INTEGRA LIFESCIENCES HOLDINGS CORP 10-Q

Item 1. Financial Statements INTEGRA LIFESCIENCES HOLDINGS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME / (LOSS) (UNAUDITED) (In thousands, except per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Total revenue, net $ 370,232 $ 379,095 $ 983,221 $ 1,122,430 Costs and expenses: Cost of goods sold 134,811 142,636 373,765 415,219 Research and development 19,460 19,003 55,202 54,957 In-process research and development — 59,889 — 59,889 Selling, general and administrative 150,076 173,098 432,136 513,345 Intangible asset amortization 8,343 5,056 23,393 21,340 Total costs and expenses 312,690 399,682 884,496 1,064,750 Operating income (loss) 57,542 ( 20,587 ) 98,725 57,680 Interest income 2,273 2,913 7,124 8,051 Interest expense ( 20,796 ) ( 13,962 ) ( 54,230 ) ( 40,495 ) Other income, net 2,492 4,127 2,985 8,461 Income (loss) before income taxes 41,511 ( 27,509 ) 54,604 33,697 Provision (benefit) for income taxes 9,174 101 13,456 ( 1,185 ) Net income (loss) $ 32,337 $ ( 27,610 ) $ 41,148 $ 34,882 Net income (loss) per share Basic $ 0.38 $ ( 0.32 ) $ 0.49 $ 0.41 Diluted $ 0.38 $ ( 0.32 ) $ 0.48 $ 0.40 Weighted average common shares outstanding (See Note 14): Basic 84,325 85,688 84,745 85,536 Diluted 84,752 85,688 85,303 86,581 Comprehensive income (loss) (See Note 15) $ 43,548 $ ( 46,521 ) $ 25,637 $ ( 7,288 ) 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) (In thousands, except per share amounts) September 30, 2020 December 31, 2019 ASSETS Current assets: Cash and cash equivalents $ 396,279 $ 198,911 Trade accounts receivable, net of allowances of $6,727 and $4,303 218,184 275,296 Inventories, net 307,839 316,054 Assets held for sale 159,977 — Prepaid expenses and other current assets 69,817 67,907 Total current assets 1,152,096 858,168 Property, plant and equipment, net 294,439 337,404 Right of use asset - operating leases 84,916 94,530 Intangible assets, net 973,685 1,031,591 Goodwill 919,556 954,280 Deferred tax assets, net 8,150 12,623 Other assets 20,679 14,644 Total assets $ 3,453,521 $ 3,303,240 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current portion of borrowings under senior credit facility $ 22,500 $ 45,000 Current portion of lease liability - operating leases 12,518 12,253 Accounts payable, trade 50,254 113,090 Contract liabilities 4,875 4,772 Accrued compensation 71,712 79,385 Liabilities held for sale 12,349 — Accrued expenses and other current liabilities 80,938 76,809 Total current liabilities 255,146 331,309 Long-term borrowings under senior credit facility 944,102 1,198,561 Long-term borrowings under securitization facility 92,300 104,500 Long-term convertible securities 469,898 — Lease liability - operating leases 88,778 97,504 Deferred tax liabilities 27,780 36,553 Other liabilities 177,530 118,077 Total liabilities 2,055,534 1,886,504 Stockholders’ equity: Preferred stock; no par value; 15,000 authorized shares; none outstanding — — Common stock; $0.01 par value; 240,000 authorized shares; 89,191 and 88,735 issued at September 30, 2020 and December 31, 2019, respectively 892 887 Additional paid-in capital 1,284,711 1,213,620 Treasury stock, at cost; 4,915 shares and 2,865 shares at September 30, 2020 and December 31, 2019, respectively ( 235,224 ) ( 119,943 ) Accumulated other comprehensive loss ( 91,913 ) ( 76,402 ) Retained earnings 439,521 398,574 Total stockholders’ equity 1,397,987 1,416,736 Total liabilities and stockholders’ equity $ 3,453,521 $ 3,303,240 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) (In thousands) Nine Months Ended September 30, 2020 2019 OPERATING ACTIVITIES: Net income $ 41,148 $ 34,882 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 89,853 81,584 Non-cash in-process research and development expense — 59,889 Non-cash impairment charges — 5,764 Income tax expense (benefit) 4,784 ( 10,536 ) Share-based compensation 14,333 15,744 Amortization of debt issuance costs and expenses associated with debt refinancing 10,499 4,084 Non-cash lease expense 2,172 3,473 Accretion of bond issuance discount 11,075 — Loss on disposal of property and equipment 559 844 Change in fair value of contingent consideration and others ( 45 ) 10 Changes in assets and liabilities: Accounts receivable 57,863 ( 17,519 ) Inventories ( 45,531 ) ( 30,553 ) Prepaid expenses and other current assets ( 865 ) ( 8,162 ) Other non-current assets 10,868 6,650 Accounts payable, accrued expenses and other current liabilities ( 67,178 ) 366 Contract liabilities ( 548 ) ( 1,395 ) Other non-current liabilities ( 5,417 ) ( 2,876 ) Net cash provided by operating activities 123,570 142,249 INVESTING ACTIVITIES: Purchases of property and equipment ( 30,463 ) ( 47,343 ) Acquired in-process research and development milestone ( 5,000 ) — Proceeds from note receivable — 752 Proceeds from sale of property and equipment 3,311 36 Cash (paid) provided for business acquisitions, net of cash acquired — ( 30,509 ) Acquired in-process research and development — ( 64,995 ) Net cash used in investing activities ( 32,152 ) ( 142,059 ) FINANCING ACTIVITIES: Proceeds from borrowings of long-term indebtedness 151,300 215,800 Payments on debt ( 441,000 ) ( 143,250 ) Purchase of option hedge on convertible notes ( 104,248 ) — Proceeds from convertible notes issuance 575,000 — Proceeds from sale of stock purchase warrants 44,563 — Payment of debt issuance costs ( 24,347 ) — Purchases of treasury stock ( 100,000 ) — Proceeds from exercised stock options 3,821 6,948 Cash taxes paid in net equity settlement ( 4,686 ) ( 6,272 ) Net cash provided by financing activities 100,403 73,226 Effect of exchange rate changes on cash and cash equivalents 5,547 ( 4,273 ) Net increase in cash and cash equivalents 197,368 69,143 Cash and cash equivalents at beginning of period 198,911 138,838 Cash and cash equivalents at end of period $ 396,279 $ 207,981 The accompanying unaudited notes are an integral part of these condensed consolidated financial statements. 6 Table of Contents INTEGRA LIFESCIENCES HOLDINGS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (UNAUDITED) (In thousands, except per share amounts) Nine Months Ended September 30, 2020 Common Stock Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Equity Shares Amount Shares Amount (In thousands) Balance, January 1, 2020 88,735 $ 887 ( 2,865 ) $ ( 119,943 ) $ 1,213,620 $ ( 76,402 ) $ 398,574 $ 1,416,736 Net income — — — — — — 9,180 9,180 Other comprehensive loss, net of tax — — — — — ( 28,187 ) — ( 28,187 ) Issuance of common stock through employee stock purchase plan 13 — — — 694 — — 694 Issuance of common stock for vesting of share based awards, net of shares withheld for taxes 357 2 10 476 ( 3,217 ) — — ( 2,739 ) Share-based compensation — — — 3,781 — — 3,781 Share repurchase and equity component of the convertible note issuance, net — — ( 135 ) ( 7,632 ) 42,538 — — 34,906 Accelerated shares repurchased — — ( 1,304 ) ( 75,407 ) ( 16,961 ) — — ( 92,368 ) Adoption of Update No. 2016-13 — — — — — — ( 200 ) ( 200 ) Balance, March 31, 2020 89,105 $ 889 ( 4,294 ) $ ( 202,506 ) $ 1,240,455 $ ( 104,589 ) $ 407,553 $ 1,341,802 Net loss — — — — — — ( 369 ) ( 369 ) Other comprehensive income, net of tax — — — — — 1,464 — 1,464 Issuance of common stock for vesting of share based awards, net of shares withheld for taxes 84 3 — ( 35 ) 1,282 — — 1,250 Share-based compensation — — — — 4,948 — — 4,948 Accelerated shares repurchased — — ( 621 ) ( 32,685 ) 32,685 — — — Balance, June 30, 2020 89,189 $ 892 ( 4,915 ) $ ( 235,226 ) $ 1,279,370 $ ( 103,125 ) $ 407,184 $ 1,349,095 Net income — — — — — — 32,337 32,337 Other comprehensive income, net of tax — — — — — 11,212 — 11,212 Issuance of common stock for vesting of share based awards, net of shares withheld for taxes 2 — — 2 ( 69 ) — — ( 67 ) Share-based compensation — — — — 5,410 — — 5,410 Balance, September 30, 2020 89,191 $ 892 ( 4,915 ) $ ( 235,224 ) $ 1,284,711 $ ( 91,913 ) $ 439,521 $ 1,397,987 7 Table of Contents Nine Months Ended September 30, 2019 Common Stock Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Equity Shares Amount Shares Amount (In thousands) Balance, January 1, 2019 88,044 $ 880 ( 2,881 ) $ ( 120,615 ) $ 1,192,601 $ ( 45,443 ) $ 348,373 $ 1,375,796 Net income — — — — — — 32,756 32,756 Other comprehensive loss, net of tax — — — — — ( 11,236 ) — ( 11,236 ) Issuance of common stock through employee stock purchase plan 17 — — — 716 — — 716 Issuance of common stock for vesting of share based awards, net of shares withheld for taxes 243 2 12 506 ( 5,629 ) — — ( 5,121 ) Share-based compensation — — — — 4,119 — — 4,119 Balance, March 31, 2019 88,304 $ 882 ( 2,869 ) $ ( 120,109 ) $ 1,191,807 $ ( 56,679 ) $ 381,129 $ 1,397,030 Net income — — — — — — 29,736 29,736 Other comprehensive loss, net of tax — — — — — ( 12,021 ) — ( 12,021 ) Issuance of common stock for vesting of share based awards, net of shares withheld for taxes 47 1 — 2 405 — — 408 Share-based compensation — — — — 5,798 — — 5,798 Balance, June 30, 2019 88,351 $ 883 ( 2,869 ) $ ( 120,107 ) $ 1,198,010 $ ( 68,700 ) $ 410,865 $ 1,420,951 Net loss — — — — — — ( 27,610 ) ( 27,610 ) Other comprehensive loss, net of tax — — — — — ( 18,915 ) — ( 18,915 ) Issuance of common stock for vesting of share based awards, net of shares withheld for taxes 338 3 — 6 4,665 — — 4,674 Share-based compensation — — — — 5,874 — — 5,874 Balance, September 30, 2019 88,689 $ 886 ( 2,869 ) $ ( 120,101 ) $ 1,208,549 $ ( 87,615 ) $ 383,255 $ 1,384,974 The accompanying unaudited notes are an integral part of these condensed consolidated financial statements. 