INTEGER HOLDINGS CORP, 10-K filed on 2/28/2017
Annual Report
Document and Entity Information (USD $)
In Millions, except Share data, unless otherwise specified
12 Months Ended
Dec. 30, 2016
Feb. 24, 2017
Jul. 1, 2016
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
Integer Holdings Corporation 
 
 
Entity Central Index Key
0001114483 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 30, 2016 
 
 
Amendment Flag
false 
 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Current Fiscal Year End Date
--12-30 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 967 
Entity Common Stock, Shares Outstanding
 
30,998,920 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 30, 2016
Jan. 1, 2016
Current assets:
 
 
Cash and cash equivalents
$ 52,116 
$ 82,478 
Accounts receivable, net of allowance for doubtful accounts of $0.7 million and $1.0 million, respectively
204,626 
207,342 
Inventories
225,151 
252,166 
Refundable income taxes
13,388 
11,730 
Prepaid expenses and other current assets
22,026 
20,888 
Total current assets
517,307 
574,604 
Property, plant and equipment, net
372,042 
379,492 
Amortizing intangible assets, net
849,772 
893,977 
Indefinite-lived intangible assets
90,288 
90,288 
Goodwill
967,326 
1,013,570 
Deferred income taxes
3,970 
3,587 
Other assets
31,838 
26,618 
Total assets
2,832,543 
2,982,136 
Current liabilities:
 
 
Current portion of long-term debt
31,344 
29,000 
Accounts payable
77,896 
84,362 
Income taxes payable
3,699 
3,221 
Accrued expenses
72,281 
97,257 
Total current liabilities
185,220 
213,840 
Long-term debt
1,698,819 
1,685,053 
Deferred income taxes
208,579 
221,804 
Other long-term liabilities
14,686 
10,814 
Total liabilities
2,107,304 
2,131,511 
Commitments and contingencies
   
   
Stockholders’ equity:
 
 
Preferred stock, $0.001 par value, authorized 100,000,000 shares; no shares issued or outstanding
Common stock, $0.001 par value; 100,000,000 shares authorized; 31,059,038 and 30,664,119 shares issued, respectively; 30,925,496 and 30,601,167 shares outstanding, respectively
31 
31 
Additional paid-in capital
637,955 
620,470 
Treasury stock, at cost, 133,542 and 62,952 shares, respectively
(5,834)
(3,100)
Retained earnings
109,087 
231,854 
Accumulated other comprehensive income (loss)
(16,000)
1,370 
Total stockholders’ equity
725,239 
850,625 
Total liabilities and stockholders’ equity
$ 2,832,543 
$ 2,982,136 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Dec. 30, 2016
Jan. 1, 2016
Current assets:
 
 
Allowance for doubtful accounts
$ 0.7 
$ 1.0 
Stockholders’ equity:
 
 
Preferred stock, par value
$ 0.001 
$ 0.001 
Preferred stock, shares authorized
100,000,000 
100,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0.001 
$ 0.001 
Common stock, shares authorized
100,000,000 
100,000,000 
Common stock, shares issued
31,059,038 
30,664,119 
Common stock, shares outstanding
30,925,496 
30,601,167 
Treasury stock, shares
133,542 
62,952 
Consolidated Statements of Operations and Comprehensive Income (Loss) (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 30, 2016
Jan. 1, 2016
Jan. 2, 2015
Income Statement [Abstract]
 
 
 
Sales
$ 1,386,778 
$ 800,414 
$ 687,787 
Cost of sales
1,008,479 
565,279 
456,389 
Gross profit
378,299 
235,135 
231,398 
Operating expenses:
 
 
 
Selling, general and administrative expenses
153,291 
102,530 
90,602 
Research, development and engineering costs, net
55,001 
52,995 
49,845 
Other operating expenses, net
61,737 
66,464 
15,297 
Total operating expenses
270,029 
221,989 
155,744 
Operating income
108,270 
13,146 
75,654 
Interest expense
111,270 
33,513 
4,252 
(Gain) loss on cost and equity method investments, net
833 
(3,350)
(4,370)
Other income, net
(5,018)
(1,317)
(807)
Income (loss) before provision (benefit) for income taxes
1,185 
(15,700)
76,579 
Provision (benefit) for income taxes
(4,776)
(8,106)
21,121 
Net income (loss)
5,961 
(7,594)
55,458 
Earnings (loss) per share:
 
 
 
Basic (in dollars per share)
$ 0.19 
$ (0.29)
$ 2.23 
Diluted (in dollars per share)
$ 0.19 
$ (0.29)
$ 2.14 
Weighted average shares outstanding:
 
 
 
Basic (in shares)
30,778 
26,363 
24,825 
Diluted (in shares)
30,973 
26,363 
25,975 
Comprehensive Income (Loss)
 
 
 
Net income (loss)
5,961 
(7,594)
55,458 
Foreign currency translation loss
(19,269)
(7,841)
(3,502)
Net change in cash flow hedges, net of tax
2,478 
108 
(1,359)
Defined benefit plan liability adjustment, net of tax
(579)
(20)
(374)
Other comprehensive loss, net
(17,370)
(7,753)
(5,235)
Comprehensive income (loss)
$ (11,409)
$ (15,347)
$ 50,223 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 30, 2016
Jan. 1, 2016
Jan. 2, 2015
Cash flows from operating activities:
 
 
 
Net income (loss)
$ 5,961 
$ (7,594)
$ 55,458 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
90,524 
44,632 
37,197 
Debt related charges included in interest expense
7,278 
11,320 
773 
Inventory step-up amortization
22,986 
 
Stock-based compensation
8,408 
9,376 
13,186 
Non-cash (gain) loss on cost and equity method investments
1,495 
275 
(4,370)
Other non-cash (gains) losses
5,216 
1,093 
(3,214)
Deferred income taxes
(7,350)
(10,298)
531 
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
(2,169)
3,684 
(11,731)
Inventories
22,170 
(25,752)
(6,726)
Prepaid expenses and other assets
(3,846)
(1,861)
(3,281)
Accounts payable
(1,127)
3,129 
(970)
Accrued expenses
(13,935)
(28,605)
1,214 
Income taxes payable
(7,093)
(9,906)
2,949 
Net cash provided by operating activities
105,532 
12,479 
81,276 
Cash flows from investing activities:
 
 
 
Acquisition of property, plant and equipment
(58,632)
(44,616)
(24,827)
Proceeds from sale of property, plant and equipment
347 
746 
Proceeds from sale (purchase of) cost and equity method investments
(3,015)
(6,300)
2,248 
Acquisitions, net of cash acquired
(423,389)
(16,002)
Other investing activities
(2,000)
2,655 
Net cash used in investing activities
(63,300)
(473,559)
(35,922)
Cash flows from financing activities:
 
 
 
Principal payments of long-term debt
(46,000)
(1,232,175)
(10,000)
Proceeds from issuance of long-term debt
57,000 
1,749,750 
Issuance of common stock
2,821 
6,583 
8,278 
Payment of debt issuance costs
(1,177)
(45,933)
Distribution of cash and cash equivalents to Nuvectra Corporation
(76,256)
Purchase of non-controlling interests
(6,818)
(9,875)
Other financing activities
(1,716)
(440)
(655)
Net cash provided by (used in) financing activities
(72,146)
467,910 
(2,377)
Effect of foreign currency exchange rates on cash and cash equivalents
(448)
(1,176)
(1,618)
Net increase (decrease) in cash and cash equivalents
(30,362)
5,654 
41,359 
Cash and cash equivalents, beginning of year
82,478 
76,824 
35,465 
Cash and cash equivalents, end of year
$ 52,116 
$ 82,478 
$ 76,824 
Consolidated Statement of Stockholders' Equity (USD $)
In Thousands, unless otherwise specified
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Treasury Stock [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Balance at Jan. 03, 2014
$ 542,055 
$ 24 
$ 344,915 
$ (1,232)
$ 183,990 
$ 14,358 
Balance, shares at Jan. 03, 2014
 
24,459 
 
(37)
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Net income (loss)
55,458 
 
 
 
55,458 
 
Total other comprehensive income (loss)
(5,235)
 
 
 
 
(5,235)
Stock-based compensation
8,921 
 
8,921 
 
 
 
Net shares issued (acquired)
3,465 
7,754 
(4,290)
 
 
Net shares issued under stock incentive plans, shares
 
640 
 
(86)
 
 
Excess tax benefit on share-based compensation
4,357 
 
4,357 
 
 
 
Shares contributed to 401(k) Plan
4,341 
126 
4,215 
 
 
Shares contributed to 401(k) Plan, shares
 
 
95 
 
 
Shares issued in connection with acquisition
 
 
 
 
 
Issuance of roll-over options in connection with acquisition
 
 
 
 
 
Balance at Jan. 02, 2015
613,362 
25 
366,073 
(1,307)
239,448 
9,123 
Balance, shares at Jan. 02, 2015
 
25,099 
 
(28)
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Net income (loss)
(7,594)
 
 
 
(7,594)
 
Total other comprehensive income (loss)
(7,753)
 
 
 
 
(7,753)
Stock-based compensation
9,364 
 
9,364 
 
 
 
Net shares issued (acquired)
504 
5,764 
(5,261)
 
 
Net shares issued under stock incentive plans, shares
 
585 
 
(107)
 
 
Excess tax benefit on share-based compensation
5,639 
 
5,639 
 
 
 
Shares contributed to 401(k) Plan
3,920 
452 
3,468 
 
 
Shares contributed to 401(k) Plan, shares
 
 
72 
 
 
Shares issued in connection with acquisition
245,368 
245,363 
 
 
Issuance of shares in connection with acquisition, shares
 
4,980 
 
 
 
Issuance of roll-over options in connection with acquisition
4,508 
 
4,508 
 
 
 
Purchase of non-controlling interests in subsidiaries
(16,693)
 
(16,693)
 
 
 
Balance at Jan. 01, 2016
850,625 
31 
620,470 
(3,100)
231,854 
1,370 
Balance, shares at Jan. 01, 2016
 
30,664 
 
(63)
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Net income (loss)
5,961 
 
 
 
5,961 
 
Total other comprehensive income (loss)
(17,370)
 
 
 
 
(17,370)
Stock-based compensation
8,408 
 
8,408 
 
 
 
Net shares issued (acquired)
(1,164)
1,570 
(2,734)
 
 
Net shares issued under stock incentive plans, shares
 
395 
 
(71)
 
 
Excess tax benefit on share-based compensation
2,266 
 
2,266 
 
 
 
Shares contributed to 401(k) Plan
 
 
 
 
 
Shares issued in connection with acquisition
 
 
 
 
 
Issuance of roll-over options in connection with acquisition
 
 
 
 
 
Spin-off of Nuvectra Corporation
(123,487)
 
5,241 
 
(128,728)
 
Balance at Dec. 30, 2016
$ 725,239 
$ 31 
$ 637,955 
$ (5,834)
$ 109,087 
$ (16,000)
Balance, shares at Dec. 30, 2016
 
31,059 
 
(134)
 
