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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 June 30, 2023
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. 000-26224
 
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 Exchange Act).    Yes  ☐    No  ☒
The number of shares of the registrant’s Common Stock, $0.01 par value, outstanding as of July 26, 2023 was 81,403,831.


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 June 30,Six Months Ended June 30,
 2023202220232022
Total revenue, net$381,267 $397,815 $762,113 $774,453 
Costs and expenses:
Cost of goods sold174,241 148,404 322,216 290,973 
Research and development26,588 25,589 53,312 49,674 
Selling, general and administrative164,908 160,651 331,565 320,577 
Intangible asset amortization3,026 3,304 6,134 7,198 
Total costs and expenses368,763 337,948 713,227 668,422 
Operating income12,504 59,867 48,886 106,031 
Interest income3,939 1,965 8,046 3,342 
Interest expense(12,464)(12,236)(24,564)(23,891)
Other income (expense), net(155)1,979 1,234 5,408 
Income before income taxes3,824 51,575 33,602 90,890 
Provision (benefit) for income taxes(360)6,787 5,192 13,201 
Net income $4,184 $44,788 $28,410 $77,689 
Net income per share
Basic$0.05 $0.54 $0.35 $0.93 
Diluted$0.05 $0.54 $0.35 $0.93 
Weighted average common shares outstanding (See Note 13):
Basic80,966 83,168 81,418 83,400 
Diluted81,151 83,622 81,739 83,979 
Comprehensive income (See Note 14)
1,947 52,598 22,975 $109,630 
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)
June 30, 2023December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents$309,192 $456,661 
Trade accounts receivable, net of allowances of $4,692 and $4,304
258,663 263,465 
Inventories, net354,293 324,583 
Prepaid expenses and other current assets129,112 116,789 
Total current assets1,051,260 1,161,498 
Property, plant and equipment, net317,571 311,302 
Right of use asset - operating leases148,651 148,284 
Intangible assets, net1,093,596 1,126,609 
Goodwill1,043,273 1,038,881 
Deferred tax assets, net56,050 45,994 
Other assets67,200 57,190 
Total assets$3,777,601 $3,889,758 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of borrowings under senior credit facility$4,844 $38,125 
Current portion of borrowings under securitization facility90,800 — 
Current portion of lease liability - operating leases14,618 14,624 
Accounts payable, trade99,766 102,100 
Contract liabilities8,275 7,253 
Accrued compensation64,645 78,771 
Accrued expenses and other current liabilities94,548 80,033 
Total current liabilities377,496 320,906 
Long-term borrowings under senior credit facility764,616 733,149 
Long-term borrowings under securitization facility— 104,700 
Long-term convertible securities568,798 567,341 
Lease liability - operating leases159,538 157,420 
Deferred tax liabilities70,653 63,338 
Other liabilities153,340 138,501 
Total liabilities2,094,441 2,085,355 
Stockholders’ equity:
Preferred stock; no par value; 15,000 authorized shares; none outstanding
— — 
Common stock; $0.01 par value; 240,000 authorized shares; 90,881 and 90,477 issued at June 30, 2023 and December 31, 2022, respectively
909 905 
Additional paid-in capital1,283,675 1,276,977 
Treasury stock, at cost; 9,527 shares and 6,823 shares at June 30, 2023 and December 31, 2022, respectively
(513,782)(362,862)
Accumulated other comprehensive income4,830 10,265 
Retained earnings907,528 879,118 
Total stockholders’ equity1,683,160 1,804,403 
Total liabilities and stockholders’ equity$3,777,601 $3,889,758 
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)
 Six Months Ended June 30,
 20232022
OPERATING ACTIVITIES:
Net income$28,410 $77,689 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization61,969 59,336 
Deferred income tax provision1,726 7,542 
Share-based compensation8,891 13,027 
Amortization of debt issuance costs and expenses associated with debt refinancing3,314 3,392 
Non-cash lease expense1,751 1,393 
Loss (gain) on disposal of property and equipment(104)732 
Change in fair value of contingent consideration and others6,081 (5,799)
Changes in assets and liabilities:
Accounts receivable4,826 (9,632)
Inventories(27,555)(17,576)
Prepaid expenses and other current assets(10,512)(4,120)
Other non-current assets(8,184)6,738 
Accounts payable, accrued expenses and other current liabilities(15,899)(14,556)
Contract liabilities724 774 
Other non-current liabilities(1,003)(8,118)
Net cash provided by operating activities54,435 110,822 
INVESTING ACTIVITIES:
Purchases of property and equipment(29,252)(18,732)
Acquired in-process research and development milestone— (4,742)
Net proceeds from swaps designated as net investment hedges— 4,909 
Net cash used in investing activities(29,252)(18,565)
FINANCING ACTIVITIES:
Proceeds from borrowings of long-term indebtedness15,200 23,000 
Payments on debt(29,100)(23,000)
Payment of debt issuance costs(7,578)— 
Purchases of treasury stock(150,000)(125,000)
Proceeds from exercised stock options3,437 1,592 
Cash taxes paid in net equity settlement(5,335)(23,204)
Net cash used in financing activities(173,376)(146,612)
Effect of exchange rate changes on cash and cash equivalents724 (11,941)
Net decrease in cash and cash equivalents(147,469)(66,296)
Cash and cash equivalents at beginning of period456,661 513,448 
Cash and cash equivalents at end of period$309,192 $447,152 
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)
Six Months Ended June 30, 2023
Common StockTreasury StockAdditional Paid-In CapitalAccumulated Other Comprehensive LossRetained EarningsTotal Equity
SharesAmountSharesAmount
Balance, January 1, 202390,476 $905 (6,823)$(362,862)$1,276,977 $10,265 $879,118 $1,804,403 
Net income— — — — — — 24,226 24,226 
Other comprehensive income (loss), net of tax— — — — — (3,198)— (3,198)
Issuance of common stock through employee stock purchase plan21 — — — 1,107 — — 1,107 
Issuance of common stock for vesting of share based awards, net of shares withheld for taxes316 1 16 846 (4,858)— — (4,011)
Share-based compensation— 2 — — 3,609 — — 3,611 
Accelerated shares repurchased— $— (2,111)(119,662)(31,538)$— — (151,200)
Balance, March 31, 202390,813 $908 (8,918)$(481,678)$1,245,297 $7,067 $903,344 $1,674,938 
Net income— — — — — — 4,184 4,184 
Other comprehensive loss, net of tax— — — — — (2,237)— (2,237)
Issuance of common stock for vesting of share based awards, net of shares withheld for taxes68 1 — 21 985 — — 1,007 
Share-based compensation— — — — 5,268 — — 5,268 
Accelerated shares repurchased— $— (609)(32,125)32,125 $— $— — 
Balance, June 30, 202390,881 $909 (9,527)$(513,782)$1,283,675 $4,830 $907,528 $1,683,160 
Six Months Ended June 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 (loss), 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 loss, 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 
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 June 30, 2023 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 in the United States ("GAAP") 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, 2022 included in the Company’s Annual Report on Form 10-K. The December 31, 2022 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. Operating results for the three and six-month periods ended June 30, 2023 are not necessarily indicative of the results to be expected for the entire year.
The preparation of consolidated financial statements is in conformity with 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 condensed 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.

