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10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
Form 10-Q
(Mark One)
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2016
 
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________ to _______________
Commission file number: 001-37599
LivaNova PLC
(Exact name of registrant as specified in its charter)
England and Wales
98-1268150
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
5 Merchant Square, North Wharf Road
London, United Kingdom

W2 1AY
(Address of principal executive offices)

(Zip Code)

(44) 203 786 5275
 
Registrant’s telephone number, including area code:

 
____________________
Securities registered pursuant to Section 12(b) of the Act:
Ordinary Shares — £1.00 par value per share
 
The NASDAQ Stock Market LLC
Title of Each Class of Stock
 
Name of Each Exchange on Which Registered
_______________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑     No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☑    No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
 
 
 
Large accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
☐ (Do not check if a smaller reporting company)
Smaller reporting company
☐
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☐     No ☑
Class
Outstanding at May 5, 2016
Ordinary Shares - £1.00 par value per share
49,068,828
EXPLANATORY NOTE
LivaNova PLC, a public limited company incorporated under the laws of England and Wales (“LivaNova”) was formed on February 20, 2015, for the purpose of facilitating the business combination of Cyberonics, Inc., a Delaware corporation (“Cyberonics”), and Sorin S.p.A., a joint stock company organized under the laws of Italy (“Sorin”). On October 19, 2015, as further described herein, LivaNova became the holding company of the combined businesses of Cyberonics and Sorin, and LivaNova’s ordinary shares were listed for trading on the NASDAQ Global Market and admitted to listing on the standard segment of the United Kingdom Financial Conduct Authority’s Official List and to trading on the Main Market of the London Stock Exchange under the trading symbol “LIVN.” In this Quarterly Report on Form 10-Q, LivaNova, as the successor company to Cyberonics, is reporting (in accordance with generally accepted accounting principles in the United States) the consolidated results of LivaNova for the period January 1, 2016 to March 31, 2016, utilizing as a comparative prior reporting period the historical results for Cyberonics and its consolidated subsidiaries for the quarterly period January 24, 2015 to April 24, 2015.




LIVANOVA PLC
TABLE OF CONTENTS
 
 
PART I. FINANCIAL INFORMATION
 
PAGE NO.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 

 
Item 1A
 
 
Item 2
 

 
Item 6
 
 
In this Quarterly Report on Form 10-Q, “LivaNova,” “the Company,” “we,” “us” and “our” refer to LivaNova PLC and its consolidated subsidiaries.
This report may contain references to our proprietary intellectual property, including among others:
•
Trademarks for our VNS therapy systems, the VNS Therapy® System, the VITARIA™ System and our proprietary Pulse generators products: Model 102 (Pulse™), Model 102R (Pulse Duo™), Model 103 (Demipulse®), Model 104 (Demipulse Duo®), Model 105 (AspireHC®) and the Model 106 (AspireSR®).
•
Trademarks for our Oxygenators product systems: Inspire™, Heartlink™ and Connect™.
•
Trademarks for our line of surgical tissue and mechanical valve replacements and repair products: MitroflowTM, Crown PRTTM, Solo SmartTM, PercevalTM, Top HatTM, Reduced Series Aortic ValvesTM, Carbomedics Carbo-SealTM, Carbo-Seal ValsalvaTM, Carbomedics StandardTM, OrbisTM and OptiformTM, and Mitral valve repair products: Memo 3DTM, Memo 3D ReChordTM, AnnuloFloTM and AnnuloFlexTM.
•
Trademarks for our implantable cardiac pacemakers and associated services: REPLY 200TM, ESPRITTM, KORA 100TM, SafeRTM, the REPLY CRT-PTM and the remede® System.
•
Trademarks for our Implantable Cardioverter Defibrillators and associated technologies: the INTENSIATM, PLATINIUMTM, and PARADYMTM product families.
•
Trademarks for our cardiac resynchronization therapy devices, technologies services: SonRTM, SonRtipTM, SonR CRTTM, the INTENSIATM, PARADYM RFTM and PARADYM 2TM product families and the Respond CRTTM clinical trial.
•
The trademarks for heart failure treatment product, Equilia™.
These trademarks and tradenames are the property of LivaNova or the property of our consolidated subsidiaries and are protected under applicable intellectual property laws. Solely for convenience, our trademarks and tradenames referred to in this Quarterly Report on Form 10-Q may appear without the ® or ™ symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and tradenames.
________________________________________

2


PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LIVANOVA PLC AND SUBSIDIARIES’
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
(In thousands, except per share amounts)
 
 
Three Months Ended
 
Thirteen Weeks Ended
 
 
March 31, 2016
 
April 24, 2015
Net sales
 
$
286,969

 
$
74,072

Cost of sales
 
123,567

 
7,595

Gross profit
 
163,402

 
66,477

Operating expenses:
 
 
 
 

Selling, general and administrative
 
115,575

 
29,690

Research and development
 
31,690

 
10,689

Merger and Integration expenses
 
6,761

 
8,692

Restructuring expenses
 
28,592

 
—

Amortization of intangibles
 
15,892

 
685

Litigation related expenses
 
997

 
—

Total operating expenses
 
199,507

 
49,756

Income (loss) from operations
 
(36,105
)
 
16,721

Interest income
 
(213
)
 
(38
)
Interest expense
 
1,192

 
7

Foreign exchange and other - (gain) loss
 
1,835

 
(112
)
Income (loss) before income taxes
 
(38,919
)
 
16,864

Income tax (benefit) expense
 
(1,258
)
 
6,350

Losses from equity method investments
 
2,717

 
—

Net income (loss)
 
$
(40,378
)
 
$
10,514

 
 
 
 
 
Basic income (loss) per share
 
$
(0.83
)
 
$
0.40

Diluted income (loss) per share
 
$
(0.83
)
 
$
0.40

Shares used in computing basic income (loss) per share
 
48,918

 
26,024

Shares used in computing diluted income (loss) per share
 
48,918

 
26,269


See accompanying notes to the consolidated financial statements
3


LIVANOVA PLC AND SUBSIDIARIES’
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(In thousands)
 
 
Three Months Ended
 
Thirteen Weeks Ended
 
 
March 31, 2016
 
April 24, 2015
Net income (loss)
 
$
(40,378
)
 
$
10,514

Other comprehensive income (loss):
 
 
 
 
Net change in unrealized loss on derivatives
 
(3,765
)
 
—

Tax effect
 
386

 
—

 
 
(3,379
)
 
—

Foreign currency translation adjustment, net of tax
 
48,501

 
(477
)
Total other comprehensive income (loss)
 
45,122

 
(477
)
Total comprehensive income (loss)
 
$
4,744

 
$
10,037



See accompanying notes to the consolidated financial statements
4


LIVANOVA PLC AND SUBSIDIARIES’
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data)
 
 
March 31, 2016
 
December 31, 2015
 
 

 
 
ASSETS
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
87,468

 
$
112,613

Short-term Investments
 
6,988

 
6,997

Accounts receivable, net
 
288,537

 
272,352

Inventories
 
210,762

 
212,448

Prepaid taxes
 
51,354

 
42,425

Prepaid expenses and other current assets
 
38,560

 
26,579

Total Current Assets
 
683,669

 
673,414

Property, plant and equipment, net
 
253,750

 
244,587

Goodwill
 
764,540

 
745,356

Intangible assets, net
 
674,737

 
658,942

Investments
 
77,682

 
77,486

Deferred tax assets, net
 
157,811

 
153,509

Other assets
 
5,521

 
5,445

Total Assets
 
$
2,617,710

 
$
2,558,739

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current Liabilities:
 
 
 
 
Current debt obligations
 
$
75,539

 
$
82,513

Accounts payable
 
118,855

 
109,588

Accrued liabilities
 
80,534

 
63,047

Income taxes payable
 
26,951

 
26,699

Accrued employee compensation and related benefits liability
 
79,669

 
77,274

Total Current Liabilities
 
381,548

 
359,121

Long-term debt obligations
 
96,058

 
91,791

Deferred income taxes liability
 
250,531

 
235,483

Long-term employee compensation and related benefits liability
 
32,531

 
31,139

Other long-term liabilities
 
31,809

 
29,743

Total Liabilities
 
792,477

 
747,277

Commitments and contingencies (Note 16)
 

 

Stockholders’ Equity:
 
 
 
 
Ordinary Shares, £1.00 par value: unlimited shares authorized; 49,008,015 and 48,868,305 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively
 
75,640

 
75,444

Additional paid-in capital
 
1,750,863

 
1,742,032

Accumulated other comprehensive loss
 
(9,106
)
 
(54,228
)
Retained earnings
 
7,836

 
48,214

Total Stockholders’ Equity
 
1,825,233

 
1,811,462

Total Liabilities and Stockholders’ Equity
 
$
2,617,710

 
$
2,558,739


See accompanying notes to the consolidated financial statements
5


LIVANOVA PLC AND SUBSIDIARIES’
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(In thousands)
 
 
 
 
 
 
Additional
 
Accumulated Other
 
Accumulated
 
Total
 
 
Common / Ordinary
 
Paid-In
 
Comprehensive
 
Earnings
 
Stockholders’
 
 
Shares
 
Amount
 
Capital
 
Income (Loss)
 
(Loss)
 
Equity
Balance at December 31, 2015
 
48,868

 
$
75,444

 
$
1,742,032

 
$
(54,228
)
 
$
48,214

 
$
1,811,462

Stock-based compensation plans
 
140

 
196

 
8,831

 
—

 
—

 
9,027

Net loss
 
—

 
—

 
—

 
—

 
(40,378
)
 
(40,378
)
Other comprehensive income
 
—

 
—

 
—

 
45,122

 
—

 
45,122

Balance at March 31, 2016 (unaudited)
 
49,008

 
$
75,640

 
$
1,750,863

 
$
(9,106
)
 
$
7,836

 
$
1,825,233


See accompanying notes to the consolidated financial statements
6



LIVANOVA PLC AND SUBSIDIARIES’
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
 
Three Months Ended
 
Thirteen Weeks Ended
 
 
March 31, 2016
 
April 24, 2015
Cash Flows From Operating Activities:
 
 

 
 

Net income (loss)
 
$
(40,378
)
 
$
10,514

Non-cash items included in net income (loss):
 
 
 
 
Depreciation and amortization
 
23,568

 
1,991

Stock-based compensation
 
6,116

 
2,493

Deferred income tax expense
 
1,282

 
2,774

Impairment of intangible assets
 
—

 
448

Loss on disposal of assets
 
150

 
—

Loss from equity method investments
 
2,717

 
—

Unrealized (gain) loss in foreign currency transactions
 
(697
)
 
109

Restructuring reserve
 
22,011

 
—

Other
 
3,292

 
—

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(8,442
)
 
(3,754
)
Inventories
 
10,800

 
(3,093
)
Other current and non-current assets
 
(16,030
)
 
(1,325
)
Current and non-current liabilities
 
5,211

 
6,016

Net cash provided by operating activities
 
9,600

 
16,173

Cash Flow From Investing Activities:
 
 
 
 
Purchase of short-term investments
 
(6,991
)
 
—

Maturities of short-term investments
 
7,000

 
—

Purchase of property, plant and equipment and other
 
(8,137
)
 
(1,197
)
Intangible assets purchases
 
(820
)
 
—

Net cash used in investing activities
 
(8,948
)
 
(1,197
)
Cash Flows From Financing Activities:
 
 
 
 
Short-term borrowing
 
14,083

 
—

Short-term repayments
 
(24,425
)
 
—

Repayment of long-term debt obligations
 
(569
)
 
—

Repayment of trade receivable advances
 
(16,076
)
 
—

Loans to equity-method companies
 
(2,846
)
 
—

Proceeds from exercise of options and SARS for common stock
 
2,541

 
170

Realized excess tax benefits - stock-based compensation
 
705

 
1,612

Purchase of treasury stock
 
—

 
(8,350
)
Cash settlement of compensation-based stock units
 
—

 
(384
)
Other financial assets and liabilities
 
(482
)
 
—

Net cash used in financing activities
 
(27,069
)
 
(6,952
)
Effect of exchange rate changes on cash and cash equivalents
 
1,272

 
(51
)
Net increase (decrease) in cash and cash equivalents
 
(25,145
)
 
7,973

Cash and cash equivalents at beginning of period
 
112,613

 
116,214

Cash and cash equivalents at end of period
 
$
87,468

 
$
124,187

 
 
 
 
