Document


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 June 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=11740035&doc=12
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 ☑     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
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 
Class
Outstanding at August 7, 2017
Ordinary Shares - £1.00 par value per share
48,181,815

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 generators products: Model 102 (Pulse™), Model 102R (Pulse Duo™), Model 103 (Demipulse®), Model 104 (Demipulse Duo®), Model 105 (AspireHC®), Model 106 (AspireSR®) and our newest model in development, Sentiva™.
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, KORA 250TM, SafeRTM, the REPLY CRT-PTM, the remedé® System.
Trademarks for our Implantable Cardioverter Defibrillators and associated technologies: the INTENSIATM, PLATINIUMTM, and PARADYM® product families.
Trademarks for our cardiac resynchronization therapy devices, technologies services: SonR®, SonRtipTM, SonR CRTTM, the INTENSIATM, PARADYM RFTM, PARADYM 2TM and PLATINIUMTM product families and the Respond CRTTM 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 insurance 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 disputes, shareholder-related matters, environmental proceedings, income tax disputes, and other related 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; in particular, the implementation of Brexit will likely cause increased economic volatility;
changes in tax laws, including changes due 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 consolidated financial statements and related notes included elsewhere in this report. Operating results for the three and six months ended June 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. Condensed Consolidated Financial Statements
LIVANOVA PLC AND SUBSIDIARIES’
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
(In thousands, except per share amounts)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Net sales
 
$
321,387

 
$
321,047

 
$
606,492

 
$
608,016

Cost of sales
 
108,888

 
130,654

 
210,351

 
254,221

Product remediation
 
1,723

 
848

 
931

 
1,554

Gross profit
 
210,776

 
189,545

 
395,210

 
352,241

Operating expenses:
 
 
 
 
 
 
 
 
Selling, general and administrative
 
120,369

 
120,645

 
232,766

 
236,511

Research and development
 
43,007

 
30,211

 
72,658

 
61,901

Merger and integration expenses
 
3,522

 
6,200

 
5,730

 
12,961

Restructuring expenses
 
1,118

 
4,246

 
11,268

 
32,838

Amortization of intangibles
 
11,681

 
6,292

 
23,095

 
22,184

Total operating expenses
 
179,697

 
167,594

 
345,517

 
366,395

Income (loss) from operations
 
31,079

 
21,951

 
49,693

 
(14,154
)
Interest income
 
252

 
321

 
525

 
534

Interest expense
 
(1,578
)
 
(1,978
)
 
(3,893
)
 
(3,170
)
Gain on acquisition of Caisson Interventional, LLC
 
39,428

 

 
39,428

 

Foreign exchange and other (losses) gains
 
(2,973
)
 
617

 
466

 
(1,218
)
Income (loss) before income taxes
 
66,208

 
20,911

 
86,219

 
(18,008
)
Income tax expense
 
3,313

 
8,418

 
8,968

 
7,160

Losses from equity method investments
 
(15,397
)
 
(3,536
)
 
(18,482
)
 
(6,253
)
Net income (loss)
 
$
47,498

 
$
8,957

 
$
58,769

 
$
(31,421
)
 
 
 
 
 
 
 
 
 
Basic income (loss) per share
 
$
0.99

 
$
0.18

 
$
1.22

 
$
(0.64
)
Diluted income (loss) per share
 
$
0.98

 
$
0.18

 
$
1.22

 
$
(0.64
)
Shares used in computing basic income (loss) per share
 
48,140

 
49,056

 
48,104

 
48,987

Shares used in computing diluted income (loss) per share
 
48,303

 
49,162

 
48,241

 
48,987


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 June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Net income (loss)
 
$
47,498

 
$
8,957

 
$
58,769

 
$
(31,421
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Net change in unrealized loss on derivatives
 
(1,310
)
 
(3,501
)
 
(3,943
)
 
(7,266
)
Tax effect
 
559

 
1,800

 
1,283

 
2,186

Net of tax
 
(751
)
 
(1,701
)
 
(2,660
)
 
(5,080
)
Foreign currency translation adjustment, net of tax
 
56,587

 
(14,098
)
 
72,017

 
34,403

Total other comprehensive income (loss)
 
55,836

 
(15,799
)
 