8 Table of Contents INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION General The terms “we,” “our,” “us,” “Company” and “Integra” refer to Integra LifeSciences Holdings Corporation, a Delaware corporation, and its subsidiaries unless the context suggests otherwise. In the opinion of management, the September 30, 2020 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 shareholder's 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, 2019 included in the Company’s Annual Report on Form 10-K. The December 31, 2019 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, 2020 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 the equity component of convertible debt 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. The novel coronavirus (“COVID-19”) pandemic and the resulting adverse impacts to global economic conditions, as well as our operations, may impact future estimates including, but not limited to, inventory valuations, fair value measurements, goodwill and long-lived asset impairments, the effectiveness of the Company’s hedging instruments, deferred tax valuation allowances, and allowances for doubtful accounts receivable. Risks and Uncertainties The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on the Company's business is highly uncertain and difficult to predict, as the responses to the pandemic and information is rapidly evolving. From late March, the Company's customers diverted resources to treat COVID-19 patients and deferred or canceled elective or non-emergent surgical procedures, all of which impacted hospitals' abilities to meet their obligations, including to the Company. Beginning in May 2020 and through the end of the third quarter of 2020, procedural volumes relevant to the Company’s products steadily increased and, in some geographic areas, began to approach normalized levels. However, on-going uncertainty persists about the continuing sustainability of those procedural volumes as virus outbreaks constrain healthcare networks. Furthermore, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that it could cause a local and/or global economic recession. Such economic disruption has had an adverse effect on the Company's business as customers curtailed and reduced capital and overall spending. Policymakers around the globe have responded with fiscal policy actions to support the healthcare industry and the economy as a whole. The magnitude and overall effectiveness of these actions remains uncertain. The severity of the impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company's customers, all of which are uncertain and cannot be predicted with certainty. The Company's future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions and uncertain demand, and the impact of any initiatives or programs that the Company may undertake to address financial and operations challenges faced by its customers. The COVID-19 pandemic continues to cause a financial strain on healthcare systems which varies by location, and as a result we do not expect the same level of spending in the fourth quarter that we experienced last year. 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. If the downturn is more severe and prolonged than currently expected, the Company may need to take further steps to reduce costs. 9 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) Recently Issued Accounting Standards In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) : Measurement of Credit Losses on Financial Instruments. The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets including trade receivables held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted this guidance on January 1, 2020 using a modified retrospective transition method which requires a cumulative-effect adjustment to the opening balance of retained earnings to be recognized on the date of adoption with no change to financial results reported in prior periods. The cumulative-effect adjustment recorded on January 1, 2020, is not material. The adoption of this ASU did not have a significant impact on the Company's consolidated financial statements and related disclosures. The Company's exposure to credit losses may increase if its customers are adversely affected by changes in healthcare laws, coverage, and reimbursement, economic pressures or uncertainty associated with local or global economic recessions, disruption associated with the current COVID-19 pandemic, or other customer-specific factors. Although the Company has historically not experienced significant credit losses, it is possible that there could be an adverse impact as hospital's cash flows are impacted by their response to the COVID-19 pandemic. In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans. The new guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans, including removing certain previous disclosure requirements, adding certain new disclosure requirements, and clarifying certain other disclosure requirements. The ASU will be effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The adoption is not expected to have a material impact on the Company's consolidated financial statements and related disclosures. In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) , relating to a customer's accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by a vendor (e.g., a service contract). Under the new guidance, a customer will apply the same criteria for capitalizing implementation costs as it would for an arrangement that has a software license. The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted this guidance on January 1, 2020 using a prospective transition method. The adoption of this guidance did not have a significant impact on the Company's consolidated financial statements and related disclosures. In December 2019, the FASB issued ASU No. 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 intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new 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. Adoption of the standard requires certain changes to be made prospectively, with some changes to be made retrospectively. The Company is currently assessing the impact of this standard on its financial condition and results of operations. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform , which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. This amendment applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This ASU is effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently assessing the impact that this ASU will have on its consolidated financial statements and related disclosures. In August 2020, the FASB issued ASU No. 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 10 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify. The guidance also simplifies the diluted net income per share calculation in certain areas. The ASU will be effective for annual and interim periods beginning after December 15, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently assessing the impact of this standard on its consolidated financial statements and related disclosures. There are no other recently issued accounting pronouncements that are expected to have any significant effect on the Company's financial position, results of operations or cash flows. 2. ASSETS AND LIABILITIES HELD FOR SALE On September 29, 2020, the Company and certain of its subsidiaries entered into an agreement to sell its Extremity Orthopedics business to Smith & Nephew USD Limited for approximately $ 240 million in cash. The transaction includes the sale of the Company’s upper and lower Extremity Orthopedics product portfolio, including ankle and shoulder arthroplasty and hand and wrist product lines. In connection with the transaction, the Company will pay $ 41.5 million to the Consortium of Focused Orthopedists, LLC (“CFO”) pursuant to the terms of certain agreements between Integra and CFO relating to the development of shoulder arthroplasty products. The transaction is expected to close at or around the end of 2020, subject to the satisfaction of customary conditions, including regulatory approvals and consultation with employee representative bodies. The Company considered the assets and liabilities associated with the Extremity Orthopedics business to be accounted as held-for-sale as the six criteria under ASC 260 were met during the third quarter of 2020. Upon designation of the assets and liabilities as held for sale, the Company recorded the assets at the lower of their carrying value or their estimated fair value, less estimated costs to sell. Goodwill was allocated to the assets and liabilities held for sale using the relative fair value method of the Extremity Orthopedics business to the Company's Orthopedics and Tissue Technologies reporting unit. The fair value of the business less costs to sell exceeded the related carrying value. The Extremity Orthopedics business was treated as a single disposal group and presented separately in the condensed consolidated balance sheet as assets and liabilities held for sale as of September 30, 2020 . These balances are presented as current assets and liabilities as they are expected to be sold within twelve months. The major classes of assets and liabilities classified as a held for sale consisted of the following as of September 30, 2020 (amounts in thousands): Prepaid and other current assets $ 748 Other assets 4,448 Deferred tax assets 6,927 Intangible assets 13,332 Property, plant and equipment, net 36,714 Goodwill 47,117 Inventories 50,691 Total assets held for sale $ 159,977 Other liabilities 241 Current portion of lease liability - operating leases 1,060 Accrued compensation 1,584 Deferred tax liabilities 3,035 Lease liability - operating leases 6,429 Total liabilities held for sale $ 12,349 3. BUSINESS DEVELOPMENT Arkis BioSciences Inc. On July 29, 2019, the Company acquired Arkis BioSciences Inc. ("Arkis") for an acquisition purchase price of $ 30.6 million (the "Arkis Acquisition") plus contingent consideration of up to $ 25.5 million, that may be payable based on the successful completion of certain development and commercial milestones. The contingent consideration had an acquisition date fair value of $ 13.1 million. Arkis was a privately-held company that marketed the CerebroFlo® external ventricular drainage (EVD) catheter with Endexo® technology, a permanent additive designed to reduce the potential for catheter obstruction due to thrombus formation. 11 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) Assets Acquired and Liabilities Assumed at Fair Value The Arkis 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 final fair values of the assets acquired and liabilities assumed at the acquisition date: Final Valuation as of September 30, 2019 Weighted Average Life (Dollars in thousands) Cash $ 90 Other current assets 751 Property, plant and equipment 457 Deferred tax assets 1,697 Intangible assets: CerebroFlo developed technology 20,100 15 years Enabling technology license 1,980 14 years Goodwill 27,153 Total assets acquired 52,228 Accounts payable, accrued expenses and other liabilities 2,926 Contingent consideration 13,100 Deferred tax liabilities 5,603 Net assets acquired $ 30,599 Intangible Assets The estimated fair value of the intangible assets was determined using the income approach, which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. 