ACQUISITIONS AND PRO FORMA RESULTS

Tekmed

On December 15, 2015, the Company acquired the assets of Tekmed Instruments S.p.A ("Tekmed") for an aggregate purchase price of $14.1 million including a minimal amount of working capital and purchase adjustment which was recorded as an adjustment to assumed liabilities. Tekmed was a distributor of the Company's and third parties' products in Italy and focused on neurosurgery and neurotrauma, along with representation in plastic and reconstructive surgery, cardiovascular surgery, image diagnostics, general surgery, anesthesia and intensive care, interventional radiology, and proton therapy. This acquisition enables the Company to sell directly into the market support the Specialty Surgical Solutions division's growth in Italy along with other key Integra franchises.

The Company recorded revenue for Tekmed of approximately $4.2 million and $0.3 million in the consolidated statements of operations for the year-ended December 31, 2016 and 2015, respectively. The net income or loss attributable to this acquisition cannot be identified on a stand-alone basis because it is in the process of being integrated into the Company's operations.

The following summarizes the allocation of the purchase price as of December 31, 2016 based on the fair value of the assets acquired and liabilities assumed:



	Purchase Price Allocation
	(Dollars in thousands)
Inventory	$	1,143
Property, plant and equipment	669
Other current assets	11
Intangible assets:			Wtd. Avg. Life:
Supplier Contracts	4,981		2 - 13 Years
Goodwill	9,665
Total assets acquired	16,469
Accrued expenses and other liabilities acquired	802
Deferred tax liability	1,564
Net assets acquired	$	14,103

Tornier's United States Toe & Ankle Business

On October 2, 2015, the Company acquired the United States rights to Tornier's Salto Talaris® and Salto Talaris® XT ankle replacement products and Tornier's Futura^TM silastic toe replacement products (the "Salto and Futura") for $6.0 million in cash. Under the agreement, Integra acquired the U.S. rights to the Salto Talaris® Total Ankle Prosthesis, Salto Talaris® XT Revision Total Ankle Prosthesis, Futura™ Primus Flexible Great Toe system, Futura™ Classic Flexible Great Toe system, and Futura™ Lesser Metatarsal Phalangeal system. The agreement also includes an option to purchase, in the future, the rights to the Salto Talaris®, Salto Talaris® XT, Salto Mobile, and Futura™ silastic toe replacement products outside the United States. The estimated fair value of the net assets acquired exceeded the purchase price for the Salto and Futura product lines and resulted in the Company recording a gain of $1.1 million for the year-ended December 31, 2015 in Other Income. The acquired toe and ankle products enhances the Company's lower extremities product offering and accelerates its entry into the U.S. total ankle replacement market.

The Company recorded revenue for Salto and Futura of approximately $14.4 million and $3.6 million in the consolidated statements of operations for the year-ended December 31, 2016 and 2015, respectively. The net income or loss attributable to this acquisition cannot be identified on a stand-alone basis because it is in the process of being integrated into the Company's operations.

The following summarizes the allocation of the purchase price as of December 31, 2016 based on the fair value of the assets acquired and liabilities assumed:



	Purchase Price Allocation
	(Dollars in thousands)
Inventory	$	2,688
Property, plant, and equipment	1,453
Intangible assets:			Life:
Ankle product family	3,210		11 years
Toe product family	460		10 years
Total assets acquired	7,811
Deferred tax liability	700
Net assets acquired	$	7,111