69,357

 
29,323

Total comprehensive income (loss)
 
$
103,334

 
$
(6,842
)
 
$
128,126

 
$
(2,098
)


See accompanying notes to the condensed consolidated financial statements
6



LIVANOVA PLC AND SUBSIDIARIES’
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 
 
June 30, 2017
 
December 31, 2016
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
42,690

 
$
39,789

Accounts receivable, net
 
305,355

 
275,730

Inventories
 
204,680

 
183,489

Prepaid and refundable taxes
 
55,584

 
60,615

Assets held for sale
 
13,859

 
4,477

Prepaid expenses and other current assets
 
49,213

 
55,973

Total Current Assets
 
671,381

 
620,073

Property, plant and equipment, net
 
211,164

 
223,842

Goodwill
 
763,525

 
691,712

Intangible assets, net
 
713,176

 
609,197

Investments
 
41,013

 
61,092

Deferred tax assets, net
 
11,981

 
6,017

Other assets
 
121,445

 
130,698

Total Assets
 
$
2,533,685

 
$
2,342,631

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current Liabilities:
 
 
 
 
Current debt obligations
 
$
55,776

 
$
47,650

Accounts payable
 
105,109

 
92,952

Accrued liabilities and other
 
90,046

 
75,567

Taxes payable
 
22,654

 
22,340

Accrued employee compensation and related benefits
 
68,863

 
78,302

Total Current Liabilities
 
342,448

 
316,811

Long-term debt obligations
 
69,741

 
75,215

Deferred income taxes liability
 
169,208

 
172,541

Long-term employee compensation and related benefits
 
33,102

 
31,668

Other long-term liabilities
 
75,666

 
39,487

Total Liabilities
 
690,165

 
635,722

Commitments and contingencies (Note 9)
 

 

Stockholders’ Equity:
 
 
 
 
Ordinary Shares, £1.00 par value: unlimited shares authorized; 48,215,885 shares issued and 48,163,627 shares outstanding at June 30, 2017; 48,156,690 shares issued and 48,028,413 shares outstanding at December 31, 2016
 
74,652

 
74,578

Additional paid-in capital
 
1,726,235

 
1,719,893

Accumulated other comprehensive income (loss)
 
870

 
(68,487
)
Retained earnings (deficit)
 
44,194

 
(14,575
)
Treasury stock at cost, 52,258 shares at June 30, 2017 and 128,277 shares at December 31, 2016
 
(2,431
)
 
(4,500
)
Total Stockholders’ Equity
 
1,843,520

 
1,706,909

Total Liabilities and Stockholders’ Equity
 
$
2,533,685

 
$
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)
 
 
Six Months Ended June 30,
 
 
2017
 
2016
Operating Activities:
 
 

 
 

Net income (loss)
 
$
58,769

 
$
(31,421
)
Non-cash items included in net income (loss):
 
 
 
 
Depreciation
 
17,998

 
19,483

Amortization
 
23,095

 
22,184

Stock-based compensation
 
8,564

 
10,807

Deferred income tax benefit
 
(19,791
)
 
(12,845
)
Losses from equity method investments
 
18,482

 
6,253

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
 
17,770

 
8,656

Other
 
1,830

 
4,723

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, net
 
(15,912
)
 
(27,174
)
Inventories
 
(6,927
)
 
24,735

Other current and non-current assets
 
(13,904
)
 
(14,998
)
Restructuring reserve
 
(11,129
)
 
16,803

Accounts payable and accrued current and non-current liabilities
 
(12,438
)
 
(14,622
)
Net cash provided by operating activities
 
31,560

 
12,584

Investing Activities:
 
 

 
 

Purchases of property, plant and equipment and other
 
(14,923
)
 
(16,656
)
Acquisition of Caisson Interventional, LLC, net of cash acquired
 
(14,194
)
 

Proceeds from sale of cost method investment
 
3,192

 

Proceeds from asset sales
 
5,170

 

Purchases of short-term investments
 

 
(7,028
)
Maturities of short-term investments
 

 
7,026

Other
 
(145
)
 
609

Net cash used in investing activities
 
(20,900
)
 
(16,049
)
Financing Activities:
 
 
 
 
Change in short-term borrowing, net
 
(12,812
)
 