 
Supplementary Disclosures of Cash Flow Information:
 
 
 
 
Cash paid for interest
 
602

 
1

Cash paid for income taxes
 
3,603

 
3,324


See accompanying notes to the consolidated financial statements
7


LIVANOVA PLC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Note 1.  Nature of Operations
Background. LivaNova PLC and its subsidiaries (collectively, the “Company”, “LivaNova”, “we” or “our”), the successor registrant to Cyberonics, Inc., was incorporated in England and Wales on February 20, 2015 for the purpose of facilitating the business combination of Cyberonics, Inc., a Delaware corporation (“Cyberonics”) and Sorin S.p.A., a joint stock company organized under the laws of Italy (“Sorin”). As a result of the business combination, LivaNova became the holding company of the combined businesses of Cyberonics and Sorin. This business combination became effective on October 19, 2015, at which time LivaNova’s ordinary shares were listed for trading on the NASDAQ Global Market (“NASDAQ”) and on the London Stock Exchange (the “LSE”) as a standard listing under the trading symbol “LIVN.”
Description of the business. Headquartered in London, United Kingdom (“U.K.”), LivaNova, is a global medical device company focused on the development and delivery of important therapeutic solutions for the benefit of patients, healthcare professionals and healthcare systems throughout the world. Working closely with medical professionals throughout the world in the field of Cardiac Surgery, Neuromodulation and Cardiac Rhythm Management, we design, develop, manufacture and sell innovative therapeutic solutions that are consistent with our mission to improve our patients’ quality of life, increase the skills and capabilities of healthcare professionals and minimize healthcare costs.
Description of the Mergers.
On October 19, 2015, pursuant to the terms of a definitive Transaction Agreement entered into by LivaNova, Cyberonics, Sorin and Cypher Merger Sub (the “Merger Sub”), dated March 23, 2015, (the “Merger Agreement”) Sorin merged with and into LivaNova, with LivaNova continuing as the surviving company, immediately followed by the merger of Merger Sub with and into Cyberonics, with Cyberonics continuing as the surviving company and as a wholly owned subsidiary of LivaNova (the “Mergers”). Upon the consummation of the Mergers, the historical financial statements of Cyberonics became the Company’s historical financial statements. Accordingly, the historical financial statements of Cyberonics are included in the comparative prior periods.
The issuance of LivaNova ordinary shares in connection with the Mergers was registered under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to the Registration Statement on Form S-4 (File No. 333-203510), as amended, filed with the United States Securities and Exchange Commission (the “SEC”) by LivaNova and declared effective on August 19, 2015. Further, pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), LivaNova is deemed to be a “successor” issuer to Cyberonics. As such, the ordinary shares of LivaNova are deemed to be registered under Section 12(b) of the Exchange Act, and LivaNova is subject to the informational requirements of the Exchange Act and the rules and regulations promulgated thereunder.
Note 2.  Basis of Presentation, Use of Accounting Estimates and Significant Accounting Policies
Basis of Presentation. The accompanying condensed consolidated financial statements of LivaNova at March 31, 2016 have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S.” and such principles, “U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of regulation S-X. The accompanying condensed consolidated balance sheet of LivaNova at December 31, 2015 has been prepared from audited financial statements but do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the operating results of LivaNova and its subsidiaries, for the three months ended March 31, 2016, and are not necessarily indicative of the results that may be expected for the fiscal year that will end December 31, 2016. The financial information presented herein should be read in conjunction with the audited consolidated financial statements and notes thereto accompanying our Transition Report on Form 10-KT for the fiscal period that began April 25, 2015 and ended December 31, 2015, as amended (the “2015 Form 10-KT”).
We have included the condensed consolidated statement of income (loss), comprehensive income (loss) and the cash flow for the thirteen weeks ended April 24, 2015 as the equivalent prior period for comparative purposes. This financial information reflects all adjustments considered necessary for a fair presentation of the operating results of Cyberonics and its subsidiaries, as LivaNova’s predecessor, for the thirteen weeks ended April 24, 2015.
Fiscal Year-End.  Prior to the Mergers, Cyberonics, LivaNova’s predecessor, utilized a 52/53-week fiscal year that ended on the last Friday in April. After the Mergers, consummated on October 19, 2015, Cyberonics changed to a calendar year ending December 31st.

8


Reporting Periods. In this Quarterly Report on Form 10-Q, we are reporting the results of our operations for the three months ended March 31, 2016, which consist of the combined results of operations of Cyberonics and Sorin. Since LivaNova is the successor company to Cyberonics, we are presenting the results of Cyberonics’ operations for the thirteen weeks ended April 24, 2015, as the prior year equivalent quarter. The thirteen weeks ended April 24, 2015 was selected for comparative purposes as it was the closest period to a calendar quarter ending March 31, 2015 (less than 30 days difference) and it was impracticable and cost prohibitive to recast Cyberonics’ prior year financial information in order to present the three months ended March 31, 2015.
Consolidation.  The accompanying condensed consolidated financial statements as of December 31, 2015 and/or for the three months ended March 31, 2016, as applicable, include the combined operating results for LivaNova and the legacy business of Cyberonics and Sorin, LivaNova’s wholly owned subsidiaries and the LivaNova PLC Employee Benefit Trust (the “Trust”). The accompanying consolidated operating results for the thirteen weeks ended April 24, 2015 include the results of operations for Cyberonics and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates. The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in such financial statements and accompanying notes. These estimates are based on management’s best knowledge of current events and actions we may undertake in the future. Estimates are used in accounting for, among other items, valuation and amortization of intangible assets, goodwill, amortization of intangible assets, measurement of deferred tax assets and liabilities, uncertain income tax positions, stock-based compensation, obsolete and slow-moving inventories, allowance for doubtful accounts, and in general, allocations to provisions and the fair value of assets and liabilities recorded in a business combination. Actual results could differ materially from those estimates.
Merger, Integration and Restructuring Charges. As a result of the Mergers, we incurred merger, integration and restructuring charges and reported merger and integration expenses and restructuring expenses separately as operating expenses in the consolidated statement of income (loss).
Merger Expenses. Merger expenses consisted of expenses directly related to the Mergers, such as professional fees for legal services, accounting services, due diligence, a fairness opinion and the preparation of registration and regulatory filings in the United States and Europe, as well as investment banking fees.
Integration Expenses. Integration expenses consisted primarily of consultancy fees with regard to: our systems integration, organization structure integration, finance, synergy and tax planning, the transition to U.S. GAAP for Sorin activity, our LSE listing and certain re-branding efforts.
Restructuring Expenses. After the consummation of the Mergers between Cyberonics and Sorin in October 2015, we initiated several restructuring plans (the “Restructuring Plans”) to combine our business operations. We identify costs incurred and liabilities assumed for the Restructuring Plans. The Restructuring Plans are intended to leverage economies of scale, eliminate duplicate corporate expenses and streamline distributions, logistics and office functions in order to reduce overall costs.
Business Combinations. On October 19, 2015, and pursuant to the terms of the Merger Agreement, Sorin merged with and into LivaNova, with LivaNova continuing as the surviving company, immediately followed by the merger of Merger Sub with and into Cyberonics, with Cyberonics continuing as the surviving company and as a wholly owned subsidiary of LivaNova. Following the completion of the Mergers, LivaNova became the holding company of the combined businesses of Cyberonics and Sorin, and LivaNova’s ordinary shares were listed under the ticker symbol “LIVN” on NASDAQ and admitted for listing on the standard segment of the U.K. Financial Authority’s Official List and to trading on the LSE.
The purchase price allocation recorded in the transition period April 25, 2015 to December 31, 2015 was based on a preliminary acquisition valuation and includes the use of estimates based on information that was available to management at the time. Management is in the process of finalizing appraisals and estimates that may result in a change in the valuation of assets acquired, liabilities assumed, goodwill recognized and the related impact on deferred taxes and cumulative translation adjustments. These changes may have a material impact on the results of operations and financial position. As management finalizes the valuation of assets acquired and liabilities assumed, additional purchase price adjustments will be recorded during the measurement period. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed can materially impact the results of operations. Refer to “Note 3. Business Combinations” for additional information.

9


The following reclassifications have been made to conform prior period consolidated balance sheet and statement of income (loss) with current year presentation:
Amortization Expense. Amortization expense of $685 thousand was reclassified and reported separately in the consolidated statement of income (loss) rather than included within Research and Development expense.
Accrued Employee Compensation and Related Benefits. In the consolidated balance sheet, some accruals amounting to $17.5 million in total were reclassified from Other Current Liabilities to Accrued Employee Compensation and Related Benefit Liability.
Cash and Cash Equivalents. We consider all highly liquid investments with an original maturity of three months or less, consisting of demand deposit accounts and money market mutual funds, to be cash equivalents and are carried in the balance sheet at cost, which approximated their fair value. We carried $21.1 million and $41.1 million in money market mutual funds at March 31, 2016 and December 31, 2015, respectively.
U.S. Medical Device Excise Tax (“MDET”). Section 4191 of the Internal Revenue Code enacted by the Health Care and Education Reconciliation Act of 2010, in conjunction with the Patient Protection and Affordable Care Act, established a 2.3% excise tax on medical devices sold domestically beginning on January 1, 2013, with this excise tax now suspended from January 1, 2016 through December 31, 2017. We include the cost of MDET in cost of sales on the consolidated statements of income for the applicable reporting periods. The MDET tax expense amounted to $0.9 million for the thirteen weeks ended April 24, 2015.
Italian Medical Device Payback (“IMDP”). The Italian Parliament introduced new rules for entities that supply goods and services to the Italian National Healthcare System. The new healthcare law is expected to impact the business and financial reporting of companies operating in the medical technology sector that sell medical devices in Italy. A key provision of the law is a ‘payback’ measure, requiring companies selling medical devices in Italy to make payments to the Italian state if medical device expenditures exceed regional maximum ceilings. Companies are required to make payments equal to a percentage of expenditures exceeding maximum regional caps. There is considerable uncertainty about how the law will operate and what the exact timeline is for finalization. Our current assessment of the IMDP involves significant judgment regarding the expected scope and actual implementation terms of the measure as the latter have not been clarified to date by Italian authorities. We account for the estimated cost of the IMDP as a deduction from revenue. The estimated cost of the IMDP amounted to $0.3 million for the three months ended March 31, 2016.
Income Taxes. After the Mergers, we became a U.K. corporation and we operate through our various subsidiaries in a number of countries throughout the world. Our provision for income taxes is based on the tax laws and rates applicable in the jurisdictions in which we operate and earn income. We use significant judgment and estimates in accounting for our income taxes. We recognize deferred tax assets and liabilities for the anticipated future tax effects of temporary differences between the financial statements basis and the tax basis of our assets and liabilities, which are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Income tax expense compared to pre-tax income yields an effective tax rate.
Segments. Prior to the Mergers we had one operating and reportable segment. Upon completion of the Mergers, we reorganized our reporting structure and aligned our segments and the underlying divisions and businesses. We currently function in three operating segments; the historical Cyberonics operations are included in the Neuromodulation segment with the historical Sorin businesses included in the Cardiac Surgery (“CS”) and the Cardiac Rhythm Management (“CRM”) segments. Refer to “Note 22. Geographic and Segment Information” for additional information.
Note 3. Business Combinations
On October 19, 2015, and pursuant to the terms of the Merger Agreement, Sorin merged with and into LivaNova, with LivaNova continuing as the surviving company, immediately followed by the merger of Merger Sub with and into Cyberonics, with Cyberonics continuing as the surviving company and as a wholly owned subsidiary of LivaNova. Following the completion of the Mergers, LivaNova became the holding company of the combined businesses of Cyberonics and Sorin, and LivaNova’s ordinary shares were listed, under the ticker symbol “LIVN,” on NASDAQ and admitted for listing on the standard segment of the U.K. Financial Authority’s Official List and trading on the LSE. As a result of the Mergers, on October 19, 2015, LivaNova issued approximately 48.8 million ordinary shares.