Recent Accounting Pronouncements
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 through December 31, 2024. The Alternative Reference Rates Committee, a group of private-market participants convened by the U.S. Federal Reserve Board and the New York Federal Reserve, has recommended the use of the Secured Overnight Financing Rate ("SOFR") as a more robust reference rate alternative to LIBOR. On March 24, 2023, the Company entered into the seventh amendment and restatement (the "March 2023 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. In connection with the March 2023, Amendment the Company replaced all LIBOR-based contracts with SOFR, which is calculated based on overnight transactions under repurchase agreements backed by Treasury securities. In addition, on April 17, 2023 the company entered into an amendment (the "April 2023 Amendment") of the Securitization Facility and amended the interest rate from LIBOR to SOFR indexed rate. (See Note 6). In March 2023, the Company entered into a basis swap where the Company receives Term SOFR and pays LIBOR to convert the portfolio of interest rate swaps from LIBOR to SOFR. Integra has elected to adopt the optional expedient under ASC 848, which will allow the interest rate swap hedging relationship to continue, without de-designation, due to the change in the indexed rate from LIBOR to SOFR.
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
Surgical Innovation Associates, Inc. Acquisition

On December 6, 2022, the Company completed its acquisition of Surgical Innovation Associates, Inc. ("SIA") for an acquisition purchase price of $51.5 million (the "SIA Acquisition"). In addition to the purchase price, the acquisition includes two separate contingent considerations payments, which are dependent on 1) achieving certain revenue-based performance milestones in 2023, 2024, and 2025 (up to $50.0 million in additional payments), as well as 2) the approval by the FDA of the Premarket Approval (“PMA”) Application for DuraSorb for certain uses by certain timing targets (up to $40.0 million in additional payments). SIA's core technology, DuraSorb, is a fully resorbable scaffold of a globally accepted polymer, which is cleared for use in hernia repair, abdominal wall, and other soft tissue reinforcement. DuraSorb sales will be reported within Integra’s Tissue Technologies ("TT") segment as part of its Wound Reconstruction and Care franchise.

