Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             
COMMISSION FILE NO. 0-26224
 
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
DELAWARE
 
51-0317849
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
 
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
 
 
311 ENTERPRISE DRIVE
PLAINSBORO, NEW JERSEY
 
08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
 
(ZIP CODE)
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (609) 275-0500
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o  
Smaller reporting company
o
 
 
 
 
Emerging growth company
o
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o    No  ý
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes  o    No  ý




The number of shares of the registrant’s Common Stock, $0.01 par value, outstanding as of April 25, 2019 was 85,476,801.

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
INDEX
 

 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EX-101 INSTANCE DOCUMENT
 
EX-101 SCHEMA DOCUMENT
 
EX-101 CALCULATION LINKBASE DOCUMENT
 
EX-101 DEFINITION LINKBASE DOCUMENT
 
EX-101 LABELS LINKBASE DOCUMENT
 
EX-101 PRESENTATION LINKBASE DOCUMENT
 



Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(UNAUDITED)
(In thousands, except per share amounts)
 
 
Three Months Ended March 31,
 
2019
 
2018
Total revenue, net
$
359,690

 
$
357,082

Costs and expenses:
 
 
 
Cost of goods sold
128,912

 
144,222

Research and development
18,321

 
18,325

Selling, general and administrative
174,870

 
163,566

Intangible asset amortization
5,279

 
5,390

Total costs and expenses
327,382

 
331,503

Operating income
32,308

 
25,579

Interest income
2,428

 
76

Interest expense
(13,149
)
 
(18,768
)
Other income, net
3,236

 
2,245

Income before income taxes
24,823

 
9,132

Income tax benefit
(7,933
)
 
(1,860
)
Net income
$
32,756

 
$
10,992

 
 
 
 
Net income per share
 
 
 
Basic
$
0.38

 
$
0.14

Diluted
$
0.38

 
$
0.14

 
 
 
 
Weighted average common shares outstanding (See Note 13):
 
 
 
Basic
85,343

 
78,552

Diluted
86,258

 
79,834

Comprehensive income (See Note 14)
$
21,520

 
$
32,604



The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.

3

Table of Contents

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except per share amounts)
 
 
March 31, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
157,025

 
$
138,838

Trade accounts receivable, net of allowances of $4,099 and $3,719
279,072

 
265,737

Inventories, net
286,962

 
280,347

Prepaid expenses and other current assets
99,627

 
90,160

  Total current assets
822,686

 
775,082

Property, plant and equipment, net
306,350

 
300,112

Intangible assets, net
1,058,630

 
1,079,496

Goodwill
922,508

 
926,475

Deferred tax assets, net
16,404

 
6,805

Other assets
79,133

 
19,917

Total assets
$
3,205,711

 
$
3,107,887

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term portion of borrowings under senior credit facility
$
33,750

 
$
22,500

Accounts payable, trade
100,553

 
76,050

Deferred revenue
3,750

 
3,764

Accrued compensation
57,561

 
75,693

Accrued expenses and other current liabilities
92,492

 
84,545

  Total current liabilities
288,106

 
262,552

Long-term borrowings under senior credit facility
1,205,025

 
1,210,513

Long-term borrowings under securitization facility
126,000

 
121,200

Deferred tax liabilities
57,660

 
57,778

Other liabilities
131,890

 
80,048

Total liabilities
1,808,681

 
1,732,091

Commitments and contingencies (Refer to Note 16)

 

Stockholders’ equity:
 
 
 
Preferred stock; no par value; 15,000 authorized shares; none outstanding

 

Common stock; $0.01 par value; 240,000 authorized shares; 88,304 and 88,044 issued at March 31, 2019 and December 31, 2018, respectively
882

 
880

Additional paid-in capital
1,191,807

 
1,192,601

Treasury stock, at cost; 2,869 shares and 2,881 shares at March 31, 2019 and December 31, 2018, respectively
(120,109
)
 
(120,615
)
Accumulated other comprehensive loss
(56,679
)
 
(45,443
)
Retained earnings
381,129

 
348,373

Total stockholders’ equity
1,397,030

 
1,375,796

Total liabilities and stockholders’ equity
$
3,205,711

 
$
3,107,887


The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.

4

Table of Contents



INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
 
Three Months Ended March 31,
 
2019
 
2018
OPERATING ACTIVITIES:
 
 
 
Net income
$
32,756

 
$
10,992

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
27,093

 
27,096

Deferred income tax
(6,843
)
 
(1,636
)
Amortization of debt issuance costs
1,357

 
1,519

Loss on disposal of property and equipment
367

 
146

Change in fair value of contingent consideration and other
194

 
379

Share-based compensation
4,083

 
4,731

Changes in assets and liabilities, net of business acquisitions:
 
 
 
Accounts receivable
(13,705
)
 
(18,400
)
Inventories
(12,048
)
 
1,297

Prepaid expenses and other current assets
(12,949
)
 
12,163

Other non-current assets
(628
)
 
339

Accounts payable, accrued expenses and other current liabilities
5,387

 
2,974

Deferred revenue
(188
)
 

Other non-current liabilities
4,608

 
(69
)
Net cash provided by operating activities
29,484

 
41,531

INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(16,086
)
 
(15,387
)
Proceeds from note receivable
245

 
221

Proceeds from sale of property and equipment
35

 
148

Cash provided by business acquisitions

 
5,720

Net cash used in investing activities
(15,806
)
 
(9,298
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from borrowings of long-term indebtedness
67,200

 
25,000

Payments on debt
(57,400
)
 
(35,000
)
Net cash paid for contingent consideration

 
(7,772
)
Proceeds from exercised stock options
1,750

 
3,662

Cash taxes paid in net equity settlement
(6,157
)
 
(6,776
)
Net cash provided by (used in) financing activities
5,393

 
(20,886
)
Effect of exchange rate changes on cash and cash equivalents
(884
)
 
3,114

Net increase in cash and cash equivalents
18,187

 
14,461

Cash and cash equivalents at beginning of period
138,838

 
174,935

Cash and cash equivalents at end of period
$
157,025

 
$
189,396


The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.

5

Table of Contents

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(UNAUDITED)
(In thousands)

 
Three Months Ended March 31, 2019
 
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Total Equity
Shares
 
Amount
Shares
 
Amount
 
(In thousands)
Balance, January 1, 2019
88,044

 
$
880

 
(2,881
)
 
$
(120,615
)
 
$
1,192,601

 
$
(45,443
)
 
$
348,373

 
$
1,375,796

Net income

 

 

 

 

 

 
32,756

 
32,756

Other comprehensive income (loss), net of tax

 

 

 

 

 
(11,236
)
 

 
(11,236
)
Issuance of common stock through employee stock purchase plan
17

 

 

 

 
716

 

 

 
716

Issuance of common stock for vesting of share based awards, net of shares withheld for taxes
243

 
2

 
12

 
506

 
(5,629
)
 

 

 
(5,121
)
Share-based compensation

 

 

 

 
4,119

 

 

 
4,119

Balance, March 31, 2019
88,304

 
$
882

 
(2,869
)
 
$
(120,109
)
 
$
1,191,807

 
$
(56,679
)
 
$
381,129

 
$
1,397,030



The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.


