What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-10-25 compared with 2023-07-27 · 170 added, 134 removed, 285 unchanged (52% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes thereto appearing elsewhere in this report and our consolidated financial statements for the year ended December 31, 2022 included in our Annual Report on Form 10-K.

The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto appearing elsewhere in this report and our consolidated financial statements for the year ended December 31, 2022 included in our Annual Report on Form 10-K.

We have made statements in this report that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”).

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

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

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and the potential impact of our compliance with governmental regulations and accounting guidance.

On September 12, 2023, a securities class action complaint, captioned Pembroke Pines Firefighters & Police Officers Pension Fund v.

Integra LifeSciences Holdings Corporation , No.

23-cv-20321 (D.N.J.), was filed by a purported stockholder of the Company in the United States District Court for the District of New Jersey (the “Pembroke Litigation”) against the Company and certain of the Company’s current and former executive officers.

The Pembroke Litigation, filed on behalf of a putative class of stockholders who purchased or acquired the Company’s common stock between March 11, 2019 and May 22, 2023, inclusive, alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, on the basis of purportedly materially false and misleading statements and omissions relating to certain quality systems issues identified by the U.S.

Food and Drug Administration at the Company’s Boston, Massachusetts manufacturing facility, the Company’s efforts to remediate those issues, and the Company’s forecasts for certain products in its Tissue Technologies segment.

The complaint seeks, among other things, compensatory damages, attorneys’ fees, expert fees, and other costs.

The Company believes that it has strong defenses to the allegations in the Pembroke Litigation, as we intend to defend the matter vigorously.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, results of operations, financial condition, and/or cash flows.

These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks, uncertainties and assumptions described in the “Risk Factors” section and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2022.

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December 31, 2022.

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.

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We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by applicable law.

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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.

Integra LifeSciences is a world leader in medical technologies and products that transform surgical, neurologic and regenerative care to help restore patients’ lives.

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

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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 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.

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.

Following 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.

We have 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.

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Integra is well-established in acute care in the hospital setting and plans to leverage that strong position to grow in this segment and shape treatment pathways into preoperative care and additional sites of care.

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Driving Operations and Customer Excellence.

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Additionally, we continue to invest in technologies, systems and processes to enhance the customer experience.

In 2023, we continue to invest in our capacity expansion.

This includes ongoing projects of transferring our Boston manufacturing to a new location in Braintree, MA., validating manufacturing processes in our 109 facility in Plainsboro, and increasing cleanroom capacity in our Memphis location.

In 2022, certain transactional back-office finance and customer service activities were outsourced to enhance customer quality, build scale for future growth, and capture cost efficiencies.

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These efforts resulted in Integra being named in several best workplace lists globally in 2023, including Integra China being recognized as a Great Place to Work in Greater China.

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Additionally, we have been making great strides in advancing our environmental, social and governance ("ESG") agenda to drive sustainability across the organization and recently published our first ESG report in late 2022.

Clinical and Product Development Activities

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We continue to update our CUSA Clarity platform by incorporating new ultrasonic handpiece and integrated electrosurgical capabilities.

We launched a modified 23 kHz CUSA Electrosurgery Module (CEM) for Clarity handpieces that can be used with additional electrosurgery generators in August 2023.

In 2023, we continued to advance the early-stage technology platforms we acquired in 2019.

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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.

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.

Our work to combine our Bactiseal® antimicrobial technology with the Endexo anti-occlusive technology continues to progress for both a silicone-based hydrocephalus and EVD project.

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 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 blood evacuation.

Rebound Therapeutics specializes in single-use medical device, known as the 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 ini tiated a registry called MIRROR to collect data on early surgical intervention using this same technology platform for blood evacuation.

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.

Additionally, the 9 mm Surgiscope 510(k) was submitted to the FDA in August 2023 and is currently under review, with clearance and launch expected in Q4 2023 or Q1 2024.

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

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

In 2021, we launched our CereLink ICP Monitor System in the U.S.

