What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-07-29 compared with 2021-04-29 · 177 added, 109 removed, 272 unchanged (51% of the section changed)

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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.

In January 2021, we completed the sale of our Extremity Orthopedics business to Smith & Nephew for approximately $240 million in cash subject to finalization of working capital adjustments.

In January 2021, we completed the sale of our Extremity Orthopedics business for approximately $240 million in cash subject to finalization of working capital adjustments.

This transaction enables us to increase our investments in our core Neurosurgery and Tissue Technology businesses which will strengthen our existing leadership positions in both areas, fund pipeline opportunities to drive future growth and expand our addressable markets.

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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.

With acquisitions, new product introductions and a broad 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.

To support our commercial efforts in Tissue Technologies, we expanded our two-tier specialist model to increase our presence in focused segments.

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In Japan, we are experiencing strong growth as a result of the successful launch of DuraGen® in mid-2019, 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.

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.

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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.

We also continued to advance the early-stage technology platforms we acquired during 2019.

We advanced the early-stage technology platforms we acquired during 2019.

Through the Arkis Biosciences acquisition, we added a platform technology, CerebroFlo® external ventricular drainage (EVD) catheter with Endexo® technology, a permanent additive designed to reduce the potential for catheter obstruction due to thrombus formation.

The CerebroFlo® EVD Catheter has demonstrated an average of 99% less thrombus accumulation onto its surface, in vitro, compared to a market leading EVD catheter.

We also acquired a company, Rebound Therapeutics, that specialized in single-use medical devices that enable minimally invasive access with enhanced lighting and visualization to the neurosurgery suite and launched the MIRROR registry to collect data on this new device.

Importantly, these new platforms provide us with the opportunity to expand into new, faster growth therapeutic areas, such as intracerebral hemorrhage and minimally invasive neurosurgery.

Within our Tissue Technologies segment, in 2020, we launched AmnioExcel® Plus Placental Allograft Membrane, a human placental tissue product for treatment of wounds.

We also completed a randomized clinical study of PriMatrix for use in the closure of Diabetic Foot Ulcers (DFU).

The Company also 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.

We acquired Rebound Therapeutics, a company that specialized in single-use medical devices that enable minimally invasive access with enhanced lighting and visualization to the neurosurgery suite and launched the MIRROR registry to collect data on this new device.

These new platforms provide us with the opportunity to expand into new, faster growth therapeutic areas such as intracerebral hemorrhage and minimally invasive neurosurgery.

Within our Tissue Technologies segment, we recently completed one of the largest diabetic foot ulcers (DFU) randomized controlled trials (RCTs) of PriMatrix® Dermal Repair Scaffold for the management of DFU.

This multi-center study enrolled more than 225 patients with chronic DFU's over the course of 12-week treatments and 4-week follow-up phases.

The results of this study, which was published in the Journal of Wound Care, demonstrated that PriMatrix® plus standard of care (SOC) consisting of sharp debridement, infection elimination, use of dressings and offloading was significantly more likely to achieve complete wound closure compared with SOC alone, with a median number of one application of the product.

In 2020, we 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 look 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.

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During the first half of 2020, in response to the pandemic, we acted swiftly by implementing protocols to ensure continuity of our manufacturing and distribution sites around the world and to provide for the safety of our employees.

During the first quarter of 2021, the Company's revenues were still impacted due to COVID-19 resurgences and lower surgical procedural volumes, though not to the levels seen in early 2020.

As a result, the Company has continued to manage its operating costs in this environment.

During the second half of 2020, the Company's revenues were still impacted due to COVID-19 resurgences, though not to the levels seen in the first half of 2020.

During the first half of 2021, our business segments were well positioned to capitalize on the improving demand driven by the ongoing global market recovery.

We saw particularly healthy order activity in products used in neurosurgery, instruments, burn, trauma and surgical reconstruction as markets gradually recovered.

Areas such as capital equipment and our international indirect markets are still early in their recovery, but are reporting encouraging trends.

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

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On June 22, 2015, the FDA issued an Untitled Letter (the "Untitled Letter") alleging that BioD's 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.

