What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-07-29 compared with 2024-05-06 · 169 added, 108 removed, 281 unchanged (50% of the section changed)

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We have made statements in this Quarterly 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”).

All statements other than statements of historical fact contained in this Quarterly Report, including, but not limited to, statements regarding our business strategy and plans, growth and growth strategies, developments in the markets for our products and services, financial results, development launches and effectiveness, research and development strategy, regulatory approvals, competitive strengths, the potential or anticipated direct or indirect impact of the Coronavirus pandemic on our business, results of operations, and/or financial condition, objectives of management for future operations and current expectations or forecasts of future results, our expectations regarding the Boston facility;

All statements other than statements of historical fact contained in this Quarterly Report, including, but not limited to, statements regarding our business strategy and plans, growth and growth strategies, developments in the markets for our products and services, financial results, development launches and effectiveness, research and development strategy, regulatory approvals, competitive strengths, objectives of management for future operations and current expectations or forecasts of future results, our expectations regarding the Boston facility and the Company’s plans to operationalize its Braintree facility, transition the manufacture of SurgiMend® and PriMatrix® to the Braintree facility, and to obtain pre-market approval of SurgiMend® PRS in implant-based breast reconstruction;

restructuring and cost-saving initiatives, intellectual property rights, litigation and tax matters, governmental proceedings and investigations, mergers and acquisitions, divestitures, market acceptance of our products and services, accounting estimates, financing activities, ongoing contractual obligations, working capital adequacy, value of our investments, our effective tax rate, our expected returns to shareholders, and sales efforts, are forward-looking statements.

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the Company’s ability to remediate quality systems violations;

difficulties or delays in obtaining and maintaining required regulatory approvals related to the transition of the manufacturing to the Braintree facility and obtain pre-market approval of SurgiMend® PRS in implant-based breast reconstruction;

the possibility that costs or difficulties related to building and the operationalization of the Braintree facility or the transition of manufacturing activities from the Company’s Boston facility to the Braintree facility will be greater than expected;

fluctuations in hospitals’ spending for capital equipment;

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and international governmental, regulatory, fiscal, monetary and public health responses to public health crises;

fluctuations in foreign currency exchange rates;

fluctuations in foreign currency

exchange rates;

the amount of our bank borrowings outstanding and other factors influencing liquidity;

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Innovating for Outcomes.

An important part of Integra’s growth strategy is introducing new products to strengthen and expand our portfolio, including via acquisitions.

For example, On April 1, 2024, the Company successfully completed the acquisition of Acclarent from Ethicon, Inc., a subsidiary of Johnson & Johnson.

Acclarent is an innovator and market leader in ear, nose and throat (“ENT”) procedures and we believe that the acquisition of Acclarent will provide Integra with the opportunity to become a leading provider of ENT products and technologies.

Furthermore, we believe that, owing to the ENT segment being an anatomical adjacency to neurosurgery, the acquisition will allow Integra to deliver future innovation both within the ENT segment and across our other CSS technology platforms.

Additionally, we seek clinical evidence to support regulatory approval and strong reimbursement of our product portfolio around the world, including new indications for existing technologies.

An important part of Integra’s growth strategy is introducing new products to strengthen and expand our portfolio through clinical evidence to support regulatory approval and strong reimbursement of our product portfolio around the world, including new indications for existing technologies.

For example, in 2021, we filed a pre-market approval (“PMA”) application for a specific indication for Surgimend® in the use of post-mastectomy breast reconstruction.

In 2022, we acquired SIA, which is also pursuing a PMA for DuraSorb for use in implant-based breast reconstruction (“IBBR”), and in June 2023 we completed enrollment in the DuraSorb U.S.

investigational device exemption clinical study for two-stage breast reconstruction;

the primary follow-up period is one year after device implantation.

We hope to have approval for DuraSorb in 2025.

For SurgiMend, we are not currently able to predict an approval date because of the delays in remediating our Boston manufacturing site.

We cannot predict an approval date because of the timeline of restarting manufacturing at the Braintree facility, where Surgimend® will be manufactured.

In the late 2022, we acquired SIA, which is also pursuing a PMA for DuraSorb for use in implant-based breast reconstruction (“IBBR”).