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

We launched our CereLink ICP Monitor System in the U.S.

and Europe direct markets.

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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market where SIA is pursuing pre-market approval for use in IBBR.

In 2023, the Company received 510(k) clearance for MicroMatrix® Flex

As part of our ongoing efforts to remain compliant, the Company continues to work towards European Union Medical Device Regulation ("EU MDR") certifications.

In 2023 the Company has received EU MDR certification in the CSS segment for Hakim Programmable Valves.

Additionally, the Company has received EU MDR certification in the TT segment for IDRT and BioPatch.

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On August 18, 2022, we, after consultation with the FDA and other regulatory authorities outside of the United States, initiated an immediate voluntary global product removal of all CereLink intracranial pressure monitors as a result of customer reports about monitors whose pressure readings were out of range.

We believe that the out-of-range readings are principally caused by electrical interference from the external environment and/or interference from a component on the circuit board of the monitor.

We believe that the out-of-range readings are principally caused by a combined interaction of electrical noise (originating from sources such as electrical components in the device, other devices set up near the CereLink Monitor, and the hospital power grid) and an electrical potential difference between the patient and monitor.

These out-of-range readings have occurred at a low incidence rate and at a limited number of sites;

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

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 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.

We submitted a traditional application for 510(k) to the FDA on September 15, 2023 which includes design changes to remedy the issue.

We plan to resume shipments of CereLink monitors in the U.S.

following receipt of 510(k) clearance.

Shipments resumed in international markets with a limited release in Q3 2023.

As of September 30, 2023, we maintained a $1.3 million provision for product returns, and a $0.8 million rework accrual.

On March 7, 2019, TEI Biosciences, Inc.

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The 2019 Warning Letter related to quality systems issues at TEI's manufacturing facility located in Boston, Massachusetts.

The Boston facility manufactures extracellular bovine matrix products.

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

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”).

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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.

The Company has submitted an initial response to the FDA for both the 2023 Form 483 and 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.

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

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.

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 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.

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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.

In the nine months ended September 30, 2023, due to the Boston recall, the Company recorded a $19.7 million provision for product returns, as a reduction of net revenue.

Of this amount, $9.0 million was credited to customers in the nine months ended September 30, 2023.

The Company also recorded a $24.6 million write off of inventory that was no longer able to be sold.

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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 transferred production to our existing Switzerland facility .

In 2022, we outsourced certain transactional back-office finance and customer service activities to enhance customer quality, build scale for future growth, and capture cost efficiencies.

In support of our continued focus on product margins we closed a manufacturing facility located in France in 2022, and transferred production to our existing Switzerland facility.

In addition to closing the manufacturing facility, we outsourced certain transactional back-office finance and customer service activities to enhance customer quality, build scale for future growth, and capture cost efficiencies.

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RESULTS OF OPERATIONS

Executive Summary

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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Net income for the three and nine months ended September 30, 2023 was $19.5 million and $47.9 million, or $0.24 and $0.59 per diluted share respectively, as compared to $49.9 million and $127.6 million or $0.60 and $1.53 per diluted share for the three and nine months ended September 30, 2022.

The decrease in net income for the three and nine months ended September 30, 2023, was primarily driven by impacts from the Boston recall.

This includes inventory write-offs of $24.6 million and a provision for product returns of $19.7 million for the nine months ended September 30, 2023.

Special Charges

Income before taxes includes the following special charges :

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

Three Months Ended September 30, Nine Months Ended September 30,

Dollars in thousands 2023 2022 2023 2022

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

Three Months Ended June 30, Six Months Ended June 30, 2023

Three Months Ended September 30, Nine Months Ended September 30,

Dollars in thousands 2023 2022 2023 2022

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Selling, general and administrative 14,302 877 37,371 12,440

Gain from Sale of Business — (644) — (644)

Other income (122) (676) (749) (3,161)

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We provide this information to investors so that they can analyze our operating results in the same way that management does and to use this information in their assessment of our core business and valuation of Integra.

