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

For the quarterly period ended September 30, 2021
or
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.)
1100 Campus Road 08540
Princeton,New Jersey(ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 
Registrant's Telephone Number, Including Area Code: (609275-0500
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report:
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASSTRADING SYMBOLNAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, Par Value $.01 Per ShareIARTNasdaq Global Select Market
 
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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).   Yes      No  

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 filerAccelerated filer
Non-accelerated filer
  
Smaller reporting company
Emerging growth company

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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  
The number of shares of the registrant’s Common Stock, $0.01 par value, outstanding as of October 29, 2021 was 84,699,539.



Table of Contents
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)
(Dollars in thousands, except per share amounts)
 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Total revenue, net$386,861 $370,232 $1,136,924 $983,221 
Costs and expenses:
Cost of goods sold144,468 134,811 441,558 373,765 
Research and development25,831 19,460 68,326 55,202 
Selling, general and administrative156,010 150,076 475,195 432,136 
Intangible asset amortization4,113 8,343 12,838 23,393 
Total costs and expenses330,422 312,690 997,917 884,496 
Operating income56,439 57,542 139,007 98,725 
Interest income1,786 2,273 5,298 7,124 
Interest expense(12,192)(20,796)(38,270)(54,230)
Gain (loss) from the sale of business(230) 41,967  
Other income, net4,985 2,492 14,888 2,985 
Income before income taxes50,788 41,511 162,890 54,604 
Provision for income taxes7,559 9,174 39,199 13,456 
Net income $43,229 $32,337 $123,691 $41,148 
Net income per share
Basic$0.51 $0.38 $1.46 $0.49 
Diluted$0.51 $0.38 $1.45 $0.48 
Weighted average common shares outstanding (See Note 13):
Basic84,754 84,325 84,647 84,745 
Diluted85,447 84,752 85,391 85,303 
Comprehensive income (See Note 14)46,41743,548 150,975 $25,637 
The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.
4

Table of Contents
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands, except per share amounts) 
September 30, 2021December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents$470,231 $470,166 
Trade accounts receivable, net of allowances of $6,251 and $6,439
222,232 225,532 
Inventories, net327,167 310,117 
Prepaid expenses and other current assets84,155 69,282 
Assets held for sale 162,105 
Total current assets1,103,785 1,237,202 
Property, plant and equipment, net293,921 287,529 
Right of use asset - operating leases87,600 83,635 
Intangible assets, net1,155,795 989,436 
Goodwill1,012,081 932,367 
Deferred tax assets, net91,797 73,690 
Other assets29,486 11,277 
Total assets$3,774,465 $3,615,136 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of borrowings under senior credit facility$45,000 $33,750 
Current portion of borrowings under securitization facility 112,500 
Current portion of lease liability - operating leases13,526 12,818 
Accounts payable, trade59,600 54,608 
Income taxes payable24,780  
Contract liabilities5,388 5,275 
Accrued compensation79,229 76,117 
Accrued expenses and other current liabilities105,335 94,194 
Liabilities held for sale 11,751 
Total current liabilities332,858 401,013 
Long-term borrowings under senior credit facility823,736 933,387 
Long-term borrowings under securitization facility111,700  
Long-term convertible securities563,697 474,834 
Lease liability - operating leases94,840 88,118 
Deferred tax liabilities70,325 16,190 
Other liabilities145,622 186,727 
Total liabilities2,142,778 2,100,269 
Stockholders’ equity:
Preferred stock; no par value; 15,000 authorized shares; none outstanding
  
Common stock; $0.01 par value; 240,000 authorized shares; 89,597 and 89,251 issued at September 30, 2021 and December 31, 2020, respectively
896 893 
Additional paid-in capital1,258,830 1,290,909 
Treasury stock, at cost; 4,899 shares and 4,914 shares at September 30, 2021 and December 31, 2020, respectively
(234,449)(235,141)
Accumulated other comprehensive loss(46,774)(74,059)
Retained earnings653,184 532,265 
Total stockholders’ equity1,631,687 1,514,867 
Total liabilities and stockholders’ equity$3,774,465 $3,615,136 
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 CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
