NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
General
The terms “we,” “our,” “us,” “Company” and “Integra” refer to Integra LifeSciences Holdings Corporation, a Delaware corporation, and its subsidiaries unless the context suggests otherwise.
In the opinion of management, the
June 30, 2017
unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations and cash flows of the Company. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended
December 31, 2016
included in the Company’s Annual Report on Form 10-K. The
December 31, 2016
consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. Operating results for the three- and six-month periods ended
June 30, 2017
are not necessarily indicative of the results to be expected for the entire year.
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent liabilities, and the reported amounts of revenues and expenses. Significant estimates affecting amounts reported or disclosed in the consolidated financial statements include allowances for doubtful accounts receivable and sales returns and allowances, net realizable value of inventories, valuation of intangible assets including in-process research and development, amortization periods for acquired intangible assets, discount rates and estimated projected cash flows used to value and test impairments of long-lived assets and goodwill, estimates of projected cash flows and depreciation and amortization periods for long-lived assets, computation of taxes, valuation allowances recorded against deferred tax assets, the valuation of stock-based compensation, valuation of derivative instruments, valuation of the equity component of convertible debt instruments, valuation of contingent liabilities, the fair value of debt instruments and loss contingencies. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the current circumstances. Actual results could differ from these estimates.
Amendment to the Certificate of Incorporation and Stock Split
On October 25, 2016, the Board of Directors recommended, subject to stockholder approval, an Amendment to the Company’s Certificate of Incorporation (the “Amendment”) to increase the number of authorized shares of common stock from
60.0 million
shares to
240.0 million
shares with
$0.01
per share par value, for the purpose of, among other things, effecting a two-for-one stock split. The stockholders approved the amendment at its special meeting of stockholders on December 21, 2016, and the Company subsequently filed a certificate of amendment to its Amended and Restated Certificate of Incorporation to effect the increase in the number of authorized shares of common stock and the two-for-one-stock split. Stockholders of record, as of the close of market on December 21, 2016, became entitled to receive one additional share of common stock for each share held. The shares were distributed on January 3, 2017. No fractional shares of common stock were issued as a result of the stock split. The adjusted stock price was reflected on the NASDAQ stock market beginning on January 4, 2017.
The shares of common stock retain a par value of
$0.01
per share. Accordingly, the stockholders' equity reflects the stock split by reclassifying from "additional paid-in capital" to "common stock" an amount equal to the par value of the increased shares resulting from the stock split. All share and per share amounts of common stock contained in the Company's financial statements have been restated for all periods to give retroactive effect to the stock split.
Johnson & Johnson's Codman Neurosurgery Business
On February 14, 2017, the Company entered into a binding offer letter (the “Offer Letter”) with DePuy Synthes, Inc., a Delaware corporation (“DePuy Synthes”), a wholly-owned subsidiary of Johnson & Johnson, pursuant to which Integra made a binding offer to acquire certain assets, and assume certain liabilities, of Johnson & Johnson’s Codman neurosurgery business (the “Codman Neurosurgery Transaction”). The assets and liabilities subject to the proposed Codman Neurosurgery Transaction relate to the research, development, manufacture, marketing, distribution and sale of certain products used in connection with neurosurgery procedures (the “Codman Neurosurgery Business”). The purchase price for the Codman Neurosurgery Transaction is
$1.045 billion
, subject to adjustments set forth in the Purchase Agreement (as defined below) relating to the book value of inventory transferred to the Company at the closing of the Codman Neurosurgery Transaction, the book value of certain inventory retained by DePuy Synthes and the amount of certain prepaid taxes.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
Pursuant to the terms of the Offer Letter, following the conclusion of certain statutory information or consultation processes in connection with the Codman Neurosurgery Transaction by the employees of DePuy Synthes and its affiliates in France, Switzerland, and Germany, on May 11, 2017, DePuy Synthes accepted the Company’s offer and countersigned the Asset Purchase Agreement (the “Purchase Agreement”) with respect to the Codman Neurosurgery Transaction, previously executed by the Company. Completion of the Codman Neurosurgery Transaction remains subject to the satisfaction or waiver of customary closing conditions, including, among other things, (i) the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), (ii) obtaining antitrust approvals in Spain, the United Kingdom and India, (iii) the transfer of certain product registrations required for the operation of the Codman Neurosurgery Business, (iv) the receipt of certain audited and unaudited financial statements of the Codman Neurosurgery Business, (v) the absence of a material adverse effect regarding the Codman Neurosurgery Business, and (vi) customary conditions regarding the accuracy of the representations and warranties and material compliance by the parties with their respective obligations under the Purchase Agreement. The parties have received antitrust clearance in India, the United Kingdom and Spain, and the Company is in discussions with the Federal Trade Commission for antitrust clearance under the HSR Act.
Assets and Liabilities Held for Sale
The Company considers assets and liabilities to be held for sale when management approves and commits to a formal plan to actively market the assets and liabilities for sale, the assets and liabilities are available for immediate sale in its present condition, an active program to locate a buyer and other actions required to complete the sale have been initiated, the sale of the assets and liabilities are expected to be completed within one year, the assets and liabilities are being actively marketed for sale at a price that is reasonable in relation to its current fair value and it is unlikely that significant changes will be made to the plan. Upon designation of the assets and liabilities as held for sale, the Company records the assets at the lower of its carrying value or its estimated fair value, less estimated costs to sell. Assets held for sale are not depreciated. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met and gains are not recognized until the date of sale. The Company assesses the fair value of assets held for sale less any costs to sell each reporting period it remains classified as held for sale and reports any reduction in fair value as an adjustment to the carrying value of the assets held for sale.
To facilitate the Company’s planned acquisition of the Codman Neurosurgery Business, the Company has identified certain assets within its Specialty Surgical Solutions segment as Assets Held for Sale as of June 30, 2017 when all of the criteria above were met. The assets are expected to be disposed of by sale in the next twelve months.
Assets and liabilities held for sale consisted of the following as of June 30, 2017 (amounts in thousands):
|
|
|
|
|
Inventories
|
$
|
7,674
|
|
Property, plant and equipment, net
|
399
|
|
Goodwill
|
2,911
|
|
Total assets held for sale
|
$
|
10,984
|
|
|
|
Deferred revenue
|
$
|
792
|
|
Accrued compensation
|
184
|
|
Total liabilities held for sale
|
$
|
976
|
|
Goodwill was allocated to the assets and liabilities held for sale using the relative fair value method. Assets and liabilities held for sale were included in prepaid expenses and other current assets and accrued expenses and other current liabilities in the consolidated balance sheet. The Company recognized
no
losses in its consolidated statement of operations for the three and six months ended June 30, 2017.
Recently Issued Accounting Standards
In May 2014, the FASB issued Update No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should 1) identify the contract(s) with a customer, 2) identify the performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue when (or as) the entity satisfies a performance obligation. This update will become effective for all annual periods and interim reporting periods beginning after December 15, 2017.
The Company will adopt this standard on January 1, 2018. The Company expects to apply the full retrospective method of adoption. The Company is progressing with the implementation and continues to evaluate the impact of the standard’s revenue recognition
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
model on business processes, accounting systems, controls and financial statement disclosures. The Company has reviewed significant contracts with customers and does not expect the adoption of ASU 2014-09 to have a material impact on the amount or timing of revenues recognized. However, the Company’s initial conclusion may change as the implementation is finalized.
In July 2015, the FASB issued Update No. 2015-11,
Simplifying the Measurement of Inventory
. The amendment requires an entity to measure inventory that is within the scope of this amendment at the lower of cost and net realizable value. Existing impairment models will continue to be used for inventories that are accounted for using the last-in first-out (“LIFO”) method. The ASU requires prospective adoption for inventory measurements for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years for public business entities. Early adoption was permitted. The Company adopted
ASU 2015-11
as of January 1, 2017 on a prospective basis, and there was no significant impact of this guidance on its consolidated financial statements.
