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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, 2022
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: (609) 275-0500
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 filer☒Accelerated 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 24, 2022 was 83,518,163.


Table of Contents





INTEGRA LIFESCIENCES HOLDINGS CORPORATION
INDEX

 
 Page
Number


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,
 2022202120222021
Total revenue, net$385,191 $386,861 $1,159,644 $1,136,924 
Costs and expenses:
Cost of goods sold148,445 144,468 439,418 441,558 
Research and development24,736 25,831 74,410 68,326 
Selling, general and administrative143,820 156,010 464,397 475,195 
Intangible asset amortization3,141 4,113 10,339 12,838 
Total costs and expenses320,142 330,422 988,564 997,917 
Operating income65,049 56,439 171,080 139,007 
Interest income3,264 1,786 6,606 5,298 
Interest expense(12,809)(12,192)(36,700)(38,270)
Gain (loss) from the sale of businesses644 (230)644 41,967 
Other income, net2,648 4,985 8,056 14,888 
Income before income taxes58,796 50,788 149,686 162,890 
Provision for income taxes8,881 7,559 22,082 39,199 
Net income $49,915 $43,229 $127,604 $123,691 
Net income per share
Basic$0.60 $0.51 $1.54 $1.46 
Diluted$0.60 $0.51 $1.53 $1.45 
Weighted average common shares outstanding (See Note 13):
Basic83,042 84,754 82,955 84,647 
Diluted83,399 85,447 83,476 85,391 
Comprehensive income (See Note 14)55,69146,417 165,320 $150,975 
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, 2022December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents$511,937 $513,448 
Trade accounts receivable, net of allowances of $3,958 and $4,735
248,268 231,831 
Inventories, net311,060 317,386 
Prepaid expenses and other current assets123,357 91,051 
Assets held for sale1,831 — 
Total current assets1,196,453 1,153,716 
Property, plant and equipment, net300,729 311,703 
Right of use asset - operating leases148,270 84,543 
Intangible assets, net1,054,035 1,145,573 
Goodwill977,860 1,013,458 
Deferred tax assets, net51,768 56,950 
Other assets77,898 16,440 
Total assets$3,807,013 $3,782,383 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of borrowings under senior credit facility$56,250 $45,000 
Current portion of lease liability - operating leases13,488 14,775 
Accounts payable, trade80,732 61,837 
Contract liabilities6,364 5,295 
Accrued compensation68,626 92,656 
Accrued expenses and other current liabilities78,992 120,458 
Total current liabilities304,452 340,021 
Long-term borrowings under senior credit facility814,530 824,257 
Long-term borrowings under securitization facility106,000 112,500 
Long-term convertible securities566,612 564,426 
Lease liability - operating leases157,533 90,329 
Deferred tax liabilities69,743 45,788 
Other liabilities63,729 120,258 
Total liabilities2,082,599 2,097,579 
Stockholders’ equity:
Preferred stock; no par value; 15,000 authorized shares; none outstanding
— — 
Common stock; $0.01 par value; 240,000 authorized shares; 90,341 and 89,600 issued at September 30, 2022 and December 31, 2021, respectively
903 896 
Additional paid-in capital1,267,641 1,264,943 
Treasury stock, at cost; 6,823 shares and 4,899 shares at September 30, 2022 and December 31, 2021, respectively
(362,863)(234,448)
Accumulated other comprehensive loss(7,439)(45,155)
Retained earnings826,172 698,568 
Total stockholders’ equity1,724,414 1,684,804 
Total liabilities and stockholders’ equity$3,807,013 $3,782,383 
The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.