(15,599
)
Proceeds from short-term borrowing (maturities greater than 90 days)
 
20,000

 

Repayment of long-term debt obligations
 
(11,306
)
 
(11,066
)
Loans to cost and equity method investees
 
(6,834
)
 
(3,775
)
Repayment of trade receivable advances
 

 
(21,626
)
Proceeds from exercise of stock options and SARs
 
2,442

 
4,722

Other
 
(1,691
)
 
1,168

Net cash used in financing activities
 
(10,201
)
 
(46,176
)
Effect of exchange rate changes on cash and cash equivalents
 
2,442

 
914

Net increase (decrease) in cash and cash equivalents
 
2,901

 
(48,727
)
Cash and cash equivalents at beginning of period
 
39,789

 
112,613

Cash and cash equivalents at end of period
 
$
42,690

 
$
63,886


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 six months ended, June 30, 2017 and June 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 annual report on Form 10-K for the year ended December 31, 2016, 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 six months ended June 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 Annual Report on Form 10-K for the year ended December 31, 2016.
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 six months ended June 30, 2016, to the current period presentation, we reclassified $0.8 million and $1.6 million, respectively, of Litigation Related Expenses to the Product Remediation line, and $0.5 million and $0.8 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 three months ended June 30, 2017.
To conform the condensed consolidated statement of cash flows for the six months ended June 30, 2016 to the current period presentation, certain amounts were reclassified within Operating 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 Annual Report on Form 10-K for the year ended December 31, 2016. 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.

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 in Accumulated Other Comprehensive Income (Loss) in the condensed consolidated balance sheets. Gains and losses arising from transactions

9



denominated in a currency different from an entity’s functional currency are included in Foreign exchange and other gains (losses) 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 sales earnouts.
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 has been 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 at June 30, 2017.
We recognized acquisition-related expense of approximately $1.0 million for legal and valuation expenses during the three months ended June 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 June 30, 2017 added no revenue and $2.0 million in expenses in our condensed consolidated statement of income (loss) for the three and six months ended June 30, 2017.

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):
 
 
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

 
 
 
 
 
 
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 approximately 323 personnel of which 270 have occurred as of June 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 six months ended June 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 $13.9 million as of June 30, 2017, on the condensed consolidated balance sheet.
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
 
6,193

 
5,075

 
11,268

Cash payments and adjustments
 
(20,312
)
 
(5,457
)
 
(25,769
)
Balance at June 30, 2017
 
$
6,973

 
$
2,674

 
$
9,647

The following table presents restructuring expense by reportable segment (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Cardiac Surgery
 
$
501

 
$
751

 
$
6,503

 
$
4,962

Cardiac Rhythm Management
 
(1,479
)
 
855

 
(1,359
)
 
16,021

Neuromodulation
 
(185
)
 
1,973

 
499

 
4,136

Other
 
2,281

 
667

 
5,625

 
7,719

Total
 
$
1,118

 
$
4,246

 
$
11,268

 
$
32,838


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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 addition of a vacuum system to new and existing devices. These changes are intended to address regulatory actions and further reduce the risk of possible dispersion of aerosols from 3T devices in the operating room. The deployment of this solution for commercially distributed devices will occur upon final validation and verification of the design changes and approval or clearance by regulatory authorities worldwide, including FDA clearance in the United States (“U.S.”) In April 2017, we obtained CE Mark in Europe for the design change of the 3T device. As part of this 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 regulatory approvals are received. We are continuing with 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 progressively made available on a global basis, prioritizing and allocating devices to 3T device users based on pre-established criteria. Finally, in May 2017 we completed our first vacuum and sealing upgrade on a customer-owned device. As capacity of upgrade components increases, we anticipate expanding the vacuum and sealing upgrade program to as many countries as possible throughout the remainder of 2017.
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
 
(3,076
)
Effect of changes in foreign currency exchange rates
 
1,579

Balance at June 30, 2017
 
$
31,975

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. For further information, please refer to “Note 9. Commitments and Contingencies - 3T Heater-Cooler Devices.” At this stage, no liability has been recognized with respect to any lawsuits involving us related to the 3T device, while related legal costs are expensed as incurred.

