ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Diversificationpatients, starting with the journey that a patient takes from diagnosis and Platform Synergies. The selling platforms of Specialty Surgical Solutionstreatment planning to surgery and Orthopedics and Tissue Technologies each contribute a different strength to our core business. Specialty Surgical Solutions provides us with a strong presencepostoperative care. Integra is well-established in acute care in the hospital with market-leading productssetting and comprehensive solutionsplans to leverage that strong position to grow in this segment and shape treatment pathways into preoperative care and additional sites of care.
Driving Operations and Customer Excellence. Integra has been making investments to build more responsive and scalable processes, enhance the reliability of our supply chain, and drive productivity initiatives to further supply and lower costs. Additionally, we continue to invest in technologies, systems and processes to enhance the customer experience. In 2022, certain transactional back-office finance and customer service activities were outsourced to enhance customer quality, build scale for surgical specialties, such as neurosurgery, as wellfuture growth, and capture cost efficiencies.
Cultivating a High-Performance Culture. Creating a culture focused on empowerment and agility and building a diverse and inclusive workplace are cornerstones of our people strategy. These efforts resulted in Integra being named in several best workplace lists globally in 2022, including Integra China being recognized as a strong capacityGreat Place to generate cash flows. Orthopedics and Tissue Technologies enables us to grow our top line by continuing to introduce new, differentiated productsWork in fast-growing markets, such as small joint replacement and advanced wound care, as well as to increase gross margins. We have unique synergies between these platforms, such as our regenerative technology, instrument sourcing capabilities, and enterprise contract management.Greater China.
Specialized Sales Footprint. Our medical technology investment and manufacturing strategy provide us with a specialized set of customer call-points and synergies. We have market-leading products across our portfolio providing both scale and depth in solutions for a broad set of clinical needs across many departments in healthcare systems. We also have clinical expertise across all our channels in the United States, and an opportunity to expand and leverage this expertise in markets worldwide. In response to our customers’ needs for clinical and technical solutions across multiple departments and clinical areas,Additionally, we have developedbeen making great strides in advancing our environmental, social and deployedgovernance ("ESG") agenda to drive sustainability across the organization and recently published our enterprise selling team to bring unique clinical solutions for the most difficult healthcare issuesfirst ESG report in our key accounts across multiple clinical sites and multi-hospital integrated delivery networks.
Ability to Change and Adapt. Our corporate culture is what enables us to adapt and evolve. We have demonstrated that we can quickly and profitably integrate new products and businesses. This core strength has made it possible for us to grow over the years, and is key to our ability to grow into a multi-billion-dollar company.
Acquisitions
Derma Sciences
On February 24, 2017, the Company executed the Agreement and Plan of Merger (the "Merger Agreement") under which the Company acquired all the outstanding shares of Derma Sciences, Inc., a Delaware corporation ("Derma Sciences") for an aggregate purchase price of approximately $210.8 million including payment of certain of Derma Sciences' closing expenses and settlement of stock-based compensation plans of $4.8 million and $4.3 million, respectively. The purchase price consisted of a cash payment to the former shareholders of Derma Sciences of approximately $201.7 million upon the closing of the transaction.
Derma Sciences is a tissue regeneration company focused on advanced wound and burn care that offers products to help manage chronic and hard-to-heal wounds, especially those resulting from diabetes and poor vascular functioning.
TGX Medical
On April 4, 2017, the Company entered into a Membership Interest Purchase Agreement (the "Purchase Agreement"), by and among the Company, MCF I LP THX Medical System LLC Holdings, Inc., Terragraphix, Inc. and TGX Medical Systems, LLC (collectively, "TGX Medical"). Pursuant to the Purchase Agreement, the Company purchased all issued and outstanding membership interests in TGX Medical for $5.4 million, including a $0.1 million adjustment made in the third quarter of 2017 related to additional closing costs incurred by TGX Medical.
TGX Medical designs, develops and markets software solutions that track surgical instruments from the operating room, sterilization, to storage, which helps ensure that the instruments have been properly cleaned, assembled and maintained. TGX Medical’s customers are located in the U.S. and Canada.
Johnson & Johnson's Codman Neurosurgery Business
On May 11, 2017, the Company entered into an asset purchase agreement (the “Purchase Agreement”) with DePuy Synthes, Inc., a Delaware corporation (“DePuy Synthes”), a wholly-owned subsidiary of Johnson & Johnson, pursuant to which the Company agreed to acquire certain assets, and assume certain liabilities, of Johnson & Johnson’s Codman neurosurgery business (the “Codman Acquisition”). The assets and liabilities subject to the Codman Acquisition relate to the research, development, manufacturing, marketing, distribution and sale of certain products used in connection with neurosurgery procedures.
On October 2, 2017, upon the terms and subject to the conditions set forth in the Purchase Agreement, the Codman Acquisition was completed. Under the terms of the Purchase Agreement, the Company paid an aggregate purchase price of $1.014 billion, subject to adjustments set forth in the Purchase Agreement relating to the book value of inventory transferred to us at the closing of the Codman Acquisition, the book value of certain inventory retained by DePuy Synthes that will be transferred to the Company in the future along with certain prepaid taxes.
To facilitate the completion of the Codman Acquisition, the Company drew $700.0 million from the Term Loan A-1 component of the Senior Credit Facility and cash available as of September 30, 2017.
Divestitures
On September 8, 2017, the Company and certain of its subsidiaries entered into an asset purchase agreement (the “Divestiture Agreement”) with Natus Medical Incorporated (“Natus”), pursuant to which the Company agreed to divest its Camino Intracranial Pressure monitoring and the U.S. rights to the fixed pressure shunts businesses together with certain of the neurosurgery assets that will be acquired as part of the Codman Acquisition (the “Divestiture”). The Divestiture Agreement was entered in connection with the review of the Codman Acquisition by the Federal Trade Commission and the antitrust authority of Spain. The Divestiture was conditioned upon completion of the Codman Acquisition.
On October 6, 2017, upon the terms and subject to the conditions set forth in the Divestiture Agreement (see Note 1 - Basis of Presentation), the Divestiture was completed and Natus paid an aggregate purchase price of $46.4 million. The assets sold to Natus pursuant to the Divestiture Agreement are related to the Company’s intracranial pressure monitoring and the U.S. rights to the fixed pressure valve shunt systems businesses along with certain assets related to the Codman U.S. rights to the dural graft implant, external ventricular drainage catheter and cerebrospinal fluid collection systems businesses that the Company purchased from DePuy Synthes on October 2, 2017.
late 2022.
Clinical and Product Development Activities
Integra continues to invest in collecting clinical evidence to support our existing products and new product launches, and to ensure that we obtain market access for broader and more cost-effective solutions.
After finalizingIn 2022, we made progress to several enhancements to our multi-centerCUSA Clarity Tissue Ablation System. The extended laparoscopic tip was launched in the U.S. to enhance laparoscopic liver procedures. In addition, a single-sided bone tip received 510(k) clearance. In early 2023, we had our commercial launch with initial surgeries successfully completed. We continue to update our CUSA Clarity platform by incorporating new ultrasonic handpiece and integrated electrosurgical capabilities.
In 2023, we continued to advance the early-stage technology platforms we acquired in 2019. Through the acquisition of Arkis Biosciences, Inc. ("Arkis") we added a platform technology, CerebroFlo® external ventricular drainage ("EVD"), catheter with Endexo® technology, a permanent additive designed to reduce the potential for catheter obstruction due to thrombus formation. The CerebroFlo EVD Catheter has demonstrated an average of 99% less thrombus accumulation onto its surface, in vitro, compared to a market leading EVD catheter. Our work to combine our bactiseal antimicrobial technology with the Endexo anti-occlusive technology obtained through our 2019 acquisition of Arkis continues to progress for both a silicone-based hydrocephalus and EVD project.
In 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 trial evaluating the safety and effectivenesslaunch of the INTEGRA Dermal Regeneration TemplateAurora 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. In 2022, we launched the treatmentAurora® Evacuator with Coagulation device in the U.S., designed to be used in conjunction with our Aurora Surgiscope to safely address and evacuate fluid in the brain.
We are focused on the development of diabetic foot ulcers ("DFU")core clinical applications in 2015,our electromechanical technologies portfolio. In June 2022, we launched the Neutus® EVD system, our first EVD in China. The Neutus EVD system is manufactured in China by Shanghai Haoju Medical Technology Co., Ltd. under an exclusive distribution arrangement. The device is used in the management of 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. Refer below to the information appearing in the "FDA Matters" section for additional information on the voluntary recall of the CereLink ICP Monitor System.
Within our TT segment, 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. In the third quarter of 2021, we filed the resulting dataPMA application for a specific indication for SurgiMend in the use of post-mastectomy breast reconstruction, for which we hope to obtain FDA approval in 2024. On December 6, 2022, we completed the acquisition of SIA, which develops, markets and sells DuraSorb®, a resorbable synthetic matrix for plastic and reconstructive surgery. This acquisition advances our global strategy in breast reconstruction, expanding plans to access the U.S. market where SIA is pursuing pre-market approval for use in IBBR.
FDA Matters
On August 18, 2022, we, after consultation with the FDA and received PMA approvalother 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 January 7, 2016. The Company started commercializing the resulting DFU product, Omnigraft,circuit board of the 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 2016. Additionally,the third quarter of 2023. Based on the outlook for returning the product to market and feedback from customers, we finalized patient follow-uprecorded 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 post-approval study forreduction of net revenue, and no additional rework costs.
