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| PART II | |
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Item 9A. | Controls and Procedures | |
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| PART III | |
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| PART IV | |
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DEFINITIONS
In this Annual Report on Form 10-K “LivaNova,”for the year ended December 31, 2023, the following terms and abbreviations have the meanings listed below. “LivaNova” and “the Company,” “we,” “us” and “our”Company” refer to LivaNova PLC and its consolidated subsidiaries.
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Abbreviation | | Definition |
2015 Plan | | LivaNova PLC 2015 Incentive Award Plan |
2020 Restructuring Plan | | A plan, initiated during the fourth quarter of 2020, to reduce LivaNova’s cost structure |
2021 | | The year ended December 31, 2021 |
2021 First Lien Credit Agreement | | First Lien Credit Agreement for $125 million between LivaNova PLC and its wholly-owned subsidiary, Borrower, and Goldman Sachs Bank USA, as First Lien Administrative Agent and First Lien Collateral Agent, entered into on August 13, 2021 |
2022 | | The year ended December 31, 2022 |
2022 Plan | | LivaNova PLC 2022 Incentive Award Plan |
2022 Restructuring Plan | | A plan, initiated during the second quarter of 2022, to implement a cost-optimization and cost reduction program to adapt to current economic conditions |
2023 | | The year ended December 31, 2023 |
2024 Proxy Statement | | Definitive Proxy Statement for the annual meeting of shareholders scheduled for June 11, 2024 |
2024 Restructuring Plan | | A plan, initiated during the first quarter of 2024, to enhance LivaNova’s focus on its core Cardiopulmonary and Neuromodulation segments |
A&R 2022 Plan | | Amended and Restated LivaNova PLC 2022 Incentive Award Plan |
ACS | | Advanced Circulatory Support |
ALung | | ALung Technologies, Inc. |
AOCI | | Accumulated other comprehensive income (loss) |
APAC | | Asia-Pacific |
ASMs | | Anti-seizure medications |
Audit Committee | | LivaNova’s Audit and Compliance Committee |
Barclays | | Barclays Bank Ireland PLC |
BEPS | | Base Erosion and Profit Shifting |
Borrower | | LivaNova USA, Inc. |
Bridge Loan Facility | | Incremental Facility Amendment No. 1 to the 2021 First Lien Credit Agreement, relating to a €200 million bridge loan facility, dated February 24, 2022, and repaid on July 6, 2022 |
CCPA | | California Consumer Privacy Act |
CDC | | Centers for Disease Control and Prevention |
CE Mark | | Conformité Européenne, French for “European Conformity” |
CED | | Coverage with Evidence Development |
CEO | | Chief Executive Officer |
CFO | | Chief Financial Officer |
CISO | | Chief Information Security Officer |
CLO | | Chief Legal Officer |
CMS | | The US Centers for Medicare & Medicaid Services |
Code of Conduct | | LivaNova PLC’s Code of Ethics and Business Conduct |
CODM | | Chief Operating Decision Maker |
Court of Appeal | | Court of Appeal in Milan |
CPB | | Cardiopulmonary bypass |
CRO | | Chief Risk Officer |
Cyberonics | | Cyberonics, Inc. |
D23 study | | The longest and largest naturalistic study on treatments for patients experiencing chronic and severe DTD, published by the American Journal of Psychiatry in 2017 |
Delayed Draw Term Facility | | $50 million delayed draw term facility under the 2021 First Lien Credit Agreement resulting from the Incremental Facility Amendment No. 2 |
DRE | | Drug-resistant epilepsy |
DTC | | Depository Trust Company |
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Abbreviation | | Definition |
DTD | | Difficult-to-treat depression |
ECJ | | European Court of Justice |
ECMO | | Extracorporeal membrane oxygenation |
ESG | | Environmental, social and governance |
ESPP | | Global Employee Share Purchase Plan |
EtO | | Ethylene oxide |
EU | | European Union |
EVP | | Employee Value Proposition |
Exchange Act | | US Securities Exchange Act of 1934, as amended |
False Claims Act | | US False Claims Act |
FCPA | | US Foreign Corrupt Practices Act of 1977 |
FDA | | US Food and Drug Administration |
FIFO | | First-in-first-out |
FX | | Foreign currency exchange rate |
GAAP | | Generally Accepted Accounting Principles |
GDPR | | General Data Protection Regulation |
Hemolung RAS | | Hemolung Respiratory Assist System |
HHS | | The US Department of Health & Human Services |
HIPAA | | Health Insurance Portability and Accountability Act of 1996 |
HITECH | | Health Information Technology and Clinical Health Act |
HLM | | Heart-lung machine |
IBR | | Incremental borrowing rate |
ILBM | | In-line blood monitor |
ImThera | | ImThera Medical, Inc., acquired by LivaNova in 2018, a company developing an implantable neurostimulation device system for the treatment of obstructive sleep apnea |
Incremental Facility Amendment No. 2 | | An incremental facility amendment to the 2021 First Lien Credit Agreement, dated July 6, 2022 |
Indenture | | The indenture governing the Notes |
Initial Term Facility | | $300 million term facility under the 2021 First Lien Credit Agreement resulting from the Incremental Facility Amendment No. 2 |
IPR&D | | In-Process Research and Development |
IRC | | US Internal Revenue Code |
IRS | | US Internal Revenue Service |
IS | | Information security |
ISDA | | International Swaps and Derivatives Association, Inc. |
ISIN | | National Inspectorate for Nuclear Safety and Radiation Protection, a sub-body of the Italian Ministry of Economic Development |
ISMS | | Information Security Management System |
ISO | | International Organization for Standardization |
IT | | Information technology |
LivaNova PLC | | A public limited company organized under the laws of England and Wales on February 20, 2015 |
LivaNova USA | | LivaNova USA, Inc. |
LSM | | LivaNova Site Management S.r.l. |
MDD | | Medical Device Directive |
MDL | | Federal multi-district litigation in the US District Court for the Middle District of Pennsylvania |
MDR | | EU Medical Device Regulation |
Mitral | | Mitral Holdco S.à r.l. |
MRI | | Magnetic resonance imaging |
Nasdaq | | Nasdaq Global Market |
NCD | | Non-coverage determination |
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Abbreviation | | Definition |
NIST | | National Institute of Standards and Technology |
Notes | | $287.5 million aggregate principal amount of 3.00% senior notes due December 2025, issued June 17, 2020 |
OCI | | Other comprehensive income (loss) |
OECD | | Organization for Economic Co-operation and Development |
Option Counterparties | | Certain financial institutions with whom LivaNova entered into privately negotiated capped call transactions |
Order | | Administrative order from the Italian Ministry of the Environment received by LivaNova in 2021 |
OSA | | Obstructive sleep apnea |
OSPREY clinical trial | | LivaNova’s clinical trial, “Treating Obstructive Sleep Apnea using Targeted Hypoglossal Neurostimulation” |
Pillar Two | | OECD BEPS Pillar Two |
Plan Committee | | Qualified Plan Committee |
PMA | | Pre-market approval |
PP&E | | Property, plant and equipment |
Public Administrations | | The Italian Ministry of the Environment and other Italian government agencies |
R&D | | Research and Development |
RECOVER clinical study | | LivaNova’s clinical study “A Prospective, Multi-center, Randomized Controlled Blinded Trial Demonstrating the Safety and Effectiveness of VNS Therapy System as Adjunctive Therapy Versus a No Stimulation Control in Subjects With Treatment-Resistant Depression” |
Report | | This Annual Report on Form 10-K |
RSUs | | Service-based restricted stock units |
S&P | | Standard & Poor’s |
SARs | | Service-based stock appreciation rights |
SDRT | | UK Stamp Duty Reserve Tax |
SEC | | US Securities and Exchange Commission |
Securities Act | | US Securities Act of 1933, as amended |
SG&A | | Selling, general and administrative expenses |
SNIA | | SNIA S.p.A. |
SNIA Litigation Guarantee | | A first demand bank guarantee of €270.0 million in connection with the SNIA litigation |
SOFR | | Secured Overnight Financing Rate |
Sorin | | Sorin S.p.A. |
Sorin spin-off | | The spin-off of Sorin from SNIA in 2004 |
Term Facilities | | The Initial Term Facility, together with the Delayed Draw Term Facility |
Trust | | LivaNova PLC Employee Benefit Trust |
UK | | United Kingdom |
UK Act | | Finance (No.2) Act 2023 |
UK Bribery Act | | UK Bribery Act of 2010 |
US | | United States of America |
US GAAP | | Generally Accepted Accounting Principles in the US |
USD | | US dollar |
UTPR | | Undertaxed profits rule |
VNS | | Vagus nerve stimulation |
VNS Therapy | | LivaNova Vagus Nerve Stimulation Therapy |
WACC | | Weighted average cost of capital |
Warning Letter | | FDA Warning Letter received by LivaNova on December 29, 2015 |
INTELLECTUAL PROPERTY, TRADEMARKS AND TRADE NAMES
This reportReport may contain references to ourLivaNova’s proprietary intellectual property, including among others:
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• | 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™).
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• | Trademarks for our oxygenator product systems: Inspire®, Heartlink® and Connect™.
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• | 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®, Memo 3D®, Memo 3D ReChord™, AnnuloFlo®, AnnuloFlex®, Bicarbon Slimline™, Bicarbon Filtline™ and Bicarbon Overline®.
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•Trademarks for LivaNova’s Neuromodulation systems, the VNS Therapy™ System, the VITARIATM System and LivaNova’s proprietary pulse generator products: Model 102 (Pulse™), Model 102R (Pulse Duo™), Model 103 (Demipulse™), Model 104 (Demipulse Duo™), Model 106 (AspireSR™), Model 1000 (SenTiva™), Model 1000-D (SenTiva™ Duo), Model 7103 (VITARIATM and TitrationAssistTM) and Model 8103 (Symmetry™).