6

Table of Contents



INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(UNAUDITED)
(In thousands)

 
Three Months Ended March 31, 2018
 
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Total Equity
Shares
 
Amount
Shares
 
Amount
 
(In thousands)
Balance, January 1, 2018
81,306

 
$
813

 
(2,927
)
 
$
(121,644
)
 
$
821,758

 
$
(23,807
)
 
$
285,186

 
$
962,306

Net income

 

 

 

 

 

 
10,992

 
10,992

Adoption of Update No. 2014-09

 

 

 

 

 

 
1,854

 
1,854

Other comprehensive income (loss), net of tax

 

 

 

 

 
22,144

 
(532
)
 
21,612

Issuance of common stock
297

 
3

 

 

 
3,107

 

 

 
3,110

Issuance of common stock through employee stock purchase plan

 

 

 

 
553

 

 

 
553

Issuance of common stock for vesting of share based awards, net of shares withheld for taxes
108

 
1

 
37

 
910

 
(7,643
)
 

 

 
(6,732
)
Share-based compensation

 

 

 

 
4,745

 

 

 
4,745

Balance, March 31, 2018
81,711

 
$
817

 
(2,890
)
 
$
(120,734
)
 
$
822,520

 
$
(1,663
)
 
$
297,500

 
$
998,440



The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.


7

Table of Contents

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION
General
The terms “we,” “our,” “us,” “Company” and “Integra” refer to Integra LifeSciences Holdings Corporation, a Delaware corporation, and its subsidiaries unless the context suggests otherwise.
In the opinion of management, the March 31, 2019 unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations and cash flows of the Company. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K. The December 31, 2018 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. Operating results for the three month period ended March 31, 2019 are not necessarily indicative of the results to be expected for the entire year.
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management 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. Significant estimates affecting amounts reported or disclosed in the consolidated financial statements include allowances for doubtful accounts receivable and sales returns and allowances, net realizable value of inventories, valuation of intangible assets including amortization periods for acquired intangible assets, discount rates and estimated projected cash flows used to value and test impairments of long-lived assets and goodwill, estimates of projected cash flows and depreciation and amortization periods for long-lived assets, computation of taxes, valuation allowances recorded against deferred tax assets, the valuation of stock-based compensation, valuation of derivative instruments, valuation of pension assets and liabilities, valuation of contingent liabilities, the fair value of debt instruments and loss contingencies. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the current circumstances. Actual results could differ from these estimates.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (the New Lease Standard). The New Lease Standard requires that lessees recognize virtually all of its leases on the balance sheet by recording a right-of-use asset and lease liability (other than leases that meet the definition of a "short-term lease"). This update became effective for all annual periods and interim reporting periods beginning after December 15, 2018.
The Company adopted the New Lease Standard as of January 1, 2019 using a modified retrospective transition. Under this method, financial results reported in periods prior to January 1, 2019 are unchanged. The Company also elected the package of practical expedients, which among other things, does not require reassessment of lease classification. As most of our leases do not provide an implicit rate, we used our collateralized incremental borrowing rate based on the information available at the lease implementation date in determining the present value of the lease payments. The adoption of the New Lease Standard had an impact on our consolidated balance sheet due to the recognition of $76.4 million of lease liabilities with corresponding right-of-use assets ("ROU") of $67.3 million for operating leases. The difference between lease liabilities and right-of-use assets is primarily attributed to unamortized lease incentives which will be amortized over the term of each respective lease.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets including trade receivables held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is evaluating the impact, if any, that this pronouncement will have on our financial position and results of operations.
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans. The new guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans, including removing certain previous disclosure requirements, adding certain new disclosure requirements, and clarifying certain other disclosure requirements. The ASU will be effective for fiscal years beginning after December 15, 2020, including

8

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

interim periods within those fiscal years. Early adoption is permitted. The adoption is not expected to have a material impact on the Condensed and Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), relating to a customer's accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by a vendor (i.e., a service contract). Under the new guidance, a customer will apply the same criteria for capitalizing implementation costs as it would for an arrangement that has a software license. The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application is permitted. The Company can choose to adopt the new guidance (1) prospectively to eligible costs incurred on or after the date this guidance is first applied or (2) retrospectively. The Company is evaluating the impact, if any, that this pronouncement will have on our financial position and results of operations.
There are no other recently issued accounting pronouncements that are expected to have any significant effect on the Company's financial position, results of operations or cash flows.
2. BUSINESS DEVELOPMENT
Integrated Shoulder Collaboration, Inc.
On January 4, 2019, the Company entered into a licensing agreement with Integrated Shoulder Collaboration, Inc ("ISC"). Under the terms of the agreement, the Company paid ISC $1.7 million for the exclusive, worldwide license to commercialize its short stem and stemless shoulder system. A patent related to short stem and stemless shoulder systems was issued to ISC during the first quarter of 2019. ISC is eligible to receive royalties on sales of the short stem and stemless shoulder system. The Company has the option to acquire ISC at a date four years subsequent to the first commercial sale, which becomes mandatory upon the achievement of a certain sales threshold of the short stem and stemless shoulder system, for an amount not to exceed $80.0 million. The transaction was accounted for as an asset acquisition as the Company concluded that it acquired primarily one asset. The total upfront payment of $1.7 million was expensed as a component of research and development expense and the future milestone and option payments will be recorded if the corresponding events become probable.
3. REVENUES FROM CONTRACTS WITH CUSTOMERS
Summary of Accounting Policies on Revenue Recognition
Revenue is recognized upon the transfer of control of promised products or services to the customers in an amount that reflects the consideration the Company expects to receive in exchange for those products and services.
Total revenue, net, includes product sales, product royalties and other revenues, such as fees received for services.
For products shipped with FOB shipping point terms, the control of the product passes to the customer at the time of shipment. For shipments in which the control of the product is transferred when the customer receives the product, the Company recognizes revenue upon receipt by the customer. Certain products that the Company produces for private label customers have no alternative use and the Company has a right of payment for performance to date. Revenues from those products are recognized over the period that the Company manufactures these products, which is typically one to three months. The Company uses the input method to measure the manufacturing activities completed to date, which depicts the progress of the Company's performance obligation of transferring control of goods being manufactured for private label customers.
A portion of the Company's product revenue is generated from consigned inventory maintained at hospitals and distributors, and also from inventory physically held by field sales representatives. For these types of products sales, the Company retains control until the product has been used or implanted, at which time revenue is recognized.   
Revenues from sale of products and services are evidenced by either a contract with the customer or a valid purchase order and an invoice which includes all relevant terms of sale. For product sales, invoices are generally issued upon the transfer of control (or upon the completion of the manufacturing in the case of the private label transactions recognized over time) and are typically payable thirty days after the invoice date. The Company performs a review of each specific customer's creditworthiness and ability to pay prior to acceptance as a customer. Further, the Company performs periodic reviews of its customers' creditworthiness prospectively.
Performance Obligations
The Company's performance obligations consist mainly of transferring control of goods and services identified in the contracts, purchase orders, or invoices. The Company has no significant multi-element contracts with customers.
Significant Judgments

9

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

Usage-based royalties and licenses are estimated based on the provisions of contracts with customers and recognized in the same period that the royalty-based products are sold by the Company's strategic partners. The Company estimates and recognizes royalty revenue based upon communication with licensees, historical information, and expected sales trends. Differences between actual reported licensee sales and those that were estimated are adjusted in the period in which they become known, which is typically the following quarter. Historically, such adjustments have not been significant.
The Company estimates returns, price concessions, and discount allowances using the expected value method based on historical trends and other known factors. Rebate allowances are estimated using the most likely method based on each customer contract.
The Company's return policy, as set forth in its product catalogs and sales invoices, requires the Company to review and authorize the return of a product in advance. Upon the authorization, a credit will be issued for the goods returned within a set amount of days from the shipment, which is generally ninety days.
The Company disregards the effects of a financing component if the Company expects, at contract inception, that the period between the transfer and customer payment for the good or services will be one year or less. The Company has no significant revenues recognized on payments expected to be received more than one year after the transfer of control of products or services to customers.
Contract Asset and Liability
Revenues recognized from the Company's private label business that are not invoiced to the customers as a result of recognizing revenue over time are recorded as a contract asset included in the prepaid expenses and other current assets account in the consolidated balance sheet.
Other operating revenues may include fees received under service agreements. Non-refundable fees received under multiple-period service agreements are recognized as revenue as the Company satisfies the performance obligations to the other party. A portion of the transaction price allocated to the performance obligations to be satisfied in the future periods is recognized as contract liability.
The following table summarizes the changes in the contract asset and liability balances for the three months ended March 31, 2019:
Contract Asset
 
