What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-07-27 compared with 2023-04-26 · 175 added, 95 removed, 244 unchanged (53% of the section changed)

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regulatory approval of new products;

statements regarding the issues causing the voluntary removal of the Company’s CereLink ICP Monitor System and the Company’s voluntary recall of all products manufactured at its Boston facility;

the potential effects of the process deviations identified at the Boston facility;

the anticipated impact of the voluntary removal and recall and manufacturing stoppage on the Company’s business;

the Company’s ability to address in a timely manner the product-related issues discussed herein and re-initiate sales of Cerelink and resume manufacturing activities at its Boston facility;

our future financial performance;

increased presence in new markets, including markets outside the U.S.;

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As forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events.

One must carefully consider forward-looking statements and understand that such forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, and involve a variety of risks and uncertainties, known and unknown, including, among others, those discussed in the sections entitled “Government Regulation” within “Item 1.

Business” and “Item 1A.

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Integra, headquartered in Princeton, New Jersey, is a world leader in neurosurgical solutions and regenerative tissue technologies.

The Company was founded in 1989 with the acquisition of an engineered collagen technology platform used to repair and regenerate tissue.

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.

We have expanded our 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 LifeSciences Holdings Corporation common stock trades on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “IART.”

Integra is a global leader in regenerative tissue technologies and neurological solutions dedicated to limiting uncertainty for clinicians so they can focus on providing the best patient care.

Founded in 1989 with the acquisition of an engineered collagen technology platform used to repair and regenerate tissue, Integra LifeSciences Holdings Corporation common stock trades on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “IART.” 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.

We manufacture and sell medical technologies and products in two reportable business segments:

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We source most of our handheld surgical instruments and sealant products through specialized third-party vendors.

Integra is committed to restoring patients’ lives through transformative technologies and products in the segments in which we compete.

Integra is committed to restoring patients’ lives through technologies and products that transform surgical, neurologic and regenerative care.

Our mission is to innovate treatment pathways to advance patient outcomes and set new standards of care.

We refocused our strategies around five pillars, specifically three core growth drivers -- innovating for outcomes, growing internationally, broadening our impact on care pathways – enabled by two key levers:

driving operational and customer excellence and cultivating a high-performance culture.

These five pillars drive how and where we aim to accelerate in 2023 and in the coming years.

In connection with the completion of our strategic refresh, we refocused our strategies around five pillars.

Of these five pillars, we have identified three core growth drivers, innovating for outcomes, growing internationally, and broadening our impact on care pathways, which are enabled by two key levers, driving operational and customer excellence and cultivating a high-performance culture.

As outlined in greater detail below, we believe these five pillars will enable us to realize and advance our integrated growth strategy:

Innovating for Outcomes.

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market where SIA is pursuing pre-market approval for use in implant-based breast reconstruction ("IBBR").

As part of our commitment to implant-based breast reconstruction strategy and innovating new treatment pathways, in June 2023 we completed enrollment in the DuraSorb U.S.

investigational device exemption (IDE) clinical study for two-stage breast reconstruction.

We also continued to advance the development of pioneering neurosurgical technologies with the expansion of our product offerings.

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Over the years, we have been significantly expanding our global footprint through investments in our commercial organization, expansion and development of international markets and new product introductions.

Several new products were introduced in 2023, including MicroMatrix® and Certas Plus® Programmable Valve which were launched in Europe, and CUSA Clarity Laparoscopic ("Lap") tip which was launched in Australia and New Zealand.

In addition, DuraGen Secure received approval in Japan, while DuraGen Plus was approved in China.

Broadening Impact on Care Pathways.

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Creating a culture focused on empowerment and agility and building a diverse and inclusive workplace are cornerstones of our people strategy.

These efforts resulted in Integra being named in several best workplace lists globally in 2022.

Most recently, Integra China was recognized as a Great Place to Work in Greater China.

These efforts resulted in Integra being named in several best workplace lists globally in 2022, including Integra China being recognized as a Great Place to Work in Greater China.

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Our work to combine our bactiseal antimicrobial technology with the Endexo anti-occlusive technology obtained through our 2019 acquisition of Arkis continues to progress for both a silicone-based hydrocephalus and EVD project.

In 2019, we also acquired Rebound Therapeutics Corporation ("Rebound Therapeutics"), a company that specialized in 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 ICH.

In 2022, 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.