•Trademarks for LivaNova’s Cardiopulmonary products and systems: Essenz™, S5™, S3™, S5 Pro™, B-Capta™, Inspire™, Heartlink™, XTRA™, 3T Heater-Cooler™, Connect™ and Revolution™.
•Trademarks for LivaNova’s advanced circulatory support systems: TandemLife™, TandemHeart™, TandemLung™, ProtekDuo™, LifeSPARC™, ALung™, Hemolung™, Respiratory Dialysis™ and ActivMix™.
•Trademarks for LivaNova’s obstructive sleep apnea system: ImThera™ and aura6000™.
These trademarks and tradenamestrade names are the property of LivaNova or the property of ourLivaNova’s consolidated subsidiaries and are protected under applicable intellectual property laws. Solely for convenience, ourLivaNova’s trademarks and tradenamestrade names referred to in this Annual Report on Form 10-K may appear without the ® or ™ symbols, symbol, but such references are not intended to indicate in any way that wethe Company will not assert, to the fullest extent under applicable law, ourLivaNova’s rights to these trademarks and tradenames.
trade names.
CAUTIONARY STATEMENTNOTE ABOUT FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report, on Form 10-K, other than purelystatements of historical information,or current fact, 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”).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, ourthe Company’s actual financial results, performance, achievements or prospects may differ materially from those expressed or implied by these forward-looking statements. In some cases,Generally, 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 ourthe Company’s control, that could cause ourthe Company’s actual results to differ materially from the forward-looking statements contained in this Annual Report on Form 10-K. Suchand include, but are not limited to, the following risks uncertaintiesand uncertainties: volatility in the global market and worldwide economic conditions, including as caused by the invasion of Ukraine, the evolving instability in the Middle East, inflation, changing interest rates, foreign exchange fluctuations, changes to existing trade agreements and relationships between the US and other important factors include, among others:countries including the implementation of sanctions; cyber-attacks or other disruptions to the Company’s information technology systems or those of third parties with which the Company interacts; costs of complying with privacy and security of personal information requirements and laws; risks uncertaintiesrelated to reductions and factors set forthinterruptions in the “Risk Factors” sectionCompany’s supply chain; changes in technology, including the development of this Annual Report on Form 10-K, previoussuperior or alternative technology or devices by competitors and/or competition from providers of alternative medical therapies; failure to obtain approvals or reimbursement in relation to the Company’s products; failure to establish, expand or maintain market acceptance of the Company’s products for the treatment of the Company’s approved indications; failure to develop and commercialize new products and the rate and degree of market acceptance of such products; unfavorable results from clinical studies or failure to meet milestones; failure to comply with, or changes in, laws, regulations or administrative practices affecting government regulation of the Company’s products; risks relating to recalls, enforcement actions or product liability claims; changes or reduction in reimbursement for the Company’s products or failure to comply with rules relating to reimbursement of healthcare goods and services; failure to comply with anti-bribery laws; losses or costs from pending or future Quarterly Reports on Form 10-Qlawsuits and Annual or Transitional Reports on Form 10-Kgovernmental investigations, including in the case of the Company’s 3T Heater-Cooler and SNIA litigations; risks associated with environmental laws and regulations as well as environmental liabilities, violations, protest voting and litigation; product liability, intellectual property, shareholder-related, environmental-related, income tax and other documents that we have filedlitigation, disputes, losses and costs; failure to retain key personnel, prevent labor shortages, or will filemanage labor costs; the failure of the Company’s R&D efforts to keep up with the SEC; business and financialrapid pace of technological development in the medical device industry; risks inherentrelating to the industries in which we operate; our abilityimpact of climate change and ESG pressures from internal and external stakeholders; the risk of quality concerns and the impacts thereof; failure to hireprotect the Company’s proprietary intellectual property; failure of new acquisitions to further the Company’s strategic objectives or strengthen the Company’s existing businesses; the potential for impairments of intangible assets, goodwill and retain key personnel; our abilityother long-lived assets; risks relating to attract new customersthe Company’s indebtedness including under the exchangeable senior notes, the Company’s revolving credit facility and retain existing customersthe Company’s 2022 Term Facilities, as defined herein; effectiveness of the Company’s internal controls over financial reporting; changes in the manner anticipated; our reliance onCompany’s profitability and/or failure to manage costs and integration of information technology systems;expenses; fluctuations in future quarterly operating results and/or variations in revenue and operating expenses relative to estimates; changes in legislationtax laws and regulations, including exposure to additional income tax liabilities; and other unknown or governmental regulations affecting us; changes relating to competitive factors in the industries in which we operate; international, national or local economic, social or political conditions that could adversely affect us, our partners or our customers; conditions in the credit markets; our inability to meet expectations regarding the timing, completion and accounting of tax treatments; reductions in customer spending, a slowdown in customer payments and changes in customer demand for products and services; our international operations, which are subject to the risks of currency fluctuations and foreign exchange controls; and the potential of international unrest, economic downturn or effects of currencies, tax assessments, tax adjustments, anticipated tax rates, raw material costs or availability, benefit or retirement plan costs or other regulatory compliance costs.
These factors are not necessarily all of the importantunpredictable factors that could harm the Company’s financial performance.
See also the section titled “Risk Factors” (refer to Part I, Item 1A of this report) for further discussion of certain risks and uncertainties that could cause our actual financial results performance, achievements or prospectsand events to differ materially from those expressed in or implied by any of ourthe forward-looking statements. Other unknown or unpredictable factors also could harm our results. All forward-looking statements attributable to us or persons acting on our behalfin this Report are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made,of this Report, and we do not undertakeLivaNova expressly disclaims any intention or assume any obligation to update publiclyor revise any of these forward-looking statements, to reflect actual results,whether as a result of new information, or future events changesor otherwise. You are advised, however, to consult any further disclosures LivaNova makes on related subjects in assumptions or changes in other factors affectingits Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. This cautionary note is applicable to all forward-looking statements except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.contained in this report.
The following discussion and analysis should be read in conjunction with and are qualified in their entirety by reference to the discussions included in Item“Item 1A. Risk Factors, Item” “Item 7. Management’s Discussion &and Analysis of Financial Condition and Results of OperationsOperations” and elsewhere in this AnnualReport.
PART I
Item 1. Business
Description of the Business and Background
LivaNova PLC is a market-leading global medical technology company. The Company designs, develops, manufactures, markets and sells products and therapies that are consistent with LivaNova’s mission to provide hope for patients and their families through innovative medical technologies that deliver life-changing improvements. LivaNova is a public limited company organized under the laws of England and Wales and is headquartered in London, England. LivaNova’s ordinary shares are listed for trading on the Nasdaq under the symbol “LIVN.”
Business Overview
For the periods presented herein, LivaNova was comprised of three reportable segments: Cardiopulmonary, Neuromodulation and ACS. “Other” includes non-allocated corporate expenses for the years ended December 31, 2022 and 2023. For the year ended December 31, 2021, “Other” also includes the results of LivaNova’s Heart Valve business, which was divested on June 1, 2021.
During the first quarter of 2024, the Company reorganized its operating and reporting structure upon initiating the 2024 Restructuring Plan as further described below. In 2024, LivaNova’s ACS segment will be included within “Other,” excluding the ACS standalone cannulae and accessories business, which will be included within the Cardiopulmonary reportable segment.
For further information regarding LivaNova’s reportable segments, historical financial information and methodology for the presentation of financial results, please refer to “Item 15. Exhibits and Financial Statement Schedules” of this Report.
Cardiopulmonary
LivaNova’s Cardiopulmonary segment is engaged in the design, development, manufacture, marketing and selling of cardiopulmonary products, including HLMs, oxygenators, autotransfusion systems, perfusion tubing systems, cannulae and other related accessories. It includes the Essenz Perfusion System, the Company’s next-generation HLM with an embedded patient monitor for tailored patient care strategies and sensing technology for data-driven decision making during CPB procedures.
CPB is commonly used in many operations involving the heart. This technique enables the surgical team to oxygenate and circulate the patient’s blood, thus enabling the surgeon to operate on the heart. The most commonly performed procedures requiring CPB are conventional coronary artery bypass grafting and valve surgeries. LivaNova’s products enable CPB for neonatal, pediatric, and adult patients.
Heart-lung Machines
The HLM product group includes HLMs, heater-coolers, related cardiac surgery equipment and maintenance, and technical services. HLMs temporarily take over the work of the heart and/or lungs, providing blood and oxygen to the body. HLMs are most often used during procedures that require the heart to be stopped. Heater-coolers are used during surgeries to warm or cool patients as part of their care. They are especially important during surgeries involving the heart and lungs.
In March 2023, LivaNova announced it had received FDA 510(k) clearance for its Essenz HLM, which enabled the commercial launch of Essenz in the US. In the same month, LivaNova also initiated a broad commercial release of Essenz in Europe following a successful limited commercial release that supported more than 200 adult, pediatric and neonatal patients in that region. Approvals in various other countries have followed.
In August 2023, LivaNova announced it had received FDA 510(k) clearance and CE Mark for its Essenz ILBM, which provides continuous measurement of essential blood parameters to perfusionists throughout CPB procedures. The ILBM is integrated into the Essenz Perfusion System, which enables perfusionists to access and manage reliable blood parameters without the need for additional monitors or holders.
Oxygenators and Perfusion Tubing Systems
The oxygenators product group is comprised of disposable devices for extracorporeal circulation, including the Inspire systems. The Inspire range of products is comprised of 12 models that provide perfusionists with a customizable approach for the benefit of patients. Oxygenators exchange oxygen and carbon dioxide in the blood of patients during surgical procedures and are utilized by perfusionists during cardiac surgery in conjunction with a HLM and can also be utilized in ECMO.