On March 7, 2019, TEI Biosciences, Inc. ("TEI"), one of our DuraSeal Exact Spine Sealant System,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 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 study results2019 Warning Letter on March 28, 2019 and provide regular progress reports to the FDA inas to its corrective actions. On October 2016. The study showed28, 2021, the continued safetyFDA initiated an inspection of the facility and effectivenessat 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 and will continue to provide responses to the FDA. On March 1, 2023, the FDA commenced an inspection of the Boston facility, and issued an FDA Form 483 at the conclusion of this approved medical device, and we expect that this study will satisfyinspection (the “2023 Form 483”). On July 19, 2023, TEI received a Warning Letter, dated July 17, 2023, from the post-approval commitmentFDA related to this product. We continue to investquality system issues at the TEI Boston facility (the “2023 Warning Letter”). The 2023 Warning Letter did not identify any new observations that had not already been provided in additional clinical studies to support market access and promotion of existing products, and to pursue new product indications, such as breast reconstruction.the 2023 Form 483. The Company continuessubmitted an initial response to invest in product development such as long-term research programsthe 2023 Form 483 to evaluate products as well as next generation nerve product.
FDA Untitled Letter
On June 22, 2015, the FDA issued an Untitled Letter (the "Untitled Letter") alleging that BioD LLC's ("BioD") morselized amniotic membrane based productsand is in the process of preparing a written response to the 2023 Warning Letter. We are committed to resolving the matters identified in the Warning Letters and Form 483s and are continuing our significant efforts to remediate the observations. Although the Warning Letters and the Form 483s do not meetrestrict our ability to manufacture or ship products or require the criteria for regulation as human cellular tissue-basedrecall of any products, (“HCT/Ps”) solely under Section 361 of the Public Health Service Act and that, as a result, BioD would need a biologics license to lawfully market those morselized products (BioD is a wholly owned subsidiary of Derma Sciences). Since the issuance of the Untitled Letter, BioD and now the Company had and plan to continue discussionsin 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 communicateimplement additional detection and quality controls. Following implementation of such controls, the Company expects to resume manufacturing at its disagreement withBoston facility by late in the FDA’s assertion that certainfourth quarter of 2023. Additionally, the Warning Letters do not restrict the Company’s ability to seek FDA 510(k) clearance of products, but premarket approval applications for Class III devices to which the quality system regulation violations are more than minimally manipulated. To date,reasonably related will not be approved until the FDA has not changed its position that certain of the acquired morselized products are not eligible for marketing solely under Section 361 of the Public Health Service Act.violations have been addressed. The Company continues to market theseBoston facility manufactures extracellular bovine matrix products.
On December 22, 2014, the FDA issued for comment “Draft Guidance for Industry and FDA Staff: Minimal Manipulation of Human Cells, Tissues, and Cellular and Tissue-Based Products.” On October 28, 2015, the FDA issued for comment, "Draft Guidance for Industry and FDA Staff: Homologous Use of Human Cells, Tissues, and Cellular and Tissue-Based Products." The FDA held a public hearing on September 12 and 13, 2016 to obtain input on the Homologous Use draft guidance and the Minimal Manipulation draft guidance, as well as other recently issued guidance documents on HCT/Ps.
If the FDA does allow us to continue to market its morselized products without a 510(k) or biologics license either prior to or after finalization of the draft guidance documents, it may impose conditions on marketing, such as labeling restrictions and compliance with current Good Manufacturing Practices. Compliance with these conditions would require significant additional time and cost investments from us. It also is possible We cannot give any assurances that the FDA will not allow usbe satisfied with our response to market any form of a morselized product without a biologics license even priorthe issues identified by the FDA or as to finalizationthe expected date of the draft guidance documentsresolution of such issues. Until the issues cited by the FDA are resolved to the FDA’s satisfaction, the FDA may initiate additional regulatory action without further notice. Any adverse regulatory action, depending on its magnitude, may restrict us from effectively manufacturing, marketing and could require us to recallselling our morselized products. We continue to market these products. The Company continues to monitor the FDA's position on these products. Any potential action of the FDAproducts and could have a material adverse effect on our business, financial impact oncondition and results of operations.
Revenues of products manufactured in the sales of BioD’s morselized amniotic tissue-based products. Revenues from BioD morselized amniotic membrane based productsBoston facility for the three and nine monthsyear ended September 30, 2017December 31, 2022 were less than 1.0%approximately 5.3% of consolidated revenues. In the second quarter of 2023, due to the voluntary recall of Primatrix®, Surgimend®, Revize™, and TissueMend™, the Company recorded a $12.9 million provision for product returns, as a reduction of net revenue. Of this amount, $0.7 million was paid out in Q2. The Company also recorded a $24.1 million write off of inventory that was no longer able to be sold.
Optimization and Integration Activities
As a result of our ongoing acquisition strategy and significant growth in recent years, we have undertaken cost-saving initiatives to consolidate manufacturing operations, distribution facilities and transfer activities, eliminate duplicative positions, realign various sales and marketing activities, and expand and upgrade production capacity for our regenerative technology products. These efforts are expected to continue and while we expect a positive impact from ongoing restructuring, integration, and manufacturing transfer and expansion activities, such results remain uncertain. In support of our continued focus on product margins during 2022, we closed a manufacturing facility located in France and 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.
RESULTS OF OPERATIONS
Executive Summary
Net income for the three months ended SeptemberJune 30, 20172023 was $3.2$4.2 million, or $0.04$0.05 per diluted share, as compared to $20.1$44.8 million or $0.25$0.54 per diluted share for the three months ended SeptemberJune 30, 2016.
Net2022. The decrease in net income for the ninethree months ended SeptemberJune 30, 20172023, was $20.4 million, or $0.26 per diluted share, as compared to $46.3 million or $0.59 per diluted share for the nine months ended September 30, 2016.
Net income for the nine months ended September 30, 2017 decreasedprimarily driven by impacts from the same period last year, primarily resulting from higher acquisition-related expensesBoston recall of $51.9our TEI products, including inventory write-offs of $24.1 million and offset by growth in botha provision for product returns of our Orthopedics and Tissue Technologies and Specialty Surgical Solutions segments. The results also reflect strong growth in our regenerative technology franchise.$12.9 million.
Special Charges
Income before taxes includes the following special charges:charges:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
Dollars in thousands | 2023 | | 2022 | | 2023 | | 2022 |
Acquisition, divestiture and integration-related charges | $ | 3,448 | | | $ | (6,284) | | | $ | 12,224 | | | $ | (5,710) | |
Structural optimization charges | 4,794 | | | 8,172 | | | 9,129 | | | 14,492 | |
EU medical device regulation | 9,278 | | | 10,249 | | | 20,682 | | | 19,762 | |
Boston recall expenses(1) | 28,051 | | | — | | | 28,051 | | | — | |
Total | $ | 45,571 | | | $ | 12,137 | | | $ | 70,086 | | | $ | 28,544 | |
(1) This includes inventory write-offs and idle capacity charges. |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands) |
Global ERP implementation charges | $ | — |
| | $ | 3,366 |
| | $ | 3,261 |
| | $ | 12,386 |
|
Structural optimization charges | 1,944 |
| | 1,993 |
| | 5,336 |
| | 5,540 |
|
Certain employee severance charges | — |
| | 153 |
| | 125 |
| | 1,420 |
|
Discontinued product lines charges | — |
| | — |
| | 1,025 |
| | — |
|
Acquisition-related charges | 24,904 |
| | 4,935 |
| | 68,919 |
| | 16,996 |
|
Convertible debt non-cash interest | — |
| | 2,132 |
| | — |
| | 6,300 |
|
Hurricane Maria related | 1,261 |
| | — |
| | 1,261 |
| | — |
|
Total | $ | 28,109 |
| | $ | 12,579 |
| | $ | 79,927 |
| | $ | 42,642 |
|
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, | |
| 2017 | | 2016 | | 2017 | | 2016 | |
| (In thousands) | |
Dollars in thousands | | Dollars in thousands | 2023 | | 2022 | | 2023 | | 2022 |
Cost of goods sold | $ | 4,141 |
| | $ | 5,662 |
| | $ | 9,567 |
| | $ | 16,479 |
| Cost of goods sold | $ | 33,148 | | | $ | 5,131 | | | $ | 39,214 | | | $ | 9,661 | |
Research and development | — |
| | 200 |
| | — |
| | 200 |
| Research and development | 4,212 | | | 5,538 | | | 8,431 | | | 9,805 | |
Selling, general and administrative | 23,968 |
| | 4,585 |
| | 68,097 |
| | 19,663 |
| Selling, general and administrative | 8,338 | | | 2,661 | | | 23,069 | | | 11,563 | |
Interest expense | — |
| | 2,132 |
| | — |
| | 6,300 |
| |
Other expense | — |
| | — |
| | 2,263 |
| | — |
| |
Total from continuing operations | $ | 28,109 |
| | $ | 12,579 |
| | $ | 79,927 |
| | $ | 42,642 |
| |
| Other income | | Other income | (127) | | | (1,193) | | | (628) | | | $ | (2,485) | |
Total | | Total | $ | 45,571 | | | $ | 12,137 | | | $ | 70,086 | | | $ | 28,544 | |
We typically define special charges as items for which the amounts and/or timing of such expenses may vary significantly from period to period, depending upon our acquisition, divestiture, integration and restructuring activities, and for which the amounts are non-cash in nature, orand for which the amounts are not expected to recur at the same magnitude. We believe that given our ongoing strategy of seeking acquisitions, our continuing focus on rationalizing our existing manufacturing and distribution infrastructure and our continuing review of various product lines in relation to our current business strategy, some of the special charges discussed above could recur with similar materiality in the future. In 2010, we began investing significant resources in the global implementation of a single enterprise resource planning ("ERP") system. We began capitalizing certain costs for the project starting in 2011 and continued to do so during 2017. We expect the additional capital and integration expenses associated with our current ERP system to decrease in 2017 as the project is substantially complete. We expect additional capital and integration expenses in 2017 associated with the integration of the Derma Sciences and Codman neurosurgery businesses. In September 2017, Hurricane Maria caused disruption and minor damage to our operations in our facility in Añasco, Puerto Rico. We incurred expenses to restore the facility to its normal operations.