In 2023, we continued to advance our innovation from the Rebound Therapeutics Corporation ("Rebound Therapeutics"), which was acquired in 2019.

Rebound Therapeutics specializes in 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 2022, 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 fluid in the brain.

We are focused on the development of core clinical applications in our electromechanical technologies portfolio.

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and Europe direct markets and continued the global rollout in the first half of 2022.

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.

Refer below to the information appearing in the "FDA Matters" section for additional information on the voluntary recall of the CereLink ICP Monitor System.

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however, out of an abundance of caution, we removed all CereLink monitors from the field.

We are continuing our investigation into the matter in order to remedy the observed issue and plans to resume shipment of the CereLink monitors as soon as any such issues have been resolved and required regulatory reviews have been completed.

We are continuing our work to remedy the observed issue and currently anticipate resuming shipments of the CereLink monitors beginning late in the third quarter of 2023.

Based on the outlook for returning the product to market and feedback from customers, we recorded a $1.9 million provision for product returns, as a reduction of net revenue, and a $0.8 million rework accrual in cost of goods sold in 2022.

In the first quarter of 2023 we recorded an additional $0.8M in provision for product returns as a reduction of net revenue, and no additional rework costs .

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In the first half of 2023 we recorded an additional $0.8 million in provision for product returns as a reduction of net revenue, and no additional rework costs.

On March 7, 2019, TEI Biosciences, Inc.

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

We submitted our initial response to the FDA Warning Letter on March 28, 2019 and provide regular progress reports to the FDA as to its corrective actions and, since the conclusion of the inspection, we have undertaken significant efforts to remediate the observations and continue 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").

We submitted our initial response to the 2019 Warning Letter on March 28, 2019 and provide regular progress reports to the FDA as to its corrective actions.

On October 28, 2021, the FDA initiated an inspection of the facility and at the

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conclusion of the inspection issued an FDA Form 483 on November 12, 2021 (the "2021 Form 483").

We provided an initial response to the inspection observations and will continue to provide responses to the FDA.

On March 1, 2023, the FDA commenced an inspection of the facility, and we anticipate that the FDA will issue an FDA Form 483 at the conclusion of this inspection.

The Warning Letter and the 2021 FDA Form 483 do not restrict our 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.

On March 1, 2023, the FDA commenced an inspection of the Boston facility, and issued an FDA Form 483 at the conclusion of this inspection (the “2023 Form 483”).

On July 19, 2023, TEI received a Warning Letter, dated July 17, 2023, from the FDA related to quality system issues at the TEI Boston facility (the “2023 Warning Letter”).

The 2023 Warning Letter did not identify any new observations that had not already been provided in the 2023 Form 483.

The Company submitted an initial response to the 2023 Form 483 to the FDA and is in the process of preparing a written response to the 2023 Warning Letter.

We are committed to resolving the matters identified in the Warning Letters and Form 483s and are continuing our significant efforts to remediate the observations.

Although the Warning Letters and the Form 483s do not restrict our ability to manufacture or ship products or require the recall of any products, in May 2023, after consultation with the FDA, the Company initiated a voluntary recall of products manufactured in the Boston facility distributed between March 1, 2018 and May 22, 2023, and extended the temporary halt of manufacturing at the facility to implement additional detection and quality controls.

Following implementation of such controls, the Company expects to resume manufacturing at its Boston facility by late in the fourth quarter of 2023.

Additionally, the Warning Letters do not restrict the Company’s ability to seek FDA 510(k) clearance of products, but 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 addressed.

The Boston facility manufactures extracellular bovine matrix products.

We cannot give any assurances that the FDA will be satisfied with our response to the issues identified by the FDA or as to the expected date of the resolution of such issues.

Until the issues cited by the FDA 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, 2023 were approximately 4.4% of consolidated revenues.

Revenues of products manufactured in the Boston facility for the year ended December 31, 2022 were approximately 5.3% of consolidated revenues.

In the second quarter of 2023, due to the voluntary recall of Primatrix®, Surgimend®, Revize™, and TissueMend™, the Company recorded a $12.9 million provision for product returns, as a reduction of net revenue.

Of this amount, $0.7 million was paid out in Q2.

The Company also recorded a $24.1 million write off of inventory that was no longer able to be sold.

Optimization and Integration Activities

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Executive Summary

Net income for the three months ended March 31, 2023 was $24.2 million, or $0.29 per diluted share, as compared to $32.9 million or $0.39 per diluted share for the three months ended March 31, 2022.