Autotransfusion Systems
One of the key elements for a complete blood management strategy is autologous blood transfusion. The autotransfusion product group facilitates the collection, processing and reinfusion of the patient’s own blood lost at the surgical site.
Cannulae
The cannulae product group in the Cardiopulmonary segment is used to connect the extracorporeal circulation system to the heart of the patient during cardiac surgery. During the first quarter of 2024, as a result of the 2024 Restructuring Plan as further described below, the Company will transition all ACS standalone cannulae and accessories, including ProtekDuo and transseptal (TandemHeart) cannulae, into its Cardiopulmonary segment. The ACS cannulae are designed and used for temporary unloading of the right ventricle, for supporting the left ventricle and for connecting ECMO systems.
Neuromodulation
LivaNova’s Neuromodulation segment is engaged in the design, development, manufacture, marketing and selling of devices that deliver neuromodulation therapy for treating DRE and DTD. LivaNova’s principal Neuromodulation product, the VNS Therapy System, consists of an implantable pulse generator and connective lead that stimulates the vagus nerve; surgical equipment to assist with the implant procedure; equipment and instruction manuals enabling a treating physician to set parameters for a patient’s pulse generator; and for epilepsy, magnets to manually suspend or induce nerve stimulation. The lead does not need to be removed to replace a generator with a depleted battery.
The Neuromodulation segment is also engaged in the development and management of clinical testing for LivaNova’s aura6000 System for treating OSA. The aura6000 device stimulates the hypoglossal nerve, which engages specific tongue and palate muscles to open the airway while a patient sleeps.
LivaNova’s Neuromodulation segment also includes costs associated with the Company’s former Heart Failure program, which the Company began winding down during the first quarter of 2023.
Epilepsy
There are several broad types of treatment available to patients with epilepsy: multiple ASMs; various forms of the ketogenic diet; VNS; resective and ablative brain surgery; and intracranial neurostimulation. ASMs typically serve as a first-line treatment and are prescribed for virtually all patients diagnosed with epilepsy. After two ASMs fail to deliver seizure control, the epilepsy is characterized as drug-resistant. At this point, adjunctive non-drug options are considered, including VNS therapy, ketogenic diet, resective or ablative surgery and other neuromodulation therapies.
In 1997, LivaNova’s VNS Therapy System was the first medical device treatment approved by the FDA for the treatment of DRE, and today is the only neuromodulation device approved for use in the US in DRE patients as young as four years of age with partial onset, or focal, seizures. Other worldwide regulatory bodies have also approved the VNS Therapy System for treating patients with DRE, many without age or seizure-type restrictions. In 2020, CMS expanded reimbursement for VNS Therapy use in the treatment of Dravet Syndrome and, in January 2022, expanded reimbursement for VNS Therapy use in the treatment of Lennox-Gastaut Syndrome.
LivaNova distributes multiple VNS Therapy Systems for the treatment of epilepsy, including Model 103 (Demipulse), Model 104 (Demipulse Duo), Model 106 (AspireSR), Model 1000 (SenTiva) and Model 1000D (SenTiva Duo) pulse generators. LivaNova’s AspireSR and SenTiva generators provide the traditional benefits of VNS Therapy but add an additional stimulation capability: closed loop stimulation (AutoStim) which responds to detection of changes in heart rate potentially indicative of a seizure. The SenTiva generator is the smallest and lightest VNS device capable of delivering responsive therapy for epilepsy and includes the additional flexibility of LivaNova’s Scheduled Programming and Day & Night Programming capabilities. In 2017, the SenTiva, AspireHC and AspireSR VNS Therapy devices were approved by the FDA for expanded MRI access and similar CE Mark approval followed shortly thereafter.
Depression
In 2005, the FDA approved the VNS Therapy System for the adjunctive treatment of chronic or recurrent depression for patients 18 years or older who are experiencing a major depressive episode and have not had an adequate response to four or more antidepressant treatments. In 2007, CMS issued a non-coverage determination with respect to reimbursement of the VNS Therapy System for patients with DTD, significantly limiting access for most patients. In 2020, LivaNova’s VNS Therapy System, Symmetry received CE mark approval for the treatment of DTD.
In 2017, the American Journal of Psychiatry published the results of the longest and largest naturalistic study on treatments for patients experiencing chronic and severe DTD. The findings showed that the addition of the VNS Therapy System to traditional
treatment was effective in significantly reducing symptoms of depression and well-tolerated compared with traditional treatment alone. Following publication of the D23 study, LivaNova requested that CMS reconsider its previous NCD, and in 2018, CMS published a tracking sheet to reconsider.
In 2019, CMS produced a final decision providing coverage for the VNS Therapy System for Medicare beneficiaries through CED when offered in a CMS-approved, double-blind, randomized, placebo-controlled trial with a follow-up duration of at least one year, as well as coverage of VNS Therapy System device replacement. The CED also includes the possibility to extend the study to a prospective longitudinal registry.
In 2019, CMS accepted the protocol for LivaNova’s RECOVER clinical study and the first patient was enrolled. RECOVER includes 500 unipolar and up to 500 bipolar patients at a maximum of 100 sites in the US in the randomized part of the trial and may include up to an additional 5,800 patients in an open label registry.
In March 2023, LivaNova randomized the 500th unipolar depression patient into the RECOVER clinical study and subsequently completed all unipolar implants in May. Upon receipt of the 12-month follow-up data for all 500 patients, the Company expects to conduct a final analysis for the unipolar cohort, potentially culminating in publication of the study results for that cohort.
In June 2023, LivaNova randomized the 150th bipolar depression patient into the RECOVER clinical study. The RECOVER clinical study’s protocol allows for a minimum of 150 and a maximum of 500 bipolar depression patients to be randomized into the study. Upon randomizing the 150th bipolar patient, a series of interim analyses are being conducted every 25 patients by an independent Statistical Analysis Committee to assess if predictive probability of success has been reached for the bipolar cohort of the study. If any analysis reveals that the predictive probability of success has been reached, recruitment into the bipolar arm of the study will cease and LivaNova will notify CMS and initiate the prospective open-label longitudinal study for future bipolar Medicare patients. After the last patient enrolled into the RECOVER clinical study has completed 12 months of follow-up, a final analysis will be conducted on the complete bipolar dataset.
The RECOVER clinical study, if successful, may potentially be used to support a peer-reviewed publication and reconsideration of reimbursement for the VNS Therapy System by CMS for the treatment of DTD. The reconsideration process will happen independently for the unipolar and bipolar cohorts.
Obstructive Sleep Apnea
In 2018, LivaNova acquired full ownership of ImThera, a company developing an implantable neurostimulation device system for the treatment of obstructive sleep apnea. The device stimulates the hypoglossal nerve, which engages specific tongue and palate muscles to open the airway while a patient sleeps.
In 2021, LivaNova received approval from the FDA to proceed with its investigational device exemption clinical study, the OSPREY clinical trial, and the first patient was implanted in March 2022. The OSPREY clinical trial seeks to confirm the safety and effectiveness of the aura6000 System.
Advanced Circulatory Support
LivaNova’s ACS segment was engaged in the design, development, manufacture, marketing and selling of temporary life support products. ACS’s products, which comprise the LifeSPARC and Hemolung systems, and standalone cannulae and accessories, including ProtekDuo and transseptal (TandemHeart) cannulae, simplify temporary extracorporeal cardiopulmonary life support solutions for critically ill patients.
On January 5, 2024, the Board of Directors of LivaNova PLC approved the 2024 Restructuring Plan to enhance the Company’s focus on its core Cardiopulmonary and Neuromodulation segments. The main component of this plan is to wind down the ACS segment, which the Company anticipates will be substantially complete by the end of 2024. During the first quarter of 2024, the Company reorganized its operating and reporting structure upon initiating the 2024 Restructuring Plan and transitioned all ACS standalone cannulae and accessories, including ProtekDuo and transseptal (TandemHeart) cannulae, into its Cardiopulmonary segment. Operations for other ACS products, including LifeSPARC and Hemolung systems, will be discontinued by the end of 2024. For additional information, please refer to “Note 6. Restructuring” in LivaNova’s consolidated financial statements included in this Report.
R&D
The Company’s R&D investment consists of product design and development expenses, including technology, software, clinical study programs and regulatory activities. LivaNova’s markets are subject to rapid technological advances, and as such, product improvement, software advancements and innovation are necessary to maintain market leadership. The Company directs its R&D efforts toward maintaining or achieving technological leadership in each of its markets to help ensure that patients using the Company’s devices and therapies receive the most advanced and effective treatment available. LivaNova remains committed to developing technological enhancements and new uses for existing products, as well as less invasive and new technologies to address unmet patient needs. LivaNova continues to engage researchers to collect clinical and health economic evidence that support regulatory filings and value dossiers and to establish the value proposition to patients, physicians, and payors for its current and future products.
Patents and Licenses
LivaNova relies on a combination of patents, trademarks, copyrights, trade secrets and non-disclosure and non-competition agreements to protect the Company’s intellectual property. LivaNova generally files patent applications in the US and countries where patent protection for LivaNova’s technology is appropriate and available. As of December 31, 2023, LivaNova held more than 865 issued patents worldwide, with approximately 295 pending patent applications that cover various aspects of the Company’s technology. Patents typically have a 20-year term from the application filing date. In addition, LivaNova holds exclusive and non-exclusive licenses to a variety of third-party technologies covered by patents and pending patent applications. There can be no assurance that pending patent applications will result in the issuance of patents, that patents issued to or licensed by LivaNova will not be challenged or circumvented by competitors, or that these patents will be found to be valid or sufficiently broad to protect LivaNova’s technology or to provide the Company with a competitive advantage. LivaNova has also obtained certain trademarks and trade names for the Company’s products and maintains certain details about its processes, products and strategies as trade secrets. In the aggregate, LivaNova considers these intellectual property assets to be of material importance to its business. LivaNova regularly reviews third-party patents and patent applications in an effort to protect its intellectual property and avoid disputes over proprietary rights.