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 asset (including net revenues, cost of sales, R&D costs, selling and marketing costs, and working capital/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 each asset’s life cycle, and competitive trends impacting the asset and each cash flow stream. The Company used a discount rate of 14.5 % 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 Arkis Acquisition to the Codman Specialty Surgical 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. One of the key factors that contributes to the recognition of goodwill, and a driver for the Company's acquisition of Arkis, is the planned expansion of the Endexo technology with the existing products within the Codman Specialty Surgical segment. 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 resultant probability-weighted cash flows 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 Company's consolidated statement of operations. Changes in the fair value of the contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount of revenue estimates and changes in probability assumptions with respect to the likelihood of achieving the various contingent payment obligations. 12 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) As part of the acquisition, the Company is required to pay the former shareholders of Arkis up to $ 25.5 million based on the timing of certain development milestones of $ 10.0 million and commercial sales milestones of $ 15.5 million, respectively. The Company used a probability weighted income approach to calculate the fair value of the contingent consideration that considered the possible outcomes of scenarios related to each specified milestone. The Company estimated the fair value of the contingent consideration to be $ 13.1 million at the acquisition date. The estimated fair value as of September 30, 2020 was $ 14.2 million. This amount is included in other liabilities at September 30, 2020 in the consolidated balance sheets 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. The pro forma results are not presented for this acquisition as they are not material. Rebound Therapeutics Corporation On September 9, 2019, the Company acquired Rebound Therapeutics Corporation (“Rebound”), developers of a single-use medical device known as the AURORA Surgiscope® System ("Aurora") which enables minimally invasive access, using optics and illumination, for visualization, diagnostic and therapeutic use in neurosurgery (the “Rebound transaction”). Under the terms of the Rebound transaction, the Company made an upfront payment of $ 67.1 million and are committed to pay up to $ 35.0 million of contingent development milestones upon achievement of certain regulatory milestones. The acquisition of Rebound was primarily concentrated in one single identifiable asset and thus, for accounting purposes, the Company has concluded that the acquired assets do not meet the accounting definition of a business. The initial payment was allocated primarily to Aurora, resulting in a $ 59.9 million in-process research and development (IPR&D) expense. The balance of approximately $ 7.2 million, which included $ 2.1 million of cash and cash equivalents and a net deferred tax asset of $ 4.2 million, was allocated to the remaining net assets acquired. The deferred tax asset primarily resulted from a federal net operating loss carry forward. During the fourth quarter of 2019, the Company achieved the first developmental milestone which triggered a $ 5.0 million obligation to be paid to former shareholders of Rebound. The Company recorded $ 5.0 million as IPR&D expense in the consolidated statements of operations during the year ended December 31, 2019. The obligation was included in accrued expenses and other current liabilities at December 31, 2019 in the consolidated balance sheets. The milestone was paid during the first quarter of 2020. Integrated Shoulder Collaboration, Inc. On January 4, 2019, the Company entered into a licensing agreement with Integrated Shoulder Collaboration, Inc ("ISC"). Under the terms of the agreement, the Company paid ISC $ 1.7 million for the exclusive, worldwide license to commercialize its short stem and stemless shoulder system. A patent related to short stem and stemless shoulder systems was issued to ISC during the first quarter of 2019. ISC is eligible to receive royalties on sales of the short stem and stemless shoulder system. The Company has the option to acquire ISC at a date four years subsequent to the first commercial sale, which becomes mandatory upon the achievement of a certain sales thresholds of the short stem and stemless shoulder system, for an amount not to exceed $ 80.0 million. The transaction was accounted for as an asset acquisition as the Company concluded that it acquired primarily one asset. During the quarter ended March 31, 2019, the total upfront payment of $ 1.7 million was expensed as a component of research and development expense and the future milestone and option payments will be recorded if the corresponding events become probable. In connection with the sale of the Company's Extremity Orthopedic business, the Company will pay $ 41.5 million to CFO pursuant to the terms of certain agreements between Integra and CFO relating to the sale of shares of ISC which includes the development of shoulder arthroplasty products effectively terminating our licensing agreement with ISC. See Note 2, Assets and Liabilities Held for Sale, for details of the transaction. 4. REVENUES FROM CONTRACTS WITH CUSTOMERS Summary of Accounting Policies on Revenue Recognition Revenue is recognized upon the transfer of control of promised products or services to the customers in an amount that reflects the consideration the Company expects to receive in exchange for those products and services. Total revenue, net, includes product sales, product royalties and other revenues, such as fees received for services. For products shipped with FOB shipping point terms, the control of the product passes to the customer at the time of shipment. For shipments in which the control of the product is transferred when the customer receives the product, the Company recognizes revenue upon receipt by the customer. Certain products that the Company produces for private label customers have no alternative use and the Company has a right of payment for performance to date. Revenues from those products are recognized over the period 13 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) that the Company manufactures these products, which is typically one to three months . The Company uses the input method to measure the manufacturing activities completed to date, which depicts the progress of the Company's performance obligation of transferring control of goods being manufactured for private label customers. A portion of the Company's product revenue is generated from consigned inventory maintained at hospitals and distributors, and also from inventory physically held by field sales representatives. For these types of product sales, the Company retains control until the product has been used or implanted, at which time revenue is recognized. Revenues from sale of products and services are evidenced by either a contract with the customer or a valid purchase order and an invoice which includes all relevant terms of sale. For product sales, invoices are generally issued upon the transfer of control (or upon the completion of the manufacturing in the case of the private label transactions recognized over time) and are typically payable thirty days after the invoice date. The Company performs a review of each specific customer's creditworthiness and ability to pay prior to acceptance as a customer. Further, the Company performs periodic reviews of its customers' creditworthiness prospectively. Performance Obligations The Company's performance obligations consist mainly of transferring control of goods and services identified in the contracts, purchase orders, or invoices. The Company has no significant multi-element contracts with customers. Significant Judgments Usage-based royalties and licenses are estimated based on the provisions of contracts with customers and recognized in the same period that the royalty-based products are sold by the Company and the Company's strategic partners. The Company estimates and recognizes royalty revenue based upon communication with licensees, historical information, and expected sales trends. Differences between actual reported licensee sales and those that were estimated are adjusted in the period in which they become known, which is typically the following quarter. Historically, such adjustments have not been significant. The Company estimates returns, price concessions, and discount allowances using the expected value method based on historical trends and other known factors. Rebate allowances are estimated using the most likely method based on each customer contract. The Company's return policy, as set forth in its product catalogs and sales invoices, requires review and authorization in advance prior to the return of product. Upon the authorization, a credit will be issued for the goods returned within a set amount of days from the shipment, which is generally ninety days . The Company disregards the effects of a financing component if the Company expects, at contract inception, that the period between the transfer and customer payment for the goods or services will be one year or less. The Company has no significant revenues recognized on payments expected to be received more than one year after the transfer of control of products or services to customers. Contract Asset and Liability Revenues recognized from the Company's private label business that are not invoiced to the customers as a result of recognizing revenue over time are recorded as a contract asset included in the prepaid expenses and other current assets account in the consolidated balance sheet. Other operating revenues may include fees received under service agreements. Non-refundable fees received under multiple-period service agreements are recognized as revenue as the Company satisfies the performance obligations to the other party. A portion of the transaction price allocated to the performance obligations to be satisfied in the future periods is recognized as contract liability. 