Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
Form 10-Q
(Mark One)
þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2017
 
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
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11867891&doc=11
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.)
20 Eastbourne Terrace
London, United Kingdom
W2 6LG
(Address of principal executive offices)

(Zip Code)

(44) (0) 20 3325 0660
 
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 þ     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 þ    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
þ

Accelerated filer
¨
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
Emerging growth company
¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act

¨
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ¨     No þ
Class
Outstanding at October 27, 2017
Ordinary Shares - £1.00 par value per share
48,211,559

1



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

 
 
 
 
 
 
 
 
 
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 generator products: Model 102 (Pulse®), Model 102R (Pulse Duo®), Model 103 (Demipulse®), Model 104 (Demipulse Duo®), Model 105 (AspireHC®), Model 106 (AspireSR®) and Model 1000 (SenTiva™).
Trademarks for our oxygenator product systems: Inspire™, Heartlink™ and Connect™.
Trademarks for our line of surgical tissue and mechanical valve replacements and repair products: Mitroflow™, Crown PRT™, Solo Smart™, Perceval™, Top Hat™, Reduced Series Aortic Valves™, Carbomedics Carbo-Seal™, Carbo-Seal Valsalva™, Carbomedics Standard™, Orbis™ and Optiform™, and Mitral valve repair products: Memo 3D™, Memo 3D ReChord™, AnnuloFlo™ and AnnuloFlex™.
Trademarks for our implantable cardiac pacemakers and associated services: REPLY 200™, ESPRIT™, KORA 100™, KORA 250™, SafeR™, the REPLY CRT-P™, the remedé® System.
Trademarks for our Implantable Cardioverter Defibrillators and associated technologies: the INTENSIA™, PLATINIUM™, and PARADYM® product families.
Trademarks for our cardiac resynchronization therapy devices, technologies services: SonR®, SonRtip™, SonR CRT™, the INTENSIA™, PARADYM RF™, PARADYM 2™ and PLATINIUM™ product families and the Respond CRT™ clinical trial.
Trademarks for heart failure treatment product: Equilia®.
Trademarks for our bradycardia leads: BEFLEX™ (active fixation) and XFINE™ (passive fixation).
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 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



NOTE ABOUT FORWARD LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q, other than purely historical information, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements include, but are not limited to, LivaNova’s plans, objectives, strategies, financial performance and outlook, trends, the amount and timing of future cash distributions, prospects or future events and involve known and unknown risks that are difficult to predict. As a result, our actual financial results, performance, achievements or prospects may differ materially from those expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as “may,” “could,” “seek,” “guidance,” “predict,” “potential,” “likely,” “believe,” “will,” “should,” “expect,” “anticipate,” “estimate,” “plan,” “intend,” “forecast,” “foresee” or variations of these terms and similar expressions, or the negative of these terms or similar expressions. Such forward-looking statements are necessarily based on estimates and assumptions that, while considered reasonable by LivaNova and its management based on their knowledge and understanding of the business and industry, are inherently uncertain. These statements are not guarantees of future performance, and stockholders should not place undue reliance on forward-looking statements. There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q, and include but are not limited to the risks and uncertainties summarized below:
Risks related to our business:
changes in our common stock price;
changes in our profitability;
regulatory activities and announcements, including the failure to obtain regulatory approvals for our new products;
effectiveness of our internal controls over financial reporting;
fluctuations in future quarterly operating results;
failure to comply with, or changes in, laws, regulations or administrative practices affecting government regulation of our products, including, but not limited to, U.S. Food and Drug Administration (“FDA”) laws and regulations;
failure to establish, expand or maintain market acceptance of our products for the treatment of our approved indications;
any legislative or administrative reform to the healthcare system, including the U.S. Medicare or Medicaid systems or international reimbursement systems, that significantly reduces reimbursement for our products or procedures or denies coverage for such products or procedures or enhances coverage for competitive products or procedures, as well as adverse decisions by administrators of such systems on coverage or reimbursement issues relating to our products;
failure to maintain the current regulatory approvals for our products’ approved indications;
failure to obtain or maintain coverage and reimbursement for our products’ approved indications;
unfavorable results from clinical studies;
variations in sales and operating expenses relative to estimates;
our dependence on certain suppliers and manufacturers to provide certain materials, components and contract services necessary for the production of our products;
product liability, intellectual property, shareholder-related, environmental-related, income tax and other litigation, disputes, losses and costs;
protection, expiration and validity of our intellectual property;
changes in technology, including the development of superior or alternative technology or devices by competitors;
failure to comply with applicable U.S. domestic laws and regulations, including federal and state privacy and security laws and regulations;
failure to comply with non-U.S. law and regulations;
non-U.S. operational and economic risks and concerns;
failure to attract or retain key personnel;

3



failure of new acquisitions to further our strategic objectives or strengthen our existing businesses;
losses or costs from pending or future lawsuits and governmental investigations;
changes in accounting rules that adversely affect the characterization of our consolidated financial position, results of operations or cash flows;
changes in customer spending patterns;
continued volatility in the global market and worldwide economic conditions, including volatility caused by the implementation of Brexit;
changes in tax laws, including changes related to Brexit, or exposure to additional income tax liabilities;
harsh weather or natural disasters that interrupt our business operations or the business operations of our hospital-customers; and
failure of the market to adopt new therapies or to adopt new therapies quickly.
Other factors that could cause our actual results to differ from our projected results are described in (1) “Part II, Item 1A. Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, (2) our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (“2016 Form 10-K”), (3) our reports and registration statements filed and furnished from time to time with the SEC and (4) other announcements we make from time to time.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of future results, including the full fiscal year. You should also refer to our “Annual Consolidated Financial Statements,” “Notes” thereto, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” contained in our 2016 Form 10-K.
Financial Information and Currency of Financial Statements
All of the financial information included in this quarterly report has been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The reporting currency of our consolidated financial statements is U.S. dollars.

________________________________________


4



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LIVANOVA PLC AND SUBSIDIARIES’
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
(In thousands, except per share amounts)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Net sales
 
$
309,664

 
$
295,268

 
$
916,156

 
$
903,284

Cost of sales
 
108,233

 
106,454

 
318,584

 
360,675

Product remediation
 
1,642

 
689

 
2,573

 
2,243

Gross profit
 
199,789

 
188,125

 
594,999

 
540,366

Operating expenses:
 
 
 
 
 
 
 
 
Selling, general and administrative
 
121,177

 
109,233

 
353,943

 
345,744

Research and development
 
31,393

 
32,175

 
104,051

 
94,076

Merger and integration expenses
 
2,013

 
7,576

 
7,743

 
20,537

Restructuring expenses
 
792

 
4,381

 
12,060

 
37,219

Amortization of intangibles
 
12,350

 
11,775

 
35,445

 
33,959

Total operating expenses
 
167,725

 
165,140

 
513,242

 
531,535

Income from operations
 
32,064

 
22,985

 
81,757

 
8,831

Interest income
 
199

 
585

 
724

 
1,119

Interest expense
 
(1,421
)
 
(3,495
)
 
(5,314
)
 
(6,665
)
Gain on acquisition of Caisson Interventional, LLC
 

 

 
39,428

 

Foreign exchange and other gains (losses)
 
491

 
1,216

 
957

 
(2
)
Income before income taxes
 
31,333

 
21,291

 
117,552

 
3,283

Income tax expense
 
1,913

 
9,731

 
10,881

 
16,891

Losses from equity method investments
 
(1,590
)
 
(13,129
)
 
(20,072
)
 
(19,382
)
Net income (loss)
 
$
27,830

 
$
(1,569
)
 
$
86,599

 
$
(32,990
)
 
 
 
 
 
 
 
 
 
Basic income (loss) per share
 
$
0.58

 
$
(0.03
)
 
$
1.80

 
$
(0.67
)
Diluted income (loss) per share
 
$
0.57

 
$
(0.03
)
 
$
1.79

 
$
(0.67
)
Shares used in computing basic income (loss) per share
 
48,181

 
49,075

 
48,130

 
49,016

Shares used in computing diluted income (loss) per share
 
48,534

 
49,075

 
48,339

 
49,016


See accompanying notes to the condensed consolidated financial statements
5



LIVANOVA PLC AND SUBSIDIARIES’
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(In thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Net income (loss)
 
$
27,830

 
$
(1,569
)
 
