ACQUISITIONS AND DIVESTITURES

3 Months Ended

Mar. 31, 2021

Mergers, Acquisitions and Dispositions [Abstract]

Sale of Extremity Orthopedics Business

On January 4, 2021, the Company completed its previously announced sale of its Extremity Orthopedics business to Smith & Nephew USD Limited ("Smith & Nephew"). The transaction included the sale of the Company's upper and lower Extremity Orthopedics product portfolio, including ankle and shoulder arthroplasty and hand and wrist product lines. The Company received an aggregate purchase price of $240.0 million from Smith and Nephew and concurrently paid $41.5 million to the Consortium of Focused Orthopedists, LLC ("CFO") effectively terminating the licensing agreement between Integra and CFO relating to the development of shoulder arthroplasty products.

Assets and liabilities divested consisted of the following as of December 31, 2020 (amounts in thousands):


Prepaid expenses and other current assets	$	713
Right of use asset-operating leases and Other assets	3,186
Deferred tax assets	6,589
Intangible assets, net	13,332
Property, plant and equipment, net	37,893
Goodwill	47,546
Inventories	52,845
Total assets held for sale	$	162,104
Other liabilities	336
Current portion of lease liability - operating leases	539
Accrued compensation	1,767
Deferred tax liabilities	3,440
Lease liability - operating leases	5,669
Total liabilities held for sale	$	11,751

The Divestiture does not represent a strategic shift that will have a major effect on the Company's operations and financial statements. Goodwill was allocated to the assets and liabilities divested using the relative fair value method of the Extremity Orthopedics business to the Company's Tissue Technologies reporting unit. The Company recognized a gain of $42.9 million in connection with the sale that is presented in Gain from the sale of business in the consolidated statement of operations for the three months ended March 31, 2021. The net proceeds are subject to adjustments based on changes in the actual closing net working capital.The purchase price is preliminary pending finalization of potential working capital adjustments.

The Company also entered into a transition services agreement ("TSA") with Smith & Nephew which requires the Company to provide certain services on behalf of Smith & Nephew for the duration of the period subsequent to the sale of the business as defined in the agreement. The Company recognized a payable due to Smith & Nephew of $9.0 million, included in the consolidated balance sheet within accrued expenses and other current liabilities respectively.

ACell Inc. Acquisition

On January 20, 2021, the Company acquired ACell Inc. (the "ACell Acquisition") for an acquisition purchase price of $305.4 million plus contingent consideration of up to $100 million, that may be payable upon achieving certain revenue-based performance milestones in 2022, 2023 and 2025. The purchase price is subject to adjustments based on changes in the actual closing net working capital. The consideration is preliminary pending finalization of potential working capital adjustments. ACell was a privately-held company that offered a portfolio of regenerative products for complex wound management, including developing and commercializing products based on MatriStem Urinary Bladder Matrix ("UBM"), a technology platform derived from porcine urinary bladder extracellular matrix.

Assets Acquired and Liabilities Assumed at Fair Value

The ACell Acquisition has been accounted for using the acquisition method of accounting. This method requires that assets acquired and liabilities assumed in a business combination are recognized at their fair values as of the acquisition date. As of March 31, 2021, certain amounts relating to the valuation of intangible assets and tax related matters have not been finalized. The finalization of these matters may result in changes to goodwill.

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


	Preliminary Valuation		Weighted Average Life
	(In thousands)
Current assets:
Cash	$	2,726
Trade accounts receivable, net	16,469
Inventories, net	18,299
Prepaids expenses and other current assets	1,498
Total current assets	38,992
Property, plant and equipment, net	13,769
Intangible assets	245,000		13-14 years
Goodwill	92,983
Right of use asset - operating leases	9,259
Deferred tax assets	9,768
Other assets	148
Total assets acquired	409,919

Current liabilities:
Accounts payable	$	718
Accrued expenses	6,227
Current portion of lease liability - operating leases	1,673
Total current liabilities	8,618
Other long-term liability	276
Lease liability - operating leases	7,585
Deferred tax liability	64,178
Contingent consideration	23,900
Total liabilities assumed	104,557

Net assets acquired	$	305,362

Intangible Assets

The estimated fair value of the developed technology acquired was determined using the multi-period excess earnings method of the income approach, which estimates value based on the present value of future economic benefits. Some of the more significant assumptions inherent in the development of those asset valuations include the estimated net cash flows for each year for each product including net revenues, cost of sales, R&D costs, selling and marketing costs, 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 each asset’s life cycle, and competitive trends impacting the asset and each cash flow stream.

The Company used a discount rate of 8.5% to arrive at the present value for the acquired intangible assets to reflect the rate of return a market participant would expect to earn and incremental commercial uncertainty in the cash flow projections. No assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change. For these and other reasons, actual results may vary significantly from estimated results.

Goodwill

The Company allocated goodwill related to the ACell Acquisition to the Tissue Technologies segment. Goodwill is the excess of the consideration transferred over the net assets recognized and represents the expected synergies of the combined company and assembled workforce. Goodwill recognized as a result of this acquisition is non-deductible for income tax purposes.

Contingent Consideration

As part of the acquisition, the Company is required to pay the former shareholders of ACell up to $100 million based on the achievement of certain revenue-based performance milestones in 2022, 2023, and 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 Company determines the acquisition date fair value of contingent consideration obligations using a Monte Carlo simulation, as well as significant unobservable inputs, reflecting the Company’s assessment of the assumptions market participants would use to value these liabilities. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined using the fair value concepts in ASC 820. The resultant most likely payouts are discounted using an appropriate effective annual interest rate. At each reporting date, the contingent consideration obligation will be revalued to estimated fair value and changes in fair value will be reflected as income or expense in our consolidated statement of operations. Changes in the fair value of the contingent considerations may result from changes in discount periods and rates and changes in the timing and amount of revenue estimates. Adverse 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.

Deferred Tax Liabilities

Deferred tax liabilities result from identifiable intangible assets’ fair value adjustments. These adjustments create excess book basis over tax basis which is tax-effected by the statutory tax rates of applicable jurisdictions.

Pro forma revenues for the three months ended March 31, 2021 and 2020 were $364.7 million and $377.3 million, respectively. Pro forma net income and earnings per share are not presented for this acquisition as they are not material.