What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-07-27 compared with 2022-04-27 · 175 added, 100 removed, 257 unchanged (52% of the section changed)

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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:

Integra manufactures and sells medical technologies and products in two reportable business segments:

Codman Specialty Surgical ("CSS") and Tissue Technologies ("TT").

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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.

On May 20, 2022, we entered into an agreement to sell our non-core traditional wound care ("TWC") business to Gentell, LLC for approximately $28.8 million, which consists of $27.8 million in cash plus $1.0 million in contingent consideration which may be received upon achieving certain revenue-based performance milestones.

The transaction is expected to close at or around August 31, 2022, subject to the satisfaction of customary conditions.

Revenues for the TWC business were approximately $27 million in 2021.

See Note 2, Assets and Liabilities Held for Sale, to the Notes to Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for details.

Our portfolio optimization actions over the past two years have allowed us to increase our focus on Integra’s core portfolio of market-leading products in neurosurgery, surgical instrumentation and regenerative tissue and moves us closer to achieving our long-term organic growth and profitability targets.

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.

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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.

These investments in our international and domestic sales channel position us well for expansion and long-term growth.

Customer Experience.

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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.

We also launched digital tools and programs, resources and virtual product training to drive continued customer familiarity with our growing portfolio of medical technologies globally.

In addition, we announced plans to outsource certain transactional back-office finance and customer service activities to enhance customer quality, build scale for future growth, and capture cost efficiencies.

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.

In 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.

Through the first half 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.

In June 2022, we launched the Neutus ® EVD system, our first external ventricular drain (“EVD") in China.

The Neutus EVD system is manufactured in China by Shanghai Haoju Medical Technology Co., Ltd.

under an exclusive distribution arrangement.

The device is used in the management of cerebrospinal fluid and is highly complementary to our Bactiseal ® catheter and advanced intercranial pressure monitoring products.

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.

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.

In 2022, we continued to advance the two early-stage technology platforms we acquired in 2019.

Through the acquisition of Arkis Biosciences, we added a platform technology, CerebroFlo ® 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.

In 2021, we began and continued to conduct 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").

In the second quarter of 2022, we have continued to execute on our growth initiatives.

We launched the Aurora ® Evacuator with Coagulation device in the U.S., designed to be used in conjunction with our Aurora Surgiscope to safely address and evacuate blood in the brain caused by hemorrhagic stroke.

Within our TT segment, in the first half of 2022, we launched NeuraGen ® 3D Nerve 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.

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

COVID-19 Pandemic and the Economic Recession

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.

The rapid and evolving spread of the virus and subsequent variants have resulted in 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.

We remain confident that the underlying markets in which the Company competes remain attractive and we remain focused on managing the business for the long-term.

The COVID-19 pandemic and actions taken by governmental authorities, private businesses and individuals, such as “shelter-in-place” orders and restrictions on travel and access to our customers or temporary closures of our facilities or the facilities o f our suppliers, 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.

While COVID variants continue to contribute to an uncertain business environment, effects resulting from the pandemic such as inflationary pressures and global central bank actions to contain high inflation levels could cause a local and/or global economic recession.

Capital markets and worldwide economies have also been significantly impacted and such economic recession could have a material adverse effect on the Company’s long-term business as hospitals reduce capital, as well as overall spending.

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.

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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.

As of June 30, 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.

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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, 2022 were approximately 5.1% of consolidated revenues.

Revenues of products manufactured in the TEI Boston facility for the six months ended June 30, 2022 were approximately 6.0% of consolidated revenues.

ACQUISITIONS & DIVESTITURES

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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.

In connection with the sale, the Company recognized a $41.8 million as Gain from the sale of business in the consolidated statement of operations for the year ended December 31, 2021.

The Company finalized the net working capital and paid an additional $1.3 million to Smith & Nephew as of December 31, 2021.

See Note 3, Acquisitions and Divestitures , to the Notes to Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for details.

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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.

In support of our continued focus on product margins during 2022, we closed a manufacturing facility located in France and began the transfer of production to the Company’s existing Switzerland facility.

We expect this transition to be completed by the fourth quarter of 2022.

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.

Net income for the three months ended June 30, 2022 was $44.8 million, or $0.54 per diluted share, as compared to $35.1 million or $0.41 per diluted share for the three months ended June 30, 2021.

The increase in net income for the three months ended June 30, 2022, was primarily driven by higher revenues across most franchises.

Net income for the six months ended June 30, 2022 was $77.7 million, or $0.93 per diluted share, as compared to $80.5 million or $0.94 per diluted share for the six months ended June 30, 2021.