$
86,599

 
$
(32,990
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Net change in unrealized gain (loss) on derivatives
 
(1,980
)
 
2,042

 
(5,923
)
 
(5,224
)
Tax effect
 
473

 
(673
)
 
1,756

 
1,513

Net of tax
 
(1,507
)
 
1,369

 
(4,167
)
 
(3,711
)
Foreign currency translation adjustment, net of tax
 
39,106

 
(1,805
)
 
111,123

 
32,598

Total other comprehensive income (loss)
 
37,599

 
(436
)
 
106,956

 
28,887

Total comprehensive income (loss)
 
$
65,429

 
$
(2,005
)
 
$
193,555

 
$
(4,103
)


See accompanying notes to the condensed consolidated financial statements
6



LIVANOVA PLC AND SUBSIDIARIES’
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 
 
September 30, 2017
 
December 31, 2016
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
65,158

 
$
39,789

Accounts receivable, net
 
314,041

 
275,730

Inventories
 
214,593

 
183,489

Prepaid and refundable taxes
 
58,969

 
60,615

Assets held for sale
 
14,117

 
4,477

Prepaid expenses and other current assets
 
55,176

 
55,973

Total Current Assets
 
722,054

 
620,073

Property, plant and equipment, net
 
213,769

 
223,842

Goodwill
 
781,070

 
691,712

Intangible assets, net
 
717,646

 
609,197

Investments
 
46,380

 
61,092

Deferred tax assets, net
 
4,356

 
6,017

Other assets
 
117,855

 
130,698

Total Assets
 
$
2,603,130

 
$
2,342,631

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current Liabilities:
 
 
 
 
Current debt obligations
 
$
52,074

 
$
47,650

Accounts payable
 
102,651

 
92,952

Accrued liabilities and other
 
92,212

 
75,567

Taxes payable
 
28,954

 
22,340

Accrued employee compensation and related benefits
 
80,466

 
78,302

Total Current Liabilities
 
356,357

 
316,811

Long-term debt obligations
 
71,853

 
75,215

Deferred income taxes liability
 
152,133

 
172,541

Long-term employee compensation and related benefits
 
33,957

 
31,668

Other long-term liabilities
 
74,404

 
39,487

Total Liabilities
 
688,704

 
635,722

Commitments and contingencies (Note 9)
 

 

Stockholders’ Equity:
 
 
 
 
Ordinary Shares, £1.00 par value: unlimited shares authorized; 48,250,361 shares issued and 48,200,257 shares outstanding at September 30, 2017; 48,156,690 shares issued and 48,028,413 shares outstanding at December 31, 2016
 
74,697

 
74,578

Additional paid-in capital
 
1,731,565

 
1,719,893

Accumulated other comprehensive income (loss)
 
38,469

 
(68,487
)
Retained earnings (deficit)
 
72,024

 
(14,575
)
Treasury stock at cost, 50,104 shares at September 30, 2017 and 128,277 shares at December 31, 2016
 
(2,329
)
 
(4,500
)
Total Stockholders’ Equity
 
1,914,426

 
1,706,909

Total Liabilities and Stockholders’ Equity
 
$
2,603,130

 
$
2,342,631


See accompanying notes to the condensed consolidated financial statements
7



LIVANOVA PLC AND SUBSIDIARIES’
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
Operating Activities:
 
 

 
 

Net income (loss)
 
$
86,599

 
$
(32,990
)
Non-cash items included in net income (loss):
 
 
 
 
Depreciation
 
27,880

 
30,193

Amortization
 
35,445

 
33,959

Stock-based compensation
 
14,261

 
15,575

Deferred income tax benefit
 
(27,270
)
 
(10,224
)
Losses from equity method investments
 
20,072

 
19,382

Gain on acquisition of Caisson Interventional, LLC
 
(39,428
)
 

Impairment of property, plant and equipment
 
4,581

 

Amortization of income taxes payable on inter-company transfers of property
 
23,831

 
17,114

Other
 
3,364

 
8,765

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, net
 
(19,107
)
 
(11,040
)
Inventories
 
(11,006
)
 
20,607

Other current and non-current assets
 
(17,846
)
 
(25,845
)
Restructuring reserve
 
(12,753
)
 
14,961

Accounts payable and accrued current and non-current liabilities
 
(14,958
)
 
(31,109
)
Net cash provided by operating activities
 
73,665

 
49,348

Investing Activities:
 
 

 
 

Purchases of property, plant and equipment and other
 
(24,004
)
 
(28,928
)
Acquisition of Caisson Interventional, LLC, net of cash acquired
 
(14,194
)
 

Proceeds from sale of cost method investment
 
3,192

 

Proceeds from asset sales
 
5,346

 
222

Purchases of cost and equity method investments
 
(5,209
)
 
(8,059
)
Loans to cost and equity method investees
 
(6,928
)
 
(6,595
)
Purchases of short-term investments
 

 
(7,054
)
Maturities of short-term investments
 

 
14,051

Net cash used in investing activities
 
(41,797
)
 
(36,363
)
Financing Activities:
 
 
 
 
Change in short-term borrowing, net
 
(18,054
)
 
(33,831
)
Proceeds from short-term borrowing (maturities greater than 90 days)
 
20,000

 

Repayment of long-term debt obligations
 
(11,615
)
 
(11,354
)
Proceeds from exercise of stock options
 
3,221

 
7,888

Repayment of trade receivable advances
 

 
(23,848
)
Proceeds from long-term debt obligations
 

 
7,994

Share repurchases
 

 
(11,053
)
Other
 
(3,552
)
 
1,208

Net cash used in financing activities
 
(10,000
)
 
(62,996
)
Effect of exchange rate changes on cash and cash equivalents
 
3,501

 
1,030

Net increase (decrease) in cash and cash equivalents
 
25,369

 
(48,981
)
Cash and cash equivalents at beginning of period
 
39,789

 
112,613

Cash and cash equivalents at end of period
 
$
65,158

 
$
63,632


See accompanying notes to the condensed consolidated financial statements
8



LIVANOVA PLC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Unaudited Condensed Consolidated Financial Statements
Basis of Presentation
The accompanying condensed consolidated financial statements of LivaNova as of, and for the three and nine months ended, September 30, 2017 and September 30, 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, 2016 has been derived from audited financial statements contained in our 2016 Form 10-K, but does 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 and nine months ended September 30, 2017, and are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The financial information presented herein should be read in conjunction with the audited consolidated financial statements and notes thereto accompanying our 2016 Form 10-K.
Description of the Mergers
On October 19, 2015 LivaNova became the holding company of the combined businesses of Cyberonics, Inc. (“Cyberonics”) and Sorin S.p.A. (“Sorin”) (the “Mergers”). Based on the structure of the Mergers, management determined that Cyberonics was considered to be the accounting acquirer and predecessor for accounting purposes.
Reclassification of Prior-Year Comparative Period Presentation
To conform the condensed consolidated statement of income (loss) for the three and nine months ended September 30, 2016, to the current period presentation, we reclassified $0.7 million and $2.2 million, respectively, of Litigation Related Expenses to the Product Remediation line, and $1.7 million and $2.5 million, respectively, of Litigation Related Expenses to Selling, General and Administrative Expenses.
To conform the condensed consolidated balance sheet as of December 31, 2016 to the current period presentation, we reclassified $4.5 million of Assets Held for Sale, relating to our plan to exit the Costa Rica manufacturing operation, to a separate line item in the condensed consolidated balance sheet from Prepaid Expenses and Other Current Assets. We received $4.9 million in proceeds from the sale of our Costa Rica manufacturing operation during the nine months ended September 30, 2017.
To conform the condensed consolidated statement of cash flows for the nine months ended September 30, 2016 to the current period presentation, certain amounts were reclassified within Operating Activities. Commencing with nine months ended September 30, 2017, Loans to Equity and Cost Method Investees of 6.9 million were presented as Investing Activities. To conform the condensed consolidated statement of cash flows for the nine months ended September 30, 2016 to the current period presentation, Loans to Equity and Cost Method Investees of $6.6 million were reclassified from Financing Activities to Investing Activities.
Significant Accounting Policies
Our significant accounting policies are detailed in "Note 2: Basis of Presentation, Use of Accounting Estimates and Significant Accounting Policies" of our 2016 Form 10-K. A further explanation of our Foreign Currency accounting policy is discussed below:
Foreign Currency
Our functional currency is the U.S. dollar, however, a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than the U.S. dollar. We determine the functional currency of our subsidiaries that exist and operate in different economic and currency environments based on the primary economic environment in which the subsidiary operates, that is, the currency of the environment in which an entity primarily generates and expends cash. Our significant foreign subsidiaries are located in Europe and the U.S. The functional currency of our significant European subsidiaries is the Euro and the functional currency of our significant U.S. subsidiaries is the U.S. dollar.