Assets Acquired and Liabilities Assumed at Fair Value

The SIA Acquisition has been accounted for using the acquisition method of accounting. This method requires that assets acquired, and liabilities assumed in a business combination to be recognized at their fair values as of the acquisition date.

The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date:

Dollars in thousandsPreliminary ValuationWeighted Average Life
Current assets:
Cash4,438 
Trade accounts receivable, net 1,551 
Inventories, net2,900 
Prepaid expenses and other current assets1,654 
Total current assets$10,543 
Intangible assets75,000 14 years
Goodwill41,380 
Total assets acquired$126,923 
Current liabilities:
Accounts payable and accrued expenses$2,044 
Total current liabilities$2,044 
Deferred Tax Liability11,325 
Contingent consideration57,607 
Total liabilities assumed70,976 
Net assets acquired$55,947 

Developed Technology

The estimated fair value of the developed technology 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, working capital, and contributory asset charges, the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of the asset’s life cycle, and competitive trends impacting the asset and the cash flow stream.

The Company used a discount rate of 18% 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

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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
The Company allocated goodwill related to the SIA Acquisition to the TT segment. Goodwill is the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined company and assembled workforce. A key factor that contributes to the recognition of goodwill, and a driver for the Company’s acquisition of SIA, is the attractive growth opportunities presented by the surgical matrix business in the breast reconstruction market. Goodwill recognized as a result of this acquisition is non-deductible for income tax purposes.

Contingent Consideration

The Company determines the acquisition date fair value of contingent consideration obligations based on a probability-weighted income approach derived from revenue estimates and a probability assessment with respect to the likelihood of achieving contingent obligations. 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 resulting most likely payouts are discounted using an appropriate effective annual interest rate. At each reporting date, the contingent consideration obligation will be revalued to estimated fair value and changes in fair value will be reflected as income or expense in the 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. Changes in assumptions utilized in the contingent consideration fair value estimates could result in an increase in the contingent consideration obligation and a corresponding charge to operating results.

As part of the SIA Acquisition, the Company is required to pay to the shareholder of SIA up to $90.0 million for two separate payments, which are dependent on 1) achieving certain revenue-based performance milestones in 2023, 2024, and 2025 (up to $50.0 million in additional payments), as well as 2) the approval by the FDA of the PMA for DuraSorb for certain uses by certain timing targets (up to $40.0 million in additional payments). The Company used iterations of the Monte Carlo simulation to calculate the fair value of the contingent consideration for the revenue-based milestone that considered the possible outcomes of scenarios related to each specific milestone for the revenue based performance milestone. The Company used probabilities of achieving the conditions to calculate the fair value of the contingent consideration for the PMA approval milestone. The Company estimated the fair value of the contingent consideration for the revenue based milestone to be $32.6 million at the acquisition date and $25.0 million for the PMA approval milestone as of December 31, 2022. The company recorded a total of $50.1 million in other liabilities as of June 30, 2023 and $12.7 million in accrued expenses and other current liabilities at June 30, 2023 in the consolidated balance sheet of the company.

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.

