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, 2021 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, as amended 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: risk of the COVID-19 pandemic could lead to further material delays and cancellations of, or reduced demand for, procedures; delayed capital spending by the Company's customers; disruption and/or higher costs to the Company’s supply chain; staffing shortages in hospitals; labor impacts in 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, 2021, under the heading "Risk Factors" in this report, and in other filings with the SEC. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by applicable law. 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 technology. 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, as well as nerves and tendons. The Company has expanded its base regenerative technology business to include surgical instruments, neurosurgical products and advanced wound care through global acquisitions and product development to meet the evolving needs of its customers and enhance patient care. Integra manufacture and sell medical technologies and products in two reportable business segments: Codman Specialty Surgical ("CSS") and Tissue Technologies ("TT"). The CSS segment, which represents two-thirds of our total revenue, consists of market-leading technologies and instrumentation used for a wide range of specialties, such as neurosurgery, neurocritical care and otolaryngology. We are the world leader in neurosurgery and one of the top three providers in instruments used in precision, specialty, and general surgical procedures. Our TT segment generates about one-third of our overall revenue and focuses on three main areas: complex wound surgery, surgical reconstruction, and peripheral nerve repair. We have key manufacturing and research facilities located in California, Indiana, Maryland, Massachusetts, New Jersey, Ohio, Puerto Rico, Tennessee, Utah, Canada, China, France, Germany, Ireland and Switzerland. We source most of our handheld surgical instruments and dural sealant products through specialized third-party vendors. 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) enabling an execution-focused culture, 2) optimizing relevant scale, 3) advancing innovation and agility, 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 acquisitions, we can build scale, increase competitiveness, and achieve our long-term goals. 31 Table of Contents 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. During 2021, the Company acquired ACell Inc. ("ACell"), an innovative regenerative medicine company specializing in the manufacturing of porcine urinary bladder extracellular matrices. This acquisition not only expanded the Company’s product offering of regenerative technologies, but it is also expected to support the Company’s long-term growth and profitability strategy as this product line has a financial profile similar to Integra’s other regenerative tissue products. All critical components of ACell have been integrated into the Company’s TT segment. See Note 2, Acquisitions and Divestitures , to the Notes to Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for additional details. In 2022, we continued to advance the development of pioneering neurosurgical technologies from our 2019 acquisitions, Arkis Biosciences, Inc. and Rebound Therapeutics Corporation 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 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. In addition to acquisitions and organic reinvestment, we continually look to optimize our portfolio towards higher growth and higher margin businesses. As such, we may opportunistically divest businesses or discontinue products where we see limited runway for future value creation in line with our aspirations due in part to changes in the market, business fundamentals or the regulatory environment. In January 2021, we completed the sale of our Extremity Orthopedics business to Smith & Nephew USD Limited ("Smith & Nephew"), a subsidiary of Smith & Nephew plc, for approximately $240 million in cash. This transaction enables us to increase our investments in our core neurosurgery and tissue technologies businesses and fund pipeline opportunities to expand our addressable markets to strengthen our existing leadership positions in these segments and drive future growth. See Note 2, Acquisitions and Divestitures , to the Notes to Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for details. Commercial Channel Investments. 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 utilize a two-tier specialist model to increase our presence in focused segments by creating a virtual selling organization to help serve the evolving needs of our customers. In addition, we continue to build upon our leadership brands across our product franchises in both CSS and TT to engage customers through enterprise-wide contracts with leading hospitals, integrated delivery networks and global purchasing organizations in the United States. Internationally, we have increased our commercial resources significantly in key emerging markets and are making investments to support our sales organization and maximize our commercial opportunities. Domestically, we have also increased our TT sales force in the United States to support the expanded regenerative tissue product portfolio that included ACell products. These investments in our international and dometic sales channel position us well for expansion and long-term growth. Customer Experience. We aspire to be ranked as a best-in-class provider and are committed to strengthen