We completed enrollment for the DuraSorb U.S.

investigational device exemption clinical study for two-stage breast reconstruction in June 2023 and are conducting the primary follow-up one year after device implantation.

We hope to secure approval for DuraSorb in 2025.

In addition, in March 2024, we expanded our urinary bladder matrix platform with the U.S.

launch of MicroMatrix® Flex, a dual-syringe system enabling the convenient mixing and precise delivery of MicroMatrix® paste to provide convenient access to hard-to-reach spaces and to help prepare an even wound surface in challenging wound areas.

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 and manufacturing organizations, the expansion and development of international markets and new product introductions.

As part of our In-China-For-China strategy, we continue the build out of our assembly capabilities in our new facility in Suzhou, China.

Several new products were introduced in select international markets in 2023, including MicroMatrix® and Certas Plus® Programmable Valve which were launched in Europe, and CUSA Clarity Laparoscopic tip

which was launched in Australia, New Zealand, Japan, Canada, South Africa and Israel.

As part of our In-China-For-China strategy, we continue the build out of our assembly capabilities in our new

facility in Suzhou, China.

Several new products were introduced in select international markets in 2023 and 2024, including MicroMatrix® and Certas Plus® Programmable Valve, which were launched in Europe, and CUSA Clarity laparoscopic tip, which was launched in Australia, New Zealand, Japan, Canada, South Africa and Israel.

In addition, DuraGen® Secure, received approval in Japan, while DuraGen Plus, an absorbable and sutureless collagen onlay indicated as a dura substitute for the repair of dura mater, was approved in China.

CereLink, DuraSeal® and MediHoney® also continued their market uptake in international markets.

Broadening Impact on Care Pathways.

We seek ways to develop products and technologies that impact the lives of patients, starting with the journey that a patient takes from diagnosis and treatment planning to surgery and postoperative care.

We seek ways to develop and acquire products and technologies that impact the lives of patients, starting with the journey that a patient takes from diagnosis and treatment planning to surgery and postoperative care.

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

On April 1, 2024, the Company successfully completed the acquisition of Acclarent from Ethicon, Inc., a subsidiary of Johnson & Johnson.

Acclarent is an innovator and market leader in ear, nose and throat (“ENT”) procedures and the acquisition of Acclarent has positioned Integra as one of the leading providers of ENT products and technologies.

Furthermore, we believe that, owing to the ENT business being an anatomical adjacency to neurosurgery, the acquisition will allow Integra to deliver future innovation both within the ENT business and across our other CSS technology platforms.

Driving Operations and Customer Excellence.

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We continue to invest in our capacity expansion.

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

Cultivating a High-Performance Culture.

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

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

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 continues to progress for both a silicone-based hydrocephalus and EVD project.

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The 9mm Surgiscope received 510(k) clearance from the FDA in the fourth quarter of 2023.

On August 18, 2022, the Company, 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.

Shipments of CereLink monitors to international markets resumed in the third quarter of 2023 and shipments in the U.S.

resumed in the first quarter of 2024.

Regenerative Technologies.

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Our collagen manufacturing capability, combined with our history of innovation, including our launch of NeuraGen 3D, provides us with strong platform technologies for multiple indications.

In the second quarter of 2023, after consultation with the FDA, The Company initiated a voluntary global recall of all products manufactured at the Boston facility, including PriMatrix®, SurgiMend®, Revize™, and TissueMend™, distributed between March 1, 2018 and May 22, 2023.

In the third quarter of 2021, we filed a PMA application for a specific indication for Surgimend® in the use of post-mastectomy breast reconstruction.

In 2022, we acquired SIA, which has also submitted a PMA application for DuraSorb with IBBR, and in June 2023 we completed enrollment in the DuraSorb U.S.

IDE clinical study for two-stage breast reconstruction;

investigational device exemption clinical study for two-stage breast reconstruction;

the primary follow-up period is one year after device implantation.

By offering two distinct product solutions, we believe we have the opportunity to build a leading position in the IBBR market.

We hope to have approval for DuraSorb in 2025.

For SurgiMend, we are not currently able to predict an approval date because of the delays in remediating our Boston manufacturing site.

We hope to secure approval for DuraSorb in 2025.