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Revenues and Gross Margin

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

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

Three Months Ended September 30, Nine Months Ended September 30,

Dollars in thousands 2023 2022 2023 2022

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Gross margin as a percentage of total revenues 57.1 % 61.5 % 57.5 % 62.1 %

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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 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.

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

For the three months ended September 30, 2023, total revenues decreased by $2.8 million to $382.4 million from $385.2 million for the same period in 2022.

This decrease was primarily driven by the impact of the Boston recall, which was comprised of $6.8 million of return reserve recorded, as well as a decline in revenue of $20.5 million.

The decrease was also inclusive of a favorable foreign currency impact of $1.0 million on revenues, as well as a $4.4 million decrease that impacts both domestic and international revenues related to the divestiture of the TWC business.

This also includes an increase of $2.9 million related to the SIA Acquisition.

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.

Excluding the impacts of these items, domestic revenues increased by $11.2 million, or 4.3% as compared to the prior year period.

International revenues increased by $14.5 million or 14.9% as compared to the prior period.

The increase in domestic revenues was primarily driven by our Instruments and Neurosurgery portfolios.

The increase in international revenues was primarily driven by increases in our APAC region including China, Japan, and Australia.

In the CSS segment, revenues were $268.2 million which was an increase of $18.4 million, or 7.4% as compared to the prior-year period , inclusive of a $0.9 million favorable foreign currency impact on revenue.

Excluding the impact of foreign exchange, Neurosurgery portfolio grew mid single digits primarily due to sales in Dural Access, Neuro Monitoring 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 $114.2 million which was a decrease of $21.2 million, or 15.6% from the prior-year period.

This decrease is primarily driven by the impact of the Boston recall of $6.8 million additional return reserve and $20.5 million decline in revenue.

The decrease is also inclusive of a $0.1 million favorable foreign currency impact on revenue, a $4.4 million decrease that impacts both domestic and international revenues related to the divestiture of the TWC business, and an increase of $2.9 million related to the SIA Acquisition.

Excluding the impact of these items, the TT segment increased high single digits as compared to the same period in the prior year, attributable to strong sales in MicroMatrix®, Cytal®, Gentrix® and amniotics.

Gross margin was $218.3 million for the three months ended September 30, 2023, a decrease of $18.4 million from $236.7 million for the sa me period in 2022.

Gross margin as a percentage of revenues was 57.1% for the three months ended September 30, 2023 and 61.5% f or the sa me period in 2022.

The decrease in gross margin percentage was primarily associated with the Boston recall, which includes a provision for product returns of $6.8 million and idle capacity at the Boston facility of $5.1 million for the three months ended September 30, 2023.

Operating Ex penses

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

Three Months Ended June 30,

Three Months Ended September 30,

Research and development 7.0 % 6.4 %

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Total operating expenses 50.1 % 44.5 %

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.

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Total operating expenses, which consist of research and development, selling, general and administrative, and amortization expenses, increased by $20.1 million, or 11.7% to $191.8 million in the three months ended September 30, 2023, compared to $171.7 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 June 30, 2023 increased by $1.0 million as compared to the same period in the prior year.

Research and development expenses for the three months ended September 30, 2023 increased by $1.9 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 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.

Selling, general and administrative costs for the three months ended September 30, 2023 increased by $18.1 million as compared to the same period in the prior year driven primarily due to increased costs associated with SIA Acquisition and higher spend in commercial selling activities.

Prior year expenses included a reduction in the fair value of contingent consideration for ACell of $13.1 million.

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, 2023 was $3.0 million compared to $3.3 million for the same period in the prior year.

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Amortization expense (exclu din g amounts reported in cost of product revenues for technology-based intangible assets) for the three months ended September 30, 2023 was $3.2 million compared to $3.1 million for the same period in the prior year.