LivaNova relies on non-disclosure and non-competition agreements with employees, consultants and other parties to protect, in part, trade secrets and other proprietary technology. There can be no assurance that these agreements will not be breached or will be enforceable, that LivaNova will have adequate remedies for any breach, that others will not independently develop equivalent proprietary information or that third parties will not otherwise gain access to LivaNova’s trade secrets and proprietary knowledge.
For additional information, please refer to “Item 1A. Risk Factors” of this Report, under the section entitled “LivaNova is substantially dependent on Form 10-K.
patent and other proprietary rights and failing to protect such rights or to be successful in litigation related to LivaNova’s rights or the rights of others may result in the Company’s payment of significant monetary damages and/or royalty payments, negatively impact LivaNova’s ability to sell current or future products or prohibit the Company from enforcing its patent and other proprietary rights against others.”
Markets and Distribution Methods
LivaNova sells most of its medical devices through direct sales representatives in the US and a combination of direct sales representatives and independent distributors in international markets. Europe and the APAC region are the Company’s largest international markets, comprising 19% and 13% of net revenue during the year ended December 31, 2023, respectively.
LivaNova’s marketing and sales strategy is focused on rapid, cost-effective delivery of high-quality products to a diverse group of customers worldwide, including perfusionists, neurologists, neurosurgeons and other physicians, hospitals and other medical institutions and healthcare providers. To achieve this objective, LivaNova’s sales team develops and preserves strong relationships with customers, and the Company cultivates and maintains close working relationships with professionals in the medical industry. These relationships provide LivaNova with a detailed understanding of therapeutic and diagnostic trends, developments, and emerging opportunities, which enables the Company to respond to the changing needs of providers and patients. LivaNova actively participates in medical meetings and conducts comprehensive training and educational activities to enhance its presence in the medical communities it serves. LivaNova believes that these activities also contribute to advancing the expertise of healthcare professionals.
The current trend among hospitals and other medical device customers is to consolidate into larger purchasing groups to enhance purchasing power. As a result, customer transactions have become increasingly complex, which has led, and may continue to lead, to downward pricing pressure and an increase in the use of preferred vendors. LivaNova’s global customer base continues to evolve in response to these and other economic developments across the geographic markets the Company serves.
Competition and Industry
LivaNova competes in the global medical device market with sales in more than 100 countries. This market is characterized by technological advances and scientific discoveries which can often trigger rapid changes in market dynamics. LivaNova’s competitors range from large manufacturers with multiple business lines to small manufacturers offering a limited selection of specialized products. LivaNova faces competition from, among others, providers of alternative medical therapies, pharmaceuticals and surgical interventions.
Physician advisories, regulatory safety alerts and publications about LivaNova’s products, or competitor products, can cause major shifts in industry market share, reflecting the importance of product quality, product efficacy and quality systems in the medical device industry. In addition, developments in managed care, economically motivated customers, consolidation among healthcare providers, increased competition and declining reimbursement rates may increasingly require LivaNova to compete on the basis of price. In order to continue to compete effectively, LivaNova will likely be required to continue to create or acquire advanced technology, incorporate this technology into proprietary products, obtain regulatory approvals in a timely manner, maintain high-quality manufacturing processes, and successfully market and sell these products.
LivaNova’s primary medical device competitors in the Cardiopulmonary, Neuromodulation and ACS product groups are Terumo Medical Corporation, Maquet Medical Systems, Medtronic plc, Haemonetics Corporation, NeuroPace, Inc. and Abbott Laboratories, Inc., although not all competitors are present in all product lines.
Production, Quality Systems and Raw Materials
LivaNova manufactures a majority of its products in facilities located in the US, Italy, Germany, Australia and Brazil. LivaNova purchases raw materials and components used in its products from numerous suppliers located in various countries worldwide. For quality assurance, sole source availability or cost effectiveness purposes, LivaNova may procure certain components and raw materials from a sole supplier. LivaNova takes countermeasures to reduce its supply chain risk, including working with suppliers to ensure continuity of supply while maintaining high quality and reliability and working to minimize the instances in which the Company relies on a sole supplier. LivaNova uses quality systems in the design, development, manufacturing, warehousing and distribution of its products to ensure its products are safe and effective. In addition, LivaNova utilizes environmental management systems and safety programs to protect the environment and the Company’s employees. For example, all of LivaNova’s manufacturing facilities are certified ISO 13485. Additionally, LivaNova’s Mirandola, Italy plant is ISO 14001 and ISO 45001 certified, and its Munich, Germany plant is ISO 14001 certified. For additional information related to LivaNova’s manufacturing facilities, refer to “Item 2. Properties” in this Report.
Government Regulation and Other Considerations
LivaNova’s medical devices are subject to extensive government regulation by numerous government agencies, both within and outside the US. These agencies require LivaNova to comply with laws and regulations governing the research, development, testing, manufacturing, labeling, pre-market clearance or approval, marketing, distribution, advertising, promotion, record keeping, reporting, tracking, importing, and exporting of LivaNova’s products. LivaNova’s business is also affected by data privacy and security laws, cost containment initiatives, and environmental health and safety laws and regulations worldwide. LivaNova works to ensure compliance with such laws and regulations and continues to monitor the laws applicable to LivaNova, which are subject to changing and evolving interpretations.
Product Approval and Monitoring
Many countries in which LivaNova sells its products subject the Company’s medical devices to their own product approval and requirements regarding performance, safety and quality. For example, each medical device that LivaNova seeks to distribute commercially in the US must receive 510(k) clearance or PMA from the FDA, unless specifically exempted by the agency. The 510(k) process, also known as pre-market notification, requires LivaNova to demonstrate that its new medical device is substantially equivalent to a legally marketed medical device. The PMA process, which is more costly and rigorous than the 510(k) process, requires LivaNova to demonstrate independently that a medical device is safe and effective for its intended use. One or more clinical studies may be required to support a 510(k) application and are almost always required to support a PMA application.
The EU has established a single regulatory product approval process, pursuant to which a CE Mark certifies conformity with all of the legal requirements of the regulatory process. To obtain a CE Mark, defined products must meet minimum standards of performance, safety and quality based on, among other things, the evaluation of clinical data supporting the safety and performance of the products during normal conditions of use. The competent authorities of the EU countries separately regulate the clinical research for medical devices and the market surveillance of products placed on the market, and manufacturers with CE marked devices are subject to regular inspections to monitor compliance with the applicable directives and essential
requirements. In 2017, for example, the EU published its MDR, which has resulted in significant additional pre- and post-market requirements. Certifications to EU MDR must be achieved by December 2027 or December 2028, based on the risk classification of the device. Penalties for regulatory non-compliance can be severe, including fines and revocation or suspension of a company’s business license, mandatory price reductions and criminal sanctions.
LivaNova is also required to comply with the regulations of every other country where it commercializes products before the Company can launch or maintain new products in the market. To be sold in Japan, for example, LivaNova’s medical devices must undergo thorough safety examinations and demonstrate medical efficacy from the Japanese government through the Ministry of Health, Labour and Welfare before they are granted approval. In China, regulatory requirements are becoming more stringent. Many countries also require that product approvals be recertified on a regular basis, generally every four to five years. The recertification process requires LivaNova to evaluate any device change and any new regulation or standard relevant to the device and, where required, conduct appropriate testing to document continued compliance.
The global regulatory environment is becoming increasingly more stringent and unpredictable. Several countries that did not have regulatory requirements for medical devices have established such requirements in recent years, and other countries have expanded, or plan to expand, their existing regulations. While some regulatory bodies have pursued harmonization of global regulations, requirements continue to differ significantly among countries. LivaNova expects this global regulatory environment will continue to evolve, which could impact the Company’s cost, approval lead time, or ability to maintain existing or obtain future product approvals.
Product and Promotional Restrictions
Both before and after LivaNova releases a product for commercial distribution, the Company has ongoing responsibilities under various laws and regulations governing medical devices. The FDA and other regulatory agencies in and outside the US review LivaNova’s design and manufacturing practices, labeling, record keeping, and required reports of adverse experiences and other information to identify potential problems with marketed medical devices. LivaNova is also subject to periodic inspections for compliance with applicable quality system regulations, which govern the methods used in, and the facilities and controls used for, the design, manufacture, packaging, and servicing of finished medical devices intended for human use. In addition, the FDA and other US regulatory bodies monitor the manner in which LivaNova promotes and advertises its products. Although physicians are permitted to use their medical judgment to prescribe medical devices for indications other than those cleared or approved by the FDA, LivaNova is prohibited from promoting products for such “off-label” uses and can only market the Company’s products for cleared or approved uses.
Any adverse regulatory action, depending on its magnitude, may limit LivaNova’s ability to market and sell its products effectively, limit its ability to obtain future premarket approvals or result in a substantial modification to LivaNova’s business practices and operations. For additional information, see “Item 1A. Risk Factors” of this Report, under the section entitled “LivaNova’s products are subject to complex laws and regulations, and failure to obtain product approvals, clearance or reimbursement may materially adversely affect LivaNova’s business, results of operations, cash flows and financial condition.”