For SurgiMend®, we cannot predict an approval date because of the timeline of restarting manufacturing at the Braintree facility.

Additionally, in 2022, we launched NeuraGen 3D Nerve Guide Matrix, a resorbable implant for repair of peripheral nerve discontinuities and engineered to create an optimized environment for nerve regeneration.

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(“TEI”), one of our wholly-owned subsidiaries, received a Warning Letter (the “2019 Warning Letter”), dated March 6, 2019, from the FDA.

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

The 2019 Warning Letter related to quality systems issues at TEI’s manufacturing facility located in Boston, Massachusetts (the “Boston facility”).

The Boston facility manufactures extracellular bovine matrix products in our TT segment that are sold both in wound reconstruction and care and in private label channels.

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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”).

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.

In May 2023, after consultation with the FDA, The Company initiated a voluntary global recall of all products manufactured at the Boston facility, including PriMatrix®, SurgiMend®, Revize™, and TissueMend™, distributed between March 1, 2018 and May 22, 2023.

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

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As required by the 2023 Warning Letter, we retained an outside expert consultant to perform an audit of the Boston facility in March 2024.

While we anticipated this audit would yield findings and there would be remaining work to be completed, the audit yielded more findings than we anticipated.

We are still determining the full scope of the work required to address these additional findings and resume commercial distribution.

Based on a preliminary assessment of the work to be done, we no longer expect to resume commercial distribution in 2024.

As a result, the Company elected to perform impairment testing on certain definite-lived intangibles and goodwill.

Since receiving the third-party audit findings for the Boston facility in March, the Company has reassessed its plans and timeline to resume the manufacture of PriMatrix® and SurgiMend®.

In parallel, the Company has been furthering its plans to complete the construction and operationalization of its new tissue manufacturing facility in Braintree, Massachusetts (the “Braintree facility”).

Based on these assessments, the Company no longer plans to restart the manufacture of PriMatrix® and SurgiMend® at its Boston facility and will, instead, restart manufacturing of these products at the Braintree facility.

The Company expects to operationalize the Braintree facility in the first half of 2026.

As a result of these decisions, during the three months ended June 30, 2024, the Company recorded a $4.6 million impairment charge, comprised of a $1.7 million impairment of an operating lease right-of-use asset and a $2.9 million write-off of fixed assets, which was recorded as a component of cost of goods sold in the condensed consolidated statements of operations.

For further detail on the impairment, see Note 10.

Leases and Related Party Leases .

The Company elected to perform impairment testing on certain definite-lived intangibles and goodwill in the first quarter of 2024, which resulted in an intangible impairment of $7.1 million.

For further detail on the impairment testing, see Note 5.

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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.

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 submitted a traditional 510(k) premarket notification to the FDA on September 15, 2023 and received 510(k) clearance on February 4, 2024 from the FDA.

The submission included design changes to remedy the out-of-range readings.

Shipments of CereLink monitors in the U.S.

resumed in the first quarter of 2024 and shipments to international markets resumed in the third quarter of 2023.

Optimization and Integration Activities

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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 Q2 2024, we initiated the planning of a Compliance Master Plan (the “CMP”), a systematic and holistic approach to improving our quality system and Good Manufacturing Practice (“GMP”) compliance for the Boston/Braintree sites.

While the initial planning has been implemented for the Boston/Braintree sites, the CMP will be expanded across our manufacturing and supply network in the coming months to ensure we can sustain compliance and enable our product supply to match our customer demand.

We expect the CMP implementation and engagement to last through 2025.

RESULTS OF OPERATIONS

Executive Summary

Net loss for the three months ended March 31, 2024 was $3.3 million, or $0.04 per diluted share, as compared to net income of $24.2 million or $0.29 per diluted share for the three months ended March 31, 2023.

The decrease in net income for the three months ended March 31, 2024, was driven by higher manufacturing costs and impairment charges of $7.1 million , primarily related to our Boston facility.

Net loss for the three and six months ended June 30, 2024 was $(12.4) million and $(15.7) million, or $(0.16) and $(0.20) per diluted share, as compared to net income of $4.2 million and $28.4 million or $0.05 and $0.35 per diluted share for the three and six months ended June 30, 2023.