Non-Operating Income and Expenses

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

Three Months Ended June 30,

Three Months Ended September 30,

Dollars in thousands 2023 2022

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Interest expense (13,062) (12,809)

Gain (loss) from the sale of business — 644

Other income, net 471 2,648

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Interest Income

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 income for the three months ended September 30, 2023 increased by $1.3 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 June 30, 2023 increased by $0.2 million as compared to the same period in the prior year.

Interest expense for the three months ended September 30, 2023 increased by $0.3 million as compared to the same period in the prior year.

Other Income, net

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.

Other income, net for the three months ended September 30, 2023 decreased by $2.2 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,

Three Months Ended September 30,

Dollars in thousands 2023 2022

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Effective tax rate (4.8) % 15.1 %

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.

Our effective income tax rates for the three months ended September 30, 2023 and 2022 were (4.8)% and 15.1%, respectively.

For the three months ended September 30, 2023, the primary drivers of the lower tax rate relate to a reduction to book income in higher-taxed jurisdictions and a $3.3 million benefit related to the filing of the prior year tax returns.

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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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Our 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.

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

Nine Months Ended September 30, 2023 as Compared to Nine Months Ended September 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.

For the nine months ended September 30, 2023, total revenues decreased by $15.1 million to $1,144.5 million from $1,159.6 million for the same period in 2022.

This decrease was primarily driven by the impact of the Boston recall, which was comprised of $19.7 million of return reserve recorded, as well as a decline in revenue of $42.4 million.

The decrease was also inclusive of an unfavorable foreign currency impact of $7.7 million on revenues, as well as a $16.3 million decrease that impacts both domestic and international revenues related to the divestiture of the TWC business.

This also includes an increase of $7.2 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.

Excluding the impacts of these items, domestic revenues increased by $36.8 million, or 4.7% as compared to the prior year period.

International revenues increased by $30.2 million or 9.8% 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.

The increase in domestic revenues was primarily driven by increases in our Instruments and Neurosurgery portfolio.

The increase in international revenues was primarily driven by our APAC region including China, Japan, and Australia.

In the CSS Segment, revenues were $787.4 million an increase of $32.4 million, or 4.3% from the prior period, inclusive of a $7.2M unfavorable foreign currency impact on revenue.

Excluding the impact of foreign exchange, Neurosurgery portfolio grew mid single digits primarily due to sales in Dural Access, CSF Management, and Advanced Energy.

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

In the TT segment, revenues w ere $357.2 million, a decrease of $47.5 million, or 11.7% from the prior-year period, inclusive of a $0.5 million unfavorable foreign currency impact on revenue, a $16.3 million decrease that impacts both domestic and international revenues related to the divestiture of the TWC business, and of $7.2 million related to the SIA Acquisition.

This also includes the impact of the Boston recall of $19.7 million return reserve and $42.4 million decline in revenue.

Gross margin was $658.2 million for the nine months ended September 30, 2023, a decrease of $62.0 million from $720.2 million for the same period last year.

Gross margin as a percentage of total revenue decreased to 57.5% for the nine months ended September 30, 2023 from 62.1% in the same period last year.

The decrease in gross margin percentage was primarily associated with the Boston recall, which includes inventory write-offs of $24.6 million, a provision for product returns of $19.7 million, and idle capacity at the Boston facility of $9.0 million for the nine months ended September 30, 2023.

Operating Expenses

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

Six Months Ended June 30,

Nine Months Ended September 30,

Research and development 7.0 % 6.4 %

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Total operating expenses 50.9 % 47.4 %

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.

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Total operating expenses, which consist of selling, general and administrative expenses, research and development expenses, and amortization expenses, increased by $33.6 million, or 6.1% to $582.8 million in the nine months ended September 30, 2023, compared to $549.1 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.

Research and development expenses for the nine months ended September 30, 2023 increased by $5.5 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.

Selling , general and administrative costs increased by $29.1 million as compared to the same period in the prior year driven primarily due to increased costs associated with SIA Acquisition and higher spend in commercial selling activities.

Prior year expenses included a reduction in the fair value of contingent consideration for ACell of $13.1 million.

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.