our relationships with all customers. We continue to invest in technologies, systems and processes to enhance the customer experience. Additionally, we launched digital tools and programs, resources and virtual product training 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. In the third quarter of 2021, we launched our CereLink™ ICP Monitor System in the U.S. and Europe direct markets. CereLink provides enhanced accuracy, usability and advanced data presentation that provides clinicians with uncompromised, advanced continuous ICP monitoring that until now, has not been available when treating patients with traumatic brain injuries. Through the first quarter of 2022, we have continued the global rollout of Cerelink with product launches in Australia and Canada, as well as several other indirect markets in EMEA. We are focused on the development of core clinical applications in our electromechanical technologies portfolio. Also, we continue to update our CUSA Clarity platform by incorporating 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. 32 Table of Contents In 2022 we continued to advance the early-stage technology platforms we acquired in 2019. Through the acquisition of Arkis Biosciences, 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. In 2019, we also acquired Rebound Therapeutics Corporation which specialized in a single-use medical device, known as Aurora Surgiscope, which is the only tubular retractor system designed for cranial surgery with an integrated access channel, camera and lighting. In the third quarter of 2021, we conducted a limited clinical launch of the Aurora Surgiscope for use in minimally invasive neurosurgery as well as initiated a registry called MIRROR to collect data on early surgical intervention using this same technology platform for the treatment of intracerebral hemorrhages (" ICH"). Within our TT segment, during 2021, we completed one of the largest diabetic foot ulcers ("DFU"), randomized controlled trials of the 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 the first quarter of 2022, we launched NeuraGen ® 3D Guide Matrix, a resorbable implant for repair of peripheral nerve discontinuities and designed to optimize the environment for nerve regeneration to allow for more complete functional recovery. COVID-19 Pandemic During this global crisis, the Company's focus remained on supporting patients, providing customers with life-saving products, and protecting the well-being of our employees. The rapid and evolving spread of the virus and subsequent variants have resulted in an unprecedented challenges to the global healthcare industry. 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. The COVID-19 pandemic may continue to have widespread and unpredictable impacts and the Company has continued to manage risks in this uncertain environment. We remain confident that the underlying markets in which the Company competes remain attractive. We also remain focused on managing the business for the long-term. 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. Capital markets and worldwide economies have also been significantly impacted by the COVID-19 pandemic, and it is possible that the pandemic 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, disruption and/or higher costs to the Company’s supply chain, staffing shortages in hospitals and labor constraints in our facilities, could further impact our sales margins 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. FDA Matters We manufacture and distribute products derived from human tissue for which FDA has specific regulations governing human cells, tissues and cellular and tissue-based products ("HCT/Ps"). An HCT/P is a product containing or consisting of human cells or tissue intended for transplantation into a human patient. Refer to Item 1. Business and Item 1A. Risk Factors in our 2021 10-K report for further details around these FDA regulations and their potential effect on the Company's portfolio of morselized amniotic material-based products as well as the impact on consolidated revenues. On June 22, 2015, the FDA issued an Untitled Letter (the "Untitled Letter") alleging that BioD LLC'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 LLc ("BioD") would need a biologics license to lawfully market those morselized products. 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 “2020 HCT/P Final Guidance”). The 2020 HCT/P Final Guidance document supersedes the November 2017 guidance by the same title. 33 Table of Contents 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, 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 2020 HCT/P Final Guidance maintained this approach and extended the discretionary enforcement period to May 31, 2021. Considering the risk of enforcement action, the Company discontinued the manufacturing of all morselized amniotic membrane tissue-based products prior to May 31, 2021. We no longer distribute these products. As of March 31, 2022, the Company has not received any further notice of enforcement action from the FDA regarding its morselized amniotic membrane tissue-based products. On March 7, 2019, TEI Biosciences, Inc. ("TEI"), a wholly-owned subsidiary of the Company received a Warning Letter (the “Warning Letter”), dated March 6, 2019, from the FDA. The warning letter related to quality systems issues at TEI's 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 and, since the conclusion of the inspection, has undertaken significant efforts to remediate the observations and continues to do so. On October 28, 2021 the FDA initiated an inspection of the facility and at the conclusion of the inspection issued a FDA Form 483 on November 12, 2021 (the "2021 Form 483"). The Company provided an initial response to the inspection observations and will continue to provide responses to FDA. The Warning Letter and the 2021 FDA Form 483 do not restrict the Company’s ability to manufacture or ship products or require the recall of any products, nor do they restrict our ability to seek FDA 510(k) clearance of products. 