We believe that the separate identification of these special charges provides important supplemental information to investors regarding financial and business trends relating to our financial condition and results of operations. Investors may find this
information useful in assessing comparability of our operating performance from period to period, assessingagainst the business model objectives that management has established, and comparing our performance against other companies in our industry. We provide this information to investors so that they can analyze our operating results in the same way that management does and to use this information in their assessment of our core business and valuation of Integra.
Update on Remediation Activities
We had an FDA warning letter related to TEI, acquired by Integra on July 17, 2015. TEI received a Warning Letter from the FDA dated May 29, 2015 for promoting the product SurgiMend for breast surgery applications that were not cleared in the 510(k) process and do not have a PMA approval for the indication. The FDA requested that TEI immediately cease all activities that resulted in misbranding or adulteration of the product in commercial distribution. The FDA also required TEI to cease all violations regarding promotion of the productfor an indication that was not cleared or approved. TEI responded to the FDA with a corrective action plan and took action to address the issues prior to the completion of the acquisition. The FDA warning letter was lifted on August 31, 2017.
Revenues and Gross Margin on Product Revenues
OurThe Company's revenues and gross margin on product revenues were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
Dollars in thousands | 2023 | | 2022 | | 2023 | | 2022 |
Segment Net Sales | | | |
Codman Specialty Surgical | $ | 271,030 | | $ | 257,863 | | $ | 519,166 | | $ | 505,171 |
Tissue Technologies | 110,237 | | 139,952 | | 242,947 | | 269,282 |
Total revenues | $ | 381,267 | | $ | 397,815 | | $ | 762,113 | | 774,453 |
Cost of goods sold | 174,241 | | 148,404 | | 322,216 | | 290,973 |
Gross margin on total revenues | $ | 207,026 | | $ | 249,411 | | $ | 439,897 | | $ | 483,480 |
Gross margin as a percentage of total revenues | 54.3 | % | | 62.7 | % | | 57.7 | % | | 62.4 | % |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Segment Net Sales | (Dollars in thousands) |
Specialty Surgical Solutions | $ | 164,760 |
| | $ | 159,409 |
| | $ | 480,907 |
| | $ | 468,767 |
|
Orthopedics & Tissue Technologies | 114,074 |
| | 90,923 |
| | 338,727 |
| | 267,644 |
|
Total revenue | 278,834 |
| | 250,332 |
| | 819,634 |
| | 736,411 |
|
Cost of goods sold | 101,757 |
| | 89,329 |
| | 287,340 |
| | 263,667 |
|
Gross margin on total revenues | $ | 177,077 |
| | $ | 161,003 |
| | $ | 532,294 |
| | $ | 472,744 |
|
Gross margin as a percentage of total revenues | 63.5 | % | | 64.3 | % | | 64.9 | % | | 64.2 | % |
Three Months Ended SeptemberJune 30, 20172023 as Compared to Three Months Ended SeptemberJune 30, 20162022
Revenues and Gross Margin
For the three months ended SeptemberJune 30, 2017,2023, total revenues increaseddecreased by $28.5$16.5 million to $278.8$381.3 million from $250.3$397.8 million for the same period in 2016. Revenues for the quarter were negatively impacted by approximately $7.02022, inclusive of an unfavorable foreign currency impact of $1.7 million dueon revenues, as well as a $3.2 million decrease that impacts both domestic and international revenues related to the hurricanes in Texas, Florida and Puerto Rico.
Specialty Surgical Solutions revenues were $164.8 million,divestiture of the TWC business. This also includes an increase of 3.4%$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. The increase resultedperiod, with no meaningful impact from double-digit growth in our tissue ablation franchise, includingforeign currency on revenue, as well as a $3.2 million decrease that impacts both domestic and international revenues related to the continued launchdivestiture of our CUSA Clarity product. Our dural repair products and precision tools and instruments product lines both increased in the low single digits for the quarter. Our dural repair growth was lower than expected based on competitive pressures, which resulted in lower pricing.
Orthopedics and Tissue Technologies revenues were $114.1 million,TWC business. This also includes an increase of 25.5% from$2.4 million related to the prior-year period. Revenue fromSIA acquisition. Excluding the Derma Sciences acquisitionimpact of these items, the primary driver of the decrease was $24.1related to the Boston recall.
Gross Margin
Gross margin was $207.0 million for the three months ended SeptemberJune 30, 2017. Revenues2023, a decrease of $42.4 million from our regenerative technologies products grew during the quarter, driven by Integra Skin and PriMatrix, and offset by the declines in our SurgiMend portfolio. Disruption to operations in our Puerto Rico facility drove our private label business to decline double-digits in the third quarter of 2017, while we experienced strong growth in our ankle and shoulder portfolios, which together grew 30% compared to the same period last year.
Gross margin increased to $177.1$249.4 million for the three-monthsame period ended September 30, 2017, an increase of $16.1 million from $161.0 million for the same period last year.in 2022. Gross margin as a percentage of total revenue decreased to 63.5% revenues was 54.3% for the third quarter of 2017 from 64.3% forthree months ended June 30, 2023 and 62.7% for the samesame period last year. Thein 2022. This decrease in gross margin percentage resultedis primarily from salesthe result of Derma Sciences productsexpenses associated with lower margins than the company average. The decrease also results from the impairment charge of $3.3 million related to the completed technology assets acquired from Tarsus Medical, Inc., since the underlying product will no longer be sold.Boston recall.
Operating Expenses
We expect our consolidated gross margin percentage for the full year 2017 to be approximately 63.0%, which includes the impact of the Codman Acquisition. We expect no significant change in gross margin percentage in 2017 compared to 2016, as gross margins from products acquired in the Derma Sciences transaction are expected to offset the margins from the growth in our regenerative business.
Operating Expenses
The following is a summary of operating expenses as a percent of total revenues:
| | | | | | | | | | | |
| Three Months Ended June 30, |
| 2023 | | 2022 |
Research and development | 7.0 | % | | 6.4 | % |
Selling, general and administrative | 43.3 | % | | 40.4 | % |
Intangible asset amortization | 0.8 | % | | 0.8 | % |
Total operating expenses | 51.1 | % | | 47.6 | % |
|
| | | | | |
| Three Months Ended September 30, |
| 2017 |
| 2016 |
Research and development | 5.4 | % |
| 6.0 | % |
Selling, general and administrative | 52.3 | % |
| 44.9 | % |
Intangible asset amortization | 2.0 | % |
| 1.4 | % |
Total operating expenses | 59.7 | % |
| 52.3 | % |
Total operating expenses, which consist of research and development, expenses, selling, general and administrative, expenses, and amortization expense,expenses, increased $35.5by $5.0 million, or 27.1%,2.6% to $166.4$194.5 million in the three months ended SeptemberJune 30, 2017,2023, compared to $130.9$189.5 millionin the same period last year.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 infor the third quarter of 2017 decreasedthree months ended June 30, 2023 increased by $0.1$1.0 million to $15.0 millionas compared to $15.1 million in the same period lastin the prior year. We expect full-year 2017This increase in spending on researchresulted from additional spending related to the SIA acquisition, new product development and development to be approximately 6.0% of total revenues.clinical studies.
Selling, General and Administrative
Selling, general and administrative expenses incosts for the third quarter of 2017three months ended June 30, 2023 increased by $33.6$4.3 million to $145.9 million compared to $112.3 million in the same period last year. Selling and marketing expenses increased by $13.8 million compared to last year resulting primarily from selling and marketing expenses of Derma Sciences of approximately $8.0 million and additional investments in adding direct sales representatives and distributors. We also paid higher commissions resulting from the increase in revenues. General and administrative costs increased by $19.8 million, resulting from the increase in acquisition-related expenses of $20.0 million, offset by lower ERP implementation costs. We expect full-year selling, general and administrative expenses to be approximately 52.0% to 53.0% of revenue in 2017, resulting from acquisition and integration-related costs and additional investments in our commercial channels.
Amortization expense as a percentage of revenues in the third quarter of 2017 increased compared to the same period last year. This increase was related primarily to the intangible assets recognized from the Derma Sciences acquisition in the first quarterprior year driven primarily due to increased costs associated with SIA acquisition and costs associated with higher spend in commercial selling activities.
Intangible Asset Amortization
Amortization expense (excluding amounts reported in cost of 2017.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.