12



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):
 
 
June 30, 2017
 
December 31, 2016
Respicardia Inc. (1)
 
$
20,046

 
$
17,518

ImThera Medical, Inc. (2)
 
12,000

 
12,000

Rainbow Medical Ltd. (3)
 
4,045

 
3,733

MD Start II
 
571

 
526

Other (4)
 
145

 

 
 
$
36,807

 
$
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. During the six months ended June 30, 2017, we loaned Respicardia $1.4 million, 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. During the six months ended June 30, 2017, we loaned ImThera $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 six months ended June 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 (losses) gains in the condensed consolidated statement of income (loss).
Equity Method Investments
Our equity-method investments consist of our equity position in the following entities (in thousands, except for percent ownership):
 
 
% Ownership (1)
 
June 30, 2017
 
December 31, 2016
Caisson Interventional LLC (2)
 

 
$

 
$
16,423

Highlife S.A.S. (3)
 
38.0
%
 
883

 
6,009

MicroPort Sorin CRM (Shanghai) Co. Ltd.
 
49.0
%
 
3,306

 
4,867

Other
 
 
 
17

 
16

Total
 
 
 
$
4,206

 
$
27,315

(1)
Ownership percentages as of June 30, 2017.
(2)
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.
(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 June 30, 2017, we recognized an impairment of our investment in, and notes receivable from, Highlife, see the paragraph below for further details.
Highlife Impairment
We recognized an impairment of our equity-method investment in, and notes receivable from, Highlife S.A.S. (“Highlife”) during the three months ended June 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 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 June 30, 2017 was $0.8 million and is included in Other Assets on the condensed consolidated balance sheet.

13




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:
 
 
June 30, 2017
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Derivative assets - designated as cash flow hedges (FX)
 
$
1,813

 
$

 
$
1,813

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivative liabilities - designated as cash flow hedges (interest rate swaps)
 
$
1,899

 
$

 
$
1,899

 
$

Derivative liabilities - freestanding instruments (FX)
 
84

 

 
84

 

Contingent payments (1)
 
36,080

 

 

 
36,080

 
 
$
38,063

 
$

 
$
1,983

 
$
36,080

 
 
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 payments (1)
 
3,890

 

 

 
3,890


 
$
6,224

 
$

 
$
2,334

 
$
3,890

(1)
These contingent payments arose as a result of acquisitions, refer to “Note 15. Supplemental Financial Information - Other Long-Term Liabilities” for further information.

14



Note 7. Financing Arrangements
The outstanding principal amount of long-term debt (in thousands, except interest rates):
 
 
June 30, 2017
 
December 31, 2016
 
Maturity
 
Interest Rate
European Investment Bank (1)
 
$
76,072

 
$
78,987

 
June 2021
 
0.95
%
Banca del Mezzogiorno (2)
 
6,283

 
6,747

 
December 2019
 
0.50% - 3.15%

Mediocredito Italiano (3)
 
7,404

 
7,276

 
December 2023
 
0.50% - 3.07%

Bpifrance (ex-Oséo)
 
1,724

 
1,909

 
October 2019
 
2.58
%
Region Wallonne
 
804

 
798

 
December 2023 and June 2033
 
0.00% - 2.42%

Mediocredito Italiano - mortgages and other
 
803

 
799

 
September 2021 and September 2026
 
0.40% - 0.65%

Total debt
 
93,090

 
96,516

 
 
 
 
Less current portion of long-term debt
 
23,349

 
21,301

 
 
 
 
Total long-term debt
 
$
69,741

 
$
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 $32.4 million and $26.4 million, at June 30, 2017 and December 31, 2016, respectively, with interest rates ranging from 0.2% to 12.6% 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 of our R&D projects. The Finance Contract has a borrowing base of €100 million (or approximately $114 million USD equivalent) and can be drawn in up to two tranches, each in a minimum amount of €50 million (or approximately $57 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 June 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 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 Accumulated Other Comprehensive Income (loss) (“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 swaps 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