In February 2016, the FASB issued Update No. 2016-02,
Leases (Topic 842)
. Under current accounting guidance an entity is not required to report operating leases on the balance sheet. The amendment requires that lessees recognize virtually all of their leases on the balance sheet by recording a right-of-use asset and lease liability (other than leases that meet the definition of a "short-term lease"). This update will become effective for all annual periods and interim reporting periods beginning after December 15, 2018. The new standard must be adopted using a modified retrospective transition. Early adoption is permitted. The Company is in the process of evaluating the impact of this standard on its financial statements.
In August 2016, the FASB issued Update No. 2016-15,
Classification of Certain Cash Receipts and Cash Payments
. The guidance addresses the classification of cash flows related to debt repayment or extinguishment costs, settlement of zero-coupon debt instruments or debt instruments with coupon rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after business combination, proceeds from the settlement of insurance claims and corporate-owned life insurance, distribution received from equity method investees and beneficial interest in securitization transaction. This update will become effective for all annual periods and interim reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is in the process of evaluating the impact of this standard on its financial statements.
In October 2016, the FASB issued Update No. 2016-16,
Intra-Entity Transfers of Assets Other Than Inventory.
The guidance requires the income tax consequences of intra-entity transfers of assets other than inventory to be recognized as current period income tax expense or benefit and removes the requirement to defer and amortize the consolidated tax consequences of intra-entity transfers. The new standard will be effective for all annual periods beginning after December 15, 2017. Early adoption is permitted. The Company is in the process of evaluating the impact of this standard on its financial statements.
In January 2017, the FASB issued Update No. 2017-01,
Business Combinations
. The standard provides guidance for evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance provides a screen to determine when an integrated set of assets and activities (a “set”) does not qualify to be a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in an identifiable asset or a group of similar identifiable assets, the set of assets and activities is not a business. If the screen is not met, the guidance requires a set of assets and activities to be considered a business and to include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs and removes the evaluation as to whether a market participant could replace the missing elements. The new standard will be effective for all annual periods beginning after December 15, 2017. Early adoption is permitted. The Company elected to early adopt ASU 2017-01 effective January 1, 2017. The implementation of the amended guidance did not have any material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued Update 2017-04,
Simplifying the Test for Goodwill Impairment
. The standard eliminates the second step in the goodwill impairment test, which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The standard is effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company elected to early adopt
ASU 2017-04
effective January 1, 2017 and will apply the new guidance in its annual assessment in the third quarter of 2017.
In May 2017, the FASB issued ASU 2017-09,
Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
. The update to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The new standard will be effective for all annual periods beginning after December 15, 2017. Early adoption is permitted. The Company is in the process of evaluating the impact of this standard on its financial statements.
There are no other recently issued accounting pronouncements that are expected to have a material effect on the Company's financial position, results of operations or cash flows.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
2. BUSINESS ACQUISITION
TGX Medical
On April 4, 2017, the Company entered into a Membership Interest Purchase Agreement (the "Purchase Agreement"), by and among the Company, MCF I LP THX Medical System LLC Holdings, Inc., Terragraphix, Inc. and TGX Medical Systems, LLC (collectively, "TGX Medical"). Pursuant to the Purchase Agreement, the Company purchased all issued and outstanding membership interests in TGX Medical for
$5.3 million
, subject to adjustment based on actual working capital as defined in the Purchase Agreement at the date of closing.
TGX Medical designs, develops and markets software solutions that track surgical instruments from the operating room, sterilization, to storage, which helps ensure that the instruments have been properly cleaned, assembled and maintained. TGX Medical’s customers are located in the U.S. and Canada.
The Company recorded revenue for TGX Medical of approximately
$0.2 million
in the condensed consolidated statements of operations and comprehensive income for three months ended
June 30, 2017
. The net income or loss attributable to this acquisition cannot be identified on a stand-alone basis because it is in the process of being integrated into the Company's operations.
The following summarizes the preliminary allocation of the purchase price as of
June 30, 2017
based on the fair value of the assets acquired and liabilities assumed:
|
|
|
|
|
|
|
Preliminary Purchase Price
Allocation
|
|
|
(Dollars in thousands)
|
|
Cash and cash equivalents
|
$
|
49
|
|
|
Accounts receivables
|
279
|
|
|
Property, plant and equipment
|
3
|
|
|
Intangible assets:
|
|
Wtd. Avg. Life:
|
Completed technology
|
4,707
|
|
13 Years
|
Goodwill
|
541
|
|
|
Total assets acquired
|
5,579
|
|
|
Accounts payable
|
13
|
|
|
Accrued expenses and other current liabilities
|
65
|
|
|
Other liabilities
|
234
|
|
|
Net assets acquired
|
$
|
5,267
|
|
|
Goodwill was allocated to the Special Surgical Solutions 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. Goodwill recognized as a result of the acquisition is not deductible for income tax purposes.
Derma Sciences
On February 24, 2017, the Company executed the Agreement and Plan of Merger (the "Merger Agreement") under which the Company acquired all of the outstanding shares of Derma Sciences, Inc., a Delaware corporation ("Derma Sciences") for an aggregate purchase price of approximately
$210.8 million
, including payment of certain of Derma Sciences' closing expenses and settlement of stock-based compensation plans of
$4.8 million
and
$4.3 million
, respectively. The purchase price consisted of a cash payment to the former shareholders of Derma Sciences of approximately
$201.7 million
upon the closing of the transaction.
Derma Sciences is a tissue regeneration company focused on advanced wound and burn care that offers products to help manage chronic and hard-to-heal wounds, especially those resulting from diabetes and poor vascular functioning.
The Company recorded revenue for Derma Sciences of approximately
$23.8 million
and
$34.3 million
in the condensed consolidated statements of operations and comprehensive income for the three and six months ended
June 30, 2017
, respectively. The net income or loss attributable to this acquisition cannot be identified on a stand-alone basis because it is in the process of being integrated into the Company's operations.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
The following summarizes the preliminary allocation of the purchase price as of
June 30, 2017
based on the fair value of the assets acquired and liabilities assumed:
|
|
|
|
|
|
|
Preliminary Purchase Price
Allocation
|
|
|
(Dollars in thousands)
|
|
Cash and cash equivalents
|
$
|
16,512
|
|
|
Short-term investments
|
19,238
|
|
|
Accounts receivable
|
8,949
|
|
|
Inventory
|
17,977
|
|
|
Prepaid expenses and other current assets
|
4,369
|
|
|
Property, plant and equipment
|
4,311
|
|
|
Intangible assets:
|
|
Wtd. Avg. Life:
|
Customer relationship
|
78,300
|
|
14 years
|
Trademarks/brand names
|
13,500
|
|
15 years
|
Completed technology
|
11,600
|
|
14 years
|
Non-compete agreement
|
280
|
|
1 year
|
Goodwill
|
70,700
|
|
|
Deferred tax assets
|
17,820
|
|
|
Other assets
|
101
|
|
|
Total assets acquired
|
263,657
|
|
|
Accounts payable
|
4,560
|
|
|
Accrued expenses and other current liabilities
|
7,347
|
|
|
Contingent liability
|
37,174
|
|
|
Other liabilities
|
3,805
|
|
|
Net assets acquired
|
$
|
210,771
|
|
|
Goodwill was allocated to the Orthopedics and Tissue Technologies 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. Goodwill recognized as a result of the acquisition is not deductible for income tax purposes.
The Company adjusted its preliminary purchase price allocation of other liabilities by
$1.7 million
because of additional liabilities for sales and use tax, employment tax and unclaimed property.