The decrease in net income for the three months ended March 31, 2023, was primarily driven by impacts from the SIA acquisition, including additional amortization, research and development, and other costs.

Net income for the three months ended June 30, 2023 was $4.2 million, or $0.05 per diluted share, as compared to $44.8 million or $0.54 per diluted share for the three months ended June 30, 2022.

The decrease in net income for the three months ended June 30, 2023, was primarily driven by impacts from the Boston recall of our TEI products, including inventory write-offs of $24.1 million and a provision for product returns of $12.9 million.

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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 2023 2022 2023 2022

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EU medical device regulation 9,278 10,249 20,682 19,762

Boston recall expenses (1)

28,051 — 28,051 —

Total $ 45,571 $ 12,137 $ 70,086 $ 28,544

(1) This includes inventory write-offs and idle capacity charges.

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, 2023

Dollars in thousands 2023 2022 2023 2022

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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 2023 2022 2023 2022

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Gross margin as a percentage of total revenues 54.3 % 62.7 % 57.7 % 62.4 %

Three Months Ended March 31, 2023 as Compared to Three Months Ended March 31, 2022

For the three months ended March 31, 2023, total revenues increased by $4.2 million to $380.8 million from $376.6 million for the same period in 2022, inclusive of a unfavorable foreign currency impact of $7.0 million on revenues, as well as a $4.5 million decrease that impacts both domestic and international revenues related to the divestiture of the TWC business.

This also includes an increase of $1.8 million related to the SIA acquisition.

Excluding the impacts of these items, domestic revenues increased by $6.8 million, or 2.6% as compared to the prior year period.

International revenues increased by $7.1 million or 6.5% as compared to the prior period.

The increase in domestic revenues was primarily driven by strong sales in our TT segment.

The increase in international revenues was primarily driven by Advanced Energy.

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Three Months Ended June 30, 2023 as Compared to Three Months Ended June 30, 2022

For the three months ended June 30, 2023, total revenues decreased by $16.5 million to $381.3 million from $397.8 million for the same period in 2022, inclusive of an unfavorable foreign currency impact of $1.7 million on revenues, as well as a $3.2 million decrease that impacts both domestic and international revenues related to the divestiture of the TWC business.

This also includes an increase of $2.4 million related to the SIA acquisition.

Excluding the impacts of these items, domestic revenues decreased by $12.2 million, or 4.3% as compared to the prior year period.

International revenues decreased by $1.8 million or 1.7% as compared to the prior period.

The decrease in domestic revenues was primarily driven by decreases related to the Boston recall, offset by increases in our Instruments portfolio.

The decrease in international revenues was primarily driven by decreases related to the Boston recall, offset by increases in the neurosurgery and instruments portfolio.

In the CSS segment, revenues were $271.0 million which was an increase of $13.2 million, or 5.1% as compared to the prior-year period, inclusive of a $1.7 million unfavorable foreign currency impact on revenue.

Excluding the impact of foreign exchange, Neurosurgery portfolio grew low single digits primarily due to sales in Advanced Energy.

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 $132.7 million which was an increase of $3.4 million, or 2.6% from the prior-year period, inclusive of a $0.6 million unfavorable foreign currency impact on revenue, as well as a $4.5 million decrease that impacts both domestic and international revenues related to the divestiture of the TWC business.

Excluding the impact of foreign exchange, Neurosurgery portfolio grew low single digits primarily due to sales in Dural Access and Programmable Valves.

Sales in our instruments portfolio increased low-double digits as compared to the same period in the prior year.

In the TT segment, revenues were $110.2 million which was a decrease of $29.7 million, or 21.2% from the prior-year period, with no meaningful impact from foreign currency on revenue, as well as a $3.2 million decrease that impacts both domestic and international revenues related to the divestiture of the TWC business.

This also includes an increase of $2.4 million related to the SIA acquisition.

Excluding the impact of these items, our sales increased mid single digits, driven by strong customer demand and increased burn cases.

Gross margin was $232.9 million for the three months ended March 31, 2023, a decrease of $1.2 million from $234.1 million for the sa me period in 2022.

Gross margin as a percentage of revenues was 61.1% for the three months ended March 31, 2023 and 62.1% f or the sa me period in 2022.

This decrease in gross margin is a result of unfavorable product mix and an increase in manufacturing costs.