Governmental Trade Regulations
The sale and shipment of LivaNova’s products and services across international borders, as well as the purchase of components and products from international sources, subject LivaNova to extensive governmental trade regulations. Many countries control the export and re-export of goods, technology and services for public health, national security, regional stability, antiterrorism and other reasons. Some governments may also impose economic sanctions against certain countries, persons or entities. In certain circumstances, governmental authorities may require LivaNova to obtain approval before LivaNova may export or re-export goods, technology or services to certain destinations, to certain end-users and for certain end-uses. Because LivaNova is subject to extensive regulations in the countries in which it operates, the Company is subject to the risk that laws and regulations could change in a way that would expose LivaNova to additional costs, penalties or liabilities.
LivaNova also sells and provides goods, technology and services to agents, representatives and distributors who may export such items to customers and end-users, and if these third parties violate applicable export control or economic sanctions laws or regulations when engaging in transactions involving the Company’s products, LivaNova may be subject to varying degrees of liability depending on the extent of its participation in the transaction. The activities of these third parties may cause disruption or delays in the distribution and sale of LivaNova’s products or result in restrictions being placed on the Company’s international distribution and sales of products, which may materially impact LivaNova’s business activities.
Data Privacy and Security Laws
As a global medical device technology company, LivaNova may be subject to various laws worldwide that protect the privacy, security and confidentiality of certain data, including employee data and patient health information and restrict the use and
unauthorized disclosure of such information. Privacy standards are often strict. Enforcement actions and financial penalties related to privacy issues in the EU continue to grow, and new privacy and data localization laws and restrictions are being passed in other countries including the US. The management of cross-border transfers of personal information outside of EU member countries is becoming more complex, which may complicate LivaNova’s business and clinical research activities, as well as product offerings that involve transmission or use of patient health information. LivaNova continues to adapt its business processes to comply with those standards and requirements applicable to it.
In the US, HIPAA, as amended by the HITECH Act and their respective implementing regulations, imposes specified requirements relating to the privacy and security of certain individually identifiable health information. Among other things, HITECH makes certain of HIPAA’s privacy and security standards directly applicable to “business associates,” essentially defined as service providers of covered entities that create, receive, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity. In certain instances, LivaNova may be considered a business associate. In such instances, the patient data that LivaNova receives may include protected health information, as defined under HIPAA. Related enforcement actions can be costly and may also interrupt LivaNova’s regular business operations. In addition, state laws, such as the CCPA, govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways, thus complicating compliance and data protection efforts. Since the CCPA was enacted, other US states have enacted privacy laws. The effects of the CCPA and other recently adopted laws include an increased ability of individuals to control the use of their personal data, heightened transparency obligations, increased obligations of companies to maintain the security of data, and increased exposure to fines or damages for companies that violate these laws, including by not providing individuals their specified privacy rights or, not maintaining data security safeguards at specified levels of quality, or that experience data breaches. For additional information, see “Item 1A. Risk Factors” of this Report, under the section entitled “Cyber-attacks or other disruptions to LivaNova’s information technology systems could lead to reduced revenue, increased costs, liability claims, fines, harm to LivaNova’s competitive position and loss of reputation.”
In the EU, the processing of certain data, including employee and patient information, is subject to the privacy, security and confidentiality provisions set forth in Regulation 2016/679. Under the GDPR, data concerning health constitutes sensitive data. The processing of sensitive data is subject to, among other obligations, appropriate notice and consent requirements. Additional requirements apply with respect to issues such as data sharing, cross-border data transfers, data security, and data breach notification. The GDPR also requires LivaNova to implement a number of accountability measures in relation to the processing of sensitive data, including carrying out Data Protection Impact Assessments and appointing a Data Protection Officer. Administrative fines may be levied for non-compliance with the GDPR’s requirements and can reach the higher of €20 million (approximately $22.1 million) or up to 4% of LivaNova’s total worldwide annual net revenue for the preceding financial year.
Cost Containment Initiatives
Government and private sector initiatives to limit the growth of healthcare costs, including price regulation, competitive pricing, bidding and tender mechanics, coverage and payment policies, comparative effectiveness of therapies, technology assessments and managed-care arrangements are continuing in many countries where LivaNova does business. These changes are driving customers to place increased emphasis on the delivery of more cost-effective medical devices and therapies. Government programs, private healthcare insurance and managed-care plans have attempted to control costs by limiting the extent of coverage or amount of reimbursement available for particular procedures or treatments, by connecting reimbursement to outcomes, by shifting to population health management and through other mechanisms designed to constrain utilization and contain costs. Hospitals are also seeking to reduce costs through a variety of mechanisms, for example, creating centralized purchasing functions that set pricing and, in some cases, limit the number of vendors that can participate in a given purchasing program. Hospitals are also aligning their interests with those of physicians through employment and other arrangements, such as gainsharing, whereby a hospital agrees with physicians to share certain realized cost savings resulting from the physicians’ collective change in practice patterns, such as standardization of devices where medically appropriate, and participation in affordable care organizations. Such alignment has created increased levels of price sensitivity among customers for LivaNova’s products.
Some third-party payers must also approve coverage and set reimbursement levels for new or innovative devices or therapies before they reimburse healthcare providers that use the medical devices or therapies. Even though a new medical device may be cleared for commercial distribution, LivaNova may find limited demand for the device until coverage and sufficient reimbursement levels have been obtained from governmental and private third-party payers. In addition, some private third-party payers require that certain procedures or the use of certain products be authorized in advance as a condition of coverage.
As a result of LivaNova’s manufacturing efficiencies, cost controls and other cost-savings initiatives, the Company believes it is well-positioned to respond to changes resulting from this worldwide trend toward cost containment. However, uncertainty
remains as to the nature of any future legislation or other reforms, making it difficult for LivaNova to predict the potential impact of cost-containment trends on future operating results.
Applicability of Anti-Corruption Laws and Regulations
LivaNova’s worldwide business is subject to the FCPA, the UK Bribery Act and other anti-corruption laws and regulations applicable in the jurisdictions where LivaNova operates. The FCPA can be used to prosecute companies in the US for arrangements with physicians or other parties outside the US if the physician or party is a government official of another country and prohibited payments are made to obtain or retain business. The UK Bribery Act prohibits both domestic and international bribery, as well as bribery across both public and private sectors. There are similar laws and regulations applicable to LivaNova outside the US and the UK, all of which are subject to evolving interpretations. For additional information, please refer to “Item 1A. Risk Factors” of this Report, under the section entitled “Failure to comply with anti-bribery laws could materially adversely affect LivaNova’s business and result in civil and/or criminal sanctions.”
Environmental Regulation and Management
LivaNova is subject to various environmental laws, directives and regulations both in the US and abroad that have resulted in, and could lead to, increased environmental compliance expenditures and reporting. LivaNova’s ongoing manufacturing and other operations involve the use, storage and transportation of hazardous and non-hazardous substances regulated under environmental health and safety laws. In addition, governmental authorities may seek to hold LivaNova liable for successor environmental liability violations committed by any companies in which LivaNova invests or acquires or may require LivaNova to clean and remove hazardous substances at its sites that were produced by the operations of prior owners and are unrelated to the Company’s current operations. For additional information, please refer to “Note 13. Commitments and Contingencies” in LivaNova’s consolidated financial statements under the sections entitled “Saluggia Site Hazardous Substances” and “SNIA Environmental Liability” and “Item 1A. Risk Factors” of this Report, under the section entitled “LivaNova is subject to environmental laws and regulations and the risk of environmental liabilities, violations, protest voting and litigation in multiple jurisdictions, any of which could have a material impact on LivaNova’s business, results of operations, cash flows, financial condition and liquidity.”
Healthcare Fraud and Abuse and Related Laws
The delivery of LivaNova’s products is subject to regulation by HHS and comparable state and non-US agencies responsible for reimbursement and regulation of healthcare products and services. LivaNova is subject to US federal and state government healthcare regulations and enforcement imposed primarily in connection with government healthcare programs, such as the Medicare and Medicaid programs, as well as healthcare regulations and enforcement imposed by governments in other countries in which LivaNova conducts business.
US federal healthcare laws apply when LivaNova or customers submit claims for items or services that are reimbursed under government healthcare programs, including laws related to kickbacks, false claims, self-referrals or other healthcare fraud. Specifically, the federal healthcare Anti-Kickback Statute prohibits persons from, among other things, knowingly and willfully offering or paying remuneration, directly or indirectly, to a person to induce them to order, purchase, lease, or recommend a good or service for which payment may be made in whole or in part under a federal healthcare program such as Medicare or Medicaid, unless the arrangement fits within one of several statutory exemptions or regulatory “safe harbors.” Violations of the federal Anti-Kickback Statute may result in civil monetary penalties up to $100,000 for each violation, plus up to three times the remuneration involved. Violations can also result in criminal penalties, including criminal fines of up to $50,000 and imprisonment for up to 10 years. Finally, violations can result in exclusion from participation in government healthcare programs, including Medicare and Medicaid.
Additionally, violations of the False Claims Act can result in significant monetary penalties and treble damages. The US federal government utilizes the False Claims Act, the Anti-Kickback Statute and similar laws to investigate and prosecute device, pharmaceutical and biotechnology companies in connection with the promotion of products for unapproved uses, the provision of patient and provider support (e.g., reimbursement support), and other prohibited sales and marketing practices. The US government has obtained multi-million and multi-billion-dollar settlements under the False Claims Act, in addition to individual criminal convictions under applicable criminal statutes. Given the US government’s success in prosecuting claims under the False Claims Act, LivaNova anticipates that the US government will continue to devote substantial resources to investigating healthcare providers’ and manufacturers’ compliance with applicable fraud and abuse laws.
In addition to the Anti-Kickback Statute and False Claims Act, many states have their own laws related to kickbacks, false claims, self-referrals or other healthcare fraud. These laws do not always have the same exceptions or safe harbors as their federal corollaries and, in some states, apply with respect to all payers, including commercial health insurance companies.