A mortization expense (excludin g amounts reported in cost of product revenues for technology-based intangible assets) for the nine months ended September 30, 2023 was $9.3 million compared to $10.3 million for the same period in prior year.

We expect total annual amortization expense to be approximately $20.7 million for the remainder of 2023, $82.2 million in 2024, $82.1 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,

Nine Months Ended September 30,

Dollars in thousands 2023 2022

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Interest expense (37,626) (36,700)

Gain from the sale of business — 644

Other income, net 1,705 8,056

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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 income for the nine months ended September 30, 2023 increased by $6.0 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.

Interes t expense for the nine months ended September 30, 2023 increased by $0.9 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,

Othe r income, net for the nine months ended September 30, 2023, decreased by $6.4 million primarily due to lower Transition Service Agreement ("TSA") income from our recent divestitures.

Nine Months Ended September 30,

Dollars in thousands 2023 2022

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Effective tax rate 8.2 % 14.8 %

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.

The Company’s effective income tax rates for the nine months ended September 30, 2023 and 2022 were 8.2% and 14.8%, r espectively.

For the nine months ended September 30, 2023, the primary drivers of the lower tax rate relate to a reduction to book income in higher-taxed jurisdictions and a $3.8 million benefit related to the filing of the prior year tax returns.

The lower rate from the nine months ended September 30, 2022 was primarily due to a $5.5 million benefit related to excess tax benefits from stock compensation.

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GEOGRAPHIC PRODUCT REVENUES AND OPERATIONS

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Total revenue by major geographic area consisted of the following:

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

Three Months Ended September 30, Nine Months Ended September 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.

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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.

Domestic revenues decreased by $12.2 million for the three months ended September 30, 2023 compared to the same period last year.

European sales increased by $3.2 million for the three months ended September 30, 2023 compared to the same period last year.

Sales to customers in Asia Pacific increased by $6.0 million for the three months ended September 30, 2023.

Sales to customers in the the Rest of World for the three months ended September 30, 2023 increased by $0.2 million compared to the same period last year .

The international revenues were impacted by $1.0 million of favorable foreign exchange impact, with the larger impact in Europe.

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.

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

Domestic revenues decreased by $15.1 million for the nine months ended September 30, 2023 compared to the same period last year.

European sales decreased by $8.9 million for the nine months ended September 30, 2023 compared to the same period last year.

Sales to customers in Asia Pacific increased by $13.1 million million for the nine months ended September 30, 2023.

Sales to customers in the Rest of World for the nine months ended September 30, 2023 decreased by $4.3 million million compared to the same period last year.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital

The Company's working capital as of June 30, 2023 and December 31, 2022 was $673.8 million and $840.6 million, respectively.

The Company's working capital as of September 30, 2023 and December 31, 2022 was $671.5 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 $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.

The Company had cash and cash equivalents totaling approximately $273.7 million and $456.7 million at September 30, 2023 and December 31, 2022 respectively, which are valued based on Level 1 measurements in the fair value hierarchy.

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

subsidiaries held approximately $247.7 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..

Six Months Ended June 30,

Nine Months Ended September 30,

Dollars in thousands 2023 2022

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Effect of exchange rate fluctuations on cash (4,150) (22,632)

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Cash Flows Provided by Operating Activities

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.

Operating cash flows for the nine months ended September 30, 2023 decreased by $97.9 million compared to the same period in 2022.

Within operating cash flows, n et income less non-cash adjustments decreased for the nine months ended September 30, 2023 by approximately $55.9 million as compared to the same period in 2022 primarily due to low er revenues attributable to the Boston recall along with higher selling expenses.

The changes in assets and liabilities for the nine months ended September 30, 2023 , net of business acquisitions, decreased cash flows by $91.7 million , mainly attributable to increases in inventory, other current assets, and decreases in accrued expenses and other current liabilities due to reduced payments processed during the year.

The changes in assets and liabilities for the nine months ended September 30, 2022, net of business acquisitions, decreased cash flows by $49.7 million , primarily due to increases in inventory to support increased sales.