15



effective, hedge accounting is discontinued. Hedge ineffectiveness, if 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 June 30, 2017 and December 31, 2016 was $240.5 million and $489.1 million, respectively. These derivative contracts are designed to offset the FX effects in earnings of various intercompany loans, our European Investment Bank loan, and trade receivables. We recorded net losses for these freestanding derivatives of $5.4 million and $7.2 million for the three and six months ended June 30, 2017, respectively, and net gains of $6.1 million and $2.2 million for the three and six months ended June 30, 2016, respectively. These gains and losses are included in Foreign Exchange and Other (Losses) Gains 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:
 
June 30, 2017
 
December 31, 2016
FX derivative contracts to be exchanged for British Pounds
 
$
19,268

 
$
6,663

FX derivative contracts to be exchanged for Japanese Yen
 
58,902

 
57,840

FX derivative contracts to be exchanged for Canadian Dollars
 
15,868

 

Interest rate swap contracts
 
60,907

 
63,246

 
 
$
154,945

 
$
127,749

After-tax net gain associated with derivatives designated as cash flow hedges recorded in the ending balance of Accumulated Other Comprehensive Income and the amount expected to be reclassified to earnings in the next 12 months (in thousands):
Description of contract:
 
June 30, 2017
 
Net amount expected to be reclassified to earnings in the next 12 months
FX derivative contracts
 
$
613

 
$
613

Interest rate swap contracts
 
346

 
87

 
 
$
959

 
$
700

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 Accumulated Other Comprehensive Income (Loss) (“AOCI”) (in thousands):
 
 
 
 
Three Months Ended June 30,
 
 
 
 
2017
 
2016
Description of derivative 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
 
$
(755
)
 
$
(532
)
 
$
(4,887
)
 
$
(42
)
FX derivative contracts
 
SG&A
 

 
544

 

 
(1,270
)
Interest rate swap contracts
 
Interest expense
 

 
543

 
18

 
(56
)
 
 
 
 
$
(755
)
 
$
555

 
$
(4,869
)
 
$
(1,368
)

16



 
 
 
 
Six Months Ended June 30,
 
 
 
 
2017
 
2016
Description of derivative 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
 
$
(7,587
)
 
$
(5,210
)
 
$
(8,467
)
 
$
148

FX derivative contracts
 
SG&A
 

 
1,354

 

 
(1,561
)
Interest rate swap contracts
 
Interest expense
 

 
212

 
(301
)
 
(89
)
 
 
 
 
$
(7,587
)
 
$
(3,644
)
 
$
(8,768
)
 
$
(1,502
)

17



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):
June 30, 2017
 
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
 
$
897

Interest rate swap contracts
 
Other assets
 

 
Other long-term liabilities
 
1,002

FX derivative contracts
 
Prepaid expenses and other current assets
 
1,813

 
Accrued liabilities
 

Total derivatives designated as hedging instruments
 

 
1,813

 

 
1,899

Derivatives not designated as hedging instruments
 

 

 

 

FX derivative contracts
 
Prepaid expenses and other current assets
 

 
Accrued liabilities
 
84

Total derivatives not designated as hedging instruments
 

 

 

 
84

 
 

 
$
1,813

 

 
$
1,983

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.”
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.

18



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.
Lastly, 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 progressively made available 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.
At 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 June 30, 2017, the product remediation liability was $32.0 million. Refer to “Note 4. Product Remediation Liability” for additional information.

19



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, naming as evidence, in part, the Warning Letter issued by the FDA in December 2015. The named plaintiffs to 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). 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 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., wholly-owned subsidiaries of LivaNova PLC, as defendants. On September 29, 2016 the Court dismissed LivaNova PLC from the case, and on October 11, 2016, the Court denied our motion to dismiss Sorin Group Deutschland GmbH and Sorin Group USA, Inc. from the lawsuit.
In addition to the case addressed in the preceding section, we have received additional lawsuits in the U.S. and Canada related to surgical cases in which a 3T device was allegedly used. Approximately 50 additional lawsuits have been filed against us in state and federal courts in the U.S. and three cases have been filed in Canada.
We intend to defend each of these claims vigorously. Given the relatively early stage of each 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 in connection therewith will not have a material adverse effect on our business, results of operations, financial condition and/or liquidity. We have not recognized an expense related to damages 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.
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 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 up to the actual value of the shareholders’ equity conveyed or received (we estimate that the value of the shareholders’ equity received was approximately €573 million (approximately $654 million USD equivalent) for certain indebtedness or liabilities of the pre-spin-off company.
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 $3.9 billion USD equivalent) 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 Italian Ministry of the Environment and other Italian government agencies, as defendants, in order to have them bound to the final ruling.