Since the issuance of the Untitled Letter, BioD and the Company have made known to the FDA 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.

Minimal Manipulation and Homologous Use” (the “HCT/P Final Guidance”).

This Guidance document supersedes the November 2017 guidance by the same title.

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 March 31, 2021, 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.

Revenues from BioD morselized amniotic membrane-based products for the three months ended March 31, 2021 were less than 1.0% of consolidated revenues.

In addition, in the November 2017 guidance, 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 of July 2020 maintained this approach and extended the discretionary enforcement period to May 31, 2021.

Rather than the risk of enforcement action, the Company discontinued manufacturing all morselized amniotic membrane tissue-based products prior to May 31, 2021.

We no longer distribute these products.

As of June 30, 2021, the Company has not received any further notice of enforcement action from the FDA regarding its morselized amniotic membrane tissue-based products.

Revenues from the now discontinued BioD morselized amniotic membrane-based products for the six months ended June 30, 2021 were less than 1.0% of consolidated revenues.

On March 7, 2019, TEI Biosciences, Inc.

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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 three months ended March 31, 2021 were approximately 4.5% of consolidated revenues.

Revenues of products manufactured in the TEI Boston facility for the six months ended June 30, 2021 were approximately 4.5% of consolidated revenues.

ACQUISITIONS & DIVESTITURES

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The Company received an aggregate purchase price of $240.0 million from Smith and Nephew and concurrently paid $41.5 million to the Consortium of Focused Orthopedists, LLC ("CFO") effectively terminating the licensing agreement between Integra and CFO relating to the development of shoulder arthroplasty products.

The Company recognized a gain of $42.9 million in connection with the sale that is presented in Gain from the sale of business in the consolidated statement of operations for the year ended March 31, 2021.

The Company recognized a gain of $42.2 million in connection with the sale that is presented in Gain from the sale of business in the consolidated statement of operations for the year ended June 30, 2021.

See Note 2- Acquisitions and Divestitures for details.

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Executive Summary

Net income for the three months ended March 31, 2021 was $45.4 million, or $0.53 per diluted share, as compared to $9.2 million or $0.11 per diluted share for the three months ended March 31, 2020.

The net income for the three months ended March 31, 2021 was primarily driven by an increase in non-operating income primarily due to the gain of $42.9 million recognized in the first quarter of 2021 as a result of the sale of its Extremity Orthopedics business to Smith & Nephew.

The Company also benefited from slightly higher revenues and lower operating expenses in the current period as compared to the prior period.

Net income for the three months ended June 30, 2021 was $35.1 million, or $0.41 per diluted share, as compared to $(0.4) million or $(0.00) per diluted share for the three months ended June 30, 2020.

The net income for the three months ended June 30, 2021, was primarily driven by increase in revenues due to procedure recovery experienced in the current year as compared to the height of the COVID-19 pandemic in the first half of 2020.

Net income for the six months ended June 30, 2021 was $80.5 million, or $0.94 per diluted share, as compared to $8.8 million or $0.10 per diluted share for the six months ended June 30, 2020.

The net income for the six months ended June 30, 2021 was primarily driven by higher revenue relating to surgical procedure recovery for the first half of 2021 and increase in non-operating income due to the gain of $42.2 million recognized in the first quarter of 2021 as a result of the sale of the Extremity Orthopedics business.

Special Charges

Income before taxes includes the following special charges :

Three Months Ended March 31,

(In thousands)

Three Months Ended June 30, Six Months Ended June 30,

Dollars in thousands 2021 2020 2021 2020

Acquisition, divestiture and integration-related charges (1)

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COVID-19 pandemic related charges (2)

— (869) — 3,836

Total $ 18,903 $ 13,339 $ 1,629 $ 38,093

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

(2) The Company completed its sale of its Extremity Orthopedics business to Smith & Nephew and recognized a gain of $42.9 million for the three months ended March 31, 2021 which was partially offset by other acquisition, divestiture and integration-related charges.

(1) The Company completed its sale of its Extremity Orthopedics business and recognized a gain of $42.2 million for the six months ended June 30, 2021 which was partially offset by other acquisition, divestiture and integration-related charges.

Acquisitions and Divestitures for details.