TEI

On July 17, 2015, the Company executed the two merger agreements (collectively, the "Agreements") under which the Company acquired TEI Biosciences, Inc., a Delaware corporation ("TEI Bio"), and TEI Medical Inc., a Delaware corporation ("TEI Med", collectively "TEI") for an aggregate purchase price of approximately $312.2 million ($210.9 million for TEI Bio and $101.3 million for TEI Med) including a working capital adjustment of $0.2 million ($0.5 million for TEI Bio offset by $0.7 million cash received for TEI Med) which was recorded as a reduction from goodwill. The purchase price consisted of a cash payment to the former shareholders of TEI Bio and TEI Med of approximately $312.4 million upon the closing of the transaction, net of $1.2 million of acquired cash. The acquired assets included a contingent receivable with a fair value of $0.4 million at acquisition and will be paid to the Company if the sale of products used in breast surgery in the United States drops below $6.0 million in either 2016 or 2017. The fair value of this asset is based on future sales projections of the products under various potential scenarios and weighting the probability of these outcomes. At the date of the acquisition, the cash flow projection was discounted using an internal rate of return of 11.0%. These fair value measurements were based on significant inputs not observed in the market and thus represented a Level 3 measurement. In 2016 the fair value of the contingent receivable increased by $1.3 million to reflect changes in estimate and time value of money. As of December 31, 2016, the $1.7 million balance of this contingent receivable is included in Prepaid expenses and other current assets and Other current assets of $1.2 million and $0.5 million, respectively.

TEI Bio is in the business of developing and commercializing biologic devices for soft tissue repair and regenerative applications, including dura and hernia repair and plastic and reconstructive surgery. TEI Med holds a license to TEI Bio’s regenerative technology in the fields of wound healing and orthopedics.

The revenue and net income or loss attributable to this acquisition cannot be identified on a stand-alone basis because it is in the process of being integrated into the Company's operations.

The following summarizes the allocation of the purchase price as of December 31, 2016 based on the fair value of the assets acquired and liabilities assumed:



	Purchase Price Allocation
	(Dollars in thousands)
Cash	$	1,241
Accounts receivable, net	9,011
Inventory	23,223
Property, plant, and equipment	2,027
Income tax receivable	5,135
Other current assets	2,670
Intangible assets:			Wtd. Avg. Life:
Developed technology	167,400		14 - 16 Years
Contractual relationships	51,345		11 - 14 Years
Leasehold interest	69
Goodwill	147,704
Total assets acquired	409,825
Accrued expenses and other liabilities	9,732
Deferred tax liabilities	87,908
Net assets acquired	$	312,185

Metasurg

On December 5, 2014, the Company acquired certain assets of Koby Ventures II, L.P. dba Metasurg ("Metasurg") for an aggregate purchase price of $27.2 million. The purchase price consists of an initial cash payment to Metasurg of $26.5 million and contingent consideration with an acquisition date fair value of $0.7 million. The potential maximum undiscounted contingent consideration of $38.5 million is based on reaching certain sales of acquired products. The fair value of this liability is based on future sales projections of the Metasurg product under various potential scenarios and weighting the probability of these outcomes for the period ended December 31, 2014. At the date of the acquisition, the cash flow projection was discounted using an internal rate of return of 19.9%. These fair value measurements were based on significant inputs not observed in the market and thus represented a Level 3 measurement. During the fourth quarter of 2015, the Company adjusted the fair value of the contingent consideration to zero as the Company no longer believe the achievement of the sales targets is probable. The adjustment was $0.7 million and was recorded in selling, general and administrative expenses. The contingency period lapsed in 2016 and no payments were made.

Metasurg develops intuitive implant systems for the foot and ankle market and sells almost entirely in the U.S. market. The acquired foot and ankle products will enhance the Company's lower extremities market position.

The Company adjusted the preliminary purchase price allocation during the quarter ended June 30, 2015 to reflect the $0.4 million working capital and purchase price adjustment. The following summarizes the final allocation of the purchase price as of December 31, 2016 based on the fair value of the assets acquired and liabilities assumed:



	Purchase Price Allocation
	(Dollars in thousands)
Inventory	$	4,800
Property, plant, and equipment	1,246
Intangible assets:			Wtd. Avg. Life:
Technology product rights	20,590		8 - 14 Years
In-process research and development	190		Indefinite
Goodwill	732
Net assets acquired	$	27,558

MicroFrance

On October 27, 2014, the Company acquired all outstanding shares of Medtronic Xomed Instrumentation, SAS ("MicroFrance") from Medtronic, Inc. ("Medtronic") as well as certain assets of Medtronic for $61.6 million in cash. MicroFrance specializes in manual ear, nose, and throat ("ENT") instruments and designs, manufactures, and sells reusable handheld instruments to ENT and laparoscopy surgical specialists around the world. The acquired ENT instruments fill a portfolio gap for the Company with clear growth opportunities through market adjacencies and provides for increased scale and reach in the international market.