HIPAA includes federal criminal statutes that prohibit, among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors; knowingly and willfully embezzling or stealing from a healthcare benefit program; willfully obstructing a criminal investigation of a healthcare offense; or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, products or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
There is also federal and state regulation of, and transparency with respect to, payments made to physicians and other healthcare providers. LivaNova is subject to, for example, the Physician Payments Sunshine Act, which requires the Company to report annually certain payments and other transfers of value it makes to US licensed physicians, nurse practitioners, physician assistants, or teaching hospitals. Any failure to comply with such laws and regulations may result in civil financial penalties.
In addition, as discussed above, the US and foreign government regulators enforce the FCPA and other anti-bribery laws. These laws and regulations are broad in scope and are subject to evolving interpretation. As a result, LivaNova has been, and will likely continue to be, required to incur substantial costs to investigate allegations, audit and monitor compliance, and/or alter the Company’s practices with respect to these laws. Violations or alleged violations of these laws could result in litigation, and LivaNova may be subject to criminal or civil penalties and sanctions, including substantial fines, imprisonment of current or former employees and exclusion from participation in governmental healthcare programs.
The evolving commercial compliance environment and the resulting need to build and maintain robust systems to comply with different compliance and/or reporting requirements in multiple jurisdictions increases the possibility that a healthcare company may violate one or more of these requirements and be required to allocate significant resources to its compliance program. If LivaNova’s operations are found to be in violation of any such laws or any other governmental regulations that apply to the Company, LivaNova may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, entry into corporate integrity agreements or other monitoring agreements with governmental agencies, the curtailment or restructuring of its operations, and exclusion from participation in federal and state healthcare programs, any of which could adversely affect LivaNova’s financial results and the Company’s ability to operate its business.
Disclosure Pursuant to Section 13(r) of the Exchange Act of 1934
Section 13(r) of the Exchange Act requires issuers to disclose in their annual reports, among other things, certain types of dealings with Iran and other entities, including transactions or dealing with government-owned entities, even when those activities are lawful and do not involve US persons. Two of LivaNova’s non-US subsidiaries currently sell medical devices, including cardiopulmonary and neuromodulation products, to distributors and non-governmental organizations in Iran to support patient care in that country. LivaNova has limited visibility into the identity of the customers of these distributors’ and non-governmental organizations in Iran. It is possible that their customers include entities, such as government-owned hospitals or sub-distributors, that are owned or controlled directly or indirectly by the Iranian government. However, to the best of its knowledge at this time, LivaNova does not have any contracts or commercial arrangements with the Iranian government or other relevant entities.
LivaNova’s gross revenues and net profits attributable to the above-mentioned Iranian activities were $1.0 million and $0.5 million for the three months ended December 31, 2023, respectively, and $4.3 million and $1.9 million for the year ended December 31, 2023, respectively.
LivaNova believes its activities are consistent with applicable law, including US, UK, EU, and other applicable sanction laws, though such laws are complex and continue to evolve rapidly. The Company intends to continue its business in Iran.
Human Capital Management
LivaNova has approximately 2,900 employees worldwide, representing 75 nationalities and located in 32 countries. These employees are crucial in achieving the Company’s mission to provide hope to its patients and their families. LivaNova encourages its employees to live by LivaNova’s five core values: patients first, meaningful innovation, act with agility, commitment to quality and integrity, and collaborative culture. LivaNova evaluates itself against these values and, ultimately, achieves success through them as an organization.
Compensation and Benefits
To meet the needs of LivaNova’s patients and customers, the Company strives to attract, retain, develop and reward exceptional talent. LivaNova’s proactive talent acquisition strategies, competitive compensation and benefits, collaborative and rewarding work environment, leadership development programs, and professional training opportunities have been a significant driver of the Company’s success. In addition to base pay, LivaNova’s rewards, compensation, and benefits programs may include, depending on jurisdiction, annual performance bonuses, stock awards, pensions, health and wellbeing programs, paid time off and parental leave, financial assistance for education-related purposes, flexible working schedules, hybrid and remote working, employee stock purchase plans, and employee rewards programs, among others.
Culture
LivaNova seeks to foster a culture of continuous learning, where open and direct communication is valued. Accordingly, LivaNova regularly conducts employee engagement surveys, called LivaNova4You, to measure overall employment engagement and satisfaction and to provide the Company with actionable data for potential opportunities for improvement.
The 2023 LivaNova4You survey results saw an increase in overall employee engagement since the last survey in 2021. With over 90% of employees completing the survey, the results indicate an increase in employee satisfaction and motivation. In response to feedback from the survey results, the executive leadership team has committed to improving, among other things, the digitization of work systems and the Company’s branding.
Performance Management, Leadership Development and Professional Training
LivaNova’s annual performance management process is designed to build employee skills and capabilities and develop and retain enterprise leaders for the future. It includes training to increase the quality of employee/manager talent review discussions and employee performance calibrations among leaders to drive consistency. All employees, which include full-time and part-time employees, start the year creating performance-aligned goals which are reviewed with their managers at both mid-year and year-end performance evaluation reviews.
Employees have access to an extensive training library called LivaNova University, which contains modules covering different aspects of the business. In addition, LivaNova has a range of tailored programs in place to develop and enhance employees’ career paths. The LivaNova Leadership Academy is a program that promotes development through three different learning forums, Manager Fundamentals, Emerging Leaders and Advanced Leadership, to accelerate the development and succession readiness for employees chosen for the program.
LivaNova also supports the continuing education of its employees externally. In the US and internationally, eligible employees can access financial aid through education reimbursement programs for approved courses and certifications completed independently. Additionally, the Company sponsors professional growth opportunities.
Finally, LivaNova offers internships and apprenticeships across functions around the globe, in partnership with universities and institutions, which regularly lead to full-time employment at the Company.
Diversity, Equity, and Inclusion
LivaNova recognizes the value in fostering a diverse, equitable and inclusive work environment and strives to provide a workplace free of harassment or discrimination. Accordingly, the Company closely monitors its gender metrics on a regular basis. As of December 31, 2023, LivaNova had nine Directors on its Board, of whom three (33%) are female and six (67%) are male. The executive leadership team at the end of 2023 consisted of twelve individuals, of whom two (17%) are female and ten (83%) are male. Of the Company’s senior leadership team, which includes the executive team, vice presidents and directors, as of December 31, 2023, approximately 30% are female and approximately 70% are male. Finally, as of December 31, 2023, of LivaNova’s approximately 2,900 employees, 51% are female and 49% are male.
LivaNova’s strategy for accelerating diversity begins with creating new ways to find extraordinary talent. Examples of the Company’s efforts include networking with historically black colleges and universities, posting job listings on diverse sites, ensuring diversity-focused interview panels, and training interviewers on how to conduct a fair, unbiased interview process.
In addition, LivaNova supports internal diversity affinity initiatives, including the Global Women’s Network which consists of female employees across the globe that convene to discuss topics that unite and celebrate the strength of diversity in the workplace. Similarly, the LivaNova Women’s Network, a mentorship program created by women and for women, facilitates pairings between mentors and mentees in the US and Latin America. Topics range from career and financial advice to performance management and connection to the Company’s strategy. These programs provide members with new perspectives, more personalized development, and an opportunity to network with other women across the organization.
Seasonality
The number of medical procedures incorporating LivaNova’s products is generally lower during the summer months, particularly in European countries, due to summer vacation schedules.
Available InformationMarkets and Distribution Methods
Our executive headquartersLivaNova sells most of its medical devices through direct sales representatives in the US and a combination of direct sales representatives and independent distributors in international markets. Europe and the APAC region are the Company’s largest international markets, comprising 19% and 13% of net revenue during the year ended December 31, 2023, respectively.
LivaNova’s marketing and sales strategy is focused on rapid, cost-effective delivery of high-quality products to a diverse group of customers worldwide, including perfusionists, neurologists, neurosurgeons and other physicians, hospitals and other medical institutions and healthcare providers. To achieve this objective, LivaNova’s sales team develops and preserves strong relationships with customers, and the Company cultivates and maintains close working relationships with professionals in the medical industry. These relationships provide LivaNova with a detailed understanding of therapeutic and diagnostic trends, developments, and emerging opportunities, which enables the Company to respond to the changing needs of providers and patients. LivaNova actively participates in medical meetings and conducts comprehensive training and educational activities to enhance its presence in the medical communities it serves. LivaNova believes that these activities also contribute to advancing the expertise of healthcare professionals.
The current trend among hospitals and other medical device customers is to consolidate into larger purchasing groups to enhance purchasing power. As a result, customer transactions have become increasingly complex, which has led, and may continue to lead, to downward pricing pressure and an increase in the use of preferred vendors. LivaNova’s global customer base continues to evolve in response to these and other economic developments across the geographic markets the Company serves.
Competition and Industry
LivaNova competes in the global medical device market with sales in more than 100 countries. This market is characterized by technological advances and scientific discoveries which can often trigger rapid changes in market dynamics. LivaNova’s competitors range from large manufacturers with multiple business lines to small manufacturers offering a limited selection of specialized products. LivaNova faces competition from, among others, providers of alternative medical therapies, pharmaceuticals and surgical interventions.
Physician advisories, regulatory safety alerts and publications about LivaNova’s products, or competitor products, can cause major shifts in industry market share, reflecting the importance of product quality, product efficacy and quality systems in the medical device industry. In addition, developments in managed care, economically motivated customers, consolidation among healthcare providers, increased competition and declining reimbursement rates may increasingly require LivaNova to compete on the basis of price. In order to continue to compete effectively, LivaNova will likely be required to continue to create or acquire advanced technology, incorporate this technology into proprietary products, obtain regulatory approvals in a timely manner, maintain high-quality manufacturing processes, and successfully market and sell these products.