(2) Charges relate to business interruptions and costs associated with the COVID-19 pandemic which impacted the Company's operations globally, partially offset by Coronavirus government relief programs in the prior year.

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

Three Months Ended March 31,

(In thousands)

Three Months Ended June 30, Six Months Ended June 30,

Dollars in thousands 2021 2020 2021 2020

Cost of goods sold $ 10,724 $ 6,300 $ 20,903 $ 15,607

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Interest expense (1)

— 4,251 — 9,519

Gain from the sale of business 679 — (42,197) —

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Basis of Presentation, for details.

(2) See Note 2.

Acquisitions and Divestitures for details.

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, divestiture, 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 March 31,

Segment Net Sales (Dollars in thousands)

Three Months Ended June 30, Six Months Ended June 30,

Dollars in thousands 2021 2020 2021 2020

Segment Net Sales

Codman Specialty Surgical $ 256,837 $ 169,778 $ 498,078 $ 401,218

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Gross margin as a percentage of total revenues 61.2 % 59.2 % 60.4 % 61.0 %

Three Months Ended March 31, 2021 as Compared to Three Months Ended March 31, 2020

For the three months ended March 31, 2021, total revenues increased by $5.7 million to $360.1 million from $354.3 million for the same period in 2020.

Domestic revenues increased by $0.9 million, or 0.4%, to $247.8 million and were 68.8% of total revenues for the three months ended March 31, 2021 compared to $246.9 million during the same period in the prior year.

International revenues increased by $4.8 million or 4.5% to $112.3 million for the three months ended March 31, 2021 compared to $107.5 million during the same period in the prior year.

Three Months Ended June 30, 2021 as Compared to Three Months Ended June 30, 2020

For the three months ended June 30, 2021, total revenues increased by $131.3 million to $390.0 million from $258.7 million for the same period in 2020.

Dom estic revenues increased by $96.3 million, or 53.0%, to $278.2 million and were 71.3% of total revenues for the three months ended June 30, 2021 compared to $181.9 million during the same period in the prior year.

International revenues increased by $35.0 million or 45.6% to $111.8 million for the three months ended June 30, 2021 compared to $76.8 million during the same period in the prior year.

The increase in revenues globally were primarily as a result of the recovery experienced from the COVID-19 pandemic across all franchises compared to the prior year due to rebound in surgical procedure volumes.

Foreign exchange fluctuations had a favorable impact of $6.0 million on revenues for the quarter.

In the Codman Specialty Surgical segment ("CSS"), revenues were $256.8 million which was an increase of $87.1 million, or 51.3% as compared to the prior-year period.

The Company saw growth within our Neurosurgery portfolio primarily with sales in advanced energy increasing high single digits as a result of capital and disposable sales recovery in our international markets.

Sales in our instruments portfolio increased low double digits as compared to the first quarter of 2020 primarily driven by recovery in physician office visits in comparison to the prior year.

In the Tissue Technologies ("TT") segment, revenues were $118.8 million which was a decrease of $4.1 million, or 3.3% from the prior-year period.

The decline in revenue was primarily as a result of the sale of the Company's Extremity Orthopedics product portfolio to Smith and Nephew which occurred on January 4, 2021.

This decline was partially offset by sales in our Wound Reconstruction portfolio which increased due to the acquisition of ACell Inc.

which was completed on January 20, 2021 and growth from our legacy portfolio such as Primatrix and Integra skin products.

The Neurosurgery and Instrument portfolios increased high-double digits as a result of the recovery experienced from the COVID-19 pandemic.

In the Tissue Technologies ("TT") segment, revenues were $133.2 million which was an increase of $44.3 million, or 49.8% from the prior-year period.

The Wound Reconstruction and Private Label portfolios increased high-double digits as a result of the recovery experienced from the COVID-19 pandemic.

Additionally, our TT segment revenue reflect the acquisition of ACell Inc.

which was completed on January 20, 2021 and the sale of the Company's Extremity Orthopedics product portfolio which occurred on January 4, 2021.

We continue to closely monitor local, regional, and global COVID-19 surges as well as new variants of the virus for an impact on procedures during Q2 2021 and beyond.