The decrease in net income for the three and six months ended June 30, 2024, was driven by costs related to the Acclarent acquisition, as well as higher manufacturing costs.

Special Charges

Income before taxes includes the following special charges :

Three Months Ended March 31,

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

Dollars in thousands 2024 2023 2024 2023

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EU medical device regulation 12,508 9,278 24,531 20,682

Boston recall expenses (1)

Boston recall / Braintree transition (1)

14,698 29,691 23,742 31,041

Total $ 50,968 $ 45,571 $ 81,198 $ 70,086

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

(1) This primarily includes idle capacity charges, inventory write offs, site transfer costs, right of use and fixed asset impairments.

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

Three Months Ended March 31,

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

Dollars in thousands 2024 2023 2024 2023

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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 2024 2023 2024 2023

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Gross margin as a percentage of total revenues 54.0 % 54.3 % 55.0 % 57.7 %

Three Months Ended March 31, 2024 as Compared to Three Months Ended March 31, 2023

For the three months ended March 31, 2024, total revenues decreased by $12.0 million to $368.9 million from $380.8 million for the same period in 2023.

This decrease was primarily driven by the impact of the Boston recall of $15.2 million.

The decrease was also inclusive of an unfavorable foreign currency impact of $2.4 million on revenues.

Excluding the impacts of these items, domestic revenues decreased by $1.3 million, or 0.5% compared to the same period in the prior year.

International revenues increased by $8.7 million or 8.1% as compared to the prior period.

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

In the CSS segment, revenues were $256.4 million which was an increase of $8.3 million, or 3.3% as compared to the prior-year period , inclusive of a $2.4 million unfavorable foreign currency impact on revenue.

Excluding the impact of foreign exchange, the Neurosurgery portfolio grew mid-single digits primarily due to increased sales in Neuro Monitoring and CSF Management.

In the TT segment, revenues were $112.4 million which was a decrease of $20.3 million, or 15.3% from the prior-year period.

This decrease is primarily driven by the impact of the Boston recall of $15.2 million decline in revenue.

Excluding the impact of these items, the TT segment showed a decrease in sales as compared to the same period in the prior year, primarily attributable to Integra Skin MediHoney® and MicroMatrix®

Gross margin was $206.8 million for the three months ended March 31, 2024, a decrease of $26.0 million from $232.9 million for the sa me period in 2023.

Gross margin as a percentage of revenues was 56.1% for the three months ended March 31, 2024 and 61.1% f or the sa me period in 2023.

The decrease in gross margin percentage was primarily associated with higher costs related to idle capacity at our Boston facility, as well as additional manufacturing expenses across our manufacturing sites.

Three Months Ended June 30, 2024 as Compared to Three Months Ended June 30, 2023

For the three months ended June 30, 2024, total revenues increased by $36.9 million to $418.2 million from $381.3 million for the same period in 2023.

Excluding the impacts of the Acclarent acquisition, the Boston recall and foreign currency impact, revenues remained flat compared to the same period in the prior year.

In the CSS segment, revenues were $301.8 million which was an increase of $30.7 million, or 11.3% as compared to the prior-year period.

This is inclusive of $31.3 million related to the Acclarent acquisition and $2.9 million unfavorable foreign currency impact on revenue.

Excluding the impact of foreign exchange and the Acclarent acquisition, the Neurosurgery portfolio grew low-single digits primarily due to increased sales in Dural Access & Repair and MicroFrance®.

In the TT segment, revenues were $116.4 million which was an increase of $6.2 million, or 5.6% from the prior-year period.

Excluding the impact of the Boston recall, the TT segment showed a low single-digit decrease in sales as compared to the same period in the prior year.

This is primarily attributable to a decline in Integra Skin due to supply constraints, partially offset by growth in DuraSorb and Gentrix.

Gross margin was $225.9 million for the three months ended June 30, 2024, an increase of $18.9 million from $207.0 million for the same period in 2023.

Gross margin as a percentage of revenues was 54.0% for the three months ended June 30, 2024 and 54.3% for the same period in 2023.

For the three months ended June 30, 2024, gross margins were impacted by Boston impairment charges, Acclarent inventory step up, and higher manufacturing costs.