Operating Expenses

Excluding the impact of these items, the primary driver of the decrease was related to the Boston recall.

Gross margin was $207.0 million for the three months ended June 30, 2023, a decrease of $42.4 million from $249.4 million for the sa me period in 2022.

Gross margin as a percentage of revenues was 54.3% for the three months ended June 30, 2023 and 62.7% f or the sa me period in 2022.

This decrease in gross margin is primarily the result of expenses associated with the Boston recall.

Operating Ex penses

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

Three Months Ended March 31,

Three Months Ended June 30,

Research and development 7.0 % 6.4 %

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Total operating expenses 51.1 % 47.6 %

Total operating expenses, which consist of research and development, selling, general and administrative, and amortization expenses, increased by $8.6 million, or 4.6% to $196.5 million in the three months ended March 31, 2023, compared to $187.9 million in the same period in 2022.

The increase in operating expenses compared to the prior year is primarily a result of the SIA acquisition combined with increases in selling costs associated with higher revenue.

Total operating expenses, which consist of research and development, selling, general and administrative, and amortization expenses, increased by $5.0 million, or 2.6% to $194.5 million in the three months ended June 30, 2023, compared to $189.5 million in the same period in 2022.

The increase in operating expenses compared to the prior year is primarily a result of the SIA acquisition combined with higher spend in selling activities as a percentage of revenue.

Research and Development

Research and development expenses for the three months ended March 31, 2023 increased by $2.6 million as compared to the same period in the prior year.

Research and development expenses for the three months ended June 30, 2023 increased by $1.0 million as compared to the same period in the prior year.

This increase in spending resulted from additional spending related to the SIA acquisition, new product development and clinical studies.

Selling, General and Administrative

Selling, general and administrative costs for the three months ended March 31, 2023 increased by $6.7 million as compared to the same period in the prior year driven primarily due to increased selling costs associated with SIA acquisition and costs associated with consulting activities.

Selling, general and administrative costs for the three months ended June 30, 2023 increased by $4.3 million as compared to the same period in the prior year driven primarily due to increased costs associated with SIA acquisition and costs associated with higher spend in commercial selling activities.

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, 2023 was $3.1 million compared to $3.9 million for the same period in the prior year.

Amortization expense (exclu din g amounts reported in cost of product revenues for technology-based intangible assets) for the three months ended June 30, 2023 was $3.0 million compared to $3.3 million for the same period in the prior year.

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

Three Months Ended March 31,

Three Months Ended June 30,

Dollars in thousands 2023 2022

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Interest Income

Interest income for the three months ended March 31, 2023 increased by $2.7 million as compared to the same period in the prior year due to higher interest rates.

Interest income for the three months ended June 30, 2023 increased by $2.0 million as compared to the same period in the prior year due to higher interest rates.

Interest Expense

Interest expense for the three months ended March 31, 2023 decreased by $0.4 million as compared to the same period in the prior year.

Interest expense for the three months ended June 30, 2023 increased by $0.2 million as compared to the same period in the prior year.

Other Income, net

Other income, net for the three months ended March 31, 2023 decreased by $2.0 million compared to the same period in the prior year.

The decrease is primarily driven by lower Transition Service Agreement ("TSA") income from the sale of our Extremity orthopedics business, offset by additional TSA income from the sale of our TWC business.

Three Months Ended March 31,

Other income, net for the three months ended June 30, 2023 decreased by $2.1 million compared to the same period in the prior year.

The decrease is primarily driven by lower Transition Service Agreement ("TSA") income from our recent divestitures.

Three Months Ended June 30,

Dollars in thousands 2023 2022

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Effective tax rate (9.4) % 13.2 %

Our effective income tax rates for the three months ended March 31, 2023 and 2022 were 18.6% and 16.3%, respectively.

For the three months ended March 31, 2023, the primary driver of the higher tax rate relates to a reduction of excess tax benefits from stock compensation.

Our effective income tax rates for the three months ended June 30, 2023 and 2022 were (9.4)% and 13.2%, respectively.

For the three months ended June 30, 2023, the primary drivers of the lower tax rate relate to a reduction to book income and a $1.1 million benefit associated with the Federal R&D credit.