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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.

For three months ended March 31, 2021 and 2020, gross margin as a percentage of revenues was 59.5% and 62.3%, respectively.

The decrease in gross margin percentage was due to increased amortization associated with technology-based intangible assets, inventory step-up amortization in connection with the ACell Inc.

acquisition, revenue mix and higher manufacturing costs.

The product revenue mix was impacted by the timing of the Extremity Orthopedics divestiture relative to the partial quarter benefit from ACell, and a higher mix of international revenue, which has lower gross margins than that of domestic revenue.

The higher manufacturing costs were mainly due to higher idle capacity relating to the impact of COVID resurgences on our workforce.

Gross margin increased to $238.7 million for the three months ended June 30, 2021, an increase of $85.5 from $153.2 million for the sa me period in 2020.

Gross margin as a percentage of revenues increased to 61.2% for the second quarter of 2021 from 59.2% in the same period last year.

This increase was mainly attributable to our strong revenue recovery from the disruption caused by the COVID-19 pandemic during the same period in the prior year, as well as due to favorable U.S.

product mix and improved manufacturing utilization.

Operating Expenses

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

Three Months Ended March 31,

Three Months Ended June 30,

Research and development 5.2 % 5.8 %

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Total operating expenses 48.0 % 53.8 %

Total operating expenses, which consist of research and development, selling, general and administrative, and amortization expenses, decreased by $10.2 million, or 5.3% to $183.5 million in the three months ended March 31, 2021, compared to $193.7 million in the same period in 2020.

The Company has continued to manage its operating costs as a result of the impact of the COVID-19 pandemic.

We also began to benefit from synergies as a result of the ACell Inc.

acquisition and the sale of the Extremity Orthopedic business.

Total operating expenses, which consist of research and development, selling, general and administrative, and amortization expenses, increased by $47.8 million, or 34.4% to $186.9 million in the three months ended June 30, 2021, compared to $139.1 million in the same period in 2020.

The increase in operating expenses compared to the prior year was primarily due to an increase in research and development, selling, general and administrative costs partially offset by a decrease in amortization expense.

The Company continues to manage and prioritize it operating costs closely given the continued uncertainty of COVID-19.

We also benefited from cost synergies as a result of the ACell Inc.

acquisition the sale of the Extremity Orthopedic business.

Research and Development

Research and development expenses for the three months ended March 31, 2021 increased by $1.6 million as compared to the same period in prior year.

The Company continues to invest in R&D programs despite the challenges from the COVID-19 pandemic.

Research and development expenses for the three months ended June 30, 2021 increased by $5.2 million as compared to the same period in the prior year.

Selling, General and Administrative

Selling, general and administrative costs decreased by $9.3 million as compared to the same period in prior year resulting from less spending on travel, events and other discretionary expenses, as well as benefits from synergies as a result of the ACell Inc.

acquisition and the sale of the Extremity and Orthopedic business.

The Company has continued to manage its operating costs as a result of the impact of the COVID-19 pandemic.

Selling, general and administrative costs increased by $46.4 million as compared to the same period in the prior year driven primarily due to costs associated with higher employee related costs, higher incentive and stock-based compensation, increased variable selling costs, as well as increased outside spending as revenue recovered.

Intangible Asset Amortization

A mortization expense (excluding amounts reported in cost of product revenues for technology-based intangible assets) for the three months ended March 31, 2021 was $4.5 million compared to $7.0 million for the same period in prior year primarily due to a reduction in amortization expense associated with intangible assets sold in conjunction with the sale of the business during the current year and accelerated amortization expense associated with an intangible asset recorded in the prior year.

We may discontinue certain products in the future as we continue to assess the profitability of our product lines.

As our profitability assessment evolves, we may make further decisions about our trade names and incur additional impairment charges or accelerated amortization.

We expect total annual amortization expense to be approximately $78.8 million in 2022, $78.0 million in 2023, $77.3 million in 2024, $77.3 million in 2025, $77.2 million in 2026 and $582.7 million thereafter.