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, | |
| 2017 | | 2016 | |
| (In thousands) | |
Dollars in thousands | | Dollars in thousands | 2023 | | 2022 |
Interest income | $ | 89 |
| | $ | 2 |
| Interest income | $ | 3,939 | | | $ | 1,965 | |
Interest expense | (6,761 | ) | | (6,295 | ) | Interest expense | (12,464) | | | (12,236) | |
Other (expense) income, net | (735 | ) | | 1,192 |
| |
| Other income, net | | Other income, net | (155) | | | 1,979 | |
Total non-operating income and expense | | Total non-operating income and expense | $ | (8,680) | | | $ | (8,292) | |
Interest Income and Interest Expense
Interest expense inincome for the three months ended SeptemberJune 30, 20172023 increased by $0.5$2.0 million primarily due to the higher outstanding balance on our Senior Credit Facility for the periodas compared to the same period in 2016, offset by the settlement of our 2016 Convertible Notes in December 2016. Our reportedprior year due to higher interest expense for the three-month period ended September 30, 2016 included non-cash interest related to the accounting for convertible securities of $2.1 million.rates.
Interest income was negligibleExpense
Interest expense for the three months ended SeptemberJune 30, 2017 and 2016.2023 increased by $0.2 million as compared to the same period in the prior year.
Other (Expenses) Income, net
Other (expenses) income, net for the three months ended SeptemberJune 30, 2017 and 2016 includes2023 decreased by $2.1 million compared to the impact of transactional foreign exchange gains and losses.same period in the prior year. The decrease is primarily driven by lower Transition Service Agreement ("TSA") income from our recent divestitures.
Income Taxes
| | | | | | | | | | | |
| Three Months Ended June 30, |
Dollars in thousands | 2023 | | 2022 |
Income before income taxes | $ | 3,824 | | | $ | 51,575 | |
Income tax (benefit) expense | (360) | | | 6,787 | |
Effective tax rate | (9.4) | % | | 13.2 | % |
|
| | | | | | | |
| Three Months Ended September 30, |
| 2017 | | 2016 |
| (In thousands) |
Income before income taxes | $ | 3,235 |
| | $ | 24,994 |
|
Income tax expense | 76 |
| | 4,850 |
|
Effective tax rate | 2.3 | % | | 19.4 | % |
The Company’sOur effective income tax rates for the three months ended SeptemberJune 30, 20172023 and 20162022 were 2.3%(9.4)% and 19.4%13.2%, respectively.
For the three months ended SeptemberJune 30, 2017,2023, the primary drivers of the lower tax rate are lowerrelate to a reduction to book income before income taxes compared toand a $1.1 million benefit associated with the same period in 2016, the jurisdictional mix of income before tax in U.S.-based operations relative to foreign operations, offset by a decrease of $0.4 million in excess tax benefits from stock-based compensation compared to the same period in 2016. The change in jurisdictional mix of income results primarily from significant acquisition and integration costs incurred in the U.S. in 2017. The tax rate for the three months ended September 30, 2016 included $0.2 million related to the release of uncertain tax positions.
Including the impact of Codman Acquisition in the fourth quarter of 2017, the Company expects its effective income tax rate for the full year to be approximately a benefit of 65.7%, mainly from lower income before taxes resulting from acquisition-related expenses and from benefits from stock-based compensation, Federal research credit benefits, and the jurisdictional mix of pretax income in U.S.-based operations relative to foreign operations. This estimate could be revised in the future as additional information is presented to the Company.
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. We consider these factors and others, including ourthe Company's history of generating taxable earnings, in assessing our ability to realize tax assets on a quarterly basis.
Additionally, changes to income tax laws and regulations, in any of the tax jurisdictions in which we operate, could impact the effective tax rate. Various governments, both U.S. and non-U.S., are increasingly focused on tax reform and revenue-raising legislation. Further, legislation in foreign jurisdictions may be enacted, in response to the base erosion and profit-shifting project begun by the Organization for Economic Cooperation and Development ("OECD"). The OECD recently finalized major reform of the international tax system with respect to implementing a global minimum tax rate. Such changes in U.S. and non-U.S. jurisdictions could have an adverse effect on the Company’s effective tax rate.
While it is often difficult to predict the final outcome or the timing of the resolution of anya particular matter with the various Federal,federal, state, and foreign tax authorities, we believe that our reserves reflect the most probable outcome of known tax contingencies. Settlement of anya particular issue would usually require the use of cash. FavorableA favorable resolution would be recognized as a reduction to our annual effective tax rate in the year of resolution. TheOur 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.
On March 29, 2017, the United Kingdom ("UK") provided formal notice
NineSix Months Ended SeptemberJune 30, 20172023 as Compared to NineSix Months Ended SeptemberJune 30, 2016
2022
Revenues and Gross Margin
For the ninesix months ended SeptemberJune 30, 2017,2023, total revenues decreased by $12.3 million to $762.1 million from $774.5 million for the same period in 2022, inclusive of an unfavorable foreign currency impact of $8.7 million on revenues, as well as a $7.7 million decrease that impacts both domestic and international revenues related to the divestiture of the TWC business. This also includes an increase of $4.2 million related to the SIA acquisition. Excluding the impacts of these items, domestic revenues decreased by $5.4 million, or 1.0% as compared to the prior year period. International revenues increased by $83.2$5.3 million or 2.4% as compared to $819.6 million from $736.4 million during the prior-yearprior 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.
Specialty Surgical SolutionsIn the CSS Segment segment revenues were $480.9$519.2 million an increase of 2.6% $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. The increase resulted from low-single digit growth in our dural repair and precision tools and instrument products. Together, our tissue ablation and neuro critical care revenues grew in the low single-digits. Our DuraGen, DuraSeal, next generation Mayfield 2 cranial stabilization device and MicroFrance products contributed to the increase. Our dural repair franchise did not grow at the rate we expected becauseperiod, inclusive of thea $0.6 million unfavorable foreign currency impact of increased competition for our dural sealant product.
Orthopedics and Tissue Technologies revenues were $338.7 million, an increase of 26.6% from the prior-year period. Revenue from Derma Sciences acquisition was $58.4 million for the nine months ended September 30, 2017. Sales from our regenerative technologies products excluding revenues from Derma Sciences grew mid-single digits, including strength in skin productson revenue, as well as a result of strong demand from$7.7 million decrease that impacts both domestic and international markets. Our upper extremities products grew double-digits, driven by strength in our shoulder products. The increases were offset by declining sales in both lower extremities and SurgiMend.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
Gross margin increased to $532.3was $439.9 million for the nine-month periodsix months ended SeptemberJune 30, 2017, up2023, a decrease of $43.6 million from $472.7$483.5 million for the same period last year. Gross margin as a percentage of total revenue increaseddecreased to 64.9%57.7% for the year to date periodsix months ended June 30, 2023 from 64.2% for62.4% in the samesame period last year. The increasedecrease in gross margin percentage resulted from an increase in sales of higher margin products such as dural repair, skin and wound products, and lower effect of purchase price adjustments from acquisitions, offset by sales in Derma Scienceswas due to expenses associated with lower margins than the Company's average and an impairment charge of $3.3 million related to the completed technology assets acquired from Tarsus Medical, Inc., since the underlying product will no longer be sold.Boston recall.
Operating Expenses
The following is a summary of operating expenses as a percent of total revenues:
| | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2023 | | 2022 |
Research and development | 5.6 | % | | 6.0 | % | Research and development | 7.0 | % | | 6.4 | % |
Selling, general and administrative | 52.9 | % | | 46.6 | % | Selling, general and administrative | 43.5 | % | | 41.4 | % |
Intangible asset amortization | 1.8 | % | | 1.4 | % | Intangible asset amortization | 0.8 | % | | 0.9 | % |
Total operating expenses | 60.3 | % | | 54.0 | % | Total operating expenses | 51.3 | % | | 48.7 | % |
Total operating expenses, which consist of research and development expenses, selling, general and administrative expenses, research and development expenses, and amortization expense,expenses, increased $96.5by $13.6 million, or 24.2%,3.6% to $494.7$391.0 million forin the first ninesix months of 2017,ended June 30, 2023, compared to $398.2$377.4 million in the same period last year.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 first nine months of 2017 increased approximately $2.0 million and decreased as a percentage of sales from 6.0% to 5.6%.prior year. This increase in spending resulted from additional spending onrelated to the SIA acquisition, new product development and clinical studies.
Selling, General and Administrative
Selling, general and administrative expensescosts increased by $11.0 million as compared to the same period in the first nineprior year driven primarily due to increased selling costs associated with SIA acquisition and costs associated with higher spend in commercial selling activities.
Intangible Asset Amortization
Amortization expense (excluding amounts reported in cost of product revenues for technology-based intangible assets) for the six months of 2017 increased by $89.9 million to $433.5ended June 30, 2023 was $6.1 million compared to $343.5$7.2 million infor the same period lastin prior year. Selling and marketing expenses increased by $35.5
We expect total annual amortization expense to be approximately $41.4 million resulting primarily from selling and marketing expensesfor the remainder of Derma Sciences of approximately $22.4 million and additional spending on new product launches and the addition of new sales representatives. General and administrative costs increased by $54.5 million resulting from the increase in acquisition-related expenses of $51.9 million offset by lower ERP implementation costs.
Amortization expense in the first nine months of 2017 increased by $4.6 million to $15.0 million, compared to $10.42023, $82.2 million in the same period last year. Amortization expense2024, $82.2 million in the first nine months2025, $82.0 million in 2026, $80.0 million in 2027, $78.5 million in 2028 and $477.1 million thereafter.