 
Summary of Significant Accounting Policies
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1.)     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Integer Holdings Corporation (together with its consolidated subsidiaries, “Integer” or the “Company”) is a publicly traded corporation listed on the New York Stock Exchange under the symbol “ITGR.” Integer is one of the largest medical device outsource manufacturers in the world serving the cardiac, neuromodulation, orthopedics, vascular, advanced surgical and portable medical markets. The Company provides innovative, high-quality medical technologies that enhance the lives of patients worldwide. In addition, it develops batteries for high-end niche applications in the energy, military, and environmental markets. The Company’s customers include large multi-national original equipment manufacturers (“OEMs”) and their affiliated subsidiaries.
On October 27, 2015, the Company acquired all of the outstanding common stock of Lake Region Medical Holdings, Inc. (“Lake Region Medical”). On March 14, 2016, the Company 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 (the “Spin-off”). Refer to Note 2 “Divestiture and Acquisitions” for further details of these transactions.
Effective June 30, 2016, the Company changed its name from Greatbatch, Inc. (“Greatbatch”) to Integer Holdings Corporation. The new name represents the union of the Greatbatch Medical, Lake Region Medical and Electrochem brands. Integer, as in whole or complete, signifies the Company’s more comprehensive products and service offerings, and a new dimension in its combined capabilities.
Basis of Presentation and Principles of Consolidation – The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of Integer Holdings Corporation and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Subsequent to the Lake Region Medical acquisition and Spin-off, the Company operated as three reportable segments: Greatbatch Medical, QiG Group (“QiG”), and Lake Region Medical. The determination of three reportable segments was deemed to be temporary while the Company reorganized its operations including its internal management and financial reporting structure. As a result of this reorganization, the Company reevaluated and revised its reportable business segments during the fourth quarter of 2016. The Company’s reportable segments are: (1) Medical, which includes the previously reported Lake Region Medical segment, the remaining operations of QiG, and the portion of the previously reported Greatbatch Medical segment not included in the new Non-Medical segment; and (2) Non-Medical, which includes the Company’s Electrochem business, which was previously included in the Company’s Greatbatch Medical segment.
This segment structure reflects the financial information and reports used by the Company’s management, specifically its Chief Operating Decision Maker (“CODM”), to make decisions regarding the Company’s business, including resource allocations and performance assessments. This segment structure reflects the Company’s current operating focus in compliance with Accounting Standards Codification (“ASC”) 280, Segment Reporting. As a result of the new segment reporting structure, the Company has reclassified prior year amounts to conform them to the current year presentation. The revised segment structure and the related presentation changes did not impact consolidated net income (loss), earnings (loss) per share, total current assets, total assets or total stockholders’ equity. Refer to Note 19, “Business Segment, Geographic and Concentration Risk Information,” for further discussion regarding the Company’s reportable segments.
The Company’s results include the financial and operating results of QiG until the Spin-off on March 14, 2016. The Company’s results include the financial and operating results of Lake Region Medical since the date of acquisition on October 27, 2015. Results for periods prior to October 27, 2015 do not include the financial and operating results of Lake Region Medical.
Fiscal Year – The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31. Fiscal years 2016, 2015 and 2014 consisted of fifty-two weeks and ended on December 30, 2016January 1, 2016 and January 2, 2015, respectively.
Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of sales and expenses during the reporting periods. Actual results could differ materially from those estimates.
Reclassifications Certain prior period amounts have been reclassified to conform to the current segment structure. Refer to Note 19 “Business Segment, Geographic and Concentration Risk Information,” for a description of the changes made to reflect the current year segment presentation.
(1.)     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents – Cash and cash equivalents consist of cash and highly liquid, short-term investments with maturities at the time of purchase of three months or less.
Concentration of Credit Risk – Financial instruments that potentially subject the Company to concentration of credit risk consist principally of accounts receivable. A significant portion of the Company’s sales and/or accounts receivable are to four customers, all in the medical device industry, and, as such, the Company is directly affected by the condition of those customers and that industry. However, the credit risk associated with trade receivables is partially mitigated due to the stability of those customers. The Company performs on-going credit evaluations of its customers. Note 19 “Business Segment, Geographic and Concentration Risk Information” contains information on sales and accounts receivable for these customers. The Company maintains cash deposits with major banks, which from time to time may exceed insured limits. The Company performs on-going credit evaluations of its banks.
Trade Accounts Receivable and Allowance for Doubtful Accounts – The Company provides credit, in the normal course of business, to its customers in the form of trade receivables. Credit is extended based on evaluation of a customer’s financial condition and collateral is not required. The Company maintains an allowance for those customer receivables that it does not expect to collect. The Company accrues its estimated losses from uncollectable accounts receivable to the allowance based upon recent historical experience, the length of time the receivable has been outstanding and other specific information as it becomes available. Provisions to the allowance for doubtful accounts are charged to current operating expenses. Actual losses are charged against this allowance when incurred.
Inventories – Inventories are stated at the lower of cost, determined using the first-in first-out method, or market. Write-downs for excess, obsolete or expired inventory are based primarily on how long the inventory has been held as well as estimates of forecasted net sales of that product. A significant change in the timing or level of demand for products may result in recording additional write-downs for excess, obsolete or expired inventory in the future. Note 4 “Inventories” contains additional information on the Company’s inventory.
Property, Plant and Equipment (“PP&E”) – PP&E is carried at cost less accumulated depreciation. Depreciation is computed by the straight-line method over the estimated useful lives of the assets, as follows: buildings and building improvements 12-30 years; machinery and equipment 3-10 years; office equipment 3-10 years; and leasehold improvements over the remaining lives of the improvements or the lease term, if less. The cost of repairs and maintenance are expensed as incurred; renewals and betterments are capitalized. Upon retirement or sale of an asset, its cost and related accumulated depreciation or amortization is removed from the accounts and any gain or loss is recorded in operating income or expense. Note 6 “Property, Plant and Equipment, Net” contains additional information on the Company’s PP&E.
Fair Value Measurements – Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants at the measurement date. ASC 820, Fair Value Measurements, establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 1 valuations do not entail a significant degree of judgment.
Level 2 – Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market.
Level 3 – Valuation is based on unobservable inputs that are significant to the overall fair value measurement. The degree of judgment in determining fair value is greatest for Level 3 valuations.
The availability of observable inputs can vary and is affected by a wide variety of factors, including, the type of asset/liability, whether the asset/liability is established in the marketplace, and other characteristics particular to the valuation. To the extent that a valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
(1.)     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, assumptions are required to reflect those that market participants would use in pricing the asset or liability at the measurement date. Note 18 “Fair Value Measurements” contains additional information on assets and liabilities recorded at fair value in the consolidated financial statements.
Business Combinations – The Company records its business combinations under the acquisition method of accounting. Under the acquisition method of accounting, the Company allocates the purchase price of each acquisition to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition. The fair value of identifiable intangible assets is based upon detailed valuations that use various assumptions made by management using one of three valuation approaches: market, income or cost. The selection of a particular method for a given asset depends on the reliability of available data and the nature of the asset, among other considerations.
The market approach estimates the value for a subject asset based on available market pricing for comparable assets. The income approach estimates the value for a subject asset based on the present value of cash flows projected to be generated by the asset. The projected cash flows are discounted at a required rate of return that reflects the relative risk of the asset and the time value of money. The projected cash flows for each asset considers multiple factors from the perspective of a marketplace participant including revenue projections from existing customers, attrition trends, technology life-cycle assumptions, marginal tax rates and expected profit margins giving consideration to historical and expected margins. The cost approach estimates the value for a subject asset based on the cost to replace the asset and reflects the estimated reproduction or replacement cost for the asset, less an allowance for loss in value due to depreciation or obsolescence, with specific consideration given to economic obsolescence if indicated. These fair value measurement approaches are based on significant unobservable inputs, including management estimates and assumptions.
Any excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired is allocated to goodwill. All direct acquisition-related costs are expensed as incurred.
In circumstances where an acquisition involves a contingent consideration arrangement, the Company recognizes a liability equal to the fair value of the contingent payments it expects to make as of the acquisition date. The Company re-measures this liability each reporting period and records changes in the fair value through Other Operating Expenses, Net. Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount periods and rates, as well as changes in the timing, amount of, or the likelihood of achieving the applicable contingent consideration.
Amortizing Intangible Assets – Amortizing intangible assets consists primarily of purchased technology and patents, and customer lists. The Company amortizes its definite-lived intangible assets over their estimated useful lives utilizing an accelerated or straight-line method of amortization, which approximates the projected cash flows used to fair value those intangible assets at the time of acquisition. When the straight-line method of amortization is utilized, the estimated useful life of the intangible asset is shortened to assure that recognition of amortization expense corresponds with the expected cash flows. The amortization period for the Company’s amortizing intangible assets are as follows: purchased technology and patents 5-15 years; customer lists 7-20 years and other intangible assets 1-10 years. Refer to Note 7 “Intangible Assets” for additional information on the Company’s amortizing intangible assets.
Impairment of Long-Lived Assets – The Company assesses the impairment of definite-lived long-lived assets or asset groups when events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that are considered in deciding when to perform an impairment review include: a significant decrease in the market price of the asset or asset group; a significant change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition; a significant change in legal factors or in the business climate that could affect the value of a long-lived asset or asset group, including an action or assessment by a regulator; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction; a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group; or a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent.
Potential recoverability is measured by comparing the carrying amount of the asset or asset group to its related total future undiscounted cash flows. If the carrying value is not recoverable, the asset or asset group is considered to be impaired. Impairment is measured by comparing the asset or asset group’s carrying amount to its fair value. When it is determined that useful lives of assets are shorter than originally estimated, and no impairment is present, the rate of depreciation is accelerated in order to fully depreciate the assets over their new shorter useful lives.
(1.)     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill and other indefinite lived intangible assets recorded are not amortized but are periodically tested for impairment. The Company assesses goodwill for impairment on the last day of each fiscal year, or more frequently if certain events occur as described above. Goodwill is evaluated for impairment through the comparison of the fair value of the reporting units to their carrying values. When evaluating goodwill for impairment, the Company may first perform an assessment of qualitative factors to determine if the fair value of the reporting unit is more-likely-than-not greater than its carrying amount. This qualitative assessment is referred to as a “step zero approach. If, based on the review of the qualitative factors, the Company determines it is more-likely-than-not that the fair value of the reporting unit is greater than its carrying value, the required two-step impairment test can be bypassed. If the Company does not perform a step zero assessment or if the fair value of the reporting unit is more-likely-than-not less than its carrying value, the Company must perform a two-step impairment test, and calculate the estimated fair value of the reporting unit. If, based upon the two-step impairment test, it is determined that the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill within the reporting unit is less than its carrying value. Under the two-step approach, fair values for reporting units are determined based on a combination of discounted cash flows and market multiples.
Other indefinite lived intangible assets are assessed for impairment on the last day of each fiscal year, or more frequently if certain events occur as described above, by comparing the fair value of the intangible asset to its carrying value. The fair value is determined by using the income approach. Note 7 “Intangible Assets” contains additional information on the Company’s long-lived intangible assets.
Cost and Equity Method Investments – Certain of the Company’s investments in equity and other securities are long-term, strategic investments in companies that are in varied stages of development. These investments are included in Other Assets on the Consolidated Balance Sheets. The Company accounts for investments in these entities under the cost or equity method depending on the type of ownership interest, as well as the Company’s ability to exercise influence over these entities. Investments accounted for under the cost method are initially recorded at the amount of the Company’s investment and carried at that cost until a security is deemed impaired or is sold. Equity securities accounted for under the equity method are initially recorded at the amount of the Company’s investment and are adjusted each period for the Company’s share of the investee’s income or loss and dividends paid.
Equity securities accounted for under both the cost and equity methods are reviewed quarterly for changes in circumstance or the occurrence of events that suggest the Company’s investment may not be recoverable. Examples of such impairment indicators include, but are not limited to: a recent sale or offering of similar shares of the investment at a price below the Company’s cost basis; a significant deterioration in earnings performance; a significant change in the regulatory, economic or technological environment of the investee; or a significant doubt about an investee’s ability to continue as a going concern. If an impairment indicator is identified, management will estimate the fair value of the investment and compare it to its carrying value. The estimation of fair value considers all available financial information related to the investee, including, but not limited to, valuations based on recent third-party equity investments in the investee. Impairment is deemed to be other-than-temporary unless the Company has the ability and intent to hold the investment for a period sufficient for a market recovery up to the carrying value of the investment. Further, evidence must indicate that the carrying value of the investment is recoverable within a reasonable period. For other-than-temporary impairments, an impairment loss is recognized equal to the difference between the investment’s carrying value and its fair value and is recognized in Other Income, Net in the Consolidated Statements of Operations and Comprehensive Income (Loss) in the period the determination is made.