Short-term Investments
Short-term investments recognized at acquisition date of Derma Sciences are investments in equity and debt securities including certificates of deposit purchased with an original maturity greater than three months which are deposited in various U.S. financial institutions and are fully insured by the Federal Deposit Insurance Corporation. The Company considers securities with original maturities of greater than 90 days to be available for sale securities. Securities under this classification are recorded at fair value and unrealized gains and losses are recorded within accumulated other comprehensive income. The estimated fair value of the available for sale securities is determined based on quoted market prices. The Company evaluates securities with unrealized losses to determine whether such losses, if any, are other than temporary. Short-term investments are classified as Level 1 in fair value hierarchy. Fair values of short-term investments are determined using the unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the balance sheet date.
During the six months ended
June 30, 2017
, the Company sold the acquired short-term investments and recognized a realized loss of
$2.3 million
included in other expense, net in the consolidated statement of operations.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
Deferred Taxes
The acquired deferred taxes of
$17.8 million
include a deferred tax asset of
$39.7 million
related to a federal net operating loss which the Company expects to utilize against income in future periods, a deferred tax asset of
$15.8 million
related to intangibles acquired by Derma Sciences in previous periods, and a deferred tax asset of
$0.6 million
related to various deferred items, offset by a deferred tax liability of
$38.3 million
for new intangibles for which the Company will not receive a tax benefit. In second quarter of 2017, the Company increased the preliminary estimated fair value of deferred tax liability by
$1.5 million
to reflect the adjustments to preliminary estimated fair values of assets and liabilities acquired.
United States Food and Drug Administration ("FDA") Untitled Letter
On June 22, 2015, the FDA issued an Untitled Letter (the "Untitled Letter") alleging that BioD LLC’s ("BioD") morselized amniotic membrane based products do not meet the criteria for regulation as human cellular tissue-based products (“HCT/Ps”) solely under Section 361 of the Public Health Service Act and that, as a result, BioD would need a biologics license to lawfully market those morselized products (BioD is a wholly owned subsidiary of Derma Sciences). Since the issuance of the Untitled Letter, BioD and now the Company have been in discussions with the FDA to communicate its disagreement with the FDA’s assertion that certain products are more than minimally manipulated and therefore do not meet the requirements for HCT/Ps. To date, the FDA has not changed its position that certain of the acquired morselized products are not eligible for marketing solely under Section 361 of the Public Health Service Act, but discussions are continuing. The Company continues to market these products.
On December 22, 2014, the FDA issued for comment “Draft Guidance for Industry and FDA Staff: Minimal Manipulation of Human Cells, Tissues, and Cellular and Tissue-Based Products.” On October 28, 2015, the FDA issued for comment, "Draft Guidance for Industry and FDA Staff: Homologous Use of Human Cells, Tissues, and Cellular and Tissue-Based Products." The FDA held a public hearing on September 12 and 13, 2016 to obtain input on the Homologous Use draft guidance and the Minimal Manipulation draft guidance, as well as other recently issued guidance documents on HCT/Ps.
If the FDA does allow us to continue to market its morselized products without a 510(k) or biologics license either prior to or after finalization of the draft guidance documents, it may impose conditions on marketing, such as labeling restrictions and compliance with current Good Manufacturing Practices. Compliance with these conditions would require significant additional time and cost investments from us. It also is possible that the FDA will not allow us to market any form of a morselized product without a biologics license even prior to finalization of the draft guidance documents and could require us to recall our morselized products. We continue to market these products. The Company continues to monitor the FDA's position on these products. Any potential action of the FDA could have a financial impact on the sales of BioD’s morselized amniotic tissue-based products. Revenues from BioD morselized amniotic membrane based products for the three and
six months ended June 30, 2017
were less than
1.0%
of consolidated revenues.
Contingent Consideration
The Company assumed contingent liabilities incurred by Derma Sciences related to its acquisitions of BioD and the intellectual property related to the Medihoney product. The Company accounted for the contingent liabilities by recording their fair value on the date of the acquisition based on a discounted cash-flow model. The contingent liabilities recognized as part of the Derma Sciences acquisition relate to the following:
|
|
i.
|
contractual incentive payments that could be made to former equity owners of BioD if net sales of BioD products exceed a certain amount for the twelve-month periods ending June 30, 2017 and 2018 ("BioD Earnout Payment");
|
|
|
ii.
|
a contractual incentive payment that could be made to the former equity owners if there has been no specific enforcement action or notice by the FDA against the specific BioD products as a result of the Untitled Letter for a certain period after closing as defined by the agreement ("Product Payment"); and
|
|
|
iii.
|
contractual incentive payments that could be made to the former owner of the intellectual property relating to the Medihoney product line, if net sales of Medihoney products exceed certain amounts defined in the agreement between Derma Sciences and the former owner of the intellectual property of Medihoney for any twelve-month period ("Medihoney Earnout Payment").
|
At the date of the acquisition, net sales used in estimating the BioD Earnout Payment is based on the weighted average of different possible scenarios using revenue volatility of
13.5%
. The BioD Earnout Payment was valued using a discount rate of
3.0%
. The maximum payout related to the BioD Earnout Payment is
$26.5 million
. The estimated fair value as of February 24, 2017 was
$9.1 million
. As of June 30, 2017, the estimated fair value of the BioD Earnout Payment is
$7.0 million
.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
At the date of acquisition, the Company estimates that the probability of the Product Payment was
98.0%
and valued it at a discount rate of
2.5%
. The maximum payout related to the Product Payment is
$29.7 million
. The estimated fair value as of February 24, 2017 was
$26.8 million
. In second quarter of 2017, the Company adjusted the preliminary estimated fair value to increase the Product Payment by
$0.9 million
related to additional products that should have been included in the preliminary estimate based on the Merger Agreement. On May 25, 2017, the Company made full payment for the Product Payment of
$26.6 million
. The payment was included in cash used in business acquisition, net of cash acquired within investing activities in the condensed consolidated statements of cash flows since the payment was made shortly after the acquisition.
At the date of the acquisition, net sales used in estimating the Medihoney Earnout Payment is based on the weighted average of different possible scenarios using revenue volatility of
27.5%
. The Medihoney Earnout Payment was valued using a discount rate of
4.5%
. The maximum payout related to the Medihoney Earnout Payment is
$5.0 million
. The estimated fair value as of February 24, 2017 and June 30, 2017 was
$1.3 million
.
These fair value measurements were based on significant inputs not observed in the market and thus represented a Level 3 measurement. The contingent considerations are re-measured to fair value at each reporting date until the contingency is resolved, and those changes in fair value are recognized in earnings. Depending on the expected timing of the estimated payments, the acquisition date fair values and subsequent remeasurement could be different.
Pro Forma Results
The following unaudited pro forma financial information summarizes the results of operations for the
three months ended June 30, 2016
and
six months ended June 30, 2017
and
2016
as if the acquisitions had been completed as of the beginning of the prior year. The pro forma results are based upon certain assumptions and estimates, and they give effect to actual operating results prior to the acquisition and adjustments to reflect (i) the change in interest expense and intangible asset amortization, (ii) certain external expenses related to the acquisition as if they were incurred on January 1 of the year prior to the acquisition that will not be recurring in the post-acquisition periods, which includes
$2.9 million
incurred by Derma Sciences prior to acquisition and
$10.2 million
incurred by Integra, and (iii) income taxes on the aforementioned adjustments at the Company’s statutory rate. No effect has been given to other cost reductions or operating synergies. As a result, these pro forma results do not necessarily represent results that would have occurred if the acquisition had taken place on the basis assumed above, nor are they indicative of the results of future combined operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands, except per share amounts)
|
Total revenue
|
|
$
|
271,737
|
|
|
$
|
553,625
|
|
|
$
|
528,750
|
|
Net income
|
|
$
|
12,733
|
|
|
$
|
19,878
|
|
|
$
|
15,218
|
|
Basic income per share
|
|
$
|
0.17
|
|
|
$
|
0.26
|
|
|
$
|
0.20
|
|
The results of operations of TGX Medical from April 1, 2017 through April 3, 2017 were immaterial.