Contract asset, January 1, 2019
$
4,193

Transferred to trade receivable of contract asset included
     in beginning of the year contract asset
(4,193
)
Contract asset, net of transferred to trade receivables on contracts during the period
5,848

Contract asset, March 31, 2019
$
5,848

 
 
Contract Liability
 
Contract liability, January 1, 2019
$
12,716

Recognition of revenue included in beginning of year contract liability
(1,165
)
Contract liability, net of revenue recognized on contracts during the period
800

Foreign currency translation
4

Contract liability, March 31, 2019
$
12,355

At March 31, 2019, the short-term portion of the contract liability of $3.8 million and the long-term portion of $8.6 million were included in accrued expenses and other current liabilities and other liabilities in the consolidated balance sheet.
As of March 31, 2019, the Company is expected to recognize revenue of approximately $3.0 million for the remainder of 2019, $2.9 million in 2020, $2.2 million in 2021, $1.3 million in 2022, $0.8 million in 2023, and $2.2 million thereafter.
Shipping and Handling Fees
The Company elected to account for shipping and handling activities as a fulfillment cost rather than a separate performance obligation. Amounts billed to customers for shipping and handling are included as part of the transaction price and recognized as revenue when control of underlying products is transferred to the customer. The related shipping and freight charges incurred by the Company are included in the cost of goods sold.


10

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

Product Warranties
Certain of the Company's medical devices, including monitoring systems and neurosurgical systems, are designed to operate over long periods of time. These products are sold with warranties which may extend for up to two years from the date of purchase. The warranties are not considered a separate performance obligation. The Company estimates its product warranties using the expected value method based on historical trends and other known factors. The Company includes them in accrued expenses and other current liabilities in the consolidated balance sheet.
Taxes Collected from Customers
The Company elected to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer.
Disaggregated Revenue
The following table presents revenues disaggregated by the major sources of revenues for the three months ended March 31, 2019 and 2018 (amounts in thousands):
 
Three Months Ended March 31, 2019
Three Months Ended March 31, 2018
 
(amounts in thousands)
Neurosurgery
$
166,415

$
166,898

Precision Tools and Instruments
68,153

69,217

Total Codman Specialty Surgical
234,568

236,115

 
 
 
Wound Reconstruction and Care
74,963

72,287

Extremity Orthopedics
22,685

22,635

Private Label
27,474

26,045

Total Orthopedics and Tissue Technologies
125,122

120,967

Total revenue
$
359,690

$
357,082

Prior period amounts were reclassified between categories within the Orthopedics and Tissue Technologies segment to conform to the current period presentation.
See Note 15, Segment and Geographical Information, for details of revenues based on the location of the customer.
Effect of Adoption of ASC Topic 606
On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to all contracts which were not completed as of January 1, 2018. Results of operations for the reporting periods after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with Topic 605, Revenue Recognition.
The adoption of Topic 606 resulted in an increase to the opening retained earnings of $1.9 million, which was recorded net of taxes as of January 1, 2018 to reflect the change in timing of the recognition of revenue related to the Company's private label business from point in time to over time during the manufacturing process and goods in transit for which control was transferred to customers at the time of shipment. The total assets and liabilities increased by $7.1 million and $5.2 million, respectively, as of January 1, 2018.
The impact of adoption in the year of implementation of Topic 606 to the Company's consolidated statement of operations for the three months ended March 31, 2018 was as follows:

11

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 
Three Months Ended March 31, 2018
 
As Reported
Excluding Impact of Topic 606
 
(Amounts in thousands)
Statement of Operations
 
 
Total revenue, net
$
357,082

$
356,622

Cost of goods sold
144,222

144,019

Income tax benefit
(1,860
)
(1,924
)
Net income
10,992

10,799


4. INVENTORIES
Inventories, net consisted of the following:
 
March 31, 2019
 
December 31, 2018
 
(In thousands)
Finished goods
$
178,263

 
$
179,885

Work in process
52,640

 
47,715

Raw materials
56,059

 
52,747

 
$
286,962

 
$
280,347


5. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the three-month period ended March 31, 2019 were as follows:
 
Codman Specialty
Surgical
 
Orthopedics and
Tissue Technologies
 
Total
 
(In thousands)
Goodwill at December 31, 2018
$
625,760

 
$
300,715

 
$
926,475

Foreign currency translation
(2,679
)
 
(1,288
)
 
(3,967
)
Goodwill at March 31, 2019
$
623,081

 
$
299,427

 
$
922,508

The components of the Company’s identifiable intangible assets were as follows:
 
March 31, 2019
 
Weighted
Average
Life
 
Cost
 
Accumulated
Amortization
 
Net
 
(Dollars in thousands)
Completed technology
19 years
 
$
852,751

 
$
(178,506
)
 
$
674,245

Customer relationships
13 years
 
231,111

 
(110,519
)
 
120,592

Trademarks/brand names
28 years
 
103,820

 
(25,665
)
 
78,155

Codman trade name
Indefinite
 
161,025

 

 
161,025

Supplier relationships
27 years
 
34,721

 
(16,876
)
 
17,845

All other
4 years
 
10,844

 
(4,076
)
 
6,768

 
 
 
$
1,394,272

 
$
(335,642
)
 
$
1,058,630



12

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 
December 31, 2018
 
Weighted
Average
Life
 
Cost
 
Accumulated
Amortization
 
Net
 
(Dollars in thousands)
Completed technology
19 years
 
$
855,679

 
$
(167,384
)
 
$
688,295

Customer relationships
13 years
 
231,448

 
(106,859
)
 
124,589

Trademarks/brand names
28 years
 
104,061

 
(24,764
)
 
79,297

Codman trade name
Indefinite
 
162,054

 

 
162,054

Supplier relationships
27 years
 
34,721

 
(16,519
)
 
18,202

All other 
4 years
 
10,958

 
(3,899
)
 
7,059

 
 
 
$
1,398,921

 
$
(319,425
)
 
$
1,079,496

Based on quarter-end exchange rates, amortization expense (including amounts reported in cost of product revenues) is expected to be approximately $49.5 million for the remainder of 2019, $65.8 million in 2020, $64.7 million in 2021, $61.2 million in 2022, $60.3 million in 2023, $59.5 million in 2024 and $535.9 million thereafter.
In April of 2019, a contract manufacturing customer of our Private Label product line received a notification from the FDA ordering them to remove their product from the market. Revenue for this customer was approximately $1.7 million and $0.6 million for the twelve month period ended December 31, 2018 and three month period ended March 31, 2019, respectively. The Company has an acquired customer relationship intangible asset associated with this customer with a carrying value of $5.9 million as of March 31, 2019. The Company is assessing the impact of this decision on our relationship with this customer and any related financial impact including potential future impairments.  

6. DEBT
Amended and Restated Senior Credit Agreement

On May 3, 2018, the Company entered into the fifth amendment and restatement (the "May 2018 Amendment") of its Senior Credit Facility (the "Senior Credit Facility") with a syndicate of lending banks with Bank of America, N.A., as Administrative Agent. The May 2018 Amendment extended the maturity date to May 3, 2023 and decreased the applicable rate, as described below. The Company continues to have the aggregate principal amount of $2.2 billion available to it through the following facilities:
i.
a $900.0 million Term Loan facility; and
ii.
a $1.3 billion revolving credit facility, which includes a $60.0 million sublimit for the issuance of standby letters of credit and a $60.0 million sublimit for swingline loans.