The Company has determined that these investments are not considered variable interest entities. The Company’s exposure related to these entities is limited to its recorded investment. These investments are in start-up research and development companies whose fair value is highly subjective in nature and subject to future fluctuations, which could be significant. Refer to Note 18 “Fair Value Measurements” for further discussion of the Company’s Cost and Equity Method Investments.
Debt Issuance Costs and Discounts – Debt issuance costs and discounts associated with the issuance of debt by the Company are deferred and amortized over the lives of the related debt. Debt issuance costs incurred in connection with the Company’s issuance of its revolving credit facility are classified within Other Assets and amortized to Interest Expense on a straight-line basis over the contractual term of the credit facility. Debt issuance costs and discounts related to the Company’s term-debt are recorded as a reduction of the carrying value of the related debt and are amortized to Interest Expense using the effective interest method over the period from the date of issuance to the put option date (if applicable) or the maturity date, whichever is earlier. The amortization of debt issuance costs and discounts are included in Debt Related Charges Included in Interest Expense in the Consolidated Statements of Cash Flows. Upon prepayment of the related debt, the Company accelerates the recognition of an appropriate amount of the costs as refinancing or extinguishment of debt. Note 9 “Debt” contains additional information on the Company’s debt issuance costs and discounts.
(1.)     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes – The consolidated financial statements of the Company have been prepared using the asset and liability approach in accounting for income taxes, which requires the recognition of deferred income taxes for the expected future tax consequences of net operating losses, credits, and temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided on deferred tax assets if it is determined, within each taxing jurisdiction, that it is more likely than not that the asset will not be realized.
The Company accounts for uncertain tax positions using a more likely than not recognition threshold. The evaluation of uncertain tax positions is based on factors including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. These tax positions are evaluated on a quarterly basis. The Company recognizes interest expense related to uncertain tax positions as Provision (Benefit) for Income Taxes. Penalties, if incurred, are recognized as a component of Selling, General and Administrative Expenses (“SG&A”).
The Company and its subsidiaries file a consolidated U.S. federal income tax return. State tax returns are filed on a combined or separate basis depending on the applicable laws in the jurisdictions where the tax returns are filed. The Company also files foreign tax returns on a separate company basis in the countries in which it operates.
Derivative Financial Instruments – The Company recognizes all derivative financial instruments in its consolidated financial statements at fair value. Changes in the fair value of derivative instruments are recorded in earnings unless hedge accounting criteria are met. The Company designated its interest rate swaps (Refer to Note 9 “Debt”) and foreign currency contracts (Refer to Note 15 “Commitments and Contingencies”) entered into as cash flow hedges. The effective portion of the changes in fair value of these cash flow hedges is recorded each period, net of tax, in Accumulated Other Comprehensive Income (Loss) until the related hedged transaction occurs. Any ineffective portion of the changes in fair value of these cash flow hedges is recorded in earnings. In the event the hedged cash flow for forecasted transactions does not occur, or it becomes probable that they will not occur, the Company reclassifies the amount of any gain or loss on the related cash flow hedge to income (expense) at that time. Cash flows related to these derivative financial instruments are included in cash flows from operating activities. The cash flows from the termination of interest rate swap agreements are reported as operating activities in the consolidated statements of cash flows.
Revenue Recognition – The Company recognizes revenue when it is realized or realizable and earned. This occurs when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable (including any price concessions under long-term agreements), the buyer is obligated to pay us (i.e., not contingent on a future event), the risk of loss is transferred, there is no obligation of future performance, collectability is reasonably assured and the amount of future returns can reasonably be estimated. With regards to the Company’s customers (including distributors), those criteria are met when title passes, generally at the point of shipment. Currently, the revenue recognition policy is the same for the Company’s Medical and Non-Medical segments. In general, for customers with long-term contracts, we have negotiated fixed pricing arrangements. During new contract negotiations, price level decreases (concessions) for future sales may be offered to customers in exchange for volume and/or long-term commitments. Once the new contracts are signed, these prices are fixed and determinable for all future sales. The Company includes shipping and handling fees billed to customers in Sales. Shipping and handling costs associated with inbound and outbound freight are recorded in Cost of Sales. In certain instances the Company obtains component parts from its customers that are included in the final product sold back to the same customer. These amounts are excluded from Sales and Cost of Sales recognized by the Company. The cost of these customer supplied component parts amounted to $35.8 million, $44.3 million and $48.1 million in fiscal years 2016, 2015 and 2014, respectively.
Environmental Costs – Environmental expenditures that relate to an existing condition caused by past operations and that do not provide future benefits are expensed as incurred. Liabilities are recorded when environmental assessments are made, the requirement for remedial efforts is probable and the amount of the liability can be reasonably estimated. Liabilities are recorded generally no later than the completion of feasibility studies. The Company has an ongoing monitoring and identification process to assess how the activities, with respect to known exposures, are progressing against the recorded liabilities, as well as to identify other potential remediation sites that are presently unknown.
(1.)     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Restructuring The Company continually evaluates alternatives to align the business with the changing needs of its customers and to lower operating costs. This includes the realignment of its existing manufacturing capacity, facility closures, or similar actions, either in the normal course of business or pursuant to significant restructuring programs. These actions may result in employees receiving voluntary or involuntary employee termination benefits, which may be pursuant to contractual agreements. Voluntary termination benefits are accrued when an employee accepts the related offer. Involuntary termination benefits are accrued upon the commitment to a termination plan and the benefit arrangement is communicated to affected employees, or when liabilities are determined to be probable and estimable, depending on the existence of a substantive plan for severance or termination. All other exit costs are expensed as incurred. Refer to Note 13 “Other Operating Expenses, Net” for additional information.
Product Warranties – The Company allows customers to return defective or damaged products for credit, replacement, or repair. The Company warrants that its products will meet customer specifications and will be free from defects in materials and workmanship. The Company accrues its estimated exposure to warranty claims, through Cost of Sales, based upon recent historical experience and other specific information as it becomes available. Note 15 “Commitments and Contingencies” contains additional information on the Company’s product warranties.
Research, Development and Engineering Costs, Net (“RD&E”) – RD&E costs are expensed as incurred. The primary costs are salary and benefits for personnel, material costs used in development projects and subcontracting costs. Cost reimbursements for certain engineering services from customers for whom the Company designs products are recorded as an offset to engineering costs upon achieving development milestones specified in the contracts. These reimbursements do not cover the complete cost of the development projects. Additionally, the technology developed under these cost reimbursement projects is owned by the Company and is utilized for future products developed for other customers. Note 12 “Research, Development and Engineering Costs, Net” contains additional information on the Company’s RD&E activities.
Stock-Based Compensation The Company recognizes stock-based compensation expense for its related compensation plans, which include stock options, restricted stock units and restricted stock awards. The fair value of the stock-based compensation is determined at the grant date. Compensation cost for service-based awards is recognized ratably over the applicable vesting period. Compensation cost for nonmarket-based performance awards is reassessed each period and recognized based upon the probability that the performance targets will be achieved. Compensation cost for market-based performance awards is expensed ratably over the applicable vesting period and is recognized each period whether the performance metrics are achieved or not. The amount of stock-based compensation expense recognized is based on the portion of the awards that are ultimately expected to vest. The Company estimates pre-vesting forfeitures at the time of grant by analyzing historical data and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The total expense recognized over the vesting period will only be for those awards that ultimately vest, excluding market and nonmarket performance award considerations.
All stock option awards granted under the Company’s compensation plans have an exercise price equal to the closing stock price on the date of grant, a ten-year contractual life and generally, vest annually over a three-year vesting term. The Company uses the Black-Scholes standard option pricing model (“Black-Scholes model”) to determine the fair value of stock options. In addition to the closing stock price on the date of grant, the determination of the fair value of the awards using the Black-Scholes model is also affected by other assumptions, including projected employee stock option exercise behaviors, risk-free interest rates, expected volatility of the Company's stock price in future periods and expected dividend yield, discussed in further detail:
Expected Term - The Company analyzes historical employee exercise and termination data to estimate the expected term assumption.
Risk-free Interest Rate - The rate is based on the U.S. Treasury yield curve in effect on the grant date for a maturity equal to or approximating the expected term of the options.
Expected Volatility - The Company calculates expected volatility using historical volatility based on the daily closing prices of the Company's common stock over a period equal to the expected term of the option.
Dividend Yield - The Company's dividend yield assumption is based on the Company’s history and the expected annual dividend yield on the grant date.
Restricted stock unit awards granted under the Company’s plans typically vest in equal annual installments over a three or four year period. Restricted stock awards are typically issued to members of the Company’s Board of Directors as a portion of their annual retainer and vest quarterly over a one-year vesting term. For service-based and nonmarket-based performance restricted stock and restricted stock unit awards, the fair market value of the award is determined based upon the closing value of the Company’s stock price on the grant date. For market-based performance restricted stock unit awards, the fair market value of the award is determined utilizing a Monte Carlo simulation model, which projects the value of the Company’s stock under numerous scenarios and determines the value of the award based upon the present value of those projected outcomes. 
(1.)     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company records deferred tax assets for awards that result in deductions on the Company's income tax returns, based on the amount of stock-based compensation expense recognized and the statutory tax rate in the jurisdiction in which it will receive a deduction. Differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on the income tax return are recorded in additional paid-in capital (if the tax deduction exceeds the deferred tax asset) or in the Consolidated Statements of Operations and Comprehensive Income (Loss) (if the deferred tax asset exceeds the tax deduction and no additional paid-in capital exists from previous awards). Note 11 “Stock-Based Compensation” contains additional information on the Company’s stock-based compensation.
Foreign Currency Translation and Remeasurement – The Company translates all assets and liabilities of its foreign subsidiaries, where the U.S. dollar is not the functional currency, at the period-end exchange rate and translates income and expenses at the average exchange rates in effect during the period. The net effect of this translation is recorded in the consolidated financial statements as Accumulated Other Comprehensive Income (Loss). Translation adjustments are not adjusted for income taxes as they relate to permanent investments in the Company’s foreign subsidiaries.
The Company has foreign operations in Ireland, Germany, France, Switzerland, Mexico, Uruguay, and Malaysia, which expose the Company to foreign currency exchange rate fluctuations due to transactions denominated in Euros, Swiss francs, Mexican pesos, Uruguayan pesos, and Malaysian ringgits. To the extent that monetary assets and liabilities, including short-term and long-term intercompany loans, are recorded in a currency other than the functional currency of the subsidiary, these amounts are remeasured each period at the period-end exchange rate, with the resulting gain or loss being recorded in Other Income, Net in the Consolidated Statements of Operations and Comprehensive Income (Loss). Net foreign currency transaction gains included in Other Income, Net amounted to $4.9 million for 2016, and $1.3 million for 2015 and 2014 and primarily related to the remeasurement of intercompany loans and the strengthening of the U.S. dollar relative to the Euro.
Defined Benefit Plans – The Company recognizes in its balance sheet as an asset or liability the overfunded or underfunded status of its defined benefit plans provided to its employees located in Mexico, Switzerland, France and Germany. This asset or liability is measured as the difference between the fair value of plan assets, if any, and the benefit obligation of those plans. For these plans, the benefit obligation is the projected benefit obligation, which is calculated based on actuarial computations of current and future benefits for employees. Actuarial gains or losses and prior service costs or credits that arise during the period, but are not included as components of net periodic benefit expense, are recognized as a component of Accumulated Other Comprehensive Income (Loss). Defined benefit expenses are charged to Cost of Sales, SG&A and RD&E expenses as applicable. Note 10 “Benefit Plans” contains additional information on these costs.
Earnings (Loss) Per Share (“EPS”) – Basic EPS is calculated by dividing Net Income (Loss) by the weighted average number of shares outstanding during the period. Diluted EPS is calculated by adjusting the weighted average number of shares outstanding for potential common shares if dilutive to the EPS calculation and consist of stock options, unvested restricted stock and restricted stock units and, if applicable, contingently convertible instruments such as convertible debt. Note 16 “Earnings (Loss) Per Share” contains additional information on the computation of the Company’s EPS. 
Comprehensive Income (Loss) – The Company’s comprehensive income (loss) as reported in the Consolidated Statements of Operations and Comprehensive Income (Loss) includes net income (loss), foreign currency translation adjustments, the net change in cash flow hedges, and defined benefit plan liability adjustments. The Consolidated Statements of Operations and Comprehensive Income (Loss) and Note 17 “Accumulated Other Comprehensive Income (Loss)” contains additional information on the computation of the Company’s comprehensive income (loss).
Recent Accounting Pronouncements – In the normal course of business, management evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), Securities and Exchange Commission (“SEC”), or other authoritative accounting bodies to determine the potential impact they may have on the Company’s Consolidated Financial Statements. Based upon this review, except as noted below, management does not expect any of the recently issued accounting pronouncements, which have not already been adopted, to have a material impact on the Company’s Consolidated Financial Statements.