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, | |
| 2017 | | 2016 | |
| (In thousands) | |
Dollars in thousands | | Dollars in thousands | 2023 | | 2022 |
Interest income | $ | 160 |
| | $ | 14 |
| Interest income | $ | 8,046 | | | $ | 3,342 | |
Interest expense | (18,073 | ) | | (19,255 | ) | Interest expense | (24,564) | | | (23,891) | |
Other expense, net | (3,691 | ) | | (398 | ) | |
| Other income, net | | Other income, net | 1,234 | | | 5,408 | |
Total non-operating income and expense | | Total non-operating income and expense | $ | (15,284) | | | $ | (15,141) | |
Interest Income and Interest Expense
Interest expense inInterest income for the nine-month periodsix months ended SeptemberJune 30, 2017 decreased2023 increased by $1.2$4.7 million primarily resulting from the settlement of our 2016 Convertible Notes in December 2016 offset by increased borrowings and higher effective borrowing rates on our Senior Credit Facilityas compared to the prior year. Our reportedsame period last year due to higher interest rates.
Interest Expense
Interest expense for the nine-month periodsix months ended SeptemberJune 30, 2016 includes non-cash interest related2023 increased by $0.7 million as compared to the accounting for convertible securities of $6.3 million.
Interest income was negligible for the nine months ended September 30, 2017 and 2016.same period last year.
Other Expense,Income, net
Other expense,income, net for the ninesix months ended SeptemberJune 30, 2017 includes a $2.32023, decreased by $4.2 million loss on sale of short term investments. Other expense for the nine months ended September 30, 2017 and 2016 includes the impact of transactional foreign exchange gains and losses.primarily due to lower Transition Service Agreement ("TSA") income from our recent divestitures.
Income Taxes | | | | | | | | | | | |
| Six Months Ended June 30, |
Dollars in thousands | 2023 | | 2022 |
Income before income taxes | $ | 33,602 | | | $ | 90,890 | |
Income tax (benefit) expense | 5,192 | | | 13,201 | |
Effective tax rate | 15.5 | % | | 14.5 | % |
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
| (In thousands) |
Income before income taxes | $ | 15,982 |
| | $ | 54,931 |
|
Income tax (benefit) expense | (4,406 | ) | | 8,615 |
|
Effective tax rate | (27.6 | )% | | 15.7 | % |
The Company'sCompany’s effective income tax rates for the ninesix months ended SeptemberJune 30, 20172023 and 20162022 were (27.6)%15.5% and 15.7%14.5%, respectively. Inrespectively.
For the ninesix months ended SeptemberJune 30, 2017,2023, the primary drivers of the lower tax rate arerelate to a reduction to book income and a $1.1 million benefit associated with the Federal R&D credit. The lower income before taxes comparedrate from the six months ended June 30, 2022 was primarily due to the same period in 2016, the jurisdictional mix of income before tax in U.S.-based operations relativea $5.7 million benefit related to foreign operations, and an increase in excess tax benefits of $3.7 million from stock-based compensation for the nine months ended September 30, 2017. The change in jurisdictional mix of income primarily results from significant acquisition and integration costs incurred in the U.S. in 2017.stock compensation.
Including the impact of the Codman Acquisition in the fourth quarter of 2017, the Company expects its effective income tax rate for the full year to be approximately a benefit of 65.7%, mainly from lower income before taxes resulting from acquisition-related expenses and benefits from stock-based compensation, Federal research credit benefits, and the jurisdictional mix of pretax income in U.S.-based operations relative to foreign operations. This estimate could be revised in the future as additional information is presented to the Company.
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 the various taxing authorities. We consider these factors and others, including our history of generating taxable earnings, in assessing our ability to realize deferred tax assets on a quarterly basis.
While it is often difficult to predict the final outcome or the timing of resolution of any particular matter with the various Federal, state and foreign tax authorities, we believe that our reserves reflect the most probable outcome of known tax contingencies. Settlement of any particular issue would usually require the use of cash. Favorable resolution would be recognized as a reduction to our annual effective tax rate in the year of resolution. The tax reserves are presented in the balance sheet within other liabilities, except for amounts relating to items it expects to pay in the coming year which are classified as current income taxes payable.
GEOGRAPHIC PRODUCT REVENUES AND OPERATIONS
We attribute revenues to geographic areas based on the location of the customer. 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, | |
| 2017 | | 2016 | | 2017 | | 2016 | |
| (In thousands) | |
Dollars in thousands | | Dollars in thousands | 2023 | | 2022 | | 2023 | | 2022 |
United States | $ | 213,685 |
| | $ | 194,346 |
| | $ | 634,047 |
| | $ | 567,103 |
| United States | $ | 276,782 | | | $ | 287,347 | | | $ | 547,784 | | | $ | 550,698 | |
Europe | 32,609 |
| | 28,553 |
| | 93,924 |
| | 89,623 |
| Europe | 37,452 | | | 46,862 | | | 78,516 | | | 90,606 | |
Asia Pacific | | Asia Pacific | 47,706 | | | 43,365 | | | 98,179 | | | 91,082 | |
Rest of World | 32,540 |
| | 27,433 |
| | 91,663 |
| | 79,685 |
| Rest of World | 19,327 | | | 20,241 | | | 37,634 | | | 42,067 | |
Total Revenues | $ | 278,834 |
| | $ | 250,332 |
| | $ | 819,634 |
| | $ | 736,411 |
| Total Revenues | $ | 381,267 | | | $ | 397,815 | | | $ | 762,113 | | | $ | 774,453 | |
We generate significant revenues outside the United States,U.S., a portion of which are U.S. dollar-denominated transactions conducted with customers whothat generate revenue in currencies other than the U.S. dollar. As a result, currency fluctuations between the U.S. dollar and the currencies in which those customers do business could have an impact on the demand for our products in foreign countries. Local economic conditions, regulatory compliance or political considerations, the effectiveness of our sales representatives and distributors, local competition and changes in local medical practice all may combine to affect our sales into markets outside the United States.U.S.
Domestic revenues increased to $213.7decreased by $10.6 million or 76.6% of total revenues, for the three months ended SeptemberJune 30, 2017 from $194.32023 compared to the same period last year. European sales decreased by $9.4 million or 77.6% of total revenues, for the three months ended SeptemberJune 30, 2016. The Derma Sciences acquisition accounted for $19.32023 compared to the same period last year. Sales to customers in Asia Pacific increased by $4.3 million of the increase for the three months ended SeptemberJune 30, 2017. International revenues increased2023. Sales to $65.1 million from $56.0 millioncustomers in the prior-year period. The Derma Sciences acquisition accounted for $4.8 millionthe Rest of the increaseWorld for the three months ended SeptemberJune 30, 2017. Foreign exchange fluctuations had a favorable impact of $1.72023 decreased by $0.9 million on revenues for the three months ended September 30, 2017 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 2016.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 increased to $634.0decreased by $2.9 million or 77.4% of total revenues, for the ninesix months ended SeptemberJune 30, 2017 from $567.1 million, or 77.0% of total revenues, for the nine months ended September 30, 2016. The Derma Sciences acquisition accounted for $46.9 million of the increase for the nine months ended September 30, 2017. International revenues increased to $185.6 million from $169.3 million in the prior-year period. The Derma Sciences acquisition accounted for $11.5 million of the increase for the nine months ended September 30, 2017. Foreign exchange fluctuations had an unfavorable impact of $0.8 million on revenues for the nine months ended September 30, 20172023 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 2016.Asia Pacific increased by $7.1 million million for the six months ended June 30, 2023. Sales to customers in the Rest of World for the six months ended June 30, 2023 decreased by $4.4 million million compared to the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
The Company's working capital as of June 30, 2023 and December 31, 2022 was $673.8 million and $840.6 million, respectively. Working capital consists of total current assets less total current liabilities as presented in the consolidated balance sheets.
Cash and Marketable Securities
WeThe Company had cash and cash equivalents totaling approximately $481.9$309.2 million and $102.1$456.7 million at SeptemberJune 30, 20172023 and December 31, 2016,2022 respectively, which are valued based on Level 1 measurements in the fair value hierarchy. At SeptemberJune 30, 2017,2023, our non-U.S. subsidiaries held approximately $133.7$267.1 million of cash and cash equivalents that are available for use outside the United States. If cashU.S. The Company asserts that it has the ability and cash equivalents held by our non-U.S. subsidiaries were repatriatedintends to indefinitely reinvest the United States, or used forundistributed earnings from its foreign operations certain amounts could be subjectunless there is no material tax cost to tax inremit the United States forearnings into the incremental amount in excess of the foreign tax paid.U.S..
Cash Flows
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
| (In thousands) |
Net cash provided by operating activities | $ | 102,995 |
| | $ | 109,876 |
|
Net cash used in investing activities | (237,767 | ) | | (21,480 | ) |
Net cash provided by (used in) financing activities | 504,733 |
| | (28,879 | ) |
Effect of exchange rate fluctuations on cash | 9,927 |
| | (51 | ) |
In 2017, we anticipate that our principal uses of cash will include approximately $50.0 to $55.0 million of capital expenditures primarily for support and maintenance in our existing plants, facility automation, our enterprise resource planning system implementation, and additions to our instrument kits used in sales of orthopedic products. On October 2, 2017, the Codman Acquisition was completed. The Company paid an aggregate purchase price of $1.014 billion, subject to certain adjustments under the Purchase Agreement. To facilitate the completion of the Codman Acquisition, the Company drew $326.4 million from the revolving component of the Senior Credit Facility on September 29, 2017 and $700.0 million from the Term Loan A-1 component of the Senior Credit Facility on October 2, 2017. | | | | | | | | | | | |
| Six Months Ended June 30, |
Dollars in thousands | 2023 | | 2022 |
Net cash provided by operating activities | $ | 54,435 | | | $ | 110,822 | |
Net cash used in investing activities | (29,252) | | | (18,565) | |
Net cash used in financing activities | (173,376) | | | (146,612) | |
Effect of exchange rate fluctuations on cash | 724 | | | (11,941) | |
| | | |
Cash Flows Provided by Operating Activities
We generated operating cash flows of $103.0 million and $109.9 million for the nine months ended September 30, 2017 and 2016, respectively.