A mortization expense (excludin g amounts reported in cost of product revenues for technology-based intangible assets) for the three months ended June 30, 2021 was $4.2 million compared to $8.1 million for the same period in prior year primarily due to a reduction in amortization expense associated with intangible assets sold in conjunction with the sale of the Extremity and Orthopedics business during the current year.

Non-Operating Income and Expenses

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

Three Months Ended March 31,

(In thousands)

Three Months Ended June 30,

Dollars in thousands 2021 2020

Interest income $ 1,764 $ 2,281

Interest expense (13,149) (15,682)

Gain from the sale of business 42,876 —

Gain (loss) from the sale of business (679) —

Other income, net 5,034 972

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Interest Income

Interest income for the three months ended March 31, 2021 decreased by $0.8 million as compared to the same period last year.

Gain from the sale of business

On January 4, 2021, the Company completed its sale of its Extremity Orthopedics business to Smith & Nephew and recognized a gain of $42.9 million for the three months ended March 31, 2021.

Interest income for the three months ended June 30, 2021 decreased by $0.5 million as compared to the same period last year.

Interest Expense

Interest expense for the three months ended March 31, 2021 decreased by $4.8 million as compared to the same period in the prior year primarily due to the elimination of the non-cash interest expense as the result of the adoption ASU 2020-06 and the expenses associated with Amended and Restated Senior Credit Agreement which occurred in the prior period.

Interest expense for the three months ended June 30, 2021 decreased by $2.5 million as compared to the same period in the prior year primarily due to the elimination of the non-cash interest expense as the result of the adoption ASU 2020-06 and the expenses associated with Amended and Restated Senior Credit Agreement which occurred in the prior period.

Basis of Presentation for details in relation to the adoption of ASU 2020-06.

Other Income, net

Other income, net for the three months ended March 31, 2021 increased by $5.3 million compared to the same period in the prior year primarily due to income associated with the transition services agreement with Smith and Nephew and favorable impact of foreign exchange.

Three Months Ended March 31,

(In thousands)

Other income, net for the three months ended June 30, 2021 increased by $4.1 million compared to the same period in the prior year primarily due to income associated with the transition services agreement from the divestiture of the Extremity Orthopedics business and and higher income from additional cross currency swaps that were entered into during Q4 2020.

Three Months Ended June 30,

Dollars in thousands 2021 2020

Income before income taxes $ 44,824 $ 1,651

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Effective tax rate 21.8 % 122.4 %

The Company’s effective income tax rates for the three months ended March 31, 2021 and 2020 were 32.5% and 19.8%, respectively.

For the three months ended March 31, 2021, the primary driver of the higher tax rate is the tax impact of the gain from the sale of the business, which closed during the first quarter.

For the three months ended March 31, 2020, the primary drivers of the rate were lower income impacted by the COVID-19 pandemic, coupled with a $3.3 million valuation allowance on certain foreign deferred tax assets.

The Company’s effective income tax rates for the three months ended June 30, 2021 and 2020 were 21.8% and 122.4%, respectively.

For the three months ended June 30, 2021, the primary driver of the lower tax rate is due to mix of income impacted by the COVID-19 pandemic.

For the three months ended June 30, 2020, the primary drivers of the higher tax rate were lower income impacted by the COVID-19 pandemic, in addition to a $3.4 million valuation allowance on certain foreign deferred tax assets.

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.

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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.

Six Months Ended June 30, 2021 as Compared to Six Months Ended June 30, 2020

Revenues and Gross Margin

For the six months ended June 30, 2021, total revenues increased by $137.1 million to $750.1 million from $613.0 million for the same period in 2020.

Domestic revenues increased by $97.3 million, or 23%, to $526.0 million and were 70% of total revenues for the six months ended June 30, 2021.

International revenues increased by $39.8 million, or 22% to $224.1 million for the six months ended June 30, 2021 compared to $184.3 million during the same period in the prior year.

The net increase of $137.1 million was a result of the recovery experienced from the COVID-19 pandemic across all franchises compared to the prior year due to rebound in surgical procedure volumes.

Foreign exchange fluctuations had a favorable impact of $11.9 million on revenues for the year.

Codman Specialty Surgical revenues were $498.1 million, an increase of $96.9 million, or 24.1% from the prior-year period.