(1.)     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Adopted
In August 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40) - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” which requires the Company to assess their ability to continue as a going concern each interim and annual reporting period. Certain disclosures are required if there is substantial doubt about the Company’s ability to continue as a going concern, including management’s plan to alleviate any such substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter. The Company adopted this ASU in the fourth quarter of 2016, which did not impact the Consolidated Financial Statements or the disclosures therein.
Not Yet Adopted
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment (Topic 350)” to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test. A goodwill impairment will now be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, limited to the amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017. The Company adopted the new guidance on a prospective basis during the first quarter of 2017. The adoption of this ASU did not have a material impact on the Company’s Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which outlines new minimum requirements for a set of assets to be considered a business. The intent of this ASU is to sharpen the distinction between the purchase or disposal of a business versus the purchase or disposal of assets. ASU 2017-01 is effective for the Company in the first quarter of 2018, with early adoption permitted, and prospective application required. The Company does not believe the adoption of this guidance will have a material impact on its Consolidated Financial Statements.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-entity Transfers of Assets Other Than Inventory,” which requires entities to recognize the income tax consequences of intra-entity transfers of assets other than inventory when the transfers occur. This ASU is effective for the Company for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of this ASU will have on its Consolidated Financial Statements.
In August 2016, the FASB issued ASU 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments: A Consensus of the FASB Emerging Issues Task Force.” ASU 2016-15 makes targeted changes to how cash receipts and cash payments are presented in the statement of cash flows. The areas specifically addressed include debt prepayment and debt extinguishment costs, the settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, cash premiums paid for and proceeds from corporate-owned life insurance policies, distributions received from equity method investees and cash receipts from payments on transferor’s beneficial interest on securitized trade receivables. Additionally, the amendment states that, in the absence of other prevailing guidance, cash receipts and payments that have characteristics of more than one class of cash flows should have each separately identifiable source or use of cash presented within the most predominant class of cash flows based on the nature of the underlying cash flows. These amendments are effective for the Company in annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating this ASU, but does not believe the adoption of this guidance will have a material impact on its Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which amends the guidance on reporting credit losses for assets held at amortized cost and available-for-sale debt securities. For assets held at amortized cost, the ASU eliminates the probable initial recognition threshold and requires an entity to reflect a current estimate of all expected credit losses, such that the net amount expected to be collected is presented. For available-for-sale debt securities, the ASU requires credit losses to be presented as an allowance versus a write-down. These amendments are effective for the Company in annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted in annual and interim reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact that the adoption of this ASU will have on its Consolidated Financial Statements.
(1.)     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.”  ASU 2016-09 changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years, with early adoption permitted. The standard requires an entity to recognize all excess tax benefits and tax deficiencies as income tax benefit or expense in the income statement as discrete items in the reporting period in which they occur, and such tax benefits and tax deficiencies are not included in the estimate of an entity’s annual effective tax rate, applied on a prospective basis. Further, the standard eliminates the requirement to defer the recognition of excess tax benefits until the benefit is realized through a reduction to taxes payable. All excess tax benefits previously unrecognized, along with any valuation allowance, should be recognized on a modified retrospective basis as a cumulative adjustment to retained earnings as of the date of adoption. Under ASU 2016-09, an entity that applies the treasury stock method in calculating diluted earnings per share is required to exclude excess tax benefits and deficiencies from the calculation of assumed proceeds since such amounts are recognized in the income statement. Excess tax benefits should also be classified as operating activities in the same manner as other cash flows related to income taxes on the statement of cash flows, as such excess tax benefits no longer represent financing activities since they are recognized in the income statement, and should be applied prospectively or retrospectively to all periods presented. The Company intends to adopt this guidance in the first quarter of fiscal year 2017. The new standard will result in the recognition of excess tax benefits in the Provision (Benefit) for Income Taxes rather than Additional Paid-In Capital, prospectively, which is expected to increase volatility in the Company’s results of operations. The Company intends to apply the presentation requirements for cash flows related to excess tax benefits on a prospective basis. ASU 2016-09 also allows an entity to elect as an accounting policy either to continue to estimate the total number of awards for which the requisite service period will not be rendered or to account for forfeitures for service based awards as they occur. An entity that elects to account for forfeitures as they occur should apply the accounting change on a modified retrospective basis as a cumulative effect adjustment to retained earnings as of the date of adoption. The Company intends to account for forfeitures as they occur. The adoption of this ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires companies to recognize a lease liability that represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use asset on the balance sheet for most leases. This ASU retains a distinction between finance leases and operating leases, and the classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the current accounting literature. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in a consolidated statement of comprehensive income and a consolidated statement of cash flows is largely unchanged from previous GAAP.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and are required to be applied on a modified retrospective basis. Earlier application is permitted. The Company expects the adoption of ASU 2016-02 will result in a material increase in the assets and liabilities on its Consolidated Balance Sheets. The Company is currently evaluating the impact that the adoption of this ASU will have on its Consolidated Statements of Operations and Other Comprehensive Income (Loss).
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset and requires entities to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option. The new ASU is effective for public companies for fiscal years beginning after December 15, 2017. Early adoption of the own credit provision is permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on its Consolidated Financial Statements.
(1.)     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company intends to adopt this guidance in the first quarter of fiscal year 2017 on a prospective basis and is currently assessing the impact of adopting this ASU on its Consolidated Financial Statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The core principle behind ASU 2014-09 is that an entity should recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for delivering goods and services. This model involves a five-step process that includes identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract and recognizing revenue when the entity satisfies the performance obligations. This ASU allows two methods of adoption; (1) a full retrospective approach where historical financial information is presented in accordance with the new standard, and (2) a modified retrospective approach where this ASU is applied to the most current period presented in the financial statements. Additionally, the guidance requires enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition. In August 2015, the FASB issued ASU No 2015-14 which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, with earlier application permitted as of annual reporting periods beginning after December 15, 2016. In March, April and May of 2016, respectively, the FASB issued ASU 2016-08, which clarifies the implementation guidance on principal versus agent considerations, ASU 2016-10, which clarifies the implementation guidance on identifying performance obligations and licensing and ASU 2016-12, which provides improvements to the guidance on collectability, non-cash consideration, and completed contracts at transition, a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. These amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company plans to adopt the requirements of these standards in the first quarter of fiscal year 2018 on a modified retrospective basis. The Company is currently evaluating the requirements of these new standards and has not yet determined the impact of adoption on its Consolidated Financial Statements. The method of adoption is subject to change as the Company progresses through its assessment.
Divestiture and Acquisitions
DIVESTITURE AND ACQUISITIONS
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.
Supplemental Cash Flow Information
SUPPLEMENTAL CASH FLOW INFORMATION
3.)    SUPPLEMENTAL CASH FLOW INFORMATION
The following represents supplemental cash flow information (in thousands) for fiscal years 2016, 2015 and 2014:
 