In connection with the May 2018 Amendment, the Company’s maximum consolidated total leverage ratio in the financial covenants (as defined in the Senior Credit Facility) was modified to the following:
Fiscal Quarter
 
Maximum Consolidated Total Leverage Ratio
 
 
 
Execution of May 2018 Amendment through March 31, 2019
 
5.50 : 1.00
June 30, 2019 through March 31, 2020
 
5.00 : 1.00
June 30, 2020 through March 31, 2021
 
4.50 : 1.00
June 30, 2021 and thereafter
 
4.00 : 1.00
Borrowings under the Senior Credit Facility bear interest, at the Company’s option, at a rate equal to the following:
i.
the Eurodollar Rate (as defined in the Senior Credit Facility) in effect from time to time plus the applicable rate (ranging from 1.00% to 1.75%), or
ii.
the highest of:
1.
the weighted average overnight Federal funds rate, as published by the Federal Reserve Bank of New York, plus 0.50%, plus the applicable rate (ranging from 0% to 0.75%),
2.
the prime lending rate of Bank of America, N.A. plus the applicable rate (ranging from 0% to 0.75%), and
3.
the one-month Eurodollar Rate plus 1.00% plus the applicable rate (ranging from 0% to 0.75%).

13

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

The applicable rates are based on the Company’s consolidated total leverage ratio (defined as the ratio of (a) consolidated funded indebtedness less cash that is not subject to any restriction on the use or investment thereof to (b) consolidated EBITDA at the time of the applicable borrowing).
The Company will pay an annual commitment fee (ranging from 0.15% to 0.30%), based on the Company's consolidated total leverage ratio, on the amount available for borrowing under the revolving credit facility.
The Senior Credit Facility is collateralized by substantially all of the assets of the Company’s U.S. subsidiaries, excluding intangible assets. The Senior Credit Facility is subject to various financial and negative covenants and at March 31, 2019, the Company was in compliance with all such covenants. In connection with the May 2018 Amendment, the Company capitalized $4.2 million of financing costs and wrote off $0.8 million of previously capitalized financing costs during the second quarter of 2018.
At March 31, 2019 and December 31, 2018, there was $350.0 million and $345.0 million outstanding, respectively, under the revolving credit component of the Senior Credit Facility at weighted average interest rates of 3.9% and 4.0%, respectively. At March 31, 2019 and December 31, 2018, there was $900.0 million outstanding under the Term Loan component of the Senior Credit Facility at a weighted average interest rate of 3.9%. At March 31, 2019, $33.8 million of the Term Loan component of the Senior Credit Facility is classified as current on the consolidated balance sheet.
Securitization Facility
During the fourth quarter of 2018, the Company entered into an accounts receivable securitization facility (the "Securitization Facility") under which accounts receivable of certain domestic subsidiaries are sold on a non-recourse basis to a special purpose entity (“SPE”), which is a bankruptcy-remote, consolidated subsidiary of the Company. Accordingly, the assets of the SPE are not available to satisfy the obligations of the Company or any of its subsidiaries. From time to time, the SPE may finance such accounts receivable with a revolving loan facility secured by a pledge of such accounts receivable. The amount of outstanding borrowings on the Securitization Facility at any one time is limited to $150.0 million. The Securitization Facility agreement is for an initial three-year term and may be extended. The agreement governing the Securitization Facility contains certain covenants and termination events. An occurrence of an event of default or a termination event under this Securitization Facility may give rise to the right of its counterparty to terminate this facility. As of March 31, 2019, the Company was in compliance with the covenants, and none of the termination events had occurred. As of March 31, 2019, the Company had $126.0 million of outstanding borrowings under its Securitization Facility at a weighted average interest rate of 3.5%.
The fair value of outstanding borrowings of the Senior Credit Facility's revolving credit and Term Loan components at March 31, 2019 was approximately $340.9 million and, $885.3 million, respectively. The fair value of the outstanding borrowing of the Securitization facility at March 31, 2019 was approximately $124.6 million. These fair values were determined by using a discounted cash flow model based on current market interest rates available to the Company. These inputs are corroborated by observable market data for similar liabilities and therefore classified within Level 2 of the fair value hierarchy. Level 2 inputs represent inputs that are observable for the asset or liability, either directly or indirectly, and are other than active market observable inputs that reflect unadjusted quoted prices for identical assets or liabilities.
Letters of credit outstanding as of March 31, 2019 and December 31, 2018 totaled $0.6 million. There were no amounts drawn as of March 31, 2019.
Contractual repayments of the Term Loan component of the Senior Credit Facility are due as follows:
Year Ended December 31,
 
Principal Repayment
 
 
(In thousands)
Remainder of 2019
 
$
22,500

2020
 
45,000

2021
 
56,250

2022
 
67,500

2023
 
708,750

 
 
$
900,000

The outstanding balance of the revolving credit component of the Senior Credit Facility is due on May 3, 2023.
7. DERIVATIVE INSTRUMENTS
Interest Rate Hedging
The Company’s interest rate risk relates to U.S. dollar denominated variable interest rate borrowings. The Company uses interest rate swap derivative instruments to manage earnings and cash flow exposure resulting from changes in interest rates. These interest

14

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

rate swaps apply a fixed interest rate on a portion of our expected LIBOR-indexed floating-rate borrowings. The Company held the following interest rate swaps as of March 31, 2019 and December 31, 2018 (amounts in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2019
December 31, 2018
Hedged Item
 
Current Notional Amount
 
Designation Date
 
Effective Date
 
Termination Date
 
Fixed Interest Rate
 
Estimated Fair Value
Estimated Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
Assets (Liabilities)
Assets (Liabilities)
3-month USD LIBOR Loan
 
$
50,000

 
June 22, 2016
 
December 31, 2016
 
June 30, 2019
 
1.062
%
 
$
193

$
410

3-month USD LIBOR Loan
 
50,000

 
June 22, 2016
 
December 31, 2016
 
June 30, 2019
 
1.062
%
 
193

415

1-month USD LIBOR Loan
 
50,000

 
July 12, 2016
 
December 31, 2016
 
June 30, 2019
 
0.825
%
 
210

418

3-month USD LIBOR Loan
 
50,000

 
February 6, 2017
 
June 30, 2017
 
June 30, 2020
 
1.834
%
 
393

619

1-month USD LIBOR Loan
 
100,000

 
February 6, 2017
 
June 30, 2017
 
June 30, 2020
 
1.652
%
 
866

1,287

1-month USD LIBOR Loan
 
100,000

 
March 27, 2017
 
December 31, 2017
 
June 30, 2021
 
1.971
%
 
552

1,246

1-month USD LIBOR Loan
 
150,000

 
December 13, 2017
 
January 1, 2018
 
December 31, 2022
 
2.201
%
 
(136
)
1,491

1-month USD LIBOR Loan
 
150,000

 
December 13, 2017
 
January 1, 2018
 
December 31, 2022
 
2.201
%
 
(168
)
1,460

1-month USD LIBOR Loan
 
100,000

 
December 13, 2017
 
July 1, 2019
 
June 30, 2024
 
2.423
%
 
(1,059
)
418

1-month USD LIBOR Loan
 
50,000

 
December 13, 2017
 
July 1, 2019
 
June 30, 2024
 
2.423
%
 
(572
)
162

1-month USD LIBOR Loan
 
200,000

 
December 13, 2017
 
January 1, 2018
 
December 31, 2024
 
2.313
%
 
(1,226
)
2,076

1-month USD LIBOR Loan
 
75,000

 
October 10, 2018
 
July 1, 2020
 
June 30, 2025
 
3.220
%
 
(3,726
)
(2,594
)
1-month USD LIBOR Loan
 
75,000

 
October 10, 2018
 
July 1, 2020
 
June 30, 2025
 
3.199
%
 
(3,698
)
(2,551
)
1-month USD LIBOR Loan
 
75,000

 
October 10, 2018
 
July 1, 2020
 
June 30, 2025
 
3.209
%
 
(3,735
)
(2,568
)
1-month USD LIBOR Loan
 
100,000

 
December 18, 2018
 
December 30, 2022
 
December 31, 2027
 
2.885
%
 
(2,426
)
(797
)
1-month USD LIBOR Loan
 
100,000

 
December 18, 2018
 
December 30, 2022
 
December 31, 2027
 
2.867
%
 
(2,337
)
(873
)
Total interest rate derivatives designated as cash flow hedge
 
$
1,475,000

 
 
