2.) DIVESTITURE AND ACQUISITIONS

Spin-off of Nuvectra Corporation

On March 14, 2016, Integer completed the spin-off of a portion of its former QiG segment through a tax-free distribution of all of the shares of its QiG Group, LLC subsidiary to the stockholders of Integer on a pro rata basis. Immediately prior to completion of the Spin-off, QiG Group, LLC was converted into a corporation organized under the laws of Delaware and changed its name to Nuvectra Corporation (“Nuvectra”). On March 14, 2016, each of the Company’s stockholders of record as of the close of business on March 7, 2016 (the “Record Date”) received one share of Nuvectra common stock for every three shares of Integer common stock held as of the Record Date. Upon completion of the Spin-off, Nuvectra became an independent publicly traded company whose common stock is listed on the NASDAQ stock exchange under the symbol “NVTR.”

The portion of the former QiG segment spun-off consisted of QiG Group, LLC and its subsidiaries: (i) Algostim, LLC (“Algostim”), (ii) PelviStim LLC (“PelviStim”), and (iii) the Company’s NeuroNexus Technologies (“NeuroNexus”) subsidiary. The operations of Centro de Construcción de Cardioestimuladores del Uruguay (“CCC”) and certain other existing QiG research and development capabilities were retained by the Company and not included as part of the Spin-off. As the Company continues to focus on the design and development of complete medical device systems and components, and more specifically on medical device systems and components in the neuromodulation market, the Spin-off was not considered a strategic shift that had a major effect on the Company’s operations and financial results. Accordingly, the Spin-off is not presented as a discontinued operation in the Company’s Consolidated Financial Statements. The results of Nuvectra are included in the Consolidated Statements of Operations and Comprehensive Income (Loss) through the date of the Spin-off.

(2.) DIVESTITURE AND ACQUISITIONS (Continued)

In connection with the Spin-off, during the first quarter of 2016, the Company made a cash capital contribution of $75 million to Nuvectra and divested the following assets and liabilities (in thousands):



Assets divested
Cash and cash equivalents	$	76,256
Other current assets	977
Property, plant and equipment, net	4,407
Amortizing intangible assets, net	1,931
Goodwill	40,830
Deferred income taxes	6,446
Total assets divested	130,847
Liabilities transferred
Current liabilities	2,119
Net assets divested	$	128,728

For fiscal year 2016, Nuvectra contributed a pre-tax loss of $5.2 million to the Company’s results of operations. Nuvectra contributed a pre-tax loss of $24.4 million and $21.4 million to the Company’s results of operations for the fiscal years ended January 1, 2016 and January 2, 2015, respectively.

In connection with the Spin-off, on March 14, 2016, Integer entered into several agreements with Nuvectra that govern its post Spin-off relationship with Nuvectra, including a Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement and Transition Services Agreement. These agreements contain customary mutual indemnification provisions. Amounts earned by Integer under the Transition Services Agreement were immaterial for the year ended December 30, 2016. Accounts Receivable, Net within the Consolidated Balance Sheet at December 30, 2016 includes $9.9 million due from Nuvectra for payments made by the Company on Nuvectra’s behalf.

Acquisition of Lake Region Medical Holdings, Inc.

On October 27, 2015, the Company acquired all of the outstanding common stock of Lake Region Medical Holdings, Inc. for a total purchase price including debt assumed of approximately $1.77 billion. Lake Region Medical specializes in the design, development, and manufacturing of products across the medical component and device spectrum primarily serving the cardio, vascular and advanced surgical markets.

Fair Value of Consideration Transferred

The aggregate consideration paid by the Company to the stockholders of Lake Region Medical consisted of the following (in thousands):



Cash	$	478,490
Fair value of Integer common stock	245,368
Replacement stock options attributable to pre-acquisition service	4,508
Total purchase consideration	$	728,366

The fair value of the Integer common stock issued as part of the consideration was determined based upon the closing stock price of Integer’s shares as of the acquisition date. The fair value of the Integer stock options issued as part of the consideration was determined utilizing a Black-Scholes option pricing model as of the acquisition date. Concurrent with the closing of the acquisition, the Company repaid all of the outstanding debt of Lake Region Medical of approximately $1.0 billion. The cash portion of the purchase price and the repayment of Lake Region Medical’s debt was primarily funded through a new senior secured credit facility and the issuance of senior notes. Refer to Note 9 “Debt” for additional information regarding the Company’s debt.

(2.) DIVESTITURE AND ACQUISITIONS (Continued)

Fair Value of Assets Acquired and Liabilities Assumed

This transaction was accounted for under the acquisition method of accounting. Accordingly, the cost of the acquisition was allocated to the Lake Region Medical assets acquired and liabilities assumed based on their fair values as of the closing date of the acquisition, with the amount exceeding the fair value of the net assets acquired recorded as goodwill. The fair value of assets acquired and liabilities assumed was finalized during the third quarter of fiscal year 2016. Measurement-period adjustments made during 2016 were an increase to current liabilities of $1.5 million, and reductions to goodwill of $1.1 million and deferred tax liabilities of $2.6 million These adjustments did not impact the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). The measurement period for this acquisition is closed and no further purchase price adjustments will be made.