10


On October 19, 2015, each ordinary share of Sorin was converted into the right to receive 0.0472 ordinary shares of LivaNova (the “Sorin Exchange Ratio”), and each share of common stock of Cyberonics was converted into the right to receive one ordinary share of LivaNova. The fair value of the shares issued as total consideration of the Mergers is based on Cyberonics’closing stock price of $69.95 per share on October 16, 2015, the last business day prior to the close of the Mergers. Based on the number of outstanding shares of Sorin and Cyberonics as of October 19, 2015, former Sorin and Cyberonics shareholders held approximately 46 percent and 54 percent, respectively, of LivaNova’s ordinary shares after giving effect to the Mergers.
Based on the relative voting rights of Cyberonics and Sorin shareholders immediately following completion of the Mergers and the premium paid by Cyberonics for Sorin ordinary shares, and after taking into consideration all relevant facts, Cyberonics was considered to be the acquirer for accounting purposes. LivaNova accounted for the acquisition of Sorin as a business combination using the acquisition method of accounting. Under the acquisition method of accounting, the tangible and identifiable intangible assets acquired and liabilities assumed were recorded based on their fair values at the acquisition date with the excess over the fair value of consideration recognized as goodwill.
We are in the process of finalizing appraisals and estimates utilized in the purchase price allocation that may result in a change in the valuation of assets acquired, liabilities assumed, goodwill recognized and the related impact on deferred taxes and cumulative translation adjustments. These changes may have a material impact on the results of operations and financial position. Although, as of March 31, 2016, no changes have been recognized. Fair values recorded in the acquisition will be finalized by October 19, 2016. During the measurement period, we may recognize adjustments to the provisional amounts with a corresponding adjustment to goodwill in the reporting period in which the adjustments to the provisional amounts are determined. We will adjust our financial statements as needed, including recognizing in our current-period earnings the full effect of changes in depreciation, amortization, or other income effects, by line item, if any, as a result of the change to the provisional amounts calculated.
The following tables summarizes the fair value of consideration transferred in the Mergers (in thousands):
 
 
As of
 
 
October 16, 2015
Consideration Transferred:
 
 
Fair value of common shares issued to Sorin shareholders
 
$
1,577,603

Fair value of common shares issued to Sorin share award holders (1)
 
9,231

Fair value of LivaNova stock appreciation rights issued to Sorin stock appreciation rights holders (2)
 
2,249

Total fair value of consideration transferred
 
$
1,589,083

(1)
Each Sorin share award (other than a Sorin stock appreciation right) granted prior to the Sorin merger effective time accelerated, vested and was converted into the right to receive LivaNova ordinary shares based on the Sorin Exchange Ratio. The total fair value of the replacement awards is $25.2 million, including $9.2 million attributable to pre-combination services and allocated to consideration transferred to acquire Sorin. Of the remaining $16.0 million, $8.3 million was recognized immediately in the post-combination period and $7.7 million will be recognized over the post-combination service period to February 28, 2017 due to the service period requirements of the awards. Refer to “Note 18. Stock-Based Incentive Plans” for further discussion of treatment of equity awards. The consideration transferred in the Mergers was measured using the fair-value-based measure of the share awards as of the closing date. For purposes of calculating the consideration transferred, the fair-value-based measure of the Sorin share awards was determined to be the opening market price of LivaNova’s ordinary shares of $69.39 on October 19, 2015.
(2)
As of October 16, 2015 there were 3,815,824 Sorin stock appreciation rights. Each Sorin stock appreciation right granted prior to the Sorin merger effective time accelerated, vested and was converted into the right to receive 0.0472 LivaNova stock appreciation right based on the Sorin Exchange Ratio. The total fair value of the replacement stock appreciation rights is $3.8 million, including $2.2 million attributable to pre-combination services and allocated to consideration transferred to acquire Sorin. The remaining $1.6 million was recognized immediately in the post-combination period. Refer to “Note 18” for further discussion of treatment of equity awards.

11


During the three months ended March 31, 2016, we did not remeasure the fair values of the assets acquired in the merger with Sorin. The following tables summarizes the preliminary fair values of Sorin’s assets acquired and liabilities assumed in the Mergers on October 19, 2016 (in thousands):
 
 
As of
 
 
October 19, 2015
Estimated Fair Value of Assets Acquired and Liabilities Assumed:
 
 
Cash and cash equivalents
 
$
12,495

Accounts receivable
 
224,466

Inventories
 
233,832

Other current assets
 
60,674

Property, plant and equipment
 
207,639

Intangible assets
 
688,729

Equity investments
 
67,059

Other assets
 
7,483

Deferred tax assets
 
135,370

Total assets acquired
 
1,637,747

Current portion of debt and other obligations
 
110,601

Other current liabilities
 
237,855

Long-term debt
 
128,458

Deferred tax liabilities
 
279,328

Other long-term liabilities
 
55,567

Total liabilities assumed
 
811,809

Goodwill
 
$
763,145

Goodwill has been allocated to Cardiac Surgery, Cardiac Rhythm Management and Neuromodulation reporting units. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents growth opportunities and expected cost synergies of the combined company. As a result we have provisionally assigned the goodwill arising from the Sorin acquisition to all three reporting units. This assignment was made by taking into consideration market participant rates of return for each acquired reporting unit (Cardiac Surgery and Cardiac Rhythm Management) in order to assess the respective fair values. The remaining goodwill, allocated to Neuromodulation, which is the accounting acquirer’s existing business unit, is supported by the synergies deriving from the Mergers. Goodwill recognized as a result of the acquisition is not deductible for tax purposes.
The following table summarizes the calculation of the fair value of LIvaNova’s ordinary shares issued to Sorin shareholders (in thousands, except per share data and the exchange ratio):
Total Sorin shares outstanding as of October 16, 2015
 
477,824

Sorin Exchange Ratio
 
0.0472

Shares of LivaNova issued
 
22,553

Value per share of Cyberonics as of October 16, 2015
 
$
69.95

Fair value of ordinary shares transferred to Sorin shareholders
 
$
1,577,603

Based upon a preliminary acquisition valuation, LivaNova acquired $464.0 million of customer-related intangible assets, $211.1 million of developed technology intangible assets, and $13.6 million related to the Sorin trade-name, with weighted average estimated useful lives of 17, 14, and 4 years, respectively. Other long-term liabilities include $2.7 million of unfavorable leases with weighted average remaining lives of 5 years.
Contingent liabilities assumed includes $9.2 million related to uncertain tax positions. During the three months ended March 31, 2016, we did not alter the contingent liability related to uncertain tax positions we assumed during the Mergers, except for changes due to foreign currency exchange rates.

12


Contingent liabilities also include $3.4 million for contingent payments at fair value related to two acquisitions completed by Sorin prior to the closing of the Mergers. The contingent payments for one acquisition are based on achievement of sales targets by the acquiree through June 30, 2018 and the contingent payments for the second acquisition are based on sales of cardiopulmonary disposable products and heart lung machines through 2019 of the acquiree. During the three months ended March 31, 2016, we did not change the carrying amount of these contingent liabilities, although, due to foreign currency exchange rate changes the carrying amount increased by $0.7 million to $4.1 million.
During the three months ended March 31, 2016, we incurred $6.8 million of merger and integration expenses. The merger and the integration costs were related primarily to advisory, legal, and accounting fees.
Note 4. Reorganization Plans
Our 2015 and 2016 Reorganization Plans (the “Plans”) were initiated October 2015 and March 2016, respectively, and were initiated in conjunction with the completion of the Mergers. These Plans are intended to leverage economies of scale, streamline distribution and logistics and strengthen operational and administrative effectiveness in order to reduce overall costs. Costs associated with these Plans were reported as restructuring expenses in the operating results of our consolidated statement of income (loss). There were no restructuring expenses in the comparative thirteen weeks of historical Cyberonics activity ended April 24, 2015.
We estimate that the Plans will result in a net reduction of approximately 131 personnel in the workforce. The Plans also include the closure of our R&D facility in Meylan, France and consolidation of it’s research and development (“R&D”) capabilities into the Clamart facility.
The Reorganization Plans’ details for the three months ended March 31, 2016 are as follows (in thousands):
 
 
Employee severance and other termination costs
 
Other
 
Total
Beginning liability balance
 
$
6,919

 
$
—

 
$
6,919

Restructuring charges
 
27,350

 
1,242

 
28,592

Cash payments
 
(6,581
)
 
—

 
(6,581
)
FX and other
 
(463
)
 
—

 
(463
)
Ending liability balance
 
$
27,225

 
$
1,242

 
$
28,467

The following table presents restructuring expense by reportable segment (in thousands):

 
Three Months Ended March 31, 2016
Cardiac Surgery
 
$
4,210

Cardiac Rhythm Management
 
15,166

Neuromodulation
 
2,163

Other
 
7,053

Total
 
$
28,592


Note 5. Accounts Receivable and Allowance for Bad Debt
Accounts receivable, net, consisted of the following (in thousands):
 
March 31, 2016
 
December 31, 2015
Trade receivables from third parties
$
290,427

 
$
274,005

Allowance for bad debt
(1,890
)
 
(1,653
)
 
$
288,537

 
$
272,352



13


Note 6. Inventories
Inventories consisted of the following (in thousands):

March 31, 2016
 
December 31, 2015
Raw materials
$
54,199

 
$
52,482

Work-in-process
43,580

 
44,369

Finished goods
112,983

 
115,597

 
$
210,762

 
$
212,448

Inventories are reported net of the provision for obsolescence which totaled $4.0 million and $3.6 million at March 31, 2016 and December 31, 2015, respectively.
Note 7. Property, Plant and Equipment (“PP&E”)
PP&E consisted of the following (in thousands):

March 31, 2016
 
December 31, 2015
 
Estimated lives in years
Land
$
16,227

 
$
15,662

 
---
Building and building improvements
84,706

 
82,014

 
up to 45
Equipment, software, furniture and fixtures
154,289

 
140,364

 
up to 16
Other
8,239

 
8,634

 
up to 10
Capital investment in process
40,902

 
42,210

 
---
Total
304,363

 
288,884

 
 
Accumulated depreciation
(50,613
)
 
(44,297
)
 
 
 
$
253,750

 
$
244,587

 
 
Aggregate depreciation for LivaNova was $10.9 million for the three months ended March 31, 2016 and $2.1 million for Cyberonics for the thirteen weeks ended April 24, 2015. As part of the Mergers, in October 2015, we acquired Sorin’s PP&E at an estimated fair value of $207.6 million.
Note 8. Goodwill and Intangible Assets
Detail of finite-lived and indefinite-lived intangible assets (in thousands):

 
March 31, 2016
 
December 31, 2015
Schedule of finite-lived intangible assets:
 
 
 
 
Developed technology
 
$
220,936

 
$
213,873

Customer relationships
 
466,196

 
444,472

Trademarks and trade names
 
13,679

 
13,030

Other intangible assets
 
12

 
11

Total
 
$
700,823

 
$
671,386

Accumulated amortization
 
(26,086
)
 
(12,444
)
Net
 
$
674,737

 
$
658,942

Schedule of indefinite-lived intangible assets:
 
 
 
 
Goodwill, net of impairment:
 
$
764,540

 
$
745,356


14


The amortization periods for our finite-lived intangible assets as of March 31, 2016: 
 
Minimum Life in years
 
Maximum life in years
Developed technology
5
 
18
Customer relationships
4
 
18
Trademarks and trade names
4
 
4
Other intangible assets
5
 
5
Aggregate amortization was $15.9 million and $0.7 million for the three months ended March 31, 2016 and the thirteen weeks ended April 24, 2015, respectively. This increase in aggregate amortization was due to the acquisition of intangibles during with the Mergers in October 2015, in which we acquired certain finite-lived intangible assets as follows: $464.0 million of customer relationships, $211.1 million of developed technology and $13.6 million of trade names.
The estimated future aggregate amortization based on our finite-lived intangible assets at March 31, 2016 (in thousands):
Year ending December 31,
 
2016 - remaining nine months
$
35,971

2017
47,895

2018
47,914

2019
46,991

2020
43,987

Thereafter
451,979

Detail of goodwill movements during the three months ended March 31, 2016 by segment (in thousands):
 
 
Neuromodulation
 
Cardiac Surgery
 
Cardiac Rhythm Management
 
Total Goodwill
Balance as of December 31, 2015
 
$
315,943

 
$
412,541

 
$
16,872

 
$
745,356

Other adjustments, net
 
—

 
—

 
—

 
—

Impairments
 
—

 
—

 
—

 
—

Currency adjustments
 
—

 
18,438

 
746

 
19,184

Balance as of March 31, 2016
 
$
315,943

 
$
430,979

 
$
17,618

 
$
764,540

Note 9. Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
 
 
March 31, 2016
 
December 31, 2015
Restructuring related expense accruals
 
$
28,467

 
$
6,919

Advances received on customer receivables
 
9,607

 
24,494

Derivatives
 
6,282

 
1,815

Provisions for agents, returns and other
 
5,656

 
7,199

Product warranty obligations
 
2,112

 
2,119

Accrued royalty costs
 
1,405

 
1,316

Clinical study costs
 
1,170

 
2,004

Accrued insurance
 
165

 
2,566

Other
 
25,670

 
14,615

 
 