14 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) The following table summarizes the changes in the contract asset and liability balances for the nine months ended September 30, 2020 : Contract Asset Contract asset, January 1, 2020 $ 8,680 Transferred to trade receivable of contract asset included in beginning of the year contract asset ( 8,680 ) Contract asset, net of transferred to trade receivables on contracts during the period 6,653 Contract asset, September 30, 2020 $ 6,653 Contract Liability Contract liability, January 1, 2020 $ 11,946 Recognition of revenue included in beginning of year contract liability ( 3,150 ) Contract liability, net of revenue recognized on contracts during the period 2,631 Foreign currency translation ( 42 ) Contract liability, September 30, 2020 $ 11,385 At September 30, 2020 , the short-term portion of the contract liability of $ 4.9 million and the long-term portion of $ 6.5 million were included in accrued expenses and other current liabilities and other liabilities in the consolidated balance sheet. As of September 30, 2020 , the Company is expected to recognize approximately 43 % of unsatisfied (or partially unsatisfied) performance obligations as revenue through 2020, with the remaining balance to be recognized in 2021 and 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. 15 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 nine months ended September 30, 2020 and 2019 (amounts in thousands): Three Months Ended September 30, 2020 Three Months Ended September 30, 2019 Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019 Neurosurgery $ 189,674 $ 195,330 $ 516,048 $ 567,779 Instruments 49,649 57,654 124,493 169,031 Total Codman Specialty Surgical 239,323 252,984 640,541 736,810 Wound Reconstruction and Care 82,115 82,213 210,673 239,458 Extremity Orthopedics 21,922 20,852 54,556 65,299 Private Label 26,872 23,046 77,451 80,863 Total Orthopedics and Tissue Technologies 130,909 126,111 342,680 385,620 Total revenue $ 370,232 $ 379,095 $ 983,221 $ 1,122,430 Prior period amounts were reclassified between categories within the Codman Specialty Surgical segment to conform to the current period presentation. See Note 16, Segment and Geographical Information , for details of revenues based on the location of the customer. 5. INVENTORIES Inventories, net consisted of the following: September 30, 2020 December 31, 2019 (In thousands) Finished goods $ 223,726 $ 201,870 Work in process 57,037 48,333 Raw materials 77,767 $ 65,851 Transfer to assets held for sale (See Note 2. Assets Held for Sale ) ( 50,691 ) — Total inventories $ 307,839 $ 316,054 6. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill Changes in the carrying amount of goodwill for the nine -month period ended September 30, 2020 were as follows: Codman Specialty Surgical Orthopedics and Tissue Technologies Total (In thousands) Goodwill at December 31, 2019 $ 653,500 $ 300,780 $ 954,280 Transfer to assets held for sale (See Note 2. Assets Held for Sale ) — ( 47,117 ) ( 47,117 ) Foreign currency translation 8,928 3,465 12,393 Goodwill at September 30, 2020 $ 662,428 $ 257,128 $ 919,556 16 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) The components of the Company’s identifiable intangible assets were as follows: September 30, 2020 Weighted Average Life Cost Accumulated Amortization Net (Dollars in thousands) Completed technology 19 years $ 891,554 $ ( 250,609 ) $ 640,945 Customer relationships 12 years 223,512 ( 138,989 ) 84,523 Trademarks/brand names 28 years 104,404 ( 31,425 ) 72,979 Codman tradename Indefinite 167,013 — 167,013 Supplier relationships 27 years 34,721 ( 19,018 ) 15,703 All other (1) 4 years 11,101 ( 5,247 ) 5,854 Transfer to assets held for sale (See Note 2. Assets Held for Sale ) ( 39,821 ) 26,489 ( 13,332 ) $ 1,392,484 $ ( 418,799 ) $ 973,685 December 31, 2019 Weighted Average Life Cost Accumulated Amortization Net (Dollars in thousands) Completed technology 19 years $ 880,623 $ ( 213,702 ) $ 666,921 Customer relationships 12 years 222,575 ( 119,393 ) 103,182 Trademarks/brand names 28 years 103,873 ( 28,514 ) 75,359 Codman tradename Indefinite 163,126 — 163,126 Supplier relationships 27 years 34,721 ( 17,947 ) 16,774 All other (1) 4 years 10,869 ( 4,640 ) 6,229 $ 1,415,787 $ ( 384,196 ) $ 1,031,591 (1) At September 30, 2020 and December 31, 2019 , all other included IPR&D of $ 1.0 million, which was indefinite-lived. At September 30, 2020, this IPR&D asset was presented separately as "assets held for sale" in conjunction with the sale of the Extremity Orthopedics business which is expected to be sold within twelve months. See Note 2, Assets and Liabilities Held for Sale , for details. Goodwill and Intangible Assets with Indefinite Lives The Company tests goodwill and intangible assets with indefinite lives for impairment annually in the third quarter in accordance with ASC Topic 350. Additionally, the Company may perform interim tests if an event occurs or circumstances change that could potentially reduce the fair value of a reporting unit or indefinite lived intangible asset below its carrying amount. The carrying value of each reporting unit is determined by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. The Company tests goodwill for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors, including reporting unit specific operating results as well as industry, market and general economic conditions, to determine whether it is more likely than not that the fair values of a reporting unit is less than its carrying amount, including goodwill. The Company may elect to bypass this qualitative evaluation for some or all of its reporting units and perform a quantitative test. During the third quarter of 2020, the Company began with the qualitative evaluation, which was sufficient to find no impairment. For intangible assets with indefinite lives, the Company elected to bypass the qualitative evaluation for its Codman tradename intangible asset and perform a quantitative test during the third quarter 2020. In performing this test, the Company utilized a discount rate of 11.5 % . The assumptions used in evaluating the Codman tradename for impairment are subject to change and are tracked against historical results by management. Based on the results of the quantitative test, the Company recorded no impairment to the Codman tradename intangible asset. 17 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) Based on quarter-end exchange rates, amortization expense (including amounts reported in cost of product revenues) is expected to be approximately $ 15.7 million for the remainder of 2020 , $ 62.1 million in 2021 , $ 59.7 million in 2022 , $ 58.9 million in 2023 , $ 58.4 million in 2024 , $ 58.4 million in 2025 and $ 494.9 million thereafter. 7. DEBT Amendment to the Sixth Amended and Restated Senior Credit Agreement On February 3, 2020, the Company entered into the sixth amendment and restatement (the "February 2020 Amendment") of its Senior Credit Facility (the "Senior Credit Facility") with a syndicate of lending banks with Bank of America, N.A., as Administrative Agent. The February 2020 Amendment extended the maturity date to February 3, 2025. The Company continues to have the aggregate principal amount of up to approximately $ 2.2 billion available to it through the following facilities: (i) a $ 877.5 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. On July 14, 2020, the Company entered into an amendment (the "July 2020 Amendment") to the February 2020 Amendment of the Senior Credit Facility to increase financial flexibility in light of the unprecedented impact and uncertainty of the COVID-19 pandemic on the global economy. The July 2020 amendment does not increase the Company’s total indebtedness. In connection with the July 14, 2020 amendment, the Company’s maximum consolidated total leverage ratio in the financial covenants (as defined in the Senior Credit Facility) was modified to the following: Fiscal Quarter Maximum Consolidated Total Leverage Ratio Execution of July 2020 Amendment through June 30, 2021 5.50 to 1.00 September 30, 2021 through June 30, 2022 5.00 to 1.00 September 30, 2022 through June 30, 2023 4.50 to 1.00 September 30, 2023 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. the Eurodollar Rate (as defined in the amendment and restatement) in effect from time to time plus the applicable rate (ranging from 1.00 % to 2.25 % ), 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 Eurodollar Rate 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 July 2020 amendment, 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 September 30, 2020 , the Company was in compliance with all such covenants. In connection with the February 2020 Amendment, the Company capitalized $ 4.6 million of financing costs in connection with modification of the Senior Credit Facility and wrote off $ 1.2 million of previously capitalized financing costs during the first quarter of 2020. In connection with the July 2020 amendment, the Company expensed $ 3.3 million of incremental financing costs in connection with the modification of the Senior Credit Facility during the third quarter of 2020. At September 30, 2020 and December 31, 2019 , there was $ 97.5 million and $ 375.0 million outstanding, respectively, under the revolving credit component of the Senior Credit Facility at weighted average interest rates of 1.5 % and 3.2 % , respectively. At September 30, 2020 and December 31, 2019 , there was $ 877.5 million outstanding, respectively, under the Term Loan component of the Senior Credit Facility at a weighted average interest rate of 1.5 % and 3.2 % , respectively. At September 30, 2020 , $ 22.5 18 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) million of the Term Loan component of the Senior Credit Facility is classified as current on the consolidated balance sheet as the first mandatory repayment is due June 30, 2021. The fair value of outstanding borrowings of the Senior Credit Facility's revolving credit and Term Loan components at September 30, 2020 were $ 94.6 million and $ 853.7 million , respectively. These fair values were determined by using a discounted cash flow model based on current market interest rates available to the Company. These inputs are corroborated by observable market data for similar liabilities and therefore classified within Level 2 of the fair value hierarchy. Level 2 inputs represent inputs that are observable for the asset or liability, either directly or indirectly, and are other than active market observable inputs that reflect unadjusted quoted prices for identical assets or liabilities. Letters of credit outstanding as of September 30, 2020 and December 31, 2019 totaled $ 1.6 million and $ 0.8 million . There were no amounts drawn as of September 30, 2020 . Contractual repayments of the Term Loan component of the Senior Credit Facility are due as follows: Quarter Ended September 30, 2020 Principal Repayment (In thousands) Remainder of 2020 $ — 2021 33,750 2022 45,000 2023 61,875 2024 67,500 2025 669,375 $ 877,500 The outstanding balance of the revolving credit component of the Senior Credit Facility is due on February 3, 2025. 