The Neurosurgery and Instrument portfolios increased high-double digits as a result of the recovery experienced from the COVID-19 pandemic.

Tissue Technologies revenues were $252.0 million, an increase of $40.2 million, or 19.0% from the prior-year period.

The Wound Reconstruction and Private Label portfolios increased high-double digits as a result of the recovery experienced from the COVID-19 pandemic.

Additionally, our TT segment revenue reflect the acquisition of ACell Inc.

which was completed on January 20, 2021 and the sale of the Company's Extremity Orthopedics product portfolio which occurred on January 4, 2021.

Gross margin was $453.0 million for the six-month period ended June 30, 2021, an increase of $78.9 million from $374.0 million for the same period last year.

Gross margin as a percentage of total revenue decreased to 60.4% for the six months ended June 30, 2021 from 61.0% in the same period last year.

The decrease in gross margin percentage was due to increased amortization associated with technology-based intangible assets and inventory step-up amortization in connection with the ACell Inc.

Operating Expenses

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

Six Months Ended June 30,

Research and development 5.7 % 5.8 %

Selling, general and administrative 42.6 % 46.0 %

Intangible asset amortization 1.2 % 2.5 %

Total operating expenses 49.5 % 54.3 %

Total operating expenses, which consist of selling, general and administrative expenses, research and development expenses, IPR&D expense and amortization expenses, increased by $37.6 million, or 11.3% to $370.4 million in the six months ended June 30, 2021, compared to $332.9 million in the same period in 2020.

Selling, General and Administrative

Selling, general and administrative costs increased by $37.1 million as compared to the same period in the prior year driven primarily due to costs associated with higher employee related costs, higher incentive and stock-based compensation, increased variable selling costs, as well as increased outside spending as revenue recovered.

Intangible Asset Amortization

A mortization expense (excludin g amounts reported in cost of product revenues for technology-based intangible assets) for the six months ended June 30, 2021 was $8.7 million compared to $15.1 million for the same period in prior year primarily due to a reduction in amortization expense associated with intangible assets sold in conjunction with the sale of the Extremity and Orthopedics business during the current year and accelerated amortization expense associated with an intangible asset recorded in the prior year.

We expect total annual amortization expense to be app roximately $40.6 million for the remainder of 2021, $79.1 million in 2022, $78.4 million in 2023, $77.7 million in 2024, $77.7 million in 2025, $77.5 million in 2026 and $585.7 million thereafter.

Non-Operating Income and Expenses

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

Six Months Ended June 30,

Dollars in thousands 2021 2020

Interest income $ 3,512 $ 4,851

Interest expense (26,078) (33,434)

Gain from the sale of business 42,197 —

Other income, net 9,903 493

Total non-operating income and expense $ 29,534 $ (28,090)

Interest Income

Interest income for the six months ended June 30, 2021 decreased by $1.3 million as compared to the same period last year primarily due to the settlement of cross-currency swaps designated as net investment hedges during Q4 2020.

Interest Expense

Interest expense for the six months ended June 30, 2021 decreased by $7.4 million as compared to the same period last year primarily due to the elimination of the non-cash interest expense as the result of the adoption ASU 2020-06 and the expenses associated with Amended and Restated Senior Credit Agreement which occurred in the prior period.

Basis of Presentation for details in relation to the adoption of ASU 2020-06.

Gain from the sale of business

On January 4, 2021, the Company completed its sale of its Extremity Orthopedics business and recognized a gain of $42.2 million in the first quarter of the current year.

Other Income, net

Other income, net for the six months ended June 30, 2021, increased by $9.4 million primarily due to income associated with the transition services agreement with Smith and Nephew and higher income from additional cross currency swaps that were entered into during Q4 2020.

Six Months Ended June 30,

Dollars in thousands 2021 2020

Income before income taxes $ 112,102 $ 13,093

Income tax (benefit) expense 31,640 4,282

Effective tax rate 28.2 % 32.7 %

The Company’s effective income tax rates for the six months ended June 30, 2021 and 2020 were 28.2% and 32.7%, r espectively.