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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
 Nine Months Ended September 30,
 20222021
OPERATING ACTIVITIES:
Net income$127,604 $123,691 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization88,803 89,090 
Non-cash impairment charges— 2,754 
Deferred income tax provision (benefit) 1,439 (13,498)
Share-based compensation21,994 29,778 
Amortization of debt issuance costs and expenses associated with debt refinancing5,142 5,308 
Non-cash lease expense3,040 3,099 
Loss on disposal of property and equipment914 2,029 
Gain from the sale of businesses(644)(41,967)
Change in fair value of contingent consideration and others(19,481)(544)
Changes in assets and liabilities:
Accounts receivable(23,870)17,437 
Inventories(24,443)(3,598)
Prepaid expenses and other current assets1,629 (11,696)
Other non-current assets9,575 5,900 
Accounts payable, accrued expenses and other current liabilities(803)33,858 
Contract liabilities2,524 — 
Other non-current liabilities(14,288)1,509 
Net cash provided by operating activities179,135 243,150 
INVESTING ACTIVITIES:
Purchases of property and equipment(27,887)(20,595)
Proceeds from sale of property and equipment— 3 
Proceeds from sale of businesses23,960 190,468 
Acquired in-process research and development milestone(4,742)— 
Net proceeds from swaps designated as net investment hedges4,909 76 
Cash paid for business acquisitions, net of cash acquired— (303,910)
Net cash used in investing activities(3,760)(133,958)
FINANCING ACTIVITIES:
Proceeds from borrowings of long-term indebtedness34,250 13,450 
Payments on debt(40,750)(114,250)
Payment of debt issuance costs— (249)
Purchases of treasury stock(125,000)— 
Proceeds from exercised stock options1,592 6,588 
Cash taxes paid in net equity settlement(24,346)(4,286)
Net cash used in financing activities(154,254)(98,747)
Effect of exchange rate changes on cash and cash equivalents(22,632)(10,380)
Net decrease in cash and cash equivalents(1,511)65 
Cash and cash equivalents at beginning of period513,448 470,166 
Cash and cash equivalents at end of period$511,937 $470,231 
The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.
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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(Dollars in thousands)
Nine Months Ended September 30, 2022
Common StockTreasury StockAdditional Paid-In CapitalAccumulated Other Comprehensive LossRetained EarningsTotal Equity
SharesAmountSharesAmount
Balance, January 1, 202289,600 $896 (4,899)$(234,448)$1,264,943 $(45,155)$698,568 $1,684,804 
Net income— — — — — — 32,901 32,901 
Other comprehensive income, net of tax— — — — — 24,130 — 24,130 
Issuance of common stock through employee stock purchase plan17 — — — 1,078 — — 1,078 
Issuance of common stock for vesting of share based awards, net of shares withheld for taxes339 4 14 714 (9,758)— — (9,040)
Share-based compensation— — — — 6,324 — — 6,324 
Accelerated shares repurchased— $— (1,938)$(129,152)$4,152 $— $— $(125,000)
Balance, March 31, 202289,956 $900 (6,823)$(362,886)$1,266,739 $(21,025)$731,469 $1,615,197 
Net income— — — — — — 44,788 44,788 
Other comprehensive income, net of tax— — — — — 7,810 — 7,810 
Issuance of common stock for vesting of share based awards, net of shares withheld for taxes378 3 — 6 (13,655)— — (13,646)
Share-based compensation— — — — 6,768 — — 6,768 
Balance, June 30, 202290,334 $903 (6,823)$(362,880)$1,259,852 $(13,215)$776,257 $1,660,917 
Net income— — — — — — 49,915 49,915 
Other comprehensive income, net of tax— — — — — 5,776 — 5,776 
Issuance of common stock for vesting of share based awards, net of shares withheld for taxes7 — — 17 (1,160)— — (1,143)
Share-based compensation— — — — 8,949 — — 8,949 
Balance, September 30, 202290,341 903 (6,823)(362,863)1,267,641 (7,439)826,172 1,724,414 
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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(Dollars in thousands)
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 
Issuance of common stock for vesting of share based awards, net of shares withheld for taxes123 1 — 12 2,529 — — 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 
    
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, 2022 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, 2021 included in the Company’s Annual Report on Form 10-K. The December 31, 2021 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, 2022 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, including reductions in capital and overall spending by our customers, increased freight costs, decreased availability of certain raw materials used in certain of our products and labor constraints. The COVID-19 pandemic has had, and may continue to have, an adverse effect on the Company’s business, results of operations, financial condition, and cash flows, and its future impacts remain highly uncertain and unpredictable. Although there was not a material impact to the Company’s consolidated financial statements as of and for the nine months ended September 30, 2022, changes in the Company’s assessment about the length and severity of the pandemic, as well as other factors, could result in actual results differing from estimates. 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, containment measures and other macroeconomic factors which could cause a local/or global economic recession. 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)
Employee Termination Benefits
The Company incurred employee termination costs on restructuring activities associated with a closure of a manufacturing facility in France, outsourcing plans for select transactional back office activities, and executive reorganization in the consolidated statement of operations for the nine months ended September 30, 2022. The following table summarizes our restructuring related accrual balances included within accrued expenses and other current liabilities in the consolidated balance sheet for the nine months ended September 30, 2022.