$
80,534

 
$
63,047


15


Note 10. Product Warranties
We include warranty obligations with current accrued liabilities in the consolidated balance sheet. Warranty obligation consisted of the following (in thousands):
 
Amount
December 31, 2015
$
2,119

Warranty claims provision
142

Settlements made
(193
)
Effect of changes in foreign currency exchange rates
44

March 31, 2016
$
2,112

Note 11. Other Long-Term Liabilities
Other long-term liabilities consisted of the following (in thousands):

 
March 31, 2016
 
December 31, 2015
Liability for uncertain tax positions
 
$
13,401

 
$
13,048

Government grant deferred revenue
 
4,108

 
3,918

Earnout for contingent payments (1)
 
4,075

 
3,457

Unfavorable operating leases (2)
 
3,164

 
2,513

Financial derivatives (3)
 
2,180

 
1,793

Other
 
4,881

 
5,014

 
 
$
31,809

 
$
29,743

(1)
The earnout for contingent payments represents contingent payments we assumed during the Mergers for two acquisitions completed by Sorin prior to the Mergers. The first acquisition, in September 2015, was of Cellplex PTY Ltd. in Australia; the second acquisition was of the commercial activities of a local distributor in Colombia. The contingent payments for the first acquisition are based on achievement of sales targets by the acquiree through June 30, 2018 and the contingent payments for the second acquisition are based on sales of cardiopulmonary disposable products and heart lung machines of the acquiree through December 2019.
(2)
The unfavorable operating lease adjustment obligation represents our acquisition of Sorin’s future lease obligations at their estimated fair value in conjunction with the Mergers.
(3)
Financial derivative obligations, long-term, represent forward interest rate swap contracts, which hedges our long-term European Investment Bank debt.
Note 12. Investments 
Short-Term Investments Detail. Our short-term investment consisted of held-to-maturity commercial paper with maturities over three months but less than twelve months and carried at cost plus accrued interest, as shown below (in thousands):

 
March 31, 2016
 
December 31, 2015
Commercial paper (1)
 
$
6,988

 
$
6,997

 
(1)
Refer to “Note 13. Fair Value Measurements.”

16


Cost-Method Investments.  Our cost-method investments are shown in long-term assets in the consolidated balance sheets and consist of our equity positions in the following privately-held companies (in thousands):
 
 
March 31, 2016
 
December 31, 2015
ImThera Medical, Inc. - convertible preferred shares and warrants (1)
 
$
12,000

 
$
12,000

Rainbow Medical Ltd.(2)
 
4,042

 
3,847

Total
 
$
16,042

 
$
15,847

 
(1)
ImThera Medical, Inc. is a private U.S. company developing a neurostimulation device system for the treatment of obstructive sleep apnea. Refer to “Note 13. Fair Value Measurements.”
(2)
Rainbow Medical Ltd. is a private Israeli venture capital company that seeds and grows companies developing medical devices in a diverse range of medical fields. Refer to “Note 13. Fair Value Measurements.”
Equity Method Investments. Our equity-method investments are shown in long-term assets of our condensed consolidated balance sheets and consist of our equity position in the following entities (in thousands, except for percent ownership):
 
 
% Ownership (1)
 
March 31, 2016
 
December 31, 2015
La Bouscarre S.C.I.
 
50.0
%
 
$
17

 
$
16

LMTB - Laser und Medizin Technologie Gmbh
 
—
%
 
—

 
3

Caisson Interventional LLC (2)
 
43.7
%
 
12,718

 
13,712

Highlife S.A.S. (2)
 
38.0
%
 
8,457

 
8,363

MicroPort Sorin CRM (Shanghai) Co. Ltd.
 
49.0
%
 
8,729

 
8,959

Respicardia Inc.
 
19.7
%
 
31,719

 
30,586

Total
 
 
 
$
61,640

 
$
61,639

(1)
Ownership percentages as of March 31, 2016.
(2)
We have outstanding loans to Caisson Interventional LLC and to Highlife S.A.S for $6.6 million included in Other Assets (long-term) on the consolidated balance sheet. We loaned an additional $2.8 million to Highlife during the three months ended March 31, 2016. Refer to “Note 13. Fair Value Measurements - Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis” for further information.
We adjusted the carrying amount of our equity-method investments for our share of the investees losses, in the amount of $2.7 million during the three months ended March 31, 2016. Our share of the losses are reflected in the consolidated statements of income (loss). In addition, we adjusted the carrying amount of our equity-method investments for foreign currency translation gains of $2.7 million during the three months ended March 31, 2016, which are reflected in the consolidated statement of other comprehensive income. During the thirteen weeks ended April 24, 2015, there were no historical Cyberonics equity-method investments.
Other Assets. “Other assets” in the long-term section of the consolidated balance sheet includes the cash surrender value of company-owned life insurance policies, which are based on the fair values in a mutual fund portfolio, amounting to $1.8 million at March 31, 2016 and December 31, 2015.
Note 13. Fair Value Measurements
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative guidance for fair value measurements establishes a three-tier fair value hierarchy, categorizing the inputs used to measure fair value. The hierarchy can be described as follows:
Level 1. Observable inputs such as quoted prices in active markets.

17


Level 2. Inputs other than the quoted prices in active markets that are observable either directly or indirectly. To measure the fair value of its derivative transactions (transactions to hedge exchange risk and interest rate risk), we calculate the mark-to-market of each transaction using prices quoted in active markets (e.g., the spot exchange rate of a currency for forward exchange transactions) and observable market inputs processed for the measurement (e.g., the fair value of an interest rate swap using the interest rate curve), or the measurement of an exchange rate option (with the processing of listed prices and observable variables such as volatility). For all level 2 valuations, we use the information provided by a third-party as a source for obtaining quoted observable prices and to process market variables.
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. When a determination is made to classify an asset or liability within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. The fair value of assets using Level 3 input are based on our own judgments about the assumptions that market participants would use in pricing the asset and on observable market data, when available. We generally consider: (a) sale prices for similar assets, (b) discounted estimated future cash flows using an appropriate discount rate and/or (c) estimated replacement cost.
We review the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. There were no transfers between Level 1, Level 2, or Level 3 during the three months ended March 31, 2016 or the thirteen weeks ended April 24, 2015.

18


Assets and Liabilities That Are Measured at Fair Value on a Recurring Basis
The following table provides information by level for assets and liabilities that are measured at fair value on a recurring basis (in thousands):
 
Fair Value
as of
 
Fair Value Measurements Using Inputs Considered as:

March 31, 2016
 
Level 1
 
Level 2
 
Level 3
Liabilities:
 
 
 
 
 
 
 
Derivative Liabilities - for hedging (foreign currency exchange rates)
$
2,214

 
$
—

 
$
2,214

 
$
—

Derivative Liabilities - for hedging (interest rates)
3,335

 
—

 
3,335

 
—

Derivative Liabilities - not for hedging (interest rates)
4

 
—

 
4

 
—

Derivative Liabilities - not for hedging (exchange rates)
2,909

 
—

 
2,909

 
—

Earnout for contingent payments (1)
4,075

 
—

 
—

 
4,075

Total Liabilities
$
12,537

 
$
—

 
$
8,462

 
$
4,075


 
Fair Value
as of
 
Fair Value Measurements Using Inputs Considered as:
 
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Derivative Assets - for hedging (exchange rates)
$
839

 
$
—

 
$
839

 
$
—

Derivative Assets - not for hedging (exchange rates)
—

 
—

 
—

 
—

Total Assets
$
839

 
$
—

 
$
839

 
$
—

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivative Liabilities - for hedging (interest rates)
$
2,876

 
$
—

 
$
2,876

 
$
—

Derivative Liabilities - not for hedging (interest rates)
24

 
—

 
24

 
—

Derivative Liabilities - not for hedging (exchange rates)
1,547

 
—

 
1,547

 
—

Earnout for contingent payments (1)
3,457

 
—

 
—

 
3,457

Total Liabilities
$
7,904

 
$
—

 
$
4,447

 
$
3,457

(1)
This contingent payment arose as a result of acquisitions by Sorin, prior to the Mergers. Cellplex PTY Ltd. was acquired in September 2015 and the contingent payments are based on achievement of sales targets by the acquiree through June 30, 2018. The other acquisition was the commercial activities of a local distributor in Colombia and the contingent payments are based on sales of cardiopulmonary disposable products and heart lung machines of the acquiree through December 2019.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Our investment in cost-method equity securities and our investments in equity securities that are accounted for using the equity method consisted of investments in equity, partnership interests and advances to privately held companies for which there are no quoted market prices. These investments and our non-financial assets such as: goodwill of $763.1 million recorded on the date of the Mergers, intangible assets, and PP&E, are measured at fair value when there is an indicator of impairment and recorded at fair value only when impairment is recognized. We classify the measurement of these assets as Level 3 input within the fair value hierarchy. No impairment was recognized during the three months ended March 31, 2016. During the thirteen weeks ended April 24, 2015 we fully impaired certain finite-lived intangible assets and PP&E for a loss of $0.4 million and $0.8 million, respectively, that were primarily related to R&D projects that no longer factored into our future product plans.

19


Short-Term Financial Instruments Not Measured at Fair Value
The carrying values of our cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to the short-term nature of these items. The balance of our investments in short-term securities, consisted of commercial paper carried at cost plus accrued interest which approximates its fair value. Refer to “Note 12. Investments” for further information.
The carrying value of our long-term debt including the short-term portion, as of March 31, 2016, was $118.0 million which we believe approximates fair value. Cyberonics had no debt outstanding as of April 24, 2015.
Note 14. Financing Arrangements
The outstanding principal amount of long-term debt at March 31, 2016 and December 31, 2015, consisted of the following (in thousands, except interest rates):
 
 
Principal Amount at
 
Principal Amount at
 
 
 
Effective Interest Rate
 
 
March 31, 2016
 
December 31, 2015
 
Maturity
 
European Investment Bank (1)
 
$
104,260

 
$
99,426

 
June 2021
 
1.035
%
Banca del Mezzogiorno (2)
 
9,321

 
8,851

 
December 2019
 
0.50% - 3.35%

Bpifrance (ex-Oséo) (3)
 
2,576

 
2,621

 
October 2019
 
2.58
%
Novalia SA (Vallonie) (4)
 
920

 
1,192

 
March 2020 - June 2033
 
0.00% - 3.42%

Mediocredito Italiano (5)
 
926

 
944

 
September 2021-2026
 
0.0525% - 0.765%

Total long-term facilities
 
118,003

 
113,034

 
 
 
 
Less current portion of long-term debt
 
21,945

 
21,243

 
 
 
 
Total long-term debt
 
$
96,058

 
$
91,791

 
 
 
 
(1)
In July 2014, Sorin obtained a European Investment Bank loan to support product development projects in Italy and France for the Cardiac Surgery (the “CS”) and Cardiac Rhythm Management (the “CRM”) Business Units, and in addition, for the support of New Venture therapeutic solutions aimed at treating heart failure and mitral valve regurgitation.
(2)
In January 2015, Sorin obtained loans to support R&D projects as a part of the Large Strategic Project program of the Italian Ministry of Education, Universities and Research. One loan is subsidized by Cassa Depositi e Prestiti, at a fixed rate of 0.5%, and a second loan provided by GE Capital Interbanca, at a floating interest rate of the 6-month Euribor rate plus 3.3%.
(3)
In 2012, Sorin obtained a loan with Bpifrance, a French government entity that provides financial support for R&D.
(4)
In 2010, Sorin obtained loans from Novalia SA, a finance company in the Wallonia Region in Belgium, to support several R&D projects.
(5)
In 2014, Sorin assumed real estate loans with the acquisition of the cannulae business. The loans are due to Mediocredito Italiano and are secured by a mortgage on our building located at our Cantù manufacturing site in Italy.