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

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Six Months Ended June 30, 2023 as Compared to Six Months Ended June 30, 2022

Revenues and Gross Margin

For the six months ended June 30, 2023, total revenues decreased by $12.3 million to $762.1 million from $774.5 million for the same period in 2022, inclusive of an unfavorable foreign currency impact of $8.7 million on revenues, as well as a $7.7 million decrease that impacts both domestic and international revenues related to the divestiture of the TWC business.

This also includes an increase of $4.2 million related to the SIA acquisition.

Excluding the impacts of these items, domestic revenues decreased by $5.4 million, or 1.0% as compared to the prior year period.

International revenues increased by $5.3 million or 2.4% as compared to the prior period.

The decrease in domestic revenues was primarily driven by decreases related to the Boston recall, offset by increases in our Instruments portfolio.

The decrease in international revenues was primarily driven by decreases related to the Boston recall, offset by increases in the neurosurgery and instruments portfolio.

In the CSS Segment segment revenues were $519.2 million an increase of $14.0 million, or 2.8% from the prior period, inclusive of a $8.1M unfavorable foreign currency impact on revenue.

Excluding the impact of foreign exchange, Neurosurgery portfolio grew low single digits primarily due to sales in Dural Access and Programmable Valves.

Sales in our instruments portfolio increased low-double digits as compared to the same period in the prior year.

In the Tissue Technologies segment revenues were $242.9 million, a decrease of $26.3 million, or 9.8% from the prior-year period, inclusive of a $0.6 million unfavorable foreign currency impact on revenue, as well as a $7.7 million decrease that impacts both domestic and international revenues related to the divestiture of the TWC business.

This also includes an increase of $4.2 million related to the SIA acquisition.

Excluding the impact of these items, the primary diver of the decrease was related to the Boston recall.

Gross margin was $439.9 million for the six months ended June 30, 2023, a decrease of $43.6 million from $483.5 million for the same period last year.

Gross margin as a percentage of total revenue decreased to 57.7% for the six months ended June 30, 2023 from 62.4% in the sam e period last year.

The decrease in gross margin percentage was due to expenses associated with the Boston recall.

Operating Expenses

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

Six Months Ended June 30,

Research and development 7.0 % 6.4 %

Selling, general and administrative 43.5 % 41.4 %

Intangible asset amortization 0.8 % 0.9 %

Total operating expenses 51.3 % 48.7 %

Total operating expenses, which consist of selling, general and administrative expenses, research and development expenses, and amortization expenses, increased by $13.6 million, or 3.6% to $391.0 million in the six months ended June 30, 2023, compared to $377.4 million in the same period in 2022.

Research and Development

Research and development expenses for the six months ended June 30, 2023 increased by $3.6 million as compared to the same period in the prior year.

This increase in spending resulted from additional spending related to the SIA acquisition, new product development and clinical studies.

Selling, General and Administrative

Selling, general and administrative costs inc reased by $11.0 milli on as compared to the same period in the prior year driven primarily due to increased selling costs associated with SIA acquisition and costs associated with higher spend in commercial selling activities.

Intangible Asset Amortization

A mortization expense (excludin g amounts reported in cost of product revenues for technology-based intangible assets) for the six months ended June 30, 2023 was $6.1 million compared to $7.2 million for the same period in prior year.

We expect total annual amortization expense to be approximately $41.4 million for the remainder of 2023, $82.2 million in 2024, $82.2 million in 2025, $82.0 million in 2026, $80.0 million in 2027, $78.5 million in 2028 and $477.1 million thereafter.

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Non-Operating Income and Expenses

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

Six Months Ended June 30,

Dollars in thousands 2023 2022

Interest income $ 8,046 $ 3,342

Interest expense (24,564) (23,891)

Other income, net 1,234 5,408

Total non-operating income and expense $ (15,284) $ (15,141)

Interest Income

In terest income for the six months ended June 30, 2023 increased by $4.7 million as compared to the same period last year due to higher interest rates.

Interest Expense

Interest expense for the six months ended June 30, 2023 increased by $0.7 million as compared to the same period last year.

Other Income, net

Other income, net for the six months ended June 30, 2023, decreased by $4.2 million primarily due to lower Transition Service Agreement ("TSA") income from our recent divestitures.

Six Months Ended June 30,

Dollars in thousands 2023 2022

Income before income taxes $ 33,602 $ 90,890

Income tax (benefit) expense 5,192 13,201

Effective tax rate 15.5 % 14.5 %

The Company’s effective income tax rates for the six months ended June 30, 2023 and 2022 were 15.5% and 14.5%, r espectively.