3. INVENTORIES
Inventories, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(In thousands)
|
Finished goods
|
$
|
141,832
|
|
|
$
|
127,973
|
|
Work in process
|
49,690
|
|
|
50,043
|
|
Raw materials
|
43,158
|
|
|
39,247
|
|
|
$
|
234,680
|
|
|
$
|
217,263
|
|
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the
six
-month period ended
June 30, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty
Surgical
Solutions
|
|
Orthopedics and
Tissue Technologies
|
|
Total
|
|
(In thousands)
|
Goodwill at December 31, 2016
|
$
|
284,358
|
|
|
$
|
226,213
|
|
|
$
|
510,571
|
|
Derma Sciences acquisition
|
—
|
|
|
70,700
|
|
|
70,700
|
|
TGX Medical acquisition
|
541
|
|
|
—
|
|
|
541
|
|
Transfer to assets held for sale
|
(2,911
|
)
|
|
—
|
|
|
(2,911
|
)
|
Foreign currency translation
|
3,103
|
|
|
3,406
|
|
|
6,509
|
|
Balance, June 30, 2017
|
$
|
285,091
|
|
|
$
|
300,319
|
|
|
$
|
585,410
|
|
The components of the Company’s identifiable intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
Weighted
Average
Life
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
(Dollars in thousands)
|
Completed technology
|
17 years
|
|
$
|
497,079
|
|
|
$
|
(109,454
|
)
|
|
$
|
387,625
|
|
Customer relationships
|
13 years
|
|
232,961
|
|
|
(84,592
|
)
|
|
148,369
|
|
Trademarks/brand names
|
28 years
|
|
105,147
|
|
|
(21,200
|
)
|
|
83,947
|
|
Supplier relationships
|
27 years
|
|
34,721
|
|
|
(14,378
|
)
|
|
20,343
|
|
All other
(1)
|
5 years
|
|
11,498
|
|
|
(3,038
|
)
|
|
8,460
|
|
|
|
|
$
|
881,406
|
|
|
$
|
(232,662
|
)
|
|
$
|
648,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Weighted
Average
Life
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
(Dollars in thousands)
|
Completed technology
|
17 years
|
|
$
|
479,964
|
|
|
$
|
(94,991
|
)
|
|
$
|
384,973
|
|
Customer relationships
|
12 years
|
|
152,335
|
|
|
(77,005
|
)
|
|
75,330
|
|
Trademarks/brand names
|
30 years
|
|
90,507
|
|
|
(19,158
|
)
|
|
71,349
|
|
Supplier relationships
|
27 years
|
|
34,721
|
|
|
(13,664
|
)
|
|
21,057
|
|
All other
(1)
|
5 years
|
|
10,806
|
|
|
(2,340
|
)
|
|
8,466
|
|
|
|
|
$
|
768,333
|
|
|
$
|
(207,158
|
)
|
|
$
|
561,175
|
|
|
|
(1)
|
At
June 30, 2017
and
December 31, 2016
, all other included in-process research and development ("IPR&D") of
$1.0 million
in both periods, which was indefinite-lived.
|
Based on quarter-end exchange rates, annual amortization expense (including amounts reported in cost of product revenues, but excluding any possible future amortization associated with acquired in-process research and development) is expected to be approximately
$48.4 million
in
2017
,
$49.3 million
in
2018
,
$49.2 million
in
2019
,
$49.1 million
in
2020
,
$48.1 million
in
2021
and
$44.6 million
in 2022. Identifiable intangible assets are initially recorded at fair market value at the time of acquisition using an income or cost approach.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
5. DEBT
Amended and Restated Senior Credit Agreement
On
March 31, 2017
, the Company entered into an amendment ("March 2017 Amendment") to its fourth amended and restated Senior Credit Facility with a syndicate of lending banks and Bank of America, N.A., as Administrative Agent. The March 2017 Amendment increased the aggregate principal amount from
$1.5 billion
to
$2.2 billion
available to the Company through the following facilities:
|
|
i.
|
a
$500.0 million
Term Loan A facility;
|
|
|
ii.
|
a
$700.0 million
Term Loan A-1, which will be available in a single drawing on a delayed basis at the time of closing of the Asset Purchase Agreement dated February 14, 2017 between the Company and DuPuy Synthes, Inc., a wholly owned subsidiary of Johnson & Johnson to acquire certain assets, and assume certain liabilities of Johnson & Johnson’s Codman neurosurgery business (see Note 1 -
Basis of Presentation
); and
|
|
|
iii.
|
a
$1.0 billion
revolving credit facility, which includes a
$60.0 million
sublimit for the issuance of standby letters of credit and a
$60.0 million
sublimit for swingline loans.
|
In connection with the March 2017 Amendment, the Company’s maximum consolidated total leverage ratio in the financial covenants was increased to the following:
|
|
|
|
Fiscal Quarter
|
|
Maximum Consolidated Total Leverage Ratio
|
|
|
|
December 31, 2016 through before the first fiscal quarter after the delayed draw date of Term Loan A-1
|
|
4.50 : 1.00
|
First fiscal quarter ended after the delayed draw date of Term Loan A-1 through September 30, 2018
|
|
5.50 : 1.00
|
October 1, 2018 through September 30, 2019
|
|
5.00 : 1.00
|
October 1, 2019 through September 30, 2020
|
|
4.50 : 1.00
|
October 1, 2020 and thereafter
|
|
4.00 : 1.00
|
There was no change in the maturity date, which remains December 7, 2021.
Borrowings under the Senior Credit Facility bear interest, at the Company’s option, at a rate equal to:
|
|
i.
|
the Eurodollar Rate (as defined in the amendment and restatement) in effect from time to time plus the applicable rate (ranging from
1.00%
to
2.00%
), or
|
|
|
1.
|
the weighted average overnight Federal funds rate, as published by the Federal Reserve Bank of New York, plus
0.50%
,
|
|
|
2.
|
the prime lending rate of Bank of America, N.A., or
|
|
|
3.
|
the one-month Eurodollar Rate plus
1.00%
.
|
The applicable rates are based on the Company’s consolidated total leverage ratio (defined as the ratio of (a) consolidated funded indebtedness less cash in excess of
$40.0 million
that is not subject to any restriction on the use or investment thereof to (b) consolidated EBITDA) at the time of the applicable borrowing.
The Company will pay an annual commitment fee ranging from
0.15%
to
0.35%
, based on the Company’s consolidated total leverage ratio on the daily amount by which the revolving credit facility exceeds the outstanding loans and letters of credit under the 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, as of
June 30, 2017
, the Company was in compliance with all such covenants. The Company capitalized
$0.5 million
of incremental financing costs in 2017 in connection with the modifications to the Senior Credit Facility.
At
June 30, 2017
and
December 31, 2016
, there were
$380.0 million
and
$165.0 million
outstanding, respectively, under the revolving credit component of the Senior Credit Facility at a weighted average interest rate of
2.6%
and
2.2%
, respectively. At
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
June 30, 2017
and
December 31, 2016
, there was
$500.0 million
outstanding under the Term Loan A component of the Senior Credit Facility at a weighted average interest rate of
2.6%
and
2.2%
, respectively. At
June 30, 2017
, there was
no
outstanding balance under Term Loan A-1 component of Senior Credit Facility. At
June 30, 2017
, there was approximately
$1.3 billion
available for borrowing under the Senior Credit Facility, including the
$700.0 million
available under the Term Loan A-1 component.