20


The outstanding principal amount of short-term debt as of March 31, 2016, and December 31, 2015, consisted of the following (in thousands, except interest rates):
 
 
Principal Amount at
 
Principal Amount at
 
Effective Interest Rate
 
 
March 31, 2016
 
December 31, 2015
 
Intesa San Paolo Bank
 
$
10,257

 
$
20,630

 
0.300
%
BNL BNP Paribas
 
15,955

 
18,459

 
0.300
%
Unicredit Banca
 
6,838

 
15,201

 
0.380
%
Barclays Bank
 
13,676

 
—

 
0.324
%
BNP Paribas (Brazil)
 
2,852

 
2,225

 
16.20
%
French Government
 
2,130

 
2,030

 
—

Other short-term facilities
 
1,886

 
2,725

 


Total short-term facilities
 
53,594

 
61,270

 
 
Current portion of long-term debt
 
21,945

 
21,243

 
 
Total current debt
 
75,539

 
82,513

 
 
Total debt
 
$
171,597

 
$
174,304

 
 

Note 15. Derivatives and Risk Management
Due to the global nature of our operations, we are exposed to foreign currency exchange rate fluctuations, and, due to certain loans with floating interest rates, we are also subject to the impact of changes in interest rates on our interest payments. We enter into foreign currency exchange rate (“FX”) forward contracts and interest rate swap contracts, to reduce the impact of foreign currency rates and interest rate fluctuations on net revenues and cash flow. We measure all outstanding derivatives at fair value and report the fair value in the consolidated balance sheets as either financial assets or liabilities. We do not enter into derivative contracts for speculative purposes. Derivatives that are not designated as hedge instruments are referred to as freestanding derivatives and we account for changes in fair value in earnings. If a derivative qualifies for hedge accounting and is designated as a hedging instrument, then, depending on hedge effectiveness, we account for changes in the fair value of the derivative immediately in earnings or in other comprehensive income until the hedged item is recognized in earnings upon settlement or termination of the hedge contract. We measure hedge effectiveness each quarter end. If a derivative that qualified for hedge accounting is later determined to be ineffective, in whole or in part due to changes in the underlying hedged transaction, the fair value of the portion of the derivative determined to be ineffective will be recognized as a gain or loss in earnings for the applicable period. If the hedging instrument matures or is canceled, the amounts previously recorded in the statement of accumulated other comprehensive income is reclassified to earnings.
Freestanding Derivative Foreign Currency Forward Contracts
The gross notional amount of derivative FX forward contracts, not designated as hedging instruments, outstanding at March 31, 2016 and December 31, 2015 was $285.3 million and $254.4 million, respectively. These contracts consist of primarily FX forward contracts designed to offset the FX effects in earnings of intercompany loans denominated in a variety of foreign currencies versus the Euro, which settle monthly or quarterly, and are renewed or not in accordance with the underlying outstanding intercompany loan amounts. In addition, we included FX forward currency contracts originally designed to hedge net revenues denominated in British pounds and Japanese yen but derecognized during the period ended March 31, 2016.
The amount and location of the gains (losses) in the condensed consolidated statements of income (loss) related to freestanding FX contracts (in thousands):
Derivatives Not Designated as Hedging Instruments
Location of gains / (losses) in the statement of net income (loss)
 
Three Months Ended March 31, 2016
FX forward contracts (1)
Foreign exchange and other
 
$
(3,822
)
(1)
The aggregate amounts include realized and unrealized gains and losses. There were no derivative contracts outstanding during the thirteen weeks of historic Cyberonics activity that ended April 24, 2015.

21


Cash Flow Hedges
Foreign Currency Risk
We utilize FX forward contracts that are designed to hedge the variability of cash flows associated with our 15 month forecast of net revenues denominated in British Pound and Japanese Yen and are designated as a cash flow hedges. These hedges are denominated in USDs and are settled when the earnings process has completed and the receivables collected. The gross notional amount of FX forward contracts designated as cash flow hedges outstanding at March 31, 2016 was $82.8 million, related to contracts for £8.5 million and ¥8.1 billion, and at December 31, 2015 the gross notional amount was $66.9 million, related to contracts for £8.5 million and ¥6.4 billion. At March 31, 2016, we had $2.4 million in after-tax net unrealized losses associated with FX cash flow hedging recorded in Accumulated Other Comprehensive Income (“AOCI”) and of this total we expect that $2.3 million will be reclassified to earnings during the next 12 months. There was no FX hedge ineffectiveness and there were no components of the FX hedge contracts excluded in the measurement of hedge effectiveness during the three months ended March 31, 2016. During the three months ended March 31, 2016, we discontinued FX forward contracts in the amount of £1.5 million ($2.3 million) due to a review of the forecast for 2016 of our revenues and costs denominated in GBP’s, which resulted in a gain of $190 thousand. There were no FX derivatives outstanding during the thirteen weeks of historic Cyberonics activity that ended April 24, 2015.
Interest Rate Risk
In July 2014, Sorin entered into a European Investment Bank (“EIB”) long-term loan agreement that matures in June 2021 with variable interest payments due quarterly based on the Euribor 3 month floating interest rate. To minimize the impact of changes in interest rates on our interest payments we entered into an interest rate swap agreement program to swap the EIB floating-rate interest payments for fixed-rate interest payments. The interest rate swap contracts qualify for, and are designated as, a cash flow hedge. Each interest rate swap contract has a quarterly settlement in conjunction with the scheduled payment of interest on the European Investment Bank loan. The contracts had an aggregate notional amount of €73.3 million (equivalent to $83.5 million) at March 31, 2016 and €73.3 million (equivalent to $79.6 million) at December 31, 2015. At March 31, 2016, we had $0.1 million in after-tax net unrealized losses associated with interest rate cash flow hedging recorded in AOCI, and of this total we expect that $61 thousand will be reclassified to earnings during the next 12 months. There was no interest rate swap hedge ineffectiveness or component of the swap contract excluded in the measurement of hedge effectiveness during the three months ended March 31, 2016. In addition, no interest rate swap contract was derecognized, canceled or discontinued during the three months ended March 31, 2016. There were no interest rate swap contracts outstanding during the thirteen weeks of historic Cyberonics activity that ended April 24, 2015.
Presentation in Financial Statements
The amount of gains (losses) posted to other comprehensive income related to FX forward contracts, and interest rate swap derivative instruments, designated as cash flow hedges during the three months ended March 31, 2016 and the amount of cash flow hedge gains (losses) reclassified to the consolidated statements of income (loss) from other comprehensive income for the three months ended March 31, 2016, were as follows (in thousands):

 
Gross Gains (Losses) Recognized in OCI on the Effective Portion of the Derivative
 
Effective Portion of Gains (Losses) on Derivatives Reclassified from AOCI to Earnings:
Derivatives in Cash Flow Hedging Relationships
 
Amount
 
Location
 
Amount
FX forward contract
 
$
(3,580
)
 
Foreign Exchange and Other (1)
 
$
190

 
 
 
 
SG&A
 
(291
)
Interest rate swap contracts
 
(319
)
 
Interest expense
 
(33
)
Total
 
$
(3,899
)
 

 
$
(134
)
(1)
Includes FX contracts derecognized as revenue hedges during the three months ended March 31, 2016.

22


The fair value on a gross basis and the location of derivative instruments reported in the consolidated balance sheet are shown in the table below as of March 31, 2016 (in thousands):

 
Liability Derivatives
Derivatives designated as hedging instruments
 
Balance Sheet Location
 
Fair Value (1)
Interest rate contracts
 
Accrued liabilities
 
$
1,155

Interest rate contracts
 
Other long-term liabilities
 
2,180

Foreign currency exchange rate contracts
 
Accrued liabilities
 
2,214

Total derivatives designated as hedging instruments
 

 
$
5,549

Derivatives not designated as hedging instruments
 

 

Interest rate contracts
 
Accrued liabilities
 
$
4

Foreign currency exchange rate contracts
 
Accrued liabilities
 
2,909

Total derivatives not designated as hedging instruments
 

 
$
2,913

Total derivatives
 

 
$
8,462

The fair value on a gross basis and the location of derivative instruments reported in the consolidated balance sheet are shown in the table below as of December 31, 2015 (in thousands):
 
 
Liability Derivatives
Derivatives designated as hedging instruments
 
Balance Sheet Location
 
Fair Value (1)
Interest rate contracts
 
Accrued liabilities
 
$
1,083

Interest rate contracts
 
Other long-term liabilities
 
1,793

Foreign currency exchange rate contracts
 
Accrued liabilities
 
(839
)
Total derivatives designated as hedging instruments
 
 
 
2,037

Derivatives not designated as hedging instruments
 
 
 
 
Interest rate contracts
 
Accrued liabilities
 
24

Foreign currency exchange rate contracts
 
Accrued liabilities
 
1,547

Total derivatives not designated as hedging instruments
 
 
 
1,571

Total derivatives
 
 
 
$
3,608

(1)
For the classification of input used to evaluate the fair value of our derivatives, refer to “Note 13. Fair Value Measurements.”
Note 16.  Commitments and Contingencies
Litigation and Regulatory Proceedings
FDA Warning Letter. On December 31, 2015, LivaNova received a Warning Letter (the “Warning Letter”) dated December 29, 2015 from the U.S. Food and Drug Administration (“FDA”) alleging certain violations of FDA regulations applicable to medical device manufacturers at the Company’s Munich, Germany and Arvada, Colorado facilities.
The FDA inspected the Munich facility from August 24, 2015 to August 27, 2015 and the Arvada facility from August 24, 2015 to September 1, 2015. On August 27, 2015, the FDA issued a Form 483 identifying two observed non-conformities with certain regulatory requirements at the Munich facility. We did not receive a Form 483 in connection with the FDA’s inspection of the Arvada facility. Following the receipt of the Form 483, we provided written responses to the FDA describing corrective and preventive actions that were underway or to be taken to address the FDA’s observations at the Munich facility. The Warning Letter responded in part to our responses and identified other alleged violations not previously included in the Form 483.

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The Warning Letter further stated that our 3T Heater Cooler devices and other devices we manufactured at our Munich facility are subject to refusal of admission into the United States until resolution of the issues set forth by the FDA in the Warning Letter. The FDA has informed us that the import alert is limited to the 3T Heater Cooler devices, but that the agency reserves the right to expand the scope of the import alert if future circumstances warrant such action. The Warning Letter did not request that existing users cease using the 3T Heater Cooler device, and manufacturing and shipment of all of our products other than the 3T Heater Cooler remain unaffected by the import limitation. To help clarify these issues for current customers, we issued an informational Customer Letter in January 2016, and that same month agreed with the FDA on a process for shipping 3T Heater Cooler devices to existing U.S. users pursuant to a certificate of medical necessity program.
Lastly, the Warning Letter states that premarket approval applications for Class III devices to which certain Quality System regulation deviations identified in the Warning Letter are reasonably related will not be approved until the violations have been corrected. However, the Warning Letter only specifically names the Munich and Arvada facilities in this restriction, which do not manufacture or design devices subject to premarket approval.
We are continuing to work diligently to remediate the FDA’s inspectional observations for the Munich facility as well as the additional issues identified in the Warning Letter. We take these matters seriously and intend to respond timely and fully to the FDA’s requests.
The Warning Letter had no impact on our consolidated financial position, results of operations or cash flows in our fiscal year ended December 31, 2015, and the impact on our consolidated financial position, results of operations or cash flows for the three months ended March 31, 2016 was not material. We believe that less than 1% of our fiscal year 2016 consolidated sales will be impacted by this Warning Letter and the FDA’s concerns will be resolved without a material impact on our consolidated financial position, results of operations or cash flows in our fiscal year 2016.
Baker, Miller et al v. LivaNova PLC. On February 12, 2016, LivaNova was alerted that a class action complaint had been filed in the U.S. District Court for the Middle District of Pennsylvania with respect to the Company’s 3T Heater Cooler devices, naming as evidence, in part, the Warning Letter issued by the FDA in December 2015. The named plaintiffs to the complaint are two individuals who underwent open heart surgeries at WellSpan York Hospital and Penn State Milton S. Hershey Medical Center in 2015, and the complaint alleges that: (i) patients were exposed to a harmful form of bacteria, known as nontubercuous mycobacterium (“NTM”), from LivaNova’s 3T Heater Cooler devices; and (ii) LivaNova knew or should have known that design or manufacturing defects in 3T Heater Cooler devices can lead to NTM bacterial colonization, regardless of the cleaning and disinfection procedures used (and recommended by the Company). Named plaintiffs seek to certify a class of plaintiffs consisting of all Pennsylvania residents who underwent open heart surgery at WellSpan York Hospital and Penn State Milton S. Hershey Medical Center between 2011 and 2015 and who are currently asymptomatic for NTM infection (approximately 3,600 patients).
The putative class action, which has not been certified, seeks: (i) declaratory relief finding the 3T Heater Cooler devices are defective and unsafe for intended uses; (ii) medical monitoring; (iii) general damages; and (iv) attorneys’ fees. On March 21, 2016, the plaintiffs filed a First Amended Complaint adding Sorin Group Deutschland GmbH and Sorin Group USA, Inc. as defendants.
At LivaNova, patient safety is of the utmost importance, and significant resources are dedicated to the delivery of safe, high-quality products. We intend to vigorously defend against these claims. Given the early stage of this matter, we cannot, however, give any assurances that additional legal proceedings making the same or similar allegations will not be filed against LivaNova PLC or one of its subsidiaries, nor that the resolution of the complaint and any related litigation in connection therewith will not have a material adverse effect on our business, results of operations, financial condition and/or liquidity.
SNIA Litigation. Sorin S.p.A. was created as a result of a spin-off (the “Sorin spin-off”) from SNIA S.p.A. (“SNIA”). The Sorin spin-off, which spun off SNIA’s medical technology division, became effective on January 2, 2004. Pursuant to the Italian Civil Code, in a spin-off transaction, the parent and the spun-off company can be held jointly liable for certain indebtedness or liabilities of the pre-spin-off company in two scenarios:
•
The parent and the spun-off company can be held jointly liable, up to the actual value of the shareholders’ equity conveyed or received, for “debt” (debiti) of the pre-spin-off company that existed at the time of the spin-off. This joint liability is secondary in nature and, consequently, arises only when such indebtedness is not satisfied by the company owing such indebtedness. We estimate that at the time of the spin-off, the value of the residual shareholders’ equity received was approximately €573 million.
•
The parent and the spun-off company can be held jointly liable, up to the actual value of the shareholders’ equity conveyed or received, for “liabilities” (elementi del passivo) whose allocation between the parties to the spin-off cannot be determined based on the spin-off plan.