Operating cash flows for the ninesix months ended SeptemberJune 30, 20172023 decreased compared to the same period in 2016. Net income decreased compared to the same period of the prior year. Net income after non-cash adjustments decreased cash flows for the nine months ended September 30, 2017 by approximately $17.1$56.4 million compared to the same period in 2016, which resulted2022. Within operating cash flows, net 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 fromdue to lower revenues and margins and higher selling expenses.
The changes in assets and liabilities for the increasesix months ended June 30, 2023, net of business acquisitions, decreased cash flows by $57.6 million, mainly attributable to increases in depreciationinventory and amortization, non-cash impairment charges, share-based compensation expenses and realized loss on sale of short-term investmentsother current assets, offset by non-cash interest expense from convertible debt, which was settledincreases in December 2016. Net changes in working capital were minimal for the nine months ended September 30, 2017. Among the changes in working capital, accounts receivable used $9.9 million of cash, inventory used $0.9 million of cash, prepaidaccrued expenses and other current liabilities due to reduced payments processed in the quarter.
The changes in assets used $14.7and liabilities for the six months ended June 30, 2022, net of business acquisitions, decreased cash flows by $46.5 million, of cashprimarily due to increases in inventory to support increased sales and decreases in accounts payable, accrued expenses and other current liabilities provided $24.0 million of cash, deferred revenue provided $1.4 million of cash, and other non-current liabilities provided $2.4 million of cash. Increasesdue to increased payments processed in accounts receivables and inventories are consistent with the increase in revenue.
Operating cash flow for the nine months ended September 30, 2016 increased compared to the same period in 2015. Net income increased compared to the same period of the prior year. Net income after non-cash adjustments increased cash flows for the nine months ended September 30, 2016 by approximately $35.1 million compared to the same period in 2015, which resulted primarily from the $35.6 million expense relating to the adjustment of the valuation allowance recorded as a result of the spin-off of our spine business in July 2015 offset by the increase in depreciation and amortization. Changes in working capital decreased cash flows for the nine months ended September 30, 2016 by approximately $8.9 million. Among the changes in working capital, accounts receivable used $8.1 million of cash, inventory used $9.1 million of cash, prepaid expenses and other current assets provided $1.1 million of cash and accounts payable, and accrued expenses and other current liabilities provided $5.8 million of cash. Increases in accounts receivables and inventories are consistent with the increase in revenue.quarter.
Cash Flows Used in Investing Activities
During the ninesix months ended SeptemberJune 30, 2017,2023, we paid $29.8$29.3 million for capital expenditures mostto support operations improvement initiatives at a number of which were directed to the expansion of aour manufacturing facilityfacilities and commercial expansion. We also used $225.6 million for the acquisition of Derma Sciences and TGX Medical, net of cash acquired. The payment for Derma Sciences includes a $210.5 million initial payment plus a $26.6 million payment for the BioD Product Payment in May 2017. We received $17.0 million from the sale of short-term investments acquired from Derma Sciences. In the third quarter of 2017, we received $0.3 million in cash from escrow related to the acquisition of BioD by Derma Sciences.other information technology investments.
During the ninesix months ended SeptemberJune 30, 2016,2022, we paid $26.1$18.7 million for capital expenditures mostto support operations improvement initiatives at a number of which were directedour manufacturing facilities and other information technology investments as well as the final $4.7 million payment related to the implementationfinal developmental milestone for Rebound Therapeutics Corporation. This was partially offset by $4.9 million proceeds on cross-currency swaps.
Cash Flows Provided by (Used in)Used in Financing Activities
Our principal sourceUses of cash from financing activities in the ninesix months ended SeptemberJune 30, 2017 was $571.42023 related to the repurchase of treasury stock of $150.0 million in borrowingsunder the 2023 accelerated share repurchase agreement, repayments of $29.1 million under our Senior Credit Facility used to acquire Derma Sciences and to fund a portionSecuritization Facility. We also had $7.6 million in payment of debt issuance costs. In addition, the Codman AcquisitionCompany had $5.3 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 that we received from the exercise of stock options of $9.8 million, offset by repayments of $65.0 million on the revolving portion of our Senior Credit Facility and $6.8 million cash taxes paid in net equity settlement. In the third quarter of 2017, we paid $4.8 million related to the BioD Earnout Payments.options.
Our principal sourceUses of cash from financing activities in the ninesix months ended SeptemberJune 30, 2016 was a $15.02022 related to the repurchase of treasury stock of $125.0 million under the 2022 accelerated share repurchase agreement, repayments of $23.0 million under our Senior Credit Facility and Securitization Facility. In addition, we had $23.2 million in cash taxes paid for net equity settlements.
Sources of cash from financing activities for the six months ended June 30, 2022 were $23.0 million borrowing under our Senior Credit Facility for general operating purposes and proceeds that we received from stock option exercises of $9.9 million, offset by repayments of $48.8 million on the revolving portion of our Senior CreditSecuritization Facility and $4.6$1.6 million cash taxes paid in net equity settlement.
Upcoming Debt Maturities
The first quarterly installmentproceeds from the exercise of the Company's Term Loan A component of its Senior Credit Facility is due on March 31, 2018. We recorded $18.8 million of the Term Loan A component of the Senior Credit Facility as a current liability in the Company's consolidated balance sheets. There are no other upcoming debt maturities in the next twelve months.stock options.
Amended and Restated Senior Credit Agreement, Convertible DebtSenior Notes, Securitization and Related Hedging Activities
See Note 5 -6. Debt, to the current period’s condensed consolidated financial statementsNotes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report) for a discussion of our (i) amendedAmended and restatedRestated Senior Credit Agreement, the 2025 Notes and (ii) convertible debtSecuritization Facility and relatedNote 7, Derivative Instruments, to the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report) for discussion of our hedging activities.
We are forecasting that sales and earnings for the next twelve months will be sufficient to remain in compliance with our financial covenants under the terms of the March 2023 Amendment to the Senior Credit Facility.
Share Repurchase Plan
On October 25, 2016, our Board of Directors terminatedJanuary 26, 2023, the Company entered into a $150 million accelerated share repurchase authorization dated October 28, 2014, which authorized management to purchase up to $75.0("2023 ASR") and received 2.1 million shares of outstandingthe Company common stock prior at inception of the 2023 ASR, which represented approximately 80% of the expected total shares under the 2023 ASR. The settlement of the ASR agreement was completed in two separate transactions on April 26, 2023 and May 4, 2023, where the Company received an additional 0.30 million and 0.31 million shares respectively, determined using the volume-weighted average price of the Company's common stock during the term of the 2023 ASR.
On January 12, 2022, we entered into a $125.0 million accelerated share repurchase ("2022 ASR") and received 1.48 million shares of our common stock at inception of the 2022 ASR, which represented approximately 80% of the expected total shares under the 2022 ASR. On March 24, 2022, the early exercise provision under the 2022 ASR was exercised by 2022 ASR counterparty. Upon settlement of the 2022 ASR on March 24, 2022, we received an additional 0.46 million shares determined using the volume-weighted average price of our common stock during the term of the 2022 ASR.
See Note 11. Treasury Stock, to the endNotes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1 of 2016, and authorized new repurchases of up to $150.0 million of outstanding common stock through December 2018. Shares may be repurchased either in the open market or in privately negotiated transactions.
The Company has not repurchased any shares of common stock under these authorizations through September 30, 2017.this Quarterly Report) for further details.
Dividend Policy
We have not paid any cash dividends on our common stock since our formation. Our Senior Credit Facility limits the amount of dividends that we may pay. Any future determinations to pay cash dividends on our common stock will be at the discretion of ourthe Board of Directors and will depend upon our financial condition, results of operations, cash flows and other factors deemed relevant by the Board of Directors.Board.
Capital Resources
We believe that our cash and available borrowings under the Senior Credit Facility are sufficient to finance our operations and capital expenditures for the foreseeable future. The Company considersOur future capital requirements will depend on many factors, including the portiongrowth of our business, the Senior Credit Facility payable withintiming and introduction of new products and investments, strategic plans and acquisitions, among others. Additional sources of liquidity available to us include short term borrowings and the next twelve-month periodissuance of $18.8 million as a current liability.
long term debt and equity securities.
Off-Balance Sheet Arrangements
There were no off-balanceWe do not have any off–balance sheet financing arrangements during the ninesix months ended SeptemberJune 30, 20172023 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 We will continue to have cash requirements to support seasonal working capital needs and capital expenditures, to pay interest, to service debt, and to fund acquisitions. As part of our ongoing operations, we enter into contractual arrangements that obligate us to make future cash payments.
Our primary obligations include principal and interest payments on revolving portion and Term Loan component of the Senior Credit Facility, Securitization Facility and Convertible Securities. See Note 6. Debt, to the Notes to Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report) for details. We also lease some of our manufacturing facilities and office buildings which have future minimum lease payments associated. See Note 10. Leases and Related Party Leases,to the Notes to Consolidated Financial Statements (Part I, Item 1 of this 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. See Note 9. Retirement Plans, and Note 16. Commitments and Contingencies, to the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report) for details. The associated obligations are not fixed. We also have a liability for uncertain tax benefits including interest and penalties. We cannot make a reliable estimate of the period in which the uncertain tax benefits may be realized.