 Nine Months Ended September 30,
 20212020
OPERATING ACTIVITIES:
Net income$123,691 $41,148 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization89,090 89,853 
Non-cash impairment charges2,754  
Deferred income tax (benefit) provision(13,498)4,784 
Share-based compensation29,778 14,333 
Amortization of debt issuance costs and expenses associated with debt refinancing5,308 10,499 
Non-cash lease expense3,099 2,172 
Accretion of bond issuance discount 11,075 
Loss on disposal of property and equipment2,029 559 
Gain from the sale of business(41,967) 
Change in fair value of contingent consideration and others(544)(45)
Changes in assets and liabilities:
Accounts receivable17,437 57,863 
Inventories(3,598)(45,531)
Prepaid expenses and other current assets(11,696)(865)
Other non-current assets5,900 10,868 
Accounts payable, accrued expenses and other current liabilities33,858 (67,178)
Contract liabilities (548)
Other non-current liabilities1,509 (5,417)
Net cash provided by operating activities243,150 123,570 
INVESTING ACTIVITIES:
Purchases of property and equipment(20,595)(30,463)
Proceeds from sale of Extremity Orthopedics business 190,468  
Proceeds from sale of property and equipment3 3,311 
Cash paid for business acquisitions, net of cash acquired(303,910) 
Acquired in-process research and development (5,000)
Net proceeds on swaps designated as net investment hedges76  
Net cash used in investing activities(133,958)(32,152)
FINANCING ACTIVITIES:
Proceeds from borrowings of long-term indebtedness13,450 151,300 
Payments on debt(114,250)(441,000)
Purchase of option hedge on convertible notes (104,248)
Proceeds from convertible notes issuance 575,000 
Proceeds from sale of stock purchase warrants 44,563 
Payment of debt issuance costs(249)(24,347)
Purchases of treasury stock (100,000)
Proceeds from exercised stock options6,588 3,821 
Cash taxes paid in net equity settlement(4,286)(4,686)
Net cash (used) provided by financing activities(98,747)100,403 
Effect of exchange rate changes on cash and cash equivalents(10,380)5,547 
Net increase in cash and cash equivalents65 197,368 
Cash and cash equivalents at beginning of period470,166 198,911 
Cash and cash equivalents at end of period$470,231 $396,279 
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 SHAREHOLDERS' EQUITY
(UNAUDITED)
(Dollars in thousands, except per share amounts)
Nine Months Ended September 30, 2021
Common StockTreasury StockAdditional Paid-In CapitalAccumulated Other Comprehensive LossRetained EarningsTotal Equity
SharesAmountSharesAmount
Balance, January 1, 202189,251 $893 (4,914)$(235,141)$1,290,909 $(74,059)$532,265 $1,514,867 
Net income— — — — — — 45,394 45,394 
Other comprehensive income, net of tax— — — — — 30,432 — 30,432 
Issuance of common stock through employee stock purchase plan18 — — — 1,127 — — 1,127 
Issuance of common stock for vesting of share based awards, net of shares withheld for taxes137 1 15 680 (3,222)— — (2,541)
Share-based compensation— — — — 6,098 — — 6,098 
Adoption of Update No. 2020-06— — — — (63,274)— (2,772)(66,046)
Balance, March 31, 202189,406 894 (4,899)(234,461)1,231,638 (43,627)574,887 1,529,331 
Net income— — — — — — 35,068 35,068 
Other comprehensive loss, net of tax— — — — — (6,336)— (6,336)
Issuance of common stock for vesting of share based awards, net of shares withheld for taxes68 1 —  1,175 — — 1,176 
Share-based compensation— — — — 15,742 — — 15,742 
Balance, June 30, 202189,474 $895 (4,899)$(234,461)$1,248,555 $(49,963)$609,955 $1,574,981 
Net income— — — — — — 43,229 43,229 
Other comprehensive income, net of tax— — — — — 3,189 — 3,189 
Treasury shares retirement— — — 12 (12)— —  
Issuance of common stock for vesting of share based awards, net of shares withheld for taxes123 1 —  2,541 — — 2,542 
Share-based compensation— — — — 7,746 — — 7,746 
Balance, September 30, 202189,597 896 (4,899)(234,449)1,258,830 (46,774)653,184 1,631,687 
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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(Dollars in thousands, except per share amounts)
Nine Months Ended September 30, 2020
Common StockTreasury StockAdditional Paid-In CapitalAccumulated Other Comprehensive LossRetained EarningsTotal Equity
SharesAmountSharesAmount
Balance, January 1, 202088,735 $887 (2,865)$(119,943)$1,213,620 $(76,402)$398,574 $1,416,736 
Net income— — — — — — 9,180 9,180 
Other comprehensive loss, net of tax— — — — — (28,187)— (28,187)
Issuance of common stock through employee stock purchase plan13 — — — 694 — — 694 
Issuance of common stock for vesting of share based awards, net of shares withheld for taxes357 2 10 476 (3,217)— — (2,739)