Sale of non-core traditional wound care business
On August 31, 2022, the Company completed its 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 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 TT 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 condensed consolidated statement of operations for the year ended December 31, 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 recognized an asset of $11.1 million, as a form of a deposit for the inventory transferred, which based on the expected timing of inventory purchases, was primarily included within prepaid expenses and other current assets in the consolidated balance sheet. This deposit will be utilized by the Company on future orders placed to Gentell for such products. As of June 30, 2023, the Company had a deposit remaining of $6.2 million which is included in prepaid assets and recognized a payable due to Gentell of $0.6 million, which is included in the condensed consolidated balance sheet within accrued expenses and other current liabilities.
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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
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 Estimates
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 90 days.
In the second quarter of 2023, due to the voluntary recall of Primatrix®, Surgimend®, Revize™, and TissueMend™, the Company recorded a $12.9 million provision for product returns, as a reduction of net revenue. Of this amount, $0.7 million was paid out in Q2.
The Company 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.
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 sheets.
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.
11
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
The following table summarized the changes in the contract asset and liability balances for the six months ended June 30, 2023:
Dollars in thousandsTotal
Contract Asset
Contract asset, January 1, 2023
$10,122 
Transferred to trade receivable from contract asset included in beginning of the year contract asset(7,743)
Written off from beginning of the year contract asset due to Boston recall(2,379)
Contract asset, net of transferred to trade receivables on contracts during the period9,639 
Contract asset, June 30, 2023
$9,639 
Contract Liability
Contract liability, January 1, 2023
$16,127 
Recognition of revenue included in beginning of year contract liability$(5,487)
Contract liability, net of revenue recognized on contracts during the period6,172 
Foreign currency translation(15)
Contract liability, June 30, 2023
$16,797 
At June 30, 2023, the short-term portion of the contract liability of $8.3 million and the long-term portion of $8.5 million is included in current liabilities and other liabilities, respectively, in the consolidated balance sheets.
As of June 30, 2023, the Company is expected to recognize revenue of approximately 49% of unsatisfied (or partially unsatisfied) performance obligations as revenue within 12 months, with the remaining balance to be recognized 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.
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.
12
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
Disaggregated Revenue
The following table presents revenues disaggregated by the major sources of revenues for the three and six months ended June 30, 2023 and 2022 (dollar amounts in thousands):
Three Months Ended June 30, 2023Three Months Ended June 30, 2022Six Months Ended June 30, 2023Six Months Ended June 30, 2022
Neurosurgery$205,803 $200,295 $398,673 $394,970 
Instruments65,227 57,568 120,493 110,201 
Total Codman Specialty Surgical271,030 257,863 519,166 505,171 
Wound Reconstruction and Care91,118 104,894 192,058 199,524 
Private Label19,119 35,058 50,889 69,758 
Total Tissue Technologies110,237 139,952 242,947 269,282 
Total revenue$381,267 $397,815 $762,113 $774,453 
See Note 15, Segment and Geographical Information, for details of revenues based on the location of the customer.
4. INVENTORIES
Inventories, net consisted of the following:
Dollars in thousandsJune 30, 2023December 31, 2022
Finished goods$174,603 $172,088 
Work in process79,263 70,598 
Raw materials100,427 81,897 
Total inventories, net$354,293 $324,583 
Boston Recall
In the second quarter of 2023, due to the voluntary recall of Primatrix®, Surgimend®, Revize™, and TissueMend™, the Company recorded a $24.1 million write off of inventory that was no longer able to be sold.
Subsequent Event
On July 24, 2023, a severe tornado struck the Lelocle, Switzerland area (the “Lelocle Tornado”) causing significant damage to certain inventory held at one of the Company’s storage facilities. There wasn’t any damage to Integra’s manufacturing facility in Switzerland. The extent of damage to the facility is being assessed, however, the Company believes the inventory write-off will not exceed $8 million. The Company maintains insurance coverage for damage to its facilities and inventory, as well as business interruption insurance. The Company is in the process of reviewing these coverages with its insurance carriers. The Company believes there will be a recovery under its insurance policies, however no assurance can be given regarding the amounts, if any, that will be ultimately recovered or when any such recoveries will be made.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Changes in the carrying amount of goodwill for the six-month period ended June 30, 2023 were as follows:
Dollars in thousandsCodman Specialty
Surgical		Tissue TechnologiesTotal
Goodwill at December 31, 2022$656,219 $382,662 $1,038,881 
SIA Acquisition Working Capital Adjustment— (382)(382)
Foreign currency translation3,015 1,759 4,774 
Goodwill at June 30, 2023
$659,234 $384,039 $1,043,273 
The Company tests goodwill for impairment by either performing a qualitative evaluation or a quantitative analysis. In the second quarter of 2023, due to the voluntary recall of Primatrix®, Surgimend®, Revize™, and TissueMend™ as well as the
13
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
associated drop in the Company's stock price in Q2, the Company elected to perform a quantitative analysis for its Tissue Technologies reporting unit.
The quantitative test estimates the fair value of the reporting unit using a discounted cash flow model, which incorporates significant estimates and assumptions made by management which, by their nature, are characterized by uncertainty. The quantitative test utilized a long-term growth rate of 2% and a discount rate of 10%. The Company determined, after performing the quantitative analysis, that the fair value of the goodwill of the reporting unit was not less than the carrying amount, with more than 20% headroom.
Other Intangible Assets
The components of the Company’s identifiable intangible assets were as follows:
 June 30, 2023
Dollars in thousandsWeighted
Average
Life		CostAccumulated
Amortization		Net
Completed technology18 years$1,211,660 $(408,428)$803,232 
Customer relationships12 years$193,550 $(148,103)$45,447 
Trademarks/brand names28 years$97,950 $(36,700)$61,250 
Codman tradenameIndefinite$169,279 $— $169,279 
Supplier relationships30 years$30,211 $(17,659)$12,552 
All other11 years$6,064 $(4,228)$1,836 
$1,708,714 $(615,118)$1,093,596 
 December 31, 2022
Dollars in thousandsWeighted
Average
Life		CostAccumulated
Amortization		Net
Completed technology18 years$1,204,325 $(370,968)$833,357 
Customer relationships12 years193,081 (144,040)49,041 
Trademarks/brand names28 years97,265 (34,674)62,591 
Codman tradenameIndefinite166,693 — 166,693 
Supplier relationships30 years30,211 (17,170)13,041 
All other11 years5,957 (4,071)1,886 
$1,697,532 $(570,923)$1,126,609 
Based on quarter-end exchange rates, amortization expense (including amounts reported in cost of goods sold) is expected to be approximately $41.4 million for the remainder of 2023, $82.2 million in 2024, $82.2 million in 2025, $82.0 million in 2026, $80.0 million in 2027, $78.5 million in 2028 and $477.1 million thereafter.
The Company periodically performs testing for impairment on certain long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the second quarter of 2023, due to the voluntary recall of Primatrix®, Surgimend®, Revize™, and TissueMend™, the Company elected to perform impairment testing on certain definite lived intangibles.
The impairment testing estimates the fair value of the intangibles using an undiscounted cash flow model. The Company determined, after performing the impairment testing, that the fair value of the intangibles was not less that the carrying amount.
6. DEBT
Amendment to the Seventh Amended and Restated Senior Credit Agreement
On March 24, 2023, the Company entered into the seventh amendment and restatement (the "March 2023 Amendment") of the Senior Credit Facility (the "Senior Credit Facility") with a syndicate of lending banks with Bank of America, N.A., as Administrative Agent. The March 2023 Amendment extended the maturity date to March 24, 2028, amended the contractual repayments of Term loan A, and amended the interest rate from LIBOR to SOFR-indexed interest. The Company continues to have the aggregate principal amount of up to approximately $2.1 billion available to it through the following facilities: (i) a $775.0 million term loan facility, and (ii) a $1.3 billion revolving credit facility, which includes a $60 million sublimit for the issuance of standby letters of credit and a $60 million sublimit for swingline loans.
14
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
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 QuarterMaximum Consolidated Total Leverage Ratio
March 31, 2023 through December 31, 2024
4.50 to 1.00
March 31, 2025 through June 30, 2026
4.25 to 1.00
September 30, 2026 and the last day of each fiscal quarter thereafter
4.00 to 1.00
Borrowings under the Senior Credit Facility bear interest, at the Company’s option, at a rate equal to the following:
i.term SOFR in effect from time to time plus 0.10% 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%
2.the prime lending rate of Bank of America, N.A. or
3.the one-month Term SOFR plus 1.00%