(Dollars in thousands)Amount
Balance at December 31,2021$10,226 
Charges:
Cost of Goods Sold$1,379 
Research and development130
Selling, general and administrative3,494
Payments and other adjustments$(10,569)
Balance at September 30,2022$4,660 
Included in the accrual balance at September 30, 2022 above is $1.8 million related to the closure of a manufacturing facility located in France, $1.7 million related to executive reorganization and $1.2 million related to the outsourcing plans for select transactional back office activities.
Assets Held for Sale
On July 18 2022, the Company entered into a preliminary agreement to sell a manufacturing facility located in France which is expected to close during the fourth quarter of 2022, subject to satisfaction of customary conditions. The Company considered the building to be accounted as held-for-sale as the six criteria under ASC 260 were met during the third quarter of 2022. Assets held for sale are reported at the lower of the carrying amount or fair value less estimated costs to sell and are not depreciated while they are held for sale. The fair value of the business less costs to sell exceeded the related carrying value.
Recent Accounting Pronouncements
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 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 (Topic 848), and subsequent amendment to the initial guidance: ASU 2021-01, Reference Rate Reform (Topic 848): Scope (collectively, “Topic 848”). Topic 848 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to 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. The guidance generally can be applied from March 12, 2020 through December 31, 2022. On October 5, 2022, the FASB approved an extension of the sunset date of the reference rate reform from December 31, 2022 to December 31, 2024, past LIBOR’s end date. The Company currently has contracts that are indexed to LIBOR and are continuing to evaluate the scope of impacted contracts and potential risk. The Company is also monitoring the developments regarding alternative rates and may amend certain contracts to accommodate those rates if the contract does not already specify a replacement rate. While the notional value of agreements potentially indexed to LIBOR is material, the Company does not expect a material impact to the consolidated financial statements and related disclosures associated with this transition.
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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 was effective for annual and interim periods beginning after December 15, 2021, and early adoption was 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)
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. 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. Additionally, from January 1, 2021, the Company is no longer incurring non-cash interest expense for the amortization of debt discount.
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 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 had 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 non-core traditional wound care business
On August 31, 2022, the Company completed its previously announced sale of its non-core traditional wound care ("TWC") business to Gentell, LLC ("Gentell") for $28.8 million, which consists of $27.8 million in cash plus $1.0 million in contingent consideration which may be received upon achieving certain revenue-based performance milestones two years after the closing date. The proceeds from the sale of the TWC business of $27.8 million is presented in the consolidated statement of cash flows net of cash transferred of $3.5 million and other transaction fees. The transaction included the sale of the Company's TWC products, such as sponges, gauze and conforming bandages, and certain advanced wound care dressings, such as supportive, calcium alginate, hydrogel, and foam dressings.
The divestiture did not represent a strategic shift that had 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 TWC business to the Company's Tissue Technologies reportable business segment. In connection with the sale, the Company recognized $0.6 million as a gain from the sale of the business in the consolidated statement of operations for the nine months ended September 30, 2022. The transaction is subject to final working capital adjustments.
In addition to the purchase and sale agreement, the Company also entered into a contract manufacturing agreement with Gentell. Under the terms of the agreement, Gentell received inventory, equipment, and tooling to manufacture certain MediHoney® and TCC-EZ® products on behalf of the Company. On the close date of this transaction, the Company transferred all inventory associated with these products to Gentell and subsequently recognized a prepaid asset of $11.1 million, as a form of a deposit for the inventory transferred. Based on the expected timing of inventory purchases, $8.3 million was included within prepaid expenses and other current assets and $2.8 million within other assets in the consolidated balance sheet. This deposit will be utilized by the Company on future orders placed to Gentell for such products.