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 Notes. The portion of debt proceeds that was classified as equity at the time of the offering was $ 104.5 million , and that amount is being amortized to interest expense using the effective interest method through August 2025. The effective interest rate implicit in the liability component is 4.2 % . In connection with this offering, the Company capitalized $ 13.2 million of financing fees. At September 30, 2020 , the carrying amount of the liability component was $ 481.5 million, the remaining unamortized discount was $ 93.5 million, and the principal amount outstanding was $ 575.0 million. The fair value of the 2025 Notes at September 30, 2020 was $ 541.8 million . 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 $1000 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) at any time on or after February 20, 2023; or (4) if specified corporate transactions occur. As of September 30, 2020 , none of these conditions existed with respect to the 2025 Notes and as a result the 2025 Notes are classified as long term. 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 19 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) Notes. The initial strike price of the warrant transactions was $ 113.34 for the 2025 Notes, subject to customary anti-dilution adjustments. During the nine months ended September 30, 2020 , the Company recognized cash interest related to the contractual interest coupon of $ 1.9 million and amortization of the discount on the liability component of $ 11.1 million for a total interest charge of $ 13.0 million on the 2025 Notes. Securitization Facility During the fourth quarter of 2018, the Company entered into an accounts receivable securitization facility (the "Securitization Facility") under which accounts receivable of certain domestic subsidiaries are sold on a non-recourse basis to a special purpose entity (“SPE”), which is a bankruptcy-remote, consolidated subsidiary of the Company. Accordingly, the assets of the SPE are not available to satisfy the obligations of the Company or any of its subsidiaries. From time to time, the SPE may finance such accounts receivable with a revolving loan facility secured by a pledge of such accounts receivable. The amount of outstanding borrowings on the Securitization Facility at any one time is limited to $ 150.0 million . The Securitization Facility Agreement ("Securitization Agreement") is for an initial three-year term and may be extended. The 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 September 30, 2020 , the Company was in compliance with the covenants and none of the termination events had occurred. At September 30, 2020 and December 31, 2019 , the Company had $ 92.3 million and $ 104.5 million , respectively, of outstanding borrowings under its Securitization Facility at a weighted average interest rate of 1.4 % and 2.8 % , respectively. The fair value of the outstanding borrowing of the Securitization Facility at September 30, 2020 was $ 92.8 million . 8. 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 LIBOR-indexed floating-rate borrowings. The Company held the following interest rate swaps as of September 30, 2020 and December 31, 2019 (dollar amounts in thousands): September 30, 2020 December 31, 2019 September 30, 2020 December 31, 2019 Hedged Item Notional Amount Notional Amount Designation Date Effective Date Termination Date Fixed Interest Rate Estimated Fair Value Asset (Liability) 3-month USD LIBOR Loan — 50,000 February 6, 2017 June 30, 2017 June 30, 2020 1.834 % $ — $ ( 2 ) 1-month USD LIBOR Loan — 100,000 February 6, 2017 June 30, 2017 June 30, 2020 1.652 % — 12 1-month USD LIBOR Loan 100,000 100,000 March 27, 2017 December 31, 2017 June 30, 2021 1.971 % ( 1,377 ) ( 581 ) 1-month USD LIBOR Loan 150,000 150,000 December 13, 2017 January 1, 2018 December 31, 2022 2.201 % ( 6,901 ) ( 2,880 ) 1-month USD LIBOR Loan 150,000 150,000 December 13, 2017 January 1, 2018 December 31, 2022 2.201 % ( 6,922 ) ( 2,880 ) 1-month USD LIBOR Loan 100,000 100,000 December 13, 2017 July 1, 2019 June 30, 2024 2.423 % ( 8,454 ) ( 3,517 ) 1-month USD LIBOR Loan 50,000 50,000 December 13, 2017 July 1, 2019 June 30, 2024 2.423 % ( 4,064 ) ( 1,778 ) 1-month USD LIBOR Loan 200,000 200,000 December 13, 2017 January 1, 2018 December 31, 2024 2.313 % ( 18,188 ) ( 6,595 ) 1-month USD LIBOR Loan 75,000 75,000 October 10, 2018 July 1, 2020 June 30, 2025 3.220 % ( 10,608 ) ( 5,750 ) 1-month USD LIBOR Loan 75,000 75,000 October 10, 2018 July 1, 2020 June 30, 2025 3.199 % ( 10,871 ) ( 5,747 ) 1-month USD LIBOR Loan 75,000 75,000 October 10, 2018 July 1, 2020 June 30, 2025 3.209 % ( 10,586 ) ( 5,807 ) 1-month USD LIBOR Loan 100,000 100,000 December 18, 2018 December 30, 2022 December 31, 2027 2.885 % ( 11,282 ) ( 4,930 ) 1-month USD LIBOR Loan 100,000 100,000 December 18, 2018 December 30, 2022 December 31, 2027 2.867 % ( 11,127 ) ( 4,691 ) Total interest rate derivatives designated as cash flow hedge $ 1,175,000 $ 1,325,000 $ ( 100,380 ) $ ( 45,145 ) 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 loss (“AOCL”), 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 AOCL to interest expense at that time. 20 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 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 AOCL, net of tax, until the hedged item affects earnings. Once the related hedged item affects earnings, the Company reclassifies amounts recorded in AOCL to earnings. If the hedged forecasted transaction does not occur, or if it becomes probable that it will not occur, the Company will reclassify the amount of any gain or loss on the related cash flow hedge to earnings at that time. For contracts not designated as hedging instruments, the changes in fair value of the contracts are recognized in other income (expense), net in the consolidated statements of operation, along with the offsetting foreign currency gain or loss on the underlying assets or liabilities. The success of the Company’s hedging program depends, in part, on forecasts of certain activity denominated in foreign currency. The Company may experience unanticipated currency exchange gains or losses to the extent that there are differences between forecasted and actual activities during periods of currency volatility. In addition, changes in currency exchange rates related to any unhedged transactions may affect earnings and cash flows. Cross-Currency Rate Swaps On October 2, 2017, the Company entered into cross-currency swap agreements to convert a notional amount of $ 300.0 million equivalent to 291.2 million of CHF denominated intercompany loans into U.S. dollars. The CHF-denominated intercompany loans were the result of the purchase of intellectual property by a subsidiary in Switzerland as part of an acquisition. The objective of these cross-currency swaps is to reduce volatility of earnings and cash flows associated with changes in the foreign currency exchange rate. Under the terms of these contracts, which have been designated as cash flow hedges, the Company will make interest payments in Swiss Francs and receive interest in U.S. dollars. Upon the maturity of these contracts, the Company will pay the principal amount of the loans in Swiss Francs and receive U.S. dollars from the counterparties. The Company held the following cross-currency rate swaps as of September 30, 2020 and December 31, 2019 (dollar amounts in thousands): September 30, 2020 December 31, 2019 Effective Date Termination Date Fixed Rate Aggregate Notional Amount Fair Value Asset (Liability) Pay CHF October 2, 2017 October 2, 2020 1.75 % CHF 32,355 $ ( 1,565 ) $ ( 101 ) Receive U.S.$ 4.38 % $ 33,333 Pay CHF October 2, 2017 October 2, 2021 1.85 % CHF 48,533 ( 2,003 ) ( 119 ) Receive U.S.$ 4.46 % $ 50,000 Pay CHF October 2, 2017 October 2, 2022 1.95 % CHF 145,598 ( 4,167 ) ( 289 ) Receive U.S.$ 4.52 % $ 150,000 Total $ ( 7,735 ) $ ( 509 ) On October 2, 2020 in accordance with the termination date, the Company settled a cross-currency swap designated as a cash flow hedge of an intercompany loan with an aggregate notional amount of $ 33.3 million . The 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 AOCL. For the three and nine months ended September 30, 2020 , the Company recorded losses of $ 6.9 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 gains recognized on the intercompany loans. For the three and nine months ended September 30, 2019 , the Company recorded gains of $ 5.7 million and $ 3.9 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 nine months ended September 30, 2020 , the Company recorded a loss of $ 6.3 million and a gain of $ 2.7 million in AOCL, respectively, related to change in fair value of the cross-currency swaps. For the three and nine months ended September 30, 2019 , the Company recorded gains of $ 9.7 million and $ 15.4 million in AOCL, respectively, related to change in fair value of the cross-currency swaps. For the three and nine months ended September 30, 2020 , the Company recorded gains of $ 1.5 million and $ 4.5 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 nine months ended September 30, 2019 , the Company recorded gains of $ 1.8 million and 21 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) $ 5.5 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 gain that is expected to be reclassified to other income (expense), net from AOCL as of September 30, 2020 within the next twelve months is $ 3.0 million . As of September 30, 2020 , the Company does not expect any gains or losses will be reclassified into earnings as a result of the discontinuance of these cash flow hedges because the original forecasted transaction will not occur. Net Investment Hedges The Company manages certain foreign exchange risks through a variety of strategies, including hedging. The Company is exposed to foreign exchange risk 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, the Company entered into cross-currency swap agreements designated as net investment hedges to partially offset the effects of foreign currency on foreign subsidiaries. The Company held the following cross-currency rate swaps designated as net investment hedges as of September 30, 2020 and December 31, 2019 , respectively (dollar amounts in thousands): September 30, 2020 December 31, 2019 Effective Date Termination Date Fixed Rate Aggregate Notional Amount Fair Value Asset (Liability) Pay EUR October 3, 2018 September 30, 2021 — % EUR 44,859 $ 589 $ 2,459 Receive U.S.