine months ended September 30, 2020 were less than 1.0% of consolidated revenues. On March 7, 2019, TEI Biosciences, Inc. a subsidiary of the Company received a Warning Letter (the “Warning Letter”), dated March 6, 2019, from the United States Food and Drug Administration. The warning letter relates to quality systems issues at our manufacturing facility located in Boston, Massachusetts. 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 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, 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. 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 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 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. 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 35 Table of Contents 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 September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In thousands) (In thousands) Acquisition, divestiture and integration-related charges (2) $ 7,148 $ 74,531 $ 19,856 $ 106,816 Structural optimization charges 4,543 5,353 9,015 13,169 EU medical device regulation 2,399 1,978 5,470 3,200 Litigation charges — (2,254 ) — 46 Discontinued product lines charges 999 3,104 5,486 6,825 Impairment charges — — — 5,764 COVID-19 pandemic related charges (1) (192 ) — 3,644 — Expenses related to debt refinancing 3,428 — 6,168 — Convertible debt non-cash interest expense 4,295 — 11,075 — Total $ 22,620 $ 82,712 $ 60,714 $ 135,820 36 Table of Contents (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 September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In thousands) (In thousands) Cost of goods sold (1) $ 6,892 $ 5,963 $ 22,500 $ 17,177 Research and development 859 — 432 1,650 IPR&D expense — 59,889 — 59,916 Selling, general and administrative 7,146 19,361 20,539 53,814 Intangible asset amortization (2) — — — 5,764 Interest expense 7,723 — 17,243 — Other expense — (2,501 ) — (2,501 ) Total $ 22,620 $ 82,712 $ 60,714 $ 135,820 (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. We believe that given our ongoing strategy of seeking acquisitions, our continuing focus on rationalizing our existing manufacturing and distribution infrastructure and our continuing review of various product lines in relation to our current business strategy, some of the special charges discussed above could recur with similar materiality in the future. We believe that the separate identification of these special charges provides important supplemental information to investors regarding financial and business trends relating to our financial condition and results of operations. Investors may find this information useful in assessing comparability of our operating performance from period to period, assessing the objectives that management has established, and against other companies in our industry. We provide this information to investors so that they can analyze our operating results in the same way that management does and to use this information in their assessment of our core business and valuation of Integra. Revenues and Gross Margin The Company's revenues and gross margin on product revenues were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Segment Net Sales (Dollars in thousands) (Dollars in thousands) Codman Specialty Surgical $ 239,323 $ 252,984 $ 640,541 $ 736,810 Orthopedics & Tissue Technologies 130,909 126,111 342,680 385,620 Total revenue 370,232 379,095 983,221 1,122,430 Cost of goods sold 134,811 142,636 373,765 415,219 Gross margin on total revenues $ 235,421 $ 236,459 $ 609,456 $ 707,211 Gross margin as a percentage of total revenues 63.6 % 62.4 % 62.0 % 63.0 % 37 Table of Contents Three Months Ended September 30, 2020 as Compared to Three Months Ended September 30, 2019 Revenues and Gross Margin 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 September 30, 2020 2019 Research and development 5.3 % 5.0 % IPR&D expense — % 15.8 % Selling, general and administrative 40.5 % 45.7 % Intangible asset amortization 2.3 % 1.3 % Total operating expenses 48.0 % 67.8 % 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 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. 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 September 30, 2020 2019 (In thousands) Interest income $ 2,273 $ 2,913 Interest expense (20,796 ) ( 13,962 ) Other income, net 2,492 4,127 38 Table of Contents Interest Expense 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. Income Taxes Three Months Ended September 30, 2020 2019 (In thousands) Income before income taxes $ 41,511 $ (27,509 ) Income tax (benefit) expense 9,174 101 Effective tax rate 22.1 % (0.4 )% 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 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 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. 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 39 Table of Contents The following is a summary of operating expenses as a percent of total revenues: Nine Months Ended September 30, 2020 2019 Research and development 5.6 % 4.9 % IPR&D expense — % 5.3 % Selling, general and administrative 44.0 % 45.7 % Intangible asset amortization 2.4 % 1.9 % Total operating expenses 51.9 % 57.8 % 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: Nine Months Ended September 30, 2020 2019 (In thousands) Interest income $ 7,124 $ 8,051 Interest expense (54,230 ) (40,495 ) Other income, net 2,985 8,461 Interest Expense 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. Income Taxes Nine Months Ended September 30, 2020 2019 (In thousands) Income before income taxes $ 54,604 $ 33,697 Income tax (benefit) expense 13,456 (1,185 ) Effective tax rate 24.6 % (3.5 )% The Company’s effective income tax rates for the nine months ended September 30, 2020 and 2019 were 24.6% and (3.5)% , respectively. 40 Table of Contents 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 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. 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 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. 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 The Company attributes revenues to geographic areas based on the location of the customer. Total revenue by major geographic area consisted of the following: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In thousands) (In thousands) United States $ 266,477 $ 266,280 $ 695,179 $ 796,397 Europe 45,995 49,242 123,917 148,753 Asia Pacific 40,473 42,079 113,934 114,810 Rest of World 17,287 21,494 50,191 62,470 Total Revenues $ 370,232 $ 379,095 $ 983,221 $ 1,122,430 The Company generates significant revenues outside the U.S., a portion of which are U.S. dollar-denominated transactions conducted with customers who generate revenue in currencies other than the U.S. dollar. As a result, currency fluctuations between the U.S. dollar and the currencies in which those customers do business could have an impact on the demand for the Company's products in foreign countries. 