The applicable rates are based on the Company’s consolidated total leverage ratio (defined as the ratio of (a) consolidated funded indebtedness as of such date less cash that is not subject to any restriction on the use or investment thereof to (b) consolidated EBITDA (as defined by the amended Seventh Amended and Restated Credit Agreement (the "Credit Agreement")), for the period of four consecutive fiscal quarters ending on such date).
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 June 30, 2023, the Company was in compliance with all such covenants. The Company capitalized $7.6 million in deferred financing costs in connection with the modification of the Senior Credit Facility and wrote off $0.2 million of previously capitalized financing costs during the first quarter of 2023.
At June 30, 2023 and December 31, 2022 there was no balance outstanding under the revolving portion of the Senior Credit Facility. At June 30, 2023 and December 31, 2022, there was $775.0 million outstanding under the term loan component of the Senior Credit Facility at a weighted average interest rate of 6.6% and 5.6%, respectively. The liability related to the Senior Credit Facility shown on the balance sheet at June 30, 2023 and December 31, 2022 is reflected net of $5.5 million and $3.7 million, respectively, in deferred financing costs. As of June 30, 2023 and December 31, 2022 there was $4.8 million and $38.1 million of the Term Loan component of the Senior Credit Facility classified as current on the condensed consolidated balance sheet, respectively.
The fair value of outstanding borrowings of the Senior Credit Facility's Term Loan component at June 30, 2023 was $759.3 million. This fair value was 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 June 30, 2023 and December 31, 2022 totaled $1.7 million and $1.6 million, respectively. There were no amounts drawn as of June 30, 2023.
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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
Contractual repayments of the Term Loan component of the Senior Credit Facility are due as follows:
Quarter Ended June 30, 2023
Principal Repayment
Dollars in thousands
Remainder of 2023
$— 
2024
$14,531 
2025
$33,906 
2026
$38,750 
Thereafter687,813 
$775,000 
Future interest payments on the term loan component of the Senior Credit Facility based on current interest rates are expected to approximate $25.5 million for remainder of 2023, $50.5 million in 2024, $48.7 million in 2025, $46.2 million in 2026, and $52.8 million thereafter . Interest is calculated on the term loan portion of the Senior Credit Facility based on SOFR plus the certain amounts set forth in the Credit Agreement. As the revolving credit facility and Securitization Facility can be repaid at any time, no interest has been included in the calculation.
Any outstanding borrowings on the revolving credit component of the Senior Credit Facility is due on March 24, 2028.
Convertible Senior Notes
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 will mature on August 15, 2025 and bear interest at a rate of 0.5% per annum payable semi-annually in arrears, unless earlier converted, repurchased or redeemed in accordance with the terms of the 2025 Notes. In connection with this offering, the Company capitalized $13.2 million of financing fees.
The 2025 Notes are senior, unsecured obligations of the Company, and are convertible into cash and shares of its common stock based on initial conversion rate, subject to adjustment of 13.5739 shares per $1,000 principal amounts of the 2025 Notes (which represents an initial conversion price of $73.67 per share). The 2025 Notes convert only in the following circumstances: (1) if the closing price of the Company's common stock has been at least 130% of the conversion price during the period; (2) if the average trading price per $1,000 principal amount of the 2025 Notes is less than or equal to 98% of the average conversion value of the 2025 Notes during a period as defined in the indenture; (3) if the Company calls the notes for optional redemption as defined in the indenture; or (4) if specified corporate transactions occur. As of June 30, 2023, none of these conditions existed with respect to the 2025 Notes and as a result the 2025 Notes are classified as long term.
On December 9, 2020, the Company entered into the First Supplemental Indenture to the original agreement dated as of February 4, 2020 between the Company and Citibank, N.A., as trustee, governing the Company’s outstanding 2025 Notes. The Company irrevocably elected (1) to eliminate the Company’s option to choose physical settlement on any conversion of the 2025 Notes that occurs on or after the date of the First Supplemental Indenture and (2) with respect to any Combination Settlement for a conversion of the 2025 Notes, the Specified Dollar Amount that will be settled in cash per $1,000 principal amount of the 2025 Notes shall be no lower than $1,000.