20



On April 1, 2016 (the “Decision”) the Court of Milan dismissed all legal actions of SNIA and of the Public Administration against Sorin, further requiring the Public Administrations to pay Sorin €300,000 (or approximately $342,600 USD equivalent), as legal fees (of which SNIA is jointly liable for €50,000).
On June 21, 2016, the Public Administrations filed an appeal against the Decision before the Court of Appeal of Milan. The first hearing of the appeal proceedings was held on December 20, 2016, and the final hearing is now scheduled for November 22, 2017. After such 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.
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, United Kingdom 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 from the Italian Ministry of the Environment (the “Remediation Order”), 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 of whatsoever nature 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 first instance decision on October 6, 2016 fully rejecting the Public Administration’s request and awarding us €200,000 (approximately $228,000 USD equivalent) in damages for frivolous litigation, plus €200,000 (approximately $228,000 USD equivalent) 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

21



probable or reasonably estimable. In addition, we cannot reasonably estimate a range of potential loss, if any, that may result from this matter.
Tax Litigation
In a tax audit report received 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 (approximately $117.2 million USD equivalent), 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) on February 3, 2017. The Italian Supreme Court’s decision is pending.
The appeal submitted against the first-level decisions for 2005 and 2006 were rejected. We appealed these adverse decisions to the Italian Supreme Court, which is 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 Milano 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 $71.5 million USD equivalent). 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 risk provision of €17.0 million (approximately $19.4 million USD equivalent).
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 cash flows.

22



Note 10.  Stockholders’ Equity
Comprehensive income
The table below presents the change in each component of accumulated other comprehensive income (loss) (“AOCI”), net of tax, and the reclassifications out of AOCI into net earnings for the six months ended June 30, 2017 and June 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
 
(7,587
)
 
72,017

 
64,430

Tax benefit
 
1,821

 

 
1,821

Other comprehensive (loss) income before reclassifications, net of tax
 
(5,766
)
 
72,017

 
66,251

Reclassification of loss from accumulated other comprehensive income, before tax
 
3,644

 

 
3,644

Tax benefit
 
(538
)
 

 
(538
)
Reclassification of loss from accumulated other comprehensive income, after tax
 
3,106

 

 
3,106

Net current-period other comprehensive (loss) income, net of tax
 
(2,660
)
 
72,017

 
69,357

As of June 30, 2017
 
$
959

 
$
(89
)
 
$
870

 
 
 
 
 
 
 
As of December 31, 2015
 
$
888

 
$
(55,116
)
 
$
(54,228
)
Other comprehensive (loss) income before reclassifications, before tax
 
(8,768
)
 
34,403

 
25,635

Tax benefit
 
2,639

 

 
2,639

Other comprehensive (loss) income before reclassifications, net of tax
 
(6,129
)
 
34,403

 
28,274

Reclassification of loss from accumulated other comprehensive income, before tax
 
1,502

 

 
1,502

Tax benefit
 
(453
)
 

 
(453
)
Reclassification of loss from accumulated other comprehensive income, after tax
 
1,049

 

 
1,049

Net current-period other comprehensive (loss) income, net of tax
 
(5,080
)
 
34,403

 
29,323

As of June 30, 2016
 
$
(4,192
)
 
$
(20,713
)
 
$
(24,905
)
(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.

23



Note 11. Stock-Based Incentive Plans
Stock-based incentive plans compensation expense (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Service-based stock appreciation rights ("SARs")
 
$
1,866

 
$
2,009

 
$
3,466

 
$
4,584

Service-based restricted stock units ("RSUs")
 
2,289

 
2,393

 
4,493

 
5,904

Market-based performance restricted stock units
 
177

 