 
 
 
 
 
 
 
$
(16,676
)
$
619

The Company has designated these derivative instruments as cash flow hedges. The Company assesses the effectiveness of these derivative instruments and has recorded the changes in the fair value of the derivative instrument designated as a cash flow hedge as unrealized gains or losses in accumulated other comprehensive income (“AOCI”), net of tax, until the hedged item affected earnings, at which point any gain or loss was reclassified to earnings. If the hedged cash flow does not occur, or if it becomes probable that it will not occur, the Company will reclassify the remaining amount of any gain or loss on the related cash flow hedge recorded in AOCI to interest expense at that time.
Foreign Currency Hedging
From time to time the Company enters into foreign currency hedge contracts intended to protect the U.S. dollar value of certain forecasted foreign currency denominated transactions. The Company assesses the effectiveness of the contracts that are designated as hedging instruments. The changes in fair value of foreign currency cash flow hedges are recorded in AOCI, net of tax, until the hedged item affects earnings. Once the related hedged item affects earnings, the Company reclassifies amounts recorded in AOCI to earnings. If the hedged forecasted transaction does not occur, or if it becomes probable that it will not occur, the Company will reclassify the amount of any gain or loss on the related cash flow hedge to earnings at that time. For contracts not designated as hedging instruments, the changes in fair value of the contracts are recognized in other income (expense), net in the consolidated statements of operation, along with the offsetting foreign currency gain or loss on the underlying assets or liabilities.
The success of the Company’s hedging program depends, in part, on forecasts of certain activity denominated in foreign currency. The Company may experience unanticipated currency exchange gains or losses to the extent that there are differences between forecasted and actual activities during periods of currency volatility. In addition, changes in currency exchange rates related to any unhedged transactions may affect earnings and cash flows.
Cross-Currency Rate Swaps
On October 2, 2017, the Company entered into cross-currency swap agreements to convert a notional amount of $300.0 million equivalent to 291.2 million of CHF denominated intercompany loans into U.S. dollars. The CHF-denominated intercompany loans were the result of the purchase of intellectual property by a subsidiary in Switzerland as part of the Codman Acquisition. The objective of these cross-currency swaps is to reduce volatility of earnings and cash flows associated with changes in the foreign currency exchange rate. Under the terms of these contracts, which have been designated as cash flow hedges, the Company will make interest payments in Swiss Francs and receive interest in U.S. dollars. Upon the maturity of these contracts, the Company will pay the principal amount of the loans in Swiss Francs and receive U.S. dollars from the counterparties.

15

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

The Company held the following cross-currency rate swaps as of March 31, 2019 (dollar amounts in thousands):
 
 
 
 
 
 
 
 
 
 
 
March 31, 2019
 
 
Effective Date
 
Termination Date
 
Fixed Rate
 
Aggregate Notional Amount
 
Fair Value
Asset (Liability)
 
 
 
 
 
 
 
 
 
 
 
Pay CHF
 
October 2, 2017
 
October 2, 2020
 
1.75%
 
CHF
64,710

 
$
1,062

Receive U.S.$
 
 
4.38%
 
$
66,667

 
 
 
 
 
 
 
 
 
 
 
 
 
Pay CHF
 
October 2, 2017
 
October 2, 2021
 
1.85%
 
CHF
48,533

 
575

Receive U.S.$
 
 
4.46%
 
$
50,000

 
 
 
 
 
 
 
 
 
 
 
 
 
Pay CHF
 
October 2, 2017
 
October 2, 2022
 
1.95%
 
CHF
145,598

 
1,078

Receive U.S.$
 
 
4.52%
 
$
150,000

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
 
 
 
$
2,715

During the three months ended March 31, 2019, the Company settled a cross-currency swap designated as a cash flow hedge of an intercompany loan with an aggregate notional amount of $33.3 million. The original termination date was October 2, 2020, however, as the intercompany loan settlement was consummated during the three months ended March 31, 2019, the cross-currency swap was settled simultaneously. As a result of the settlement, the Company recorded a loss of $0.4 million in other income, net in the consolidated statement of operations.
The Company held the following cross-currency rate swaps as of December 31, 2018 (dollar amounts in thousands):
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
Effective Date
 
Termination Date
 
Fixed Rate
 
Aggregate Notional Amount
 
Fair Value
Asset (Liability)
 
 
 
 
 
 
 
 
 
 
 
Pay CHF
 
October 2, 2017
 
October 2, 2020
 
1.75%
 
CHF
97,065

 
$
(215
)
Receive U.S.$
 
 
4.38%
 
$
100,000

 
 
 
 
 
 
 
 
 
 
 
 
 
Pay CHF
 
October 2, 2017
 
October 2, 2021
 
1.85%
 
CHF
48,533

 
(422
)
Receive U.S.$
 
 
4.46%
 
$
50,000

 
 
 
 
 
 
 
 
 
 
 
 
 
Pay CHF
 
October 2, 2017
 
October 2, 2022
 
1.95%
 
CHF
145,598

 
(2,193
)
Receive U.S.$
 
 
4.52%
 
$
150,000

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
 
 
 
$
(2,830
)

The cross-currency swaps are carried on the consolidated balance sheet at fair value, and changes in the fair values are recorded as unrealized gains or losses in AOCI. For the three months ended March 31, 2019 and 2018, the Company recorded a gain of $3.3 million and loss of $6.4 million, respectively, in other income (expense), net for the foreign currency rate translation to offset the gains or losses recognized on the intercompany loans.
For the three months ended March 31, 2019 and 2018, the Company recorded a gain of $5.5 million and a loss of $7.0 million, respectively, in AOCI related to the change in fair value of the cross-currency swap.
For the three months ended March 31, 2019 and 2018, the Company recorded gains of $1.9 million in other income, net included in the consolidated statements of operations related to the interest rate differential of the cross-currency swap.
As of March 31, 2019, an estimated gain of $6.8 million is expected to be reclassified within the next twelve months to other income, net from AOCI. As of March 31, 2019, the Company does not expect any gains or losses will be reclassified into earnings as a result of the discontinuance of these cash flow hedges because the original forecasted transaction will not occur.
Net Investment Hedges
The Company manages certain foreign exchange risks through a variety of strategies, including hedging. The Company is exposed to foreign exchange risk in its international operations from foreign currency purchases, net investments in foreign subsidiaries, and foreign currency assets and liabilities created in the normal course of business. On October 1, 2018, the

16

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

Company entered into cross-currency swap agreements designated as net investment hedges to partially offset the effects of foreign currency on foreign subsidiaries.
The Company held the following cross-currency rate swaps designated as net investment hedges as of March 31, 2019 and December 31, 2018, respectively (dollar amounts in thousands):
 
 
 
 
 
 
 
 
 
 
 
March 31, 2019
December 31, 2018
 
 
Effective Date
 
Termination Date
 
Fixed Rate
 
Aggregate Notional Amount
 
Fair Value
Asset (Liability)
Fair Value
Asset (Liability)
 
 
 
 
 
 
 
 
 
 
 
 
Pay EUR
 
October 3, 2018
 
September 30, 2021
 
 
EUR
70,738

 
$
3,343

$
1,359

Receive U.S.$
 
 
 
3.01%
 
$
82,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay EUR
 
October 3, 2018
 
September 30, 2023
 
 
EUR
51,760

 
2,175

(421
)
Receive U.S.$
 
 
 