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 products. We cannot 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 three months ended March 31, 2022 were approximately 5.1% of consolidated revenues. ACQUISITIONS & DIVESTITURES Divestiture On January 4, 2021, the Company completed its sale of its Extremity Orthopedics business to Smith & Nephew. The transaction included the sale of the Company's upper and lower Extremity Orthopedics product portfolio, including ankle and shoulder arthroplasty and hand and wrist product lines. The Company received an aggregate purchase price of $240.0 million from Smith & 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, and was finalized at $41.8 million during the year ended December 31, 2021, as a result of $1.3 million in net working payments, pursuant to the divestiture agreement. See Note 2, Acquisitions and Divestitures , to the Notes to Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for details. Acquisition Our growth strategy includes the acquisition of businesses, assets or products lines to increase the breadth of our offerings and the reach of our product portfolios and drive relevant scale to our customers. On January 20, 2021, the Company acquired ACell, Inc. for an acquisition purchase price of $306.9 million plus contingent consideration obligations of up to $100 million, that may be payable upon achieving certain revenue-based performance milestones in 2022, 2023 and 2025 . ACell was a privately-held company that offered a portfolio of regenerative products for complex wound management, including developing and commercializing products based on MatriStem Urinary Bladder Matrix ("UBM"), a technology platform derived from porcine urinary bladder extracellular matrix. See Note 2, Acquisitions and Divestitures , to the Notes to Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for details. 34 Table of Contents OPTIMIZATION AND INTEGRATION ACTIVITIES As a result of our ongoing acquisition strategy and significant growth in recent years, we have undertaken cost-saving initiatives to consolidate manufacturing operations, distribution facilities and transfer activities, implement a common ERP system, eliminate duplicative positions, realign various sales and marketing activities, and expand and upgrade production capacity for our regenerative technology products. These efforts are expected to continue and while we expect a positive impact from ongoing restructuring, integration, and manufacturing transfer and expansion activities, such results remain uncertain. RESULTS OF OPERATIONS Executive Summary Net income for the three months ended March 31, 2022 was $32.9 million, or $0.39 per diluted share, as compared to $45.4 million or $0.53 per diluted share for the three months ended March 31, 2021. The decrease in net income for the three months ended March 31, 2022, was primarily driven by the prior year gain of $42.9 million as a result of the sale of its Extremity Orthopedics business to Smith & Nephew. Excluding this gain, net income increased for the three months period ended March 31, 2022, principally driven by earnings from higher revenues compared to the prior period, partially offset by an increase in operating expenses for key growth priorities in research and development, selling and marketing areas. Special Charges Income before taxes includes the following special charges : Three Months Ended March 31, Dollars in thousands 2022 2021 Acquisition, divestiture and integration-related charges (1) $ 574 $ (27,001) Structural optimization charges 6,320 3,979 EU medical device regulation 9,513 5,748 Total $ 16,407 $ (17,274) (1) The Company completed its sale of its Extremity Orthopedics business 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. See Note 2, Acquisitions and Divestitures for details. The items reported above are reflected in the condensed consolidated statements of operations as follows: Three Months Ended March 31, Dollars in thousands 2022 2021 Cost of goods sold $ 4,530 $ 10,179 Research and development 4,267 5,515 Selling, general and administrative 8,902 11,494 Gain from the sale of business (1) — (42,876) Other income (1,292) (1,586) Total $ 16,407 $ (17,274) (1 ) 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. 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, against the business model 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. 