For the six months ended June 30, 2021, the primary drivers of the lower tax rate was mix of income in lower-taxed jurisdictions, offset by the tax impact of the gain on sale of its Extremity Orthopedics business which was completed during the first quarter of 2021.

For the six months ended June 30, 2020, the primary drivers of the higher tax rate were lower book income in lower-taxed jurisdictions and 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 in certain jurisdictions.

The Company expects its effective income tax rate for the full year to be approximately 24.8%, driven primarily by the jurisdictional mix of income and the tax impact of the gain from the sale of its Extremity Orthopedic business, which closed during the first quarter.

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

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Total revenue by major geographic area consisted of the following:

Three Months Ended March 31,

(In thousands)

Three Months Ended June 30, Six Months Ended June 30,

Dollars in thousands 2021 2020 2021 2020

United States $ 278,186 $ 181,850 $ 525,979 $ 428,702

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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 increased by $0.9 million for the three months ended March 31, 2021 compared to the same period last year.

European sales decreased by $0.1 million for the three months ended March 31, 2021 compared to the same period last year.

Sales to customers in Asia Pacific increased by $7.3 million for the three months ended March 31, 2021 driven by accelerated recovery in both the Japan and China markets in relation to otherwise negative COVID-19 impacts.

The Rest of the World for the three months ended March 31, 2021 decreased by $2.5 million compared to the same period last year primarily due to adverse effects of the COVID-19 pandemic.

Domestic revenues increased by $96.3 million for the three months ended June 30, 2021 compared to the same period last year.

European sales increased by $16.4 million for the three months ended June 30, 2021 compared to the same period last year.

Sales to customers in Asia Pacific increased by $10.8 million for the three months ended June 30, 2021.

The Rest of the World for the three months ended June 30, 2021 increased by $7.8 million compared to the same period last year.

Domestic revenues increased by $97.3 million for the six months ended June 30, 2021 compared to the same period last year.

European sales increased by $16.3 million for the six months ended June 30, 2021 compared to the same period last year.

Sales to customers in Asia Pacific increased by $18.1 million for the six months ended June 30, 2021.

The Rest of the World for the six months ended June 30, 2021 increased by $5.3 million compared to the same period last year.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital

The working capital as of March 31, 2021 and December 31, 2020 was $626.8 million and $836.2 million, respectively.

The working capital as of June 30, 2021 and December 31, 2020 was $713.6 million and $836.2 million, respectively.

Working capital consists of total current assets less total current liabilities as presented in the consolidated balance sheets.

Cash and Marketable Securities

The Company had cash and cash equivalents totaling approximately $409.0 million and $470.2 million at March 31, 2021 and December 31, 2020 respectively, which are valued based on Level 1 measurements in the fair value hierarchy.

At March 31, 2021, our non-U.S.

The Company had cash and cash equivalents totaling approximately $397.4 million and $470.2 million at June 30, 2021 and December 31, 2020 respectively, which are valued based on Level 1 measurements in the fair value hierarchy.

At June 30, 2021, our non-U.S.

subsidiaries held approximately $290.8 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.

Three Months Ended March 31,

(In thousands)

Six Months Ended June 30,

Dollars in thousands 2021 2020

Net cash provided by operating activities $ 160,371 $ 53,931

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Cash Flows Provided by Operating Activities

Operating cash flows for the three months ended March 31, 2021 increased by $48.3 million compared to the same period in 2020.

For the three months ended March 31, 2021 , net income after removing the impact of the gain on sale of business and non-cash adjustments decreased by approximately $10.1 million.

T he changes in assets and liabilities increased cash flows by $26.0 million primarily due to operating cash flow contributions of accounts receivable for the three months ended March 31, 2021 when compared to the prior year.

In addition, the increase was also driven by an increase in accounts payables, accrued expenses and other current liabilities for the three months ended March 31, 2021.

Operating cash flows for the six months ended June 30, 2021 increased by $106.4 million compared to the same period in 2020.

Net income after removing the impact of the gain on sale of business and non-cash adjustments increased for the six months ended June 30, 2021 by approximately $32.9 million as compared to the same period in 2020 primarily due to the revenue recovery in the current year as compared to the height of the COVID-19 pandemic in the first half of the 2020 .