OTHER MATTERS
Critical Accounting Estimates
We based the discussion and analysis of our financial condition and results of operations upon our consolidated financial statements, which have been prepared in conformity with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent liabilities, and the reported amounts of revenues and expenses. The critical accounting estimates includeddiscussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, have2022 did not materially changed.change in the three months ended June 30, 2023.
Recently Issued Accounting Standards
Information regarding new accounting pronouncements is included in Note 1 -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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including changes in foreign currency exchange rates and interest rates that could adversely affect our results of operations and financial condition. To manage the volatility relating to these typical business exposures, we may enter into various derivative transactions when appropriate. We do not hold or issue derivative instruments for trading or other speculative purposes.
Foreign Currency Exchange and Other Rate Risks
We operate on a global basis and are exposed to the risk that changes in foreign currency exchange rates could adversely affect our financial condition, results of operations and cash flows. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros, British pounds, Swiss francs, Canadian dollars, Japanese yen, Mexican pesos, Brazilian reais, Australian dollars and Chinese yuan. We manage the foreign currency exposure centrally, on a combined basis, which allows us to net exposures and to take advantage of any natural offsets. To mitigate the impact of currency fluctuations on transactions denominated in nonfunctional currencies, we periodically enter into derivative financial instruments in the form of foreign currency exchange forward contracts with major financial institutions. We temporarily record realized and unrealized gains and losses on these contracts that qualify as cash flow hedges in other comprehensive income, and then recognize them in other income or expense when the hedged item affects net earnings.
From time to time, we enter into foreign currency forward exchange contracts with terms of up to 12 months to manage currency exposures for transactions denominated in a currency other than an entity’s functional currency. As a result, the impact of foreign currency gains/losses recognized in earnings are partially offset by gains/losses on the related foreign currency forward exchange contracts in the same reporting period. Refer to Note 7. Derivative Instruments, to Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report) for further information.
We maintain written policies and procedures governing our risk management activities. With respect to cash flow hedges,derivatives, changes in cash flows attributable to hedged transactionsitems are generally expected to be completely offset by changes in the fair value of hedge instruments. Consequently, foreign currency exchange contracts would not subject us to material risk resulting fromdue to exchange rate movements, because gains and losses on these contracts offset gains and losses on the assets, liabilities or transactions being hedged.
The results of operations discussed herein have not been materially affected by inflation.
Interest Rate Risk
Cash and Cash Equivalents - We are exposed to the risk of interest rate fluctuations on the interest income earned on our cash and cash equivalents. A hypothetical 100 basis pointpoints movement in interest rates applicable to our cash and cash equivalents outstanding at SeptemberJune 30, 20172023 would increaseimpact interest income by approximately $4.8$3.1 million on an annual basis. No significant decrease in interest income would be expected as our cash balances are earning interest at rates of approximately one basis point.basis. We are subject to foreign currency exchange risk with respect to cash balances maintained in foreign currencies.
Senior Credit FacilityDebt - Our interest rate risk relates primarily to U.S. dollar LIBOR-indexedSOFR-indexed borrowings. We have used anuse interest rate swap derivative instrumentinstruments to manage our earnings and cash flow exposure to changes in interest rates. ThisThese interest rate swap fixesswaps fix the interest rate on a portion of our expected LIBOR-indexedSOFR-indexed floating-rate borrowings beginning various dates starting on December 31, 2016.
borrowings. These interest rate swaps were designated as cash flow hedges as of June 30, 2023. The total notional amounts related to the Company’s interest rate swaps were $1.5 billion with $775.0 million effective as of June 30, 2023. Based on our outstanding borrowings at SeptemberJune 30, 2017,2023, a one-percentage point increase100 basis points change in interest rates would affecthave impacted interest expense on the unhedged portion of the debt by $7.7$0.9 million on an annualized basis. A one-percentage point decrease inSee Note 7. Derivative Instruments, to the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report) for further information regarding interest rates would affect interest expense on the debt by $7.7 million on an annualized basis.rate swaps.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Exchange Act report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’sSEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Management has designed our disclosure controls and procedures to provide reasonable assurance of achieving the desired control objectives.
As required by Exchange Act Rule 13a-15(b), we have carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of SeptemberJune 30, 2017.2023. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of SeptemberJune 30, 20172023 to provide such reasonable assurance.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended SeptemberJune 30, 20172023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
As previously disclosed, the Company is in the process of a multi-year implementation of a global enterprise resource planning system. In response to business integration activities, the Company haswe have and will continue to further align and streamline the design and operation of the financial control environment to be responsive to the changing business model.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various lawsuits, claimsInformation pertaining to legal proceedings can be found in Note 16, Commitments and proceedings are pending or have been settled by us; the most significant of which are described below.
The Company is subject to various claims, lawsuits and proceedings in the ordinary course of the Company's business, including claims by current or former employees, distributors and competitors and with respect to its products and product liability claims, lawsuits and proceedings, some of which have been settled by the Company. In the opinion of management, such claims are either adequately covered by insurance or otherwise indemnified, or are not expected, individually or in the aggregate, to result in a material adverse effect on our financial condition. However, it is possible that the Company's results of operations, financial position and cash flows in a particular period could be materially affected by these contingencies.
TEI
TEI, acquired by Integra on July 17, 2015, manufactures a bovine-derived surgical mesh product for Boston Scientific Corporation ("BSC”) and has been named as a defendant in lawsuits under a broad range of products liability theories, many of which have not been served on TEI. As of September 30, 2017, only ten cases remained against TEI. Pursuant to an indemnification agreement with BSC (i) BSC is managing the litigation; (ii) TEI has in place a products liability insurance policy, of which it must exhaust $3.0 million before BSC’s indemnity begins to cover relevant claims (and of which only a small portion has been utilized to date and against which the insurer has reserved the entire $3.0 million). Because the thrust of products liability litigation focuses on synthetic surgical mesh products, counsel is filing motions to dismiss on behalf of TEI in many cases. In addition, Integra has certain protections in the merger agreements with TEI which would indemnify it for approximately $30.0 million for the first fifteen months after closing and between $20.0 and $30.0 million for the remainder of the three-year period after closing for losses relating to a variety of matters, including half of certain products liability claims (including those related to the product it manufactures for BSC) not covered by insurance. As of October 26, 2017, no indemnification payments were received nor owed in relation to the lawsuits for the initial indemnification time period, which covered the first fifteen months after closing.
The Company accrues for loss contingencies when it is deemed probable that a loss has been incurred and that loss is estimable. The amounts accrued are based on the full amount of the estimated loss before considering insurance proceeds, and do not include an estimate for legal fees expected to be incurred in connection with the loss contingency. The Company consistently accrues legal fees expected to be incurred in connection with loss contingencies as those fees are incurred by outside counsel as a period cost.
BioD
On April 7, 2017, the Company's indirect wholly-owned subsidiary, BioD filed an action in the Superior Court of New Jersey, Chancery Division, Middlesex County seeking a declaration that the resignation of Russell Olsen, the former CEO of BioD, was “for Good Reason” (as defined in Olsen’s employment agreement); a finding that Olsen breached the implied covenant of good faith and fair dealing, committed legal fraud, equitable fraud and negligent misrepresentation; and an award of damages for such actions, including a return of severance fees paid to Olsen. BioD was acquired in August 2016 by Derma Sciences, which Integra subsequently acquired in February 2017. After receiving a job offer from Integra that Olsen believed materially diminished his title and authority, on February 24, 2017 Olsen indicated his intention to terminate his position with BioD for Good Reason, as otherwise permitted by his employment agreement with BioD. Shortly thereafter, Cynthia Weatherly (as representative of the former equity owners of BioD) claimed in a letter to Derma Sciences that Olsen’s resignation was a “termination Without Cause” (as also defined in Olsen’s employment agreement), which would arguably trigger an acceleration of the earn out under a merger agreement between Derma Sciences, BioD and other parties (the "BioD Merger Agreement"), which was entered into in July 2016, and require as a result of the acceleration the payment of $26.5 million by BioD. As previously disclosed and described in Note 2 - Business AcquisitionContingencies, to the Company's consolidated financial statements for the three and nine months ended September 30, 2017, Integra assumedNotes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1 of this contingent liability in connection with its acquisition of Derma Sciences. The action for a declaratory judgment was filed to clarify that Olsen’s termination was for Good Reason and not Without Cause. If the employment agreementQuarterly Report).
was terminated for Good Reason, then the Company believes that the earn out provision under the BioD Merger Agreement should not be accelerated.
ITEM 1A. RISK FACTORS
The Risk FactorsThere have been no material changes in our risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 20162022 and Quarterly Report on Form 10-Q forsubsequent periodic reports filed with the quarterly periods ended March 31, 2017Securities and June 30, 2017 have not materially changed except the following:
If any of our manufacturing facilities were damaged and/or our manufacturing or business processes interrupted, we could experience lost revenues and our business could be seriously harmed.