35 Table of Contents Revenues and Gross Margin The Company's revenues and gross margin on product revenues were as follows: Three Months Ended March 31, Dollars in thousands 2022 2021 Segment Net Sales Codman Specialty Surgical $ 247,308 $ 241,241 Tissue Technologies 129,330 118,830 Total revenues $ 376,638 $ 360,071 Cost of goods sold 142,569 145,823 Gross margin on total revenues $ 234,069 $ 214,248 Gross margin as a percentage of total revenues 62.1 % 59.5 % Three Months Ended March 31, 2022 as Compared to Three Months Ended March 31, 2021 Revenues For the three months ended March 31, 2022, total revenues increased by $16.6 million to $376.6 million from $360.1 million for the same period in 2021, inclusive of a unfavorable foreign currency impact of $4.6 million on revenues. Dom estic revenues increased by $15.6 million, or 6.3%, to $263.4 million and were 69.9% of total revenues for the three months ended March 31, 2022 compared to $247.8 million during the same period in the prior year. International revenues increased by $1.0 million or 0.9% to $113.3 million for the three months ended March 31, 2022 compared to $112.3 million during the same period in the prior year. The increase in revenues was primarily driven by strong recovery of surgical procedures as well as favorable order timing for our private label business. In the CSS segment, revenues were $247.3 million which was an increase of $6.1 million, or 2.5% as compared to the prior-year period, inclusive of a $4.2 million unfavorable foreign currency impact on revenue. The increase was as a result of the continued procedure recovery across neurosurgery and capital sales from the recent launch of the CereLink ICP monitoring system. Excluding the impact of foreign exchange, Neurosurgery portfolio grew mid single digits primarily due to sales in neuromonitoring and CSF Management. Sales in our instruments portfolio increased low single digits as compared to the same period in the prior year. In the TT segment, revenues were $129.3 million which was an increase of $10.5 million, or 8.8% from the prior-year period, inclusive of a $0.4 million unfavorable foreign currency impact on revenue. Sales in our Wound Reconstruction business, after adjusting for comparative number of selling days for ACell revenue, increased low single digits, led by Integra Skin and PriMatrix. Sales in our Private Label business increased low double digits driven by continued COVID-19 recovery for our private label partners and timing of orders. Gross Margin Gross margin was $234.1 million for the three months ended March 31, 2022, an increase of $19.8 million from $214.2 million for the sa me period in 2021. Gross margin as a percentage of revenues was 62.1% for the three months ended March 31, 2022 and 59.5% or the sa me period in 2021. This increase in gross margin was due to higher revenues, favorable product mix, a decrease in amortization associated with technology-based intangible assets and a reduction of inventory step-up amortization in connection with the acquisition of ACell in 2021. Operating Expenses The following is a summary of operating expenses as a percent of total revenues: Three Months Ended March 31, 2022 2021 Research and development 6.4 % 6.2 % Selling, general and administrative 42.5 % 43.5 % Intangible asset amortization 1.0 % 1.3 % Total operating expenses 49.9 % 51.0 % 36 Table of Contents Total operating expenses, which consist of research and development, selling, general and administrative, and amortization expenses, increased by $4.4 million, or 2.4% to $187.9 million in the three months ended March 31, 2022, compared to $183.5 million in the same period in 2021. The increase in operating expenses compared to the prior year primarily reflects increased selling costs associated with higher revenue, as well as higher spending for key growth initiatives in research and development, selling and marketing areas. The Company continues to prioritize its operating costs to increase organic investments that will drive long-term growth including the support of new product development and introductions, clinical studies, geographic expansion and targeted U.S. sales channel expansion. Research and Development Research and development expenses for the three months ended March 31, 2022 increased by $1.7 million as compared to the same period in the prior year. This increase in spending resulted from additional spending on new product development, clinical studies and spending related to the European Union Medical Device Regulation compliance activities. Selling, General and Administrative Selling, general and administrative costs for the three months ended March 31, 2022 increased by $3.3 million as compared to the same period in the prior year driven primarily due to increased selling costs associated with higher revenue, as well as increases to support key growth initiatives. Intangible Asset Amortization Amortization expense (exclu din g amounts reported in cost of product revenues for technology-based intangible assets) for the three months ended March 31, 2022 was $3.9 million compared to $4.5 million for the same period in prior year. Non-Operating Income and Expenses The following is a summary of non-operating income and expenses: Three Months Ended March 31, Dollars in thousands 2022 2021 Interest income $ 1,377 $ 1,748 Interest expense (11,655) (12,929) Gain (loss) from the sale of business — 42,876 Other income, net 3,429 4,869 Total non-operating income and expense $ (6,849) $ 36,564 Interest Income Interest income for the three months ended March 31, 2022 decreased by $0.4 million as compared to the same period last year. Interest Expense Interest expense for the three months ended March 31, 2022 decreased by $1.3 million as compared to the same period in the prior year primarily due to the impact of a $100 million interest rate swap that matured in second quarter of 2021 and related pay down on the revolving credit component of the Senior Credit Facility. 