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 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 41 Table of Contents $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. LIQUIDITY AND CAPITAL RESOURCES Cash and Marketable Securities 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. The Company asserts that it has the ability and intends to indefinitely reinvest the undistributed earnings from its foreign operations unless there is no material tax cost to remit the earnings into the U.S. The Company does not anticipate the need to repatriate earnings from foreign subsidiaries as a result of the impact of the COVID-19 pandemic. Cash Flows Nine Months Ended September 30, 2020 2019 (In thousands) Net cash provided by operating activities $ 123,570 $ 142,249 Net cash used in investing activities (32,152 ) (142,059 ) Net cash provided by financing activities 100,403 73,226 Effect of exchange rate fluctuations on cash 5,547 (4,273 ) Cash Flows Provided by Operating Activities 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 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; Boston, MA; Memphis, TN; and Princeton, NJ. 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 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 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. Amended and Restated Senior Credit Agreement, Convertible Senior Notes, Securitization and Related Hedging Activities See Note 7 - Debt to the current period’s condensed consolidated financial statements for a discussion of our Amended and Restated Senior Credit Agreement, Convertible Senior Notes and Securitization Facility and Note 8 - Derivative Instruments for discussion of our hedging activities. 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 42 Table of Contents 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. Share Repurchase Plan On December 11, 2018, the Board authorized the Company to repurchase up to $225.0 million of the Company’s common stock. The program allows the Company to repurchase its shares opportunistically from time to time. The repurchase authorization expires in December 2020. 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. This included $7.6 million from certain purchasers of the convertible notes in conjunction with the closing of the offering. On February 5, 2020, the Company entered into a $92.4 million accelerated share repurchase ("ASR") to complete the remaining $100.0 million of share repurchase. The Company received 1.3 million shares through the ASR, which represented approximately 80% of the expected total shares. Upon settlement of the ASR in June 2020, the Company received an additional 0.6 million shares determined using the volume-weighted average price of the Company's common stock during the term of the transaction. The Company has $125.0 million remaining under the share repurchase of its Common Stock. The price and timing of any future purchases under the share repurchase program will depend on factors such as levels of cash generation from operations, the volume of stock option exercises by employees, cash requirements for acquisitions, dividends, economic and market conditions and stock price. Dividend Policy The Company has not paid any cash dividends on our common stock since our formation. Our Senior Credit Facility limits the amount of dividends that we may pay. Any future determinations to pay cash dividends on our common stock will be at the discretion of the Board and will depend upon our financial condition, results of operations, cash flows and other factors deemed relevant by the Board. Capital Resources We believe that our cash and available borrowings under the Senior Credit Facility are sufficient to finance our operations and capital expenditures for the foreseeable future. Our future capital requirements will depend on many factors, including the growth of our business, the timing and introduction of new products and investments, strategic plans and acquisitions, among others. 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, 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 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 September 30, 2020 , the Company is obligated to pay the following amounts under various agreements: 43 Table of Contents Payments Due by Calendar Year Total Remaining 2020 2021-2022 2023-2024 Thereafter (In millions) Revolving Credit Facility (1) $ 97.5 $ — $ — $ — $ 97.5 Term Loan 877.5 — 78.8 129.4 669.3 Securitization Facility (1) 92.3 — 92.3 — — Convertible Debt (4) 575.0 — — — 575.0 Interest (2) 55.4 6.7 25.5 22.2 1.0 Employment Agreements (3) 1.2 0.2 1.0 — — Operating Leases 140.4 3.8 27.0 21.4 88.2 Purchase Obligations 6.4 1.0 4.2 1.2 — Other 4.5 1.1 0.7 1.6 1.1 Total $ 1,850.2 $ 12.8 $ 229.5 $ 175.8 $ 1,432.1 (1 ) The Company may borrow and make payments against the revolving credit portion of its Senior Credit Facility and Securitization Facility from time to time and considers all of the outstanding amounts to be long term based on its current intent and ability to repay the borrowing outside of the next twelve-month period. (2 ) Interest is calculated on the term loan portion of the Senior Credit Facility based on current interest rates paid by the Company. [As the revolving credit facility and Securitization Facility can be repaid at any time, no interest has been included in the calculation.] (3 ) Amounts shown under Employment Agreements do not include compensation resulting from a change in control. (4 ) On February 4, 2020, the Company issued $575.0 million aggregate principal amount of its of 0.5% Convertible Senior Notes due 2025 (the "2025 Notes"). The 2025 Notes will mature on August 15, 2025 and bear interest at a rate of 0.5% per annum payable semi-annually in arrears, unless earlier converted, repurchased or redeemed in accordance with the terms of the Notes. See Note 7, Debt , for the details on the 2025 Notes. 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 $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. The Company has excluded its option to acquire Integrated Shoulder Collaboration Inc., which becomes mandatory upon achievement of a certain sales threshold, for an amount not to exceed $80.0 million. 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 $1.0 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. OTHER MATTERS Critical Accounting Estimates The critical accounting estimates included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019 have not materially changed. Recently Issued Accounting Standards Information regarding new accounting pronouncements is included in Note 1 - Basis of Presentation to the current period’s condensed consolidated financial statements. 44 Table of Contents