9



Assets and liabilities for subsidiaries whose functional currency is not the U.S. dollar are translated into U.S. dollars based on a combination of both current and historical exchange rates, while their revenues earned and expenses incurred are translated into U.S. dollars at average period exchange rates. Translation adjustments are included as ‘Accumulated other comprehensive income (loss)’ (“AOCI”) in the condensed consolidated balance sheets. Gains and losses arising from transactions denominated in a currency different from an entity’s functional currency are included in ‘Foreign exchange and other (losses) gains’ in our condensed consolidated statements of income (loss).
Note 2. Acquisitions
In support of our strategic growth initiatives, on May 2, 2017, we acquired the remaining 51% equity interests in Caisson Interventional, LLC (“Caisson”) for a purchase price of up to $72.0 million, net of $6.3 million of debt forgiveness, consisting of $18.0 million paid at closing, $14.4 million to be paid after 12 months, and contingent consideration of up to $39.6 million to be paid on a schedule driven primarily by regulatory approvals and a sales-based earnout.
Caisson, a clinical-stage medical device company based in Maple Grove, Minnesota, is focused on the design, development and clinical evaluation of a novel transcatheter mitral valve replacement (“TMVR”) implant device with a fully transvenous delivery system.
The following table presents the acquisition date fair-value of the consideration transferred and the fair value of our interest in Caisson prior to the acquisition (in thousands):
Cash (1)
 
$
15,660

Debt forgiven (2)
 
6,309

Deferred consideration (1)
 
12,994

Contingent consideration (1)
 
29,303

Fair value of consideration transferred
 
64,266

Fair value of our interest prior to the acquisition (2)
 
52,505

Fair value of total consideration
 
$
116,771

(1)
Concurrent with the acquisition, we recognized $5.8 million of post-combination compensation expense. Of this amount, $2.4 million is reflected as a reduction of $18.0 million in cash paid at closing of the acquisition, while $3.4 million increased the deferred consideration and contingent consideration liabilities recognized at the date of the acquisition to a total of $14.1 million and $31.7 million, respectively.
(2)
On the acquisition date, we remeasured the notes receivable from Caisson and our existing investment in Caisson at fair value and recognized a pre-tax non-cash gain of $1.3 million and $38.1 million, respectively, which are included in ‘Gain on acquisition of Caisson Interventional, LLC’ in the condensed consolidated statements of income (loss).
The following table presents the preliminary purchase price allocation at fair value for the Caisson acquisition (in thousands):
Cash and cash equivalents
 
$
1,468

In-process research and development
 
89,000

Goodwill
 
42,417

Other assets
 
918

Current liabilities
 
1,023

Deferred income tax liabilities, net
 
16,009

Net assets acquired
 
$
116,771

Acquired goodwill of $9.6 million is expected to be deductible for tax purposes. Additionally, $3.0 million of the initial cash payment was deposited in escrow for future claims indemnification. Of this amount, $2.0 million is included in ‘Prepaid expenses and other current assets’ and the remaining $1.0 million is included in ‘Other long-term assets’ on the condensed consolidated balance sheet as of September 30, 2017.
We recognized acquisition-related expenses of approximately $1.0 million for legal and valuation expenses during the nine months ended September 30, 2017. These expenses are included within ‘Selling, general and administrative’ expenses in the condensed consolidated statements of income (loss). Additionally, the results of Caisson for the period of May 2, 2017 through September 30, 2017 added no revenue and $16.9 million in expenses in our condensed consolidated statement of income (loss).

10



The contingent consideration arrangements are composed of potential cash payments upon the achievement of certain regulatory milestones and a sales-based earnout associated with sales of products covered by the purchase agreement. The sales-based earnout was valued using projected sales from our internal strategic plans. Both arrangements are Level 3 fair value measurements and include the following significant unobservable inputs (in thousands):
Caisson Acquisition
 
Fair value at May 2, 2017
 
Valuation Technique
 
Unobservable Input
 
Ranges
Regulatory milestone-based payments
 
$
14,883

 
Discounted cash flow
 
Discount rate
 
2.6% - 3.4%
 
 
 
 
 
 
Probability of payment
 
90-95%
 
 
 
 
 
 
Projected payment years
 
2018-2023
 
 
 
 
 
 
 
 
 
Sales-based earnout
 
16,805

 
Monte Carlo simulation
 
Discount rate
 
11.5-12.7%
 
 
 
 
 
 
Sales volatility
 
36.9%
 
 
 
 
 
 
Projected years of sales
 
2019-2033
 
 
$
31,688

 
 
 
 
 
 
The following table provides a reconciliation of the beginning and ending balance of the contingent consideration liability, which consisted of arrangements that arose from the Caisson acquisition and other previous acquisitions that also included contingent consideration (in thousands):
Balance at December 31, 2016
 
$
3,890

Purchase price - Caisson contingent consideration
 
31,688

Payments
 
(1,841
)
Changes in fair value
 
231

Effect of changes in foreign currency exchange rates
 
249

Balance at September 30, 2017 (1)
 
$
34,217

(1)
The contingent consideration liability represents contingent payments related to three acquisitions: the first and second acquisitions, in September 2015, were Cellplex PTY Ltd. in Australia and 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. The third acquisition, Caisson, occurred in May 2017 and is discussed above. Refer to “Note 6. Fair Value Measurements.”
Note 3. Restructuring
Our 2015 and 2016 Reorganization Plans (the “Plans”) were initiated October 2015 and March 2016, respectively, in conjunction with the completion of the Mergers. We initiated these plans 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 our operating results in the condensed consolidated statements of income (loss). We estimate that the Plans will result in a net reduction of 326 personnel of which 292 have occurred as of September 30, 2017.
In March 2017, we committed to a plan to sell our Suzhou Industrial Park facility in Shanghai, China. As a result of this exit plan we recorded an impairment of the building and equipment of $4.6 million and accrued $0.5 million of additional costs, primarily related to employee severance, during the nine months ended September 30, 2017. In addition, the remaining carrying value of the land, building and equipment was reclassified to ‘Assets held for sale’ in March 2017, with a balance of $14.1 million as of September 30, 2017, on the condensed consolidated balance sheet.

11



The following table presents restructuring expense accrual detail (in thousands):
 
 
Employee Severance and Other Termination Costs
 
Other
 
Total
Balance at December 31, 2016
 
$
21,092

 
$
3,056

 
$
24,148

Charges
 
7,126

 
4,934

 
12,060

Cash payments and adjustments
 
(23,804
)
 
(5,480
)
 
(29,284
)
Balance at September 30, 2017
 
$
4,414

 
$
2,510

 
$
6,924

The following table presents restructuring expense by reportable segment (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Cardiac Surgery
 
$
441

 
$
916

 
$
6,944

 
$
5,878

Cardiac Rhythm Management
 
(391
)
 
571

 
(1,750
)
 
16,592

Neuromodulation
 
14

 
2,882

 
513

 
7,017

Other
 
728

 
12

 
6,353

 
7,732

Total
 
$
792

 
$
4,381

 
$
12,060

 
$
37,219

Note 4. Product Remediation Liability
At December 31, 2016, we recognized a liability for a product remediation plan related to our 3T Heater-Cooler device (“3T device”). The remediation plan we developed consists primarily of a modification of the 3T device design to include internal sealing and the addition of a vacuum system to new and existing devices. These changes are intended to address regulatory actions and to reduce further the risk of possible dispersion of aerosols from 3T devices in the operating room. The deployment of this solution for commercially distributed devices has been dependent upon final validation and verification of the design changes and approval or clearance by regulatory authorities worldwide, including FDA clearance in the U.S. In April 2017, we obtained CE Mark in Europe for the design change of the 3T device and in May 2017 we completed our first vacuum and sealing upgrade on a customer-owned device. We are currently implementing the vacuum and sealing upgrade program in as many countries as possible throughout the remainder of 2017. As part of the remediation plan, we also intend to perform a no-charge deep disinfection service for 3T device users who have reported confirmed M. chimaera mycobacterium contamination. Although the deep disinfection service is not yet available in the U.S., it is currently offered in many countries around the world and will be expanded to additional geographies as we receive the required regulatory approvals. Finally, we are continuing to offer the loaner program for 3T devices, initiated in the fourth quarter of 2016, to provide existing 3T device users with a new loaner 3T device at no charge pending regulatory approval and implementation of the vacuum system addition and deep disinfection service worldwide. This loaner program began in the U.S. and is being made available progressively on a global basis, prioritizing and allocating devices to 3T device users based on pre-established criteria.
Changes in the carrying amount of the product remediation liability are as follows (in thousands):
Balance at December 31, 2016
 