24


For purposes of the Italian Civil Code, Sorin believes and has argued that the term “debt” (debiti) is generally understood to refer to indebtedness as reflected on a debtor’s balance sheet for accounting purposes in accordance with the European Union directive pursuant to which these provisions of the Italian Civil Code were enacted, which translates “debiti” as “obligations.” The European Union directive uses “obligations” to refer to indebtedness owed to creditors and the term “liabilities” to refer to general liabilities. In connection with the Sorin spin-off, the assets and liabilities of SNIA’s medical technology division were allocated to Sorin, and the remaining assets and liabilities of SNIA, including those related to the Caffaro chemical operations (as described below), were allocated to SNIA.
Between 1906 and 2010, SNIA’s subsidiaries Caffaro Chimica S.r.l. and Caffaro S.r.l. and their predecessors (the “SNIA Subsidiaries”), conducted certain chemical operations (the “Caffaro Chemical Operations”), at sites in Torviscosa, Brescia and Colleferro, Italy (the “Caffaro Chemical Sites”). These activities allegedly resulted in substantial and widely dispersed contamination of soil, water and ground water caused by a variety of hazardous substances released at the Caffaro Chemical Sites. In 2009 and 2010, SNIA and the SNIA Subsidiaries filed for insolvency. In connection with SNIA’s Italian insolvency proceedings, the Italian Ministry of the Environment and the Protection of Land and Sea (the “Italian Ministry of the Environment”), sought compensation from SNIA in an aggregate amount of €3.4 billion for remediation costs relating to the environmental damage at the Caffaro Chemical Sites allegedly caused by the Caffaro Chemical Operations. The amount, which was based on certain clean-up activities and precautionary measures set forth in three technical reports prepared by ISPRA, the technical agency of the Ministry of Environment. Similar activities and precautionary measures have also been requested to the SNIA Subsidiaries by the Ministry of Environment and other competent authorities in the context of the administrative proceeding for the remediation of the Caffaro Chemical Sites. However, these administrative acts have been invalidated in part by courts in Friuli Venezia Giulia (for the site of Torviscosa) and Brescia, which deemed them based on an inadequate fact-finding. The administrative proceeding regarding the Torviscosa site is also currently subject to a criminal investigation by the Public Prosecutor of Udine. In addition, partial final remediation plans have been approved and implemented for the Colleferro site. These plans provide remediation activities significantly different, and entailing much lower expenses, from those included in the ISPRA’s technical reports which ground the request for compensation of the abovementioned amount. Notwithstanding the above, that amount, remains in dispute, and no final remediation plan has been approved for the other site.
In September 2011, the Bankruptcy Court of Udine, and in July 2014, the Bankruptcy Court of Milan each held that the Italian Ministry of the Environment and other Italian government agencies were not creditors of SNIA and the SNIA Subsidiaries in connection with the agencies’ claims against them in the context of their Italian insolvency proceedings. LivaNova (as the successor to Sorin in the litigation) believes these findings are influential but not binding in other Italian courts, including civil courts. The Italian Ministry of the Environment and the other Italian government agencies have appealed both decisions, but in January 2016, the Court of Udine rejected the appeal (with a decision which has been challenged before the Italian Supreme Court), while the appeal before the Court of Milan is currently pending.
In January 2012, SNIA filed a civil action against Sorin in the Civil Court of Milan on the basis of the Italian Civil Code’s provisions for potential joint liability of a parent and a spun-off company in the context of a spin-off, as described above, seeking to determine Sorin’s joint liability with SNIA for damages allegedly related to the Caffaro Chemical Operations (as described below). SNIA’s civil action against Sorin also named the Italian Ministry of the Environment and other Italian government agencies, as defendants, in order to have them bound to a potential ruling. The Italian Ministry of the Environment, together with the Italian Ministry of Economy and Finance and certain additional Italian government agencies that also sought compensation from SNIA for the alleged environmental damages, subsequently counterclaimed against Sorin, seeking to have Sorin found jointly liable to them with SNIA, on the same basis. SNIA and these government agencies asked the court to find inapplicable to the Sorin spin-off the Italian Civil Code’s caps on potential joint liability of parties to a spin-off, which limit such joint liability to the actual value of the shareholders’ equity received, on the basis that the Sorin spin-off was planned prior to the date such caps were enacted under the Italian Civil Code, and despite the fact that the Sorin spin-off became effective after such date. Sorin sought to contest SNIA’s claims against Sorin, in their entirety, due to:
•
the Italian bankruptcy courts’ previous findings that the Italian Ministry of the Environment and other Italian government agencies were not creditors of SNIA and the SNIA subsidiaries in connection with the agencies’ claims against them;
•
Sorin’s belief that the alleged liabilities related to the Caffaro Chemical Operations did not constitute indebtedness of SNIA at the time of the Sorin spin-off, and thus that Sorin should not be held liable under the Italian Civil Code’s provisions relating to joint liability for indebtedness in the context of spin-offs, as described above; and
•
the allocation to SNIA of the assets and liabilities related to the Caffaro Chemical Operations in connection with the Sorin spin-off, and Sorin’s belief that Sorin should therefore not be liable under the Italian Civil Code’s provisions relating to joint liability in the context of spin-offs for liabilities of indeterminate allocation, as described above.

25


A hearing to submit final claims (precisazione delle conclusioni) in connection with SNIA’s civil action was held in September 2015 and parties have since filed final defense briefs. A favorable decision pertaining to the case was delivered in judgment No. 4101/2016 on April 1, 2016 (the “Decision”). In its Decision the Court of Milan dismissed the legal actions of SNIA in Amministrazione Straordinaria and of the Italian Public Administration (the “Public Administration”) against Sorin (now LivaNova PLC), further requiring the Public Administration to pay Sorin €300,000, as legal fees (of which €50,000 jointly with SNIA). Neither of the losing parties has yet filed an appeal in this case.
LivaNova (as successor to Sorin in the litigation) continues to believe that the risk of material loss relating to the SNIA litigation is not probable as a result of the reasons and recent court decisions described above. We also believe that the amount of potential losses relating to the SNIA litigation is, in any event, not estimable given that the underlying damages, related remediation costs, which party would be responsible for which portion, which party is responsible for which time period, all of which remains in dispute and that no final decision on a remediation plan has been approved. As a result, LivaNova has not made any accrual in connection with the SNIA litigation.
Pursuant to European Union, United Kingdom and Italian cross-border merger regulations applicable to the Mergers, legacy Sorin’s liabilities, including any potential liabilities arising from the claims against Sorin relating to the SNIA litigation, are assumed by LivaNova as successor to Sorin. Although LivaNova believes the claims against Sorin in connection with the SNIA litigation are without merit and continues to contest them vigorously, there can be no assurance as to the outcome. A finding during any appeal or novel proceedings that Sorin or LivaNova is liable for the environmental damage at the Caffaro Chemical Sites could have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Environmental Remediation Order. On July 28, 2015, Sorin and other direct and indirect shareholders of SNIA received an administrative order from the Italian Ministry of the Environment (the “Environmental Remediation Order”), directing them to promptly commence environmental remediation efforts at the Caffaro Chemical Sites (as described above). LivaNova believes that the Environmental Remediation Order is without merit. LivaNova (as successor to Sorin) believes that it should not be liable for damages relating to the Caffaro Chemical Operations pursuant to the Italian statute on which the Environmental Remediation Order relies because the statute does not apply to activities occurring prior to 2006, the date on which the statute was enacted, and Sorin was spun off from SNIA in 2004. Additionally, LivaNova believes that Sorin should not be subject to the Environmental Remediation Order because Italian environmental regulations only permit such an order to be imposed on an “operator” of a remediation site, and Sorin had never been identified in any legal proceeding as an operator at any of the Caffaro Chemical Sites, has not conducted activities of any kind at any of the Caffaro Chemical Sites and had not caused any environmental damage at any of the Caffaro Chemical Sites.
Accordingly, LivaNova (as successor to Sorin) alongside other parties, challenged the Environmental Remediation Order before the Administrative Court of Lazio in Rome (the “TAR”). A hearing was held on February 3, 2016.
On March 21, 2016 the TAR issued several judgments, annulling the Environmental Remediation Order, one for each of the addressees of the Environmental Remediation Order, including LivaNova. Those judgments were based on the fact that (i) the Environmental Remediation Order lacks any detailed analysis of the causal link between the alleged damage and the activities of the Company, which is a pre-condition to imposition of the measures proposed in the Environmental Remediation Order, (ii) the situation of the Caffaro site does not require urgent safety measures, because no new pollution events have occurred and no additional information/evidence of a situation of contamination exists and (iii) the Environmental Remediation Order was not enacted using the correct legal basis, and in any event the Ministry failed to verify the legal elements that could have led to a conclusion of legal responsibility of the addressees of the Environmental Remediation Order. The TAR decision described above may be appealed by the Ministry before the Council of State (within 60 days from the notification of the TAR’s judgment, or six months if the judgment has not been notified).
Andrew Hagerty v. Cyberonics, Inc. On December 5, 2013, the United States District Court for the District of Massachusetts unsealed a qui tam action filed by former employee Andrew Hagerty against Cyberonics under the False Claims Act (the “False Claims Act”) and the false claims statutes of 28 different states and the District of Columbia (United States of America et al ex rel. Andrew Hagerty v. Cyberonics, Inc. Civil Action No. 1:13-cv-10214-FDS). The False Claims Act prohibits the submission of a false claim or the making of a false record or statement to secure reimbursement from, or limit reimbursement to, a government-sponsored program. A “qui tam” action is a lawsuit brought by a private individual, known as a relator, purporting to act on behalf of the government. The action is filed under seal, and the government, after reviewing and investigating the allegations, may elect to participate, or intervene, in the lawsuit. Typically, following the government’s election, the qui tam action is unsealed.
Previously, in August 2012, Mr. Hagerty filed a related lawsuit in the same court and then voluntarily dismissed that lawsuit immediately prior to filing this qui tam action. In addition to his claims for wrongful and retaliatory discharge stated in the first lawsuit, the qui tam lawsuit alleges that Cyberonics violated the False Claims Act and various state false claims statutes while marketing its VNS Therapy System, and seeks an unspecified amount consisting of treble damages, civil penalties, and attorneys’ fees and expenses.