The fair values of the assets acquired and liabilities assumed are as follows (in thousands):



Assets acquired
Current assets	$	269,815
Property, plant and equipment	216,473
Amortizing intangible assets	849,000
Indefinite-lived intangible assets	70,000
Goodwill	660,670
Other non-current assets	1,629
Total assets acquired	2,067,587
Liabilities assumed
Current liabilities	103,986
Debt assumed	1,044,675
Other long-term liabilities	190,560
Total liabilities assumed	1,339,221
Net assets acquired	$	728,366

The goodwill acquired in connection with the acquisition was allocated to the Medical segment and is not deductible for tax purposes. Various factors contributed to the establishment of goodwill, including the value of Lake Region Medical’s highly trained assembled work force and management team, the incremental value resulting from Lake Region Medical’s industry leading capabilities and services to OEMs, enhanced synergies, and the expected revenue growth over time that is attributable to increased market penetration from future products and customers. In connection with the acquisition, the Company recognized a $70 million trademarks and tradenames indefinite-lived intangible asset, $160 million of purchased technology definite-lived intangible assets that have an estimated weighted average amortization period of 7 years and $689 million of customer lists definite-lived intangible assets that have an estimated weighted average amortization period of 14 years. In connection with the acquisition, the Company also recorded the inventory acquired at fair value resulting in an increase in inventory of$23.0 million. This step-up in the fair value of inventory was amortized as the inventory to which the step-up relates was sold and was fully amortized as of January 1, 2016.

The operating results of Lake Region Medical have been included in the Company’s consolidated results since the date of acquisition. For the fiscal year ended December 30, 2016, Lake Region Medical had $802.4 million of revenue and $32.8 million of net income. For the fiscal year ended January 1, 2016, Lake Region Medical had $138.6 million of revenue and a net loss of $17.4 million.

(2.) DIVESTITURE AND ACQUISITIONS (Continued)

Acquisition of Centro de Construcción de Cardioestimuladores del Uruguay

On August 12, 2014, the Company purchased all of the outstanding common stock of Centro de Construcción de Cardioestimuladores del Uruguay, headquartered in Montevideo, Uruguay. CCC is an active implantable neuromodulation medical device systems developer and manufacturer that produces a range of medical devices including implantable pulse generators, programmer systems, battery chargers, patient wands and leads. This acquisition allows the Company to more broadly partner with medical device companies, complements the Company’s core discrete technology offerings and enhances the Company’s medical device innovation efforts.

Fair Value of Assets Acquired and Liabilities Assumed

This transaction was accounted for under the acquisition method of accounting. The cost of the acquisition was allocated to the assets acquired and liabilities assumed from CCC based on their fair values as of the closing date of the acquisition, with the amount exceeding the fair value of the net assets acquired recorded as goodwill. The valuation of the assets acquired and liabilities assumed from CCC was finalized during 2015 and did not result in a material adjustment to the original valuation of net assets acquired, including goodwill and therefore was not reflected as a retrospective adjustment to the historical financial statements.

The fair values of the assets acquired and liabilities assumed are as follows (in thousands):



Assets acquired
Current assets	$	10,670
Property, plant and equipment	1,131
Amortizing intangible assets	6,100
Goodwill	8,296
Total assets acquired	26,197
Liabilities assumed
Current liabilities	4,842
Deferred income taxes	1,590
Total liabilities assumed	6,432
Net assets acquired	$	19,765

The goodwill acquired in connection with the CCC acquisition was allocated to the Medical segment and is not deductible for tax purposes. Various factors contributed to the establishment of goodwill, including: the value of CCC’s highly trained assembled work force and management team; the incremental value that CCC’s technology will bring to the Company’s medical devices; and the expected revenue growth over time that is attributable to increased market penetration from future products and customers. In connection with the acquisition, the Company recognized definite-lived intangible assets of $0.1 million for trademarks and tradenames, $1.4 million for purchased technology and $4.6 million for customer lists, which had estimated weighted average amortization periods of 2, 10 and 10 years, respectively.

The operating results of CCC have been included in the Company’s consolidated results since the date of acquisition. For the fiscal year ended January 2, 2015, CCC had $5.8 million of revenue and net income of $1.2 million. The aggregate purchase price of $19.8 million was funded with cash on hand.

(2.) DIVESTITURE AND ACQUISITIONS (Continued)

Unaudited Pro Forma Financial Information

The following unaudited pro forma information summarizes the consolidated results of operations of the Company, Lake Region Medical, and CCC for fiscal years 2015 and 2014 as if those acquisitions occurred as of the beginning of fiscal years 2014 (Lake Region Medical) and 2013 (CCC) (in thousands, except per share amounts):



	2015		2014
Sales	$	1,445,689	$	1,441,782
Net income (loss)	2,405		(25,865		)
Earnings (loss) per share:
Basic	$	0.08	$	(0.87	)
Diluted	$	0.08	$	(0.87	)

The unaudited pro forma information presents the combined operating results of Integer, Lake Region Medical, and CCC, with the results prior to the acquisition date adjusted to include the pro forma impact of the amortization of acquired intangible assets, the adjustment to interest expense reflecting the amount borrowed in connection with the acquisitions at Integer’s interest rate, and the impact of income taxes on the pro forma adjustments utilizing the applicable statutory tax rate. Fiscal year 2015 pro forma earnings were adjusted to exclude $32.3 million of acquisition-related costs (change-in-control payments, investment banking fees, professional fees), $9.5 million of debt related charges (commitment fees, swap termination fees, debt extinguishment fees) and $23.0 million of nonrecurring amortization expense related to the fair value step-up of inventory incurred in 2015 as a result of the acquisition of Lake Region Medical. Fiscal year 2014 supplemental pro forma earnings were adjusted to include these charges. The unaudited pro forma consolidated basic and diluted earnings (loss) per share calculations are based on the consolidated basic and diluted weighted average shares of Integer. The unaudited pro forma results are presented for illustrative purposes only and do not reflect the realization of potential cost savings, and any related integration costs. Costs savings may result from the acquisition; however, there can be no assurance that these cost savings will be achieved. These pro forma results do not purport to be indicative of the results that would have been obtained by the combined company, or to be a projection of results that may be obtained in the future by the combined company.