The decrease in net income for the six months ended June 30, 2022, was primarily driven by the increase in non-operating income in the prior period due to the gain of $42.2 million recognized as result of the sale of the Extremity Orthopedics business.

Excluding the impact of the gain, net income increased for the six months ended June 30, 2022, driven by higher revenues across most franchises.

Special Charges

Income before taxes includes the following special charges :

Three Months Ended March 31,

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

Dollars in thousands 2022 2021 2022 2021

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Structural optimization charges 8,172 4,712 14,492 8,691

EU medical device regulation 9,513 5,748

EU medical device regulation ("EU MDR") 10,249 3,415 19,762 9,163

Total $ 12,137 $ 18,903 $ 28,544 $ 1,629

(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.

(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.

See Note 3, 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,

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

Dollars in thousands 2022 2021 2022 2021

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Gain from the sale of business (1)

— 679 — (42,197)

Other income (1,193) (1,171) (2,485) $ (2,757)

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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 given our ongoing strategy of acquisitions and divestitures and efforts to optimize our manufacturing, distribution, commercial and administration infrastructure, 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.

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

Three Months Ended March 31,

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

Dollars in thousands 2022 2021 2022 2021

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Gross margin as a percentage of total revenues 62.7 % 61.2 % 62.4 % 60.4 %

Three Months Ended March 31, 2022 as Compared to Three Months Ended March 31, 2021

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.

Three Months Ended June 30, 2022 as Compared to Three Months Ended June 30, 2021

For the three months ended June 30, 2022, total revenues increased by $7.8 million to $397.8 million from $390.0 million for the same period in 2021, inclusive of a unfavorable foreign currency impact of $10.3 million on revenues.

Dom estic revenues increased by $9.2 million, or 3.3%, to $287.3 million and were 72.2% of total revenues for the three months ended June 30, 2022 compared to $278.2 million during the same period in the prior year.

International revenues decreased by $1.4 million or 1.2% to $110.5 million for the three months ended June 30, 2022 compared to $111.8 million during the same period in the prior year, which is inclusive of a unfavorable foreign currency impact of $10.3 million.

In the CSS segment, revenues were $257.9 million which was an increase of $1.0 million, or 0.4% as compared to the prior-year period, inclusive of a $9.2 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.

The increase was as a result of the continued broad demand recovery we have seen across many CSS franchises as well as our ability to maintain pace with customer deliveries.

Excluding the impact of foreign currency, Neurosurgery portfolio grew low single digits primarily driven by sales in advanced energy and CSF management.

Sales in our instruments portfolio increased mid single digits as compared to the same period in the prior year.

In the TT segment, revenues were $140.0 million which was an increase of $6.8 million, or 5.1% from the prior-year period, inclusive of a $1.1 million unfavorable foreign curren cy impact on revenue .

Sales in our Wound Reconstruction business, increased low single digits, led by Integra ® Dermal Matrices and SurgiMend ® .

Sales in our Private Label business increased low double digits driven by higher customer demand and favorable order timing.

Gross margin was $249.4 million for the three months ended June 30, 2022, an increase of $10.7 million from $238.7 million for the same period in 2021.

Gross margin as a percentage of revenues was 62.7% for the three months ended June 30, 2022 and 61.2% or the same period in 2021.

This increase in gross margin was due to higher revenues and a decrease in amortization associated with reduction of inventory step-up amortization in connection with the acquisition of ACell in the prior year.

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

Three Months Ended June 30,

Research and development 6.4 % 5.2 %

Selling, general and administrative 40.4 % 41.7 %

Intangible asset amortization 0.8 % 1.1 %

Total operating expenses 47.6 % 48.0 %

Total operating expenses, which consist of research and development, selling, general and administrative, and amortization expenses, increased by $2.7 million, or 1.4% to $189.5 million in the three months ended June 30, 2022, compared to $186.9 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.

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 June 30, 2022 increased by $5.5 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 EU MDR compliance activities.

Selling, General and Administrative

Selling, general and administrative costs for the three months ended June 30, 2022 decreased by $1.9 million as compared to the same period in the prior year driven by lower incentive and stock-based compensation as well as lower acquisition related expenses partially offset by normalization of spending in selling and marketing.

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 June 30, 2022 was $3.3 million compared to $4.2 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 June 30,

Dollars in thousands 2022 2021

Interest income $ 1,965 $ 1,764

Interest expense (12,236) (13,149)

Other income, net 1,979 5,034

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

Total non-operating income and expense $ (8,292) $ (7,030)

Interest Income and Interest Expense

Interest income for the three months ended June 30, 2022 increased by $0.2 million as compared to the same period last year.