$
33,487

Adjustments
 
(15
)
Remediation activity
 
(5,672
)
Effect of changes in foreign currency exchange rates
 
2,446

Balance at September 30, 2017 (1)
 
$
30,246

(1)
At September 30, 2017, the product remediation liability balance is held within ‘Accrued liabilities and other’ and ‘Other long-term liabilities’ on the condensed consolidated balance sheet. Refer to “Note 15. Supplemental Financial Information.”
It is reasonably possible that our estimate of the remediation liability could materially change in future periods due to the various significant assumptions involved, such as customer behavior, market reaction and the timing of approvals or clearance by regulatory authorities worldwide. We recognize changes in estimates on a prospective basis. At this stage, no liability has

12



been recognized with respect to any lawsuits involving us related to the 3T device, while related legal costs are expensed as incurred. For further information, please refer to “Note 9. Commitments and Contingencies - 3T Heater-Cooler Devices.”
Note 5. Investments
Cost-Method Investments
Our cost-method investments are included in ‘Investments’ in the condensed consolidated balance sheets and consist of our equity positions in the following privately-held companies (in thousands):
 
 
September 30, 2017
 
December 31, 2016
Respicardia Inc. (1)
 
$
21,129

 
$
17,518

ImThera Medical, Inc. (2)
 
12,000

 
12,000

Rainbow Medical Ltd. (3)
 
4,178

 
3,733

MD Start II
 
1,179

 
526

Other (4)
 
150

 

 
 
$
38,636

 
$
33,777

(1)
Respicardia Inc. (“Respicardia”) is a privately funded U.S. company developing an implantable device designed to restore a more natural breathing pattern during sleep in patients with central sleep apnea ("CSA") by transvenously stimulating the phrenic nerve. We have a loan outstanding to Respicardia with a carrying amount of $1.5 million, as of September 30, 2017, which is included in ‘Prepaid expenses and other current assets’ on the condensed consolidated balance sheet.
(2)
ImThera Medical Inc. (“ImThera”) is a privately funded U.S. company developing a neurostimulation device system for the treatment of obstructive sleep apnea. We have a loan outstanding to ImThera as of September 30, 2017, with a carrying amount of $1.0 million, which is included in ‘Other assets’ on the condensed consolidated balance sheet.
(3)
 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.
(4)
During the nine months ended September 30, 2017, we sold our investment in Istituto Europeo di Oncologia S.R.L, for a gain of $3.2 million. This gain is included in ‘Foreign exchange and other gains (losses)’ in the condensed consolidated statement of income (loss).
Equity Method Investments
Our equity-method investments are included in ‘Investments’ in the condensed consolidated balance sheets and consist of our equity position in the following entities (in thousands, except for percent ownership):
 
 
% Ownership (1)
 
September 30, 2017
 
December 31, 2016
MicroPort Sorin CRM (Shanghai) Co. Ltd. (2)
 
49.0%
 
$
6,948

 
$
4,867

Highlife S.A.S. (3)
 
38.0%
 
779

 
6,009

Caisson Interventional LLC (4)
 

 

 
16,423

Other
 
 
 
17

 
16

Total
 
 
 
$
7,744

 
$
27,315

(1)
Ownership percentages as of September 30, 2017.
(2)
During the three months ended September 30, 2017 we invested an additional $4.5 million in MicroPort Sorin CRM (Shanghai) Co. Ltd.
(3)
Highlife S.A.S is a privately held clinical-stage medical device company located in France and is focused on the development of a unique transcatheter mitral valve replacement system to treat patients with mitral regurgitation. During the three months ended September 30, 2017, we recognized an impairment of our investment in, and notes receivable from, Highlife. See the paragraph below for further details.
(4)
On May 2, 2017, we acquired the 51% remaining equity interests in Caisson Interventional LLC (“Caisson”), and we began consolidating the results of Caisson as of the acquisition date. Refer to “Note 2. Acquisitions” and to “Note 6. Fair Value Measurements” for further information.
Highlife Impairment
We recognized an impairment of our equity-method investment in, and notes receivable from, Highlife S.A.S. (“Highlife”) during the nine months ended September 30, 2017. Certain factors, including a revision in our investment strategy, indicated that the carrying value of our aggregate investment might not be recoverable and that the decrease in value of our aggregate investment was other than temporary. We, therefore, estimated the fair value of our investment and notes receivable using the

13



market approach. The estimated fair value of our aggregate investment was below our carrying value by $13.0 million. This aggregate impairment was included in ‘Losses from equity method investments’ in the condensed consolidated statements of income (loss). The updated carrying value of our notes receivable from Highlife at September 30, 2017 was $0.8 million and is included in ‘Other assets’ on the condensed consolidated balance sheet.
Note 6. Fair Value Measurements
Assets and Liabilities 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:
 
 
September 30, 2017
 
Level 1
 
Level 2
 
Level 3
Liabilities:
 
 
 
 
 
 
 
 
Derivative liabilities - designated as cash flow hedges (foreign currency exchange rate "FX")
 
$
724

 
$

 
$
724

 
$

Derivative liabilities - designated as cash flow hedges (interest rate swaps)
 
1,807

 

 
1,807

 
$

Derivative liabilities - freestanding instruments (FX)
 
1,456

 

 
1,456

 

Contingent consideration
 
34,217

 

 

 
34,217

 
 
$
38,204

 
$

 
$
3,987

 
$
34,217

 
 
Fair Value
as of
 
Fair Value Measurements Using Inputs Considered as:
 
 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Derivative assets - designated as cash flow hedges (FX)
 
$
4,911

 
$

 
$
4,911

 
$

Derivative assets - freestanding instruments (FX)
 
3,358

 

 
3,358

 

 
 
$
8,269

 
$

 
$
8,269

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivative liabilities - designated as cash flow hedges (FX)
 
$
942

 
$

 
$
942

 
$

Derivative liabilities - designated as cash flow hedges (interest rate swaps)
 
1,392

 

 
1,392

 

Contingent consideration
 
3,890

 

 

 
3,890


 
$
6,224

 
$

 
$
2,334

 
$
3,890

Our recurring fair value measurements, using significant unobservable inputs (level 3), relate solely to our contingent consideration liability. Refer to “Note 2. Acquisitions” for a discussion of the changes in the fair value of our contingent consideration liability.