2016
 
2015
 
2014
Noncash investing and financing activities:
 
 
 
 
 
Common stock contributed to 401(k) Plan
$

 
$
3,920

 
$
4,341

Property, plant and equipment purchases included in accounts payable
3,499

 
7,401

 
2,926

Common stock issued in connection with Lake Region Medical acquisition

 
245,368

 

Replacement stock options issued in connection with Lake Region Medical acquisition

 
4,508

 

Purchase of non-controlling interests in subsidiaries included in accrued expenses

 
6,818

 

Cash paid during the year for:
 
 
 
 
 
Interest
106,475

 
13,057

 
3,521

Income taxes
7,263

 
6,312

 
13,565

Acquisition of noncash assets

 
2,013,604

 
22,434

Liabilities assumed

 
1,340,339

 
6,432

Inventories
INVENTORIES
4.)     INVENTORIES
Inventories are comprised of the following (in thousands):
 
December 30,
2016
 
January 1,
2016
Raw materials
$
100,738

 
$
107,296

Work-in-process
89,224

 
93,729

Finished goods
35,189

 
51,141

Total
$
225,151

 
$
252,166

Assets Held For Sale
ASSETS HELD FOR SALE
5.)     ASSETS HELD FOR SALE
Assets held for sale included in Prepaid Expenses and Other Current Assets, is comprised of the following (in thousands):
Asset
 
Business Segment
 
December 30,
2016
 
January 1,
2016
Building and building improvements
 
Medical
 
$
794

 
$
996


During 2014, the Company transferred $2.1 million of assets relating to the Company’s Orvin, Switzerland property to assets held for sale. During 2016 and 2014 the Company recognized impairment charges, recorded in Other Operating Expenses, Net, of $0.2 million and $0.4 million, respectively, related to its assets held for sale. During 2015, the Company sold $0.6 million of these assets held for sale with no additional gain or loss recognized.
Property, Plant and Equipment, Net
PROPERTY, PLANT AND EQUIPMENT, NET
6.)     PROPERTY, PLANT AND EQUIPMENT, NET
PP&E is comprised of the following (in thousands):
 
December 30, 2016
 
January 1,
2016
Manufacturing machinery and equipment
$
332,886

 
$
285,068

Buildings and building improvements
132,277

 
130,184

Information technology hardware and software
52,467

 
43,947

Leasehold improvements
59,292

 
36,745

Furniture and fixtures
18,989

 
16,243

Land and land improvements
20,046

 
21,774

Construction work in process
32,252

 
76,835

Other
1,062

 
852

 
649,271

 
611,648

Accumulated depreciation
(277,229
)
 
(232,156
)
Total
$
372,042

 
$
379,492


Depreciation expense for property, plant and equipment was as follows for fiscal years 2016, 2015 and 2014 (in thousands):
 
2016
 
2015
 
2014
Depreciation expense
$
52,662

 
$
27,136

 
$
23,320


Construction work in process at December 30, 2016 and January 1, 2016 includes asset purchases related to the Company’s 2014 investment in capacity and capabilities initiatives. Additionally, construction work in process also relates to routine purchases of machinery, equipment, and information technology assets to support normal recurring operations. Refer to Note 13 “Other Operating Expenses, Net” for a description of the Company’s significant capital investment projects.
Intangible Assets
INTANGIBLE ASSETS
7.)     INTANGIBLE ASSETS
Amortizing intangible assets, net are comprised of the following (in thousands):
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Foreign
Currency
Translation
 
Net
Carrying
Amount
December 30, 2016
 
 
 
 
 
 
 
Purchased technology and patents
$
256,719

 
$
(100,719
)
 
$
333

 
$
156,333

Customer lists
759,987

 
(60,474
)
 
(6,269
)
 
693,244

Other
4,534

 
(5,142
)
 
803

 
195

Total amortizing intangible assets
$
1,021,240

 
$
(166,335
)
 
$
(5,133
)
 
$
849,772

 
 
 
 
 
 
 
 
January 1, 2016
 
 
 
 
 
 
 
Purchased technology and patents
$
255,776

 
$
(83,708
)
 
$
1,444

 
$
173,512

Customer lists
761,857

 
(40,815
)
 
(986
)
 
720,056

Other
4,534

 
(4,946
)
 
821

 
409

Total amortizing intangible assets
$
1,022,167

 
$
(129,469
)
 
$
1,279

 
$
893,977


Aggregate intangible asset amortization expense is comprised of the following for fiscal years 2016, 2015 and 2014 (in thousands):
 
2016
 
2015
 
2014
Cost of sales
$
16,769

 
$
7,403

 
$
6,201

SG&A
20,581

 
9,681

 
7,009

RD&E
512

 
412

 
667

Total intangible asset amortization expense
$
37,862

 
$
17,496

 
$
13,877



Estimated future intangible asset amortization expense based upon the carrying value as of December 30, 2016 is as follows (in thousands):
 
2017
 
2018
 
2019
 
2020
 
2021
 
After 2021
Amortization Expense
$
43,562

 
44,426

 
44,483

 
45,066

 
43,957

 
628,278


Indefinite-lived intangible assets were comprised of the following as of December 30, 2016 and January 1, 2016 (in thousands):
 
Trademarks
and
Tradenames
January 1, 2016
$
90,288

December 30, 2016
$
90,288


As discussed further in Note 1 “Summary of Significant Accounting Policies” and Note 19 “Business Segment, Geographic and Concentration Risk Information,” as a result of the Lake Region Medical acquisition and the Spin-off, during 2016 the Company restructured its operations including its internal management and financial reporting structure. In connection with this realignment, the Company reevaluated its operating and reporting segments and determined that it has two operating segments: Medical and Non-Medical. As required, the Company reassigned goodwill to its reporting units based upon their relative fair values and reclassified prior year amounts to conform them to the current year presentation. Additionally, the Company evaluated the goodwill of all of its reporting units utilizing the step-zero approach immediately prior to the change in segments and immediately after the Spin-off for its former QiG reporting unit and concluded in both cases that it was more likely than not that there was no impairment present. The Company also performed its annual goodwill impairment test utilizing the two-step method as of December 30, 2016 and concluded there was no impairment present.

(7.)     INTANGIBLE ASSETS (Continued)
The change in goodwill during fiscal year 2016 is as follows (in thousands):
 
Medical
 
Non- Medical
 
Total
January 1, 2016
$
996,570

 
$
17,000

 
$
1,013,570

Goodwill divested (Note 2)
(40,830
)
 

 
(40,830
)
Purchase accounting adjustments (Note 2)
(1,118
)
 

 
(1,118
)
Foreign currency translation
(4,296
)
 

 
(4,296
)
December 30, 2016
$
950,326

 
$
17,000

 
$
967,326


As of December 30, 2016, no accumulated impairment loss has been recognized for the goodwill allocated to the Company’s Medical or Non-Medical segments.
Accrued Expenses
ACCRUED EXPENSES
8.)    ACCRUED EXPENSES
Accrued expenses are comprised of the following (in thousands):
 
December 30, 2016
 
January 1,
2016
Salaries and benefits
$
30,199

 
$
37,579

Profit sharing and bonuses
3,054

 
6,781

Accrued interest
6,838

 
9,378

Purchase of non-controlling interest in subsidiaries

 
6,818

Severance, retention and change in control payments
6,296

 
11,969

Warranty and customer rebates
8,146

 
7,205

Other
17,748

 
17,527

Total
$
72,281

 
$
97,257

Debt
DEBT
9.)     DEBT
Long-term debt is comprised of the following (in thousands):
 
December 30, 2016
 
January 1,
2016
Senior secured term loan A
$
356,250

 
$
375,000

Senior secured term loan B
1,014,750

 
1,025,000

9.125% senior notes due 2023
360,000

 
360,000

Revolving line of credit
40,000

 

Less unamortized discount on term loan B and debt issuance costs
(40,837
)
 