For the six months ended June 30, 2023, the primary drivers of the tax rate relate to a reduction to book income and a $1.1 million benefit associated with the Federal R&D credit.

The lower rate from the six months ended June 30, 2022 was primarily due to a $5.7 million benefit related to excess tax benefits from stock compensation.

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 2023 2022 2023 2022

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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 $7.7 million for the three months ended March 31, 2023 compared to the same period last year.

European sales decreased by $2.7 million for the three months ended March 31, 2023 compared to the same period last year.

Sales to customers in Asia Pacific increased by $2.8 million for the three months ended March 31, 2023.

The Rest of World for the three months ended March 31, 2023 decreased by $3.5 million compared to the same period last year.

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Domestic revenues decreased by $10.6 million for the three months ended June 30, 2023 compared to the same period last year.

European sales decreased by $9.4 million for the three months ended June 30, 2023 compared to the same period last year.

Sales to customers in Asia Pacific increased by $4.3 million for the three months ended June 30, 2023.

Sales to customers in the the Rest of World for the three months ended June 30, 2023 decreased by $0.9 million compared to the same period last year.

The international revenues were impacted by $1.7 million of unfavorable foreign exchange impact, with the larger impact in Europe.

The increase in global revenues, inclusive of a $7.0 million unfavorable foreign exchange impact on revenue, is a result of strong sales in our TT division and our international businesses.

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

The decrease in global revenues is primarily the result of the Boston recall which affected both Domestic and International markets.

Sales in Japan and China led to continued growth in our Asia Pacific market.

Domestic revenues decreased by $2.9 million for the six months ended June 30, 2023 compared to the same period last year.

European sales decreased by $12.1 million for the six months ended June 30, 2023 compared to the same period last year.

Sales to customers in Asia Pacific increased by $7.1 million million for the six months ended June 30, 2023.

Sales to customers in the Rest of World for the six months ended June 30, 2023 decreased by $4.4 million million compared to the same period last year.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital

The Company's working capital as of March 31, 2023 and December 31, 2022 was $747.2 million and $840.6 million, respectively.

The Company's working capital as of June 30, 2023 and December 31, 2022 was $673.8 million and $840.6 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 $307.4 million and $456.7 million at March 31, 2023 and December 31, 2022 respectively, which are valued based on Level 1 measurements in the fair value hierarchy.

At March 31, 2023, our non-U.S.

The Company had cash and cash equivalents totaling approximately $309.2 million and $456.7 million at June 30, 2023 and December 31, 2022 respectively, which are valued based on Level 1 measurements in the fair value hierarchy.

At June 30, 2023, our non-U.S.

subsidiaries held approximately $267.1 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 2023 2022

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Cash Flows Provided by Operating Activities

Operating cash flows for the three months ended March 31, 2023 decreased by $18.2 million compared to the same period in 2022.

Net income after removing the non-cash adjustments decreased for the three months ended March 31, 2023 by approximately $5.3 million as compared to the same period in 2022 primarily due to higher product costs and expenses related to support for key growth initiatives in research and development, selling and marketing areas.

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The changes in assets and liabilities in the first quarter of 2023, net of business acquisitions, decreased cash flows by $42.6 million, mainly attributable to increases in inventory to support increased sales and decreases in accrued expenses and other current liabilities due to increased payments processed in the quarter.

The changes in assets and liabilities in the first quarter of 2022, net of business acquisitions, decreased cash flows by $29.8 million, primarily due to increases in inventory to support increased sales and decreases in accounts payable, accrued expenses and other current liabilities due to increased payments processed in the quarter.

Operating cash flows for the six months ended June 30, 2023 decreased by $56.4 million compared to the same period in 2022.

Within operating cash flows, n et income less non-cash adjustments decreased for the six months ended June 30, 2023 by approximately $45.3 million as compared to the same period in 2022 primarily due to lower revenues and margins and higher selling expenses .

The changes in assets and liabilities for the six months ended June 30, 2023 , net of business acquisitions, decreased cash flows by $57.6 million, mainly attributable to increases in inventory and other current assets, offset by increases in accrued expenses and other current liabilities due to reduced payments processed in the quarter.

The changes in assets and liabilities for the six months ended June 30, 2022, net of business acquisitions, decreased cash flows by $46.5 million, primarily due to increases in inventory to support increased sales and decreases in accounts payable, accrued expenses and other current liabilities due to increased payments processed in the quarter.

