INTEGRA LIFESCIENCES HOLDINGS CORP 10-Q

Item 1. Financial Statements INTEGRA LIFESCIENCES HOLDINGS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED) (Dollars in thousands, except per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Total revenue, net $ 386,861 $ 370,232 $ 1,136,924 $ 983,221 Costs and expenses: Cost of goods sold 144,468 134,811 441,558 373,765 Research and development 25,831 19,460 68,326 55,202 Selling, general and administrative 156,010 150,076 475,195 432,136 Intangible asset amortization 4,113 8,343 12,838 23,393 Total costs and expenses 330,422 312,690 997,917 884,496 Operating income 56,439 57,542 139,007 98,725 Interest income 1,786 2,273 5,298 7,124 Interest expense ( 12,192 ) ( 20,796 ) ( 38,270 ) ( 54,230 ) Gain (loss) from the sale of business ( 230 ) — 41,967 — Other income, net 4,985 2,492 14,888 2,985 Income before income taxes 50,788 41,511 162,890 54,604 Provision for income taxes 7,559 9,174 39,199 13,456 Net income $ 43,229 $ 32,337 $ 123,691 $ 41,148 Net income per share Basic $ 0.51 $ 0.38 $ 1.46 $ 0.49 Diluted $ 0.51 $ 0.38 $ 1.45 $ 0.48 Weighted average common shares outstanding (See Note 13): Basic 84,754 84,325 84,647 84,745 Diluted 85,447 84,752 85,391 85,303 Comprehensive income (See Note 14) 46,417 43,548 150,975 $ 25,637 The accompanying unaudited notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents INTEGRA LIFESCIENCES HOLDINGS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in thousands, except per share amounts) September 30, 2021 December 31, 2020 ASSETS Current assets: Cash and cash equivalents $ 470,231 $ 470,166 Trade accounts receivable, net of allowances of $ 6,251 and $ 6,439 222,232 225,532 Inventories, net 327,167 310,117 Prepaid expenses and other current assets 84,155 69,282 Assets held for sale — 162,105 Total current assets 1,103,785 1,237,202 Property, plant and equipment, net 293,921 287,529 Right of use asset - operating leases 87,600 83,635 Intangible assets, net 1,155,795 989,436 Goodwill 1,012,081 932,367 Deferred tax assets, net 91,797 73,690 Other assets 29,486 11,277 Total assets $ 3,774,465 $ 3,615,136 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current portion of borrowings under senior credit facility $ 45,000 $ 33,750 Current portion of borrowings under securitization facility — 112,500 Current portion of lease liability - operating leases 13,526 12,818 Accounts payable, trade 59,600 54,608 Income taxes payable 24,780 — Contract liabilities 5,388 5,275 Accrued compensation 79,229 76,117 Accrued expenses and other current liabilities 105,335 94,194 Liabilities held for sale — 11,751 Total current liabilities 332,858 401,013 Long-term borrowings under senior credit facility 823,736 933,387 Long-term borrowings under securitization facility 111,700 — Long-term convertible securities 563,697 474,834 Lease liability - operating leases 94,840 88,118 Deferred tax liabilities 70,325 16,190 Other liabilities 145,622 186,727 Total liabilities 2,142,778 2,100,269 Stockholders’ equity: Preferred stock; no par value; 15,000 authorized shares; none outstanding — — Common stock; $ 0.01 par value; 240,000 authorized shares; 89,597 and 89,251 issued at September 30, 2021 and December 31, 2020, respectively 896 893 Additional paid-in capital 1,258,830 1,290,909 Treasury stock, at cost; 4,899 shares and 4,914 shares at September 30, 2021 and December 31, 2020, respectively ( 234,449 ) ( 235,141 ) Accumulated other comprehensive loss ( 46,774 ) ( 74,059 ) Retained earnings 653,184 532,265 Total stockholders’ equity 1,631,687 1,514,867 Total liabilities and stockholders’ equity $ 3,774,465 $ 3,615,136 The accompanying unaudited notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents INTEGRA LIFESCIENCES HOLDINGS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands) Nine Months Ended September 30, 2021 2020 OPERATING ACTIVITIES: Net income $ 123,691 $ 41,148 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 89,090 89,853 Non-cash impairment charges 2,754 — Deferred income tax (benefit) provision ( 13,498 ) 4,784 Share-based compensation 29,778 14,333 Amortization of debt issuance costs and expenses associated with debt refinancing 5,308 10,499 Non-cash lease expense 3,099 2,172 Accretion of bond issuance discount — 11,075 Loss on disposal of property and equipment 2,029 559 Gain from the sale of business ( 41,967 ) — Change in fair value of contingent consideration and others ( 544 ) ( 45 ) Changes in assets and liabilities: Accounts receivable 17,437 57,863 Inventories ( 3,598 ) ( 45,531 ) Prepaid expenses and other current assets ( 11,696 ) ( 865 ) Other non-current assets 5,900 10,868 Accounts payable, accrued expenses and other current liabilities 33,858 ( 67,178 ) Contract liabilities — ( 548 ) Other non-current liabilities 1,509 ( 5,417 ) Net cash provided by operating activities 243,150 123,570 INVESTING ACTIVITIES: Purchases of property and equipment ( 20,595 ) ( 30,463 ) Proceeds from sale of Extremity Orthopedics business 190,468 — Proceeds from sale of property and equipment 3 3,311 Cash paid for business acquisitions, net of cash acquired ( 303,910 ) — Acquired in-process research and development — ( 5,000 ) Net proceeds on swaps designated as net investment hedges 76 — Net cash used in investing activities ( 133,958 ) ( 32,152 ) FINANCING ACTIVITIES: Proceeds from borrowings of long-term indebtedness 13,450 151,300 Payments on debt ( 114,250 ) ( 441,000 ) Purchase of option hedge on convertible notes — ( 104,248 ) Proceeds from convertible notes issuance — 575,000 Proceeds from sale of stock purchase warrants — 44,563 Payment of debt issuance costs ( 249 ) ( 24,347 ) Purchases of treasury stock — ( 100,000 ) Proceeds from exercised stock options 6,588 3,821 Cash taxes paid in net equity settlement ( 4,286 ) ( 4,686 ) Net cash (used) provided by financing activities ( 98,747 ) 100,403 Effect of exchange rate changes on cash and cash equivalents ( 10,380 ) 5,547 Net increase in cash and cash equivalents 65 197,368 Cash and cash equivalents at beginning of period 470,166 198,911 Cash and cash equivalents at end of period $ 470,231 $ 396,279 The accompanying unaudited notes are an integral part of these condensed consolidated financial statements. 6 Table of Contents INTEGRA LIFESCIENCES HOLDINGS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (Dollars in thousands, except per share amounts) Nine Months Ended September 30, 2021 Common Stock Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Equity Shares Amount Shares Amount Balance, January 1, 2021 89,251 $ 893 ( 4,914 ) $ ( 235,141 ) $ 1,290,909 $ ( 74,059 ) $ 532,265 $ 1,514,867 Net income — — — — — — 45,394 45,394 Other comprehensive income, net of tax — — — — — 30,432 — 30,432 Issuance of common stock through employee stock purchase plan 18 — — — 1,127 — — 1,127 Issuance of common stock for vesting of share based awards, net of shares withheld for taxes 137 1 15 680 ( 3,222 ) — — ( 2,541 ) Share-based compensation — — — — 6,098 — — 6,098 Adoption of Update No. 2020-06 — — — — ( 63,274 ) — ( 2,772 ) ( 66,046 ) Balance, March 31, 2021 89,406 894 ( 4,899 ) ( 234,461 ) 1,231,638 ( 43,627 ) 574,887 1,529,331 Net income — — — — — — 35,068 35,068 Other comprehensive loss, net of tax — — — — — ( 6,336 ) — ( 6,336 ) Issuance of common stock for vesting of share based awards, net of shares withheld for taxes 68 1 — — 1,175 — — 1,176 Share-based compensation — — — — 15,742 — — 15,742 Balance, June 30, 2021 89,474 $ 895 ( 4,899 ) $ ( 234,461 ) $ 1,248,555 $ ( 49,963 ) $ 609,955 $ 1,574,981 Net income — — — — — — 43,229 43,229 Other comprehensive income, net of tax — — — — — 3,189 — 3,189 Treasury shares retirement — — — 12 ( 12 ) — — — Issuance of common stock for vesting of share based awards, net of shares withheld for taxes 123 1 — — 2,541 — — 2,542 Share-based compensation — — — — 7,746 — — 7,746 Balance, September 30, 2021 89,597 896 ( 4,899 ) ( 234,449 ) 1,258,830 ( 46,774 ) 653,184 1,631,687 7 Table of Contents INTEGRA LIFESCIENCES HOLDINGS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (Dollars in thousands, except per share amounts) Nine Months Ended September 30, 2020 Common Stock Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Equity Shares Amount Shares Amount 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 ) $ 407,554 $ 1,341,803 Net loss — — — — — — ( 369 ) ( 369 ) Other comprehensive income, net of tax — — — — — 1,464 — 1,464 Issuance of common stock for vesting of share based awards, net of shares withheld for 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 ) 407,185 1,349,096 Net loss — — — — — — 32,337 32,337 Other comprehensive loss, net of tax — — — — — 11,212 — 11,212 Issuance of common stock for vesting of share based awards, net of shares withheld for 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 ) $ 439,522 $ 1,397,988 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, 2021 unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial position, statement of changes in shareholders' equity, results of operations and cash flows of the Company. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K. The December 31, 2020 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. Operating results for the three and nine month period ended September 30, 2021 are not necessarily indicative of the results to be expected for the entire year. The preparation of consolidated financial statements is in conformity with generally accepted accounting principles in the United States ("GAAP") which requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent liabilities, and the reported amounts of revenues and expenses. Significant estimates affecting amounts reported or disclosed in the consolidated financial statements include allowances for doubtful accounts receivable and sales returns and allowances, net realizable value of inventories, valuation of intangible assets including amortization periods for acquired intangible assets, discount rates and estimated projected cash flows used to value and test impairments of long-lived assets and goodwill, estimates of projected cash flows and depreciation and amortization periods for long-lived assets, computation of taxes, valuation allowances recorded against deferred tax assets, the valuation of stock-based compensation, valuation of derivative instruments, valuation of contingent liabilities, the fair value of debt instruments and loss contingencies. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the current circumstances. Actual results could differ from these estimates. Risks and Uncertainties The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. During the beginning of 2020, the Company's customers diverted resources to treat COVID-19 patients and deferred or canceled elective or non-emergent surgical procedures, all of which impacted hospitals' abilities to meet their obligations, including to the Company. Towards the end of 2020 and through the end of the third quarter of 2021, procedural volumes relevant to the Company’s products steadily increased and, in some geographic areas, began to approach normalized levels. However, on-going uncertainty persists about the continuing sustainability of those procedural volumes as virus outbreaks and staffing constrains at hospitals and surgical centers impact healthcare networks. Furthermore, capital markets and economies worldwide have also seen other indirect COVID-19 pandemic related disruptions including supply chain impacts, material inflation, and labor constraints in certain markets and geographies. Such economic disruption has had an adverse effect on the Company's business as customers curtailed and reduced capital and overall spending that have resulted in higher freight costs, longer supply chains and select labor constraints in certain geographic regions. Policymakers around the globe have responded with fiscal policy actions to support the healthcare industry and the economy as a whole. The magnitude and overall effectiveness of these actions remains uncertain. The severity of the impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, duration of the pandemic, including resurgences, new variants or strains, impact of government regulations, the speed and effectiveness of vaccine distribution, vaccine adoption rates and the duration of direct and indirect economic effects of the pandemic and containment measures. The Company's future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions and uncertain demand, the extent of inflationary pressure on material and labor costs and the impact of any initiatives or programs that the Company may undertake to address financial and operations challenges faced by its customers. Through the end of the third quarter of 2021, the Company's revenues were still impacted due to COVID-19 resurgences and lower surgical procedural volumes, though not to the levels seen during 2020. As a result, the Company has continued to manage its operating costs in this environment. Even after the COVID-19 pandemic and government responses thereto have subsided, residual economic and other effects may have an impact on the demand for post-pandemic surgery levels that are difficult to predict. 9 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) Recent Accounting Pronouncements In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) : Measurement of Credit Losses on Financial Instruments. The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets including trade receivables held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The ASU became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted this guidance on January 1, 2020 using a modified retrospective transition method which requires a cumulative-effect adjustment to the opening balance of retained earnings to be recognized on the date of adoption with no change to financial results reported in prior periods. The cumulative-effect adjustment recorded on January 1, 2020 is not material. The adoption of this ASU did not have a significant impact on the Company's consolidated financial statements and related disclosures. The Company's exposure to credit losses may increase if its customers are adversely affected by changes in healthcare laws, coverage, and reimbursement, economic pressures or uncertainty associated with local or global economic recessions, disruption associated with the COVID-19 pandemic, and other customer-specific factors. Although the Company has historically not experienced significant credit losses, it is possible that there could be an adverse impact due to customer and governmental responses to the COVID-19 pandemic. In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans . This guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption was permitted. The Company adopted this guidance during the year ended December 31, 2020. The adoption of this guidance did not have a significant impact on the Company's consolidated financial statements and related disclosures. In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), relating to a customer's accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by a vendor (e.g., a service contract). Under this guidance, a customer will apply the same criteria for capitalizing implementation costs as it would for an arrangement that has a software license. The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted this guidance on January 1, 2020 using a prospective transition method. The adoption of this guidance did not have a significant impact on the Company's consolidated financial statements and related disclosures. In December 2019, the FASB issued ASU 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes, intended to simplify the accounting for income taxes by eliminating certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for annual periods beginning after December 15, 2020 and interim periods within, with early adoption permitted. The Company adopted ASU No. 2019-12 as of January 1, 2021. Adoption of the standard requires certain changes to be made prospectively, with some changes to be made retrospectively. The adoption of this guidance did not have a significant impact on the Company's consolidated financial statements and related disclosures. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform , which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. This amendment applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference London Inter-Bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of reference rate reform. This ASU is effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. In January 2021, the FASB also issued ASU 2021-01, Reference Rate Reform- Scope which clarified certain optional expedients and exceptions to entities that are affected because of the reference rate reform. The amendments in this ASU affect the guidance in ASU 2020-04 and are effective in the same timeframe as ASU 2020-04. The Company is currently assessing the impact that this ASU will have on its consolidated financial statements and related disclosures. 10 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) In August 2020, the FASB issued ASU 2020-06, Debt- Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging Contracts in Entity's Own Equity (Subtopic 815-40):Accounting for Convertible Instruments and Contracts in an Entity's Own Equity . The guidance simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify. The guidance also simplifies the diluted net income per share calculation in certain areas. The ASU will be effective for annual and interim periods beginning after December 15, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years using either the modified retrospective or full retrospective method. As detailed in Note 6 – Debt , on February 4, 2020, the Company issued $ 575.0 million aggregate principal amount of its 0.5 % Convertible Senior Notes due 2025 (the "2025 Notes"). The 2025 Notes are subject to the guidance included in ASU 2020-06. The Company adopted this guidance on January 1, 2021 using the modified retrospective approach which resulted in a cumulative-effect adjustment that increased (decreased) the following consolidated balance sheet accounts: ADJUSTMENT CONSOLIDATED BALANCE SHEET CLASSIFICATION AMOUNT (in millions) Deferred tax impact of cumulative-effect adjustment Deferred tax liabilities $ ( 20.6 ) Debt discount reclassification Long-term convertible securities 89.1 Equity issuance costs reclassification Long-term convertible securities ( 2.5 ) Debt discount amortization and equity costs reclassification, net of tax Retained Earnings ( 2.8 ) Net impact of cumulative-effect adjustment Additional paid-in capital ( 63.3 ) Upon adoption of ASU 2020-06, the Company’s 2025 Notes were reflected entirely as a liability since the embedded conversion feature will no longer be separately presented within stockholders’ equity. On December 9, 2020, the Company made an irrevocable election under the indenture to require the principal portion of its 2025 Notes to be settled in cash and any excess in shares. Following the irrevocable notice, only the amounts settled in excess of the principal will be considered in diluted earnings per share under the “if-converted” method. Additionally, from January 1, 2021, the Company is no longer incurring non-cash interest expense for the amortization of debt discount, therefore the interest expense for the 2025 Notes, which is included in the interest expense on the consolidated statements of operations and comprehensive loss, is lower as compared to the fiscal year of 2020. In October 2020, the FASB issued ASU 2020-10, Codification Improvements , which updates various codification topics by clarifying or improving disclosure requirements to align with the regulations of the U.S. Securities and Exchange Commission (the "SEC") . The ASU has been effective for the Company for annual and interim periods beginning after January 1, 2021. The Company adopted this standard on the January 1, 2021. The adoption of this guidance did not have a significant impact on the Company's consolidated financial statements and related disclosures. In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options which provides guidance to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The amendments in this ASU No. 2021-04 are effective for all entities for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, including interim periods within those fiscal years. The amendment currently has no impact to the Company as the effect will largely depend on the terms of written call options or financings issued or modified in the future. There are no other recently issued accounting pronouncements that are expected to have any significant effect on the Company's financial position, results of operations or cash flows. 11 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 2. ACQUISITIONS AND DIVESTITURES Sale of Extremity Orthopedics Business On January 4, 2021, the Company completed its previously announced sale of its Extremity Orthopedics business to Smith & Nephew USD Limited ("Smith & Nephew"). The transaction included the sale of the Company's upper and lower Extremity Orthopedics product portfolio, including ankle and shoulder arthroplasty and hand and wrist product lines. The Company received an aggregate purchase price of $ 240.0 million from Smith and Nephew and concurrently paid $ 41.5 million to the Consortium of Focused Orthopedists, LLC ("CFO") effectively terminating the licensing agreement between Integra and CFO relating to the development of shoulder arthroplasty products. Assets and liabilities divested consisted of the following as of December 31, 2020 (dollar amounts in thousands): Prepaid expenses and other current assets $ 713 Right of use asset-operating leases and Other assets 3,186 Deferred tax assets 6,589 Intangible assets, net 13,332 Property, plant and equipment, net 37,893 Goodwill 47,546 Inventories 52,845 Total assets held for sale $ 162,104 Other liabilities 336 Current portion of lease liability - operating leases 539 Accrued compensation 1,767 Deferred tax liabilities 3,440 Lease liability - operating leases 5,669 Total liabilities held for sale $ 11,751 The divestiture does not represent a strategic shift that will have a major effect on the Company's operations and financial statements. Goodwill was allocated to the assets and liabilities divested using the relative fair value method of the Extremity Orthopedics business to the Company's Tissue Technologies reporting unit. In connection with the sale, the Company recognized a gain of $ 42.0 million that is presented in Gain from the sale of business in the consolidated statement of operations for the nine months ended September 30, 2021. The Company finalized the net working capital and paid an additional $ 1.3 million to Smith & Nephew as of September 30, 2021. The Company also entered into a transition services agreement with Smit h & Nephew which requires the Company to provide certain services on behalf of Smith & Nephew for the duration of the period subsequent to the sale of the business as defined in the agreement. The Company recognized a payable due to Smith & Nephew of $ 7.2 million as of September 30, 2021, included in the consolidated balance sheet within accrued expenses and other current liabilities. ACell, Inc. Acquisition On January 20, 2021, the Company acquired ACell, Inc. (the "ACell Acquisition") for an acquisition purchase price of $ 306.9 million plus contingent considerations of up to $ 100 million, that may be payable upon achieving certain revenue-based performance milestones in 2022, 2023 and 2025. The final working capital adjustments of $ 1.3 million was finalized and paid as of June 30, 2021. Certain amounts relating to tax matters have not been finalized which may result in changes to goodwill upon completion. ACell was a privately-held company that offered a portfolio of regenerative products for complex wound management, including developing and commercializing products based on MatriStem Urinary Bladder Matrix, a technology platform derived from porcine urinary bladder extracellular matrix. Assets Acquired and Liabilities Assumed at Fair Value The ACell Acquisition has been accounted for using the acquisition method of accounting. This method requires that assets acquired and liabilities assumed in a business combination are recognized at their fair values as of the acquisition date. 12 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the acquisition date: Dollars in thousands Preliminary Valuation as of September 30, 2021 Weighted Average Life Current assets: Cash $ 2,726 Trade accounts receivable, net 16,469 Inventories, net 18,299 Prepaids expenses and other current assets 1,498 Total current assets 38,992 Property, plant and equipment, net 13,769 Intangible assets 245,000 13 - 14 years Goodwill 94,298 Right of use asset - operating leases 9,259 Deferred tax assets 9,768 Other assets 148 Total assets acquired 411,234 Current liabilities: Accounts payable $ 718 Accrued expenses 5,966 Current portion of lease liability - operating leases 1,673 Total current liabilities 8,357 Other long-term liability 276 Lease liability - operating leases 7,585 Deferred tax liability 64,178 Contingent consideration 23,900 Total liabilities assumed 104,296 Net assets acquired $ 306,938 Intangible Assets The estimated fair value of the developed technology acquired was determined using the multi-period excess earnings method of the income approach, which estimates value based on the present value of future economic benefits. Some of the more significant assumptions inherent in the development of those asset valuations include the estimated net cash flows for each year for each product including net revenues, cost of sales, R&D costs, selling and marketing costs, the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, and competitive trends impacting the asset and each cash flow stream. The Company used a discount rate of 8.5 % to arrive at the present value for the acquired intangible assets to reflect the rate of return a market participant would expect to earn and incremental commercial uncertainty in the cash flow projections. No assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change. For these and other reasons, actual results may vary significantly from estimated results. Goodwill The Company allocated goodwill related to the ACell acquisition to the Tissue Technologies segment. Goodwill is the excess of the consideration transferred over the net assets recognized and represents the expected synergies of the combined company and assembled workforce. Goodwill recognized as a result of this acquisition is non-deductible for income tax purposes. 13 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) Contingent Consideration As part of the acquisition, the Company is required to make payments to the former shareholders of ACell up to $ 100 million based on the achievement of certain revenue-based performance milestones in 2022, 2023, and 2025. T he Company used iterations of the Monte Carlo simulation to calculate the fair value of the contingent consideration that considered the possible outcomes of scenarios related to each specific milestone. The Company estimated the fair value of the contingent consideration to be $ 23.9 million at the acquisition date. The estimated fair value as of September 30, 2021 was $ 23.0 million. This amount is included in other liabilities at September 30, 2021 in the consolidated balance sheets of the Company. The Company determines the acquisition date fair value of contingent consideration obligations using a Monte Carlo simulation, as well as significant unobservable inputs, reflecting the Company’s assessment of the assumptions market participants would use to value these liabilities. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined using the fair value concepts in ASC 820. The resultant most likely payouts are discounted using an appropriate effective annual interest rate. At each reporting date, the contingent consideration obligations will be revalued to estimated fair value and changes in fair value will be reflected as income or expense in our consolidated statement of operations. Changes in the fair value of the contingent considerations may result from changes in discount periods and rates and changes in the timing and amount of revenue estimates. Deferred Tax Liabilities Deferred tax liabilities result from identifiable intangible assets’ fair value adjustments. These adjustments create excess book basis over tax basis which is tax-effected by the statutory tax rates of applicable jurisdictions. Pro Forma Results (unaudited) Pro forma revenues for the three months ended September 30, 2021 and 2020 were $ 386.9 million and $ 396.8 million, respectively. Pro forma revenues for the nine months ended September 30, 2021 and 2020 were $ 1,141.5 million and $ 1,051.9 million, respectively. Pro forma net income and earnings per share are not presented for this acquisition as they are not material. 3. REVENUES FROM CONTRACTS WITH CUSTOMERS Summary of Accounting Policies on Revenue Recognition Revenue is recognized upon the transfer of control of promised products or services to the customers in an amount that reflects the consideration the Company expects to receive in exchange for those products and services. Performance Obligations The Company's performance obligations consist mainly of transferring control of goods and services identified in the contracts, purchase orders, or invoices. The Company has no significant multi-element contracts with customers. Significant Judgments Usage-based royalties and licenses are estimated based on the provisions of contracts with customers and recognized in the same period that the royalty-based products are sold by the Company and the Company's strategic partners. The Company estimates and recognizes royalty revenue based upon communication with licensees, historical information, and expected sales trends. Differences between actual reported licensee sales and those that were estimated are adjusted in the period in which they become known, which is typically the following quarter. Historically, such adjustments have not been significant. The Company estimates returns, price concessions, and discount allowances using the expected value method based on historical trends and other known factors. Rebate allowances are estimated using the most likely method based on each customer contract. The Company's return policy, as set forth in its product catalogs and sales invoices, requires review and authorization in advance prior to the return of product. Upon the authorization, a credit will be issued for the goods returned within a set amount of days from the shipment, which is generally ninety days . The Company disregards the effects of a financing component if the Company expects, at contract inception, that the period between the transfer and customer payment for the goods or services will be one year or less. The Company has no significant revenues recognized on payments expected to be received more than one year after the transfer of control of products or services to customers. 14 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) Contract Asset and Liability Revenues recognized from the Company's private label business that are not invoiced to the customers as a result of recognizing revenue over time are recorded as a contract asset included in the prepaid expenses and other current assets account in the consolidated balance sheet. Other operating revenues may include fees received under service agreements. Non-refundable fees received under multiple-period service agreements are recognized as revenue as the Company satisfies the performance obligations to the other party. A portion of the transaction price allocated to the performance obligations to be satisfied in the future periods is recognized as contract liability. The following table summarizes the changes in the contract asset and liability balances for the nine months ended September 30, 2021: Contract Asset Contract asset, January 1, 2021 $ 7,430 Transferred to trade receivable of contract asset included in beginning of the year contract asset ( 7,430 ) Contract asset, net of transferred to trade receivables on contracts during the period 8,378 Contract asset, September 30, 2021 $ 8,378 Contract Liability Contract liability, January 1, 2021 $ 11,961 Recognition of revenue included in beginning of year contract liability $ ( 4,291 ) Contract liability, net of revenue recognized on contracts during the period 3,694 Foreign currency translation ( 26 ) Contract liability, September 30, 2021 $ 11,338 At September 30, 2021, the short-term portion of the contract liability of $ 5.4 million and the long-term portion of $ 5.9 million were included in accrued expenses and other current liabilities and other liabilities, respectively, in the consolidated balance sheet. As of September 30, 2021, the Company is expected to recognize approximately 48 % of unsatisfied (or partially unsatisfied) performance obligations as revenue within twelve months , with the remaining balance to be recognized thereafter. Shipping and Handling Fees 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, 2021 and 2020 (dollar amounts in thousands): Three Months Ended September 30, 2021 Three Months Ended September 30, 2020 Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020 Neurosurgery $ 199,210 $ 189,674 $ 591,064 $ 516,048 Instruments 57,287 49,649 163,511 124,493 Total Codman Specialty Surgical 256,497 239,323 754,575 640,541 Wound Reconstruction and Care (2) 99,744 82,115 291,058 210,673 Extremity Orthopedics (1) — 21,922 — 54,556 Private Label 30,620 26,872 91,291 77,451 Total Tissue Technologies 130,364 130,909 382,349 342,680 Total revenue $ 386,861 $ 370,232 $ 1,136,924 $ 983,221 (1) On January 4, 2021, the Company completed its sale of its Extremity Orthopedics business. In conjunction with the sale of this business, the Company rebranded the Orthopedics and Tissue Technologies segment as Tissue Technologies in the first quarter of 2021. See Note 2. Acquisitions and Divestitures, for details. (2) See Note 2. Acquisitions and Divestitures, for details around the ACell acquisition. See Note 15, Segment and Geographical Information , for details of revenues based on the location of the customer. 4. INVENTORIES Inventories, net consisted of the following: Dollars in thousands September 30, 2021 December 31, 2020 Finished goods $ 180,766 $ 180,301 Work in process 58,697 53,336 Raw materials 87,704 76,480 Total inventories, net $ 327,167 $ 310,117 At December 31, 2020, $ 52.8 million of inventories, net was presented separately as "Assets held for sale" in conjunction with the sale of the Extremity Orthopedics business. 5. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill Changes in the carrying amount of goodwill for the nine-month period ended September 30, 2021 were as follows: Dollars in thousands Codman Specialty Surgical Tissue Technologies Total Goodwill at December 31, 2020 $ 671,975 $ 260,392 $ 932,367 ACell Acquisition — 94,298 94,298 Foreign currency translation ( 9,546 ) ( 5,038 ) ( 14,584 ) Goodwill at September 30, 2021 $ 662,429 $ 349,652 $ 1,012,081 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, 2021 Dollars in thousands Weighted Average Life Cost Accumulated Amortization Net Completed technology 18 years $ 1,123,507 $ ( 289,871 ) $ 833,636 Customer relationships 12 years $ 211,712 $ ( 140,138 ) $ 71,574 Trademarks/brand names 28 years $ 98,352 $ ( 30,609 ) $ 67,743 Codman tradename Indefinite $ 166,087 $ — $ 166,087 Supplier relationships 30 years $ 30,211 $ ( 15,948 ) $ 14,263 All other 11 years $ 6,359 $ ( 3,867 ) $ 2,492 $ 1,636,228 $ ( 480,433 ) $ 1,155,795 December 31, 2020 Dollars in thousands Weighted Average Life Cost Accumulated Amortization Net Completed technology 19 years $ 896,478 $ ( 248,088 ) $ 648,390 Customer relationships 12 years 213,270 ( 132,838 ) 80,432 Trademarks/brand names 28 years 104,209 ( 31,767 ) 72,442 Codman tradename Indefinite 170,226 — 170,226 Supplier relationships 27 years 30,211 ( 15,203 ) 15,008 All other (1) 4 years 6,693 ( 3,755 ) 2,938 $ 1,421,087 $ ( 431,651 ) $ 989,436 (1) Prior period amounts were reclassified as it relates to All other within this table to conform to the current period presentation. The increase in the Company's identifiable intangible assets at September 30, 2021 as compared to the year ended December 31, 2020, was primarily driven from intangible assets acquired in conjunction with the ACell Acquisition. See Note 2, Acquisitions and Divestitures , 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 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 2021, the Company elected to perform a qualitative analysis for its three reporting units and intangible asset with indefinite lives. The Company determined, after performing the qualitative analysis, that there was no evidence that it is more likely than not that the fair value was less that the carrying amounts, therefore, it was not necessary to perform a quantitative impairment test. Based on quarter-end exchange rates, amortization expense (including amounts reported in cost of goods sold) is expected to be approximately $ 20.2 million for the remainder of 2021, $ 78.8 million in 2022, $ 78.1 million in 2023, $ 77.4 million in 2024, $ 77.4 million in 2025, $ 77.2 million in 2026 and $ 588.9 million thereafter. 17 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 6. 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 which expired during June 30, 2021, did not increase the Company’s total indebtedness. In connection with the July 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, 2021, 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, 2021 and December 31, 2020, there wa s $ 20.0 million an d $ 97.5 million, respectively, ou tstanding under the revolving credit component of the Senior Credit Facility at weighted average interest rates of 1.3 % and 1.5 %, respectively. At September 30, 2021 and December 31, 2020, there was $ 855.0 million and $ 877.5 million, respectively, outstanding under the Term Loan component of the Senior Credit Facility at a weighted average interest rate of 1.3 % and 1.5 %, respectively. At September 30, 2021, $ 45.0 million of the Term Loan component of the Senior Credit Facility is classified as current on the consolidated balance sheet. 18 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) The fair value of outstanding borrowings of the Senior Credit Facility's revolving credit and Term Loan components at September 30, 2021 wer e $ 19.3 million and $ 826.6 million, re sp ectively. 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 i nputs that reflect unadjusted quoted prices for identical assets or liabilities. Letters of credit outstanding as of September 30, 2021 and December 31, 2020 to taled $ 1.6 million. There were no amounts drawn as of September 30, 2021. Contractual repayments of the Term Loan component of the Senior Credit Facility are due as follows: Quarter Ended September 30, 2021 Principal Repayment Dollars in thousands Remainder of 2021 $ 11,250 2022 $ 45,000 2023 $ 61,875 2024 $ 67,500 2025 $ 669,375 $ 855,000 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 2025 Notes. The portion of debt proceeds that was classified as equity at the time of the offering was $ 104.5 million. The effective interest rate implicit in the liability component was 4.2 %. In connection with this offering, the Company capitalized $ 13.2 million of financing fees. The 2025 Notes are senior, unsecured obligations of the Company, and are convertible into cash and shares of its common stock based on initial conversion rate, subject to adjustment of 13.5739 shares per $1,000 principal amounts of the 2025 Notes (which represents an initial conversion price of $ 73.67 per share). The 2025 Notes convert only in the following circumstances: (1) if the closing price of the Company's common stock has been at least 130 % of the conversion price during the period; (2) if the average trading price per $1,000 principal amount of the 2025 Notes is less than or equal to 98 % of the average conversion value of the 2025 Notes during a period as defined in the indenture; (3) at any time on or after February 20, 2023; or (4) if specified corporate transactions occur. As of September 30, 2021, none of these conditions existed with respect to the 2025 Notes and as a result the 2025 Notes are classified as long term. On December 9, 2020, the Company entered into the First Supplemental Indenture to the original agreement dated as of February 4, 2020 between the Company and Citibank, N.A., as trustee, governing the Company’s outstanding 2025 Notes. The Company irrevocably elected (1) to eliminate the Company’s option to choose physical settlement on any conversion of the 2025 Notes that occurs on or after the date of the First Supplemental Indenture and (2) with respect to any Combination Settlement for a conversion of the 2025 Notes, the Specified Dollar Amount that will be settled in cash per $1,000 principal amount of the 2025 Notes shall be no lower than $1,000. Holders of the Notes will have the right to require the Company to repurchase for cash all or a portion of their Notes at 100 % of their principal amount, plus any accrued and unpaid interest, upon the occurrence of a fundamental change (as defined in the indenture relating to the Notes). The Company will also be required to increase the conversion rate for holders who convert their Notes in connection with certain fundamental changes occurring prior to the maturity date or following delivery by the Company of a notice of redemption. 19 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) In connection with the issuance of the 2025 Notes, the Company entered into call transactions and warrant transactions, primarily with affiliates of the initial purchasers of the 2025 Notes (the “hedge participants”). The cost of the call transactions was $ 104.2 million for the 2025 Notes. The Company received $ 44.5 million of proceeds from the warrant transactions for the 2025 Notes. The call transactions involved purchasing call options from the hedge participants, and the warrant transactions involved selling call options to the hedge participants with a higher strike price than the purchased call options. The initial strike price of the call transactions was $ 73.67 , subject to anti-dilution adjustments substantially similar to those in the 2025 Notes. The initial strike price of the warrant transactions was $ 113.34 for the 2025 Notes, subject to customary anti-dilution adjustments. At December 31, 2020, the carrying amount of the liability component was $ 485.9 million , the remaining unamortized discount wa s $ 89.1 million , and the principal amount outstanding was $ 575.0 million . On January 1, 2021, the Company adopted ASU 2020-06 using the modified retrospective method. See Note 1, Basis of Presentation, for further details. At September 30, 2021 , the carrying amount of the liability w as $ 575.0 million. The fair value of the 2025 Notes at September 30, 2021 was $ 636.7 million. Factors that the Company considered when estimating the fair value of the 2025 Notes included recent quoted market prices or dealer quote. The level of the 2025 Notes is considered as Level 1. As a result of the adoption of ASU 2020-06, the Company recognized only cash interest related to the contractual interest coupon of $ 2.1 million on the 2025 Notes for the nine months ended September 30, 2021. Prior to the adoption, during the nine months ended September 30, 2020, the Company recognized cash interest 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 2020 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") 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, 2021, the Company was in compliance with the covenants and none of the termination events had occurred. On May 28, 2021, the Company entered into an amendment (the "May 2021 Amendment") of the Securitization Facility which extended the maturity date from December 21, 2021 to May 28, 2024. The May 2021 Amendment does not increase the Company’s total indebtedness. At September 30, 2021 and December 31, 2020, the Company had $ 111.7 million and $ 112.5 million, respectively, of outstanding borrowings under its Securitization Facility at a weighted average interest rate of 1.2 % and 1.3 %, respectively. The fair value of the outstanding borrowing of the Securitization Facility at September 30, 2021 was $ 108.0 million. These fair values were determined by using a discounted cash flow model based on current market interest rates available to the Company. These inputs are corroborated by observable market data for similar liabilities and therefore classified within Level 2 of the fair value hierarchy. Level 2 inputs represent inputs that are observable for the asset or liability, either directly or indirectly, and are other than active market observable i nputs that reflect unadjusted quoted prices for identical assets or liabilities. 20 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 7. DERIVATIVE INSTRUMENTS Interest Rate Hedging The Company’s interest rate risk relates to U.S. dollar denominated variable interest rate borrowings. The Company uses interest rate swap derivative instruments to manage earnings and cash flow exposure resulting from changes in interest rates. These interest rate swaps apply a fixed interest rate on a portion of the Company's expected LIBOR-indexed floating-rate borrowings. The Company held the following interest rate swaps as of September 30, 2021 and December 31, 2020 (dollar amounts in thousands): September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020 Hedged Item Notional Amount Designation Date Effective Date Termination Date Fixed Interest Rate Estimated Fair Value Asset (Liability) 1-month USD LIBOR Loan $ — $ 100,000 March 27, 2017 December 31, 2017 June 30, 2021 1.971 % $ — $ ( 929 ) 1-month USD LIBOR Loan 300,000 300,000 December 13, 2017 January 1, 2018 December 31, 2022 2.201 % ( 7,693 ) ( 12,557 ) 1-month USD LIBOR Loan 150,000 150,000 December 13, 2017 July 1, 2019 June 30, 2024 2.423 % ( 7,859 ) ( 11,502 ) 1-month USD LIBOR Loan 200,000 200,000 December 13, 2017 January 1, 2018 December 31, 2024 2.313 % ( 10,795 ) ( 16,243 ) 1-month USD LIBOR Loan 75,000 75,000 October 10, 2018 July 1, 2020 June 30, 2025 3.220 % ( 6,964 ) ( 9,836 ) 1-month USD LIBOR Loan 75,000 75,000 October 10, 2018 July 1, 2020 June 30, 2025 3.199 % ( 6,931 ) ( 9,826 ) 1-month USD LIBOR Loan 75,000 75,000 October 10, 2018 July 1, 2020 June 30, 2025 3.209 % ( 6,906 ) ( 9,783 ) 1-month USD LIBOR Loan 100,000 100,000 December 18, 2018 December 30, 2022 December 31, 2027 2.885 % ( 7,253 ) ( 10,407 ) 1-month USD LIBOR Loan 100,000 100,000 December 18, 2018 December 30, 2022 December 31, 2027 2.867 % ( 7,211 ) ( 10,431 ) 1-month USD LIBOR Loan 575,000 575,000 December 15, 2020 July 31, 2025 December 31, 2027 1.415 % 5,483 ( 1,907 ) 1-month USD LIBOR Loan 125,000 125,000 December 15, 2020 July 1, 2025 December 31, 2027 1.404 % 1,315 ( 348 ) $ 1,775,000 $ 1,875,000 $ ( 54,814 ) $ ( 93,769 ) 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. 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. Those amounts are subsequently reclassified to earnings from AOCL as impacted by the hedged item when the hedged item affects earnings. If the hedged forecasted transaction does not occur or if it becomes probable that it will not occur, the Company will reclassify the amount of any gain or loss on the related cash flow hedge to earnings at that time. For contracts not designated as hedging instruments, the changes in fair value of the contracts are recognized in other income, net in the consolidated statements of operation, along with the offsetting foreign currency gain or loss on the underlying assets or liabilities. 21 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) During the fourth quarter of 2020, the Company entered into foreign currency forward contracts, with a notional amount of $ 9.7 million, to mitigate the foreign exchange risk related to certain intercompany loans denominated in Canadian Dollar ("CAD") and intercompany receivables denominated in Japanese Yen ("JPY"). The contracts are not designated as hedging instruments. The Company recognized a $ 0.2 million loss from the change in fair value of the contracts, which was included in other income, net in the consolidated statement of operations as of September 30, 2021. The Company subsequently settled its foreign currency forward contracts associated with the intercompany receivables denominated in JPY during the first quarter of 2021. The fair value of the foreign currency forward contracts denominated in CAD was $ 0.2 million as of September 30, 2021. During the second quarter of 2021, the Company entered into a foreign currency swap, with a notional of $ 7.3 million to mitigate the risk from fluctuations in foreign currency exchange rates associated with certain intercompany loan denominated in Japanese Yen ("JPY"). In a foreign currency swap transaction, the Company agrees with another party to exchange, at specified intervals, the difference between one currency and another currency at a fixed exchange rate, generally set at inception, calculated by reference to an agreed upon notional amount. The notional amount of each currency is exchanged at the inception and termination of the currency swap by each party. The change in fair value of the foreign currency swap was not material for the period. 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 Swiss Francs ("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. On December 21, 2020, the Company entered into cross-currency swap agreements to convert a notional amount of $ 471.6 million equivalent to 420.1 million of a CHF-denominated intercompany loan into U.S. dollars. The CHF-denominated intercompany loan was the result of an intra-entity transfer of certain intellectual property rights to a subsidiary in Switzerland completed during the fourth quarter of 2020. The intercompany loan requires quarterly payments of CHF 5.8 million plus accrued interest. As a result, the aggregate notional amount of the related cross-currency swaps will decrease by a corresponding amount. 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 remaining 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, 2021 and December 31, 2020 (dollar amounts in thousands): September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020 Effective Date Termination Date Fixed Rate Aggregate Notional Amount Fair Value Asset (Liability) Pay CHF October 2, 2017 October 4, 2021 1.85 % CHF 48,533 48,533 ( 1,727 ) ( 4,335 ) Receive U.S.$ 4.46 % $ 50,000 50,000 Pay CHF October 2, 2017 October 2, 2022 1.95 % CHF 145,598 145,598 ( 3,894 ) ( 11,262 ) Receive U.S.$ 4.52 % $ 150,000 150,000 Pay CHF December 21, 2020 December 22, 2025 3.00 % CHF 402,887 420,137 14,380 ( 7,843 ) Receive U.S.$ 3.98 % $ 452,275 471,640 Total $ 8,759 $ ( 23,440 ) 22 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) On October 4, 2021 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 $ 50.0 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, 2021, the Company recorded gains of $ 4.3 million and $ 34.3 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 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, 2021, the Company recorded gains of $ 7.0 million and $ 36.3 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 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, 2021, the Company recorded gains of $ 1.5 million and $ 4.1 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, 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. The estimated gain that is expected to be reclassified to other income (expense), net from AOCL as of September 30, 2021 within the next twelve months is $ 6.9 million. As of September 30, 2021, 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 and December 16, 2020, the Company entered into cross-currency swap agreements designated as net investment hedges to partially offset the effects of foreign currency on foreign subsidiaries. The Company held the following cross-currency rate swaps designated as net investment hedges as of September 30, 2021 and December 31, 2020, respectively (dollar amounts in thousands): September 30, 2021 December 31, 2020 Effective Date Termination Date Fixed Rate Aggregate Notional Amount Fair Value Asset (Liability) Pay EUR October 3, 2018 September 30, 2021 — % EUR 44,859 $ — $ ( 1,884 ) Receive U.S.$ 3.01 % $ 52,000 Pay EUR October 3, 2018 September 30, 2023 — % EUR 51,760 2,050 ( 450 ) Receive U.S.$ 2.57 % $ 60,000 Pay EUR October 3, 2018 September 30, 2025 — % EUR 38,820 1,723 92 Receive U.S.$ 2.19 % $ 45,000 Pay CHF December 16, 2020 December 16, 2027 — % CHF 222,300 5,461 ( 3,794 ) Receive U.S.$ 1.10 % $ 250,000 Total $ 9,234 $ ( 6,036 ) During the nine months ended September 30, 2021, the Company settled cross-currency swaps designated as net investment hedge with an aggregate notional amount of $ 52 million equivalent to 44.9 million Euros based on the termination date. As a result of the settlement, the Company recorded a gain of $ 0.1 million in AOCL. 23 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 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, 2021, the Company recorded gains of $ 6.9 million and $ 20.5 million, respectively, 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 a loss of $ 11.3 million and a gain of $ 5.1 million, respectively, in AOCL related to the change in fair value of the cross-currency swaps. For the three and nine months ended September 30, 2021, the Company recorded gains of $ 1.7 million and $ 5.2 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, 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. The estimated gain that is expected to be reclassified to interest income from AOCL as of September 30, 2021 within the next twelve months is $ 5.3 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. 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. 24 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) The following table summarizes the fair value for derivatives designated as hedging instruments in the condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020: Fair Value as of Location on Balance Sheet (1) : September 30, 2021 December 31, 2020 Dollars in thousands Derivatives designated as hedges — Assets: Prepaid expenses and other current assets Cash Flow Hedges Cross-currency swap $ 8,587 $ 7,623 Net Investment Hedges Cross-currency swap 5,345 5,297 Other assets Cash Flow Hedges Interest rate swap (2) 6,798 — Cross-currency swap 8,578 — Net Investment Hedges Cross-currency swap 3,889 — Total derivatives designated as hedges — Assets $ 33,197 $ 12,920 Derivatives designated as hedges — Liabilities: Accrued expenses and other current liabilities Cash Flow Hedges Interest rate swap (2) $ 21,095 $ 22,033 Cross-currency swap $ 1,726 4,335 Net Investment Hedges Cross-currency swap $ — 1,884 Other liabilities Cash Flow Hedges Interest rate swap (2) $ 40,517 71,736 Cross-currency swap $ 6,680 26,728 Net Investment Hedges Cross-currency swap $ — 9,449 Total derivatives designated as hedges — Liabilities $ 70,018 $ 136,165 (1) The Company classifies derivative assets and liabilities as current based on the cash flows expected to be incurred within the following 12 months. (2) At September 30, 2021 and December 31, 2020, the total notional amounts related to the Company’s interest rate swaps were $ 1.8 billion and $ 1.9 billion, respectively. 25 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, 2021 and 2020: Dollars in thousands 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 Three Months Ended September 30, 2021 Cash Flow Hedges Interest rate swap $ ( 62,736 ) $ 2,488 $ ( 5,434 ) $ ( 54,814 ) Interest expense Cross-currency swap ( 4,363 ) 7,045 5,874 ( 3,192 ) Other income (expense),net Net Investment Hedges Cross-currency swap ( 2,078 ) 6,882 1,749 3,055 Interest income $ ( 69,177 ) $ 16,415 $ 2,189 $ ( 54,951 ) 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 ) Dollars in thousands 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 Nine Months Ended September 30, 2021 Cash Flow Hedges Interest rate swap $ ( 93,769 ) $ 21,993 $ ( 16,962 ) $ ( 54,814 ) Interest expense Cross-currency swap ( 1,073 ) 36,270 38,389 ( 3,192 ) Other income (expense),net Net Investment Hedges Cross-currency swap ( 12,291 ) 20,543 5,197 3,055 Interest income $ ( 107,133 ) $ 78,806 $ 26,624 $ ( 54,951 ) 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 ) 8. STOCK-BASED COMPENSATION As of September 30, 2021, the Company had stock options, restricted stock awards, performance stock awards, contract stock awards and restricted stock unit awards outstanding under the Integra LifeSciences Holdings Corporation Fifth Amended and Restated 2003 Equity Incentive Plan (the “2003 Plan”). The 2000 and 2001 Equity Incentive Plans were terminated as of February 19, 2021, and no further awards may be issued under the plans. 26 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) Stock options issued under the 2003 Plan become exercisable over specified periods, generally within four years from the date of grant for officers and employees, within one year from date of grant for directors which generally expire eight years from the grant date for employees, and from six to ten years for directors and certain executive officers, except in certain instances that result in accelerated vesting due to death, disability, retirement age or change in-control provisions within their grant agreements. 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, 2021, there were approximately $ 3.7 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 two years . There were 149,558 stock options granted during the nine months ended September 30, 2021. For the nine months ended September 30, 2021, the weighted average grant date fair value for stock options was $ 22.59 per option. Awards of Restricted Stock and Performance Stock Performance stock and restricted stock awards generally have requisite service periods of three years , except in certain instances that result in accelerated vesting due to death, disability, retirement age provision or change in-control provisions in their grant agreements. 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, 2021, there was approximately $ 26.8 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 258,265 restricted stock awards and 176,147 performance stock awards during the nine months ended September 30, 2021. For the nine months ended September 30, 2021, the weighted average grant date fair value for restricted stock awards and performance stock units was $ 68.41 and $ 68.10 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. 9. 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 three and the nine months ended September 30, 2021 were $ 0.5 million and $ 1.8 million. The components of the net periodic benefit costs other than the service cost component of $ 0.8 million and $ 2.4 million for the three and nine months ended September 30, 2021, are included in other income, 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, 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, net in the consolidated statements of operations. The estimated fair values of plan assets were $ 34.0 million and $ 37.8 million as of September 30, 2021 and December 31, 2020, respectively. The net plan assets of the pension plans are invested in common trusts as of September 30, 2021 and December 31, 2020. 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 The Company maintains a Deferred Compensation Plan in which 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. 27 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) During the first quarter of 2020, employees participating in the Company's deferred compensation plan began to defer their compensation. This deferred compensation is invested in funds offered under this plan and is valued based on Level 1 measurements in the fair value hierarchy. 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, 2021 were $ 3.4 million and $ 2.0 million as of September 30, 2021and December 31, 2020. Offsetting liabilities relating to the deferred compensation plan are included in Other liabilities. 10. LEASES AND RELATED PARTY LEASES The Company leases administrative, manufacturing, research and distribution facilities and vehicles through operating lease agreements. The Company has no finance leases as of September 30, 2021. 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, 2021 and September 30, 2020 was $ 15.7 million and $ 14.6 million respectively, which includes $ 0.2 million, in related party operating lease expense. Supplemental balance sheet information related to operating leases were as follows: Dollars in thousands, except lease term and discount rate September 30, 2021 December 31, 2020 ROU assets $ 87,600 $ 83,635 Current lease liabilities 13,526 12,818 Non-current lease liabilities 94,840 88,118 Total lease liabilities $ 108,366 $ 100,936 Weighted average remaining lease term (in years): Leased facilities 11.0 years 11.6 years Leased vehicles 2.2 years 2.3 years Weighted average discount rate: Leased facilities 5.0 % 4.6 % Leased vehicles 2.5 % 2.3 % Supplemental cash flow information related to leases for the nine months ended September 30, 2021 and 2020 were as follows: Dollars in thousands September 30, 2021 September 30, 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 10,942 $ 10,976 ROU assets obtained in exchange for lease liabilities: Operating leases $ 10,725 $ 6,007 28 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) Future minimum lease payments under operating leases at September 30, 2021 were as follows: Dollars in thousands Related Parties Third Parties Total 2021 $ 74 $ 4,168 $ 4,242 2022 296 17,219 17,515 2023 296 14,289 14,585 2024 296 12,331 12,627 2025 296 10,858 11,154 2026 296 9,522 9,818 Thereafter 837 72,824 73,661 Total minimum lease payments $ 2,391 $ 141,211 $ 143,602 Less: Imputed interest 35,236 Total lease liabilities 108,366 Less: Current lease liabilities 13,526 Long-term lease liabilities 94,840 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. 11. TREASURY STOCK As of September 30, 2021 and December 31, 2020, there were 4.9 million shares of treasury stock outstanding with a cost of $ 234.4 million and $ 235.1 million, respectively, at a weighted average cost per share of $ 47.86 . On December 7, 2020, 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 2022. The Company has $ 225.0 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, and such repurchases may be discontinued at any time. During the twelve months ended December 31, 2020, the Company repurchased 2.1 million shares of Integra’s common stock as part of the previous 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. 29 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 12. 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, 2021 2020 2021 2020 Reported tax rate 14.9 % 22.1 % 24.1 % 24.6 % The Company’s effective income tax rates for the three months ended September 30, 2021 and 2020 w ere 14.9 % and 22.1 %, respectively. For the three months ended September 30, 2021, the primary drivers of the tax rate are due to the jurisdictional mix of income and a benefit related to excess tax benefits from stock compensation. For the three months ended September 30, 2020, the primary drivers of the tax rate are due to the jurisdictional mix of income and 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 the reversal of $ 3.2 million valuation allowance on certain foreign deferred tax assets as the Company determined that it was more likely than not that these foreign deferred tax assets would be realized. The Company's effective income tax rates for the nine months ended September 30, 2021 and 2020 were 24.1 % and 24.6 %, respectively. For the nine months ended September 30, 2021, the primary drivers of the tax rate are due to the jurisdictional mix of income and a benefit related to excess tax benefits from stock compensation, offset by the tax impact of the gain on the sale of the Extremity and Orthopedics business which was completed during the first quarter of 2021. For the nine months ended September 30, 2020, the primary drivers of the tax rate are the jurisdictional mix of income and a $ 4.2 million recognition of a deferred tax liability related to an outside tax basis from the sale of the Extremity Orthopedics business. Additionally, changes to income tax laws and regulations, in any of the tax jurisdictions in which the Company operates, could impact the effective tax rate. Various governments, both U.S. and non-U.S., are increasingly focused on tax reform and revenue-raising legislation. The current U.S. administration has proposed tax reform which, if enacted, would increase the Company’s U.S. federal income tax liability. Further, legislation in foreign jurisdictions may be enacted, in response to the base erosion and profit-shifting (BEPS) project begun by the Organization for Economic Cooperation and Development (OECD). The OECD recently finalized major reform of the international tax system with respect to a minimum tax rate. Such changes in U.S. and Non-U.S. jurisdictions could have an adverse effect on the Company’s effective tax rate. As of September 30, 2021, the Company has not provided deferred income taxes on unrepatriated earnings from foreign subsidiaries as they are deemed indefinitely reinvested unless there is a manner under which to remit the earnings with no material tax cost. Material taxes would primarily be attributable to foreign withholding taxes and local income taxes when such earnings are distributed. The Company will repatriate foreign earnings when there is no need for reinvestment overseas and no material tax cost to bring the earnings back to the United States. Reinvestment considerations would include future acquisitions, transactions, and capital expenditure plans. The Company does not anticipate the need to repatriate earnings from foreign subsidiaries as a result of the impact of the COVID-19 pandemic. 30 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 13. NET INCOME PER SHARE Basic and diluted net income per share was as follows: Three Months Ended September 30, Nine Months Ended September 30, Dollars in thousands, except per share amounts 2021 2020 2021 2020 Basic net income per share: Net income $ 43,229 $ 32,337 $ 123,691 $ 41,148 Weighted average common shares outstanding 84,754 84,325 84,647 84,745 Basic net income per common share $ 0.51 $ 0.38 $ 1.46 $ 0.49 Diluted net income per share: Net income $ 43,229 $ 32,337 $ 123,691 $ 41,148 Weighted average common shares outstanding — Basic 84,754 84,325 84,647 84,745 Effect of dilutive securities: Stock options and restricted stock 693 427 744 558 Weighted average common shares for diluted earnings per share 85,447 84,752 85,391 85,303 Diluted net income per common share $ 0.51 $ 0.38 $ 1.45 $ 0.48 Common stock of approximately 0.1 million an d 0.6 million shares at September 30, 2021, and 2020, res pectively that are issuable through exercise of dilutive securities were not included in the computation of diluted net income per share because their effect would have been anti-dilutive. 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. Based on the adoption of ASU 2020-06, as the principal amount of the 2025 Notes will be paid in cash and only the conversion spread is settled in shares, the Company will be utilizing the if-converted method and only includes the net number of incremental shares that would be issued upon conversion. 14. ACCUMULATED OTHER COMPREHENSIVE LOSS Comprehensive income for the nine months ended September 30, 2021 and 2020 was as follows: Three Months Ended September 30, Nine Months Ended September 30, Dollars in thousands 2021 2020 2021 2020 Net income $ 43,229 $ 32,337 $ 123,691 $ 41,148 Foreign currency translation adjustment ( 7,815 ) 21,181 ( 13,058 ) 24,801 Change in unrealized loss on derivatives, net of tax 10,964 ( 9,679 ) 40,075 ( 39,814 ) Pension liability adjustment, net of tax 39 ( 291 ) 267 ( 498 ) Comprehensive income, net $ 46,417 $ 43,548 $ 150,975 $ 25,637 31 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) Changes in accumulated other comprehensive loss by component between December 31, 2020 and September 30, 2021 are presented in the table below, net of tax: Dollars in thousands Gains and Losses on Derivatives Defined Benefit Pension Items Foreign Currency Items Total Balance at January 1, 2021 $ ( 82,249 ) $ ( 5,105 ) $ 13,295 $ ( 74,059 ) Other comprehensive income (loss) 60,497 267 ( 13,058 ) 47,706 Less: Amounts reclassified from accumulated other comprehensive loss 20,421 — — 20,421 Net current-period other comprehensive income (loss) 40,076 267 ( 13,058 ) 27,285 Balance at September 30, 2021 $ ( 42,173 ) $ ( 4,838 ) $ 237 $ ( 46,774 ) For the nine months ended September 30, 2021, the Company reclassified a gain of $ 29.5 million and a loss of $ 9.1 million from accumulated other comprehensive loss to other income, net and interest income. 15. SEGMENT AND GEOGRAPHIC INFORMATION The Company internally manages two global reportable segments and reports the results of its businesses to its chief operating decision maker. The two reportable segments and their activities are described below. • The Codman Specialty Surgical segment includes (i) the Neurosurgery business, which sells a full line of products for neurosurgery and neuro critical care such as tissue ablation equipment, dural repair products, cerebral spinal fluid management devices, intracranial monitoring equipment, and cranial stabilization equipment and (ii) the 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 Tissue Technologies segment includes such offerings as skin and wound repair, bone grafts, and nerve and tendon repair products. In conjunction with the sale of the Extremity Orthopedics business, the Company rebranded the Orthopedics and Tissue Technologies segment as Tissue Technologies in the first quarter of 2021. 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, 2021 and 2020 are as follows: Three Months Ended September 30, Nine Months Ended September 30, Dollars in thousands 2021 2020 2021 2020 Segment Net Sales Codman Specialty Surgical $ 256,497 $ 239,323 $ 754,575 $ 640,541 Tissue Technologies 130,364 130,909 382,349 342,680 Total revenues $ 386,861 $ 370,232 $ 1,136,924 $ 983,221 Segment Profit Codman Specialty Surgical $ 110,686 $ 97,061 $ 331,460 $ 249,552 Tissue Technologies 57,730 50,132 172,154 110,091 Segment profit 168,416 147,193 503,614 359,643 Amortization ( 4,113 ) ( 8,343 ) ( 12,838 ) ( 23,393 ) Corporate and other ( 107,864 ) ( 81,308 ) ( 351,769 ) ( 237,525 ) Operating income $ 56,439 $ 57,542 $ 139,007 $ 98,725 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. 32 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 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, Dollars in thousands 2021 2020 2021 2020 United States $ 275,775 $ 266,477 $ 801,754 $ 695,179 Europe 46,458 45,995 140,714 123,917 Asia Pacific 45,015 40,473 136,616 113,934 Rest of World 19,613 17,287 57,840 50,191 Total Revenues $ 386,861 $ 370,232 $ 1,136,924 $ 983,221 16. COMMITMENTS AND CONTINGENCIES In consideration for certain technology, manufacturing, distribution, 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. Contingent Consideration The Company determined the fair value of contingent consideration during the nine month period ended September 30, 2021 and September 30, 2020 to reflect the change in estimates, additions, payments, transfers and the time value of money during the period. 33 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) A reconciliation of the opening balances to the closing balances of these Level 3 measurements for the nine months ended September 30, 2021 and September 30, 2020 is as follows (in thousands): Nine Months Ended September 30, 2021 Contingent Consideration Liability Related to Acquisition of: Arkis Location in Financial Statements Derma Sciences ACell Inc. (See Note 2) Location in Financial Statements Short-term Long-term Long-term Long-term Balance as of January 1, 2021 $ 3,415 $ 11,746 $ 230 $ — Additions from acquisition of ACell — — — 23,900 Transfers ( 3,415 ) 3,415 — — Change in fair value of contingent consideration liabilities — $ ( 544 ) Research and development — ( 900 ) Selling, general and administrative Balance as of September 30, 2021 $ — $ 14,617 $ 230 $ 23,000 Nine Months Ended September 30, 2020 Contingent Consideration Liability Related to Acquisition of: Arkis Derma Sciences Location in Financial Statements Long-term Long-term Balance as of January 1, 2020 $ 14,210 $ 230 Change in fair value of contingent consideration liabilities ( 45 ) — Research and development Balance as of September 30, 2020 $ 14,165 $ 230 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. Arkis was a privately-held company that marketed the CerebroFlo ® external ventricular drainage catheter with Endexo® technology, a permanent additive designed to reduce the potential for catheter obstruction due to thrombus formation. 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, 2021 and September 30, 2020 was $ 14.6 million and $ 14.2 million, respectively. The Company recorded $ 14.6 million and $ 14.2 million in other liabilities at September 30, 2021 and September 30, 2020, respectively, in the consolidated balance sheet of the Company. 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, 2021 and September 30, 2020 was $ 0.2 million. 34 Table of Contents