2.57%
 
$
60,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay EUR
 
October 3, 2018
 
September 30, 2025
 
 
EUR
38,820

 
1,037

(150
)
Receive U.S.$
 
 
 
2.19%
 
$
45,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay GBP
 
October 3, 2018
 
September 30, 2025
 
1.67%
 
GBP
128,284

 
(1,026
)
2,360

Receive U.S.$
 
 
 
2.71%
 
$
167,500

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay CHF
 
October 3, 2018
 
September 30, 2025
 
 
CHF
165,172

 
1,731

(3,780
)
Receive GBP
 
 
 
1.67%
 
GBP
128,284

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
 
 
 
$
7,260

$
(632
)
The cross-currency swaps were carried on the consolidated balance sheet at fair value, and changes in the fair values were recorded as unrealized gains or losses in AOCI. For the three months ended March 31, 2019, the Company recorded a gain of $7.9 million in AOCI related to the change in fair value of the cross-currency swaps.
For the three months ended March 31, 2019, the Company recorded a gain of $2.3 million in interest income included in the consolidated statements of operations related to the interest rate differential of the cross-currency swaps.
The estimated gain that is expected to be reclassified to interest income from AOCI as of March 31, 2019 within the next twelve months is $8.9 million.
Counterparty Credit Risk
The Company manages its concentration of counterparty credit risk on its derivative instruments by limiting acceptable counterparties to a group of major financial institutions with investment grade credit ratings, and by actively monitoring their credit ratings and outstanding positions on an ongoing basis. Therefore, the Company considers the credit risk of the counterparties to be low. Furthermore, none of the Company’s derivative transactions are subject to collateral or other security arrangements, and none contain provisions that depend upon the Company’s credit ratings from any credit rating agency.

17

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)


Fair Value of Derivative Instruments
The Company has classified all of its derivative instruments within Level 2 of the fair value hierarchy because observable inputs are available for substantially the full terms of the derivative instruments. The fair value of the interest rate swaps and the cross-currency swaps was developed using a market approach based on publicly available market yield curves and the terms of the related swap. The Company performs ongoing assessments of counterparty credit risk.
The following table summarizes the fair value and presentation for derivatives designated as hedging instruments in the condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018:
 
 
Fair Value as of
Location on Balance Sheet (1):
 
March 31, 2019
 
December 31, 2018
 
 
(In thousands)
Derivatives designated as hedges — Assets:
 
 
 
 
Prepaid expenses and other current assets
 
 
 
 
Cash Flow Hedges
 
 
 
 
Interest rate swap(2)
 
$
2,738

 
$
4,654

Cross-currency swap
 
6,849

 
7,615

Net Investment Hedges
 
 
 
 
Cross-currency swap
 
8,910

 
8,888

Other assets
 
 
 
 
Cash Flow Hedges
 
 
 
 
Interest rate swap(2)
 
346

 
5,350

Net Investment Hedges
 
 
 
 
Cross-currency swap
 
1,532

 
1,774

Total derivatives designated as hedges — Assets
 
$
20,375

 
$
28,281

 
 
 
 
 
Derivatives designated as hedges — Liabilities:
 
 
 
 
Accrued expenses and other current liabilities
 
 
 
 
Cash Flow Hedges
 
 
 
 
Interest rate swap(2)
 
$
87

 
$

Other liabilities
 
 
 
 
Cash Flow Hedges
 
 
 
 
Interest rate swap(2)
 
19,672

 
9,385

Cross-currency swap
 
4,134

 
10,445

Net Investment Hedges
 
 
 
 
Cross-currency swap
 
3,181

 
11,294

Total derivatives designated as hedges — Liabilities
 
$
27,074

 
$
31,124

 
(1) 
The Company classifies derivative assets and liabilities as non-current based on the cash flows expected to be incurred within the following 12 months.
(2) 
At March 31, 2019 and December 31, 2018, the notional amount related to the Company’s interest rate swaps were $1.5 billion.

18

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

The following presents the effect of derivative instruments designated as cash flow hedges on the accompanying condensed consolidated statement of operations during the three months ended March 31, 2019 and 2018:
 
Balance in AOCI
Beginning of
Quarter
 
Amount of
Gain (Loss)
Recognized in
AOCI
 
Amount of Gain (Loss)
Reclassified from
AOCI into
Earnings
 
Balance in AOCI
End of Quarter
 
Location in
Statements of
Operations
 
(In thousands)
Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
Cash Flow Hedges
 
 
 
 
 
 
 
 
 
Interest rate swap
$
619

 
$
(15,891
)
 
$
1,406

 
$
(16,678
)
 
Interest income
Cross-currency swap
(6,190
)
 
7,473

 
5,178

 
(3,895
)
 
Other income, net
Net Investment Hedges
 
 
 
 
 
 
 
 
 
Cross-currency swap
(632
)
 
10,221

 
2,327

 
7,262

 
Interest income
 
$
(6,203
)
 
$
1,803

 
$
8,911


$
(13,311
)
 
 
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
Cash Flow Hedges
 
 
 
 
 
 
 
 
 
Interest rate swap
$
592

 
$
14,940

 
$
(656
)
 
$
16,188

 
Interest expense
Cross-currency swap
(5,104
)
 
(7,027
)
 
(4,454
)
 
(7,677
)
 
Other income, net
 
$
(4,512
)
 
$
7,913

 
$
(5,110
)
 
$
8,511

 
 

 
8. STOCK-BASED COMPENSATION
As of March 31, 2019, the Company had stock options, restricted stock awards, performance stock units, contract stock awards and restricted stock unit awards outstanding under two plans, the 2001 Equity Incentive Plan (the “2001 Plan”) and the 2003 Equity Incentive Plan (the “2003 Plan,” and collectively, the “Plans”).
Stock options issued under the Plans become exercisable over specified periods, generally within four years from the date of grant for officers and employees, and within one year from date of grant for directors and generally expire eight years from the grant date for employees, and from six to ten years for directors and certain executive officers. The Company values stock option grants using the binomial distribution model. Restricted stock issued under the Plans vests over specified periods, generally three years after the date of grant. The vesting of performance stock issued under the Plans is subject to service and performance conditions.
Stock Options
As of March 31, 2019, there were approximately $7.0 million of total unrecognized compensation costs related to unvested stock options. These costs are expected to be recognized over a weighted-average period of approximately over three years. There were 202,752 stock options granted during the three months ended March 31, 2019. For the three months ended March 31, 2019, the weighted average grant date fair value for stock options was $18.74 per option.
Awards of Restricted Stock and Performance Stock
Performance stock and restricted stock awards generally have requisite service periods of three years. Performance stock units are subject to graded vesting conditions, and the Company expenses their fair value over the requisite service period. The Company expenses the fair value of restricted stock awards on a straight-line basis over the requisite service period. As of March 31, 2019, there were approximately $33.6 million of total unrecognized compensation costs related to these unvested awards. The Company expects to recognize these costs over a weighted-average period of approximately over two years. The Company granted 215,662 restricted stock awards and 118,903 performance stock awards during the three months ended March 31, 2019. For the three months ended March 31, 2019, the weighted average grant date fair value for restricted stock awards and performance stock units was $55.62 and $55.91 per award, respectively.
The Company has no formal policy related to the repurchase of stock for the purpose of satisfying stock-based compensation obligations.
The Company also maintains an Employee Stock Purchase Plan (the “ESPP”), which provides eligible employees with the opportunity to acquire shares of common stock at periodic intervals by means of accumulated payroll deductions. The ESPP is a non-compensatory plan based on its terms.