Sale of Extremity Orthopedics Business
On January 4, 2021, the Company completed the 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 & Nephew and concurrently paid $41.5 million to the Consortium of Focused Orthopedists, LLC ("CFO") effectively terminating the licensing agreement between Integra and the CFO relating to the development of shoulder arthroplasty products.
The divestiture did not represent a strategic shift that had 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 reportable business segment. In connection with the sale, the Company recognized a $41.8 million as a gain from the sale of the business in the consolidated statement of operations for the year ended December 31, 2021. The Company finalized the net working capital with Smith & Nephew as of December 31, 2021.
The Company also entered into a transition services agreement ("TSA") 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 TSA. The Company recognized a payable due to Smith & Nephew of $3.0 million as of September 30, 2022, which is included in the consolidated balance sheets within accrued expenses and other current liabilities. The TSA includes services such as invoicing and cash collections from customers on behalf of Smith & Nephew. As of September 30, 2022, the Company has concluded the majority of the transition services agreement, pending final payment.
ACell, Inc. Acquisition
On January 20, 2021, the Company acquired ACell, Inc. (the "ACell Acquisition") for a total purchase price of $306.9 million plus contingent consideration of up to $100 million, which may be payable upon the Company 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. Prior to the acquisition, 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 final fair values of the assets acquired and liabilities assumed at the acquisition date:
Dollars in thousandsFinal ValuationWeighted Average Life
Current assets:
Cash$2,726 
Trade accounts receivable, net 16,469 
Inventories, net18,299 
Prepaid expenses and other current assets1,498 
Total current assets$38,992 
Property, plant and equipment, net13,769 
Intangible assets245,000 
13-14 years
Goodwill94,147 
Right of use asset - operating leases9,259 
Deferred tax assets7,465 
Other assets148 
Total assets acquired$408,780 
Current liabilities:
Accounts payable$718 
Accrued expenses5,966 
Current portion of lease liability - operating leases1,673 
Total current liabilities$8,357 
Other long-term liability276 
Lease liability - operating leases7,585 
Deferred tax liability61,724 
Contingent consideration23,900 
Total liabilities assumed$101,842 
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 reportable business 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.
13
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
Contingent Consideration
As part of the ACell Acquisition, the Company is required to make payments to the former shareholders of ACell up to $100 million based on the achievement by the Company 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, 2022 was $5.0 million. The Company recorded $5.0 million and $23.0 million in other liabilities at September 30, 2022 and September 30, 2021, respectively, in the consolidated balance sheets of the Company. The change in the fair value of the contingent obligation was primarily as a result of changes in the timing and amount of revenue estimates.
The Company determined 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 are 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.
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'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.
In the third quarter of 2022, due to the voluntary recall of the CereLink® intracranial pressure monitors, the Company recorded a $1.5 million provision for product returns, as a reduction of net revenue, and a $0.8 million rework accrual in cost of goods sold.
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.
14
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. Upon invoicing to the customer, the balance is recorded in trade receivable, net 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 summarized the changes in the contract asset and liability balances for the nine months ended September 30, 2022:
Dollars in thousandsTotal
Contract Asset
Contract asset, January 1, 2022
$11,412 
Transferred to trade receivable of contract asset included in beginning of the year contract asset(11,412)
Contract asset, net of transferred to trade receivables on contracts during the period6,281 
Contract asset, September 30, 2022
$6,281 
Contract Liability
Contract liability, January 1, 2022
$11,946 
Recognition of revenue included in beginning of year contract liability$(6,054)
Contract liability, net of revenue recognized on contracts during the period8,534 
Foreign currency translation(120)
Contract liability, September 30, 2022
$14,306 
At September 30, 2022, the short-term portion of the contract liability of $6.4 million and the long-term portion of $7.9 million is included in current liabilities and other liabilities, respectively, in the consolidated balance sheets.
As of September 30, 2022, the Company is expected to recognize revenue of approximately 44