26


In October 2013, the United States Department of Justice declined to intervene in the qui tam action, but reserved the right to do so in the future. In December 2013, the district court unsealed the action. In April 2014, Cyberonics filed a motion to dismiss the qui tam complaint, alleging a number of deficiencies in the lawsuit. In May 2014, the relator filed a First Amended Complaint. Cyberonics filed another motion to dismiss in June 2014, and the parties completed their briefing on the motion in July 2014. On April 6, 2015, the district court dismissed all claims filed by Andrew Hagerty under the False Claims Act, but did not dismiss the claims for wrongful and retaliatory discharge. On July 28, 2015, Cyberonics filed its answer to the surviving claims in Mr. Hagerty’s first Amended Complaint and asserted its demand for arbitration pursuant to Mr. Hagerty’s employment documents.
In August 2015, Mr. Hagerty filed a Motion Seeking Leave to file a Second Amended Complaint responding to certain deficiencies noted by the court when dismissing claims in his First Amended Complaint alleging that Cyberonics submitted, or caused the submission of false claims under the False Claims Act. On September 4, 2015, Cyberonics filed our Brief in Opposition to Hagerty’s Motion for Leave to file a Second Amended Complaint.  Mr. Hagerty filed a Reply Brief in support of his Motion for Leave to file a Second Amended Complaint on September 11, 2015.  On September 16, 2015, the Court heard oral arguments on (a) Mr. Hagerty’s motion seeking to amend his complaint, and (b) Cyberonics’ pending motion demanding arbitration on the claims relating to wrongful and retaliatory discharge.  On November 17, 2015, the court (1) denied Mr. Hagerty’s Motion for Leave to File a Second Amended Complaint (accordingly, the previously dismissed claims remain dismissed); (2) granted Cyberonics’ Motion to Compel Arbitration of the two remaining claims (for retaliatory discharge under the False Claims Act and for wrongful termination/retaliation under Massachusetts law); and (3) stayed the pending case (in order to consolidate all issues for appeal pending resolution of the arbitration). On or about February 22, 2016, Mr. Hagerty dismissed, without prejudice, his individual claims that were ordered to arbitration. Subsequently, on or about March 21, 2016, Mr. Hagerty filed an appeal of the previously dismissed FCA claims with the U.S. First Circuit Court of Appeals. The appeal is pending.
We believe that our commercial practices were and are in compliance with applicable legal standards, and we will continue to defend this case vigorously. We make no assurance as to the resources that will be needed to respond to these matters or the final outcome, and we cannot estimate a range of potential loss or damages.
Tax Litigation. In a tax audit report notified on October 30, 2009, the Regional Internal Revenue Office of Lombardy (the “Internal Revenue Office”) informed Sorin Group Italia S.r.l. that, among several issues, it was disallowing in part (for a total of €102.6 million) a tax-deductible write down of the investment in the U.S. company, Cobe Cardiovascular Inc., which Sorin Group Italia S.r.l. recognized in 2002 and deducted in five equal installments, beginning in 2002. In December 2009, the Internal Revenue Office issued notices of assessment for 2002, 2003 and 2004. The assessments for 2002 and 2003 were automatically voided for lack of merit. In December 2010 and October 2011, the Internal Revenue Office issued notices of assessment for 2005 and 2006 respectively. The Company challenged all three notices of assessment (for 2004, 2005 and 2006) before the relevant Provincial Tax Courts.
The preliminary challenges filed for 2004, 2005 and 2006 were heard and all denied at the first jurisdictional level, and subsequently, the Company filed an appeal against the decisions in the belief that all the decisions are incorrect in their reasoning and radically flawed. The appeal submitted against the first-level decision for 2005 was rejected. The second-level decision, relating to the 2005 notice of assessment, was appealed to the Italian Supreme Court (Corte di Cassazione) at a hearing on February 3, 2016, where we argued that the assessment should be deemed null and void and illegitimate because of a false application of regulations. The Court’s decision is pending.
In November 2012, the Internal Revenue Office served a notice of assessment for 2007 and, in July 2013, served a notice of assessment for 2008, wherein the Internal Revenue Office claimed an increase in taxable income due to a reduction (similar to the previous notices of assessment for 2004, 2005 and 2006) of the losses reported by Sorin Group Italia S.r.l. for the 2002, 2003 and 2004 tax periods and utilized in 2007 and 2008. Both notices of assessment were challenged within the statutory deadline. The Provincial Tax Court of Milan suspended the decision for 2007 until the litigation regarding years 2004, 2005 and 2006 are defined.
The total amount of losses in dispute is €62.6 million or $71.3 million. At the time of Cyberonics-Sorin merger, LivaNova carefully reassessed its exposure, on this complex tax litigation, taking into account the recent general adverse trend to taxpayers on litigations with Italian tax authorities. Although the Company’s defensive arguments are strong, the negative Court trend experienced so far by Sorin (four consecutive negative judgments received to date) as well as the fact of the ultimate outcome being dependent on the last possible Court level, i.e. the Italian Supreme Court, which is entitled to resolve only on procedural and legal aspects of the case but not on its substance, led LivaNova to recognize a risk provision of $19.2 million.

27


Other Litigation. Additionally, we are the subject of various pending or threatened legal actions and proceedings that arise in the ordinary course of our business. These matters are subject to many uncertainties and outcomes that are not predictable and that may not be known for extended periods of time. Since the outcome of these matters cannot be predicted with certainty, the costs associated with them could have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Lease Agreements
We have operating leases for facilities and equipment. Rent expense from all operating leases amounted to approximately $5.9 million and $0.2 million for the three months ended March 31, 2016 and the thirteen weeks ended April 24, 2015, respectively.
Note 17.  Stockholders’ Equity
Common stock of Cyberonics and ordinary shares of LivaNova. Prior to the Mergers, shares of Cyberonics common stock were registered pursuant to Section 12(b) of the Exchange Act and listed on NASDAQ under the ticker symbol “CYBX,” and Sorin Ordinary Shares were listed on the Mercato Telematico Azionario organized and managed by Borsa Italiana S.p.A. (the “Italian Stock Exchange”). Shares of Cyberonics common stock and the Sorin ordinary shares were suspended from trading on NASDAQ and the Italian Stock Exchange, respectively, prior to the open of trading on October 19, 2015. NASDAQ filed a Form 25 on Cyberonics’ behalf to provide notice to the SEC regarding the withdrawal of shares of Cyberonics common stock from listing and to terminate the registration of such shares under Section 12(b) of the Exchange Act.
Following the completion of the Mergers, LivaNova became the holding company of the combined businesses of Cyberonics and Sorin, and LivaNova’s ordinary shares were listed on NASDAQ and listed on the Official List of the U.K.’s Financial Conduct Authority and admitted to trading on the Main Market of the LSE under the ticker symbol “LIVN.”
LivaNova is incorporated in England and Wales as a public company limited by shares. The principal legislation under which LivaNova operates is the Companies Act 2006, and regulations made thereunder. LivaNova ordinary shares were registered under the Securities Act, pursuant to the Registration Statement on Form S-4 (File No. 333-203510), as amended, filed with the SEC by LivaNova and declared effective on August 19, 2015.
Share repurchase plans prior to the Mergers. Common shares were repurchased on the open market pursuant to the Cyberonics’ Board of Directors approved repurchase plans during the year ended April 24, 2015 and prior. In January 2013, December 2013 and November 2014, the Cyberonics Board of Directors authorized repurchase programs of its common stock of up to one million shares under each program. However, on February 27, 2015, the Cyberonics treasury stock purchase plan under Rule 10b5-1 of the Exchange Act terminated, and Cyberonics stopped repurchasing its shares of common stock. During the thirteen weeks ended April 24, 2015, pursuant to the approved plans, Cyberonics repurchased 129,221 shares of its common stock, and repurchased 14,845 shares to cover employees’ minimum tax withholding obligations related to vested stock-based compensation grants, at an average price for all shares repurchased of $58.01.

28


Comprehensive income.
The table below presents the change in each component of accumulated other comprehensive income (loss), net of tax and the reclassifications out of accumulated other comprehensive income into net earnings for the three months ended March 31, 2016 and the thirteen weeks ended April 24, 2015 (in thousands):
 
 
Change in Unrealized Gain (Loss) on Cash Flow Hedging Derivatives
 
Foreign Currency Translation Adjustments Gain (Loss) (1)
 
Total
Beginning Balance - December 31, 2015
 
$
888

 
$
(55,116
)
 
$
(54,228
)
Other comprehensive income (loss) before reclassifications, before tax
 
(3,899
)
 
48,501

 
44,602

Tax benefit (expense)
 
405

 
—

 
405

Other comprehensive income (loss) before reclassifications, net of tax
 
(3,494
)
 
48,501

 
45,007

Reclassification of (gain)/loss from accumulated other comprehensive income, before tax
 
134

 
—

 
134

Tax effect
 
(19
)
 
—

 
(19
)
Reclassification of (gain)/loss from accumulated other comprehensive income, after tax
 
115

 
—

 
115

Net current-period other comprehensive income (loss), net of tax
 
(3,379
)
 
48,501

 
45,122

Ending Balance - March 31, 2016
 
$
(2,491
)
 
$
(6,615
)
 
$
(9,106
)
 
 
 
 
 
 
 
Beginning Balance - January 23, 2015
 
$
—

 
$
(2,924
)
 
$
(2,924
)
Other comprehensive income (loss) before reclassifications, before tax
 
—

 
(477
)
 
(477
)
Tax benefit (expense)
 
—

 
—

 
—

Other comprehensive income (loss) before reclassifications, net of tax
 
—

 
(477
)
 
(477
)
Reclassification of (gain)/loss from accumulated other comprehensive income, before tax
 
—

 
—

 
—

Tax effect
 
—

 
—

 
—

Reclassification of (gain)/loss from accumulated other comprehensive income, after tax
 
—

 
—

 
—

Net current-period other comprehensive income (loss), net of tax
 
—

 
(477
)
 
(477
)
Ending Balance - April 24, 2015
 
$
—

 
$
(3,401
)
 
$
(3,401
)
(1)
Taxes are not provided for foreign currency translation adjustments as translation adjustment are related to earnings that are intended to be reinvested in the countries where earned.
Note 18.  Stock-Based Incentive Plans
Stock-Based Incentive Plans
On October 16, 2015, the sole shareholder of LivaNova approved the adoption of the LivaNova 2015 Incentive Award Plan (the “2015 Plan”). The Plan became effective as of October 19, 2015. Incentive awards may be granted under the 2015 Plan in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, other stock- and cash-based awards and dividend equivalents. As of March 31, 2016, there were approximately 7,186,940 shares available for future grants under the 2015 Plan.

29


Stock-Based Compensation
 Amounts of stock-based compensation recognized in the consolidated statement of income (loss), by expense category are as follows (in thousands):
 
 
Three Months Ended March 31, 2016
 
Thirteen Weeks Ended April 24, 2015
Cost of goods sold
 
$
357

 
$
150

Selling, general and administrative
 
5,190

 
1,680

Research and development
 
298

 
664

Merger-related expense
 
271

 
—

Total stock-based compensation expense
 
$
6,116

 
$
2,493

Income tax benefit, related to awards, recognized in the consolidated statements of income
 
614

 
937

Total expense, net of income tax benefit
 
$
5,502

 
$
1,556

Amounts of stock-based compensation expense recognized in the consolidated statement of income (loss) by type of arrangement are as follows (in thousands):
 
 
Three Months Ended March 31, 2016
 
Thirteen Weeks Ended April 24, 2015
Service-based stock option awards and SAR's
 
$
2,575

 
$
997

Service-based restricted and restricted stock unit awards
 
3,511

 
1,464

Performance-based restricted stock and restricted stock unit awards
 
30

 
33

Total stock-based compensation expense
 
$
6,116

 
$
2,493

Note 19.  Employee Retirement Benefit Plans
We sponsor various retirement plans, including defined benefit pension plans covering U.S. employee and non-U.S. employees, an employee retirement savings plan and a non-qualified deferred compensation plan covering U.S. employees.
As a result of the Mergers, we assumed several Sorin defined benefit pension plans which include plans in the U.S., Italy, Germany, Japan and France. In the U.S., we assumed a frozen cash balance retirement plan that is a contributory, defined benefit plan designed to provide the benefit in terms of a stated account balance dependent on the employer’s promised interest-crediting rate. In Italy and France, we assumed a severance pay defined benefit plan that obligates the employer to pay severance pay in case of resignation, dismissal or retirement. In other jurisdictions we assumed non-contributory, defined benefit plans designated to provide a guaranteed minimum retirement benefits to eligible employees. Prior to the Mergers, we did not sponsor any defined benefit pension plans. We carried forward Cyberonics’ defined contribution plans at the Mergers, which consisted of the Cyberonics, Inc. Employee Retirement Savings Plan, that qualifies under Section 401(k) of the IRC, covering U.S. employees, the Cyberonics, Inc. Non-Qualified Deferred Compensation Plan (the “Deferred Compensation”) covering certain U.S. middle and senior management, and the Belgium Defined Contribution Pension Plan for Cyberonics’ Belgium employees.