19

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

9. DEFINED BENEFIT PLANS
The Company maintains defined benefit pension plans that cover certain employees in Austria, France, Japan, Germany and Switzerland.
Net periodic benefit costs for the Company’s defined benefit pension plans for the three months ended March 31, 2019 and 2018 were $0.5 million and $0.6 million, respectively. The components of the net periodic benefit costs other than the service cost component of $0.7 million for the three months ended March 31, 2019 and 2018, respectively, are included in other income (expense), net in the consolidated statements of operations.
The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2018 that it expected to contribute $1.9 million to its defined benefit pension plans in 2019. For the three months ended March 31, 2019, the Company did not make a contribution to the defined benefit plans. As of March 31, 2019, the Company anticipates contributing $1.9 million to its defined benefit plans in 2019.
The estimated fair values of plan assets were $30.1 million and $31.1 million as of March 31, 2019 and December 31, 2018, respectively. The net plan assets of the pension plans are invested in common trusts as of March 31, 2019 and December 31, 2018. Common trusts are classified as Level 2 in the fair value hierarchy. The fair value of common trusts is valued at the net asset value based on the fair values of the underlying investments of the trusts as determined by the sponsor of the trusts. The investment strategy of the Company's defined benefit plans is both to meet the liabilities of the plans as they fall due and to maximize the return on invested assets within an appropriate risk profile.
10. LEASES AND RELATED PARTY LEASES
The Company leases administrative, manufacturing, research and distribution facilities and vehicles through operating lease agreements. The Company has no finance leases as of March 31, 2019. Many of our leases include both lease (e.g., fixed payments including rent) and non-lease components (e.g., common-area or other maintenance costs). For vehicles, we have elected the practical expedient to group lease and non-lease components. 
Most facility leases include one or more options to renew. The exercise of lease renewal options is typically at our sole discretion, therefore, the majority of renewals to extend the lease terms are not included in our ROU assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease term.
As most of our leases do not provide an implicit rate, we use our collateralized incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.
Total operating lease expense for the three months ended March 31, 2019 and March 31, 2018, was $4.4 million and $3.4 million respectively, which includes $0.1 million, in related party operating lease expense.
Supplemental balance sheet information related to operating leases at March 31, 2019 were as follows:
 
March 31, 2019
 
(In thousands, except lease term and discount rate)
ROU assets
$
64,999

 
 
Current lease liabilities
$
12,619

Non-current lease liabilities
61,711

Total lease liabilities
$
74,330

 
 
Weighted average remaining lease term (in years):
 
Leased facilities
9.9

Leased vehicles
3.4

 
 
Weighted average discount rate:
 
Leased facilities
5.7
%
Leased vehicles
3.2
%
ROU assets were included in other assets at March 31, 2019. Current lease liabilities were included in accrued expenses and other current liabilities and non-current lease liabilities were included in other liabilities at March 31, 2019.

20

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

Supplemental cash flow information related to leases was as follows for the three months ended March 31, 2019 (in thousands):
 
March 31, 2019
 
(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
3,408

 
 
ROU assets obtained in exchange for lease liabilities:
 
Operating leases
2,004

Future minimum lease payments under operating leases at March 31, 2019 were as follows:
 
Related Parties
 
Third Parties
 
Total
 
(In thousands)
2019
$
222

 
$
11,641

 
$
11,863

2020
296

 
12,409

 
12,705

2021
296

 
11,532

 
11,828

2022
296

 
9,154

 
9,450

2023
296

 
7,282

 
7,578

Thereafter
1,724

 
40,893

 
42,617

Total minimum lease payments
$
3,130

 
$
92,911

 
$
96,041

Less: Imputed interest
 
 
 
 
21,711

Total lease liabilities
 
 
 
 
74,330

Less: Current lease liabilities
 
 
 
 
12,619

Long-term lease liabilities
 
 
 
 
61,711

During 2018, the Company entered into a lease for a new corporate headquarters in Princeton, NJ which is expected to commence during the second quarter of 2019. Total payments over the lease term are approximately $67.0 million. The payments are not included in the table above as the lease has yet to commence.
Future minimum lease payments under operating leases at December 31, 2018 were as follows:
 
Related Parties
 
Third Parties
 
Total
 
(In thousands)
2019
$
296

 
$
16,472

 
$
16,768

2020
296

 
13,510

 
13,806

2021
296

 
12,197

 
12,493

2022
296

 
12,937

 
13,233

2023
296

 
10,707

 
11,003

Thereafter
1,724

 
100,675

 
102,399

Total minimum lease payments
$
3,204

 
$
166,498

 
$
169,702

Total operating lease expense for the year ended December 31, 2018 was $16.3 million and included $0.3 million, in related party lease expense. Future lease expense for the new corporate headquarters in Princeton, NJ is included in the table above, however, has not yet commenced.
There were no future minimum lease payments under capital leases at December 31, 2018.
Related Party Leases
The Company leases its manufacturing facility in Plainsboro, New Jersey, from a general partnership that is 50% owned by a corporation whose shareholders are trusts, whose beneficiaries include family members of the Company’s principal stockholder and former director. The term of the current lease agreement is through October 31, 2032 at an annual rate of approximately $0.3 million per year. The current lease agreement also provides (i) a 5-year renewal option for the Company to extend the lease from

21

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

November 1, 2032 through October 31, 2037 at the fair market rental rate of the premises, and (ii) another 5-year renewal option to extend the lease from November 1, 2037 through October 31, 2042 at the fair market rental rate of the premises.
11. TREASURY STOCK
As of March 31, 2019 and December 31, 2018, there were 2.9 million shares of treasury stock outstanding with a cost of $120.1 million and $120.6 million, respectively, at a weighted average cost per share of $41.87 and $41.87, respectively.
On December 11, 2018, the Board of Directors authorized the Company to repurchase up to $225.0 million of the Company’s common stock. The program allows the Company to repurchase its shares opportunistically from time to time. The repurchase authorization expires in December 2020. Purchases may be affected through one or more open market transactions, privately negotiated transactions, transactions structured through investment banking institutions, or a combination of the foregoing. As of March 31, 2019, there remained $225.0 million available for repurchase under this authorization. This stock repurchase authorization replaces the previous $150.0 million stock repurchase authorization, approved by the Board in 2016.
There were no cash treasury stock repurchases during the three months ended March 31, 2019 and 2018.
12. INCOME TAXES
The following table provides a summary of the Company's effective tax rate:
 
Three Months Ended March 31,
 
2019
 
2018
Reported tax rate
(32.0
)%
 
(20.4
)%

The Company’s effective income tax rates for the three months ended March 31, 2019 and 2018 were (32.0)% and (20.4)%, respectively. For the three months ended March 31, 2019, the primary driver of the reduction in the rate is a tax benefit of $10.8 million ($0.13 per share) related to a federal tax holiday in Switzerland, which was finalized during the quarter ended March 31, 2019. The Company received a Switzerland federal tax credit of 12 million CHF, which can be used over a seven year period, ending in 2024.
As of March 31, 2019, the Company has not provided deferred income taxes on unrepatriated earnings from foreign subsidiaries as they are deemed indefinitely reinvested. Such taxes would primarily be attributable to foreign withholding taxes and local income taxes when such earnings are distributed. As such, the Company has determined the tax impact of repatriating these earnings would not be material as of March 31, 2019.

22

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

13. NET INCOME PER SHARE
Basic and diluted net income per share was as follows:
 
Three Months Ended March 31,
 
2019
 
2018
 
(In thousands, except per share amounts)
Basic net income per share:
 
 
 
Net income
$
32,756

 
$
10,992

Weighted average common shares outstanding
85,343

 
78,552

Basic net income per common share
$
0.38

 
$
0.14

 
 
 
 
Diluted net income per share:
 
 
 
Net income
$
32,756

 
$
10,992

 
 
 
 
Weighted average common shares outstanding — Basic
85,343

 
78,552

Effect of dilutive securities:
 
 
 
Stock options and restricted stock
915

 
1,282

Weighted average common shares for diluted earnings per share
86,258

 
79,834

 
 
 
 
Diluted net income per common share
$
0.38

 
$
0.14

Shares of common stock of approximately 0.3 million and 0.2 million at March 31, 2019 and 2018, respectively, that are issuable through the exercise of dilutive securities were not included in the computation of diluted net income per share because their effect would have been antidilutive.
Vested restricted and performance units that entitle the holders to approximately 0.5 million shares of common stock are included in the basic and diluted weighted average shares outstanding calculation because no further consideration is due related to the issuance of the underlying common shares.