Share-based compensation— — — — 3,781 — — 3,781 
Share repurchase and equity component of the convertible note issuance, net— — (135)(7,632)42,538 — — 34,906 
Accelerated shares repurchased— — (1,304)(75,407)(16,961)— — (92,368)
Adoption of Update No. 2016-13— — — — — — (200)(200)
Balance, March 31, 202089,105 $889 (4,294)$(202,506)$1,240,455 $(104,589)$407,554 $1,341,803 
Net loss— — — — — — (369)(369)
Other comprehensive income, net of tax— — — — — 1,464 — 1,464 
Issuance of common stock for vesting of share based awards, net of shares withheld for taxes84 3 — (35)1,282 — — 1,250 
Share-based compensation— — — — 4,948 — — 4,948 
Accelerated shares repurchased— — (621)(32,685)32,685 — —  
Balance, June 30, 202089,189 892 (4,915)(235,226)1,279,370 (103,125)407,185 1,349,096 
Net loss— — — — — — 32,337 32,337 
Other comprehensive loss, net of tax— — — — — 11,212 — 11,212 
Issuance of common stock for vesting of share based awards, net of shares withheld for taxes2  — 2 (69)— — (67)
Share-based compensation— — — — 5,410 — — 5,410 
Balance, September 30, 202089,191 $892 (4,915)$(235,224)$1,284,711 $(91,913)$439,522 $1,397,988 
The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.
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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 September 30, 2021 unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial position, statement of changes in shareholders' equity, 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, 2020 included in the Company’s Annual Report on Form 10-K. The December 31, 2020 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 and nine month period ended September 30, 2021 are not necessarily indicative of the results to be expected for the entire year.
The preparation of consolidated financial statements is in conformity with generally accepted accounting principles in the United States ("GAAP") which 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 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.
Risks and Uncertainties
The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. During the beginning of 2020, the Company's customers diverted resources to treat COVID-19 patients and deferred or canceled elective or non-emergent surgical procedures, all of which impacted hospitals' abilities to meet their obligations, including to the Company. Towards the end of 2020 and through the end of the third quarter of 2021, procedural volumes relevant to the Company’s products steadily increased and, in some geographic areas, began to approach normalized levels. However, on-going uncertainty persists about the continuing sustainability of those procedural volumes as virus outbreaks and staffing constrains at hospitals and surgical centers impact healthcare networks. Furthermore, capital markets and economies worldwide have also seen other indirect COVID-19 pandemic related disruptions including supply chain impacts, material inflation, and labor constraints in certain markets and geographies. Such economic disruption has had an adverse effect on the Company's business as customers curtailed and reduced capital and overall spending that have resulted in higher freight costs, longer supply chains and select labor constraints in certain geographic regions. Policymakers around the globe have responded with fiscal policy actions to support the healthcare industry and the economy as a whole. The magnitude and overall effectiveness of these actions remains uncertain. The severity of the impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, duration of the pandemic, including resurgences, new variants or strains, impact of government regulations, the speed and effectiveness of vaccine distribution, vaccine adoption rates and the duration of direct and indirect economic effects of the pandemic and containment measures. The Company's future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions and uncertain demand, the extent of inflationary pressure on material and labor costs and the impact of any initiatives or programs that the Company may undertake to address financial and operations challenges faced by its customers. Through the end of the third quarter of 2021, the Company's revenues were still impacted due to COVID-19 resurgences and lower surgical procedural volumes, though not to the levels seen during 2020. As a result, the Company has continued to manage its operating costs in this environment. Even after the COVID-19 pandemic and government responses thereto have subsided, residual economic and other effects may have an impact on the demand for post-pandemic surgery levels that are difficult to predict.