30


Defined Benefit Plan Net Periodic Benefit Cost
The net periodic benefit cost of the defined benefit pension plans include the following components for the three months ended March 31, 2016 (in thousands):

 
U.S. Pension Benefits
 
Non-U.S. Pension Benefits
Service cost
 
$
—

 
$
191

Interest cost
 
91

 
141

Expected return on plan assets
 
(70
)
 
(5
)
Settlements
 
—

 
—

Amortization of prior service cost (credit)
 
—

 
—

Amortization of net actuarial loss
 
214

 
(6
)
Net periodic benefit cost
 
$
235

 
$
321

U.S. Pension Plan Assets - at Fair Value Measured on a Recurring Basis
Our U.S. defined benefit plan assets are measured on a recurring basis at fair value. Refer to “Note 13. Fair Value Measurements” for a discussion of fair value measurement input classified as Levels 1, 2, and 3. Plan assets (in thousands):
 
 
Fair Value as of March 31, 2016
 
Fair Value Measurement Using Inputs Considered as:

 
 
 
Level 1
 
Level 2
 
Level 3
Equity mutual funds
 
$
1,755

 
$
—

 
$
1,755

 
$
—

Fixed income mutual funds
 
4,137

 
—

 
4,137

 
—

Money market funds
 
73

 
73

 
—

 
—

 
 
$
5,965

 
$
73

 
$
5,892

 
$
—

Defined Contribution Plans
We incurred expenses for our defined contribution plans of $2.3 million for the three months ended March 31, 2016, and $0.4 million for the thirteen weeks ended April 24, 2015.
Note 20.  Income Taxes
Our effective tax rates were 3.2% benefit for the three months ended March 31, 2016 and a 37.7% expense for the historic Cyberonics activity for the thirteen weeks ended April 24, 2015. The tax rate benefit for the three months ended March 31, 2016 was primarily due to the geographic mix of earnings before income tax in the jurisdictions in which we operate and is lower than the U.K. statutory rate of 20% due to $32 million of losses related to certain legal entities for which no tax benefit was recorded due to valuation allowances on such losses as the losses were considered ‘more-likely-than-not’ to not be utilized. In addition, there were permanent differences related to transactions that are reported for U.S. GAAP purposes but are not reported for income tax purposes in accordance with the local tax laws in the respective jurisdictions. Lastly, there were discrete items, which are items of an unusual or infrequent nature, related to tax credits or expense items that were recorded in the quarter when incurred rather than over the balance of the fiscal year. The effective tax rate for the thirteen weeks ended April 24, 2015 was 37.7%, and was primarily comprised of the U.S. federal income tax rate of 35%, plus state and foreign income taxes and permanent differences.
In April 2016, the Guardia di Finanza, the Italian law enforcement agency under the authority of the Minister of Economy and Finance, commenced an audit of Sorin Group Italia Srl for tax years 2015 and 2014.

31


In April 2016, the U.S. Internal Revenue Service (“IRS”) and U.S. Treasury Department issued new rules that materially change the manner in which the determination is made as to whether the U.S. anti-inversion rules under Section 7874 will apply. The new rules have the effect of linking with the Mergers certain future acquisitions of U.S. businesses made in exchange for LivaNova equity, and such linkage may impact LivaNova’s ability to engage in particular acquisition strategies. For example, the new temporary regulations would impact certain acquisitions of U.S. companies in an exchange for stock in LivaNova during the 36 month period beginning October 19, 2015 by excluding from the Section 7874 calculations the portion of shares of LivaNova that are allocable to the legacy Cyberonics shareholders. This new rule would generally have the effect of increasing the otherwise applicable Section 7874 fraction with respect to future acquisitions of a U.S. business, thereby increasing the risk that such acquisition could cause LivaNova to be treated as a U.S. corporation for U.S. federal income tax purposes.
New rules also provide that certain intercompany debt instruments issued on or after April 4, 2016 will be treated as equity for U.S. federal income tax purposes, therefore limiting U.S. tax benefits and resulting in possible U.S. withholding taxes. Moreover, while these new rules are not retroactive, they could impact LivaNova’s ability to engage in future restructurings if such transactions cause an existing debt instrument to be treated as reissued.
For further information relating to the impact of Section 7874 on LivaNova, refer to the section entitled “The IRS may not agree with the conclusion that LivaNova should be treated as a foreign corporation for U.S. federal tax purposes, and LivaNova may be required to pay substantial U.S. federal income taxes” and the subsequent related risk factors included in “Part I, Item 1A. Risk Factors” in the 2015 Form 10-KT.



32


Note 21.  Income Per Share
The following table sets forth the computation of basic and diluted net income per share of common/ordinary stock, (in thousands except per share data):
 
 
Three Months Ended
 
Thirteen Weeks Ended

 
March 31, 2016
 
April 24, 2015
Numerator:
 
 
 
 
Net income (loss)
 
$
(40,378
)
 
$
10,514

 
 
 
 
 
Denominator:
 
 
 
 
Basic weighted average shares outstanding
 
48,918

 
26,024

Add effects of stock options (1)
 
—

 
245

Diluted weighted average shares outstanding
 
48,918

 
26,269

Basic income (loss) per share
 
$
(0.83
)
 
$
0.40

Diluted income (loss) per share
 
$
(0.83
)
 
$
0.40

(1)
Excluded from the computation of diluted earnings per share for the three months ended March 31, 2016 were outstanding options and stock appreciation rights (“SAR’s”) to purchase 156,591 ordinary shares of LivaNova because to include them would be anti-dilutive due to the net loss during the period. Excluded from the computation of diluted earnings per share for the thirteen weeks ended April 24, 2015 were outstanding options to purchase 22,960 common shares of Cyberonics (traded previous to the Mergers under trading symbol “CYBX”) because to include them would have been anti-dilutive due to the option exercise price exceeding the average market price of the common stock for the period.
Note 22.  Geographic and Segment Information
Segment Information
We identify operating segments based on the way we manage, evaluate and internally report our business activities for purposes of allocating resources and assessing performance.
Upon completion of the Mergers, in October 2015, we reorganized our reporting structure and aligned our segments and the underlying divisions and businesses. The historical Cyberonics operations are included in the Neuromodulation segment, and the historical Sorin businesses are included in the Cardiac Surgery and the Cardiac Rhythm Management segments. This change had no impact on the reported historic Cyberonics results for the thirteen weeks ended April 24, 2015.
The Cardiac Surgery segment generates its revenue from the development, production and sale of cardiovascular surgery products. Cardiac Surgery products include oxygenators, heart-lung machines, autotransfusion, mechanical heart valves and tissue heart valves. The Cardiac Rhythm Management segment generates its revenue from the development, manufacturing and marketing of products for the diagnosis, treatment, and management of heart rhythm disorders and heart failure. Cardiac Rhythm Management products include high-voltage defibrillators CRT-D and low-voltage pacemakers. The Neuromodulation segment generates its revenue from the design, development and marketing of neuromodulation therapy for the treatment of drug-resistant epilepsy and treatment resistant depression. Neuromodulation product include the VNS Therapy System, which consists of an implantable pulse generator, a lead that connects the generator to the vagus nerve, surgical equipment to assist with the implant procedure, equipment to enable the treating physician to set the pulse generator stimulation parameters for the patient, instruction manuals and magnets to suspend or induce stimulation manually.
Corporate expenses include shared services for finance, legal, human resources and information technology. Corporate business development (“New Ventures”) is focused on new growth platforms and identification of other opportunities for expansion. In the tables below, these organizations are reported together in “Other.”
Net sales of our reportable segments include end-customer revenues from the sale of products they each develop and manufacture or distribute. We define segment income as operating income before merger and integration, restructuring, amortization and litigation expenses.

33


Net sales and operating income (loss) by reportable segment are as follows (in thousands):
Net Sales:
 
Three Months Ended March 31, 2016
 
Thirteen Weeks Ended April 24, 2015
Cardiac Surgery
 
$
143,443

 
$
—

Cardiac Rhythm Management
 
61,731

 
—

Neuromodulation
 
81,358

 
74,072

Other
 
437

 
—

Total Net Sales
 
$
286,969

 
$
74,072

Income (Loss) from Operations:
 
Three Months Ended March 31, 2016
 
Thirteen Weeks Ended April 24, 2015
Cardiac Surgery
 
$
3,119

 
$
—

Cardiac Rhythm Management
 
(9,491
)
 
—

Neuromodulation
 
40,582

 
26,098

Other
 
(18,073
)
 
—

Total Reportable Segments’ Income (Loss) from Operations
 
$
16,137

 
$
26,098

Merger and Integration expenses
 
6,761

 
8,692

Restructuring expenses
 
28,592

 
—

Amortization of intangibles
 
15,892

 
685

Litigation related expenses
 
997

 
—

Operating Income (Loss)
 
$
(36,105
)
 
$
16,721

The following table presents our assets by reportable segment (in thousands):
 
 
Three Months Ended March 31, 2016
 
December 31, 2015
Cardiac Surgery
 
$
1,507,734

 
$
1,472,108

Cardiac Rhythm Management
 
389,360

 
432,758

Neuromodulation
 
599,456

 
539,698

Other
 
121,160

 
114,175

Total Assets
 
$
2,617,710

 
$
2,558,739

The following tables present the depreciation and amortization expense and capital expenditures by reportable segment (in thousands):
Depreciation and Amortization Expense: (1)
 
Three Months Ended March 31, 2016
 
Thirteen Weeks Ended April 24, 2015
Cardiac Surgery
 
$
16,564

 
$
—

Cardiac Rhythm Management
 
5,157

 
—

Neuromodulation
 
1,370

 
1,991

Other
 
477

 
—

Total
 
$
23,568

 
$
1,991

(1)
Amortization of intangibles, as disclosed separately in the consolidated statement of income (loss), is included in the amortization by Segment above.

34


Capital expenditures:
 
Three Months Ended March 31, 2016
 
Thirteen Weeks Ended April 24, 2015
Cardiac Surgery
 
$
5,489

 
$
—

Cardiac Rhythm Management
 
480

 
—

Neuromodulation
 
1,915

 
1,197

Other
 
1,073

 
—

Total
 
$
8,957

 
$
1,197

Geographic Information
We operate under three geographic regions: United States, Europe, and Rest of World. Accordingly, the geographic information for the prior years has been restated to present these regions.
Net sales to external customers by geography are determined based on the country the products are shipped to and are as follows (in thousands):
 
 
Three Months Ended March 31, 2016
 
Thirteen Weeks Ended April 24, 2015
United States
 
$
114,128

 
$
59,374

Europe (1) (2)
 
99,307

 
9,138

Rest of World
 
73,534

 
5,560

Total (3)
 
$
286,969

 
$
74,072

(1)
Net sales to external customers includes $8.8 million in the United Kingdom for the three months ended March 31, 2016. Prior to the Mergers, we were domiciled in the United States.
(2)
Includes those countries in Europe where LivaNova has a direct sales presence.  Countries where sales are made through distributors are included in Rest of World.
(3)
No single customer represented over 10 percent of our consolidated net sales.
Property, plant and equipment, net by geography are as follows (in thousands):
 
 
March 31, 2016
 
December 31, 2015
United States
 
$
58,281

 
$
57,806

Europe (1)
 
154,465

 
148,708

Rest of World
 
41,004

 
38,073

Total
 
$
253,750

 
$
244,587

(1)
Property, plant and equipment, net includes $2.4 million in the United Kingdom at March 31, 2016 and at December 31, 2015.
Note 23. New Accounting Pronouncements
In May 2014, the FASB issued ASC Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). Update No. 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers and will replace most existing revenue recognition guidance when it becomes effective. This new standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. Early application is not permitted, and the standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect this standard will have on our financial statements and related disclosures. In August 2015, the FASB extended the effective date for the revenue recognition guidance to annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period, with early adoption permitted using the original effective d