14



Note 7. Financing Arrangements
The outstanding principal amount of long-term debt (in thousands, except interest rates):
 
 
September 30, 2017
 
December 31, 2016
 
Maturity
 
Interest Rate
European Investment Bank (1)
 
$
78,590

 
$
78,987

 
June 2021
 
0.95
%
Mediocredito Italiano (3)
 
7,719

 
7,276

 
December 2023
 
0.50% - 3.07%

Banca del Mezzogiorno (2)
 
6,490

 
6,747

 
December 2019
 
0.50% - 3.15%

Bpifrance (ex-Oséo)
 
1,603

 
1,909

 
October 2019
 
2.58
%
Region Wallonne
 
831

 
798

 
December 2023 and June 2033
 
0.00% - 2.45%

Mediocredito Italiano - mortgages and other
 
742

 
799

 
September 2021 and September 2026
 
0.40% - 0.65%

Total debt
 
95,975

 
96,516

 
 
 
 
Less current portion of long-term debt
 
24,122

 
21,301

 
 
 
 
Total long-term debt
 
$
71,853

 
$
75,215

 
 
 
 
(1)
The European Investment Bank (“EIB”) loan was obtained in July 2014 to support product development projects. The interest rate for the EIB loan is reset by the lender each quarter based on the Euribor. Interest payments are paid quarterly and principal payments are paid semi-annually.
(2)
The Banca del Mezzogiorno loan was obtained in January 2015 to support R&D projects as a part of the Large Strategic Project program of the Italian Ministry of Education.
(3)
We obtained the Mediocredito Italiano Bank loan in July 2016 as part of the Fondo Innovazione Teconologica program implemented by the Italian Ministry of Education.
Revolving Credit
The outstanding principal amount of our short-term unsecured revolving credit agreements and other agreements with various banks was $28.0 million and $26.4 million, at September 30, 2017 and December 31, 2016, respectively, with interest rates ranging from 0.2% to 10.5% and loan terms ranging from one day to 365 days.
European Investment Bank Financing Agreement
On June 29, 2017, we entered into a new finance contract (the “Finance Contract”) with the EIB to support financing of certain R&D projects. The Finance Contract has a borrowing base of €100 million (or approximately $118 million USD equivalent) and can be drawn in up to two tranches, each in a minimum amount of €50 million (or approximately $59 million USD equivalent). Drawdowns must occur by December 30, 2018, and the last repayment date of any tranche will be no earlier than four years and no later than eight years after the disbursement of the relevant tranche. Loans under the Finance Contract are subject to certain covenants and other terms and conditions. No loan drawdowns have occurred as of September 30, 2017.
Note 8. Derivatives and Risk Management
Due to the global nature of our operations, we are exposed to foreign currency exchange rate fluctuations. In addition, 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”) derivative contracts and interest rate swap contracts to reduce the impact of foreign currency rate and interest rate fluctuations on earnings and cash flow. We measure all outstanding derivatives each period end at fair value and report the fair value as either financial assets or liabilities in the condensed consolidated balance sheets. We do not enter into derivative contracts for speculative purposes. At inception of the contract, the derivative is designated as either a freestanding derivative or a hedge. Derivatives that are not designated as hedging instruments are referred to as freestanding derivatives with changes in fair value included in earnings.
If the derivative qualifies for hedge accounting, depending on the nature of the hedge and hedge effectiveness, changes in the fair value of the derivative will either be recognized immediately in earnings or recorded in other AOCI until the hedged item is recognized in earnings upon settlement/termination. FX derivative gains and losses in AOCI are reclassified to the consolidated statement of income (loss) as shown in the tables below and interest rate swap gains and losses in AOCI are reclassified to interest expense in the consolidated statement of income (loss). We evaluate hedge effectiveness at inception and on an ongoing basis. If a derivative is no longer expected to be highly effective, hedge accounting is discontinued. Hedge ineffectiveness, if

15



any, is recorded in earnings. Cash flows from derivative contracts are reported as operating activities in the condensed consolidated statements of cash flows.
Freestanding Derivative FX Contracts
The gross notional amount of freestanding derivatives outstanding at September 30, 2017 and December 31, 2016 was $239.0 million and $489.1 million, respectively. These derivative contracts are designed to offset the FX effects in earnings of various intercompany loans, our EIB loan, and trade receivables. We recorded net losses for these freestanding derivatives of $0.7 million and $7.9 million for the three and nine months ended September 30, 2017, respectively, and net gains (losses) of $(1.8) million and $0.4 million for the three and nine months ended September 30, 2016, respectively. These gains and losses are included in ‘Foreign exchange and other gains (losses)’ in the condensed consolidated statements of income (loss).
Cash Flow Hedges
Notional amounts of open derivative contracts designated as cash flow hedges (in thousands):
Description of Contract
 
September 30, 2017
 
December 31, 2016
FX derivative contracts to be exchanged for British Pounds
 
$
16,928

 
$
6,663

FX derivative contracts to be exchanged for Japanese Yen
 
44,618

 
57,840

FX derivative contracts to be exchanged for Canadian Dollars
 
13,341

 

Interest rate swap contracts
 
62,917

 
63,246

 
 
$
137,804

 
$
127,749

After-tax net loss associated with derivatives designated as cash flow hedges recorded in the ending balance of AOCI and the amount expected to be reclassified to earnings in the next 12 months (in thousands):
Description of Contract
 
September 30, 2017
 
Net Amount Expected to be Reclassified to Earnings in the Next 12 Months
FX derivative contracts
 
$
(287
)
 
$
(287
)
Interest rate swap contracts
 
(261
)
 
(69
)
 
 
$
(548
)
 
$
(356
)
Pre-tax gains (losses) for derivative contracts designated as cash flow hedges recognized in Other Comprehensive Income (Loss) (“OCI”) and the amount reclassified to earnings from AOCI (in thousands):
 
 
 
 
Three Months Ended September 30,
 
 
 
 
2017
 
2016
Description of Contract
 
Location in Earnings of Reclassified Gain or Loss
 
Losses Recognized in OCI
 
(Losses) Gains Reclassified from AOCI to Earnings
 
(Losses) Gains Recognized in OCI
 
Losses Reclassified from AOCI to Earnings
FX derivative contracts
 
Foreign exchange and other (losses) gains
 
$
(2,537
)
 
$
(1,623
)
 
$
2,535

 
$
2,795

FX derivative contracts
 
SG&A
 

 
269

 

 
(1,876
)
Interest rate swap contracts
 
Interest expense
 

 
797

 
263

 
(163
)
 
 
 
 
$
(2,537
)
 
$
(557
)
 
$
2,798

 
$
756


16



 
 
 
 
Nine Months Ended September 30,
 
 
 
 
2017
 
2016
Description of Contract
 
Location in Earnings of Reclassified Gain or Loss
 
Losses Recognized in OCI
 
(Losses) Gains Reclassified from AOCI to Earnings
 
Losses Recognized in OCI
 
Gains (Losses) Reclassified from AOCI to Earnings
FX derivative contracts
 
Foreign exchange and other (losses) gains
 
$
(10,124
)
 
$
(6,833
)
 
$
(5,932
)
 
$
2,943

FX derivative contracts
 
SG&A
 

 
1,623

 

 
(3,437
)
Interest rate swap contracts
 
Interest expense
 

 
1,009

 
(38
)
 
(252
)
 
 
 
 
$
(10,124
)
 
$
(4,201
)
 
$
(5,970
)
 
$
(746
)
The following tables present the fair value on a gross basis, and the location of, derivative contracts reported in the condensed consolidated balance sheets (in thousands):
September 30, 2017
 
Liability Derivatives
Derivatives Designated as Hedging Instruments
 
Balance Sheet Location
 
Fair Value (1)
Interest rate swap contracts
 
Accrued liabilities
 
$
875

Interest rate swap contracts
 
Other long-term liabilities
 
932

FX derivative contracts
 
Accrued liabilities
 
724

Total derivatives designated as hedging instruments
 

 
2,531

Derivatives Not Designated as Hedging Instruments
 

 

FX derivative contracts
 
Accrued liabilities
 
1,456

Total derivatives not designated as hedging instruments
 

 
1,456

 
 

 
$
3,987

December 31, 2016
 
Asset Derivatives
 
Liability Derivatives
Derivatives Designated as Hedging Instruments
 
Balance Sheet Location
 
Fair Value (1)
 
Balance Sheet Location
 
Fair Value (1)
Interest rate swap contracts
 
Prepaid expenses and other current assets
 
$

 
Accrued liabilities
 
$
942

Interest rate swap contracts
 
Other assets
 

 
Other long-term liabilities
 
1,392

FX derivative contracts
 
Prepaid expenses and other current assets
 
4,911

 
Accrued liabilities
 

Total derivatives designated as hedging instruments
 
 
 
4,911

 
 
 
2,334

Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
FX derivative contracts
 
Prepaid expenses and other current assets
 
3,358

 
Accrued liabilities
 

Total derivatives not designated as hedging instruments
 
 
 
3,358

 
 
 

 
 
 
 
$
8,269

 
 
 
$
2,334

(1)
For the classification of input used to evaluate the fair value of our derivatives, refer to “Note 6. Fair Value Measurements.”