Holders of the Notes will have the right to require the Company to repurchase for cash all or a portion of their Notes at 100% of their principal amount, plus any accrued and unpaid interest, upon the occurrence of a fundamental change (as defined in the indenture relating to the Notes). The Company will also be required to increase the conversion rate for holders who convert their Notes in connection with certain fundamental changes occurring prior to the maturity date or following delivery by the Company of a notice of redemption.
In connection with the issuance of the 2025 Notes, the Company entered into call transactions and warrant transactions, primarily with affiliates of the initial purchasers of the 2025 Notes (the “hedge participants”). The cost of the call transactions was $104.2 million for the 2025 Notes. The Company received $44.5 million of proceeds from the warrant transactions for the 2025 Notes. The call transactions involved purchasing call options from the hedge participants, and the warrant transactions involved selling call options to the hedge participants with a higher strike price than the purchased call options. The initial strike price of the call transactions was $73.67, subject to anti-dilution adjustments substantially similar to those in the 2025 Notes. The initial strike price of the warrant transactions was $113.34 for the 2025 Notes, subject to customary anti-dilution adjustments.
At June 30, 2023, the carrying amount of the liability was $575.0 million. The fair value of the 2025 Notes at June 30, 2023 was $524.6 million. Factors that the Company considered when estimating the fair value of the 2025 Notes included recent quoted market prices or dealer quotes. The level of the 2025 Notes is considered as Level 1.
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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
Securitization Facility
In 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 ("Securitization 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 Agreement may give rise to the right of its counterparty to terminate this facility. As of June 30, 2023, the Company was in compliance with the covenants and none of the termination events had occurred.
On May 28, 2021, the Company entered into an amendment (the "May 2021 Amendment") of the Securitization Facility which extended the maturity date from December 21, 2021 to May 28, 2024. In addition, on April 17, 2023 the company entered into an amendment (the "April 2023 Amendment") of the Securitization Facility and amended the interest rate from LIBOR to SOFR indexed rate. The April 2023 Amendment and the May 2021 Amendment does not increase the Company’s total indebtedness.
The Securitization Facility is currently indexed to SOFR. At June 30, 2023 and December 31, 2022, the Company had $90.8 million and $104.7 million, respectively, of outstanding borrowings under its Securitization Facility at a weighted average interest rate of 6.3% and 5.0%, respectively. At June 30, 2023, the total amount outstanding under the Securitization Facility is classified as current on the consolidated balance sheet as the total amount is due on May 28, 2024.
The fair value of the outstanding borrowing of the Securitization Facility at June 30, 2023 was $90.6 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.
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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
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 rate swaps apply a fixed interest rate on a portion of the Company's expected SOFR-indexed borrowings. In connection with the March 2023 Amendment to the Senior Credit Facility, the Company amended its interest rate from LIBOR to SOFR-indexed interest. In March 2023, the Company entered into a basis swap where the Company receives Term SOFR and pays LIBOR to convert the portfolio of swaps from LIBOR to SOFR.
The Company held the following interest rate swaps as of June 30, 2023 and December 31, 2022 (dollar amounts in thousands):
June 30, 2023June 30, 2023
Hedged ItemNotional AmountDesignation DateEffective DateTermination DateFixed Interest RateEstimated Fair Value
Asset (Liability)
1-month Term SOFR Loan150,000 December 13, 2017July 1, 2019June 30, 20242.423 %4,259 
1-month Term SOFR Loan200,000 December 13, 2017January 1, 2018December 31, 20242.313 %8,200 
1-month Term SOFR Loan75,000 October 10, 2018July 1, 2020June 30, 20253.220 %2,320 
1-month Term SOFR Loan75,000 October 10, 2018July 1, 2020June 30, 20253.199 %2,364 
1-month Term SOFR Loan75,000 October 10, 2018July 1, 2020June 30, 20253.209 %2,334 
1-month Term SOFR Loan100,000 December 18, 2018December 30, 2022December 31, 20272.885 %4,844 
1-month Term SOFR Loan100,000 December 18, 2018December 30, 2022December 31, 20272.867 %4,841 
1-month Term SOFR Loan575,000 December 15, 2020July 31, 2025December 31, 20271.415 %24,174 
1-month Term SOFR Loan125,000 December 15, 2020July 1, 2025December 31, 20271.404 %5,502 
Basis Swap (1)
—March 31, 2023March 24, 2023December 31, 2027N/A(1,937)
$1,475,000 $56,901 
(1) The notional of the basis swap amortizes to match the total notional of the interest rate swap portfolio over time