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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
Recent Accounting Pronouncements
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 became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted this guidance on January 1, 2020 using a modified retrospective transition method which requires a cumulative-effect adjustment to the opening balance of retained earnings to be recognized on the date of adoption with no change to financial results reported in prior periods. The cumulative-effect adjustment recorded on January 1, 2020 is not material. The adoption of this ASU did not have a significant impact on the Company's consolidated financial statements and related disclosures. The Company's exposure to credit losses may increase if its customers are adversely affected by changes in healthcare laws, coverage, and reimbursement, economic pressures or uncertainty associated with local or global economic recessions, disruption associated with the COVID-19 pandemic, and other customer-specific factors. Although the Company has historically not experienced significant credit losses, it is possible that there could be an adverse impact due to customer and governmental responses to the COVID-19 pandemic.
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. This guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption was permitted. The Company adopted this guidance during the year ended December 31, 2020. The adoption of this guidance did not have a significant impact on the Company's consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 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 (e.g., a service contract). Under this 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. The Company adopted this guidance on January 1, 2020 using a prospective transition method. The adoption of this guidance did not have a significant impact on the Company's consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes, intended to simplify the accounting for income taxes by eliminating certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for annual periods beginning after December 15, 2020 and interim periods within, with early adoption permitted. The Company adopted ASU No. 2019-12 as of January 1, 2021. Adoption of the standard requires certain changes to be made prospectively, with some changes to be made retrospectively. The adoption of this guidance did not have a significant impact on the Company's consolidated financial statements and related disclosures.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform, which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. This amendment applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference London Inter-Bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of reference rate reform. This ASU is effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. In January 2021, the FASB also issued ASU 2021-01, Reference Rate Reform- Scope which clarified certain optional expedients and exceptions to entities that are affected because of the reference rate reform. The amendments in this ASU affect the guidance in ASU 2020-04 and are effective in the same timeframe as ASU 2020-04. The Company is currently assessing the impact that this ASU will have on its consolidated financial statements and related disclosures.
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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
In August 2020, the FASB issued ASU 2020-06, Debt- Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging Contracts in Entity's Own Equity (Subtopic 815-40):Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. The guidance simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify. The guidance also simplifies the diluted net income per share calculation in certain areas. The ASU will be effective for annual and interim periods beginning after December 15, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years using either the modified retrospective or full retrospective method.
As detailed in Note 6 – Debt, on February 4, 2020, the Company issued $575.0 million aggregate principal amount of its 0.5% Convertible Senior Notes due 2025 (the "2025 Notes"). The 2025 Notes are subject to the guidance included in ASU 2020-06. The Company adopted this guidance on January 1, 2021 using the modified retrospective approach which resulted in a cumulative-effect adjustment that increased (decreased) the following consolidated balance sheet accounts:
ADJUSTMENTCONSOLIDATED BALANCE SHEET CLASSIFICATIONAMOUNT
(in millions)
Deferred tax impact of cumulative-effect adjustmentDeferred tax liabilities$(20.6)
Debt discount reclassificationLong-term convertible securities89.1
Equity issuance costs reclassificationLong-term convertible securities(2.5)
Debt discount amortization and equity costs reclassification, net of taxRetained Earnings(2.8)
Net impact of cumulative-effect adjustmentAdditional paid-in capital(63.3)
Upon adoption of ASU 2020-06, the Company’s 2025 Notes were reflected entirely as a liability since the embedded conversion feature will no longer be separately presented within stockholders’ equity. On December 9, 2020, the Company made an irrevocable election under the indenture to require the principal portion of its 2025 Notes to be settled in cash and any excess in shares. Following the irrevocable notice, only the amounts settled in excess of the principal will be considered in diluted earnings per share under the “if-converted” method. Additionally, from January 1, 2021, the Company is no longer incurring non-cash interest expense for the amortization of debt discount, therefore the interest expense for the 2025 Notes, which is included in the interest expense on the consolidated statements of operations and comprehensive loss, is lower as compared to the fiscal year of 2020.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements, which updates various codification topics by clarifying or improving disclosure requirements to align with the regulations of the U.S. Securities and Exchange Commission (the "SEC") . The ASU has been effective for the Company for annual and interim periods beginning after January 1, 2021. The Company adopted this standard on the January 1, 2021. The adoption of this guidance did not have a significant impact on the Company's consolidated financial statements and related disclosures.