The Company adjusted the preliminary purchase price allocation during the quarter ended March 31, 2015 to reflect the $1.5 million working capital and purchase price adjustments. The following summarizes the final allocation of the purchase price as of December 31, 2016 based on the fair value of the assets acquired and liabilities assumed:



	Purchase Price Allocation
	(Dollars in thousands)
Cash	$	2,195
Inventory	3,155
Prepaid expenses	620
Property, plant, and equipment	3,675
Other current assets	5,025
Intangible assets:			Wtd. Avg. Life:
Trade name	11,990		20 years
Technology	4,580		15 - 16 Years
Customer relationships	18,130		12 - 16 Years
Goodwill	16,607
Total assets acquired	65,977
Accounts payable and other liabilities	5,910
Net assets acquired	$	60,067

Confluent Surgical, Inc.

On January 15, 2014, the Company acquired all outstanding shares of Confluent Surgical, Inc., ("Confluent Surgical") - including its surgical sealant and adhesion barrier product lines - from Covidien Group S.a.r.l, ("Covidien") for an aggregate purchase price of $255.9 million. The purchase price consists of an initial cash payment to Covidien of $231.0 million upon the closing of the transaction, a separate prepayment of $4.0 million made under a transitional supply agreement with an affiliate of Covidien, and contingent consideration with an acquisition date fair value of $20.9 million. The potential maximum undiscounted contingent consideration of $30.0 million consists of $25.0 million upon obtaining certain U.S. governmental approvals and $5.0 million upon obtaining certain European governmental approvals, both related to the completion of the transition of the Confluent Surgical business.

The transitional supply agreement secures the supply of the acquired products from an affiliate of Covidien until the earlier of (i) the time that the transition of the Confluent Surgical business as discussed above is complete, or (ii) the fifth anniversary of the effective date of the agreement (the agreement also contains an option to extend for another two years by providing written notice at least 180 days prior to the end of the initial five-year period). This agreement contains financial incentives to the affiliate of Covidien for the timely supply of products each fiscal quarter through the third anniversary of the agreement. The prices paid under the supply agreement are essentially flat through the third anniversary of the agreement, and then increase significantly each of the following three years. The Company also entered into a transition services agreement with an affiliate of Covidien at the closing for services such as customer service, accounting and information technology management, clinical and regulatory affairs, manufacturing transition services, and other functions.

This acquisition complements the Company's global neurosurgery growth strategy aimed at providing a broader set of solutions for surgical procedures in the head.

The Company adjusted the preliminary purchase price allocation during the quarter ended June 30, 2014 to reduce deferred tax liabilities by $12.4 million. This adjustment offset goodwill and was the result of the Company analyzing and revising its tax positions in certain jurisdictions. The following summarizes the final allocation of the purchase price as of December 31, 2016 based on the fair value of the assets acquired and liabilities assumed:



	Purchase Price Allocation
	(Dollars in thousands)
Inventory deposit	$	4,000
Property, plant, and equipment	438
Intangible assets:			Wtd. Avg. Life:
Technology product rights	239,800		3 - 20 Years
Other	400
Deferred tax assets - long term	12
Goodwill	105,331
Total assets acquired	349,981
Contingent supply liability	5,891
Other	731
Deferred tax liabilities - long term	87,464
Net assets acquired	$	255,895

Subsequent to the acquisition date, a regulatory event occurred that resulted in the full-impairment of one of the acquired technology product rights of $0.6 million. This event was not known, or knowable, at the time of the acquisition and therefore the impairment has been included in the Company's cost of sales.

The Company accounted for the contingent supply liability by recording its fair value as a liability on the date of the acquisition based on a discounted cash-flow model. This contingent supply liability relates to contractual quarterly incentive payments that will be made to an affiliate of Covidien if certain supply minimums under the transitional supply agreement are met.