For the three months ended June 30, 2023, gross margins were impacted by 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 7.1 % 7.0 %

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Total operating expenses 54.7 % 51.1 %

Total operating expenses, which consist of research and development, selling, general and administrative, and amortization expenses, increased by $6.4 million, or 3.3% to $202.9 million in the three months ended March 31, 2024, compared to $196.5 million in the same period in 2023, mainly driven by intangible amortization.

Total operating expenses, which consist of research and development, selling, general and administrative, and amortization expenses, increased by $34.4 million, or 17.7%, to $228.9 million in the three months ended June 30, 2024, compared to $194.5 million in the same period in 2023.

Research and Development

Research and development expenses for the three months ended March 31, 2024 increased by $0.2 million as compared to the same period in the prior year.

Research and development expenses for the three months ended June 30, 2024 increased by $3.2 million as compared to the same period in the prior year primarily due to the Acclarent acquisition.

Selling, General and Administrative

Selling, general and administrative costs for the three months ended March 31, 2024 decreased by $0.9 million as compared to the same period in the prior year.

Selling, general and administrative costs for the three months ended June 30, 2024 increased by $30.6 million as compared to the same period in the prior year due to the professional fees and costs associated with the Acclarent acquisition and higher spending in commercial selling activities for both legacy and Acclarent products.

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, 2024 was $10.1 million compared to $3.1 million for the same period in the prior year.

The increase is driven by the impairment of customer relationship intangible related to our Boston facility.

Amortization expense (excluding amounts reported in cost of product revenues for technology-based intangible assets) for the three months ended June 30, 2024 was $3.7 million compared to $3.0 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 March 31,

Three Months Ended June 30,

Dollars in thousands 2024 2023

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Interest expense (18,651) (12,464)

Other income, net (610) 1,389

Other income (expense), net 1,437 (155)

Total non-operating income and expense $ (12,156) $ (8,680)

Interest Income

Interest income for the three months ended March 31, 2024 increased by $0.9 million as compared to the same period in the prior year primarily due to higher interest rates.

Interest income for the three months ended June 30, 2024 increased by $1.1 million as compared to the same period in the prior year primarily due to higher interest rates.

Interest Expense

Interest expense for the three months ended March 31, 2024 increased by $1.5 million as compared to the same period in the prior year primarily due incremental borrowing and higher interest rates.

Other Income, net

Other income, net for the three months ended March 31, 2024 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 our divestitures.

Three Months Ended March 31,

Interest expense for the three months ended June 30, 2024 increased by $6.2 million as compared to the same period in the prior year primarily due to incremental borrowing to fund Acclarent acquisition and higher interest rates.

Other Income (expense), net

Other income (expense), net for the three months ended June 30, 2024 increased by $1.6 million compared to the same period in the prior year, primarily driven by favorable foreign exchange impact.

Three Months Ended June 30,

Dollars in thousands 2024 2023

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Effective tax rate 18.3 % (9.4) %

Our effective income tax rates for the three months ended March 31, 2024 and 2023 were 37.3% and 18.6%, respectively.

For the three months ended March 31, 2024, the primary drivers of the higher tax rate relates to a $1.5 million expense due to a shortfall from stock based compensation, offset by a tax benefit for the intangible asset impairment, as compared to previous year.

The Company does not have tax basis in the impaired intangible asset and has treated the tax impact as a discrete event in this quarter.

Our effective income tax rates for the three months ended June 30, 2024 and 2023 were 18.3% and (9.4)%, respectively.

For the three months ended June 30, 2024, the higher tax rate is primarily driven by lower book income, as compared to the previous year.

For the three months ended June 30, 2023, the lower rate was partially driven by 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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jurisdictions could have an adverse effect on the Company’s effective tax rate.

As discussed previously, the Company recorded a total impairment charge of $7.1 million in intangible asset amortization during the first quarter of 2024.

The Company does not have tax basis in the impaired customer relationship, therefore the charge resulted in a $1.6 million reduction of the Company’s deferred tax liability related to such intangible.

While it is often difficult to predict the outcome or the timing of the resolution of a particular matter with the various federal, state, and foreign tax authorities, we believe that our reserves reflect the most probable outcome of known tax contingencies.