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 $42.9 million for the three months ended March 31, 2021. Other Income, net Other income, net for the three months ended March 31, 2022 decreased by $1.4 million compared to the same period in the prior year primarily due to less income associated with the transition services agreement from the divestiture of the Extremity Orthopedics business and by a unfavorable impact of foreign exchange as compared to the prior year. 37 Table of Contents Income Taxes Three Months Ended March 31, Dollars in thousands 2022 2021 Income before income taxes $ 39,315 $ 67,278 Income tax (benefit) expense 6,414 21,884 Effective tax rate 16.3 % 32.5 % The Company’s effective income tax rates for the three months ended March 31, 2022 and 2021 were 16.3% and 32.5%, respectively. For the three months ended March 31, 2022, the primary drivers of the tax rate are a favorable jurisdictional mix of income, as well as a $0.8M benefit related to excess tax benefit from stock compensation. For the three months ended March 31, 2021, the primary driver of the higher tax rate is the tax impact of the gain on the sale of the Extremity Orthopedics business, which closed during the first quarter of 2021. 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. Additionally, changes to income tax laws and regulations, in any of the tax jurisdictions in which the Company operates, could impact the effective tax rate. Various governments, both U.S. and non-U.S., are increasingly focused on tax reform and revenue-raising legislation. The current U.S. administration has proposed tax reform which, if enacted, may increase the Company’s U.S. federal income tax liability. Further, legislation in foreign jurisdictions may be enacted, in response to the base erosion and profit-shifting project begun by the Organization for Economic Cooperation and Development ("OECD"). The OECD recently finalized major reform of the international tax system with respect to a implementing a global minimum tax rate. Such changes in U.S. and non-U.S. jurisdictions could have an adverse effect on the Company’s effective tax rate. 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. 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 March 31, Dollars in thousands 2022 2021 United States $ 263,351 $ 247,793 Europe 43,744 45,819 Asia Pacific 47,717 47,295 Rest of World 21,826 19,164 Total Revenues $ 376,638 $ 360,071 The Company generates significant revenues outside the U.S., a portion of which are U.S. dollar-denominated transactions conducted with customers that 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. 38 Table of Contents Domestic revenues increased by $15.6 million for the three months ended March 31, 2022 compared to the same period last year. European sales decreased by $2.1 million for the three months ended March 31, 2022 compared to the same period last year. Sales to customers in Asia Pacific increased by $0.4 million for the three months ended March 31, 2022. The Rest of World for the three months ended March 31, 2022 increased by $2.7 million compared to the same period last year. The international revenues were impacted by $4.6 million of unfavorable foreign exchange impact, with the larger impact in Europe. The increase in global revenues, inclusive of a $4.6 million unfavorable foreign exchange impact on revenue, was primarily driven by the strong recovery of procedures as well as favorable order timing for our private label business. Sales in China, Japan, Europe , Canada and our indirect markets continue to drive international growth. LIQUIDITY AND CAPITAL RESOURCES Working Capital The Company's working capital as of March 31, 2022 and December 31, 2021 was $750.2 million and $813.7 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 $407.1 million and $513.4 million at March 31, 2022 and December 31, 2021 respectively, which are valued based on Level 1 measurements in the fair value hierarchy. At March 31, 2022, our non-U.S. subsidiaries held approximately $260.5 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. Cash Flows Three Months Ended March 31, Dollars in thousands 2022 2021 Net cash provided by operating activities $ 44,344 $ 69,081 Net cash used in investing activities (14,067) (117,566) Net cash used in financing activities (133,465) (3,015) Effect of exchange rate fluctuations on cash (3,168) (9,690) Cash Flows Provided by Operating Activities Operating cash flows for the three months ended March 31, 2022 decreased by $24.7 million compared to the same period in 2021. Net income after removing the impact of the gain on sale of business and non-cash adjustments increased for the three months ended March 31, 2022 by approximately $31.0 million as compared to the same period in 2021 primarily due to earnings from higher revenues, partially offset by higher expense related to support for key growth initiatives in research and development, selling and marketing areas. The changes in assets and liabilities, net of business acquisitions, decreased cash flows by $29.8 million as compared to the increase of $26.0 million for the same period in 2021 . The change in 2022 is mainly attributable to increases in inventory to support increased sales and decrease in accounts payable, accrued expenses and other current liabilities due to increased payments processed in the quarter. The changes in 2021 were primarily due to reduction in accounts receivable due to strong cash collections and increases in accounts payable, accrued expenses and other current liabilities. 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. The 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. Cash Flows Used in Investing Activities During the three months ended March 31, 2022, the Company paid $9.3 million for capital expenditures to support operations improvement initiatives at a number of our manufacturing facilities and other information technology investments as well as the final $4.7 million payment related to the final developmental milestone for Rebound Therapeutics Corporation. 