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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
December 31, 2022December 31, 2022
Hedged ItemNotional AmountDesignation DateEffective DateTermination DateFixed Interest RateEstimated Fair Value
Asset (Liability)
1-month USD LIBOR Loan150,000 December 13, 2017July 1, 2019June 30, 20242.423 %5,012 
1-month USD LIBOR Loan200,000 December 13, 2017January 1, 2018December 31, 20242.313 %8,380 
1-month USD LIBOR Loan75,000 October 10, 2018July 1, 2020June 30, 20253.220 %1,831 
1-month USD LIBOR Loan75,000 October 10, 2018July 1, 2020June 30, 20253.199 %1,905 
1-month USD LIBOR Loan75,000 October 10, 2018July 1, 2020June 30, 20253.209 %1,970 
1-month USD LIBOR Loan100,000 December 18, 2018December 30, 2022December 31, 20272.885 %4,252 
1-month USD LIBOR Loan100,000 December 18, 2018December 30, 2022December 31, 20272.867 %4,153 
1-month USD LIBOR Loan575,000 December 15, 2020July 31, 2025December 31, 20271.415 %23,742 
1-month USD LIBOR Loan125,000 December 15, 2020July 1, 2025December 31, 20271.404 %5,467 
$1,475,000 $56,712 
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. Those amounts are subsequently reclassified to earnings from AOCI as impacted by the hedged item when the hedged item affects 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, 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 anticipated 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 September 26, 2022, the Company amended the CHF-denominated intercompany loan to extend the termination date to September 2023 and as a result, the Company early terminated the cross-currency swap designated as cash flow hedge of an intercompany loan with aggregate notional amount of 50.0 million. Simultaneously, the Company entered into a cross-currency swap agreement to convert a notional amount of CHF 48.5 million equivalent to 49.1 million of this amended intercompany loan into U.S. dollars. The loss recorded by the Company upon the settlement of the swap was not material for the period.
On December 21, 2020, the Company entered into cross-currency swap agreements to convert a notional amount of $471.6 million equivalent to 420.1 million of a CHF-denominated intercompany loan into U.S. dollars. The CHF-denominated intercompany loan was the result of an intra-entity transfer of certain intellectual property rights to a subsidiary in Switzerland completed during the fourth quarter of 2020. The intercompany loan requires quarterly payments of CHF 5.8 million plus accrued interest. As a result, the aggregate notional amount of the related cross-currency swaps will decrease by a corresponding amount.
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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
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.
The Company held the following cross-currency rate swaps as of June 30, 2023 and December 31, 2022 (dollar amounts in thousands):
June 30, 2023December 31, 2022June 30, 2023December 31, 2022
Effective DateTermination DateFixed RateAggregate Notional AmountFair Value
Asset (Liability)
Pay CHFDecember 21, 2020December 22, 20253.00%CHF377,591 374,137 (16,217)(4,241)
Receive U.S.$3.98%$418,066 420,001 
Pay CHFSeptember 28, 2022September 29, 20231.95%CHF48,532 48,532 (5,131)(3,528)
Receive U.S.$5.32%$49,142 49,142 
Total$(21,348)$(7,769)
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 and six months ended June 30, 2023 the Company recorded losses of $8.5 million and $12.0 million, respectively, in other income, net related to change in fair value related to the foreign currency rate translation to offset the losses recognized on the intercompany loans. For the three and six months ended June 30, 2022, the Company recorded gains of $19.3 million and $25.8 million, respectively, in other income, net related to change in fair value related to the foreign currency rate translation to offset the gain or losses recognized on the intercompany loans.
For the three and six months ended June 30, 2023, the Company recorded losses of $12.9 million and $10.7 million in AOCI, respectively, related to change in fair value of the cross-currency swaps. For the three and six months ended June 30, 2022, the Company recorded a loss of $21.1 million and a gain of $21.5 million in AOCI, respectively, related to change in fair value of the cross-currency swaps.
For the three and six months ended June 30, 2023, the Company recorded gains of $1.4 million and $2.9 million, respectively, in other income, net included in the consolidated statements of operations related to the interest rate differential of the cross-currency swaps. For the three and six months ended June 30, 2022, the Company recorded gains of $2.0 million and $3.8 million, respectively, in other income, net included in the consolidated statements of operations related to the interest rate differential of the cross-currency swaps.
The estimated loss that is expected to be reclassified to other income (expense), net from AOCI as of June 30, 2023 within the next twelve months is $2.0 million. As of June 30, 2023, the Company does not expect any gains or losses will be reclassified into earnings because the original forecasted transactions 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 from its international operations through 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 and December 16, 2020, the Company entered into cross-currency swap agreements designated as net investment hedges to partially offset the effects of foreign currency on foreign subsidiaries.
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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
The Company held the following cross-currency rate swaps designated as net investment hedges as of June 30, 2023 and December 31, 2022, respectively (dollar amounts in thousands):
June 30, 2023December 31, 2022
June 30, 2023
December 31, 2022
Effective DateTermination DateFixed RateAggregate Notional AmountFair Value
Asset (Liability)
Pay EUROctober 3, 2018September 30, 2023—%EUR51,760 51,760 3,612 4,713 
Receive U.S.$2.57%$60,000 60,000 
Pay EUROctober 3, 2018September 30, 2025—%EUR38,820 38,820 3,272 4,307 
Receive U.S.$2.19%$45,000 45,000 
Pay CHFMay 26, 2022December 16, 2028—%CHF288,210 288,210 (26,854)(14,663)
Receive U.S.$1.94%$300,000 300,000 
Total$(19,970)$(5,643)
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 and six months ended June 30, 2023, the Company recorded losses of $11.1 million and $10.1 million, respectively, in AOCI related to the change in fair value of the cross-currency swaps. For the three and six months ended June 30, 2022, the Company recorded gains of $10.8 million and $12.1 million in AOCI, respectively, related to change in fair value of the cross-currency swaps.
For the three and six months ended June 30, 2023, the Company recorded gains of $2.1 million and $4.2 million, respectively, in interest income included in the consolidated statements of operations related to the interest rate differential of the cross-currency swaps. For the three and six months ended June 30, 2022, the Company recorded gains of $1.0 million and $2.3 million, respectively, 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 June 30, 2023 within the next twelve months is $10.6 million.
Foreign Currency Forward Contract
The Company has entered into a hedge for forecasted intercompany purchases denominated in foreign currencies through the use of forward contracts designated as cash flow hedges. To the extent these forward contracts meet hedge accounting criteria, changes in their fair value are not included in accumulated comprehensive loss. These changes in fair value will be recognized into earnings as a component of cost of sales when the forecasted-transaction occurs.
During the first half of 2023, the Company entered into Foreign Currency Forward Contracts to mitigate the risk of foreign currency on intercompany purchases in CHF. These contracts typically settle at various dates within twelve months of execution. As of June 30, 2023 the notional amount of Foreign Currency Forward Contracts was $12.6 million. During the three and six months ended June 30, 2023 the Company recorded gains of $0.3 million and $0.2 million, respectively in AOCI related to the change in fair value of the Foreign Currency Forward Contracts.
For the three and six months ended June 30, 2023 the company recorded a gain of $0.4 million in cost of goods sold included in the consolidated statements of operations related to the Foreign Currency Forward Contracts.
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.