The changes in assets and liabilities, net of business acquisitions, increased cash flows by $37.5 million as compared to the decrease of $36.1 million for the same period in 2020.

The increase in 2021 is attributable to a reduction in inventories mainly driven by higher revenues in the first half of 2021, an increase in accounts payables, accrued expenses and other current liabilities partially offset by an increase in accounts receivable due to continued collection efforts.

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 an adequate safety stock of select products as surgical procedures continue to recover from levels experienced in the second quarter.

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 three months ended March 31, 2021, we paid a net cash amount of $302.6 million in relation to the acquisition of ACell Inc.

During the six months ended June 30, 2021, we paid a net cash amount of $303.9 million in relation to the acquisition of ACell Inc.

and received net proceeds of $191.7 million for the sale of the Extremity Orthopedics business.

The Company also paid for $13.3 million capital expenditures to support operations improvement initiatives at a number of our manufacturing facilities and other information technology investments.

During the three months ended March 31, 2020, the Company paid $16.5 million for capital expenditures, most of which were directed to our Mansfield, Massachusetts facility, our Princeton, New Jersey facility and commercial expansion, as well as $5.0 million payment related to the first developmental milestone for Rebound.

During the six months ended June 30, 2020, the Company paid $23.7 million for capital expenditures, most of which were directed to our facilities located in Mansfield, MA, Boston, MA, Memphis, TN, and Princeton, NJ.

Cash Flows Used in Financing Activities

Uses of cash from financing activities in the three months ended March 31, 2021 were $2.2 million proceeds from the exercise of stock options which was partially offset by net repayments of $1.6 million on the Securitization Facility offset and $3.6 million cash taxes paid in net equity settlement.

Sources of cash from financing activities in the three months ended March 31, 2020 were $515.3 million proceeds from the issuance of Convertible Senior Notes including the call and warrant transactions, $113.2 million borrowing under our Senior Credit Facility and Securitization Facility and $2.3 million in proceeds from the exercise of stock options.

These were offset by repayments of $344.2 million on the revolving portion of our Senior Credit Facility and Securitization Facility, $20.3 million debt issuance costs related to the Amended and Restated Credit Agreement, $100 million purchases of treasury stock and $4.3 million cash taxes paid in net equity settlement.

Uses of cash from financing activities in the six months ended June 30, 2021 were repayments of $102.2 million under our Senior Credit Facility and Securitization Facility.

In addition, the Company had $3.8 million in cash taxes paid in net equity settlement.

These uses were offset by $3.6 million proceeds from the exercise of stock options and $2.2 million borrowings under our Securitization Facility.

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.

These were offset by repayments of $388.5 million on the revolving portion of our Senior Credit Facility and Securitization Facility, $20.3 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.

Amended and Restated Senior Credit Agreement, Convertible Senior Notes, Securitization and Related Hedging Activities

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During the year ended December 31, 2020, the Company repurchased 2.1 million shares of Integra’s common stock as a part of our previous 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.

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.

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Off-Balance Sheet Arrangements

We do not have any off–balance sheet financing arrangements during the three months ended March 31, 2021 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.

We do not have any off–balance sheet financing arrangements during the six months ended June 30, 2021 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 March 31, 2021, the Company is obligated to pay the following amounts under various agreements:

As of June 30, 2021, the Company is obligated to pay the following amounts under various agreements:

Payments Due by Calendar Year

Total Remaining 2021 2022-2023 2024-2025 Thereafter

(In millions)

Dollars in millions Total Remaining 2021 2022-2023 2024-2025 Thereafter

Revolving Credit Facility (1) $ 8.8 $ — $ — $ 8.8 $ —

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

this liability had a total estimated fair value of $39.6 million at March 31, 2021.

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

this liability had a total estim ated fair value of $38.5 million at June 30, 2021.

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

The Company has excluded its future pension contribution 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 $0.9 million at March 31, 2021.

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.

The Company has excluded the liability for uncertain tax benefits from the contractual obligations table above, including i nterest and penalties, totaling $0.8 million at June 30, 2021.

This liabili ty 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

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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