(45,947
)
Total debt
1,730,163

 
1,714,053

Less current portion of long-term debt
31,344

 
29,000

Total long-term debt
$
1,698,819

 
$
1,685,053


Senior Secured Credit Facilities
In connection with the Lake Region Medical acquisition, on October 27, 2015, the Company replaced its existing credit facility with new senior secured credit facilities (the “Senior Secured Credit Facilities”) consisting of (i) a $200 million revolving credit facility (the “Revolving Credit Facility”), (ii) a $375 million term loan A facility (the “TLA Facility”), and (iii) a $1,025 million term loan B facility (the “TLB Facility”). The TLA Facility and TLB Facility are collectively referred to as the “Term Loan Facilities.” The TLB facility was issued at a 1% discount.
(9.)     DEBT (Continued)
Revolving Credit Facility
The Revolving Credit Facility matures on October 27, 2020 and includes a $15 million sublimit for swingline loans and a $25 million sublimit for standby letters of credit. The Company is required to pay a commitment fee on the unused portion of the Revolving Credit Facility, which will range between 0.175% and 0.25%, depending on the Company’s total net leverage ratio, as defined in the Senior Secured Credit Facilities agreement. As of December 30, 2016, the Company had $40 million of outstanding borrowings on the Revolving Credit Facility and an available borrowing capacity of $151.1 million after giving effect to$8.9 million of outstanding standby letters of credit. As of December 30, 2016, the weighted average interest rate on outstanding borrowings under the Revolving Credit Facility was 3.95%.
Subject to certain conditions, commitments under the Revolving Credit Facility may be increased through an incremental revolving facility so long as, on a pro forma basis, the Company’s first lien net leverage ratio does not exceed 4.25:1.00. The outstanding amount of the Revolving Credit Facility approximated its fair value as of December 30, 2016 based upon the debt being variable rate and short-term in nature.
Term Loan Facilities
The TLA Facility and TLB Facility mature on October 27, 2021 and October 27, 2022, respectively. Interest rates on the TLA Facility, as well as the Revolving Credit Facility, are at the Company’s option, either at: (i) the prime rate plus the applicable margin, which will range between 0.75% and 2.25%, based on the Company’s total net leverage ratio, as defined in the Senior Secured Credit Facilities agreement or (ii) the applicable LIBOR rate plus the applicable margin, which will range between 1.75% and 3.25%, based on the Company’s total net leverage ratio. Interest rates on the TLB Facility are, at the Company’s option, either at: (i) the prime rate plus 3.25% or (ii) the applicable LIBOR rate plus 4.25%, with LIBOR subject to a 1.00% floor. As of December 30, 2016, the interest rate on the TLA Facility and TLB Facility were 4.01% and 5.25%, respectively.
Subject to certain conditions, one or more incremental term loan facilities may be added to the Term Loan Facilities so long as, on a pro forma basis, the Company’s first lien net leverage ratio does not exceed 4.25:1.00.
As of December 30, 2016, the estimated fair value of TLA and TLB were approximately $349 million and $1,022 million, respectively, based on quoted market prices for the debt, recent sales prices for the debt and consideration of comparable debt instruments with similar interest rates and trading frequency, among other factors, and is classified as Level 2 measurements within the fair value hierarchy.
Covenants
The Revolving Credit Facility and the TLA Facility contain covenants requiring (A) a maximum total net leverage ratio of 6.25:1.0, subject to step downs and (B) a minimum interest coverage ratio of adjusted EBITDA (as defined in the Senior Secured Credit Facilities) to interest expense of not less than 2.50:1.0, subject to step ups. The TLB Facility does not contain any financial maintenance covenants. During the fourth quarter of 2016, the Company amended the Senior Secured Credit Facilities. The amendment modified certain covenants covering the Revolving Credit Facility and the TLA Facility. Pursuant to the amendment, the maximum total net leverage ratio stepped down to 6.25:1.0 beginning in the fourth fiscal quarter of 2016 until and including the fourth fiscal quarter for 2017, and will gradually decline to 4.0:1.0 by the second fiscal quarter of 2020. Additionally, pursuant to the amendment, the minimum interest coverage ratio dropped to 2.50:1.0 beginning in the fourth fiscal quarter of 2016 until and including the fourth fiscal quarter of 2017. For fiscal quarters in 2018 and 2019, the interest coverage ratio will rise to 2.75:1.0 and 3.0:1.0, respectively.
The Senior Secured Credit Facilities also contain negative covenants that restrict the Company’s ability to (i) incur additional indebtedness; (ii) create certain liens; (iii) consolidate or merge; (iv) sell assets, including capital stock of the Company’s subsidiaries; (v) engage in transactions with the Company’s affiliates; (vi) create restrictions on the payment of dividends or other amounts from the Company’s restricted subsidiaries; (vii) pay dividends on capital stock or redeem, repurchase or retire capital stock; (viii) pay, prepay, repurchase or retire certain subordinated indebtedness; (ix) make investments, loans, advances and acquisitions; (x) make certain amendments or modifications to the organizational documents of the Company or its subsidiaries or the documentation governing other senior indebtedness of the Company; and (xi) change the Company’s type of business. These negative covenants are subject to a number of limitations and exceptions that are described in the Senior Secured Credit Facilities agreement. As of December 30, 2016, the Company was in compliance with all financial and negative covenants under the Senior Secured Credit Facilities.
(9.)     DEBT (Continued)
The Senior Secured Credit Facilities provide for customary events of default. Upon the occurrence and during the continuance of an event of default, the outstanding advances and all other obligations under the Senior Secured Credit Facilities become immediately due and payable. The Senior Secured Credit Facilities are guaranteed by Integer Holdings Corporation, as a parent guarantor, and all of the Company’s present and future direct and indirect wholly-owned domestic subsidiaries (other than Greatbatch Ltd. (which is the borrower under the Senior Secured Credit Facilities), non-wholly owned joint ventures, and certain other excluded subsidiaries). The Senior Secured Credit Facilities are secured, subject to certain exceptions, by a first priority security interest in; i) the present and future shares of capital stock of (or other ownership or profit interests in) Greatbatch Ltd. and each guarantor (except Integer Holdings Corporation); ii) sixty-six percent (66%) of all present and future shares of voting capital stock of each specified first-tier foreign subsidiary; iii) substantially all of the Company’s, Greatbatch Ltd.’s and each other guarantor’s other personal property; and iv) all proceeds and products of the property and assets of the Company, Greatbatch Ltd. and the other guarantors.
9.125% Senior Notes due 2023
On October 27, 2015, the Company completed a private offering of $360 million aggregate principal amount of 9.125% senior notes due on November 1, 2023 (the “Senior Notes”). All the Senior Notes are outstanding as of December 30, 2016.
Interest on the Senior Notes is payable on May 1 and November 1 of each year.  The Company may redeem the Senior Notes, in whole or in part, prior to November 1, 2018 at a price equal to 100% of the principal amount thereof plus a “make-whole” premium.  Prior to November 1, 2018, the Company may redeem up to 40% of the aggregate principal amount of the Senior Notes using the proceeds from certain equity offerings at a redemption price equal to 109.125% of the aggregate principal amount of the Senior Notes. On or after November 1, 2018, the Company may redeem the Senior Notes, in whole or in part, pursuant to a customary schedule of declining redemption prices. As of December 30, 2016, the estimated fair value of the Senior Notes was approximately $359 million, based on quoted market prices of these notes, recent sales prices for the notes and consideration of comparable debt instruments with similar interest rates and trading frequency, among other factors, and is classified as Level 2 measurements within the fair value hierarchy.
The Senior Notes are senior unsecured obligations of the Company. The Senior Notes contain restrictive covenants that, among other things, limit the ability of the Company to: (i) incur or guarantee additional indebtedness or issue certain disqualified stock or preferred stock; (ii) create certain liens; (iii) pay dividends or make distributions in respect of capital stock; (iv) make certain other restricted payments; (v) enter into agreements that restrict certain dividends or other payments; (vi) enter into sale-leaseback agreements; (vii) engage in certain transactions with affiliates; and (viii) consolidate or merge with, or sell substantially all of their assets to, another person. These covenants are subject to a number of limitations and exceptions that are described in the indenture for the Senior Notes. The Senior Notes provide for customary events of default, subject in certain cases to customary cure periods, in which the Senior Notes and any unpaid interest would become due and payable. As of December 30, 2016, the Company was in compliance with all restrictive covenants under the indenture governing the Senior Notes.
As of December 30, 2016, the weighted average interest rate on all outstanding borrowings is 5.76%.
Contractual maturities of the Company’s debt facilities for the next five years and thereafter, excluding any discounts or premiums, as of December 30, 2016 are as follows (in thousands):
 
2017
 
2018
 
2019
 
2020
 
2021
 
After 2021
Future minimum principal payments
$
31,344

 
40,719

 
47,750

 
87,750

 
239,937

 
1,323,500


(9.)     DEBT (Continued)
Debt Issuance Costs and Discounts
The Company incurred debt issuance costs in conjunction with the issuance of the Senior Secured Credit Facilities and the Senior Notes. The change in deferred debt issuance costs related to the Company’s Revolving Credit Facility is as follows (in thousands):
January 2, 2015
$
2,200

Financing costs deferred
4,152

Write-off during the period
(907
)
Amortization during the period
(654
)
January 1, 2016
4,791

Amortization during the period
(991
)
December 30, 2016
$
3,800

The change in unamortized discount and debt issuance costs related to the Term Loan Facilities and Senior Notes is as follows (in thousands):
 
Debt Issuance Costs
 
Unamortized Discount on TLB Facility
 
Total
January 2, 2015
$
887

 
$

 
$
887

Financing costs incurred
41,781

 
10,250

 
52,031

Write-off during the period
(732
)
 

 
(732
)
Amortization during the period
(6,028
)
 
(211
)
 
(6,239
)
January 1, 2016
35,908

 
10,039

 
45,947

Financing costs incurred
1,177

 

 
1,177

Amortization during the period
(4,989
)
 
(1,298
)
 
(6,287
)
December 30, 2016
$
32,096

 
$
8,741

 
$
40,837


During fiscal year 2015, the Company wrote off $1.6 million of debt issuance costs in connection with the extinguishment and modification of its term loan and revolving line of credit, respectively, which is included in Interest Expense on the Consolidated Statements of Operations and Comprehensive Income (Loss).
(9.)     DEBT (Continued)
Interest Rate Swaps
From time to time, the Company enters into interest rate swap agreements in order to hedge against potential changes in cash flows on its outstanding variable rate debt. During 2016, the Company entered into a one year $250 million interest rate swap and a three year $200 million interest rate swap to hedge against potential changes in cash flows on its outstanding variable rate debt, which are indexed to the one-month LIBOR rate. The variable rate received on the interest rate swaps and the variable rate paid on the variable rate debt will have the same rate of interest, excluding the credit spread, and will reset and pay interest on the same day. The swaps are being accounted for as cash flow hedges.
In connection with the Lake Region Medical acquisition, the Company terminated its then outstanding interest rate swap agreements as the forecasted cash flows that the interest rate swaps were hedging were no longer expected to occur. As a result, during the fourth quarter of 2015, the Company made a $2.8 million payment to the interest rate swap counterparty and recognized a $2.8 million charge to Interest Expense.
Information regarding the Company’s outstanding interest rate swaps designated as cash flow hedges as of December 30, 2016 is as follows (dollars in thousands):
Notional Amount
 
Start Date
 
End Date
 
Pay Fixed Rate
 
Receive Current Floating Rate
 
Fair Value
 
Balance Sheet Location
$
250,000

 
Jul-16
 
Jun-17
 
0.615
%
 
0.7561
%
 
$
267

 
Prepaid Expenses and Other Current Assets
$
200,000

 
Jun-17
 
Jun-20
 
1.1325
%
 
N/A
 
$
3,215

 
Other Assets

The estimated fair value of the interest rate swap agreements represents the amount the Company expects to receive (pay) to terminate the contract. No portion of the change in fair value of the Company’s interest rate swaps during 2016, 2015, or 2014 were considered ineffective. The amount recorded as Interest Expense during 2016, 2015, and 2014 related to the Company’s interest rate swaps was $0.1 million, $3.5 million $0.5 million, respectively.
Benefit Plans
BENEFIT PLANS
10.)     BENEFIT PLANS
Savings Plan
The Company sponsors a defined contribution 401(k) plan (the “Company plan”), for its U.S. based employees. The plan provides for the deferral of employee compensation under Section 401(k) and a discretionary Company match. In 2016, 2015, and 2014, this match was 35% per dollar of participant deferral, up to 6% of the total compensation for legacy Greatbatch associates. Net costs related to this defined contribution plan were $2.0 million in 2016, $2.3 million in 2015, and $2.2 million in 2014.
In addition to the above, under the terms of the 401(k) plan document there is an annual discretionary defined contribution of up to 4% of each legacy Greatbatch employee’s eligible compensation based upon the achievement of certain performance targets. This amount is contributed to the 401(k) plan in the form of Company stock. The Company did not make a discretionary stock contribution in 2016 or 2015. Compensation cost recognized related to the defined contribution plan was $4.2 million in 2014. As of December 30, 2016, certain participants in the 401(k) Plan held, on an aggregate basis, approximately 334,000 shares of Company stock.
Subsequent to the Lake Region Medical acquisition, the Company continued the 401(k) plan previously provided to legacy Lake Region Medical employees. This plan is available to most Lake Region employees whereby employees are allowed to contribute up to, subject to compliance with federal 401(k) plan contribution limits, 50% of gross salary. The Company matches 50% of an employee’s contributions for the first 6% of the employee’s gross salary at a maximum contribution rate per employee of 3% of the employee’s gross salary. The employee’s contributions vest immediately, while the Company’s contributions vest over a five-year period. Net costs related to this defined contribution plan were $4.4 million in 2016 and $0.8 million from the date of acquisition through the fiscal year end in 2015.
In January 2017, the Lake Region Medical plan was merged into the Company plan. Beginning in fiscal year 2017, the Company will match $0.50 per dollar of participant deferral, up to 6% of the base salary for each participant.