39 Table of Contents 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. and received net proceeds of $191.7 million for the sale of the Extremity Orthopedics business. The Company also paid for $6.7 million capital expenditures to support operations improvement initiatives at a number of our manufacturing facilities and other information technology investments Cash Flows Used in Financing Activities Uses of cash from financing activities in the three months ended March 31, 2022 related to the repurchase of treasury stock of $125.0 million under the 2022 accelerated share repurchase agreement, repayments of $11.8 million under our Senior Credit Facility and Securitization Facility. In addition, the Company had $9.2 million in cash taxes paid for net equity settlements. Sources of cash from financing activities for the three months ended March 31, 2022 were $11.3 million borrowing under our Senior Credit Facility and Securitization Facility and $1.2 million proceeds from the exercise of stock options. 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. Amended and Restated Senior Credit Agreement, Convertible Senior Notes, Securitization and Related Hedging Activities See Note 6 , Debt , to the Notes to Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for a discussion of our Amended and Restated Senior Credit Agreement, the 2025 Notes and Securitization Facility and Note 7, Derivative Instruments , to the Notes to Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for discussion of our hedging activities. We are forecasting that sales and earnings for the next twelve months 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. Share Repurchase Plan On January 12, 2022, the Company entered into a $125.0 million accelerated share repurchase ("2022 ASR") and received 1.48 million shares of the Company common stock at inception of the 2022 ASR, which represented approximately 80% of the expected total shares under the 2022 ASR. On March 24, 2022, the early exercise provision under the 2022 ASR was exercised by 2022 ASR counterparty. Upon settlement of the 2022 ASR on March 24, 2022, the Company received an additional 0.46 million shares determined using the volume-weighted average price of the Company's common stock during the term of the 2022 ASR. On April 26, 2022, the Board of Directors 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 2024. This stock repurchase authorization replaces the previous $225 million stock repurchase authorization, of which $100 million remained authorized at the time of its replacement, and which was otherwise set to expire on December 31, 2022. Purchases may be affected through one or more open market transactions, privately negotiated transactions, transactions structured through investment banking institutions, or a combination of the foregoing See Note 11, Treasury Stock of the Notes to Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for further details. Dividend Policy We have 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. Off-Balance Sheet Arrangements We do not have any off–balance sheet financing arrangements during the three months ended March 31, 2022 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. 40 Table of Contents Contractual Obligations and Commitments We will continue to have cash requirements to support seasonal working capital needs and capital expenditures, to pay interest, to service debt, and to fund acquisitions. As part of our ongoing operations, we enter into contractual arrangements that obligate us to make future cash payments. Our primary obligations include principal and interest payments on revolving portion and Term Loan component of the Senior Credit Facility, Securitization Facility and Convertible Securities. See Note 6 , Debt , to the Notes to Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for details. The Company also leases some of our manufacturing facilities and office buildings which have future minimum lease payments associated. See Note 10, Leases and Related Party Leases to the Notes to Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for a schedule of our future minimum lease payments. Amounts related to the Company's other obligations, including employment agreements and purchase obligations were not material. The Company has contingent consideration obligation related to prior and current year acquisitions and future pension contribution obligations. See Note 9, Defined Benefit Plans and Note 16, Commitments and Contingencies to the Notes to Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for details. The associated obligations are not fixed. The Company also has a liability for uncertain tax benefits including interest and penalties. See Note 12, Income Taxes to the Notes to Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for details. The Company cannot make a reliable estimate of the period in which the uncertain tax benefits may be realized. Employee Termination Benefits The Company incurred restructuring costs related to employee terminations associated with a future plant closure in the consolidated statement of operations for the three months ended March 31, 2022, Restructuring costs were included in accrued expenses and other current liabilities in the consolidated balance sheet for the three months ended March 31, 2022 and year ended December 31, 2021 . See Note 1, Basis of Presentation of the Notes to Consolidated Financial Statements ( Part I, Item 1 of this Form 10-Q) for additional details. 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, 2021 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.