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options which provides guidance to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The amendments in this ASU No. 2021-04 are effective for all entities for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, including interim periods within those fiscal years. The amendment currently has no impact to the Company as the effect will largely depend on the terms of written call options or financings issued or modified in the future.
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.
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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
2. ACQUISITIONS AND DIVESTITURES
Sale of Extremity Orthopedics Business
On January 4, 2021, the Company completed its previously announced sale of its Extremity Orthopedics business to Smith & Nephew USD Limited ("Smith & Nephew"). The transaction included the sale of the Company's upper and lower Extremity Orthopedics product portfolio, including ankle and shoulder arthroplasty and hand and wrist product lines. The Company received an aggregate purchase price of $240.0 million from Smith and Nephew and concurrently paid $41.5 million to the Consortium of Focused Orthopedists, LLC ("CFO") effectively terminating the licensing agreement between Integra and CFO relating to the development of shoulder arthroplasty products.
Assets and liabilities divested consisted of the following as of December 31, 2020 (dollar amounts in thousands):
Prepaid expenses and other current assets$713 
Right of use asset-operating leases and Other assets3,186 
Deferred tax assets6,589 
Intangible assets, net13,332 
Property, plant and equipment, net37,893 
Goodwill47,546 
Inventories52,845 
Total assets held for sale $162,104 
Other liabilities336 
Current portion of lease liability - operating leases539 
Accrued compensation 1,767 
Deferred tax liabilities3,440 
Lease liability - operating leases5,669 
Total liabilities held for sale$11,751 
The divestiture does not represent a strategic shift that will have a major effect on the Company's operations and financial statements. Goodwill was allocated to the assets and liabilities divested using the relative fair value method of the Extremity Orthopedics business to the Company's Tissue Technologies reporting unit. In connection with the sale, the Company recognized a gain of $42.0 million that is presented in Gain from the sale of business in the consolidated statement of operations for the nine months ended September 30, 2021. The Company finalized the net working capital and paid an additional $1.3 million to Smith & Nephew as of September 30, 2021.
The Company also entered into a transition services agreement with Smith & Nephew which requires the Company to provide certain services on behalf of Smith & Nephew for the duration of the period subsequent to the sale of the business as defined in the agreement. The Company recognized a payable due to Smith & Nephew of $7.2 million as of September 30, 2021, included in the consolidated balance sheet within accrued expenses and other current liabilities.
ACell, Inc. Acquisition
On January 20, 2021, the Company acquired ACell, Inc. (the "ACell Acquisition") for an acquisition purchase price of $306.9 million plus contingent considerations of up to $100 million, that may be payable upon achieving certain revenue-based performance milestones in 2022, 2023 and 2025. The final working capital adjustments of $1.3 million was finalized and paid as of June 30, 2021. Certain amounts relating to tax matters have not been finalized which may result in changes to goodwill upon completion. ACell was a privately-held company that offered a portfolio of regenerative products for complex wound management, including developing and commercializing products based on MatriStem Urinary Bladder Matrix, a technology platform derived from porcine urinary bladder extracellular matrix.
Assets Acquired and Liabilities Assumed at Fair Value
The ACell Acquisition has been accounted for using the acquisition method of accounting. This method requires that assets acquired and liabilities assumed in a business combination are recognized at their fair values as of the acquisition date.