(10.)     BENEFIT PLANS (Continued)
Defined Benefit Plans
The Company is required to provide its employees located in Switzerland, Mexico, France, and Germany certain statutorily mandated defined benefits. Under these plans, benefits accrue to employees based upon years of service, position, age and compensation. The defined benefit pension plan provided to the Company’s employees located in Switzerland is a funded contributory plan, while the plans that provide benefits to the Company’s employees located in Mexico, France, and Germany are unfunded and noncontributory. The liability and corresponding expense related to these benefit plans is based on actuarial computations of current and future benefits for employees.
During 2012, the Company transferred most major functions performed at its facilities in Switzerland into other existing facilities and curtailed its defined benefit plan provided to employees at those Swiss facilities. During 2013, the plan assets that remained after settlement payments were made were transferred to an AA- rated insurance carrier who bears the pension risk and longevity risk, and will be used to cover the pension liability for the remaining retirees of the Swiss plan, as well as the remaining employees at that location.
The Company’s fiscal year end dates are the measurement dates for its defined benefit plans. Information relating to the funding position of the Company’s defined benefit plans for fiscal years 2016 and 2015 were as follows (in thousands):
 
2016
 
2015
Change in projected benefit obligation:
 
 
 
Projected benefit obligation at beginning of year
$
7,992

 
$
2,843

Projected benefit obligation acquired

 
4,316

Service cost
431

 
439

Interest cost
174

 
165

Plan participants’ contribution
75

 
61

Actuarial loss
341

 
235

Benefits transferred in, net
84

 
258

Foreign currency translation
(369
)
 
(325
)
Projected benefit obligation at end of year
8,728

 
7,992

Change in fair value of plan assets:
 
 
 
Fair value of plan assets at beginning of year
871

 
437

Employer contributions
36

 
69

Plan participants’ contributions
75

 
61

Actual loss on plan assets
(9
)
 
(39
)
Benefits transferred in, net
224

 
362

Foreign currency translation
(25
)
 
(19
)
Fair value of plan assets at end of year
1,172

 
871

Projected benefit obligation in excess of plan assets at end of year
$
7,556

 
$
7,121

Defined benefit liability classified as other current liabilities
$
109

 
$
46

Defined benefit liability classified as long-term liabilities
$
7,447

 
$
7,075

Accumulated benefit obligation at end of year
$
7,115

 
$
6,299


(10.)     BENEFIT PLANS (Continued)
Amounts recognized in Accumulated Other Comprehensive Income (Loss) for fiscal years 2016 and 2015 are as follows (in thousands):
 
2016
 
2015
Net loss occurring during the year
$
368

 
$
164

Amortization of losses
(62
)
 
(156
)
Prior service cost
1

 
(1
)
Amortization of prior service cost
(11
)
 
(9
)
Pre-tax adjustment (gain) loss
296

 
(2
)
Taxes
283

 
22

Net loss
$
579

 
$
20


The amortization of amounts in Accumulated Other Comprehensive Income (Loss) expected to be recognized as components of net periodic benefit expense during fiscal year 2017 are as follows (in thousands):
Amortization of net prior service cost
$
9

Amortization of net loss
61


Net pension cost for fiscal years 2016 and 2015 is comprised of the following (in thousands):
 
2016
 
2015
Service cost
$
431

 
$
439

Interest cost
174

 
165

Expected return on assets
(18
)
 
(11
)
Recognized net actuarial loss
72

 
164

Net pension cost
$
659

 
$
757


The weighted-average rates used in the actuarial valuations to determine the net pension cost for fiscal years 2016, 2015 and 2014 were as follows:
 
2016
 
2015
 
2014
Discount rate
2.2
%
 
2.3
%
 
3.4
%
Salary growth
2.9
%
 
3.0
%
 
3.1
%
Expected rate of return on assets
2.0
%
 
2.3
%
 
2.5
%

The weighted-average rates used in the actuarial valuations to determine the projected benefit obligation for fiscal years 2016, 2015 and 2014 were as follows:
 
2016
 
2015
 
2014
Discount rate
1.9
%
 
2.2
%
 
2.3
%
Salary growth
2.9
%
 
2.9
%
 
3.0
%
Expected rate of return on assets
1.5
%
 
2.0
%
 
2.3
%

The discount rate used is based on the yields of AA bonds with a duration matching the duration of the liabilities plus approximately 50 basis points to reflect the risk of investing in corporate bonds. The expected rate of return on plan assets reflects earnings expectations on existing plan assets.
(10.)     BENEFIT PLANS (Continued)
The following table provides information by level for the defined benefit plan assets that are measured at fair value as of December 30, 2016 and January 1, 2016 (in thousands).
 
Fair Value
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
December 30, 2016
 
 
 
 
 
 
 
Insurance contract
$
1,172

 
$

 
$
1,172

 
$

January 1, 2016
 
 
 
 
 
 
 
Insurance contract
$
871

 
$

 
$
871

 
$


The fair value of Level 2 plan assets are obtained from quoted market prices in inactive markets or valuation models with observable market data inputs to estimate fair value. These observable market data inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data.  Refer to Note 1 “Summary of Significant Accounting Policies” for discussion of the fair value measurement terms of Levels 1, 2, and 3.
Estimated benefit payments over for the next ten years as of December 30, 2016 are as follows (in thousands):
 
2017
 
2018
 
2019
 
2020
 
2021
 
2022-2026
Estimated benefit payments
$
261

 
191

 
266

 
216

 
251

 
1,888

Stock-Based Compensation
STOCK-BASED COMPENSATION
11.)     STOCK-BASED COMPENSATION
Stock-based Compensation Plans
At the 2016 Annual Meeting of Stockholders held on May 24, 2016, the Company’s stockholders approved the Company’s 2016 Stock Incentive Plan (the “2016 Plan”). The 2016 Plan provides for the granting of stock options, shares of restricted stock, restricted stock units, stock appreciation rights and stock bonuses to employees, non-employee directors, consultants, and service providers. The 2016 Plan supplements the Company’s existing 2009 Stock Incentive Plan (“2009 Plan”), as amended, and 2011 Stock Incentive Plan (“2011 Plan”), as amended.
Stock options remain outstanding under the 2005 Stock Incentive Plan, but the plan has been frozen to any new award issuances.
The 2009 Plan authorizes the issuance of up to 1,350,000 shares of equity incentive awards including nonqualified and incentive stock options, restricted stock, restricted stock units, stock bonuses and stock appreciation rights subject to the terms of the 2009 Plan. The 2009 Plan limits the amount of restricted stock, restricted stock units and stock bonuses that may be awarded in the aggregate to 200,000 shares of the 1,350,000 shares authorized.
The 2011 Plan authorizes the issuance of up to 1,350,000 shares of equity incentive awards including nonqualified and incentive stock options, restricted stock, restricted stock units, stock bonuses and stock appreciation rights, subject to the terms of the 2011 Plan. The 2011 Plan does not limit the amount of restricted stock, restricted stock units or stock bonuses that may be awarded.
The 2016 Plan authorizes the issuance of up to 1,450,000 shares of equity incentive awards including nonqualified and incentive stock options, restricted stock, restricted stock units, stock bonuses and stock appreciation rights, subject to the terms of the 2016 Plan.
As of December 30, 2016, there were 1,316,690, 120,676 and 65,910 shares available for future grants under the 2016 Plan, 2011 Plan and 2009 Plan, respectively. Due to plan sub-limits, of the shares available for grant, only 10,261 shares may be awarded under the 2009 Plan in the form of restricted stock, restricted stock units or stock bonuses.


(11.)     STOCK-BASED COMPENSATION (Continued)
In connection with the Spin-off, under the provisions of the 2009 Plan and 2011 Plan, employee stock options, restricted stock awards, and restricted stock unit awards were adjusted to preserve the fair value of the awards immediately before and after the Spin-off. As such, the Company did not record any modification expense related to the conversion of the awards. Certain awards granted to employees who transferred to Nuvectra in connection with the Spin-off were canceled. As required, the Company accelerated the remaining expense related to these canceled awards of $0.5 million during the first quarter of 2016, which was classified as Other Operating Expenses, Net. The stock awards held as of March 14, 2016 were modified as follows:
Stock options: Holders of the Company’s stock option awards continued to hold stock options to purchase the same number of shares of Integer common stock at an adjusted exercise price and one new Nuvectra stock option for every three Integer stock options held as of the Record Date, which, in the aggregate, preserved the fair value of the overall awards granted. The adjusted exercise price for Integer stock options was equal to approximately 93% of the original exercise price. The stock option awards will continue to vest over their original vesting period.
Restricted stock and restricted stock units: Holders of the Company’s restricted stock and restricted stock unit awards received one new share of Nuvectra restricted stock and restricted stock unit awards for every three Integer restricted stock and restricted stock unit awards held as of the Record Date. Integer restricted stock and restricted stock unit awards will continue to vest in accordance with their original performance metrics and over their original vesting period.
During 2014, the Company recorded stock modification expense related to employee separation costs incurred during 2014 in connection with realignment initiatives. This modification expense was included within Other Operating Expenses, Net. Refer to Note 13 “Other Operating Expenses, Net” for further discussion of these initiatives.
The components and classification of stock-based compensation expense for fiscal years 2016, 2015 and 2014 were as follows (in thousands):
 
2016
 
2015
 
2014
Stock options
$
2,499

 
$
2,708

 
$
2,523

Restricted stock and units
5,909

 
6,668

 
6,417

401(k) stock contribution

 

 
4,246

Total stock-based compensation expense
$
8,408

 
$
9,376

 
$
13,186

 
 
 
 
 
 
Cost of sales
$
332

 
$
795

 
$
3,530

Selling, general and administrative expenses
6,246

 
7,510

 
7,923

Research, development and engineering costs, net
355

 
982

 
1,440

Other operating expenses, net (Note 13)
1,475

 
89

 
293

Total stock-based compensation expense
$
8,408

 
$
9,376

 
$
13,186


Weighted Average Fair Values and Black-Scholes Valuation Assumptions
The following table provides the weighted average grant date fair values of the Company's restricted stock awards, restricted stock units and performance-based restricted stock units during fiscal years 2016, 2015 and 2014:
 
2016
 
2015
 
2014
Weighted average grant date fair values:
 
 
 
 
 
Restricted stock and restricted stock units
$
47.95

 
$
49.84

 
$
44.78

Performance-based restricted stock units
30.83

 
32.92

 
31.33


(11.)     STOCK-BASED COMPENSATION (Continued)
The following table includes the weighted average grant date fair value of stock options granted to employees during fiscal years 2016, 2015 and 2014 and the related weighted average assumptions used in the Black-Scholes model:
 
2016
 
2015
 
2014
Fair value of options granted:
$
8.52

 
$
12.18

 
$
16.43

Assumptions:
 
 
 
 
 
Expected life of option from grant date (in years)
4.7

 
4.7

 
5.3

Risk-free interest rate
1.49
%
 
1.55
%
 
1.73
%
Expected volatility
27
%
 
26
%
 
39
%
Expected dividend yield
0
%
 
0
%
 
0
%

Stock-Based Compensation Activity
The following table summarizes stock option activity under all stock-based compensation plans during the fiscal year ended December 30, 2016:
 
Number of
Stock
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
(in years)
 
Aggregate
Intrinsic
Value
(in millions)
Outstanding at January 1, 2016
1,678,900

 
$
28.32

 
 
 
 
Granted
316,678

 
42.82

 
 
 
 
Exercised
(130,459
)
 
21.61

 
 
 
 
Forfeited or expired
(125,147
)
 
44.76

 
 
 
 
Adjustment due to Spin-off

 
(2.02
)
 
 
 