$ 3.01 % $ 52,000 Pay EUR October 3, 2018 September 30, 2023 — % EUR 51,760 2,443 3,087 Receive U.S.$ 2.57 % $ 60,000 Pay EUR October 3, 2018 September 30, 2025 — % EUR 38,820 2,398 2,032 Receive U.S.$ 2.19 % $ 45,000 Pay GBP October 3, 2018 September 30, 2025 1.67 % GBP 128,284 8,580 ( 154 ) Receive U.S.$ 2.71 % $ 167,500 Pay CHF October 3, 2018 September 30, 2025 — % CHF 165,172 ( 6,828 ) 1,221 Receive GBP 1.67 % GBP 128,284 Total $ 7,182 $ 8,645 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 AOCL. For the three and nine months ended September 30, 2020 , the Company recorded loss of $ 11.3 million and a gain of $ 5.1 million in AOCL related to the change in fair value of the cross-currency swaps. For the three and nine months ended September 30, 2019 , the Company recorded gains of $ 17.1 million and $ 26.6 million in AOCL related to the change in fair value of the cross-currency swaps. For the three and nine months ended September 30, 2020 , the Company recorded gains of $ 2.2 million and $ 6.6 million 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 nine months ended September 30, 2019 , the Company recorded gains of $ 2.5 million and $ 7.2 million , respectively, in interest income included in the consolidation 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 AOCL as of September 30, 2020 within the next twelve months is $ 7.7 million . Counterparty Credit Risk The Company manages its concentration of counterparty credit risk on its derivative instruments by limiting acceptable counterparties to a group of major financial institutions with investment grade credit ratings, and by actively monitoring their credit ratings and outstanding positions on an ongoing basis. Therefore, the Company considers the credit risk of the counterparties to be low. Furthermore, none of the Company’s derivative transactions are subject to collateral or other security arrangements, and none contain provisions that depend upon the Company’s credit ratings from any credit rating agency. 22 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) Fair Value of Derivative Instruments The Company has classified all of its derivative instruments within Level 2 of the fair value hierarchy because observable inputs are available for substantially the full term of the derivative instruments. The fair values of the interest rate swaps and cross-currency swaps were developed using a market approach based on publicly available market yield curves and the terms of the swap. The Company performs ongoing assessments of counterparty credit risk. The following table summarizes the fair value for derivatives designated as hedging instruments in the condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019 : Fair Value as of Location on Balance Sheet (1) : September 30, 2020 December 31, 2019 (In thousands) Derivatives designated as hedges — Assets: Prepaid expenses and other current assets Cash Flow Hedges Interest rate swap $ — $ 12 Cross-currency swap 4,608 5,032 Net Investment Hedges Cross-currency swap 7,717 7,952 Other assets Net Investment Hedges Cross-currency swap 9,071 3,465 Total derivatives designated as hedges — Assets $ 21,396 $ 16,461 Derivatives designated as hedges — Liabilities: Accrued expenses and other current liabilities Cash Flow Hedges Interest rate swap $ 22,324 $ 6,635 Cross-currency swap 1,565 101 Other liabilities Cash Flow Hedges Interest rate swap 78,056 38,522 Cross-currency swap 10,777 5,440 Net Investment Hedges Cross-currency swap 9,605 2,772 Total derivatives designated as hedges — Liabilities $ 122,327 $ 53,470 (1) The Company classifies derivative assets and liabilities as non-current based on the cash flows expected to be incurred within the following 12 months. 23 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) The following presents the effect of derivative instruments designated as cash flow hedges on the accompanying condensed consolidated statement of operations during the three and nine months ended September 30, 2020 and 2019 : Balance in AOCL Beginning of Quarter Amount of Gain (Loss) Recognized in AOCL Amount of Gain (Loss) Reclassified from AOCL into Earnings Balance in AOCL End of Quarter Location in Statements of Operations (In thousands) Three Months Ended September 30, 2020 Cash Flow Hedges Interest rate swap $ ( 102,128 ) $ ( 3,971 ) $ ( 5,718 ) $ ( 100,381 ) Interest expense Cross-currency swap 5,843 ( 6,272 ) ( 5,353 ) 4,924 Other income (expense),net Net Investment Hedges Cross-currency swap 22,223 ( 11,254 ) 2,202 8,767 Interest income $ ( 74,062 ) $ ( 21,497 ) $ ( 8,869 ) $ ( 86,690 ) Three Months Ended September 30, 2019 Cash Flow Hedges Interest rate swap $ ( 43,161 ) $ ( 13,788 ) $ 237 $ ( 57,186 ) Interest expense Cross-currency swap ( 2,284 ) 9,661 7,520 ( 143 ) Other income (expense),net Net Investment Hedges Cross-currency swap 4,054 17,136 2,489 18,701 Interest income $ ( 41,391 ) $ 13,009 $ 10,246 $ ( 38,628 ) Balance in AOCL Beginning of Year Amount of Gain (Loss) Recognized in AOCL Amount of Gain (Loss) Reclassified from AOCL into Earnings Balance in AOCL End of Quarter Location in Statements of Operations (In thousands) Nine Months Ended September 30, 2020 Cash Flow Hedges Interest rate swap $ ( 45,146 ) $ ( 65,608 ) $ ( 10,373 ) $ ( 100,381 ) Interest expense Cross-currency swap 177 ( 2,688 ) ( 7,435 ) 4,924 Other income (expense),net Net Investment Hedges Cross-currency swap 10,229 5,102 6,564 8,767 Interest income $ ( 34,740 ) $ ( 63,194 ) $ ( 11,244 ) $ ( 86,690 ) Nine months ended September 30, 2019 Cash Flow Hedges Interest rate swap $ 619 $ ( 54,841 ) $ 2,964 $ ( 57,186 ) Interest expense Cross-currency swap ( 6,190 ) 15,418 9,371 ( 143 ) Other income (expense), net Net Investment Hedges Cross-currency swap ( 632 ) 26,558 7,225 18,701 Interest income $ ( 6,203 ) $ ( 12,865 ) $ 19,560 $ ( 38,628 ) 9. STOCK-BASED COMPENSATION As of September 30, 2020 , the Company had stock options, restricted stock awards, performance stock units, contract stock awards and restricted stock unit awards outstanding under two plans, the 2001 Equity Incentive Plan (the “2001 Plan”) and the 2003 Equity Incentive Plan (the “2003 Plan,” and collectively, the “Plans”). Stock options issued under the Plans become exercisable over specified periods, generally within four years from the date of grant for officers and employees, and within one year from date of grant for directors and generally expire eight years from the grant 24 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) date for employees, and from six to ten years for directors and certain executive officers. The Company values stock option grants using the binomial distribution model. Restricted stock issued under the Plans vests over specified periods, generally three years after the date of grant. The vesting of performance stock issued under the Plans is subject to service and performance conditions. Stock Options As of September 30, 2020 , there were approximately $ 6.0 million of total unrecognized compensation costs related to unvested stock options. These costs are expected to be recognized over a weighted-average period of approximately three years . There were 348,587 stock options granted during the nine months ended September 30, 2020 . For the nine months ended September 30, 2020 , the weighted average grant date fair value for stock options was $ 13.03 per option. Awards of Restricted Stock and Performance Stock Performance stock and restricted stock awards generally have requisite service periods of three years . Performance stock units are subject to graded vesting conditions based on revenue goals of the Company. The Company expenses the fair value of restricted stock awards on a straight-line basis over the requisite service period. As of September 30, 2020 , there was approximately $ 27.5 million of total unrecognized compensation costs related to these unvested awards. The Company expects to recognize these costs over a weighted-average period of approximately two years . The Company granted 322,485 restricted stock awards and 180,875 performance stock awards during the nine months ended September 30, 2020 . For the nine months ended September 30, 2020 , the weighted average grant date fair value for restricted stock awards and performance stock units was $ 44.08 and $ 43.39 per award, respectively. The Company also maintains an Employee Stock Purchase Plan (the “ESPP”), which provides eligible employees with the opportunity to acquire shares of common stock at periodic intervals by means of accumulated payroll deductions. The ESPP is a non-compensatory plan based on its terms. 10. RETIREMENT PLANS The Company maintains defined benefit pension plans that cover certain employees in France, Japan, Germany and Switzerland. Net periodic benefit costs for the Company’s defined benefit pension plans for the three and nine months ended September 30, 2020 were $ 1.0 million and $ 3.0 million, respectively. The components of the net periodic benefit costs other than the service cost component of $ 1.0 million and $ 2.9 million for the three and nine months ended September 30, 2020 , respectively, are included in other income (expense), net in the consolidated statements of operations. Net periodic benefit costs for the Company’s defined benefit pension plans for the three and nine months ended September 30, 2019 was $ 1.0 million and $ 2.1 million, respectively. The components of the net periodic benefit costs other than the service cost component of $ 0.7 million and $ 2.0 million for the three and nine months ended September 30, 2019 , respectively, are included in other income (expense), net in the consolidated statements of operations. The estimated fair values of plan assets were $ 33.2 million and $ 30.8 million as of September 30, 2020 and December 31, 2019 , respectively. The net plan assets of the pension plans are invested in common trusts as of September 30, 2020 and December 31, 2019 . Common trusts are classified as Level 2 in the fair value hierarchy. The fair value of common trusts is valued at the net asset value based on the fair values of the underlying investments of the trusts as determined by the sponsor of the trusts. The investment strategy of the Company's defined benefit plans is both to meet the liabilities of the plans as they fall due and to maximize the return on invested assets within an appropriate risk profile. Deferred Compensation Plan In May 2019, the Company adopted the Integra LifeSciences Deferred Compensation Plan (the “Plan”). Under the Plan, certain employees of the Company may defer the payment and taxation of up to 75 % of their base salary and up to 100 % of bonus amounts and other eligible cash compensation. During the first quarter of 2020, employees participating in the Plan began to defer their compensation. This deferred compensation is invested in funds offered under the Plan and is valued based on Level 1 measurements in the fair value hierarchy. The purpose of the Plan is to retain key employees by providing them with an opportunity to defer a portion of their compensation as elected by the participant in accordance with the Plan. Any amounts set aside to defray the liabilities assumed by the Company will remain the general assets of the Company until such amounts are distributed to the participants. Assets of the Company's deferred compensation plan are included in Other current assets and recorded at fair value based on their quoted market prices. The fair value of these assets at September 30, 2020 was $ 1.7 million. Offsetting liabilities relating to the deferred compensation plan are included in Other liabilities. 25 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 11. LEASES AND RELATED PARTY LEASES The Company leases administrative, manufacturing, research and distribution facilities and vehicles through operating lease agreements. The Company has no finance leases as of September 30, 2020 . Many of the Company's leases include both lease (e.g., fixed payments including rent) and non-lease components (e.g., common-area or other maintenance costs). For vehicles, the Company has elected the practical expedient to group lease and non-lease components. Most facility leases include one or more options to renew. The exercise of lease renewal options is typically at the Company's sole discretion, therefore, the majority of renewals to extend the lease terms are not included in the Right of Use ("ROU") assets and lease liabilities as they are not reasonably certain of exercise. The Company regularly evaluates renewal options and when they are reasonably certain of exercise, the renewal period is included in the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses a collateralized incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. Total operating lease expense for the nine months ended September 30, 2020 and September 30, 2019 , was $ 14.6 million and $ 14.2 million respectively, which includes $ 0.2 million , in related party operating lease expense. Supplemental balance sheet information related to operating leases at September 30, 2020 were as follows: September 30, 2020 (In thousands, except lease term and discount rate) Weighted average remaining lease term (in years): Leased facilities 11.8 Leased vehicles 1.4 Weighted average discount rate: Leased facilities 4.6 % Leased vehicles 2.2 % Supplemental cash flow information related to leases for the nine months ended September 30, 2020 and September 30, 2019 were as follows: September 30, 2020 September 30, 2019 (In thousands) (In thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 10,976 $ 10,680 ROU assets obtained in exchange for lease liabilities: Operating leases $ 6,007 $ 41,860 26 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) Future minimum lease payments under operating leases at September 30, 2020 were as follows: Related Parties Third Parties Total (In thousands) 2020 $ 74 $ 3,742 $ 3,816 2021 296 13,209 13,505 2022 296 13,224 13,520 2023 296 10,782 11,078 2024 296 9,996 10,292 Thereafter 1,426 86,750 88,176 Total minimum lease payments $ 2,684 $ 137,703 $ 140,387 Less: Imputed interest 39,091 Total lease liabilities 101,296 Less: Current lease liabilities 12,518 Long-term lease liabilities 88,778 Related Party Leases The Company leases its manufacturing facility in Plainsboro, New Jersey, from a general partnership that is 50 % owned by a corporation whose shareholders are trusts, whose beneficiaries include family members of the Company’s principal stockholder and former director. The term of the current lease agreement is through October 31, 2029 at an annual rate of approximately $ 0.3 million per year. The current lease agreement also provides (i) a 5 -year renewal option for the Company to extend the lease from November 1, 2029 through October 31, 2034 at the fair market rental rate of the premises, and (ii) another 5 -year renewal option to extend the lease from November 1, 2034 through October 31, 2039 at the fair market rental rate of the premises. 12. TREASURY STOCK As of September 30, 2020 and December 31, 2019 , there were 4.9 million and 2.9 million shares of treasury stock outstanding with a cost of $ 235.2 million and $ 119.9 million, at a weighted average cost per share of $ 47.86 and $ 41.87 , respectively. On December 11, 2018, the board of directors of the Company (the “Board”) authorized the Company to repurchase up to $ 225.0 million of the Company’s common stock. The program allows the Company to repurchase its shares opportunistically from time to time. The repurchase authorization expires in December 2020. During the nine months ended September 30, 2020 , the Company repurchased 2.1 million shares of Integra’s common stock as part of the existing share repurchase authorization. The Company utilized $ 100.0 million of net proceeds from the offering of the Convertible Senior Notes to execute the share repurchase transactions. This included $ 7.6 million from certain purchasers of the convertible notes in conjunction with the closing of the offering. On February 5, 2020, the Company entered into a $ 92.4 million accelerated share repurchase ("ASR") to complete the remaining $ 100.0 million of share repurchase. The Company received 1.3 million shares at inception of the ASR, which represented approximately 80 % of the expected total shares. Upon settlement of the ASR in June 2020, the Company received an additional 0.6 million shares determined using the volume-weighted average price of the Company's common stock during the term of the transaction. The Company has $ 125.0 million remaining under the share repurchase of its Common Stock. The price and timing of any future purchases under the share repurchase program will depend on factors such as levels of cash generation from operations, the volume of stock option exercises by employees, cash requirements for acquisitions, dividends, economic and market conditions and stock price. 13. INCOME TAXES The following table provides a summary of the Company's effective tax rate: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Reported tax rate 22.1 % ( 0.4 )% 24.6 % ( 3.5 )% 27 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) The Company’s effective income tax rates for the three months ended September 30, 2020 and 2019 were 22.1 % and ( 0.4 )% , respectively. For the three months ended September 30, 2020 , the primary drivers of the higher tax rate are the jurisdictional mix of income along with a $ 4.2 million recognition of a deferred tax liability related to an outside tax basis from the sale of the Extremity Orthopedics business, offset by a $ 3.2 million benefit from the reversal of the French valuation allowance. For the three months ended September 30, 2019 , the rate was primarily driven by the impact of the Rebound transaction, which resulted in a $ 59.9 million IPR&D expense. This amount was not deductible for tax purposes. The Company's effective income tax rates for the nine months ended September 30, 2020 and September 30, 2019 were 24.6 % and ( 3.5 )% , respectively. For the nine months ended September 30, 2020 , the primary drivers of the higher tax rate are the jurisdictional mix of income along with a $ 4.2 million recognition of a deferred tax liability related to an outside tax basis from the sale of the Extremity Orthopedics business. For the nine months ended September 30, 2019 , the primary driver of the tax rate is the impact of the Rebound transaction, which resulted in a $ 59.9 million IPR&D expense. This amount is not deductible for tax purposes. This was offset by a tax benefit of $ 10.8 million related to a federal tax holiday in Switzerland, which was finalized during the quarter ended March 31, 2019. The Company received a federal tax credit in Switzerland of 12 million CHF, which may be used over a seven year period, ending in 2024. As of September 30, 2020 , the Company has not provided deferred income taxes on unrepatriated earnings from foreign subsidiaries as they are deemed indefinitely reinvested. Such taxes would primarily be attributable to foreign withholding taxes and local income taxes when such earnings are distributed. As such, the Company has determined the tax impact of repatriating these earnings would not be material as of September 30, 2020 . The Company does not anticipate the need to repatriate earnings from foreign subsidiaries as a result of the impact of the COVID-19 pandemic. On March 27, 2020, the Coronavirus Aid Relief, and Economic Security Act (CARES Act) was signed into law. The CARES Act included certain income tax provisions for corporations and individuals, among other provisions. The Company does not expect the CARES Act provisions to have a significant impact on the Company's income taxes. The Company continues to monitor the issuance of new legislation, regulations, and case law that may impact federal, state, and international tax positions. 14. NET INCOME (LOSS) PER SHARE Basic and diluted net income (loss) per share was as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In thousands, except per share amounts) (In thousands, except per share amounts) Basic net income (loss) per share: Net income (loss) $ 32,337 $ ( 27,610 ) $ 41,148 $ 34,882 Weighted average common shares outstanding 84,325 85,688 84,745 85,536 Basic net income (loss) per common share $ 0.38 $ ( 0.32 ) $ 0.49 $ 0.41 Diluted net income (loss) per share: Net income (loss) $ 32,337 $ ( 27,610 ) $ 41,148 $ 34,882 Weighted average common shares outstanding — Basic 84,325 85,688 84,745 85,536 Effect of dilutive securities: Stock options and restricted stock 427 — 558 1,045 Weighted average common shares for diluted earnings per share 84,752 85,688 85,303 86,581 Diluted net income (loss) per common share $ 0.38 $ ( 0.32 ) $ 0.48 $ 0.40 Common stock of approximately 0.3 million and 0.6 million shares at September 30, 2020 , and 2019 , respectively that are issuable through exercise of dilutive securities were not included in the computation of diluted net income (loss) per share because their effect would have been anti-dilutive. 28 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) Performance Shares and Restricted Units that entitle the holders to approximately 0.5 million shares of common stock are included in the basic and diluted weighted average shares outstanding calculation from their date of issuance because no further consideration is due related to the issuance of the underlying common shares. 15. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) was as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In thousands) (In thousands) Net income (loss) $ 32,337 $ ( 27,610 ) $ 41,148 $ 34,882 Foreign currency translation adjustment 21,181 ( 18,651 ) 24,801 ( 17,960 ) Change in unrealized loss on derivatives, net of tax ( 9,679 ) ( 775 ) ( 39,814 ) ( 24,714 ) Pension liability adjustment, net of tax ( 291 ) 515 ( 498 ) 504 Comprehensive income (loss), net $ 43,548 $ ( 46,521 ) $ 25,637 $ ( 7,288 ) Changes in accumulated other comprehensive loss by component between December 31, 2019 and September 30, 2020 are presented in the table below, net of tax: Gains and Losses on Derivatives Defined Benefit Pension Items Foreign Currency Items Total (In thousands) Balance at January 1, 2020 $ ( 26,625 ) $ ( 9,709 ) $ ( 40,068 ) $ ( 76,402 ) Other comprehensive income (loss) ( 48,429 ) ( 498 ) 24,801 ( 24,126 ) Less: Amounts reclassified from accumulated other comprehensive loss ( 8,615 ) — — ( 8,615 ) Net current-period other comprehensive income (loss) ( 39,814 ) ( 498 ) 24,801 ( 15,511 ) Balance at September 30, 2020 $ ( 66,439 ) $ ( 10,207 ) $ ( 15,267 ) $ ( 91,913 ) For the nine months ended September 30, 2020 , the Company reclassified a loss of $ 5.7 million and $ 2.9 million from accumulated other comprehensive loss to other income (expense), net and interest income, respectively. 16. SEGMENT AND GEOGRAPHIC INFORMATION The Company internally manages two global reportable segments and reports the results of its businesses to its chief operating decision maker. The two reportable segments and their activities are described below. • The Codman Specialty Surgical segment includes (i) the Neurosurgery business, which sells a full line of products for neurosurgery and neuro critical care such as tissue ablation equipment, dural repair products, cerebral spinal fluid management devices, intracranial monitoring equipment, and cranial stabilization equipment and (ii) the instruments business, which sells more than 40,000 instrument patterns and surgical and lighting products to hospitals, surgery centers, dental, podiatry, and veterinary offices. • The Orthopedics and Tissue Technologies segment includes such offerings as skin and wound repair, bone and joint fixation implants in the upper and lower extremities, bone grafts, and nerve and tendon repair products. The Corporate and other category includes (i) various executive, finance, human resource, information systems and legal functions, (ii) brand management, and (iii) share-based compensation costs. The operating results of the various reportable segments as presented are not comparable to one another because (i) certain operating segments are more dependent than others on corporate functions for unallocated general and administrative and/or operational manufacturing functions and (ii) the Company does not allocate certain manufacturing costs and general and administrative costs to the operating segment results. Net sales and profit by each reportable segment for the three and nine months ended September 30, 2020 and 2019 are as follows: 29 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In thousands) (In thousands) Segment Net Sales Codman Specialty Surgical $ 239,323 $ 252,984 $ 640,541 $ 736,810 Orthopedics and Tissue Technologies 130,909 126,111 342,680 385,620 Total revenues $ 370,232 $ 379,095 $ 983,221 $ 1,122,430 Segment Profit Codman Specialty Surgical $ 97,061 $ 101,129 $ 249,552 $ 291,750 Orthopedics and Tissue Technologies 50,132 30,383 110,091 112,664 Segment profit 147,193 131,512 359,643 $ 404,414 Amortization ( 8,343 ) ( 5,056 ) $ ( 23,393 ) ( 21,340 ) Corporate and other ( 81,308 ) ( 147,043 ) ( 237,525 ) ( 325,394 ) Operating income $ 57,542 $ ( 20,587 ) $ 98,725 $ 57,680 The Company does not allocate any assets to the reportable segments. No asset information is reported to the chief operating decision maker and disclosed in the financial information for each segment. The Company attributes revenues to geographic areas based on the location of the customer. Total revenue by major geographic area consisted of the following: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In thousands) (In thousands) United States $ 266,477 $ 266,280 $ 695,179 $ 796,397 Europe 45,995 49,242 123,917 148,753 Asia Pacific 40,473 42,079 113,934 114,810 Rest of World 17,287 21,494 50,191 62,470 Total Revenues $ 370,232 $ 379,095 $ 983,221 $ 1,122,430 17. COMMITMENTS AND CONTINGENCIES In consideration for certain technology, manufacturing, distribution, and selling rights and licenses granted to the Company, the Company has agreed to pay royalties on sales of certain products that it sells. The royalty payments that the Company made under these agreements were not significant for any of the periods presented. The Company is subject to various claims, lawsuits and proceedings in the ordinary course of the Company's business, including claims by current or former employees, distributors and competitors and with respect to its products and product liability claims, lawsuits and proceedings, some of which have been settled by the Company. In the opinion of management, such claims are either adequately covered by insurance or otherwise indemnified, or are not expected, individually or in the aggregate, to result in a material, adverse effect on the Company's financial condition. However, it is possible that the Company's results of operations, financial position and cash flows in a particular period could be materially affected by these contingencies. The Company accrues for loss contingencies when it is deemed probable that a loss has been incurred and that loss is estimable. The amounts accrued are based on the full amount of the estimated loss before considering insurance proceeds and do not include an estimate for legal fees expected to be incurred in connection with the loss contingency. The Company consistently accrues legal fees expected to be incurred in connection with loss contingencies as those fees are incurred by outside counsel as a period cost. 30 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) Contingent Consideration The Company determined the fair value of contingent consideration during the nine month period ended September 30, 2020 and September 30, 2019 to reflect the change in estimates, additions, payments, transfers and the time value of money during the period. A reconciliation of the opening balances to the closing balances of these Level 3 measurements for the nine months ended September 30, 2020 and September 30, 2019 is as follows (in thousands): Nine Months Ended September 30, 2020 Contingent Consideration Liability Related to Acquisition of Arkis (See Note 3) Contingent Consideration Liability Related to Acquisition of Derma Sciences Location in Financial Statements Long-term Long-term Balance as of January 1, 2020 $ 14,210 $ 230 Loss from change in fair value of contingent consideration liabilities ( 45 ) — Research and development Balance as of September 30, 2020 $ 14,165 $ 230 Nine Months Ended September 30, 2019 Contingent Consideration Liability Related to Acquisition of Arkis (See Note 3) Contingent Consideration Liability Related to Acquisition of Derma Sciences Location in Financial Statements Long-term Long-term Balance as of January 1, 2019 $ — $ 230 Additions from acquisition of Arkis 13,100 — Balance as of September 30, 2019 $ 13,100 $ 230 Derma Sciences The Company assumed contingent consideration incurred by Derma Sciences, Inc. ("Derma Sciences") related to its acquisitions of BioD and the intellectual property related to Medihoney products. The Company accounted for the contingent liabilities by recording their fair value on the date of the acquisition based on a probability weighted income approach. The Company has already paid $ 33.3 million related to the aforementioned contingent liabilities. One contingent liability remains which relates to net sales of Medihoney products exceeding certain amounts defined in the agreement between the Company and Derma Sciences. The potential maximum undiscounted payment amounts to $ 3.0 million . The estimated fair value as of September 30, 2020 and September 30, 2019 was $ 0.2 million .