 
181

 
3

Operating performance-based restricted stock units
 
388

 
289

 
424

 
316

Total stock-based compensation expense
 
$
4,720

 
$
4,691

 
$
8,564

 
$
10,807

During the three months ended June 30, 2017, we executed stock-based compensatory grant agreements with contract terms agreed upon by us and the respective individuals, as approved by the Compensation Committee of our Board of Directors. Grants with service conditions vest ratably over four years subject to forfeiture unless service conditions are met. Market-based grants 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 grants 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 grant agreements executed during the three months ended June 30, 2017 was $1.2 million.
Stock-based compensation agreements executed during the three months ended June 30, 2017, representing potential shares and their weighted average grant date fair values by type follows (shares in thousands, fair value in dollars):
 
 
Three Months Ended June 30, 2017
 
 
Shares
 
Weighted Average Grant Date Fair Value
Service-based SARs
 
639
 
$
17.03

Service-based RSUs
 
108
 
57.37

Market-based performance RSUs
 
158

 
25.29

Operating performance-based RSUs
 
189

 
56.18

Note 12.  Income Taxes
During the three and six months ended June 30, 2017, we recorded consolidated income tax expense of $3.3 million and $9.0 million, respectively, with consolidated effective income tax rates of 5.0% and 10.4%, respectively.
During the three and six months ended June 30, 2016, we recorded consolidated income tax expense of $8.4 million and $7.2 million, respectively, with consolidated effective income tax rates of 40.3% and (39.8)%, respectively.
Our consolidated effective income tax rates for the three and six months ended June 30, 2017 include the impact of various discrete tax items, including 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. Additionally, we recognized a $3.9 million deferred tax benefit associated with certain temporary differences arising from the Mergers. Discrete tax items for the six months ended June 30, 2017 also include 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.
Our consolidated effective tax rate for the three and six months ended June 30, 2016 was impacted by $58.7 million of unbenefited net operating losses in certain tax jurisdictions, including France and the U.K.

24



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 June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
 
Net income (loss)
 
$
47,498

 
$
8,957

 
$
58,769

 
$
(31,421
)
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
 
48,140

 
49,056

 
48,104

 
48,987

Add effects of share-based compensation instruments (1)
 
163

 
106

 
137

 

Diluted weighted average shares outstanding
 
48,303

 
49,162

 
48,241

 
48,987

Basic income (loss) per share
 
$
0.99

 
$
0.18

 
$
1.22

 
$
(0.64
)
Diluted income (loss) per share
 
$
0.98

 
$
0.18

 
$
1.22

 
$
(0.64
)
(1)
Excluded from the computation of diluted earnings per share for the three and six months ended June 30, 2017 were approximately 1.8 million stock options, SARs and restricted share units outstanding as of June 30, 2017, because to include them would be anti-dilutive. Excluded from the computation of diluted earnings per share for the three months ended June 30, 2016 were approximately 1.5 million stock options, SARs and restricted share units outstanding as of June 30, 2016, because to include them would be anti-dilutive. Excluded from the computation of diluted earnings per share for the six months ended June 30, 2016, were approximately 131 thousand average outstanding stock options, SARs and restricted share units that would have been dilutive but were excluded due to the net loss.
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.

25



Net sales and income (loss) from operations by segment (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Net Sales:
 
2017
 
2016
 
2017
 
2016
Cardiac Surgery
 
$
158,586

 
$
161,051

 
$
297,790

 
$
304,494

Neuromodulation
 
97,015

 
90,039

 
184,174

 
171,397

Cardiac Rhythm Management
 
65,544

 
69,558

 
123,824

 
131,289

Other
 
242

 
399

 
704

 
836

 
 
$
321,387

 
$
321,047

 
$
606,492

 
$
608,016

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Income (Loss) from Operations:
 
2017
 
2016
 
2017
 
2016
Cardiac Surgery
 
$
23,665

 
$
9,020

 
$
39,683

 
$
11,406

Neuromodulation
 
51,747

 
47,240

 
93,425

 
87,822

Cardiac Rhythm Management
 
5,617

 
(335
)
 
8,109

 
(9,834
)
Other
 
(33,629
)
 
(17,236
)
 
(51,431
)
 
(35,565
)
Total Reportable Segments’ Income from Operations
 
47,400

 
38,689

 
89,786

 
53,829

Merger and integration expenses
 
3,522

 
6,200

 
5,730

 
12,961

Restructuring expenses
 
1,118

 
4,246

 
11,268

 
32,838

Amortization of intangibles
 
11,681

 
6,292

 
23,095

 
22,184

Income (Loss) from operations
 
$
31,079

 
$
21,951

 
$
49,693

 
$
(14,154
)
The following tables present our assets and capital expenditures by segment (in thousands):
Assets:
 