The fair value of outstanding borrowings of the Senior Credit Facility's revolving credit facility and Term Loan A components at
June 30, 2017
was approximately
$371.0 million
and
$487.9 million
, respectively. These fair values were determined by using a discounted cash flow model based on current market interest rates available to the Company. These inputs are corroborated by observable market data for similar liabilities and therefore classified within Level 2 of the fair value hierarchy. Level 2 inputs represent inputs that are observable for the asset or liability, either directly or indirectly and are other than active market observable inputs that reflect unadjusted quoted prices for identical assets or liabilities. The Company considers the balance of the revolving credit component of the Senior Credit Facility to be long-term in nature based on its current intent and ability to repay the borrowing outside the next twelve-month period.
Letters of credit outstanding as of
June 30, 2017
and
December 31, 2016
totaled
$0.5 million
. There were
no
amounts drawn as of
June 30, 2017
.
The Company used interest rate derivative instruments to manage earnings and cash flow exposure to changes in interest rates of the Term Loan A component of the Senior Credit Facility. At
June 30, 2017
and December 31, 2016, the notional amounts related to the Company’s interest rate swaps were
$400.0 million
and
$150.0 million
, respectively.
Contractual repayments of the Term Loan A will begin March 31, 2018 and are due as follows:
|
|
|
|
|
|
Year Ended December 31,
|
|
Principal Repayment
|
|
|
(In thousands)
|
2017
|
|
—
|
|
2018
|
|
25,000
|
|
2019
|
|
25,000
|
|
2020
|
|
37,500
|
|
2021
|
|
412,500
|
|
|
|
$
|
500,000
|
|
The outstanding balance of revolving credit component of the Senior Credit Facility is due on December 7, 2021.
2016 Convertible Senior Notes
On December 15, 2016, the Company extinguished its
1.625%
Convertible Senior Notes due in 2016 (the "2016 Convertible Notes") by paying the principal amount of
$227.1 million
and issued
2.9 million
shares of common stock with a fair value of
$122.0 million
related to excess conversion value.
No
gain or loss on extinguishment was recognized as a result of the conversion. The Company also received
2.9 million
shares of common stock from the exercise of call options with hedge participants with a fair value of
$123.1 million
at the date of the exercise. The shares of common stock received from the exercise of the call options were held as treasury stock as of December 31, 2016 at a weighted average price of
$41.78
for a total of
$123.1 million
.
The 2016 Convertible Notes were issued on June 15, 2011 with the aggregate principal of
$230.0 million
and a maturity date of December 15, 2016. The 2016 Convertible Notes bore interest at a rate of
1.625%
per annum payable semi-annually in arrears on December 15 and June 15 of each year. The 2016 Convertible Notes were senior, unsecured obligations and were convertible into cash and, if applicable, shares of its common stock based on a conversion rate defined within the note agreement.
In connection with the issuance of the 2016 Convertible Notes, the Company entered into call transactions and warrant transactions, primarily with affiliates of the initial purchasers of such notes (the “hedge participants”). The initial strike price of the call transaction was approximately
$28.72
per share, subject to customary anti-dilution adjustments. The initial strike price of the warrant transaction was approximately
$35.03
per share, subject to customary anti-dilution adjustments. The strike price of the call transactions and warrant transactions has been adjusted similar to the 2016 Convertible Notes as a result of the spin-off of the Company's spine business in July 2015 to
$26.42
per share and
$32.22
per share, respectively. The warrants expire on a series of expiration dates from March 2017 to August 2017. For the three and
six months ended June 30, 2017
, the hedge participants exercised
5,485,510
and
6,617,400
warrants, respectively and, as a result, the Company issued
1,681,707
and
1,893,420
shares of common stock for the three and
six months ended June 30, 2017
, respectively. The Company has
2,089,802
warrants outstanding as of
June 30, 2017
.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
Convertible Note Interest
The interest expense components of the Company’s convertible notes are as follows (net of capitalized interest amounts):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2016
|
|
(In thousands)
|
2016 Notes:
|
|
|
|
|
Amortization of the discount on the liability component (1)
|
|
$
|
2,104
|
|
|
$
|
4,168
|
|
Cash interest related to the contractual interest coupon (2)
|
|
892
|
|
|
1,780
|
|
Total
|
|
$
|
2,996
|
|
|
$
|
5,948
|
|
(1)
The amortization of the discount on the liability component of the 2016 Notes is presented net of capitalized interest of
$0.1 million
and
$0.2 million
for the three and
six months ended
June 30, 2016
, respectively.
(2)
The cash interest related to the contractual interest coupon on the 2016 Notes is presented net of capitalized interest of
none
and
$0.1 million
for the three and
six months ended
June 30, 2016
. The Company capitalized a
minimal amount
of interest for the three months ended
June 30, 2016
.
6. 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 our expected LIBOR-indexed floating-rate borrowings. The Company held the following interest rate swaps as of
June 30, 2017
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Item
|
|
Current Notional Amount
|
|
Designation Date
|
|
Effective Date
|
|
Termination Date
|
|
Fixed Interest Rate
|
|
Floating Rate
|
|
Estimated Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets (Liabilities)
|
Term Loan A
|
|
$
|
50,000
|
|
|
June 22, 2016
|
|
December 31, 2016
|
|
June 30, 2019
|
|
1.062
|
%
|
|
3-month BBA LIBOR
|
|
$
|
520
|
|
Term Loan A
|
|
50,000
|
|
|
June 22, 2016
|
|
December 31, 2016
|
|
June 30, 2019
|
|
1.062
|
%
|
|
3-month BBA LIBOR
|
|
517
|
|
Term Loan A
|
|
50,000
|
|
|
July 12, 2016
|
|
December 31, 2016
|
|
June 30, 2019
|
|
0.825
|
%
|
|
1-month USD LIBOR
|
|
682
|
|
Term Loan A
|
|
50,000
|
|
|
February 6, 2017
|
|
June 30, 2017
|
|
June 30, 2020
|
|
1.834
|
%
|
|
3-month USD LIBOR
|
|
(187
|
)
|
Term Loan A
|
|
100,000
|
|
|
February 6, 2017
|
|
June 30, 2017
|
|
June 30, 2020
|
|
1.652
|
%
|
|
1-month USD LIBOR
|
|
(35
|
)
|
Term Loan A
|
|
100,000
|
|
|
March 27, 2017
|
|
December 31, 2017
|
|
June 30, 2021
|
|
1.971
|
%
|
|
1-month USD LIBOR
|
|
(562
|
)
|
Total interested rate derivatives designated as cash flow hedge
|
|
$
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
935
|
|
The Company designated these derivative instruments as cash flow hedges. The Company recorded the effective portion of the change in the fair value of a 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 the effective portion of 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 amount of any gain or loss on the related cash flow hedge 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 records the effective portion of any change in the fair value of foreign currency cash flow hedges in AOCI, net of tax, until the hedged item affects earnings. Once the related hedged item affects earnings, the Company reclassifies the effective portion of any related unrealized gain or loss on the foreign currency cash flow hedge to earnings. If the hedged forecasted transaction does not occur, or if it becomes probable that it will not occur, the Company will reclassify the amount of any gain or loss on the related cash flow hedge to earnings at that time.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
The success of the Company’s hedging program depends, in part, on forecasts of certain activity denominated in Euros. The Company may experience unanticipated currency exchange gains or losses to the extent that there are differences between forecasted and actual activity during periods of currency volatility. In addition, changes in currency exchange rates related to any unhedged transactions may affect its earnings and cash flows.
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 is subject to collateral or other security arrangements, and none contain provisions that depend upon the Company’s credit ratings from any credit rating agency.
Fair Value of Derivative Instruments
The Company has classified all of its derivative instruments within Level 2 of the fair value hierarchy because observable inputs are available for substantially the full term of the derivative instruments. The fair value of the foreign currency forward exchange contracts related to inventory purchases is determined by comparing the forward rate as of the period end and the settlement rate specified in each contract. The fair value of the interest rate swaps was developed using a market approach based on publicly available market yield curves and the terms of the related swap. The Company performs ongoing assessments of counterparty credit risk.