Cash Flows Used in Investing Activities

During the three months ended March 31, 2023, we paid $13.7 million for capital expenditures to support operations improvement initiatives at a number of our manufacturing facilities and other information technology investments.

During the three months ended March 31, 2022, we 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 six months ended June 30, 2023, we paid $29.3 million for capital expenditures to support operations improvement initiatives at a number of our manufacturing facilities and other information technology investments.

During the six months ended June 30, 2022 , we 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.

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Cash Flows Used in Financing Activities

Uses of cash from financing activities in the three months ended March 31, 2023 related to the repurchase of treasury stock of $150.0 million under the 2023 accelerated share repurchase agreement, repayments of $12.4 million under our Senior Credit Facility and Securitization Facility.

Uses of cash from financing activities in the six months ended June 30, 2023 related to the repurchase of treasury stock of $150.0 million under the 2023 accelerated share repurchase agreement, repayments of $29.1 million under our Senior Credit Facility and Securitization Facility.

We also had $7.6 million in payment of debt issuance costs.

In addition, the Company had $5.3 million in cash taxes paid for net equity settlements.

Sources of cash from financing activities for the three months ended March 31, 2023 were $10.2 million borrowing under our Senior Credit Facility and Securitization Facility and $2.3 million proceeds from the exercise of stock options.

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.

Sources of cash from financing activities for the six months ended June 30, 2023 were $15.2 million borrowing under our Senior Credit Facility and Securitization Facility and $3.4 million proceeds from the exercise of stock options.

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, repayments of $23.0 million under our Senior Credit Facility and Securitization Facility.

In addition, we had $23.2 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.

Sources of cash from financing activities for the six months ended June 30, 2022 were $23.0 million borrowing under our Senior Credit Facility and Securitization Facility and $1.6 million proceeds from the exercise of stock options.

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

Debt , to the Notes to Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report) 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 Quarterly Report) for discussion of our hedging activities.

Debt , to the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report) 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 Unaudited Condensed Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report) 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 March 2023 Amendment to the Senior Credit Facility.

Share Repurchase Plan

On January 26, 2023, we entered into ("the 2023 ASR") and received 2.1 million shares of our common stock at inception of the 2023 ASR, which represented approximately 80% of the expected total shares under the 2023 ASR.

The remaining repurchase transactions are expected to be completed in the second quarter of 2023.

On January 26, 2023, the Company entered into a $150 million accelerated share repurchase ("2023 ASR") and received 2.1 million shares of the Company common stock at inception of the 2023 ASR, which represented approximately 80% of the expected total shares under the 2023 ASR.

The settlement of the ASR agreement was completed in two separate transactions on April 26, 2023 and May 4, 2023, where the Company received an additional 0.30 million and 0.31 million shares respectively, determined using the volume-weighted average price of the Company's common stock during the term of the 2023 ASR.

On January 12, 2022, we entered into a $125.0 million accelerated share repurchase ("2022 ASR") and received 1.48 million shares of our common stock at inception of the 2022 ASR, which represented approximately 80% of the expected total shares under the 2022 ASR.

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Upon settlement of the 2022 ASR on March 24, 2022, we received an additional 0.46 million shares determined using the volume-weighted average price of our common stock during the term of the 2022 ASR.

Treasury Stock, to the Notes to Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report) for further details.

Treasury Stock, to the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report) for further details.

Dividend Policy

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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.

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Capital Resources

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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, 2023 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, 2023 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.

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Contractual Obligations and Commitments

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Retirement Plans , and Note 16.

Commitments and Contingencies , to the Notes to Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report) for details.

Commitments and Contingencies , to the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report) for details.

The associated obligations are not fixed.

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Critical Accounting Estimates

The critical accounting estimates included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 have not materially changed.

We based the discussion and analysis of our financial condition and results of operations upon our consolidated financial statements, which have been prepared in conformity with GAAP.

The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent liabilities, and the reported amounts of revenues and expenses.

The critical accounting estimates discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 did not materially change in the three months ended June 30, 2023.

Recently Issued Accounting Standards

Information regarding new accounting pronouncements is included in Note 1.

Basis of Presentation , to the Notes to Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report) to the current period’s condensed consolidated financial statements.

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Basis of Presentation , to the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report), and is applicable to the current period’s condensed consolidated financial statements.

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