Interest expense for the three months ended June 30, 2022 decreased by $0.9 million as compared to the same period last year primarily from a lower outstanding borrowing on the Senior Secured Credit Facility.

Other income, net for the three months ended June 30, 2022 decreased by $3.1 million compared to the same period in the prior year primarily due to lower income associated with the transition services agreement from the divestiture of the Extremity Orthopedics business.

Three Months Ended June 30,

Dollars in thousands 2022 2021

Income before income taxes $ 51,575 $ 44,824

Income tax (benefit) expense 6,787 9,756

Effective tax rate 13.2 % 21.8 %

The Company’s effective income tax rates for the three months ended June 30, 2022 and 2021 were 13.2% and 21.8%, respectively.

For the three months ended June 30, 2022, the primary driver of the tax rate is a $4.8 million benefit related to excess tax benefit from stock compensation.

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.

Six Months Ended June 30, 2022 as Compared to Six Months Ended June 30, 2021

Revenues and Gross Margin

For the six months ended June 30, 2022, total revenues increased by $24.4 million to $774.5 million from $750.1 million for the same period in 2021, inclusive of an unfavorable foreign currency impact of $14.9 million on revenues.

Domestic revenues increased by $24.7 million, or 4.7%, to $550.7 million and were 71.1% of total revenues for the six months ended June 30, 2022.

International revenues decreased by $0.3 million, or 0.1% to $223.8 million for the six months ended June 30, 2022 compared to $224.1 million during the same period in the prior year.

In the CSS segment, revenues were $505.2 million, which was an increase of $7.1 million, or 1.4% from the prior-year period , inclusive of a $13.4 million unfavorable foreign currency impact on revenue.

The Neurosurgery portfo lio grew low 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 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.

In the TT segment, revenues were $269.3 million, which was a increase of $17.3 million, or 6.9% from the prior-year period, inclusive of a $1.5 million unfavorable foreign currency impact on revenue.

Sales in our Wound Reconstruction business increased low single digits, led by Integra ® Dermal Matrices and SurgiMend ® .

Sales in our Private Label business increased low double digits driven by higher customer demand and favorable order timing.

Gross margin was $483.5 million for the six months ended June 30, 2022, an increase of $30.5 million from $453.0 million for the same period last year.

Gross margin as a percentage of total revenue increased to 62.4% for the six months ended June 30, 2022 from 60.4% in the same period last year.

The increase in gross margin percentage was due to higher revenues and a reduction of inventory step-up amortization in connection with the acquisition of ACell in the prior year.

Operating Expenses

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

Three Months Ended March 31,

Six Months Ended June 30,

Research and development 6.4 % 5.7 %

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Total operating expenses 48.7 % 49.5 %

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.

Total operating expenses, which consist of selling, general and administrative expenses, research and development expenses, and amortization expenses, increased by $7.0 million, or 1.9% to $377.4 million in the six months ended June 30, 2022, compared to $370.4 million in the same period in 2021.

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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.

Research and development expenses for the six months ended June 30, 2022 increased by $7.2 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 additional spending due to the EU MDR compliance.

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.

Selling, general and administrative costs increased by $1.4 million as compared to the same period in the prior year driven primaril y due to higher spending, including selling costs on commissions, investment in sales force expansion, and higher spend for key growth initiatives, offset by lower employee related costs, stock-based compensation and acquisition related costs.

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.

A mortization expense (excludin g amounts reported in cost of product revenues for technology-based intangible assets) for the six months ended June 30, 2022 was $7.2 million compared to $8.7 million for the same period in prior year.

We expect total annual amortization expense to be app roximately $38.4 million for the remainder of 2022, $76.5 million in 2023, $75.8 million in 2024, $75.8 million in 2025, $75.7 million in 2026, $73.7 million in 2027 and $499.8 million thereafter.

Non-Operating Income and Expenses

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

Three Months Ended March 31,

Six Months Ended June 30,

Dollars in thousands 2022 2021

1 unchanged sentence

Interest expense (23,891) (26,078)

Gain (loss) from the sale of business — 42,876

Gain from the sale of business — 42,197

Other income, net 5,408 9,903

1 unchanged sentence

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.

In terest income for the six months ended June 30, 2022 decreased by $0.2 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.

Interest expense for the six months ended June 30, 2022 decreased by $2.2 million as compared to the same period last year primarily from a lower outstanding borrowing on the Senior Secured 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.

On January 4, 2021, 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.

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.