Cash Flows Used in Investing Activities

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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Uses of cash from investing activities for the nine months ended September 30, 2023 related to $42.3 million paid for capital expenditures to support operations improvement initiatives at a number of our manufacturing facilities and other information technology investments.

Sources of cash from investing activities for the nine months ended September 30, 2023 were $5.4 million in proceeds from settlement of our net investment hedges.

Uses of cash from investing activities during the nine months ended September 30, 2022 related to $27.9 million paid 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.

Sources of cash from investing activities during the nine months ended September 30, 2022 included proceeds from the sale of the TWC business of $24.0 million.

The proceeds from the sale of the TWC business of $27.8 million is presented net of cash transferred of $3.5 million and other transaction fees.

Additionally, the Company also received $4.9 million proceeds on cross-currency swaps designated as net investment hedge.

Cash Flows Used in Financing Activities

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.

Uses of cash from financing activities in the nine months ended September 30, 2023 related to the repurchase of shares of treasury stock of $275.0 million under the January and August 2023 accelerated share repurchase agreements, as well as repayments of $85.9 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 $5.5 million in cash taxes paid for net equity settlements.

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.

Sources of cash from financing activities for the nine months ended September 30, 2023 were $146.9 million borrowing under our Senior Credit Facility and Securitization Facility and $4.1 million proceeds from the exercise of stock options.

Uses of cash from financing activities in the nine months ended September 30, 2022 related to the repurchase of treasury stock of $125.0 million under the 2022 accelerated share repurchase agreement, repayments of $40.8 million under our Senior Credit Facility and Securitization Facility.

In addition, we had $24.3 million in cash taxes paid for net equity settlements.

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.

Sources of cash from financing activities for the nine months ended September 30, 2022 were $34.3 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

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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.

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Share Repurchase Plan

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 August 15, 2023, the Company entered into a $125.0 million accelerated share repurchase ("August 2023 ASR") and received 2.3 million shares of the Common stock at inception of the August 2023 ASR, which represented approximately 80% of the expected total shares under the August 2023 ASR.

On October 18, 2023 the early exercise provision was exercised by the August 2023 ASR counterparty.

The Company received an additional 0.9 million shares determined using the volume-weighted average price of the Company's common stock during the term of the August 2023 ASR.

On January 26, 2023, the Company entered into a $150.0 million accelerated share repurchase ("January 2023 ASR") and received 2.1 million shares of the common stock at inception of the January 2023 ASR, which represented approximately 80% of the expected total shares under the January 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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Off-Balance Sheet Arrangements

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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We do not have any off–balance sheet financing arrangements during the nine months ended September 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.

Contractual Obligations and Commitments

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As part of our ongoing operations, we enter into contractual arrangements that obligate us to make future cash payments.

Our primary obligations include principal and interest payments on revolving portion and Term Loan component of the Senior Credit Facility, Securitization Facility and Convertible Securities.

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

Our primary obligations include principal and interest payments on the revolving portion and t erm loan component of the Senior Credit Facility, Securitization Facility and 2025 Notes.

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

We also lease some of our manufacturing facilities and office buildings which have future minimum lease payments associated.

Leases and Related Party Leases , to the Notes to Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report) for a schedule of our future minimum lease payments.

Leases and Related Party Leases , to the Notes to Unaudited Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report) for a schedule of our future minimum lease payments.

Amounts related to our other obligations, including employment agreements and purchase obligations were not material.

The Company has contingent consideration obligation related to prior and current year acquisitions and future pension contribution obligations.

The Company has contingent consideration obligations related to prior and current year acquisitions and future pension contribution obligations.

Retirement Plans , and Note 16.

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We cannot make a reliable estimate of the period in which the uncertain tax benefits may be realized.

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OTHER MATTERS

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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.

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 nine months ended September 30, 2023.

Recently Issued Accounting Standards

Information regarding new accounting pronouncements is included in Note 1.

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