The Company accounted for the contingent consideration by recording its fair value as a liability on the date of the acquisition. The contingent consideration relates to the Company's obtaining certain U.S. and European regulatory approvals. At the date of the acquisition, both of these milestones were valued using a discount rate of 2.2%, which is equivalent to the cost of debt for the estimated time horizon, and an overall probability of occurring of 95%. Accordingly, on January 15, 2014 the Company recorded a $20.9 million liability representing the initial fair value estimate of the probability weighted contingent consideration that management believes will be paid between early 2017 and late 2018. Depending on the expected timing of the estimated payments, the acquisition date fair value of the probability adjusted payments could have been $0.3 million higher or $0.4 million lower. These fair value measurements were based on significant inputs not observed in the market and thus represented a Level 3 measurement. The contingent consideration is re-measured to fair value at each reporting date until the contingency is resolved, and those changes in fair value are recognized in earnings.

Contingent Consideration

The fair value of contingent consideration during the year-ended December 31, 2016 was increased to reflect current period acquisitions, and the change in the time value of money during the period. A reconciliation of the opening balances to the closing balances of these Level 3 measurements is as follows (in thousands):



			Location in Statement of Operations
Balance as of January 1, 2016	$	21,831
Loss from decrease in fair value of contingent consideration liability	205		Selling, general and administrative
Fair value at December 31, 2016	$	22,036

The fair values of contingent consideration were estimated using the discounted cash flows model using discount rate of 2.20%. The Company assesses these assumptions on an ongoing basis as additional information impacting the assumptions is obtained. The entire contingent consideration balance was included in Other Liabilities in the consolidated balance sheets.

Supply Agreement Liability and Above Market Supply Agreement Liability

The Company determined the fair value of its supply agreement liability and above market supply agreement liability to reflect payments, changes in estimate and the time value of money during the period. A reconciliation of the opening balance to the closing balance of these Level 3 measurement is as follows (in thousands):



	Supply Agreement Liability - Current			Supply Agreement Liability - Long-term			Above Market Supply Agreement Liability			Location in Statement of Operations
Balance as of January 1, 2016	$	1,991		$	161		$	931
Payments	(2,000		)	—			(47		)
Transfer	161			(161		)	—
Loss from increase in fair value	14			—			1,083			Selling, general and administrative
Other	—			—			681			Goodwill
Balance as of December 31, 2016	$	166		$	—		$	2,648

The fair values of supply agreement liability and above market supply agreement liability were estimated using a discounted cash flow model using discount rate of 12.0%. The Company assesses the assumptions on an ongoing basis as additional information impacting assumptions is obtained. The supply agreement liability-current was included in Accrued expenses and other current liabilities and the supply agreement-long term and above market supply agreement liability were included in Other liabilities in the consolidated balance sheets.

There were no transfers between Level 1, 2 or 3 during 2016 or 2015. If the Company's estimates regarding the fair value of its contingent considerations, supply agreement and above market supply agreement are inaccurate, a future adjustment to these estimated fair values may be required. Additionally, these estimated fair values could change significantly.

Pro Forma Results (unaudited)

The following unaudited pro forma financial information summarizes the results of operations for the years ended December 31, 2015 and 2014 as if the acquisitions completed by the Company during 2015 and 2014 had been completed as of the beginning of the prior year. The pro forma results are based upon certain assumptions and estimates, and they give effect to actual operating results prior to the acquisitions and adjustments to reflect (i) increased interest expense, depreciation expense, intangible asset amortization and fair value inventory step-up, (ii) timing of recognition for certain expenses that will not be recurring in the post-acquisition entity, and (iii) income taxes at a rate consistent with the Company’s statutory rate. No effect has been given to other cost reductions or operating synergies. As a result, these pro forma results do not necessarily represent results that would have occurred if the acquisitions had taken place on the basis assumed above, nor are they indicative of the results of future combined operations.



	Year Ended December 31,
	2016		2015		2014
	(As reported)		(Pro forma)		(Pro forma)
	(In thousands except per share amounts)
Total revenue from continuing operations	$	992,075	$	940,089	$	921,998
Net income from continuing operations	$	74,564	$	10,749	$	40,721
Net income from continuing operations per share:
Basic	$	1.00	$	0.14	$	0.56