The following table summarizes the fair value and presentation for derivatives designated as hedging instruments in the condensed consolidated balance sheets as of
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of
|
Location on Balance Sheet
(1)
:
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
(In thousands)
|
Derivatives designated as hedges — Assets:
|
|
|
|
|
Interest rate swap — Prepaid expenses and other current assets
(2)
|
|
$
|
660
|
|
|
$
|
242
|
|
Interest rate swap — Other assets
(2)
|
|
$
|
1,293
|
|
|
1,629
|
|
|
|
$
|
1,953
|
|
|
$
|
1,871
|
|
Derivatives designated as hedges — Liabilities:
|
|
|
|
|
Interest rate swap — Accrued expenses and other current liabilities
(2)
|
|
$
|
618
|
|
|
$
|
—
|
|
Interest rate swap — Other liabilities
(2)
|
|
400
|
|
|
—
|
|
Total Derivatives designated as hedges — Liabilities
|
|
$
|
1,018
|
|
|
$
|
—
|
|
|
|
(1)
|
The Company classifies derivative assets and liabilities as non-current based on the cash flows expected to be incurred within the following 12 months.
|
|
|
(2)
|
At
June 30, 2017
and
December 31, 2016
, the notional amounts related to the Company’s interest rate swaps were
$400.0 million
and
$150.0 million
, respectively. There is
no
expected reduction in this notional amount in the next twelve months.
|
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
The following presents the effect of derivative instruments designated as cash flow hedges on the accompanying condensed consolidated statement of operations during the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance in AOCI
Beginning of
Quarter
|
|
Amount of
Loss
Recognized in
AOCI-
Effective Portion
|
|
Amount of Gain
Reclassified from
AOCI into
Earnings-Effective
Portion
|
|
Balance in AOCI
End of Quarter
|
|
Location in
Statements of
Operations
|
|
(In thousands)
|
Three Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
2,479
|
|
|
$
|
(1,500
|
)
|
|
$
|
44
|
|
|
$
|
935
|
|
|
Interest (expense)
|
|
$
|
2,479
|
|
|
$
|
(1,500
|
)
|
|
$
|
44
|
|
|
$
|
935
|
|
|
|
Three Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
—
|
|
|
$
|
(602
|
)
|
|
$
|
—
|
|
|
$
|
(602
|
)
|
|
Interest (expense)
|
|
$
|
—
|
|
|
$
|
(602
|
)
|
|
$
|
—
|
|
|
$
|
(602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance in AOCI
Beginning of
Year
|
|
Amount of
Loss
Recognized in
AOCI-
Effective Portion
|
|
Amount of Gain
Reclassified from
AOCI into
Earnings-Effective
Portion
|
|
Balance in AOCI
End of Quarter
|
|
Location in
Statements of
Operations
|
|
(In thousands)
|
Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
1,871
|
|
|
$
|
(914
|
)
|
|
$
|
22
|
|
|
$
|
935
|
|
|
Interest (expense)
|
|
$
|
1,871
|
|
|
$
|
(914
|
)
|
|
$
|
22
|
|
|
$
|
935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
—
|
|
|
$
|
(602
|
)
|
|
—
|
|
|
$
|
(602
|
)
|
|
Interest (expense)
|
|
$
|
—
|
|
|
$
|
(602
|
)
|
|
$
|
—
|
|
|
$
|
(602
|
)
|
|
|
The Company recognized
no
gains or losses resulting from ineffectiveness of cash flow hedges during the three and
six
months ended
June 30, 2017
and
2016
. The Company expects a minimal amount of pre-tax income recorded in AOCI related to interest rate hedges to be reclassified to earnings in the next twelve months.
7. STOCK-BASED COMPENSATION
As of
June 30, 2017
, the Company had stock options, restricted stock awards, performance stock units, contract stock awards and restricted stock unit awards outstanding under
two
plans, the 2001 Equity Incentive Plan (the “2001 Plan”) and the 2003 Equity Incentive Plan (the “2003 Plan,” and collectively, the “Plans”).
Stock options issued under the Plans become exercisable over specified periods, generally within
three
to
four years
from the date of grant for officers and employees, and within a year from date of grant for directors and generally expire
eight years
from the grant date for employees, and from
eight
to
ten years
for directors and certain executive officers. Restricted stock issued under the Plans vests over specified periods, generally
three years
after the date of grant. The vesting of performance stock issued under the Plans is subject to service and performance conditions.
Stock Options
As of
June 30, 2017
, there were approximately
$5.3 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
186,853
stock options granted during the
six
months ended
June 30, 2017
.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
Awards of Restricted Stock, Performance Stock and Contract Stock
Performance stock, restricted stock and contract stock awards generally have requisite service periods of
three
years. Performance stock units are subject to graded vesting conditions, and the Company expenses their fair value over the requisite service period. The Company expenses the fair value of restricted stock and contract stock awards on a straight-line basis over the vesting period or requisite service period, whichever is shorter. As of
June 30, 2017
, there were approximately
$27.8 million
of total unrecognized compensation costs related to these unvested awards. The Company expects to recognize these costs over a weighted-average period of approximately
two years
. The Company granted
340,078
restricted stock awards and
133,333
performance shares during the
six
months ended
June 30, 2017
.
The Company has no formal policy related to the repurchase of shares for the purpose of satisfying stock-based compensation obligations.
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.
8. TREASURY STOCK
On October 25, 2016, the Board of Directors terminated its October 2014 authorization for the repurchase of its outstanding common stock and authorized management to repurchase up to
$150.0 million
of its outstanding common stock through December 2018. Shares may be repurchased either in the open market or in privately negotiated transactions. As of
June 30, 2017
there remained
$150.0 million
available for repurchase under this authorization.
As part of the conversion of the 2016 Convertible Notes, the Company received
2.9 million
shares of common stock from the exercise of call options with hedge participants. The shares of common stock received from exercise of the call options are held as treasury stock, there were
2.9 million
treasury stock outstanding as of
June 30, 2017
and
December 31, 2016
, with cost of
$122.0 million
and
$123.1 million
, respectively, at a weighted average of
$41.78
per share.
There were
no
cash treasury stock repurchases during the
six
months ended
June 30, 2017
or
2016
.
9. INCOME TAXES
The following table provides a summary of the Company's effective tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Reported tax rate
|
(35.4
|
)%
|
|
14.6
|
%
|
|
(35.2
|
)%
|
|
12.6
|
%
|
The Company’s effective income tax rates for the three months ended
June 30, 2017
and
2016
were
(35.4)%
and
14.6%
, respectively. For the three months ended
June 30, 2017
, the primary drivers of the lower tax rate are lower income before income taxes compared to the same period in
2016
, the jurisdictional mix of income before tax in U.S.-based operations relative to foreign operations, and an increase of
$3.1 million
in excess tax benefits from stock-based compensation for the three months ended
June 30, 2017
compared to the same period in
2016
. The change in jurisdictional mix of income primarily results from significant 2017 acquisition and integration costs incurred in the U.S. The tax rate for the three months ended
June 30, 2016
included a benefit of
$0.2 million
related to the release of uncertain tax positions
.
The Company's effective income tax rates for the six months ended
June 30, 2017
and
2016
were
(35.2)%
and
12.6%
, respectively. For the six months ended
June 30, 2017
, the primary drivers of the lower tax rate are lower income before income taxes compared to the same period in
2016
, the jurisdictional mix of income before tax in U.S.-based operations relative to foreign operations, and an increase of
$4.0 million
in excess tax benefits from stock-based compensation for the six months ended
June 30, 2017
compared to the same period in
2016
, offset by an expense adjustment of
$0.2 million
related to filing of foreign income tax returns. The change in jurisdictional mix of income primarily results from significant 2017 acquisition and integration costs incurred in the U.S.