June 30, 2017
 
December 31, 2016
Cardiac Surgery
 
$
1,351,706

 
$
1,277,799

Neuromodulation
 
600,074

 
611,085

Cardiac Rhythm Management
 
345,464

 
341,998

Other
 
236,441

 
111,749

 
 
$
2,533,685

 
$
2,342,631

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Capital expenditures:
 
2017
 
2016
 
2017
 
2016
Cardiac Surgery
 
$
3,957

 
$
4,820

 
$
7,751

 
$
10,309

Neuromodulation
 
517

 
1,906

 
1,978

 
3,821

Cardiac Rhythm Management
 
1,148

 
715

 
2,806

 
1,195

Other
 
1,185

 
258

 
2,388

 
1,331

 
 
$
6,807

 
$
7,699

 
$
14,923

 
$
16,656


26



The changes in the carrying amount of goodwill by reportable segment for the six months ended June 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
 

 
29,395

 

 

 
29,395

June 30, 2017
 
$
315,943

 
$
405,164

 
$

 
$
42,418

 
$
763,525

(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 June 30,
 
Six Months Ended June 30,
Net Sales
 
2017
 
2016
 
2017
 
2016
United States
 
$
129,558

 
$
124,411

 
$
243,907

 
$
238,553

Europe (1) (2)
 
105,039

 
111,130

 
201,385

 
210,385

Rest of World
 
86,790

 
85,506

 
161,200

 
159,078

Total (3)
 
$
321,387

 
$
321,047

 
$
606,492

 
$
608,016

(1)
Net sales to external customers in the United Kingdom include $9.2 million and $17.3 million for the three and six months ended June 30, 2017, respectively and $10.5 million and $19.1 million for the three and six months ended June 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 $34.1 million and $67.0 million for the three and six months ended June 30, 2017, respectively, and $34.4 million and $67.0 million for the three and six months ended June 30, 2016, respectively.
Property, plant and equipment, net by geography are as follows (in thousands):
PP&E
 
June 30, 2017
 
December 31, 2016
United States
 
$
62,615

 
$
61,279

Europe (1)
 
134,267

 
130,777

Rest of World
 
14,282

 
31,786

Total
 
$
211,164

 
$
223,842

(1)
Property, plant and equipment, net included with Europe includes $2.9 million and $3.0 million in the United Kingdom at June 30, 2017 and December 31, 2016, respectively.
Note 15. Supplemental Financial Information
Accounts receivable, net, consisted of the following (in thousands):
 
 
June 30, 2017
 
December 31, 2016
Trade receivables from third parties
 
$
316,866

 
$
285,336

Allowance for bad debt
 
(11,511
)
 
(9,606
)
 
 
$
305,355

 
$
275,730


27



Inventories consisted of the following (in thousands):

 
June 30, 2017
 
December 31, 2016
Raw materials
 
$
52,220

 
$
47,704

Work-in-process
 
37,482

 
32,316

Finished goods
 
114,978

 
103,469

 
 
$
204,680

 
$
183,489

Inventories are reported net of the provision for obsolescence which totaled $12.3 million and $9.8 million at June 30, 2017 and December 31, 2016, respectively.
Prepaid expenses and other current assets consisted of the following (in thousands):
 
 
June 30, 2017
 
December 31, 2016
Income taxes payable on inter-company transfers of property (1)
 
$
19,445

 
$
19,445

Deposits and advances to suppliers
 
6,212

 
5,417

Earthquake grant receivable
 
4,824

 
4,748

Current loans and notes receivable
 
2,294

 
7,093

Escrow deposit - Caisson
 
2,000

 

Derivative contract assets
 
1,813

 
8,269

Other prepaid expenses
 
12,625

 
11,001

 
 
$
49,213

 
$
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 and intercompany inventory sales pursuant to ASC 810-10-45-8.
Other assets consisted of the following (in thousands):
 
 
June 30, 2017
 
December 31, 2016
Income taxes payable on inter-company transfers of property (1)
 
$
113,779

 
$
124,551

Investments