Three Months Ended March 31,

Other income, net for the six months ended June 30, 2022, increased by $4.5 million compared to the same period in the prior year primarily due to lower income associated with the transition services agreement from the divestiture of the Extremity Orthopedics business.

Six Months Ended June 30,

Dollars in thousands 2022 2021

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Effective tax rate 14.5 % 28.2 %

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 Company’s effective income tax rates for the six months ended June 30, 2022 and 2021 were 14.5% and 28.2%, r espectively.

For the six months ended June 30, 2022, the primary driver of the tax rate is a $5.7 million benefit related to excess tax benefits from stock compensation.

For the six months ended June 30, 2021, the primary driver of the higher tax rate is the tax impact of the gain on sale of the Extremity Orthopedics business,which closed during the first quarter of 2021.

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The current U.S.

administration has proposed tax reform which, if enacted, may increase the Company’s U.S.

administration has proposed tax reform which, if enacted, would 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.

Further, legislation in foreign jurisdictions may be enacted, in response to the BEPS project begun by the OECD.

The OECD recently finalized major reform of the international tax system with respect to a minimum tax rate.

Such changes in U.S.

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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.

The Company's 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,

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

Dollars in thousands 2022 2021 2022 2021

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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 $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.

Domestic revenues increased by $9.2 million for the three months ended June 30, 2022 compared to the same period last year.

European sales decreased by $1.6 million for the three months ended June 30, 2022 compared to the same period last year.

Sales to customers in Asia Pacific decreased by $0.9 million for the three months ended June 30, 2022.

The Rest of World for the three months ended June 30, 2022 increased by $1.2 million compared to the same period last year.

The international revenues were impacted by a $10.3 million unfavorable foreign e xchange impact.

Sales in Japan, China, Canada and Europe continue to drive international growth.

Domestic revenues increased by $24.7 million for the six months ended June 30, 2022 compared to the same period last year.

European sales decreased by $3.7 million for the six months ended June 30, 2022 compared to the same period last year.

Sales to customers in Asia Pacific decreased by $0.5 million for the six months ended June 30, 2022.

The Rest of World for the six months ended June 30, 2022 increased by $3.8 million compared to the same period last year.

The international revenues were impacted by a $14.9 million unfavorable foreign exchange impact.

Sales in Japan, China, Canada and Europe 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.

The Company's working capital as of June 30, 2022 and December 31, 2021 was $841.8 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.

The Company had cash and cash equivalents totaling approximately $447.2 million and $513.4 million at June 30, 2022 and December 31, 2021 respectively, which are valued based on Level 1 measurements in the fair value hierarchy.

At June 30, 2022, our non-U.S.

subsidiaries held approximately $302.6 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.

Three Months Ended March 31,

Six Months Ended June 30,

Dollars in thousands 2022 2021

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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.

Operating cash flows for the six months ended June 30, 2022 decreased by $49.5 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 six months ended June 30, 2022 by approximately $34.4 million as compared to the same period in 2021 primarily due to earnings from higher revenues.

The ch anges in assets and liabilities, net of business acquisitions, decreased cash flows by $46.5 million in 2022 as compared to the increase of $37.5 million for the same period in 2021.

The change in 2022 is mainly attributable to increases in inventory and accounts receivable due to higher revenues and decrease in accrued expenses and other current liabilities due to increased payments processed in the quarter.

The changes in 2021 were primarily 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, 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 in 2021 as compared to the decrease of $36.1 million for the same period in 2020.

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.

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, 2022, the Company paid $18.7 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.

This was partially offset by $4.9 million proceeds on cross-currency swaps designated as net investment hedge.

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.

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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.

Uses of cash from financing activities in the six months ended June 30, 2022 related to the repurchase of treasury stock of $125.0 million under the 2022 accelerated share repurchase agreement.

In addition, the Company had $23.2 million in cash taxes paid for net equity settlements as a result of the departure of the former chief executive officer of the Company.

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.

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

See Note 7 , 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 8, 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.

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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

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, which represented approximately 80% of the expected total shares.

On March 24, 2022, the early exercise provision was exercised by 2022 ASR counterparty.

Upon settlement 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.

See Note 12, Treasury Stock of the Notes to Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for further details.

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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, 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.

We do not have any off–balance sheet financing arrangements during the six months ended June 30, 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.

Contractual Obligations and Commitments

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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 .

The Company incurred restructuring costs related to employee terminations associated with a plant closure and with future outsourcing plans for select transactional back office activities in the consolidated statement of operations for the six months ended June 30, 2022.

Restructuring costs were included in accrued expenses and other current liabilities in the consolidated balance sheet for the six months ended June 30, 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.

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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