17



Note 9. Commitments and Contingencies
3T Heater-Cooler Devices
FDA Warning Letter.
On December 29, 2015, the FDA issued LivaNova a Warning Letter (the “Warning Letter”) alleging certain violations of FDA regulations applicable to medical device manufacturers at our 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.
The Warning Letter further stated that our 3T devices and other devices we manufactured at our Munich facility are subject to refusal of admission into the U.S. 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 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 device, and manufacturing and shipment of all of our products other than the 3T device 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 devices to existing U.S. users pursuant to a certificate of medical necessity program.
Finally, the Warning Letter stated 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, this restriction applies only to the Munich and Arvada facilities, which do not manufacture or design devices subject to Class III premarket approval.
We continue 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.
CDC and FDA Safety Communications and Company Field Safety Notice Update
On October 13, 2016 the Centers for Disease Control and Prevention (“CDC”) and FDA separately released safety notifications regarding the 3T devices. The CDC’s Morbidity and Mortality Weekly Report (“MMWR”) and Health Advisory Notice (“HAN”) reported that tests conducted by CDC and its affiliates indicate that there appears to be genetic similarity between both patient and 3T device strains of the non-tuberculous mycobacterium (“NTM”) bacteria M. chimaera isolated in hospitals in Iowa and Pennsylvania. Citing the geographic separation between the two hospitals referenced in the investigation, the report asserts that 3T devices manufactured prior to August 18, 2014 could have been contaminated during the manufacturing process. The CDC’s HAN and FDA’s Safety Communication, issued contemporaneously with the MMWR report, each assess certain risks associated with 3T devices and provide guidance for providers and patients. The CDC notification states that the decision to use the 3T device during a surgical operation is to be taken by the surgeon based on a risk approach and on patient need. Both the CDC’s and FDA’s communications confirm that 3T devices are critical medical devices and enable doctors to perform life-saving cardiac surgery procedures.
Also on October 13, 2016, we issued a Field Safety Notice Update for U.S. users of 3T devices to proactively and voluntarily contact facilities to aid in implementation of the CDC and FDA recommendations. In the fourth quarter of 2016, we initiated a program to provide existing 3T device users with a new loaner 3T device at no charge pending regulatory approval and implementation of additional risk mitigation strategies worldwide. This loaner program began in the U.S. and is being made available progressively on a global basis, prioritizing and allocating devices to 3T device users based on pre-established criteria. We anticipate that this program will continue until we are able to address customer needs through a broader solution that includes implementation of one or more of the risk mitigation strategies currently under review with regulatory agencies.
On December 31, 2016, we recognized a liability for our product remediation plan related to our 3T device. We concluded that it was probable that a liability had been incurred upon management’s approval of the plan and the commitments made by management to various regulatory authorities globally in November and December 2016, and furthermore, the cost associated with the plan was reasonably estimable. At September 30, 2017, the product remediation liability was $30.2 million. Refer to “Note 4. Product Remediation Liability” for additional information.

18



Litigation
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 our 3T devices. The plaintiffs named in the complaint 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 nontuberculous mycobacterium (“NTM”), from our 3T devices; and (ii) we knew or should have known that design or manufacturing defects in 3T devices can lead to NTM bacterial colonization, regardless of the cleaning and disinfection procedures used (and recommended by us). The class of plaintiffs in the complaint consists 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 currently are asymptomatic for NTM infection.
On October 23, 2017, the U.S. District Court for the Middle District of Pennsylvania issued an order certifying a class with respect to the named plaintiffs. The class action, which is currently against Sorin Group Deutschland GmbH and Sorin Group USA, Inc. seeks: (i) declaratory relief finding the 3T devices are defective and unsafe for intended uses; (ii) medical monitoring; (iii) general damages; and (iv) attorneys’ fees. Other lawsuits related to surgeries in which a 3T device allegedly was used have been filed elsewhere in the U.S., as well as in Canada, and Europe, against various LivaNova entities.
We are defending each of these claims vigorously. Given the relatively early stage of these matters, we cannot give any assurances that additional legal proceedings making the same or similar allegations will not be filed against us or one of our subsidiaries, nor that the resolution of these complaints or other related litigation will not have a material adverse effect on our business, results of operations, financial condition or liquidity. We have not recognized an expense related to damages in connection with these matters because any potential loss is not currently probable or reasonably estimable. In addition we cannot reasonably estimate a range of potential loss, if any, that may result from these matters.
Other Litigation
SNIA Litigation
Sorin was created as a result of a spin-off (the “Sorin spin-off”) from SNIA S.p.A. (“SNIA”). The Sorin spin-off, which involved 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, up to the actual value of the shareholders’ equity conveyed or received, for certain indebtedness or liabilities of the pre-spin-off company. We estimate that the value of the shareholders’ equity received by Sorin was approximately €573 million (approximately $676 million).
We believe and have argued before the relevant fora that Sorin is not jointly liable with SNIA for its alleged SNIA debts and liabilities. Specifically, 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. 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 (approximately $4.0 billion) for remediation costs relating to the environmental damage at the Caffaro Chemical Sites.
In September 2011, the Bankruptcy Court of Udine, and in July 2014, the Bankruptcy Court of Milan each held (in proceedings to which we are not parties) that the Italian Ministry of the Environment and other Italian government agencies (the “Public Administrations”) were not creditors of either SNIA Subsidiaries or SNIA in connection with their claims in the context of their Italian insolvency proceedings. In January 2016, the Court of Udine rejected the appeal brought by the Italian Public Administrations. The Public Administrations have appealed that second loss in pending proceedings before the Italian Supreme Court. The appeal by the Public Administrations before the Court of Milan remains pending.
In January 2012, SNIA filed a civil action against Sorin in the Civil Court of Milan asserting joint liability of a parent and a spun-off company. SNIA’s civil action against Sorin also named the Public Administrations, the Italian Ministry of the Environment and other Italian government agencies, as defendants, in order to have them bound to the final ruling.
On April 1, 2016, the Court of Milan dismissed all legal actions of SNIA and of the Public Administrations against Sorin, further requiring the Public Administrations to pay Sorin €300,000 (or approximately $353,910), as legal fees (of which SNIA is jointly liable for €50,000) (the “2016 Decision”).
On June 21, 2016, the Public Administrations appealed the 2016 Decision to the Court of Appeal of Milan. The first hearing of the appeal proceedings was held in December 2016, and the final hearing is now scheduled for November 22, 2017. After the hearing, the parties will file their final briefs, and the Court is expected to render its decision in mid-2018. SNIA did not file an appeal.

19



We (as successor to Sorin in the litigation) continue to believe that the risk of material loss relating to the SNIA litigation is not probable as a result of the reasoning contained in, and legal conclusions reached in, the 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 alleged damages, related remediation costs, allocation and apportionment of any such responsibility, which party is responsible, and various time periods involving different parties, all remain issues in dispute and that no final decision on a remediation plan has been approved. As a result, we have not made any accrual in connection with the SNIA litigation.
Pursuant to European Union (“EU”), United Kingdom (“UK”) and Italian cross-border merger regulations applicable to the Mergers, legacy Sorin liabilities, including any potential liabilities arising from the claims against Sorin relating to the SNIA litigation, are assumed by us as successor to Sorin. Although we believe the claims against Sorin in connection with the SNIA litigation are without merit and continue to contest them vigorously, there can be no assurance as to the outcome. A finding during any appeal or novel proceedings that we are liable for environmental damage at the Caffaro Chemical Sites or its alleged cause(s) could have a material adverse effect on our results of operations, financial condition and/or liquidity.
Environmental Remediation Order
On July 28, 2015, Sorin and other direct and indirect shareholders of SNIA received an administrative order (the “Remediation Order”) from the Italian Ministry of the Environment (the “Ministry”), directing them to promptly commence environmental remediation efforts at the Caffaro Chemical Sites (as described above). We (as successor to Sorin) believe that we should not be liable for damages relating to the Caffaro Chemical Operations pursuant to the Italian statute on which the Remediation Order relies because, inter alia, the statute does not apply to activities occurring prior to 2006, the date on which the statute was enacted. (Sorin was spun off from SNIA in 2004.) Additionally, we believe that Sorin should not be subject to the Remediation Order because Italian environmental regulations only permit such an order to be imposed on an “operator” of a remediation site, and Sorin never operated any activity at any of the industrial sites concerned and, further, was never identified in any legal proceeding as an operator at any of the Caffaro Chemical Sites and could not and in fact did not cause any environmental damage at any of the Caffaro Chemical Sites.
Accordingly, we (as successor to Sorin) alongside other parties, challenged the Remediation Order before the Administrative Court of Lazio in Rome (the “TAR”).
On March 21, 2016 the TAR annulled the Remediation Order based on the fact that (i) the Remediation Order lacks any detailed analysis of the causal link between the alleged damage and our activities, a pre-condition to imposition of the measures proposed in the 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 or evidence of a situation of contamination exists, and (iii) there was no proper legal basis for the Remediation Order, and in any event, the Ministry failed to verify the legal elements that could have led to a conclusion of legal responsibility of the recipients of the Remediation Order.
The TAR decisions described above have been appealed by the Ministry before the Council of State. No information on the timing of the first hearing of this appeal is presently available. We have not recognized an expense in connection with this matter because any potential loss is not currently probable or reasonably estimable. In addition, we cannot reasonably estimate a range of potential loss, if any, that may result from this matter.
Opposition to Merger Proceedings
On July 28, 2015, the Public Administrations filed an opposition proceeding to the proposed merger between Sorin and Cyberonics (the “Merger”), before the Commercial Courts of Milan, asking the Court to prohibit the execution of the Merger. In its initial decision on August 20, 2015, the Court authorized the Merger and the Public Administrations did not appeal this decision. The proceeding then continued as a civil case, with the Public Administration seeking damages against us. The Commercial Court of Milan delivered a decision in October 2016, fully rejecting the Public Administration’s request and awarding us €200,000 (approximately $228,000) in damages for frivolous litigation, plus €200,000 (approximately $228,000) in legal fees. The Public Administrations has appealed this decision to the Court of Appeal of Milan. The final hearing is scheduled on January 17, 2018. The Court of Appeal is likely to make a decision in mid-June 2018. We have not recognized an expense in connection with this matter because any potential loss is not currently probable or reasonably estimable. In addition, we cannot reasonably estimate a range of potential loss, if any, that may result from this matter.