The Company expects its effective income tax rate for the full year to be approximately
8.3%
, resulting largely from excess tax benefits from stock-based compensation, federal research credit benefits and the jurisdictional mix of income before tax in U.S.-
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
based operations relative to foreign operations. This estimate could be revised in the future as additional information is presented to the Company.
10. NET INCOME PER SHARE
Basic and diluted net income per share was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands, except per share amounts)
|
Basic net income per share:
|
|
|
|
|
|
|
|
Net income
|
$
|
10,835
|
|
|
$
|
12,755
|
|
|
$
|
17,230
|
|
|
$
|
26,173
|
|
Weighted average common shares outstanding
|
76,213
|
|
|
74,392
|
|
|
75,487
|
|
|
74,074
|
|
Basic net income per common share
|
$
|
0.14
|
|
|
$
|
0.17
|
|
|
$
|
0.23
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
Net income
|
$
|
10,835
|
|
|
$
|
12,755
|
|
|
$
|
17,230
|
|
|
$
|
26,173
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — Basic
|
76,213
|
|
|
74,392
|
|
|
75,487
|
|
|
74,074
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
2016 Convertible notes
|
—
|
|
|
2,285
|
|
|
—
|
|
|
1,796
|
|
Warrants
|
1,589
|
|
|
911
|
|
|
1,864
|
|
|
454
|
|
Stock options and restricted stock
|
1,161
|
|
|
1,122
|
|
|
1,352
|
|
|
1,218
|
|
Weighted average common shares for diluted earnings per share
|
78,963
|
|
|
78,710
|
|
|
78,703
|
|
|
77,542
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share
|
$
|
0.14
|
|
|
$
|
0.16
|
|
|
$
|
0.22
|
|
|
$
|
0.34
|
|
Shares of common stock of approximately
0.2 million
and
0.4 million
at
June 30, 2017
and
2016
, respectively, that are issuable through the exercise of dilutive securities were not included in the computation of diluted net income per share because their effect would have been antidilutive.
For the
three and six
months ended
June 30, 2017
and 2016 the potential excess conversion value on warrants was included in the Company's dilutive share calculation because the average stock price for the
three and six
months ended
June 30, 2017
and 2016 exceeded the conversion price.
For the
three and six
months ended
June 30, 2016
the potential excess conversion value on the 2016 Notes were included in the Company's dilutive share calculation because the average stock price for the
three and six
months ended
June 30, 2016
exceeded the conversion price.
Restricted and performance units that entitle the holders to approximately
0.5 million
shares of common stock are included in the basic and diluted weighted average shares outstanding calculation because no further consideration is due related to the issuance of the underlying common shares.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
11. COMPREHENSIVE INCOME
Comprehensive income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
Net income
|
$
|
10,835
|
|
|
$
|
12,755
|
|
|
$
|
17,230
|
|
|
$
|
26,173
|
|
Foreign currency translation adjustment
|
19,484
|
|
|
(6,569
|
)
|
|
23,548
|
|
|
4,675
|
|
Change in unrealized gain on derivatives, net of tax
|
(884
|
)
|
|
(345
|
)
|
|
(537
|
)
|
|
(345
|
)
|
Unrealized gain on short-term investments
|
(1,291
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Pension liability adjustment, net of tax
|
(13
|
)
|
|
3
|
|
|
(15
|
)
|
|
(4
|
)
|
Comprehensive income, net
|
$
|
28,131
|
|
|
$
|
5,844
|
|
|
$
|
40,226
|
|
|
$
|
30,499
|
|
Changes in Accumulated Other Comprehensive Income by component between
December 31, 2016
and
June 30, 2017
are presented in the table below, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedges
|
|
Defined Benefit Pension Items
|
|
Foreign Currency Items
|
|
Short-term Investment
|
|
Total
|
|
|
(In thousands)
|
Beginning balance
|
|
$
|
1,071
|
|
|
$
|
(36
|
)
|
|
$
|
(58,189
|
)
|
|
—
|
|
|
$
|
(57,154
|
)
|
Other comprehensive (loss) income
|
|
(559
|
)
|
|
(15
|
)
|
|
23,548
|
|
|
(3,019
|
)
|
|
19,955
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
22
|
|
|
—
|
|
|
—
|
|
|
3,019
|
|
|
3,041
|
|
Net current-period other comprehensive (loss) income
|
|
(537
|
)
|
|
(15
|
)
|
|
23,548
|
|
|
—
|
|
|
22,996
|
|
Ending balance
|
|
$
|
534
|
|
|
$
|
(51
|
)
|
|
$
|
(34,641
|
)
|
|
$
|
—
|
|
|
$
|
(34,158
|
)
|
12. 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 Specialty Surgical Solutions 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 precision tools and instruments business, which sells more than
60,000
instrument patterns and surgical and lighting products to hospitals, surgery centers, and dental, podiatry, and veterinary offices.
|
|
|
•
|
The Orthopedics and Tissue Technologies segment includes such offerings as skin repair, advanced wound care, amniotic tissue, bone and joint fixation implants in the upper and lower extremities, bone grafts and nerve and tendon repair.
|
The Corporate and other category includes (i) various legal, finance, information systems, executive, and human resource functions, (ii) brand management, and (iii) share-based compensation costs.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
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 reportable segment for the
three and six
months ended
June 30, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
Segment Net Sales
|
|
|
|
|
|
|
|
Specialty Surgical Solutions
|
$
|
159,857
|
|
|
$
|
158,163
|
|
|
$
|
316,147
|
|
|
$
|
309,338
|
|
Orthopedics and Tissue Technologies
|
122,307
|
|
|
91,146
|
|
|
224,654
|
|
|
176,741
|
|
Total revenues
|
$
|
282,164
|
|
|
$
|
249,309
|
|
|
$
|
540,801
|
|
|
$
|
486,079
|
|
Segment Profit
|
|
|
|
|
|
|
|
Specialty Surgical Solutions
|
$
|
67,250
|
|
|
$
|
63,397
|
|
|
$
|
129,953
|
|
|
$
|
120,978
|
|
Orthopedics and Tissue Technologies
|
31,010
|
|
|
26,025
|
|
|
58,089
|
|
|
46,300
|
|
Segment profit
|
98,260
|
|
|
89,422
|
|
|
188,042
|
|
|
167,278
|
|
Amortization
|
(5,419
|
)
|
|
(3,471)
|
|
|
(9,520)
|
|
|
(6,943)
|
|
Corporate and other
|
(75,856
|
)
|
|
(63,574
|
)
|
|
(151,577)
|
|
|
(115,859
|
)
|
Operating income
|
$
|
16,985
|
|
|
$
|
22,377
|
|
|
$
|
26,945
|
|
|
$
|
44,476
|
|
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 June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
United States
|
$
|
219,266
|
|
|
$
|
191,872
|
|
|
$
|
420,363
|
|
|
$
|
373,101
|
|
Europe
|
32,499
|
|
|
31,663
|
|
|
61,315
|
|
|
61,098
|
|
Rest of World
|
30,399
|
|
|
25,774
|
|
|
59,123
|
|
|
51,880
|
|
Total Revenues
|
$
|
282,164
|
|
|
$
|
249,309
|
|
|
$
|
540,801
|
|
|
$
|
486,079
|
|
13. COMMITMENTS AND CONTINGENCIES
In consideration for certain technology, manufacturing, distribution, and selling rights and licenses granted to the Company, the Company has agreed to pay royalties on sales of certain products that it sells. The royalty payments that the Company made under these agreements were not significant for any of the periods presented.