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The Company’s tax reserves are presented in the balance sheet within other liabilities, except for amounts relating to items that we expect to pay in the coming year, which would be classified as current income taxes payable .

Six Months Ended June 30, 2024 as Compared to Six Months Ended June 30, 2023

Revenues and Gross Margin

For the six months ended June 30, 2024, total revenues increased by $24.9 million to $787.0 million from $762.1 million for the same period in 2023.

Excluding the impacts of the Acclarent acquisition, the Boston recall and foreign currency impact, revenues remained flat compared to the same period in the prior year.

In the CSS Segment, revenues were $558.2 million an increase of $39.0 million, or 7.5% from the prior period, inclusive of $31.3 million related to the Acclarent acquisition, and $5.4 million unfavorable foreign currency impact on revenue.

Excluding these impacts, the Neurosurgery portfolio grew low single digits primarily due to increased sales in Dural Access and Neuro Monitoring.

In the TT segment, revenues were $228.9 million, a decrease of $14.1 million, or 5.8% from the prior-year period.

Excluding the impact of the Boston recall, the TT segment decreased low single digits as compared to the same period in the prior year.

This is primarily attributable to a decline in Integra Skin due to supply constraints, partially offset by growth in DuraSorb and Gentrix.

Gross margin was $432.8 million for the six months ended June 30, 2024, a decrease of $7.1 million from $439.9 million for the same period in 2023.

Gross margin as a percentage of total revenue decreased to 55.0% for the six months ended June 30, 2024 from 57.7% in the same period in 2023.

For the six months ended June 30, 2024, gross margins were impacted by Boston impairment charges, Acclarent inventory step up, and higher manufacturing costs.

For the six months ended June 30, 2023 gross margins were impacted by 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 7.2 % 7.0 %

Selling, general and administrative 45.9 % 43.5 %

Intangible asset amortization 1.8 % 0.8 %

Total operating expenses 54.9 % 51.3 %

Total operating expenses, which consist of selling, general and administrative expenses, research and development expenses, and amortization expenses, increased by $40.8 million, or 10.4% to $431.8 million in the six months ended June 30, 2024, compared to $391.0 million in the same period in 2023.

Research and Development

Research and development expenses for the six months ended June 30, 2024 increased by $3.4 million as compared to the same period in the prior year primarily due to the Acclarent acquisition.

Selling, General and Administrative

Selling, general and administrative costs increased by $29.7 million as compared to the same period in the prior year driven primarily due to the professional fees and costs associated with the Acclarent acquisition and higher spending in commercial selling activities for both legacy and Acclarent products.

Intangible Asset Amortization

Amortization expense (excluding amounts reported in cost of product revenues for technology-based intangible assets) for the six months ended June 30, 2024 was $13.8 million compared to $6.1 million for the same period in the prior year.

The increase is driven by the impairment of customer relationship intangible related to our Boston facility of $7.1 million.

We expect total annual amortization expense to be approximately $50.8 million for the remainder of 2024, $101.6 million in 2025, $101.4 million in 2026, $100.4 million in 2027, $96.9 million in 2028, $91.6 million in 2029 and $506.8 million thereafter.

Non-Operating Income and Expenses

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

Six Months Ended June 30,

Dollars in thousands 2024 2023

Interest income $ 10,098 $ 8,046

Interest expense (32,275) (24,564)

Other income, net 827 1,234

Total non-operating income and expense $ (21,350) $ (15,284)

Interest Income

Interest income for the six months ended June 30, 2024 increased by $2.1 million as compared to the same period in the prior year due to higher interest rates.

Interest Expense

Interes t expense for the six months ended June 30, 2024 increased by $7.7 million as compared to the same period in the prior year due to incremental borrowing and higher interest rates.

Other Income, net

Other income, net for the six months ended June 30, 2024, decreased by $0.4 million as compared to the same period in the prior year.

Six Months Ended June 30,

Dollars in thousands 2024 2023

Income before income taxes $ (20,415) $ 33,602

Income tax (benefit) expense (4,732) 5,192

Effective tax rate 23.2 % 15.5 %

The Company’s effective income tax rates for the six months ended June 30, 2024 and 2023 were 23.2% and 15.5%, respectively.