LivaNova’s primary medical device competitors in the Cardiopulmonary, Neuromodulation and ACS product groups are Terumo Medical Corporation, Maquet Medical Systems, Medtronic plc, Haemonetics Corporation, NeuroPace, Inc. and Abbott Laboratories, Inc., although not all competitors are present in all product lines.
Production, Quality Systems and Raw Materials
LivaNova manufactures a majority of its products in facilities located at 20 Eastbourne Terrace, London, United Kingdom W2 6LG. Our website addressin the US, Italy, Germany, Australia and Brazil. LivaNova purchases raw materials and components used in its products from numerous suppliers located in various countries worldwide. For quality assurance, sole source availability or cost effectiveness purposes, LivaNova may procure certain components and raw materials from a sole supplier. LivaNova takes countermeasures to reduce its supply chain risk, including working with suppliers to ensure continuity of supply while maintaining high quality and reliability and working to minimize the instances in which the Company relies on a sole supplier. LivaNova uses quality systems in the design, development, manufacturing, warehousing and distribution of its products to ensure its products are safe and effective. In addition, LivaNova utilizes environmental management systems and safety programs to protect the environment and the Company’s employees. For example, all of LivaNova’s manufacturing facilities are certified ISO 13485. Additionally, LivaNova’s Mirandola, Italy plant is www.livanova.com. We make available freeISO 14001 and ISO 45001 certified, and its Munich, Germany plant is ISO 14001 certified. For additional information related to LivaNova’s manufacturing facilities, refer to “Item 2. Properties” in this Report.
Government Regulation and Other Considerations
LivaNova’s medical devices are subject to extensive government regulation by numerous government agencies, both within and outside the US. These agencies require LivaNova to comply with laws and regulations governing the research, development, testing, manufacturing, labeling, pre-market clearance or approval, marketing, distribution, advertising, promotion, record keeping, reporting, tracking, importing, and exporting of charge onLivaNova’s products. LivaNova’s business is also affected by data privacy and security laws, cost containment initiatives, and environmental health and safety laws and regulations worldwide. LivaNova works to ensure compliance with such laws and regulations and continues to monitor the laws applicable to LivaNova, which are subject to changing and evolving interpretations.
Product Approval and Monitoring
Many countries in which LivaNova sells its products subject the Company’s medical devices to their own product approval and requirements regarding performance, safety and quality. For example, each medical device that LivaNova seeks to distribute commercially in the US must receive 510(k) clearance or through our website our Proxy Statements on Schedule 14A, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendmentsPMA from the FDA, unless specifically exempted by the agency. The 510(k) process, also known as pre-market notification, requires LivaNova to those reports fileddemonstrate that its new medical device is substantially equivalent to a legally marketed medical device. The PMA process, which is more costly and rigorous than the 510(k) process, requires LivaNova to demonstrate independently that a medical device is safe and effective for its intended use. One or furnishedmore clinical studies may be required to support a 510(k) application and are almost always required to support a PMA application.
The EU has established a single regulatory product approval process, pursuant to Section 13(a) or 15(d)which a CE Mark certifies conformity with all of the Exchange Act, and reports relating to beneficial ownership of our securities filed or furnished pursuant to Section 16legal requirements of the Exchange Act, as soon as reasonably practicable after electronically filing such materialregulatory process. To obtain a CE Mark, defined products must meet minimum standards of performance, safety and quality based on, among other things, the evaluation of clinical data supporting the safety and performance of the products during normal conditions of use. The competent authorities of the EU countries separately regulate the clinical research for medical devices and the market surveillance of products placed on the market, and manufacturers with CE marked devices are subject to regular inspections to monitor compliance with the SEC. Our websiteapplicable directives and essential
requirements. In 2017, for example, the EU published its MDR, which has resulted in significant additional pre- and post-market requirements. Certifications to EU MDR must be achieved by December 2027 or December 2028, based on the risk classification of the device. Penalties for regulatory non-compliance can be severe, including fines and revocation or suspension of a company’s business license, mandatory price reductions and criminal sanctions.
LivaNova is also contains the charters for each standing committee of our Board of Directors and our Code of Business Conduct and Ethics.
Materials we filerequired to comply with the SEC mayregulations of every other country where it commercializes products before the Company can launch or maintain new products in the market. To be readsold in Japan, for example, LivaNova’s medical devices must undergo thorough safety examinations and copied atdemonstrate medical efficacy from the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. InformationJapanese government through the Ministry of Health, Labour and Welfare before they are granted approval. In China, regulatory requirements are becoming more stringent. Many countries also require that product approvals be recertified on a regular basis, generally every four to five years. The recertification process requires LivaNova to evaluate any device change and any new regulation or standard relevant to the operationdevice and, where required, conduct appropriate testing to document continued compliance.
The global regulatory environment is becoming increasingly more stringent and unpredictable. Several countries that did not have regulatory requirements for medical devices have established such requirements in recent years, and other countries have expanded, or plan to expand, their existing regulations. While some regulatory bodies have pursued harmonization of global regulations, requirements continue to differ significantly among countries. LivaNova expects this global regulatory environment will continue to evolve, which could impact the Public Reference Room may be obtained by callingCompany’s cost, approval lead time, or ability to maintain existing or obtain future product approvals.
Product and Promotional Restrictions
Both before and after LivaNova releases a product for commercial distribution, the SEC at 1‑800‑SEC‑0330.Company has ongoing responsibilities under various laws and regulations governing medical devices. The SEC also maintains a website (www.sec.gov) that containsFDA and other regulatory agencies in and outside the US review LivaNova’s design and manufacturing practices, labeling, record keeping, and required reports proxy and information statements,of adverse experiences and other information regarding our company, filed electronicallyto identify potential problems with marketed medical devices. LivaNova is also subject to periodic inspections for compliance with applicable quality system regulations, which govern the SEC.methods used in, and the facilities and controls used for, the design, manufacture, packaging, and servicing of finished medical devices intended for human use. In addition, the FDA and other US regulatory bodies monitor the manner in which LivaNova promotes and advertises its products. Although physicians are permitted to use their medical judgment to prescribe medical devices for indications other than those cleared or approved by the FDA, LivaNova is prohibited from promoting products for such “off-label” uses and can only market the Company’s products for cleared or approved uses.
WeAny adverse regulatory action, depending on its magnitude, may limit LivaNova’s ability to market and sell its products effectively, limit its ability to obtain future premarket approvals or result in a substantial modification to LivaNova’s business practices and operations. For additional information, see “Item 1A. Risk Factors” of this Report, under the section entitled “LivaNova’s products are subject to complex laws and regulations, and failure to obtain product approvals, clearance or reimbursement may materially adversely affect LivaNova’s business, results of operations, cash flows and financial condition.”
Governmental Trade Regulations
The sale and shipment of LivaNova’s products and services across international borders, as well as the purchase of components and products from timeinternational sources, subject LivaNova to time provide important disclosuresextensive governmental trade regulations. Many countries control the export and re-export of goods, technology and services for public health, national security, regional stability, antiterrorism and other reasons. Some governments may also impose economic sanctions against certain countries, persons or entities. In certain circumstances, governmental authorities may require LivaNova to investors by posting themobtain approval before LivaNova may export or re-export goods, technology or services to certain destinations, to certain end-users and for certain end-uses. Because LivaNova is subject to extensive regulations in the Investor Relations section of our website, as allowed by SEC rules. Information on our websitecountries in which it operates, the Company is not incorporated into this Annual Report on Form 10-K.
PART I
Item 1. Business
Description ofsubject to the Businessrisk that laws and Backgroundregulations could change in a way that would expose LivaNova to additional costs, penalties or liabilities.
LivaNova PLC, headquarteredalso sells and provides goods, technology and services to agents, representatives and distributors who may export such items to customers and end-users, and if these third parties violate applicable export control or economic sanctions laws or regulations when engaging in London, (collectively withtransactions involving the Company’s products, LivaNova may be subject to varying degrees of liability depending on the extent of its subsidiaries,participation in the “Company”, “LivaNova”, “we”transaction. The activities of these third parties may cause disruption or “our”), isdelays in the distribution and sale of LivaNova’s products or result in restrictions being placed on the Company’s international distribution and sales of products, which may materially impact LivaNova’s business activities.
Data Privacy and Security Laws
As a global medical device technology company, focused onLivaNova may be subject to various laws worldwide that protect the developmentprivacy, security and deliveryconfidentiality of important therapeutic solutions forcertain data, including employee data and patient health information and restrict the benefituse and
unauthorized disclosure of patients, healthcare professionalssuch information. Privacy standards are often strict. Enforcement actions and healthcare systems throughout the world. Working closely with our global team of medical professionalsfinancial penalties related to privacy issues in the fieldsEU continue to grow, and new privacy and data localization laws and restrictions are being passed in other countries including the US. The management of Cardiac Surgerycross-border transfers of personal information outside of EU member countries is becoming more complex, which may complicate LivaNova’s business and Neuromodulation, we design, develop, manufactureclinical research activities, as well as product offerings that involve transmission or use of patient health information. LivaNova continues to adapt its business processes to comply with those standards and sell innovative therapeutic solutionsrequirements applicable to it.