The Company is subject to various claims, lawsuits and proceedings in the ordinary course of the Company's business, including claims by current or former employees, distributors and competitors and with respect to its products and product liability claims, lawsuits and proceedings, some of which have been settled by the Company. In the opinion of management, such claims are either adequately covered by insurance or otherwise indemnified, or are not expected, individually or in the aggregate, to result in a material adverse effect on our 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.
TEI, acquired by Integra on July 17, 2015, manufactures a bovine-derived surgical mesh product for Boston Scientific Corporation ("BSC") and has been named as a defendant in lawsuits under a broad range of products liability theories, many of which have not been served on TEI. Currently, there are approximately
fifty
active cases against TEI. Pursuant to an indemnification agreement with BSC (i) BSC is managing the litigation; and (ii) TEI has in place a product liability insurance policy, of which it must exhaust
$3.0 million
before BSC’s indemnity begins to cover relevant claims (and of which only a small portion has been utilized to date and against which the insurer has reserved the entire
$3.0 million
). Because the thrust of products liability litigation focuses on
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
synthetic surgical mesh products, counsel is filing motions to dismiss on behalf of TEI in many cases. In addition, Integra has certain protections in the merger agreements with TEI which would indemnify it for approximately
$30.0 million
for the first
fifteen months
after closing and between
$20.0
and
$30.0 million
for the remainder of the
three
-year period after closing for losses relating to a variety of matters, including half of certain products liability claims (including those related to the product it manufactures for BSC) not covered by insurance. As of
July 26, 2017
,
no
indemnification payments were received nor owed in relation to the lawsuits.
The Company accrues for loss contingencies when it is deemed probable that a loss has been incurred and that loss is estimable. The amounts accrued are based on the full amount of the estimated loss before considering insurance proceeds and do not include an estimate for legal fees expected to be incurred in connection with the loss contingency. The Company consistently accrues legal fees expected to be incurred in connection with loss contingencies as those fees are incurred by outside counsel as a period cost.
Contingent Consideration
The Company determined the fair value of contingent consideration during the
six
-month period ended
June 30, 2017
to reflect the change in estimate and the time value of money during the period. A reconciliation of the opening balances to the closing balances of these Level 3 measurements is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent Considerations Liabilities Related to Acquisition of Derma Sciences (
See Note 2
)
|
|
Contingent Consideration Liability Related to Acquisition of Confluent Surgical, Inc.
|
|
Location in Financial Statements
|
|
Short-term
|
|
Long-term
|
|
Short-term
|
|
Long-term
|
|
|
Balance as of January 1, 2017
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,036
|
|
|
|
Additions from acquisition of Derma Sciences
|
33,707
|
|
|
3,467
|
|
|
—
|
|
|
—
|
|
|
|
Transfers from long-term to current portion
|
—
|
|
|
—
|
|
|
4,662
|
|
|
(4,662
|
)
|
|
|
Payments
|
(26,598
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
(Gain) loss from change in fair value of contingent consideration liabilities
|
(2,359
|
)
|
|
82
|
|
|
—
|
|
|
148
|
|
|
Selling, general and administrative
|
Balance as of June 30, 2017
|
$
|
4,750
|
|
|
$
|
3,549
|
|
|
$
|
4,662
|
|
|
$
|
17,522
|
|
|
|
On January 15, 2014, the Company acquired all outstanding shares of Confluent Surgical, Inc., ("Confluent Surgical"). The purchase price includes contingent consideration. The potential maximum undiscounted contingent consideration of
$30.0 million
consists of
$25.0 million
upon obtaining certain U.S. governmental approvals and
$5.0 million
upon obtaining certain European governmental approvals, both related to the completion of the transition of the Confluent Surgical business. The fair values of contingent consideration related to the acquisition of Confluent Surgical were estimated using a discounted cash flow model using discount rate of
2.2%
.
The Company assesses these assumptions on an ongoing basis as additional information affecting the assumptions is obtained. The contingent consideration balance was included in accrued expenses and other current liabilities and other liabilities at
June 30, 2017
and in other liabilities at
December 31, 2016
.
Supply Agreement Liability and Above Market Supply Agreement Liability
On January 15, 2014, the Company entered into a transitional supply agreement with Covidien Group S.a.r.l ("Covidien"). This agreement contains financial incentives to Covidien for the timely supply of products each fiscal quarter through the third anniversary of the agreement. The prices paid under the supply agreement are essentially flat through the third anniversary of the agreement, and then increase significantly in each of the following three years.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
The Company determined the fair value of its supply agreement liability and above market supply agreement liability with Covidien during the
six
-month period ended
June 30, 2017
to reflect the payments, change in estimate and the time value of money during the period. A reconciliation of the opening balances to the closing balances of these Level 3 measurements is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supply Agreement Liability - Short-term
|
|
Above Market Supply Agreement Liability - Short-term
|
|
Above Market Supply Agreement Liability - Long-term
|
|
Location in Financial Statements
|
Balance as of January 1, 2017
|
$
|
166
|
|
|
$
|
—
|
|
|
$
|
2,648
|
|
|
|
Payments
|
(166
|
)
|
|
|
|
(273
|
)
|
|
|
Transfer from long-term to current portion
|
—
|
|
|
2,101
|
|
|
(2,101
|
)
|
|
|
Loss from increase in fair value
|
—
|
|
|
274
|
|
|
579
|
|
|
Selling, general and administrative
|
Balance as of June 30, 2017
|
$
|
—
|
|
|
$
|
2,375
|
|
|
$
|
853
|
|
|
|
The fair values of supply agreement liability and above market supply agreement liability were estimated using a discounted cash flow model using discount rate of
12.0%
. The Company assesses these assumptions on an ongoing basis as additional information impacting the assumptions is obtained. The supply agreement liability-current was included in accrued expenses and other current liabilities and the supply agreement-long term and above market supply agreement liability were included in other liabilities at
June 30, 2017
and
December 31, 2016
.
There are no transfers between level 1, 2 or 3 during the
six months ended June 30,
2017
and
2016
. If the Company's estimate regarding the fair value of its contingent consideration liabilities, supply agreement liability and above market supply agreement liability are inaccurate, a future adjustment to these estimated fair values may be required which could change significantly.
BioD
On April 7, 2017, the Company's indirect wholly-owned subsidiary, BioD filed an action in the Superior Court of New Jersey, Chancery Division, Middlesex County seeking a declaration that the resignation of Russell Olsen, the former CEO of BioD, was “for Good Reason” (as defined in Olsen’s employment agreement); a finding that Olsen breached the implied covenant of good faith and fair dealing, committed legal fraud, equitable fraud and negligent misrepresentation; and an award of damages for such actions, including a return of severance fees paid to Olsen. BioD was acquired in August 2016 by Derma Sciences, which Integra subsequently acquired in February 2017. After receiving a job offer from Integra that Olsen believed materially diminished his title and authority, on February 24, 2017 Olsen indicated his intention to terminate his position with BioD for Good Reason, as otherwise permitted by his employment agreement with BioD. Shortly thereafter, Cynthia Weatherly (as representative of the former equity owners of BioD) claimed in a letter to Derma Sciences that Olsen’s resignation was a “termination Without Cause” (as also defined in Olsen’s employment agreement), which would arguably trigger an acceleration of the earn out under a merger agreement between Derma Sciences, BioD and other parties (the "BioD Merger Agreement"), which was entered into in July 2016, and require as a result of the acceleration the payment of
$26.5 million
by BioD. As previously disclosed and described in
Note 2 - Business Acquisition
, to the Company's consolidated financial statements for the three and six months ended June 30, 2017, Integra assumed this contingent liability in connection with its acquisition of Derma Sciences. The action for a declaratory judgment was filed to clarify that Olsen’s termination was for Good Reason and not Without Cause. If the employment agreement was terminated for Good Reason, then the Company believes that the earn out provision under the BioD Merger Agreement should not be accelerated and the likelihood of loss is remote.