For the six months ended June 30, 2024, the higher tax rate is primarily driven by lower book income and a $1.7 million shortfall from stock-based compensation, as compared to the prior year.

The lower rate from the six months ended June 30, 2023 was primarily due to a $1.1 million benefit associated with the Federal research and development tax credit, offset by a $0.3 million shortfall from stock-based 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 2024 2023 2024 2023

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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 decreased by $14.8 million for the three months ended March 31, 2024 compared to the same period last year.

European sales increased by $0.5 million for the three months ended March 31, 2024 compared to the same period last year.

Sales to customers in Asia Pacific decreased by $0.9 million for the three months ended March 31, 2024.

Sales to customers in the the Rest of World for the three months ended March 31, 2024 increased by $3.2 million compared to the same period last year .

The international revenues were impacted by $2.4 million of unfavorable foreign exchange impact, with the larger impact in Asia.

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

Domestic revenues increased by $33.4 million for the three months ended June 30, 2024 compared to the same period in the prior year.

European sales increased by $3.2 million for the three months ended June 30, 2024 compared to the same period in the prior year.

Sales to customers in Asia Pacific decreased by $1.8 million for the three months ended June 30, 2024.

Sales to customers in the the Rest of World for the three months ended June 30, 2024 increased by $2.0 million compared to the same period in the prior year .

The international revenues were impacted by $3.0 million of unfavorable foreign exchange impact.

The increase in domestic revenues is primarily the result of the Acclarent acquisition.

Domestic revenues increased by $18.7 million for the six months ended June 30, 2024 compared to the same period in the prior year.

European sales increased by $3.8 million for the six months ended June 30, 2024 compared to the same period in the prior year.

Sales to customers in Asia Pacific decreased by $2.7 million for the six months ended June 30, 2024.

Sales to customers in the Rest of World for the six months ended June 30, 2024 increased by $5.2 million compared to the same period in the prior year.

The international revenues were impacted by $5.4 million of unfavorable foreign exchange impact.

The increase in domestic revenues is primarily the result of the Acclarent acquisition, which is offset by decreases related to the Boston recall.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital

The Company’s working capital as of March 31, 2024 and December 31, 2023 was $1,113.3 million and $751.1 million, respectively.

The Company’s working capital as of June 30, 2024 and December 31, 2023 was $784.0 million and $751.1 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 $591.9 million and $276.4 million at March 31, 2024 and December 31, 2023 respectively, which are valued based on Level 1 measurements in the fair value hierarchy.

At March 31, 2024, our non-U.S.

Cash and Cash Equivalents

The Company had cash and cash equivalents totaling approximately $215.2 million and $276.4 million at June 30, 2024 and December 31, 2023 respectively, which are valued based on Level 1 measurements in the fair value hierarchy.

Level 1 inputs represent quoted prices in active markets for identical assets or liabilities.

At June 30, 2024, our non-U.S.

subsidiaries held approximately $191.9 million of cash and cash equivalents that are available for use outside the U.S.

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Short Term Investments

The Company had short term investments, primarily consisting of time deposits, totaling approximately $71.2 million at March 31, 2024 compared to $32.7 million at December 31, 2023.

Three Months Ended March 31,

The Company had short term investments, primarily consisting of time deposits, which are valued based on Level 1 measurements in the fair value hierarchy, totaling approximately $81.7 million at June 30, 2024 compared to $32.7 million at December 31, 2023.

Six Months Ended June 30,

Dollars in thousands 2024 2023

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Cash Flows Provided by Operating Activities

Operating cash flows for the three months ended March 31, 2024 decreased by $10.4 million compared to the same period in 2023.

Within operating cash flows, n et income less non-cash adjustments decreased for the three months ended March 31, 2024 by approximately $29.7 million as compared to the same period in 2023 primarily due to low er revenues attributable to the Boston recall, as well as additional manufacturing expenses across our manufacturing sites.

The changes in assets and liabilities for the three months ended March 31, 2024 , net of business acquisitions, decreased cash flows by $23.4 million , mainly attributable to increases in inventory, and decreases in other current liabilities and accounts receivable.