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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the acquisition date:
Dollars in thousandsPreliminary Valuation as of September 30, 2021Weighted Average Life
Current assets:
Cash$2,726 
Trade accounts receivable, net 16,469 
Inventories, net18,299 
Prepaids expenses and other current assets1,498 
Total current assets38,992 
Property, plant and equipment, net13,769 
Intangible assets245,000 
13-14 years
Goodwill94,298 
Right of use asset - operating leases9,259 
Deferred tax assets9,768 
Other assets148 
Total assets acquired411,234 
Current liabilities:
Accounts payable$718 
Accrued expenses5,966 
Current portion of lease liability - operating leases1,673 
Total current liabilities8,357 
Other long-term liability276
Lease liability - operating leases7,585 
Deferred tax liability64,178 
Contingent consideration23,900 
Total liabilities assumed104,296 
Net assets acquired$306,938 
Intangible Assets
The estimated fair value of the developed technology acquired was determined using the multi-period excess earnings method of the income approach, which estimates value based on the present value of future economic benefits. Some of the more significant assumptions inherent in the development of those asset valuations include the estimated net cash flows for each year for each product including net revenues, cost of sales, R&D costs, selling and marketing costs, the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, and competitive trends impacting the asset and each cash flow stream.
The Company used a discount rate of 8.5% to arrive at the present value for the acquired intangible assets to reflect the rate of return a market participant would expect to earn and incremental commercial uncertainty in the cash flow projections. No assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change. For these and other reasons, actual results may vary significantly from estimated results.
Goodwill
The Company allocated goodwill related to the ACell acquisition to the Tissue Technologies segment. Goodwill is the excess of the consideration transferred over the net assets recognized and represents the expected synergies of the combined company and assembled workforce. Goodwill recognized as a result of this acquisition is non-deductible for income tax purposes.
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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
Contingent Consideration
As part of the acquisition, the Company is required to make payments to the former shareholders of ACell up to $100 million based on the achievement of certain revenue-based performance milestones in 2022, 2023, and 2025. The Company used iterations of the Monte Carlo simulation to calculate the fair value of the contingent consideration that considered the possible outcomes of scenarios related to each specific milestone. The Company estimated the fair value of the contingent consideration to be $23.9 million at the acquisition date. The estimated fair value as of September 30, 2021 was $23.0 million. This amount is included in other liabilities at September 30, 2021 in the consolidated balance sheets of the Company.
The Company determines the acquisition date fair value of contingent consideration obligations using a Monte Carlo simulation, as well as significant unobservable inputs, reflecting the Company’s assessment of the assumptions market participants would use to value these liabilities. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined using the fair value concepts in ASC 820. The resultant most likely payouts are discounted using an appropriate effective annual interest rate. At each reporting date, the contingent consideration obligations will be revalued to estimated fair value and changes in fair value will be reflected as income or expense in our consolidated statement of operations. Changes in the fair value of the contingent considerations may result from changes in discount periods and rates and changes in the timing and amount of revenue estimates.
Deferred Tax Liabilities
Deferred tax liabilities result from identifiable intangible assets’ fair value adjustments. These adjustments create excess book basis over tax basis which is tax-effected by the statutory tax rates of applicable jurisdictions.
Pro Forma Results (unaudited)
Pro forma revenues for the three months ended September 30, 2021 and 2020 were $386.9 million and $396.8 million, respectively. Pro forma revenues for the nine months ended September 30, 2021 and 2020 were $1,141.5 million and $1,051.9 million, respectively. Pro forma net income and earnings per share are not presented for this acquisition as they are not material.
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.
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
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 and 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 review and authorization in advance prior to the return of product. 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 goods 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.
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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
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 nine months ended September 30, 2021:
Contract Asset
Contract asset, January 1, 2021$7,430 
Transferred to trade receivable of contract asset included in beginning of the year contract asset(7,430)
Contract asset, net of transferred to trade receivables on contracts during the period8,378 
Contract asset, September 30, 2021
$8,378 
Contract Liability
Contract liability, January 1, 2021$11,961 
Recognition of revenue included in beginning of year contract liability$(4,291)
Contract liability, net of revenue recognized on contracts during the period3,694 
Foreign currency translation(26)
Contract liability, September 30, 2021
$11,338 
At September 30, 2021, the short-term portion of the contract liability of $5.4 million and the long-term portion of $5.9 million were included in accrued expenses and other current liabilities and other liabilities, respectively, in the consolidated balance sheet.
As of September 30, 2021, the Company is expected to recognize approximately 48% of unsatisfied (or partially unsatisfied) performance obligations as revenue within twelve months, with the remaining balance to be recognized thereafter.
Shipping and Handling Fees