20



Tax Litigation
In a tax audit report received in October 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 (approximately $121.0 million), related to tax years 2002 through 2006) 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. We 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 denied at the first jurisdictional level. We appealed these decisions. The appeal submitted against the first-level decision for 2004 was successful. The Internal Revenue Office appealed this second-level decision to the Italian Supreme Court (Corte di Cassazione) in February 2017. The Italian Supreme Court’s decision is pending.
The appeals submitted against the first-level decisions for 2005 and 2006 were rejected. We appealed these adverse decisions to the Italian Supreme Court, where the matters are still 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. In these matters the Internal Revenue Office claims 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 subsequently utilized in 2007 and 2008. We challenged both notices of assessment. The Provincial Tax Court of Milan has stayed its decision for years 2007 and 2008 pending resolution of the litigation regarding years 2004, 2005, and 2006. The total amount of losses in dispute is €62.6 million (approximately $73.8 million). We have continuously reassessed our potential exposure in these matters, taking into account the recent, and generally adverse, trend to Italian taxpayers in this type of litigation. Although we believe that our defensive arguments are strong, noting the adverse trend in some of the court decisions, we have recognized a reserve for an uncertain tax position of €17.0 million (approximately $20.0 million).
Other Matters
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 net income, financial position or liquidity.

21



Note 10. Stockholders’ Equity
Comprehensive income
The table below presents the change in each component of AOCI, net of tax, and the reclassifications out of AOCI into net earnings for the nine months ended September 30, 2017 and September 30, 2016 (in thousands):
 
 
Change in Unrealized Gain (Loss) on Derivatives
 
Foreign Currency Translation Adjustments Gain (Loss) (1)
 
Total
As of December 31, 2016
 
$
3,619

 
$
(72,106
)
 
$
(68,487
)
Other comprehensive (loss) income before reclassifications, before tax
 
(10,124
)
 
111,123

 
100,999

Tax benefit
 
2,784

 

 
2,784

Other comprehensive (loss) income before reclassifications, net of tax
 
(7,340
)
 
111,123

 
103,783

Reclassification of loss from accumulated other comprehensive income, before tax
 
4,201

 

 
4,201

Tax benefit
 
(1,028
)
 

 
(1,028
)
Reclassification of loss from accumulated other comprehensive income, after tax
 
3,173

 

 
3,173

Net current-period other comprehensive (loss) income, net of tax
 
(4,167
)
 
111,123

 
106,956

As of September 30, 2017
 
$
(548
)
 
$
39,017

 
$
38,469

 
 
 
 
 
 
 
As of December 31, 2015
 
$
888

 
$
(55,116
)
 
$
(54,228
)
Other comprehensive (loss) income before reclassifications, before tax
 
(5,970
)
 
32,598

 
26,628

Tax benefit
 
1,792

 

 
1,792

Other comprehensive (loss) income before reclassifications, net of tax
 
(4,178
)
 
32,598

 
28,420

Reclassification of loss from accumulated other comprehensive income, before tax
 
746

 

 
746

Tax benefit
 
(279
)
 

 
(279
)
Reclassification of loss from accumulated other comprehensive income, after tax
 
467

 

 
467

Net current-period other comprehensive (loss) income, net of tax
 
(3,711
)
 
32,598

 
28,887

As of September 30, 2016
 
$
(2,823
)
 
$
(22,518
)
 
$
(25,341
)
(1)
Taxes are not provided for foreign currency translation adjustments as translation adjustments are related to earnings that are intended to be reinvested in the countries where earned.
Note 11. Stock-Based Incentive Plans
Stock-based incentive plans compensation expense (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Service-based stock appreciation rights ("SARs")
 
$
2,535

 
$
1,983

 
$
6,001

 
$
6,567

Service-based restricted stock units ("RSUs")
 
2,225

 
2,517

 
6,718

 
8,419

Market performance-based restricted stock units
 
301

 
14

 
482

 
17

Operating performance-based restricted stock units
 
636

 
254

 
1,060

 
572

Total stock-based compensation expense
 
$
5,697

 
$
4,768

 
$
14,261

 
$
15,575

During the nine months ended September 30, 2017, we executed stock-based compensatory award agreements with contract terms agreed upon by us and the respective individuals, as approved by the Compensation Committee of our Board of

22



Directors. Awards with service conditions vest ratably over four years subject to forfeiture unless service conditions are met. Market performance-based awards vest ratably over four years subject to forfeiture unless certain future prices of our shares on the NASDAQ Stock Market exceed certain threshold prices in the first year following the grant date. And finally, operating performance-based awards vest ratably over four years subject to forfeiture unless certain thresholds of adjusted net sales and adjusted net income are met for fiscal year 2017. Compensation expense related to award agreements executed during 2017 for the three and nine months ended September 30, 2017 were $2.0 million and $3.2 million, respectively.
Stock-based compensation agreements executed during the nine months ended September 30, 2017, representing potential shares and their weighted average grant date fair values by type follows (shares in thousands, fair value in dollars):
 
 
Nine Months Ended September 30, 2017
 
 
Shares
 
Weighted Average Grant Date Fair Value
Service-based SARs
 
639

 
$
17.03

Service-based RSUs
 
108

 
$
57.37

Market performance-based RSUs
 
158

 
$
25.29

Operating performance-based RSUs
 
189

 
$
56.18

Note 12. Income Taxes
During the three and nine months ended September 30, 2017, we recorded consolidated income tax expense of $1.9 million and $10.9 million, respectively, with consolidated effective income tax rates of 6.1% and 9.3%, respectively.
Our consolidated effective income tax rate for the three and nine months ended September 30, 2017 included the impact of various discrete tax items, including a net $4.0 million deferred tax benefit due to the release of valuation allowances on tax losses upon the completion of a reorganization of our legal entities in the U.S. and a $2.1 million tax benefit from the resolution of prior period tax matters. Discrete tax items for the nine months ended September 30, 2017 also included the acquisition of Caisson and the $38.1 million non-taxable gain recognized to re-measure our existing equity investment in Caisson at fair value on the acquisition date, a $3.9 million deferred tax benefit associated with certain temporary differences arising from the Mergers and the recognition of a $3.0 million deferred tax asset related to a reserve for an uncertain tax position recognized in a prior year, in addition to various other discrete items.
During the three and nine months ended September 30, 2016, we recorded consolidated income tax expense of $9.7 million and $16.9 million, respectively, with consolidated effective income tax rates of 45.7% and 514.5%, respectively. The effective tax rate for the nine months ended September 30, 2016 was impacted by the recording of valuation allowances of $23.9 million related to certain tax jurisdictions, including France and the UK, in which we did not record tax benefits generated by their operating losses, as well as the tax expense generated by profitable operations in higher tax jurisdictions, such as the U.S. and Germany, offset by tax savings from our inter-company financing as part of our 2015 tax restructuring.