Damage to our manufacturing, development and/or research facilities because of fire, extreme weather conditions, natural disaster, power loss, communications failure, unauthorized entry or other events, such as a flu or other health epidemic, could significantly disrupt our operations, the operations of suppliers and critical infrastructure and delay or prevent product manufacture and shipment during the time required to repair, rebuild or replace the damaged facilities. In particular, our San Diego, California facility is susceptible to earthquake damage, wildfire damage and power losses from electrical shortages as are other businesses in Southern California. Our Añasco, Puerto Rico plant, where we manufacture collagen, silicone and our private-label products, is vulnerable to hurricane, storm, earthquake and wind damage. In September 2017, Hurricane Maria caused catastrophic damage and disruptionExchange Commission pursuant to the infrastructure in Puerto Rico, including power, communications, water supply and transportation and to the operationsSecurities Exchange Act of suppliers and service providers, some1934, as amended (the "Exchange Act").
Although we maintain property damage and business interruption insurance coverage on these facilities, our insurance might not cover all losses under such circumstances, and we may not be able to renew or obtain such insurance in the future on acceptable terms with adequate coverage or at reasonable costs. While we believe that our exposure to significant losses from such circumstances could be partially mitigated by our ability to manufacture, store, and distribute some of our products at other facilities, the losses could have a material adverse effect on our business for an undetermined period of time before the transition is complete and operations resume without significant disruption.
In addition, certain of our surgical instruments have some manufacturing processes performed by third parties in Pakistan, and we purchase a much smaller amount of instruments directly from vendors there. Pakistan is subject to political instability and unrest. Such instability could interrupt our ability to sell surgical instruments to our customers and could have a material adverse effect on our revenues and earnings. While we have developed a relationship with an alternative provider of these services in another country, and continue to work to develop other providers in other countries, we cannot guarantee that we will be completely successful in establishing all of these relationships. Even if we are successful in establishing all of these alternative relationships, we cannot guarantee that we will be able to do so at the same level of costs or that we will be able to pass along additional costs to our customers.
Further, we manufacture certain products in Europe and our European headquarters is located in France, which has experienced labor strikes and acts of terrorism. Thus far, strikes and acts of terrorism have not had a material impact on our business; however, if either were to occur, there is no assurance that they would not disrupt our business, and any such disruption could have a material adverse effect on our business.
An experienced third party hosts and maintains the enterprise business system used to support certain of our transaction processing for accounting and financial reporting, supply chain and manufacturing. Currently, we have developed a comprehensive disaster recovery plan for the Company’s infrastructure. As we have not fully tested the plan, we have adopted alternative solutions to mitigate business risk, including backup equipment, power and communications. We also implemented a comprehensive backup and recovery process for our key software applications. Our global production and distribution operations are dependent on the effective management of information flow between facilities. An interruption of the support provided by our enterprise business systems could have a material adverse effect on the business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were noThe following table provides information about purchases by the Company during the quarter ended June 30, 2023 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act. Subject to applicable law, share repurchases may be made from time to time in open market transactions, privately negotiated transactions including accelerated share repurchase agreements, or pursuant to instruments and plans complying with Rule 10b5-1 under the Exchange Act, among other types of ourtransactions and arrangements.
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Issuer purchases of equity securities |
Period | | Total number of shares purchased by month | | Average price paid per share | | Total number of shares purchased by month as part of publicly announced repurchase programs | | Approximate dollar value of shares that may yet be purchased under the plans or program |
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04/01/23 - 04/30/23 | | 303,129 | | | $ | 55.32 | | | 303,129 | | | $ | 75,000,000 | |
05/01/23 - 05/31/23 | | 305,888 | | | 50.20 | | | 305,888 | | | 75,000,000 | |
06/01/23 - 06/30/23 | | — | | | — | | | — | | | 75,000,000 | |
| | 609,017 | | | $ | 52.75 | | | 609,017 | | | |
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.
See Note 11, Treasury Stock, to the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report) for additional information regarding our share repurchase program duringand the three and nine months ended September 30, 2017.2023 ASR.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Rule 10b5-1 Trading Plans
On October 24, 2017,During the Company entered into the Third Amended and Restated Employment Agreement with Peter J. Arduini, President and Chief Executive Officerquarter ended June 30, 2023, none of the Company (the “Agreement”). The Agreement will become effective January 1, 2018 and will amend and restate the Second Amended and Restated Employment Agreement between the Company and Mr. Arduini, dated June 16, 2014, that is scheduled to expire on December 31, 2017.
Unless earlier terminated, the term of the Agreement will terminate on December 31, 2020. In the event that a change in control of the Company occurs prior to the expiration of the term, the employment period will instead continue through the later of December 31, 2020,Company’s directors or the second anniversary of the consummation of the change in control.
Under the Agreement, Mr. Arduini is entitled to receive an annual base salary of $911,622.27. Commencing with calendar year 2018, Mr. Arduini will also be eligible for an annual bonus opportunity targeted at 120% of his annual base salary. Mr. Arduini’s bonus opportunity will range from 50% of his target annual bonus opportunity (if threshold performance goals are achieved) to a maximum of 200% of his target annual bonus opportunity. Mr. Arduini’s base salary is subject to annual review and may be increased at the discretion of the Company.
The Agreement provides that Mr. Arduini is eligible to receive a discretionary annual equity award, with the amount, form and mix of such award to be determined by the Company’s Compensation Committee in its discretion after giving consideration to annual equity-based awards granted to chief executive officers in the Company’s peer group. Any annual equity awards will be granted pursuant to award agreements on forms substantially similar to the applicable form attached to the Agreement, which include provisions for accelerated time-vesting in connection with Mr. Arduini’s retirement. The Agreement also provides that each current and future equity award held by Mr. Arduini that provides for double trigger accelerated vesting will provide for accelerated vesting upon a qualifying termination that occurs onadopted or within 24 months following a change in control. In addition, Mr. Arduini’s stock options will remain exercisable for up to two years following a qualifying terminationterminated any contract, instruction or such longer period of time provided in the applicable option agreement.
The Agreement contains non-compete and non-solicitation covenants that extend for 18 months following a termination of Mr. Arduini’s employment (or 12 months in the event of a termination due to the expiration of the employment term). Further, the Company will reimburse Mr. Arduini for up to $15,000 in legal fees and expenses incurred in connection with the drafting, review and negotiation of the Agreement and any related agreements.
Under the Agreement, if Mr. Arduini’s employment is terminated outside the context of a change in control by the Company other than for “cause,” death or “disability,” or by Mr. Arduini for “good reason” (each, as defined in the Agreement), then, in addition to accrued amounts, Mr. Arduini will be entitled to the following payments and benefits:
A lump sum payment equal to 2.99 times Mr. Arduini’s annual base salary;
Company-subsidized healthcare continuation coverage for Mr. Arduini and his dependents for up to 18 months after his termination date; and
Company-paid life and disability insurance premiums for Mr. Arduini for up to 18 months after his termination date.
If Mr. Arduini’s employment is terminated by the Company within 24 months following a change in control by the Company other than for cause, death or disability, or by Mr. Arduini for good reason, then Mr. Arduini will be entitled to receive the same payments and benefits as in the non-change in control context, except: (i) the lump sum cash payment will instead equal 2.99 times the sum of Mr. Arduini’s annual base salary and target bonus and (ii) Mr. Arduini will receive a pro-rata portion of his annual bonuswritten plan for the yearpurchase or sale of termination, determined based on actual performance.Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”
If Mr. Arduini’s employment is terminated due to his death, then his estate will receive (i) a lump sum cash payment equal to Mr. Arduini’s annual base salary, and (ii) Company-subsidized healthcare continuation coverage for up to 12 months after his termination date.
Mr. Arduini’s right to receive the severance payments pursuant to the Agreement (other than upon his death) is contingent on Mr. Arduini’s executing a general release of claims against the Company (provided that the Company also executes a general release of claims against Mr. Arduini). In addition, to the extent that any payment or benefit received in connection with a change in control would be subject to an excise tax under Section 4999 of the Internal Revenue Code, such payments and/or benefits will
be subject to a “best pay cap” reduction if such reduction would result in a greater net after-tax benefit to Mr. Arduini than receiving the full amount of such payments.
The foregoing description of the Agreement is not complete and is subject to and qualified in its entirety by the terms of the Agreement, a copy of which is filed herewith as Exhibit 10.1 and incorporated herein by reference.
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* | Filed herewith |
# | Indicates a management contract or compensatory plan or arrangement. |
† | The financial information of Integra LifeSciences Holdings Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 filed on July 27, 2023 formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations and Comprehensive Income, (ii) the Condensed Consolidated Balance Sheets, (iii) Parenthetical Data to the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements, is furnished electronically herewith. |
† The financial information
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | INTEGRA LIFESCIENCES HOLDINGS CORPORATION |
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Date: | October 26, 2017July 27, 2023 | | /s/ Peter J. ArduiniJan De Witte |
| | | Peter J. ArduiniJan De Witte |
| | | President and Chief Executive Officer |
| | | (Principal Executive Officer) |
Date: | October 26, 2017 | | /s/ Glenn G. Coleman |
Date: | July 27, 2023 | | Glenn G. Coleman/s/ Lea Knight |
| | | CorporateLea Knight |
| | | Executive Vice President and Chief Financial Officer |
Table of Contents
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ExhibitsDate: | July 27, 2023 | | /s/ Jeffrey A. Mosebrook |
| | | Jeffrey A. Mosebrook |
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Senior Vice President, Finance |
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* | Filed herewith |
# | Indicates a management contract or compensatory plan or arrangement.(Principal Accounting Officer) |
† The financial information of Integra LifeSciences Holdings Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 filed on October 26, 2017 formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations and Comprehensive Income, (ii) the Condensed Consolidated Balance Sheets, (iii) Parenthetical Data to the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements, is furnished electronically herewith.