 
Outstanding at December 30, 2016
1,739,972

 
$
28.26

 
5.7
 
$
11.0

Vested and expected to vest at December 30, 2016
1,723,137

 
$
28.07

 
5.7
 
$
11.0

Exercisable at December 30, 2016
1,484,481

 
$
26.26

 
5.7
 
$
10.3

Intrinsic value is calculated for in-the-money options (exercise price less than market price) as the difference between the market price of the Company’s common shares as of December 30, 2016 ($29.45) and the weighted average exercise price of the underlying stock options, multiplied by the number of options outstanding and/or exercisable. As of December 30, 2016, $1.4 million of unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted-average period of 1.4 years. Shares are distributed from the Company’s authorized but unissued reserve upon the exercise of stock options or treasury stock if available. The Company does not intend to purchase treasury shares to fund the future exercises of stock options.
The following table provides certain information relating to the exercise of stock options during fiscal years 2016, 2015 and 2014 (in thousands):
 
2016
 
2015
 
2014
Intrinsic value
$
690

 
$
8,231

 
$
7,997

Cash received
2,821

 
6,583

 
8,278

Tax benefit realized

 
1,954

 
1,704


(11.)     STOCK-BASED COMPENSATION (Continued)
Restricted Stock and Restricted Stock Units
The following table summarizes time-vested restricted stock and restricted stock unit activity under all stock-based compensation plans during the fiscal year ended December 30, 2016:
 
Time-Vested
Restricted Stock Units and Awards
 
Weighted
Average Grant Date
Fair Value
Nonvested at January 1, 2016
39,235

 
$
47.40

Granted
52,697

 
47.95

Vested
(40,304
)
 
49.64

Forfeited
(12,234
)
 
48.46

Nonvested at December 30, 2016
39,394

 
$
45.51


The following table summarizes performance-vested restricted stock and restricted stock unit activity under all stock-based compensation plans during the fiscal year ended December 30, 2016:
 
Performance-
Vested
Restricted Stock Units and Awards
 
Weighted
Average Grant Date
Fair Value
Nonvested at January 1, 2016
577,825

 
$
25.11

Granted
163,651

 
30.83

Vested
(254,340
)
 
16.19

Forfeited
(130,550
)
 
31.16

Nonvested at December 30, 2016
356,586

 
$
31.87


Performance-based restricted stock units granted only vest if certain market-based performance metrics are achieved. The amount of shares that ultimately vest range from 0 shares to 356,586 shares based upon the total shareholder return of the Company relative to the Company’s compensation peer group over a three-year performance period beginning in the year of grant. The fair value of the restricted stock units were determined by utilizing a Monte Carlo simulation model, which projects the value of the Company’s stock versus the peer group under numerous scenarios and determines the value of the award based upon the present value of these projected outcomes.
The realized tax benefit from the vesting of restricted stock and restricted stock units was $2.3 million, $3.4 million and $2.3 million for 2016, 2015 and 2014, respectively. As of December 30, 2016, there was $4.6 million of total unrecognized compensation cost related to the restricted stock and restricted stock unit awards. That cost is expected to be recognized over a weighted-average period of approximately 1.4 years. The fair value of shares vested in 2016, 2015 and 2014 was $11.8 million, $16.1 million and $12.5 million, respectively.
Research, Development and Engineering Costs
RESEARCH, DEVELOPMENT AND ENGINEERING COSTS, NET
12.)     RESEARCH, DEVELOPMENT AND ENGINEERING COSTS, NET
RD&E costs for fiscal years 2016, 2015 and 2014 are comprised of the following (in thousands):
 
2016
 
2015
 
2014
Research, development and engineering costs
$
61,175

 
$
59,767

 
$
58,974

Less: cost reimbursements
(6,174
)
 
(6,772
)
 
(9,129
)
Total research, development and engineering costs, net
$
55,001

 
$
52,995

 
$
49,845

Other Operating Expenses, Net
OTHER OPERATING EXPENSES, NET
13.)     OTHER OPERATING EXPENSES, NET
Other Operating Expenses, Net for fiscal years 2016, 2015 and 2014 is comprised of the following (in thousands):
 
2016
 
2015
 
2014
2014 investments in capacity and capabilities
$
17,159

 
$
23,037

 
$
8,925

Orthopedic facilities optimization
747

 
1,395

 
1,317

Lake Region Medical consolidations
8,584

 
1,961

 

Acquisition and integration costs
28,316

 
33,449

 
3

Asset dispositions, severance and other
6,931

 
6,622

 
4,106

2013 operating unit realignment

 

 
1,017

Other consolidation and optimization income

 

 
(71
)
Total other operating expenses, net
$
61,737

 
$
66,464

 
$
15,297


2014 Investments in Capacity and Capabilities
In 2014, the Company announced several initiatives to invest in capacity and capabilities and to better align its resources to meet its customers’ needs and drive organic growth and profitability. These included the following:
Functions performed at the Company’s facility in Plymouth, MN to manufacture catheters and introducers will transfer into the Company’s existing facility in Tijuana, Mexico. This initiative is expected to be substantially completed by the first half of 2017 and is dependent upon the Company’s customers’ validation and qualification of the transferred products as well as regulatory approvals worldwide.
Functions performed at the Company’s facilities in Beaverton, OR and Raynham, MA to manufacture products for the portable medical market transferred to a new facility in Tijuana, Mexico. Products manufactured at the Beaverton facility, which do not serve the portable medical market, were transferred to the Company’s Raynham facility. This initiative was substantially completed during the first half of 2016. The final closure of the Beaverton, OR site occurred in the fourth quarter of 2016.
The design engineering responsibilities previously performed at the Company’s Cleveland, OH facility were transferred to the Company’s facilities in Minnesota in 2015.
The realignment of the Company’s commercial sales operations was completed in 2015.
The total capital investment expected for these initiatives is between $24.0 million and $25.0 million, of which $23.3 million has been expended through December 30, 2016. Total restructuring charges expected to be incurred in connection with this realignment are between $50.0 million and $55.0 million, of which $49.1 million has been incurred through December 30, 2016. Expenses related to this initiative were primarily recorded within the Medical segment and include the following:
Severance and retention: $6.0 million - $7.0 million;
Accelerated depreciation and asset write-offs: $3.0 million - $3.0 million; and
Other: $41.0 million - $45.0 million
Other expenses primarily consist of costs to relocate certain equipment and personnel, duplicate personnel costs, excess overhead, disposal, and travel expenditures. All expenses are cash expenditures except accelerated depreciation and asset write-offs. The change in accrued liabilities related to the 2014 investments in capacity and capabilities is as follows (in thousands):
 
Severance and Retention
 
Accelerated
Depreciation/
Asset Write-offs
 
Other
 
Total
January 1, 2016
$
1,429

 
$

 
$
1,595

 
$
3,024

Restructuring charges
397

 
2,451

 
14,311

 
17,159

Write-offs

 
(2,451
)
 

 
(2,451
)
Cash payments
(1,760
)
 

 
(15,906
)
 
(17,666
)
December 30, 2016
$
66

 
$

 
$

 
$
66


(13.)     OTHER OPERATING EXPENSES, NET (Continued)
Orthopedic Facilities Optimization
In 2010, the Company began updating its Indianapolis, IN facility to streamline operations, consolidate two buildings, increase capacity, further expand capabilities and reduce dependence on outside suppliers. This initiative was completed in 2011.
In 2011, the Company began construction of an orthopedic manufacturing facility in Fort Wayne, IN and transferred manufacturing operations being performed at its Columbia City, IN location into this new facility. This initiative was completed in 2012.
During 2012, the Company transferred manufacturing and development operations performed at its facilities in Orvin and Corgemont, Switzerland into existing facilities in Fort Wayne, IN and Tijuana, Mexico. This initiative was completed in 2013.
In connection with this consolidation, in 2013, the Company sold assets related to certain non-core Swiss orthopedic product lines to an independent third party. The purchase agreement provided the Company with an earn out payment based upon the amount of inventory consumed by the purchaser within one year after the close of the transaction. As a result of this earn out, a gain of $2.7 million was recorded in Other Operating Expenses, Net and the cash was received during 2014. During 2014, the Company transferred $2.1 million of assets relating to the Company’s Orvin, Switzerland property to held for sale and recognized a $0.4 million impairment charge. During 2015, the Company sold $0.6 million of these assets held for sale with no additional gain or loss recognized. Refer to Note 5 “Assets Held For Sale” for additional information.
During 2013, the Company began a project to expand its Chaumont, France facility in order to enhance its capabilities and fulfill larger volume customer supply agreements. This initiative is expected to be completed in 2017.
The total capital investment expected to be incurred for these initiatives is between $31.0 million and $35.0 million, of which $30.0 million has been expended through December 30, 2016. Total expense expected to be incurred for these initiatives is between $45.0 million and $48.0 million, of which $44.6 million has been incurred through December 30, 2016. All expenses have been and will be recorded within the Medical segment and are expected to include the following:
Severance and retention: approximately $11.0 million;
Accelerated depreciation and asset write-offs: approximately $13.0 million; and
Other: $21.0 million - $24.0 million
Other expenses include production inefficiencies, moving, revalidation, personnel, training, consulting, and travel costs associated with these consolidation projects. All expenses are cash expenditures except accelerated depreciation and asset write-offs. The change in accrued liabilities related to the orthopedic facilities optimizations is as follows (in thousands):
 
Severance
and
Retention
 
Accelerated
Depreciation/
Asset Write-offs
 
Other
 
Total
January 1, 2016
$

 
$

 
$

 
$

Restructuring charges

 
202

 
545

 
747

Write-offs

 
(202
)
 

 
(202
)
Cash payments

 

 
(545
)
 
(545
)
December 30, 2016
$

 
$

 
$

 
$


Lake Region Medical Consolidations
In 2014, Lake Region Medical initiated plans to close its Arvada, CO site, consolidate its two Galway, Ireland sites into one facility, and other restructuring actions that will result in a reduction in staff across manufacturing and administrative functions at certain locations. This initiative was substantially completed by the end of 2016.
During the third quarter of 2016, the Company announced the planned closure of its Clarence, NY facility. The machined component product lines manufactured in this facility will be transferred to other Integer locations in the U.S. This project is expected to be completed by the first quarter of 2018.
(13.)     OTHER OPERATING EXPENSES, NET (Continued)
The total capital investment expected for this initiative since the acquisition date is between $5.0 million and $6.0 million, of which $2.2 million has been expended through December 30, 2016. Total expense expected to be incurred for these initiatives are between $20.0 million and $25.0 million, of which $10.5 million has been incurred through December 30, 2016. Expenses related to this initiative were primarily recorded within the Medical segment and include the following:
Severance and retention: $8.0 million - $10.0 million;
Accelerated depreciation and asset write offs: approximately $1.0 million - $2.0 million; and
Other: $11.0 million - $13.0 million
Other expenses primarily consist of production inefficiencies, moving, revalidation, personnel, training, consulting, and travel costs associated with these consolidation projects. All expenses are cash expenditures except accelerated depreciation and asset write-offs. The change in accrued liabilities related to the Lake Region Medical consolidation initiatives is as follows (in thousands:
 
Severance
and
Retention
 
Accelerated
Depreciation/
Asset Write-offs
 
Other
 
Total
January 1, 2016
$
3,667

 
$

 
$
596

 
$
4,263

Restructuring charges
740

 
1,398

 
6,446

 
8,584