23

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

14. COMPREHENSIVE INCOME
Comprehensive income was as follows:
 
Three Months Ended March 31,
 
2019
 
2018
 
(In thousands)
Net income
$
32,756

 
$
10,992

Foreign currency translation adjustment
(7,009
)
 
13,780

Change in unrealized gain (loss) on derivatives, net of tax
(4,236
)
 
7,838

Pension liability adjustment, net of tax
9

 
(6
)
Comprehensive income, net
$
21,520

 
$
32,604

Changes in Accumulated Other Comprehensive Income by component between December 31, 2018 and March 31, 2019 are presented in the table below, net of tax:
 
 
Gains and Losses on Derivatives
 
Defined Benefit Pension Items
 
Foreign Currency Items
 
Total
 
 
(In thousands)
Balance at January 1, 2019
 
$
(4,813
)
 
$
(736
)
 
$
(39,894
)
 
$
(45,443
)
Other comprehensive income (loss)
 
2,516

 
9

 
(7,009
)
 
(4,484
)
Less: Amounts reclassified from accumulated other comprehensive income
 
6,752

 

 

 
6,752

Net current-period other comprehensive income (loss)
 
(4,236
)
 
9

 
(7,009
)
 
(11,236
)
Balance at March 31, 2019
 
$
(9,049
)
 
$
(727
)
 
$
(46,903
)
 
$
(56,679
)
For the three months ended March 31, 2019, the Company reclassified gains of $4.0 million and $2.8 million from AOCI to other income (expenses), net, and interest income, respectively.
15. SEGMENT AND GEOGRAPHIC INFORMATION
The Company internally manages two global reportable segments and reports the results of its businesses to its chief operating decision maker. The two reportable segments and their activities are described below.
The Codman Specialty Surgical segment includes (i) the Neurosurgery business, which sells a full line of products for neurosurgery and neuro critical care such as tissue ablation equipment, dural repair products, cerebral spinal fluid management devices, intracranial monitoring equipment, and cranial stabilization equipment and (ii) the precision tools and instruments business, which sells more than 60,000 instrument patterns and surgical and lighting products to hospitals, surgery centers, dental, podiatry, and veterinary offices.
The Orthopedics and Tissue Technologies segment includes such offerings as skin and wound repair, bone and joint fixation implants in the upper and lower extremities, bone grafts and nerve and tendon repair products.
The Corporate and other category includes (i) various executive, finance, human resource, information systems, legal functions, (ii) brand management, and (iii) share-based compensation costs.
The operating results of the various reportable segments as presented are not comparable to one another because (i) certain operating segments are more dependent than others on corporate functions for unallocated general and administrative and/or operational manufacturing functions and (ii) the Company does not allocate certain manufacturing costs and general and administrative costs to the operating segment results. Net sales and profit by each reportable segment for the three months ended March 31, 2019 and 2018 are as follows:

24

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 
Three Months Ended March 31,
 
2019
 
2018
 
(In thousands)
Segment Net Sales
 
 
 
Codman Specialty Surgical
$
234,568

 
$
236,115

Orthopedics and Tissue Technologies
125,122

 
120,967

Total revenues
$
359,690

 
$
357,082

Segment Profit
 
 
 
Codman Specialty Surgical
$
91,380

 
$
89,491

Orthopedics and Tissue Technologies
40,495

 
32,438

Segment profit
131,875

 
121,929

Amortization
(5,279
)
 
(5,390)

Corporate and other
(94,288
)
 
(90,960
)
Operating income
$
32,308

 
$
25,579

The Company does not allocate any assets to the reportable segments. No asset information is reported to the chief operating decision maker and disclosed in the financial information for each segment.
The Company attributes revenues to geographic areas based on the location of the customer. Total revenue by major geographic area consisted of the following:
 
Three Months Ended March 31,
 
2019
 
2018
 
(In thousands)
United States
$
256,726

 
$
248,928

Europe
48,640

 
51,773

Asia Pacific
35,700

 
35,785

Rest of World
18,624

 
20,596

Total Revenues
$
359,690

 
$
357,082


16. COMMITMENTS AND CONTINGENCIES
Contingent Consideration
The Company determined the fair value of contingent consideration during the three-month period ended March 31, 2019 and 2018 to reflect the change in estimates, additions, payments, transfers and the time value of money during the period.
A reconciliation of the opening balances to the closing balances of these Level 3 measurements for the three months ended March 31, 2019 and 2018 is as follows (in thousands):
Three Months Ended March 31, 2019
 
Contingent Consideration
 Liability Related to Acquisition of Derma
 
 
Long-term
Balance as of January 1, 2019
 
$
230

Balance as of March 31, 2019
 
$
230


25

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

Three Months Ended March 31, 2018
 
Contingent Considerations
 Liabilities Related to Acquisition of Derma
 
Contingent Consideration Liability Related to Acquisition of Confluent Surgical, Inc.
 
Location in Financial Statements
 
 
Short-term
 
Long-term
 
Short-term
 
 
Balance as of January 1, 2018
 
$
315

 
$
1,387

 
$
22,478

 
 
Loss from change in fair value of contingent consideration liabilities
 

 
32

 
1,422

 
Selling, general and administrative
Balance as of March 31, 2018
 
$
315

 
$
1,419

 
$
23,900

 
 
On January 15, 2014, the Company acquired all outstanding shares of Confluent Surgical, Inc., ("Confluent Surgical"). The purchase price includes contingent consideration. The potential maximum undiscounted contingent consideration of $30.0 million consists of $25.0 million upon obtaining certain U.S. governmental approvals (the "U.S. Contingent Consideration") and $5.0 million upon obtaining certain European governmental approvals, both related to the completion of the transition of the Confluent Surgical business. The U.S. Contingent Consideration is subject to adjustment to reduce the amount of maximum payment based on the timing of obtaining the U.S. governmental approval up to the minimum of $19.0 million. The fair values of contingent consideration related to the acquisition of Confluent Surgical were estimated using a discounted cash flow model using discount rate of 2.2%. During the first quarter of 2018, the Company received the U.S. governmental approvals and adjusted the related contingent consideration liability to $19.0 million, which the Company paid in April 2018. During the third quarter of 2018, the Company received certain European governmental approvals. The Company paid the remaining $5.0 million of contingent consideration related to Confluent Surgical in October of 2018.
The Company assumed contingent consideration incurred by Derma Sciences related to its acquisitions of BioD and the intellectual property related to the Medihoney product. The Company accounted for the contingent liabilities by recording their fair value on the date of the acquisition based on a discounted cash-flow model. The contingent liabilities recognized as part of the Derma Sciences acquisition relate to the following:
i.
contractual incentive payments that could be made to former equity owners of BioD if net sales of BioD products exceed a certain amount for the twelve-month periods ending June 30, 2017 and 2018 ("BioD Earnout Payments");
ii.
a contractual incentive payment that could be made to the former equity owners if there has been no specific enforcement action or notice by the FDA against the specific BioD products as a result of the Untitled Letter for a certain period after closing as defined by the agreement ("Product Payment"); and
iii.
contractual incentive payments that could be made to the former owner of the intellectual property relating to the Medihoney product line, if net sales of Medihoney products exceed certain amounts defined in the agreement betw