The changes in assets and liabilities for the three months ended March 31, 2023, net of business acquisitions, decreased cash flows by $42.6 million , primarily due to increases in inventory.

Operating cash flows for the six months ended June 30, 2024 increased by $1.7 million compared to the same period in 2023.

Within operating cash flows, net income less non-cash adjustments decreased for the six months ended June 30, 2024 by approximately $33.5 million as compared to the same period in 2023 primarily driven by costs related to the Acclarent acquisition, as well as higher manufacturing costs.

The changes in assets and liabilities for the six months ended June 30, 2024, net of business acquisitions, decreased cash flows by $22.4 million, mainly attributable to increases in prepaid and other current assets, and inventory, and decreases in other non current liabilities.

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, and decreases in accounts payable, accrued expenses and other current liabilities.

Cash Flows Used in Investing Activities

Uses of cash from investing activities for the three months ended March 31, 2024 related to $38.5 million related to short term investments, and $15.5 million paid for capital expenditures to support operations improvement initiatives at a number of our manufacturing facilities and other information technology investments.

There were no sources of cash from investing activities during the three months ended March 31, 2024.

Uses of cash from investing activities during the three months ended March 31, 2023 related to $13.7 million paid for capital expenditures to support operations improvement initiatives at a number of our manufacturing facilities and other information technology investments.

There were no sources of cash from investing activities during the three months ended March 31, 2023.

Uses of cash from investing activities for the six months ended June 30, 2024 were $282.0 million related to the Acclarent acquisition, $49.0 million related to short term investments, and $45.2 million paid for capital expenditures to support operations improvement initiatives at a number of our manufacturing facilities and other information technology investments.

There were no sources of cash from investing activities during the six months ended June 30, 2024.

Uses of cash from investing activities during the six months ended June 30, 2023 related to $29.3 million paid for capital expenditures to support operations improvement initiatives at a number of our manufacturing facilities and other information technology investments.

There were no sources of cash from investing activities during the six months ended June 30, 2023.

Cash Flows Provided by or Used in Financing Activities

Uses of cash from financing activities in the three months ended March 31, 2024 related to the repayments of $15.1 million under our Senior Credit Facility and Securitization Facility.

Uses of cash from financing activities in the six months ended June 30, 2024 related to the repayments of $105.6 million under our Senior Credit Facility and Securitization Facility, $50.0 million related to the repurchase of treasury stock of under the share repurchase agreements, and $11.9 million related to payment of SIA contingent consideration.

In addition, the Company had $3.2 million in cash taxes paid for net equity settlements.

Sources of cash from financing activities for the three months ended March 31, 2024 were $370.5 million p roceeds from borrowings of long-term indebtedness and $6.4 million proceeds from the exercise of stock options.

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 share repurchase agreements , repayments of $12.4 million under our Senior Credit Facility and Securitization Facility.

Sources of cash from financing activities for the six months ended June 30, 2024 were $429.3 million proceeds from borrowings of long-term indebtedness and $6.4 million proceeds from the exercise of stock options.

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 share repurchase agreements, repayments of $29.1 million under our Senior Credit Facility and Securitization Facility.

In addition, we had $7.6 million attributable to debt issuance costs, as well as $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.

Amended and Restated Senior Credit Agreement, Convertible Senior Notes, Securitization and Related 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.

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.

Credit Agreement, Convertible Senior Notes, Securitization and Related 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 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.

The Senior Credit Facility is subject to various financial and negative covenants and, at June 30, 2024, the Company was in compliance with all such covenants.

Our Consolidated Total Leveraging Ratio was 3.8, with the covenant requirement at 4.5 at the end of June 30, 2024.

Based on our current forecast for the next twelve months, we expect to remain in compliance with the financial and negative covenants.

Share Repurchase Plan

See Note 11, Treasury Stock , to the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report) for further details of our share repurchase programs.

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

Dividend Policy

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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, 2024 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, 2024 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 the revolving portion and t erm loan component of the Senior Credit Facility, Securitization Facility and 2025 Notes.

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

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

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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, 2023 did not materially change in the three months ended March 31, 2024.

The critical accounting estimates discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 did not materially change in the six months ended June 30, 2024.

Recently Issued Accounting Standards

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis