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, 2023 2022 2023 2022 Total revenue, net $ 382,421 $ 385,191 $ 1,144,534 $ 1,159,644 Costs and expenses: Cost of goods sold 164,076 148,445 486,292 439,418 Research and development 26,596 24,736 79,908 74,410 Selling, general and administrative 161,948 143,820 493,513 464,397 Intangible asset amortization 3,208 3,141 9,342 10,339 Total costs and expenses 355,828 320,142 1,069,055 988,564 Operating income 26,593 65,049 75,479 171,080 Interest income 4,607 3,264 12,653 6,606 Interest expense ( 13,062 ) ( 12,809 ) ( 37,626 ) ( 36,700 ) Gain (loss) from the sale of business — 644 — 644 Other income (expense), net 471 2,648 1,705 8,056 Income before income taxes 18,609 58,796 52,211 149,686 Provision (benefit) for income taxes ( 888 ) 8,881 4,304 22,082 Net income $ 19,497 $ 49,915 $ 47,907 $ 127,604 Net income per share Basic $ 0.24 $ 0.60 $ 0.59 $ 1.54 Diluted $ 0.24 $ 0.60 $ 0.59 $ 1.53 Weighted average common shares outstanding (See Note 13): Basic 79,690 83,042 80,842 82,955 Diluted 79,811 83,399 81,112 83,476 Comprehensive income (See Note 14) 16,412 55,691 39,387 $ 165,320 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, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 273,732 $ 456,661 Trade accounts receivable, net of allowances of $ 5,630 and $ 4,304 256,270 263,465 Inventories, net 366,251 324,583 Prepaid expenses and other current assets 130,976 116,789 Total current assets 1,027,229 1,161,498 Property, plant and equipment, net 318,718 311,302 Right of use asset - operating leases 156,760 148,284 Intangible assets, net 1,067,023 1,126,609 Goodwill 1,036,146 1,038,881 Deferred tax assets, net 55,587 45,994 Other assets 77,908 57,190 Total assets $ 3,739,371 $ 3,889,758 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current portion of borrowings under senior credit facility $ 9,687 $ 38,125 Current portion of borrowings under securitization facility 75,700 — Current portion of lease liability - operating leases 14,461 14,624 Accounts payable, trade 93,550 102,100 Contract liabilities 8,139 7,253 Accrued compensation 63,869 78,771 Accrued expenses and other current liabilities 90,306 80,033 Total current liabilities 355,712 320,906 Long-term borrowings under senior credit facility 850,089 733,149 Long-term borrowings under securitization facility — 104,700 Long-term convertible securities 569,527 567,341 Lease liability - operating leases 168,017 157,420 Deferred tax liabilities 74,453 63,338 Other liabilities 142,352 138,501 Total liabilities 2,160,150 2,085,355 Stockholders’ equity: Preferred stock; no par value; 15,000 authorized shares; none outstanding — — Common stock; $ 0.01 par value; 240,000 authorized shares; 90,935 and 90,477 issued at September 30, 2023 and December 31, 2022, respectively 909 905 Additional paid-in capital 1,262,319 1,276,977 Treasury stock, at cost; 11,823 shares and 6,823 shares at September 30, 2023 and December 31, 2022, respectively ( 612,777 ) ( 362,862 ) Accumulated other comprehensive income 1,745 10,265 Retained earnings 927,025 879,118 Total stockholders’ equity 1,579,221 1,804,403 Total liabilities and stockholders’ equity $ 3,739,371 $ 3,889,758 The accompanying unaudited notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents INTEGRA LIFESCIENCES HOLDINGS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands) Nine Months Ended September 30, 2023 2022 OPERATING ACTIVITIES: Net income $ 47,907 $ 127,604 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 92,527 88,803 Deferred income tax provision 2,963 1,439 Share-based compensation 14,350 21,994 Amortization of debt issuance costs and expenses associated with debt refinancing 4,731 5,142 Non-cash lease expense 2,120 3,040 Loss (gain) on disposal of property and equipment ( 4 ) 914 Gain from the sale of business — ( 644 ) Change in fair value of contingent consideration and others 8,278 ( 19,481 ) Changes in assets and liabilities: Accounts receivable 5,050 ( 23,870 ) Inventories ( 43,350 ) ( 24,443 ) Prepaid expenses and other current assets ( 21,700 ) 1,629 Other non-current assets ( 8,774 ) 9,575 Accounts payable, accrued expenses and other current liabilities ( 22,141 ) ( 803 ) Contract liabilities 141 2,524 Other non-current liabilities ( 893 ) ( 14,288 ) Net cash provided by operating activities 81,205 179,135 INVESTING ACTIVITIES: Purchases of property and equipment ( 42,330 ) ( 27,887 ) Proceeds from Sale of Business — 23,960 Acquired in-process research and development milestone — ( 4,742 ) Net proceeds from swaps designated as net investment hedges 5,381 4,909 Net cash used in investing activities ( 36,949 ) ( 3,760 ) FINANCING ACTIVITIES: Proceeds from borrowings of long-term indebtedness 146,900 34,250 Payments on debt ( 85,900 ) ( 40,750 ) Payment of debt issuance costs ( 7,578 ) — Purchases of treasury stock ( 275,000 ) ( 125,000 ) Proceeds from exercised stock options 4,092 1,592 Cash taxes paid in net equity settlement ( 5,549 ) ( 24,346 ) Net cash used in financing activities ( 223,035 ) ( 154,254 ) Effect of exchange rate changes on cash and cash equivalents ( 4,150 ) ( 22,632 ) Net decrease in cash and cash equivalents ( 182,929 ) ( 1,511 ) Cash and cash equivalents at beginning of period 456,661 513,448 Cash and cash equivalents at end of period $ 273,732 $ 511,937 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) Nine Months Ended September 30, 2023 Common Stock Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Equity Shares Amount Shares Amount Balance, January 1, 2023 90,476 $ 905 ( 6,823 ) $ ( 362,862 ) $ 1,276,977 $ 10,265 $ 879,118 $ 1,804,403 Net income — — — — — — 24,226 24,226 Other comprehensive income (loss), net of tax — — — — — ( 3,198 ) — ( 3,198 ) Issuance of common stock through employee stock purchase plan 21 — — — 1,107 — — 1,107 Issuance of common stock for vesting of share based awards, net of shares withheld for taxes 316 1 16 846 ( 4,858 ) — — ( 4,011 ) Share-based compensation — 2 — — 3,609 — — 3,611 Accelerated shares repurchased — $ — ( 2,111 ) ( 119,662 ) ( 31,538 ) $ — — ( 151,200 ) Balance, March 31, 2023 90,813 $ 908 ( 8,918 ) $ ( 481,678 ) $ 1,245,297 $ 7,067 $ 903,344 $ 1,674,938 Net income — — — — — — 4,184 4,184 Other comprehensive loss, net of tax — — — — — ( 2,237 ) — ( 2,237 ) Issuance of common stock for vesting of share based awards, net of shares withheld for taxes 68 1 — 21 985 — — 1,007 Share-based compensation — — — — 5,268 — — 5,268 Accelerated shares repurchased — $ — ( 609 ) ( 32,125 ) 32,125 $ — $ — — Balance, June 30, 2023 90,881 $ 909 ( 9,527 ) $ ( 513,782 ) $ 1,283,675 $ 4,830 $ 907,528 $ 1,683,160 Net income — — — — — — 19,497 19,497 Other comprehensive income, net of tax — — — — — ( 3,085 ) — ( 3,085 ) Treasury shares retirement — — — — — — — — Issuance of common stock for vesting of share based awards, net of shares withheld for taxes 54 — — 17 424 — — 441 Share-based compensation — — — — 5,457 — — 5,457 Accelerated shares repurchased — — ( 2,296 ) ( 99,012 ) ( 27,237 ) — — ( 126,249 ) Balance, September 30, 2023 90,935 909 ( 11,823 ) ( 612,777 ) 1,262,319 1,745 927,025 1,579,221 7 Table of Contents Nine Months Ended September 30, 2022 Common Stock Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Equity Shares Amount Shares Amount Balance, January 1, 2022 89,600 $ 896 ( 4,899 ) $ ( 234,448 ) $ 1,264,943 $ ( 45,155 ) $ 698,568 $ 1,684,804 Net income — — — — — — 32,901 32,901 Other comprehensive income (loss), net of tax — — — — — 24,130 — 24,130 Issuance of common stock through employee stock purchase plan 17 — — — 1,078 — — 1,078 Issuance of common stock for vesting of share based awards, net of shares withheld for taxes 339 4 14 714 ( 9,758 ) — — ( 9,040 ) Share-based compensation — — — — 6,324 — — 6,324 Accelerated shares repurchased — — ( 1,938 ) ( 129,152 ) 4,152 — — ( 125,000 ) Balance, March 31, 2022 89,956 $ 900 ( 6,823 ) $ ( 362,886 ) $ 1,266,739 $ ( 21,025 ) $ 731,469 $ 1,615,197 Net income — — — — — — 44,788 44,788 Other comprehensive loss, net of tax — — — — — 7,810 — 7,810 Issuance of common stock for vesting of share based awards, net of shares withheld for taxes 378 3 — 6 ( 13,655 ) — — ( 13,646 ) Share-based compensation — — — — 6,768 — — 6,768 Balance, June 30, 2022 90,334 $ 903 ( 6,823 ) $ ( 362,880 ) $ 1,259,852 $ ( 13,215 ) $ 776,257 $ 1,660,917 Net income — — — — — — 49,915 49,915 Other comprehensive income, net of tax — — — — — 5,776 — 5,776 Treasury shares retirement — — — — — — — — Issuance of common stock for vesting of share based awards, net of shares withheld for taxes 7 — — 17 ( 1,160 ) — — ( 1,143 ) Share-based compensation — — — — 8,949 — — 8,949 Balance, September 30, 2022 90,341 903 ( 6,823 ) ( 362,863 ) 1,267,641 ( 7,439 ) 826,172 1,724,414 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, 2023 unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial position, statement of changes in shareholders' equity, results of operations and cash flows of the Company. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States ("GAAP") have been condensed or omitted in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K. The December 31, 2022 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. Operating results for the three and nine-month periods ended September 30, 2023 are not necessarily indicative of the results to be expected for the entire year. The preparation of consolidated financial statements is in conformity with GAAP, which requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent liabilities, and the reported amounts of revenues and expenses. Significant estimates affecting amounts reported or disclosed in the condensed consolidated financial statements include allowances for doubtful accounts receivable and sales returns and allowances, net realizable value of inventories, valuation of intangible assets including amortization periods for acquired intangible assets, discount rates and estimated projected cash flows used to value and test impairments of long-lived assets and goodwill, estimates of projected cash flows and depreciation and amortization periods for long-lived assets, computation of taxes, valuation allowances recorded against deferred tax assets, the valuation of stock-based compensation, valuation of derivative instruments, valuation of contingent liabilities, the fair value of debt instruments and loss contingencies. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the current circumstances. Actual results could differ from these estimates. Recent Accounting Pronouncements In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-04, Reference Rate Reform (Topic 848), and subsequent amendment to the initial guidance: ASU 2021-01, Reference Rate Reform (Topic 848): Scope (collectively, “Topic 848”). Topic 848 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference London Inter-Bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of reference rate reform. The guidance generally can be applied through December 31, 2024. The Alternative Reference Rates Committee, a group of private-market participants convened by the U.S. Federal Reserve Board and the New York Federal Reserve, has recommended the use of the Secured Overnight Financing Rate ("SOFR") as a more robust reference rate alternative to LIBOR. On March 24, 2023, the Company entered into the seventh amendment and restatement (the "March 2023 Amendment") of its Senior Credit Facility (the “Senior Credit Facility”) with a syndicate of lending banks with Bank of America, N.A., as Administrative Agent. In connection with the March 2023 Amendment, the Company replaced all LIBOR-based contracts with SOFR, which is calculated based on overnight transactions under repurchase agreements backed by Treasury securities. In addition, on April 17, 2023 the Company entered into an amendment (the "April 2023 Amendment") of the Securitization Facility (as defined below) and amended the interest rate from LIBOR to SOFR indexed rate. (See Note 6). In March 2023, the Company entered into a basis swap where the Company receives Term SOFR and pays LIBOR to convert the portfolio of interest rate swaps from LIBOR to SOFR. Integra has elected to adopt the optional expedient under ASC 848, which will allow the interest rate swap hedging relationship to continue, without de-designation, due to the change in the indexed rate from LIBOR to SOFR. There are no other recently issued accounting pronouncements that are expected to have any significant effect on the Company's financial position, results of operations or cash flows. 9 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 2. ACQUISITIONS AND DIVESTITURES Surgical Innovation Associates, Inc. Acquisition On December 6, 2022, the Company completed its acquisition of Surgical Innovation Associates, Inc. ("SIA") for an acquisition purchase price of $ 51.5 million (the "SIA Acquisition") plus contingent consideration of up to $ 90.0 million.The contingent consideration includes two separate payments, which are dependent on 1) achieving certain revenue-based performance milestones in 2023, 2024, and 2025 (up to $ 50.0 million in additional payments), as well as 2) the approval by the FDA of the Premarket Approval (“PMA”) Application for DuraSorb for certain uses by certain timing targets (up to $ 40.0 million in additional payments). SIA's core technology, DuraSorb, is a fully resorbable scaffold of a globally accepted polymer, which is cleared for use in hernia repair, abdominal wall, and other soft tissue reinforcement. DuraSorb sales are reported within Integra’s Tissue Technologies ("TT") segment as part of its Wound Reconstruction and Care franchise. Assets Acquired and Liabilities Assumed at Fair Value The SIA Acquisition has been accounted for using the acquisition method of accounting. This method requires that assets acquired, and liabilities assumed in a business combination to be recognized at their fair values as of the acquisition date. The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date: Dollars in thousands Final Valuation Weighted Average Life Current assets: Cash 4,438 Trade accounts receivable, net 1,551 Inventories, net 2,900 Prepaid expenses and other current assets 1,654 Total current assets $ 10,543 Intangible assets 75,000 14 years Goodwill 41,380 Total assets acquired $ 126,923 Current liabilities: Accounts payable and accrued expenses $ 2,044 Total current liabilities $ 2,044 Deferred Tax Liability 11,325 Contingent consideration 57,607 Total liabilities assumed 70,976 Net assets acquired $ 55,947 Developed Technology The estimated fair value of the developed technology was determined using the multi-period excess earnings method of the income approach, which estimates value based on the present value of future economic benefits. Some of the more significant assumptions inherent in the development of those asset valuations include the estimated net cash flows for each year for each product including net revenues, cost of sales, R&D costs, selling and marketing costs, working capital, and contributory asset charges, the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of the asset’s life cycle, and competitive trends impacting the asset and the cash flow stream. The Company used a discount rate of 18 % to arrive at the present value for the acquired intangible assets to reflect the rate of return a market participant would expect to earn and incremental commercial uncertainty in the cash flow projections. No assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change. For these and other reasons, actual results may vary significantly from estimated results. 10 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) Goodwill The Company allocated goodwill related to the SIA Acquisition to the TT segment. Goodwill is the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined company and assembled workforce. A key factor that contributes to the recognition of goodwill, and a driver for the Company’s acquisition of SIA, is the attractive growth opportunities presented by the surgical matrix business in the breast reconstruction market. Goodwill recognized as a result of this acquisition is non-deductible for income tax purposes. Contingent Consideration The Company determines the acquisition date fair value of contingent consideration obligations based on a probability-weighted income approach derived from revenue estimates and a probability assessment with respect to the likelihood of achieving contingent obligations. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined using the fair value concepts in ASC 820. The resulting most likely payouts are discounted using an appropriate effective annual interest rate. At each reporting date, the contingent consideration obligation will be revalued to estimated fair value and changes in fair value will be reflected as income or expense in the consolidated statement of operations. Changes in the fair value of the contingent considerations may result from changes in discount periods and rates and changes in the timing and amount of revenue estimates. Changes in assumptions utilized in the contingent consideration fair value estimates could result in an increase in the contingent consideration obligation and a corresponding charge to operating results. As part of the SIA Acquisition, the Company is required to pay to the former shareholders of SIA up to $ 90.0 million for two separate payments, which are dependent on 1) achieving certain revenue-based performance milestones in 2023, 2024, and 2025 (up to $ 50.0 million in additional payments), as well as 2) the approval by the FDA of the PMA for DuraSorb for certain uses by certain timing targets (up to $ 40.0 million in additional payments). The Company used iterations of the Monte Carlo simulation to calculate the fair value of the contingent consideration for the revenue-based milestone that considered the possible outcomes of scenarios related to each specific milestone for the revenue based performance milestone. The Company used probabilities of achieving the conditions to calculate the fair value of the contingent consideration for the PMA approval milestone. The Company estimated the fair value of the contingent consideration for the revenue based milestone to be $ 32.6 million at the acquisition date and $ 25.0 million for the PMA approval milestone at the acquisition date. The company recorded a total of $ 51.2 million in other liabilities as of September 30, 2023 and $ 13.0 million in accrued expenses and other current liabilities at September 30, 2023 in the consolidated balance sheet of the Company. Deferred Tax Liabilities Deferred tax liabilities result from identifiable intangible assets’ fair value adjustments. These adjustments create excess book basis over tax basis which is tax-effected by the statutory tax rates of applicable jurisdictions. Sale of non-core traditional wound care business On August 31, 2022, the Company completed its sale of its non-core traditional wound care ("TWC") business to Gentell, LLC ("Gentell") for $ 28.8 million, which consists of $ 27.8 million in cash plus $ 1.0 million in contingent consideration which may be received upon achieving certain revenue-based performance milestones two years after the closing date. The transaction included the sale of the Company's TWC products, such as sponges, gauze and conforming bandages, and certain advanced wound care dressings, such as supportive, calcium alginate, hydrogel, and foam dressings. The divestiture did not represent a strategic shift that had a major effect on the Company's operations and financial statements. Goodwill was allocated to the assets and liabilities divested using the relative fair value method of the TWC business to the Company's TT reportable business segment. In connection with the sale, the Company recognized $ 0.6 million as a gain from the sale of the business in the condensed consolidated statement of operations for the year ended December 31, 2022. The transaction is subject to final working capital adjustments. In addition to the purchase and sale agreement, the Company also entered into a contract manufacturing agreement with Gentell. Under the terms of the agreement, Gentell received inventory, equipment, and tooling to manufacture certain MediHoney® and TCC-EZ® products on behalf of the Company. On the close date of this transaction, the Company transferred manufacturing inventory associated with these products to Gentell and recognized an asset of $ 11.1 million, as a form of a deposit for the inventory transferred, which based on the expected timing of inventory purchases, was primarily included within prepaid expenses and other current assets in the consolidated balance sheet. This deposit will be utilized by the Company on future orders placed to Gentell for such products. As of September 30, 2023, the Company had a deposit remaining of $ 6.0 million which is included in prepaid assets. In addition, there are outstanding balances related to the Company's ongoing purchase of MediHoney® and TCC-EZ® products subsequent to the close of the TWC divestiture. 11 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 3. REVENUES FROM CONTRACTS WITH CUSTOMERS Summary of Accounting Policies on Revenue Recognition Revenue is recognized upon the transfer of control of promised products or services to the customers in an amount that reflects the consideration the Company expects to receive in exchange for those products and services. Performance Obligations The Company's performance obligations consist mainly of transferring control of goods and services identified in the contracts, purchase orders, or invoices. The Company has no significant multi-element contracts with customers. Significant Estimates Usage-based royalties and licenses are estimated based on the provisions of contracts with customers and recognized in the same period that the royalty-based products are sold by the Company's strategic partners. The Company estimates and recognizes royalty revenue based upon communication with licensees, historical information, and expected sales trends. Differences between actual reported licensee sales and those that were estimated are adjusted in the period in which they become known, which is typically the following quarter. Historically, such adjustments have not been significant. The Company estimates returns, price concessions, and discount allowances using the expected value method based on historical trends and other known factors. Rebate allowances are estimated using the most likely method based on each customer contract. The Company's return policy, as set forth in its product catalogs and sales invoices, requires review and authorization in advance prior to the return of product. Upon the authorization, a credit will be issued for the goods returned within a set amount of days from the shipment, which is generally 90 days. Due to the voluntary recall of all products manufactured at the Boston facility, including Primatrix®, Surgimend®, Revize™, and TissueMend™ ("The Boston recall") the Company recorded a total of $ 6.8 million and $ 19.7 million provision for product returns, as a reduction of net revenue during the three and nine months ended September 30, 2023, respectively. Additionally, the Company has credited $ 8.3 million and $ 9.0 million to customers during the three and nine months ended September 30, 2023, respectively. As of September 30, 2023, the return reserve was $ 10.7 million. The Company disregards the effects of a financing component if the Company expects, at contract inception, that the period between the transfer and customer payment for the goods or services will be one year or less. The Company has no significant revenues recognized on payments expected to be received more than one year after the transfer of control of products or services to customers. Contract Asset and Liability Revenues recognized from the Company's private label business that are not invoiced to the customers as a result of recognizing revenue over time are recorded as a contract asset included in the prepaid expenses and other current assets account in the consolidated balance sheets. Other operating revenues may include fees received under service agreements. Non-refundable fees received under multiple-period service agreements are recognized as revenue as the Company satisfies the performance obligations to the other party. A portion of the transaction price allocated to the performance obligations to be satisfied in the future periods is recognized as contract liability. 12 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) The following table summarizes the changes in the contract asset and liability balances for the nine months ended September 30, 2023: Dollars in thousands Total Contract Asset Contract asset, January 1, 2023 $ 10,122 Transferred to trade receivable from contract asset included in beginning of the year contract asset ( 7,743 ) Written off from beginning of the year contract asset due to Boston recall ( 2,379 ) Contract asset, net of transferred to trade receivables on contracts during the period 10,392 Contract asset, September 30, 2023 $ 10,392 Contract Liability Contract liability, January 1, 2023 $ 16,127 Recognition of revenue included in beginning of year contract liability $ ( 6,159 ) Contract liability, net of revenue recognized on contracts during the period 6,282 Foreign currency translation ( 51 ) Contract liability, September 30, 2023 $ 16,199 At September 30, 2023, the short-term portion of the contract liability of $ 8.1 million and the long-term portion of $ 8.1 million are included in current liabilities and other liabilities, respectively, in the consolidated balance sheets. As of September 30, 2023, the Company is expected to recognize revenue of approximately 50 % of unsatisfied (or partially unsatisfied) performance obligations as revenue within 12 months, with the remaining balance to be recognized thereafter. Shipping and Handling Fees The Company elected to account for shipping and handling activities as a fulfillment cost rather than a separate performance obligation. Amounts billed to customers for shipping and handling are included as part of the transaction price and recognized as revenue when control of underlying products is transferred to the customer. The related shipping and freight charges incurred by the Company are included in the cost of goods sold. Product Warranties Certain of the Company's medical devices, including monitoring systems and neurosurgical systems, are designed to operate over long periods of time. These products are sold with warranties which may extend for up to two years from the date of purchase. The warranties are not considered a separate performance obligation. The Company estimates its product warranties using the expected value method based on historical trends and other known factors. The Company includes them in accrued expenses and other current liabilities in the consolidated balance sheet. Taxes Collected from Customers The Company elected to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer. 13 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, 2023 and 2022 (dollar amounts in thousands): Three Months Ended September 30, 2023 Three Months Ended September 30, 2022 Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022 Neurosurgery $ 209,229 $ 193,848 $ 607,902 $ 588,818 Instruments 58,976 55,948 179,469 166,149 Total Codman Specialty Surgical 268,205 249,796 787,371 754,967 Wound Reconstruction and Care 88,071 104,625 280,129 304,149 Private Label 26,145 30,770 77,034 100,528 Total Tissue Technologies 114,216 135,395 357,163 404,677 Total revenue $ 382,421 $ 385,191 $ 1,144,534 $ 1,159,644 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, 2023 December 31, 2022 Finished goods $ 182,066 $ 172,088 Work in process 76,072 70,598 Raw materials 108,113 81,897 Total inventories, net $ 366,251 $ 324,583 Boston Recall In the nine months ended September 30, 2023, due to the Boston recall, the Company recorded a $ 24.6 million write off of inventory to cost of goods sold that was no longer able to be sold. Inventory Write-off There was a tornado that struck the LeLocle, Switzerland area on July 24, 2023. After review of the damage to the product caused by the tornado, it was determined that the inventory write-off was $ 0.8 million. 5. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill Changes in the carrying amount of goodwill for the nine-month period ended September 30, 2023 were as follows: Dollars in thousands Codman Specialty Surgical Tissue Technologies Total Goodwill at December 31, 2022 $ 656,219 $ 382,662 $ 1,038,881 SIA Acquisition Working Capital Adjustment — ( 382 ) ( 382 ) Foreign currency translation ( 1,486 ) ( 867 ) ( 2,353 ) Goodwill at September 30, 2023 $ 654,733 $ 381,413 $ 1,036,146 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. 14 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 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. The quantitative test estimates the fair value of the reporting unit using a discounted cash flow model, which incorporates significant estimates and assumptions made by management which, by their nature, are characterized by uncertainty In the second quarter of 2023, due to the Boston recall, as well as the associated drop in the Company's stock price in that quarter, the Company elected to perform a quantitative analysis for its TT reporting unit. The quantitative test utilized a long-term growth rate of 2 % and a discount rate of 10 %. The Company determined, after performing the quantitative analysis, that the fair value of the goodwill of the reporting unit was not less than the carrying amount, with more than 20 % headroom. In the third quarter of 2023, the Company performed the annual qualitative analysis for its three reporting units and intangible assets 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 than the carrying amounts, therefore, it was not necessary to perform a quantitative impairment test. Other Intangible Assets The components of the Company’s identifiable intangible assets were as follows: September 30, 2023 Dollars in thousands Weighted Average Life Cost Accumulated Amortization Net Completed technology 18 years $ 1,206,522 $ ( 424,244 ) $ 782,278 Customer relationships 12 years $ 192,566 $ ( 149,243 ) $ 43,323 Trademarks/brand names 28 years $ 97,228 $ ( 37,363 ) $ 59,865 Codman tradename Indefinite $ 167,520 $ — $ 167,520 Supplier relationships 30 years $ 30,211 $ ( 17,904 ) $ 12,307 All other 11 years $ 5,932 $ ( 4,202 ) $ 1,730 $ 1,699,979 $ ( 632,956 ) $ 1,067,023 December 31, 2022 Dollars in thousands Weighted Average Life Cost Accumulated Amortization Net Completed technology 18 years $ 1,204,325 $ ( 370,968 ) $ 833,357 Customer relationships 12 years 193,081 ( 144,040 ) 49,041 Trademarks/brand names 28 years 97,265 ( 34,674 ) 62,591 Codman tradename Indefinite 166,693 — 166,693 Supplier relationships 30 years 30,211 ( 17,170 ) 13,041 All other 11 years 5,957 ( 4,071 ) 1,886 $ 1,697,532 $ ( 570,923 ) $ 1,126,609 Total amortization of intangible assets for the three and nine months ended September 30, 2023 was $ 20.9 million and $ 62.1 million, respectively. Of these amounts, $ 17.7 million and $ 52.8 million, respectively was related to amortization of technology based intangibles and included in cost of goods sold, with the remainder included in intangible amortization in the statement of operations. Total amortization of intangible assets for the three and nine months ended September 30, 2022 was $ 19.2 million and $ 58.7 million, respectively. Of these amounts, $ 16.1 million and $ 48.3 million, respectively was related to amortization of technology based intangibles and included in cost of goods sold, with the remainder included in intangible amortization in the statement of operations. 15 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) Based on quarter-end exchange rates, amortization expense (including amounts reported in cost of goods sold) is expected to be approximately $ 20.7 million for the remainder of 2023, $ 82.2 million in 2024, $ 82.1 million in 2025, $ 82.0 million in 2026, $ 80.0 million in 2027, $ 78.5 million in 2028 and $ 477.1 million thereafter. The Company periodically performs testing for impairment on certain long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the second quarter of 2023, due to the Boston recall, the Company elected to perform impairment testing on certain definite lived intangibles. The intangible components associated with the recalled products include completed technology and customer relationships with a net book value of $ 29.9 million and $ 8.1 million, respectively, as of September 30, 2023. The company used an undiscounted cash flow methodology and obtained revenue projections through the useful life of the intangibles. After performing the analysis, no impairment was noted. The Company will continue to monitor these intangibles as we return to the market and evaluate any changes that would impact our sales of these products. 6. DEBT Amendment to the Seventh Amended and Restated Senior Credit Agreement On March 24, 2023, the Company entered into the seventh amendment and restatement (the "March 2023 Amendment") of the Senior Credit Facility (the "Senior Credit Facility") with a syndicate of lending banks with Bank of America, N.A., as Administrative Agent. The March 2023 Amendment extended the maturity date to March 24, 2028, amended the contractual repayments of the term loan component, and amended the interest rate from LIBOR to SOFR-indexed interest. The Company continues to have the aggregate principal amount of up to approximately $ 2.1 billion available to it through the following facilities: (i) a $ 775.0 million term loan facility, and (ii) a $ 1.3 billion revolving credit facility, which includes a $ 60 million sublimit for the issuance of standby letters of credit and a $ 60 million sublimit for swingline loans. 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 March 31, 2023 through December 31, 2024 4.50 to 1.00 March 31, 2025 through June 30, 2026 4.25 to 1.00 September 30, 2026 and the last day of each fiscal quarter thereafter 4.00 to 1.00 Borrowings under the Senior Credit Facility bear interest, at the Company’s option, at a rate equal to the following: i. Term SOFR in effect from time to time plus 0.10 % plus the applicable rate (ranging from 1.00 % to 1.75 %), or ii. the highest of: 1. the weighted average overnight Federal funds rate, as published by the Federal Reserve Bank of New York, plus 0.50 % 2. the prime lending rate of Bank of America, N.A. or 3. the one-month Term SOFR plus 1.00 % The applicable rates are based on the Company’s consolidated total leverage ratio (defined as the ratio of (a) consolidated funded indebtedness as of such date less cash that is not subject to any restriction on the use or investment thereof to (b) consolidated EBITDA (as defined by the amended Seventh Amended and Restated Credit Agreement (the "Credit Agreement")), for the period of four consecutive fiscal quarters ending on such date). The Company will pay an annual commitment fee (ranging from 0.15 % to 0.30 %), based on the Company's consolidated total leverage ratio, on the amount available for borrowing under the revolving credit facility. The Senior Credit Facility is collateralized by substantially all of the assets of the Company’s U.S. subsidiaries, excluding intangible assets. The Senior Credit Facility is subject to various financial and negative covenants and at September 30, 2023, the Company was in compliance with all such covenants. The Company capitalized $ 7.6 million in deferred financing costs in connection with the modification of the Senior Credit Facility and wrote off $ 0.2 million of previously capitalized financing costs during the first quarter of 2023. 16 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) At September 30, 2023 there wa s $ 90.0 million ou tstanding under the revolving portion of the Senior Credit Facility. At December 31, 2022 there was no outstanding balance under the revolving portion of the Senior Credit Facility. At September 30, 2023 and December 31, 2022, there was $ 775.0 million outstanding under the term loan component of the Senior Credit Facility at a weighted average interest rate of 6.8 % and 5.6 %, respectively. The liability related to the Senior Credit Facility shown on the balance sheet at September 30, 2023 and December 31, 2022 is reflected net of $ 5.2 million and $ 3.7 million, respectively, in deferred financing costs. As of September 30, 2023 and December 31, 2022 there was $ 9.7 million and $ 38.1 million of the term loan component of the Senior Credit Facility classified as current on the condensed consolidated balance sheet, respectively. The fair value of outstanding borrowings of the Senior Credit Facility's term loan component at September 30, 2023 was $ 752.3 million. This fair value was determined by using a discounted cash flow model based on current market interest rates available to the Company. These inputs are corroborated by observable market data for similar liabilities and therefore classified within Level 2 of the fair value hierarchy. Level 2 inputs represent inputs that are observable for the asset or liability, either directly or indirectly, and are other than active market observable i nputs that reflect unadjusted quoted prices for identical assets or liabilities. Letters of credit outstanding as of September 30, 2023 and December 31, 2022 to taled $ 1.7 million and $ 1.6 million, respectively. There were no amounts drawn as of September 30, 2023. Contractual repayments of the term loan component of the Senior Credit Facility are due as follows: As of September 30, 2023 Principal Repayment Dollars in thousands Remainder of 2023 $ — 2024 $ 14,531 2025 $ 33,906 2026 $ 38,750 Thereafter 687,813 $ 775,000 Future interest payments on the term loan component of the Senior Credit Facility based on current interest rates are expected to approximate $ 13.5 million for remainder of 2023, $ 53.4 million in 2024, $ 51.6 million in 2025, $ 48.9 million in 2026, and $ 55.9 million thereafter. Interest is calculated on the term loan portion of the Senior Credit Facility based on SOFR plus the certain amounts set forth in the Credit Agreement. As the revolving credit facility and Securitization Facility (defined below) can be repaid at any time, no interest has been included in the calculation. Any outstanding borrowings on the revolving credit component of the Senior Credit Facility is due on March 24, 2028. Convertible Senior Notes On February 4, 2020, the Company issued $ 575.0 million aggregate principal amount of its 0.5 % Convertible Senior Notes due 2025 (the "2025 Notes"). The 2025 Notes will mature on August 15, 2025 and bear interest at a rate of 0.5 % per annum payable semi-annually in arrears, unless earlier converted, repurchased or redeemed in accordance with the terms of the 2025 Notes. In connection with this offering, the Company capitalized $ 13.2 million of financing fees. The 2025 Notes are senior, unsecured obligations of the Company, and are convertible into cash and shares of its common stock based on an initial conversion rate, subject to adjustment of 13.5739 shares per $1,000 principal amounts of the 2025 Notes (which represents an initial conversion price of $ 73.67 per share). The 2025 Notes convert only in the following circumstances: (1) if the closing price of the Company's common stock has been at least 130 % of the conversion price during the period; (2) if the average trading price per $1,000 principal amount of the 2025 Notes is less than or equal to 98 % of the average conversion value of the 2025 Notes during a period as defined in the indenture; (3) if the Company calls the notes for optional redemption as defined in the indenture; or (4) if specified corporate transactions occur. As of September 30, 2023, none of these conditions existed and the 2025 Notes are classified as long term obligations. 17 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) On December 9, 2020, the Company entered into the First Supplemental Indenture to the original indenture dated as of February 4, 2020 (The "Indenture") 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 (as defined in the indenture) for a conversion of the 2025 Notes, the Specified Dollar Amount (as defined in the indenture) 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 2025 Notes will have the right to require the Company to repurchase for cash all or a portion of their 2025 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 2025 Notes). The Company will also be required to increase the conversion rate for holders who convert their 2025 Notes in connection with certain fundamental changes occurring prior to the maturity date or following delivery by the Company of a notice of redemption. In connection with the issuance of the 2025 Notes, the Company entered into call transactions and warrant transactions, primarily with affiliates of the initial purchasers of the 2025 Notes (the “hedge participants”). The cost of the call transactions was $ 104.2 million for the 2025 Notes. The Company received $ 44.5 million of proceeds from the warrant transactions for the 2025 Notes. The call transactions involved purchasing call options from the hedge participants, and the warrant transactions involved selling call options to the hedge participants with a higher strike price than the purchased call options. The initial strike price of the call transactions was $ 73.67 , subject to anti-dilution adjustments substantially similar to those in the 2025 Notes. The initial strike price of the warrant transactions was $ 113.34 for the 2025 Notes, subject to customary anti-dilution adjustments. At September 30, 2023 , the carrying amount of the liability w as $ 575.0 million. The fair value of the 2025 Notes at September 30, 2023 was $ 524.7 million. Factors that the Company considered when estimating the fair value of the 2025 Notes included recent quoted market prices or dealer quotes. The level of the 2025 Notes is considered as Level 1. Securitization Facility In 2018, the Company entered into an accounts receivable securitization facility (the "Securitization Facility") under which accounts receivable of certain domestic subsidiaries are sold on a non-recourse basis to a special purpose entity (“SPE”), which is a bankruptcy-remote, consolidated subsidiary of the Company. Accordingly, the assets of the SPE are not available to satisfy the obligations of the Company or any of its subsidiaries. From time to time, the SPE may finance such accounts receivable with a revolving loan facility secured by a pledge of such accounts receivable. The amount of outstanding borrowings on the Securitization Facility at any one time is limited to $ 150.0 million. The Securitization Facility Agreement ("Securitization Agreement") governing the Securitization Facility contains certain covenants and termination events. An occurrence of an event of default or a termination event under this Securitization Agreement may give rise to the right of its counterparty to terminate this facility. As of September 30, 2023, the Company was in compliance with the covenants and none of the termination events had occurred. On May 28, 2021, the Company entered into an amendment (the "May 2021 Amendment") of the Securitization Facility which extended the maturity date from December 21, 2021 to May 28, 2024. In addition, on April 17, 2023 the company entered into an amendment (the "April 2023 Amendment") of the Securitization Facility and amended the interest rate from LIBOR to SOFR indexed rate. The April 2023 Amendment and the May 2021 Amendment do not increase the Company’s total indebtedness. The Securitization Facility is currently indexed to SOFR. At September 30, 2023 and December 31, 2022, the Company had $ 75.7 million and $ 104.7 million, respectively, of outstanding borrowings under its Securitization Facility at a weighted average interest rate of 6.6 % and 5.0 %, respectively. At September 30, 2023, the total amount outstanding under the Securitization Facility is classified as current on the consolidated balance sheet as the total amount is due on May 28, 2024. The fair value of the outstanding borrowing of the Securitization Facility at September 30, 2023 was $ 74.8 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. 18 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 7. DERIVATIVE INSTRUMENTS Interest Rate Hedging The Company’s interest rate risk relates to U.S. dollar denominated variable interest rate borrowings. The Company uses interest rate swap derivative instruments to manage earnings and cash flow exposure resulting from changes in interest rates. These interest rate swaps apply a fixed interest rate on a portion of the Company's expected SOFR-indexed borrowings. In connection with the March 2023 Amendment to the Senior Credit Facility, the Company amended its interest rate from LIBOR to SOFR-indexed interest. In March 2023, the Company entered into a basis swap where the Company receives Term SOFR and pays LIBOR to convert the portfolio of swaps from LIBOR to SOFR. The Company held the following interest rate swaps as of September 30, 2023 and December 31, 2022 (dollar amounts in thousands): September 30, 2023 September 30, 2023 Hedged Item Notional Amount Designation Date Effective Date Termination Date Fixed Interest Rate Estimated Fair Value Asset (Liability) 1-month Term SOFR Loan 150,000 December 13, 2017 July 1, 2019 June 30, 2024 2.423 % 3,395 1-month Term SOFR Loan 200,000 December 13, 2017 January 1, 2018 December 31, 2024 2.313 % 7,440 1-month Term SOFR Loan 75,000 October 10, 2018 July 1, 2020 June 30, 2025 3.220 % 2,381 1-month Term SOFR Loan 75,000 October 10, 2018 July 1, 2020 June 30, 2025 3.199 % 2,486 1-month Term SOFR Loan 75,000 October 10, 2018 July 1, 2020 June 30, 2025 3.209 % 2,339 1-month Term SOFR Loan 100,000 December 18, 2018 December 30, 2022 December 31, 2027 2.885 % 6,052 1-month Term SOFR Loan 100,000 December 18, 2018 December 30, 2022 December 31, 2027 2.867 % 6,187 1-month Term SOFR Loan 575,000 December 15, 2020 July 31, 2025 December 31, 2027 1.415 % 31,528 1-month Term SOFR Loan 125,000 December 15, 2020 July 1, 2025 December 31, 2027 1.404 % 7,369 Basis Swap (1) — March 31, 2023 March 24, 2023 December 31, 2027 N/A ( 1,923 ) $ 1,475,000 $ 67,254 (1) The notional of the basis swap amortizes to match the total notional of the interest rate swap portfolio over time 19 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) December 31, 2022 December 31, 2022 Hedged Item Notional Amount Designation Date Effective Date Termination Date Fixed Interest Rate Estimated Fair Value Asset (Liability) 1-month USD LIBOR Loan 150,000 December 13, 2017 July 1, 2019 June 30, 2024 2.423 % 5,012 1-month USD LIBOR Loan 200,000 December 13, 2017 January 1, 2018 December 31, 2024 2.313 % 8,380 1-month USD LIBOR Loan 75,000 October 10, 2018 July 1, 2020 June 30, 2025 3.220 % 1,831 1-month USD LIBOR Loan 75,000 October 10, 2018 July 1, 2020 June 30, 2025 3.199 % 1,905 1-month USD LIBOR Loan 75,000 October 10, 2018 July 1, 2020 June 30, 2025 3.209 % 1,970 1-month USD LIBOR Loan 100,000 December 18, 2018 December 30, 2022 December 31, 2027 2.885 % 4,252 1-month USD LIBOR Loan 100,000 December 18, 2018 December 30, 2022 December 31, 2027 2.867 % 4,153 1-month USD LIBOR Loan 575,000 December 15, 2020 July 31, 2025 December 31, 2027 1.415 % 23,742 1-month USD LIBOR Loan 125,000 December 15, 2020 July 1, 2025 December 31, 2027 1.404 % 5,467 $ 1,475,000 $ 56,712 The Company has designated these derivative instruments as cash flow hedges. The Company assesses the effectiveness of these derivative instruments and has recorded the changes in the fair value of the derivative instrument designated as a cash flow hedge as unrealized gains or losses in accumulated other comprehensive income (“AOCI”), net of tax, until the hedged item affected earnings, at which point any gain or loss was reclassified to earnings. If the hedged cash flow does not occur, or if it becomes probable that it will not occur, the Company will reclassify the remaining amount of any gain or loss on the related cash flow hedge recorded in AOCI to interest expense at that time. Foreign Currency Hedging From time to time, the Company enters into foreign currency hedge contracts intended to protect the U.S. dollar value of certain forecasted foreign currency denominated transactions. The Company assesses the effectiveness of the contracts that are designated as hedging instruments. The changes in fair value of foreign currency cash flow hedges are recorded in AOCI, net of tax. Those amounts are subsequently reclassified to earnings from AOCI as impacted by the hedged item when the hedged item affects earnings. If the hedged forecasted transaction does not occur or if it becomes probable that it will not occur, the Company will reclassify the amount of any gain or loss on the related cash flow hedge to earnings at that time. For contracts not designated as hedging instruments, the changes in fair value of the contracts are recognized in other income, net in the consolidated statements of operation, along with the offsetting foreign currency gain or loss on the underlying assets or liabilities. The success of the Company’s hedging anticipated currency exchange gains or losses to the extent that there are differences between forecasted and actual activities during periods of currency volatility. In addition, changes in currency exchange rates related to any unhedged transactions may affect earnings and cash flows. Cross-Currency Rate Swaps On September 22, 2023, the Company amended the Swiss Franc ("CHF")-denominated intercompany loan to partially settle CHF 20.0 million and extend the termination date to September 2024 and as a result, the Company terminated the cross-currency swap designated as cash flow hedge of an intercompany loan with aggregate notional amount of $ 48.5 million. Simultaneously, the Company entered into a cross-currency swap agreement to hedge a notional amount of CHF 28.5 million equivalent to $ 31.5 million of this amended intercompany loan into U.S. dollars. The loss recorded by the Company upon the settlement of the swap was not material for the period. On December 21, 2020, the Company entered into cross-currency swap agreements to convert a notional amount of $ 471.6 million equivalent to 420.1 million of a CHF-denominated intercompany loan into U.S. dollars. The CHF-denominated intercompany loan was the result of an intra-entity transfer of certain intellectual property rights to a subsidiary in Switzerland completed during the fourth quarter of 2020. The intercompany loan requires quarterly payments of CHF 5.8 million plus accrued interest. As a result, the aggregate notional amount of the related cross-currency swaps will decrease by a corresponding amount. 20 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) The objective of these cross-currency swaps is to reduce volatility of earnings and cash flows associated with changes in the foreign currency exchange rate. Under the terms of these contracts, which have been designated as cash flow hedges, the Company will make interest payments in Swiss Francs and receive interest in U.S. dollars. Upon the maturity of these contracts, the Company will pay the principal amount of the loans in Swiss Francs and receive U.S. dollars from the counterparties. The Company held the following cross-currency rate swaps as of September 30, 2023 and December 31, 2022 (dollar amounts in thousands): September 30, 2023 December 31, 2022 September 30, 2023 December 31, 2022 Effective Date Termination Date Fixed Rate Aggregate Notional Amount Fair Value Asset (Liability) Pay CHF December 21, 2020 December 22, 2025 3.00 % CHF 356,886 374,137 ( 9,326 ) ( 4,241 ) Receive U.S.$ 3.98 % $ 400,637 420,001 Pay CHF September 28, 2022 September 29, 2023 1.95 % CHF — 48,532 — ( 3,528 ) Receive U.S.$ 5.32 % $ — 49,142 Pay CHF September 22, 2023 September 29, 2024 2.40 % CHF 28,500 — 342 — Receive U.S.$ 6.27 % $ 31,457 — Total $ ( 8,984 ) $ ( 7,769 ) The cross-currency swaps are carried on the consolidated balance sheet at fair value, and changes in the fair values are recorded as unrealized gains or losses in AOCI. For the three and nine months ended September 30, 2023 the Company recorded gains of $ 15.3 million and $ 3.3 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, 2022, the Company recorded gains of $ 16.5 million and $ 42.2 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, 2023, the Company recorded gains of $ 13.8 million and $ 3.1 million in AOCI, respectively, related to change in fair value of the cross-currency swaps. For the three and nine months ended September 30, 2022, the Company recorded a loss of $ 12.3 million and a gain of $ 33.8 million in AOCI, respectively, related to change in fair value of the cross-currency swaps. For the three and nine months ended September 30, 2023, the Company recorded gains of $ 1.5 million and $ 4.4 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, 2022, the Company recorded gains of $ 1.1 million and $ 5.0 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 AOCI as of September 30, 2023 within the next twelve months is $ 4.2 million. As of September 30, 2023, the Company does not expect any gains or losses will be reclassified into earnings because the original forecasted transactions will not occur. Net Investment Hedges The Company manages certain foreign exchange risks through a variety of strategies, including hedging. The Company is exposed to foreign exchange risk from its international operations through foreign currency purchases, net investments in foreign subsidiaries, and foreign currency assets and liabilities created in the normal course of business. On October 1, 2018 and December 16, 2020, the Company entered into cross-currency swap agreements designated as net investment hedges to partially offset the effects of foreign currency on foreign subsidiaries. 21 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) The Company held the following cross-currency rate swaps designated as net investment hedges as of September 30, 2023 and December 31, 2022, respectively (dollar amounts in thousands): September 30, 2023 December 31, 2022 September 30, 2023 December 31, 2022 Effective Date Termination Date Fixed Rate Aggregate Notional Amount Fair Value Asset (Liability) Pay EUR October 3, 2018 September 30, 2023 — % EUR — 51,760 — 4,713 Receive U.S.$ 2.57 % $ — 60,000 Pay EUR October 3, 2018 September 30, 2025 — % EUR 38,820 38,820 4,223 4,307 Receive U.S.$ 2.19 % $ 45,000 45,000 Pay CHF May 26, 2022 December 16, 2028 — % CHF 288,210 288,210 ( 25,294 ) ( 14,663 ) Receive U.S.$ 1.94 % $ 300,000 300,000 Total $ ( 21,071 ) $ ( 5,643 ) The cross-currency swaps were carried on the consolidated balance sheet at fair value and changes in the fair values were recorded as unrealized gains or losses in AOCI. For the three and nine months ended September 30, 2023, the Company recorded a gain of $ 6.1 million and a loss of $ 4.1 million, respectively, in AOCI related to the change in fair value of the cross-currency swaps. For the three and nine months ended September 30, 2022, the Company recorded gains of $ 9.4 million and $ 21.5 million in AOCI, respectively, related to change in fair value of the cross-currency swaps. For the three and nine months ended September 30, 2023, the Company recorded gains of $ 1.8 million and $ 6.0 million, respectively, in interest income included in the consolidated statements of operations related to the interest rate differential of the cross-currency swaps. For the three and nine months ended September 30, 2022, the Company recorded gains of $ 2.4 million and $ 4.7 million, respectively, in interest income included in the consolidated statements of operations related to the interest rate differential of the cross-currency swaps. The estimated gain that is expected to be reclassified to interest income from AOCI as of September 30, 2023 within the next twelve months is $ 6.9 million. Foreign Currency Forward Contract The Company has entered into a hedge for forecasted intercompany purchases denominated in foreign currencies through the use of forward contracts designated as cash flow hedges. To the extent these forward contracts meet hedge accounting criteria, changes in their fair value are not included in accumulated comprehensive loss. These changes in fair value will be recognized into earnings as a component of cost of sales when the forecasted-transaction occurs. During 2023, the Company entered into foreign currency forward Contracts to mitigate the risk of foreign currency on intercompany purchases in CHF. These contracts typically settle at various dates within twelve months of execution. As of September 30, 2023 the notional amount of foreign currency forward contracts was $ 3.5 million. During the three and nine months ended September 30, 2023 the Company recorded gains of $ 0.1 million and $ 0.3 million, respectively in AOCI related to the change in fair value of the foreign currency forward contracts. For the three and nine months ended September 30, 2023 the company recorded a gain of $ 0.1 million and $ 0.4 million, respectively, in cost of goods sold included in the consolidated statements of operations related to the foreign currency forward contracts. Counterparty Credit Risk The Company manages its concentration of counterparty credit risk on its derivative instruments by limiting acceptable counterparties to a group of major financial institutions with investment grade credit ratings, and by actively monitoring their credit ratings and outstanding positions on an ongoing basis. Therefore, the Company considers the credit risk of the counterparties to be low. Furthermore, none of the Company’s derivative transactions are subject to collateral or other security arrangements, and none contain provisions that depend upon the Company’s credit ratings from any credit rating agency. 22 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) Fair Value of Derivative Instruments The Company has classified all of its derivative instruments within Level 2 of the fair value hierarchy because observable inputs are available for substantially the full term of the derivative instruments. The fair values of the interest rate swaps and cross-currency swaps were developed using a market approach based on publicly available market yield curves and the terms of the swap. The Company performs ongoing assessments of counterparty credit risk. The following table summarizes the fair value for derivatives designated as hedging instruments in the condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022: Fair Value as of Location on Balance Sheet (1) : September 30, 2023 December 31, 2022 Dollars in thousands Derivatives designated as hedges — Assets: Prepaid expenses and other current assets Cash Flow Hedges Interest rate swap (2) $ 19,938 $ 16,682 Cross-currency swap 4,242 4,497 Net Investment Hedges Cross-currency swap 2,380 11,653 Other assets Cash Flow Hedges Interest rate swap (2) 49,240 40,030 Cross-currency swap — — Net Investment Hedges Cross-currency swap 3,220 3,311 Total derivatives designated as hedges — Assets $ 79,020 $ 76,173 Derivatives designated as hedges — Liabilities: Accrued expenses and other current liabilities Cash Flow Hedges Interest rate swap (2) $ 663 $ — Cross-currency swap — 3,528 Foreign currency forward contracts 127 Net Investment Hedges Cross-currency swap — — Other liabilities Cash Flow Hedges Interest rate swap (2) 1,261 — Cross-currency swap 13,226 8,738 Net Investment Hedges Cross-currency swap 26,671 20,608 Total derivatives designated as hedges — Liabilities $ 41,948 $ 32,874 (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, 2023 and December 31, 2022, the total notional amounts related to the Company’s interest rate swaps were both $ 1.5 billion, respectively. 23 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) The following presents the effect of derivative instruments designated as cash flow hedges and net investment hedges on the accompanying condensed consolidated statement of operations during the three and nine months ended September 30, 2023 and 2022: Dollars in thousands Balance in AOCI Beginning of Quarter Amount of Gain (Loss) Recognized in AOCI Amount of Gain (Loss) Reclassified from AOCI into Earnings Balance in AOCI End of Quarter Location in Statements of Operations Three Months Ended September 30, 2023 Cash Flow Hedges Interest rate swap $ 56,901 $ 15,317 $ 4,964 $ 67,254 Interest expense Cross-currency swap ( 18,925 ) 13,796 15,347 ( 20,476 ) Other income, net Foreign Currency Forward Contract ( 123 ) 98 87 ( 112 ) Cost of Sales Net Investment Hedges Cross-currency swap ( 21,239 ) 6,051 1,772 ( 16,960 ) Interest income $ 16,614 $ 35,262 $ 22,170 $ 29,706 Three Months Ended September 30, 2022 Cash Flow Hedges Interest rate swap $ 26,939 $ 32,939 $ ( 726 ) $ 60,604 Interest expense Cross-currency swap ( 17,835 ) 12,332 17,627 ( 23,130 ) Other income, net Net Investment Hedges Cross-currency swap 7,506 9,403 2,378 14,531 Interest income $ 16,610 $ 54,674 $ 19,279 $ 52,005 Dollars in thousands Balance in AOCI Beginning of Year Amount of Gain (Loss) Recognized in AOCI Amount of Gain (Loss) Reclassified from AOCI into Earnings Balance in AOCI End of Quarter Location in Statements of Operations Nine Months Ended September 30, 2023 Cash Flow Hedges Interest rate swap $ 56,712 $ 23,477 $ 12,935 $ 67,254 Interest expense Cross-currency swap ( 20,271 ) 3,114 3,319 ( 20,476 ) Other income (expense),net Foreign Currency Forward Contract — 333 445 ( 112 ) Net Investment Hedges Cross-currency swap ( 6,914 ) ( 4,066 ) 5,980 ( 16,960 ) Interest income $ 29,527 $ 22,858 $ 22,679 $ 29,706 Nine Months Ended September 30, 2022 Cash Flow Hedges Interest rate swap $ ( 43,956 ) $ 94,729 $ ( 9,831 ) $ 60,604 Interest expense Cross-currency swap ( 9,688 ) 33,784 47,226 ( 23,130 ) Other income (expense), net Net Investment Hedges Cross-currency swap ( 2,321 ) 21,528 4,676 14,531 Interest income $ ( 55,965 ) $ 150,041 $ 42,071 $ 52,005 Derivative Instruments not designated hedges: During the second quarter of 2021, the Company entered into a foreign currency swap, with a notional amount of $ 7.3 millions to mitigate the risk from fluctuations in foreign currency exchange rates associated with an intercompany loan denominated in Japanese Yen. 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 Company subsequently paid down a portion of this swap, bringing the notional amount down to $ 5.5 million. 24 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) The following table summarizes the gains (losses) of derivative instruments not designated as hedges on the condensed consolidated statements of income, which was included in other income: Dollars in thousands Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Foreign currency swaps 135 328 778 1,148 Total $ 135 $ 328 $ 778 $ 1,148 8. STOCK-BASED COMPENSATION As of September 30, 2023, 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”). 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 2003 Plans vests over specified periods, generally three years after the date of grant. The vesting of performance stock issued under the 2003 Plans is subject to service and performance conditions. Stock Options As of September 30, 2023, there were approximately $ 4.3 million of total unrecognized compensation costs related to unvested stock options. These costs are expected to be recognized over a weighted-average period of approximately three years . There were 151,293 stock options granted during the nine months ended September 30, 2023. For the nine months ended September 30, 2023, the weighted average grant date fair value for stock options granted was $ 21.58 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, 2023, there was approximately $ 37.7 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 466,636 restricted stock awards and 161,218 performance stock awards during the nine months ended September 30, 2023. For the nine months ended September 30, 2023, the weighted average grant date fair value for restricted stock awards and performance stock units granted was $ 51.24 and $ 52.87 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 the three and nine months ended September 30, 2023 were $ 0.3 million and $ 0.9 million. The components of the net periodic benefit costs other than the service cost component of $ 0.5 million and $ 1.6 million for the three and nine months ended September 30, 2023 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, 2022 were $ 0.3 million and $ 0.8 million. The components of the net periodic benefit costs other than the service cost component of $ 0.6 million and $ 1.9 million for the three and nine months ended September 30, 2022 are included in other income, net in the consolidated statements of operations. 25 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) The estimated fair values of plan assets were $ 38.2 million and $ 38.1 million as of September 30, 2023 and December 31, 2022, respectively. The net plan assets of the pension plans are invested in common trusts as of September 30, 2023 and December 31, 2022. 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. 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 were $ 5.4 million and $ 4.7 million as of September 30, 2023 and December 31, 2022, respectively. 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, 2023. 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, 2023 and September 30, 2022 was $ 17.9 million and $ 16.6 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, 2023 December 31, 2022 ROU assets $ 156,760 $ 148,284 Current lease liabilities 14,461 14,624 Non-current lease liabilities 168,017 157,420 Total lease liabilities $ 182,478 $ 172,044 Weighted average remaining lease term (in years): Leased facilities 16.6 years 16.9 years Leased vehicles 2.0 years 2.0 years Weighted average discount rate: Leased facilities 5.5 % 5.4 % Leased vehicles 2.6 % 2.7 % 26 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) Supplemental cash flow information related to leases for the nine months ended September 30, 2023 and 2022 were as follows: Dollars in thousands September 30, 2023 September 30, 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 14,778 $ 12,804 ROU assets obtained in exchange for lease liabilities: Operating leases $ 19,540 $ 75,588 Future minimum lease payments under operating leases at September 30, 2023 were as follows: Dollars in thousands Related Parties Third Parties Total Remainder of 2023 $ 74 $ 5,415 $ 5,489 2024 296 21,821 22,117 2025 296 20,968 21,264 2026 296 18,147 18,443 2027 296 17,901 18,197 2028 296 15,740 16,036 Thereafter 246 173,735 173,981 Total minimum lease payments $ 1,800 $ 273,727 $ 275,527 Less: Imputed interest 93,049 Total lease liabilities 182,478 Less: Current lease liabilities 14,461 Long-term lease liabilities 168,017 There were no future minimum lease payments under finance leases at September 30, 2023. Related Party Leases The Company leases its manufacturing facility in Plainsboro, New Jersey, from a general partnership that is 50 % owned by a principal stockholder of the Company. The term of the current lease agreement is through October 31, 2029 at an annual rate of approximately $ 0.3 million. 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, 2023 and December 31, 2022, there were 11.8 million and 6.8 million shares of treasury stock outstanding with a cost of $ 612.8 million and $ 362.9 million, at a weighted average cost per share of $ 51.83 and $ 53.18 , respectively. On August 15, 2023, the Company entered into a $ 125 million accelerated share repurchase ("August 2023 ASR") and received 2.3 million shares of the common stock at inception of the August 2023 ASR, which represented approximately 80 % of the expected total shares under the August 2023 ASR. On October 18, 2023 the early exercise provision was exercised by the August 2023 ASR counterparty. The Company received an additional 0.9 million shares determined using the volume-weighted average price of the Company's common stock during the term of the August 2023 ASR. 27 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) On January 26, 2023, the Company entered into a $ 150 million accelerated share repurchase ("January 2023 ASR") and received 2.1 million shares of common stock at inception of the January 2023 ASR, which represented approximately 80 % of the expected total shares under the January 2023 ASR. The settlement of the January ASR agreement was completed in two separate transactions on April 26, 2023 and May 4, 2023, where the Company received an additional 0.30 million and 0.31 million shares respectively, determined using the volume-weighted average price of the Company's common stock during the term of the January 2023 ASR. On August 16, 2022, the Inflation Reduction Act of 2022 (the “Act”) was signed into law. The Act implements a new excise tax of 1% on the net share repurchases made by the Company effective for share repurchases performed January 1, 2023, or after. The Company accrued $ 2.5 million of excise tax related to the two ASR agreements during 2023. On July 18, 2023, the Board of Directors authorized a new $ 225 million share repurchase program, replacing the existing $ 225 million program authorized in April 2022, and of which $ 75 million remained authorized at the time of its replacement . The program authorized in July 2023 allows the Company to repurchase its shares opportunistically from time to time. The Company may utilize various methods to effect any repurchases, including open market transactions, privately negotiated transactions, transactions structured through investment banking institutions, including accelerated share repurchases, or a combination of the foregoing, some of which may be effected through Rule 10b5-1 plans. 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. On January 12, 2022, the Company entered into a $ 125 million accelerated share repurchase ("2022 ASR") and received 1.48 million shares of Company common stock at inception of the 2022 ASR, which represented approximately 80 % of the expected total shares under the 2022 ASR. On March 24, 2022, the early exercise provision under the 2022 ASR was exercised by 2022 ASR counterparty. Upon settlement on March 24, 2022, the Company received an additional 0.46 million shares determined using the volume-weighted average price of the Company's common stock during the term of the 2022 ASR. 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, 2023 2022 2023 2022 Reported tax rate ( 4.8 ) % 15.1 % 8.2 % 14.8 % The Company’s effective income tax rates for the three months ended September 30, 2023 and 2022 were ( 4.8 )% and 15.1 %, respectively. For the three months ended September 30, 2023, the primary drivers of the lower tax rate relate to a reduction to book income in higher-taxed jurisdictions and a $ 3.3 million benefit related to the filing of prior year tax returns. The Company’s effective income tax rates for the nine months ended September 30, 2023 and 2022 were 8.2 % and 14.8 %, respectively. For the nine months ended September 30, 2023, the primary drivers of the lower tax rate relate to a reduction to book income in higher-taxed jurisdictions and a $ 3.8 million benefit related to the filing of prior year tax returns.. The lower rate from the nine months ended September 30, 2022 was primarily due to a $ 5.5 million benefit related to excess tax benefits from stock compensation. 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. Further, legislation in foreign jurisdictions may be enacted, in response to the base erosion and profit-sharing 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 global 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, 2023, the Company has not provided deferred income taxes on unrepatriated earnings from foreign subsidiaries as they are deemed to be 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 there is no material cost to bring the earnings back to the United States. Reinvestment considerations would include future acquisitions, transactions, and capital expenditure plans. 28 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 2023 2022 2023 2022 Basic net income per share: Net income $ 19,497 $ 49,915 $ 47,907 $ 127,604 Weighted average common shares outstanding 79,690 83,042 80,842 82,955 Basic net income per common share $ 0.24 $ 0.60 $ 0.59 $ 1.54 Diluted net income per share: Net income $ 19,497 $ 49,915 $ 47,907 $ 127,604 Weighted average common shares outstanding — Basic 79,690 83,042 80,842 82,955 Effect of dilutive securities: Stock options and restricted stock 121 357 270 521 Weighted average common shares for diluted earnings per share 79,811 83,399 81,112 83,476 Diluted net income per common share $ 0.24 $ 0.60 $ 0.59 $ 1.53 Basic earnings per share is computed by dividing net income by the weighted-average common shares outstanding during the period. Diluted earnings per share is computed based on the weighted-average common shares outstanding plus the effect of dilutive potential common shares outstanding during the period calculated using the treasury stock method. Dilutive potential common shares include employee equity share options, non-vested shares, and similar equity instruments granted by the Company. Potential common share equivalents have been excluded where their inclusion would be anti-dilutive. Common stock of approximately 0.6 million an d 0.3 million shares at September 30, 2023, and 2022, 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. 14. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Comprehensive income for the three and nine months ended September 30, 2023 and 2022: Three Months Ended September 30, Nine Months Ended September 30, Dollars in thousands 2023 2022 2023 2022 Net income $ 19,497 $ 49,915 $ 47,907 $ 127,604 Foreign currency translation adjustment ( 12,841 ) ( 21,392 ) ( 8,632 ) ( 45,142 ) Change in unrealized loss/(gain) on derivatives, net of tax 10,090 27,213 112 82,957 Pension liability adjustment, net of tax ( 334 ) ( 45 ) — ( 99 ) Comprehensive income, net $ 16,412 $ 55,691 $ 39,387 $ 165,320 29 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) Changes in accumulated other comprehensive income by component between December 31, 2022 and September 30, 2023 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, 2023 $ 22,817 $ 9,322 $ ( 21,874 ) $ 10,265 Other comprehensive gain (loss) 17,601 — ( 8,632 ) 8,969 Less: Amounts reclassified from accumulated other comprehensive income, net 17,489 — — 17,489 Net current-period other comprehensive gain (loss) 112 — ( 8,632 ) ( 8,520 ) Balance at September 30, 2023 $ 22,929 $ 9,322 $ ( 30,506 ) $ 1,745 For the nine months ended September 30, 2023, the Company reclassified a gain of $ 17.5 million from accumulated other comprehensive income to other income, net and interest income, respectively. 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 TT segment includes such offerings as skin and wound repair, plastics & surgical reconstruction products, bone grafts, and nerve and tendon repair products. The Corporate and other category includes (i) various executive, finance, human resource, information systems and legal functions, (ii) brand management, and (iii) share-based compensation costs. The operating results of the various reportable segments as presented are not comparable to one another because (i) certain operating segments are more dependent than others on corporate functions for unallocated general and administrative and/or operational manufacturing functions, and (ii) the Company does not allocate certain manufacturing costs and general and administrative costs to the operating segment results. Net sales and profit by each reportable segment for the three and nine months ended September 30, 2023 and 2022 are as follows: Three Months Ended September 30, Nine Months Ended September 30, Dollars in thousands 2023 2022 2023 2022 Segment Net Sales Codman Specialty Surgical $ 268,205 $ 249,796 $ 787,371 $ 754,967 Tissue Technologies 114,216 135,395 357,163 404,677 Total revenues $ 382,421 $ 385,191 $ 1,144,534 $ 1,159,644 Segment Profit Codman Specialty Surgical $ 105,170 $ 105,717 $ 332,444 $ 308,073 Tissue Technologies 31,789 59,754 92,132 175,273 Segment profit 136,959 165,471 424,576 483,346 Amortization ( 3,208 ) ( 3,141 ) ( 9,342 ) ( 10,339 ) Corporate and other ( 107,158 ) ( 97,281 ) ( 339,755 ) ( 301,927 ) Operating income $ 26,593 $ 65,049 $ 75,479 $ 171,080 30 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) The Company does not allocate any assets to the reportable segments. No asset information is reported to the chief operating decision maker and disclosed in the financial information for each segment. The Company attributes revenues to geographic areas based on the location of the customer. Total revenue by major geographic area consisted of the following: Three Months Ended September 30, Nine Months Ended September 30, Dollars in thousands 2023 2022 2023 2022 United States $ 269,838 $ 282,016 $ 817,622 $ 832,714 Europe 41,524 38,301 120,040 128,907 Asia Pacific 48,777 42,774 146,956 133,856 Rest of World 22,282 22,100 59,916 64,167 Total Revenues $ 382,421 $ 385,191 $ 1,144,534 $ 1,159,644 16. COMMITMENTS AND CONTINGENCIES In consideration for certain technology, manufacturing, distribution, and selling rights and licenses granted to the Company, the Company has agreed to pay royalties on sales of certain products that it sells. The royalty payments that the Company made under these agreements were not significant for any of the periods presented. In the ordinary course of its business, the Company is involved in, from time to time, various legal actions, including any matters described below, involving product liability, employment, intellectual property and commercial disputes, shareholder related matters, environmental proceedings, tax disputes, and governmental proceedings and investigations, some of which have been settled by the Company. In the opinion of management, such matters 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. On September 12, 2023, a securities class action complaint, captioned Pembroke Pines Firefighters & Police Officers Pension Fund v. Integra LifeSciences Holdings Corporation , No. 23-cv-20321 (D.N.J.), was filed by a purported stockholder of the Company in the United States District Court for the District of New Jersey (the “Pembroke Litigation”) against the Company and certain of the Company’s current and former executive officers. The Pembroke Litigation, filed on behalf of a putative class of stockholders who purchased or acquired the Company’s common stock between March 11, 2019 and May 22, 2023, inclusive, alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, on the basis of purportedly materially false and misleading statements and omissions relating to certain quality systems issues identified by the U.S. Food and Drug Administration at the Company’s Boston, Massachusetts manufacturing facility, the Company’s efforts to remediate those issues, and the Company’s forecasts for certain products in its Tissue Technologies segment. The complaint seeks, among other things, compensatory damages, attorneys’ fees, expert fees, and other costs. The Company believes that it has strong defenses to the allegations in the Pembroke Litigation, as we intend to defend the matter vigorously. Contingent Consideration The Company determined the fair value of contingent consideration during the nine month period ended September 30, 2023 and September 30, 2022 to reflect the change in estimate, additions, payments, transfers and the time value of money during the period. 31 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, 2023 and September 30, 2022 is as follows (in thousands): Nine Months Ended September 30, 2023 Contingent Consideration Liability Related to Acquisition of: Arkis Location in Financial Statements Derma Sciences ACell Surgical Innovations Associates, Inc. (FN 2) Location in Financial Statements Balance as of January 1, 2023 $ 12,895 $ 230 $ 3,700 57,600 Change in fair value of contingent consideration liabilities 1,991 Research and development 1,887 ( 2,200 ) 6,600 Selling, general and administrative Balance as of September 30, 2023 14,886 2,117 1,500 64,200 Short-Term $ 4,373 $ — $ 503 $ 13,000 Long-Term 10,513 2,117 997 51,200 Total $ 14,886 $ 2,117 $ 1,500 $ 64,200 Nine Months Ended September 30, 2022 Contingent Consideration Liability Related to Acquisition of: Arkis Location in Financial Statements Derma Sciences ACell Inc. Location in Financial Statements Balance as of January 1, 2022 $ 15,099 $ 230 $ 21,800 Change in fair value of contingent consideration liabilities ( 2,681 ) Research and development — ( 16,800 ) Selling, general and administrative Balance as of September 30, 2022 $ 12,418 $ 230 $ 5,000 Short-Term $ 2,829 $ — $ — Long-Term 9,589 230 5,000 Total $ 12,418 $ 230 $ 5,000 Arkis BioSciences Inc. As part of the acquisition of Arkis BioSciences Inc. ("Arkis"), 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. Derma Sciences, Inc. The Company assumed contingent consideration incurred by Derma Sciences, Inc. ("Derma Sciences") related to its acquisitions of BioD, LLC and the intellectual property related to Medihoney® products. The Company accounted for the contingent liabilities by recording the 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 milestone 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. 32 INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) ACell Inc. As part of the acquisition of ACell ("The Acell Acquisition"), the Company is required to make payments to the former shareholders of ACell up to $ 50 million based on the achievement by the Company of certain revenue-based performance milestones in 2023 and $ 50 million 2025. The Company used iterations of the Monte Carlo simulation to calculate the fair value of the contingent consideration that considered the possible outcomes of scenarios related to each specific milestone. The Company estimated the fair value of the contingent consideration to be $ 23.9 million at the acquisition date. The change in the fair value of the contingent obligation was primarily as a result of changes in the timing and amount of revenue estimates. 33 Table of Contents "