23



Note 13. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net income (loss) per share, (in thousands, except per share data):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
 
Net income (loss)
 
$
27,830

 
$
(1,569
)
 
$
86,599

 
$
(32,990
)
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
 
48,181

 
49,075

 
48,130

 
49,016

Add effects of share-based compensation instruments (1)
 
353

 

 
209

 

Diluted weighted average shares outstanding
 
48,534

 
49,075

 
48,339

 
49,016

Basic income (loss) per share
 
$
0.58

 
$
(0.03
)
 
$
1.80

 
$
(0.67
)
Diluted income (loss) per share
 
$
0.57

 
$
(0.03
)
 
$
1.79

 
$
(0.67
)
(1)
Excluded from the computation of diluted earnings per share for the three and nine months ended September 30, 2017 were 1.6 million stock options and SARs outstanding as of September 30, 2017, because to include them would have been anti-dilutive. Excluded from the computation of diluted earnings per share for the three and nine months ended September 30, 2016 were approximately 2.3 million stock options, SARs and restricted share units outstanding as of September 30, 2016, because to include them would have been anti-dilutive due to the net losses.
Note 14. 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. We have three reportable segments: Cardiac Surgery, Neuromodulation, and Cardiac Rhythm Management.
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 systems, mechanical heart valves and tissue heart valves.
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 products 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.
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, cardiac resynchronization therapy devices and low-voltage pacemakers.
“Other” includes Corporate shared services expenses for finance, legal, human resources and information technology and Corporate business development (“New Ventures”). New Ventures, which includes our recent Caisson acquisition, is focused on new growth platforms and identification of other opportunities for expansion.
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, and amortization of intangibles.

24



Net sales and income from operations by segment (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Net Sales:
 
2017
 
2016
 
2017
 
2016
Cardiac Surgery
 
$
159,822

 
$
148,518

 
$
457,612

 
$
453,012

Neuromodulation
 
91,016

 
89,504

 
275,190

 
260,901

Cardiac Rhythm Management
 
58,411

 
56,768

 
182,235

 
188,057

Other
 
415

 
478

 
1,119

 
1,314

 
 
$
309,664

 
$
295,268

 
$
916,156

 
$
903,284

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Income from Operations:
 
2017
 
2016
 
2017
 
2016
Cardiac Surgery
 
$
23,807

 
$
17,791

 
$
63,490

 
$
29,197

Neuromodulation
 
45,932

 
47,049

 
139,357

 
134,871

Cardiac Rhythm Management
 
5,427

 
(4,598
)
 
13,536

 
(14,432
)
Other
 
(27,947
)
 
(13,525
)
 
(79,378
)
 
(49,090
)
Total Reportable Segments’ Income from Operations
 
47,219

 
46,717

 
137,005

 
100,546

Merger and integration expenses
 
2,013

 
7,576

 
7,743

 
20,537

Restructuring expenses
 
792

 
4,381

 
12,060

 
37,219

Amortization of intangibles
 
12,350

 
11,775

 
35,445

 
33,959

Income from operations
 
$
32,064

 
$
22,985

 
$
81,757

 
$
8,831

The following tables present our assets and capital expenditures by segment (in thousands):
Assets:
 
September 30, 2017
 
December 31, 2016
Cardiac Surgery
 
$
1,414,260

 
$
1,277,799

Neuromodulation
 
564,785

 
611,085

Cardiac Rhythm Management
 
351,390

 
341,998

Other
 
272,695

 
111,749

 
 
$
2,603,130

 
$
2,342,631

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Capital expenditures:
 
2017
 
2016
 
2017
 
2016
Cardiac Surgery
 
$
5,541

 
$
6,465

 
$
13,292

 
$
16,774

Neuromodulation
 
370

 
1,781

 
2,348

 
5,602

Cardiac Rhythm Management
 
1,537

 
1,591

 
4,343

 
2,786

Other
 
1,633

 
2,435

 
4,021

 
3,766

 
 
$
9,081

 
$
12,272

 
$
24,004

 
$
28,928


25



The changes in the carrying amount of goodwill by reportable segment for the nine months ended September 30, 2017 were as follows (in thousands):
 
 
Neuromodulation
 
Cardiac Surgery
 
Cardiac Rhythm Management
 
Other
 
Total
December 31, 2016
 
$
315,943

 
$
375,769

 
$

 
$

 
$
691,712

Goodwill as a result of acquisitions (1)
 

 

 

 
42,418

 
42,418

Foreign currency adjustments
 

 
46,940

 

 

 
46,940

September 30, 2017
 
$
315,943

 
$
422,709

 
$

 
$
42,418

 
$
781,070

(1)
Goodwill recognized as a result of the Caisson acquisition. Refer to “Note 2. Acquisitions.”
Geographic Information
We operate under three geographic regions: United States, Europe, and Rest of world. 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 September 30,
 
Nine Months Ended September 30,
Net Sales
 
2017
 
2016
 
2017
 
2016
United States
 
$
122,208

 
$
123,810

 
$
366,115

 
$
362,358

Europe (1) (2)
 
92,953

 
91,245

 
294,338

 
301,727

Rest of world
 
94,503

 
80,213

 
255,703

 
239,199

Total (3)
 
$
309,664

 
$
295,268

 
$
916,156

 
$
903,284

(1)
Net sales to external customers in the UK include $9.6 million and $26.8 million for the three and nine months ended September 30, 2017, respectively and $8.8 million and $27.9 million for the three and nine months ended September 30, 2016, respectively.
(2)
Includes those countries in Europe where we have a direct sales presence. Countries where sales are made through distributors are included in ‘Rest of world’.
(3)
No single customer represented over 10% of our consolidated net sales. Except for the U.S. and France, no country’s net sales exceeded 10% of our consolidated net sales. French sales were $29.6 million and $96.6 million for the three and nine months ended September 30, 2017, respectively, and $28.9 million and $95.9 million for the three and nine months ended September 30, 2016, respectively.
Property, plant and equipment, net by geography are as follows (in thousands):
PP&E
 
September 30, 2017
 
December 31, 2016
United States
 
$
62,630

 
$
61,279

Europe
 
137,682

 
130,777

Rest of world
 
13,457

 
31,786

Total
 
$
213,769

 
$
223,842

Note 15. Supplemental Financial Information
Accounts receivable, net, consisted of the following (in thousands):
 
 
September 30, 2017
 
December 31, 2016
Trade receivables from third parties
 
$
326,498

 
$
285,336

Allowance for bad debt
 
(12,457
)
 
(9,606
)
 
 
$
314,041

 
$
275,730


26



Inventories consisted of the following (in thousands):

 
September 30, 2017
 
December 31, 2016
Raw materials
 
$
51,628

 
$
47,704

Work-in-process
 
39,873

 
32,316

Finished goods
 
123,092

 
103,469

 
 
$
214,593

 
$
183,489

Inventories are reported net of the provision for obsolescence which totaled $13.7 million and $9.8 million at September 30, 2017 and December 31, 2016, respectively.
Prepaid expenses and other current assets consisted of the following (in thousands):
 
 
September 30, 2017
 
December 31, 2016
Income taxes payable on inter-company transfers of property (1)
 
$
19,445

 
$
19,445

Deposits and advances to suppliers
 
7,298

 
5,417

Earthquake grant receivable
 
4,983

 
4,748

Unbilled receivables
 
4,363

 

Escrow deposit - Caisson
 
2,000

 

Current loans and notes receivable
 
1,553

 
7,093

Derivative contract assets
 

 
8,269

Other prepaid expenses
 
15,534

 
11,001

 
 
$
55,176

 
$
55,973

(1)
The income taxes payable on intercompany transfers of property asset is the asset account created to defer the income tax effect of an intercompany intellectual property sale pursuant to ASC 810-10-45-8.
Other assets consisted of the following (in thousands):
 
 
September 30, 2017
 
December 31, 2016
Income taxes payable on inter-company transfers of property (1)
 
$
109,971

 
$
124,551

Investments (2)
 
2,316

 
2,537

Loans and notes receivable
 
1,964