In the US, HIPAA, as amended by the HITECH Act and their respective implementing regulations, imposes specified requirements relating to the privacy and security of certain individually identifiable health information. Among other things, HITECH makes certain of HIPAA’s privacy and security standards directly applicable to “business associates,” essentially defined as service providers of covered entities that are consistentcreate, receive, maintain or transmit protected health information in connection with our missionproviding a service for or on behalf of a covered entity. In certain instances, LivaNova may be considered a business associate. In such instances, the patient data that LivaNova receives may include protected health information, as defined under HIPAA. Related enforcement actions can be costly and may also interrupt LivaNova’s regular business operations. In addition, state laws, such as the CCPA, govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways, thus complicating compliance and data protection efforts. Since the CCPA was enacted, other US states have enacted privacy laws. The effects of the CCPA and other recently adopted laws include an increased ability of individuals to improve our patients’control the use of their personal data, heightened transparency obligations, increased obligations of companies to maintain the security of data, and increased exposure to fines or damages for companies that violate these laws, including by not providing individuals their specified privacy rights or, not maintaining data security safeguards at specified levels of quality, or that experience data breaches. For additional information, see “Item 1A. Risk Factors” of life, increase the skills and capabilities of healthcare professionals and minimize healthcare costs.
We were organizedthis Report, under the lawssection entitled “Cyber-attacks or other disruptions to LivaNova’s information technology systems could lead to reduced revenue, increased costs, liability claims, fines, harm to LivaNova’s competitive position and loss of Englandreputation.”
In the EU, the processing of certain data, including employee and Wales on February 20, 2015 for the purpose of facilitating the business combination of Cyberonics, Inc., a Delaware corporation (“Cyberonics”) and Sorin S.p.A., a joint stock company organized under the laws of Italy (“Sorin”). The business combination of Cyberonics and Sorin (the “Merger”) became effective on October 19, 2015, at which time LivaNova’s ordinary shares were listed for trading on the NASDAQ Global Market (“NASDAQ”) and the London Stock Exchange (“LSE”) under the trading symbol “LIVN.” On April 5, 2017, we delisted from the LSE and are currently only listed for trading on the NASDAQ. For furtherpatient information, regarding the business combination, refer to “Note 3. Business Combinations” in the notes to the consolidated financial statements included in this Annual Report on Form 10-K.
Business Franchises
LivaNova is comprised of two principal Business Franchises, which are also our reportable segments: Cardiac Surgery and Neuromodulation, corresponding to our primary therapeutic areas. Other corporate activities include corporate business development and New Ventures, focused on new growth platforms and identification of other opportunities for expansion.
On November 20, 2017, we entered into a Letter of Intent (“LOI”) to sell our Cardiac Rhythm Management Business Franchise (“CRM”) to MicroPort Scientific Corporation for $190 million in cash. We expect to enter into the definitive acquisition agreement contemplated by the LOI following completion of the notification and consultation process with CRM’s employee works councils as required by local laws. Completion of the transaction is subject to entry into the definitive acquisition agreement, receiptprivacy, security and confidentiality provisions set forth in Regulation 2016/679. Under the GDPR, data concerning health constitutes sensitive data. The processing of relevant regulatory approvals,sensitive data is subject to, among other obligations, appropriate notice and consent requirements. Additional requirements apply with respect to issues such as data sharing, cross-border data transfers, data security, and data breach notification. The GDPR also requires LivaNova to implement a number of accountability measures in relation to the processing of sensitive data, including fulfillingcarrying out Data Protection Impact Assessments and appointing a Data Protection Officer. Administrative fines may be levied for non-compliance with the requirements of the Hong Kong Stock Exchange’s Major TransactionGDPR’s requirements and other customary closing conditions. We expectcan reach the transactionhigher of €20 million (approximately $22.1 million) or up to close in the second quarter4% of 2018. Accordingly, the results of operations of the CRM Business Franchise are reflected as discontinued operations for all periods presented in this Annual Report on Form 10-K and related assets and liabilities are presented as held for sale.
For further information regarding our business segments, historical financial information and our methodologyLivaNova’s total worldwide annual net revenue for the presentationpreceding financial year.
Cost Containment Initiatives
Government and private sector initiatives to limit the growth of financial results, please referhealthcare costs, including price regulation, competitive pricing, bidding and tender mechanics, coverage and payment policies, comparative effectiveness of therapies, technology assessments and managed-care arrangements are continuing in many countries where LivaNova does business. These changes are driving customers to place increased emphasis on the consolidated financial statements and accompanying notes beginning on page F-1delivery of this Annual Report on Form 10-K.
Cardiac Surgery
Our Cardiac Surgery Business Franchise (“CS”) is engaged in the development, production and sale of cardiac surgery products, including oxygenators, heart-lung machines, perfusion tubing systems, cannulae and other accessories used for extracorporeal circulation, systems for autologous blood transfusion and blood washing, as well as a complete line of surgical tissue and mechanical heart valve replacements and repair products.
Cardiopulmonary Products
During conventional coronary artery bypass graft procedures and heart valve surgery, the patient’s heart is temporarily stopped, or arrested. The patient is placed on an extracorporeal circulatory support system that temporarily functions as the patient’s heart and lungs and provides blood flow to the body. Our products include systems to enable cardiopulmonary bypass, including heart-lung machines, oxygenators, perfusion tubing sets, cannulae and accessories, as well as related equipment and disposables for autotransfusion and autologous blood washing for neonatal, pediatric and adult patients. Our primary cardiopulmonary products include:
Heart-lung machines. The heart-lung machine (“HLM”) product group includes heart-lung machines, heater coolers, related cardiac surgery equipment and maintenance services.
Oxygenators and perfusion tubing systems. The oxygenators product group, which includes oxygenators and other disposable devices for extracorporeal circulation, includes the Inspire systems. The Inspire range of products, comprised of 12 models, provides perfusionists with a customizable approach for the benefit of patients.
Connect. Connect is our perfusion charting system. Focused on real time and retrospective calculations and trending tools, Connect assists perfusionists with data management during and after cardiopulmonary bypass.
Heartlink. Heartlink is our goal-directed perfusion system linking the Connect perfusion charting system with the Inspire oxygenator to achieve a better outcome by adapting adequacy of perfusion to the patient, thus reducing post-operative complications and Intensive Care Unit and hospital length of stay. Inspire, Heartlink and Connect products can all be integrated with our HLM machines to deliver a unique perfusion solution combining hardware components, disposablemore cost-effective medical devices and datatherapies. Government programs, private healthcare insurance and managed-care plans have attempted to control costs by limiting the extent of coverage or amount of reimbursement available for particular procedures or treatments, by connecting reimbursement to outcomes, by shifting to population health management systems and can all be integrated with our HLM machinesthrough other mechanisms designed to deliver a unique perfusion solution.
Autotransfusion systems. One of the key elements for a complete blood management strategy is autologous blood transfusion, which involves the collection, processingconstrain utilization and reinfusion of the patient’s own blood lost at the surgical site during the peri-operative period.
Cannulae. Our cannulae product family, part of the oxygenator product group, is usedcontain costs. Hospitals are also seeking to connect the extracorporeal circulation to the heart of the patient during cardiac surgery.
Heart Valves and Repair Products
We offer a comprehensive line of products to treatreduce costs through a variety of heart valve disorders, including a complete line of surgical tissuemechanisms, for example, creating centralized purchasing functions that set pricing and, mechanical valve replacements and repair products for damaged or diseased heart valves. Our heart valves and repair product offerings include:
Tissue heart valves. Our tissue valves include the Mitroflow aortic pericardial tissue valve with phospholipid reduction treatment (“PRT”) which is designed to mitigate valve calcification, and the Crown PRT and Solo Smart aortic pericardial tissue valves. CROWN PRT is the latest advancement in stented aortic bioprosthesis technology, featuring surgeon-friendly design, PRT technology, and state-of-the-art hemodynamic and durability performance. CROWN PRT enables intuitive intraoperative handling through a short rinse time, enhanced ease of implant through visible markers and improved radiographic visualization through dedicated X-ray markers. Our Solo Smart aortic pericardial tissue valve is an innovative, completely biological aortic heart valve with no synthetic material and a removable stent. Solo Smart provides the ease of implantation of a stented valve with the hemodynamic performance of a stentless valve.
Self-anchoring tissue heart valves. Perceval is LivaNova’s sutureless bioprosthetic device designed to replace a diseased native valve or a malfunctioning prosthetic aortic valve using either traditional or minimally invasive heart surgery techniques. Perceval incorporates a unique technology that allows 100% sutureless positioning and anchoring at the implantation site. This, in turn, offers the potential benefit of reducing the time the patient spends in cardiopulmonary bypass.
Mechanical heart valves. Our wide range of mechanical valve offerings includes the Carbomedics Standard, Top Hat and Reduced Series Aortic Valves, as well as the Carbomedics Carbo-Seal and Carbo-Seal Valsalva aortic prostheses. We also offer the Carbomedics Standard, Orbis and Optiform mechanical mitral valves and Bicarbon Slimline, Bicarbon Fitline and Bicarbon Overline aortic and mitral valves.
Heart valve repair products. Mitral valve repair is a well-established solution for patients suffering from a leaky mitral valve, or mitral regurgitation. We offer a wide range of mitral valve repair products, including the Memo 3D and Memo 3D ReChord, AnnuloFlo and AnnuloFlex.
Neuromodulation
Our Neuromodulation Business Franchise designs, develops and markets neuromodulation-based medical devices for the treatment of epilepsy and depression.
Neuromodulation Products
Our seminal neuromodulation product, the VNS Therapy® System, is an implantable device authorized for the treatment of drug-resistant epilepsy and treatment-resistant depression (“TRD”). The VNS Therapy System consists of: an implantable pulse generator and connective lead that work to stimulate the vagus nerve; surgical equipment to assist with the implant procedure; equipment and instruction manuals enabling a treating physician to set parameters for a patient’s pulse generator; and for epilepsy, magnets to manually suspend or induce nerve stimulation. The VNS Therapy pulse generator and lead are surgically implanted in a subcutaneous pocket in the upper left chest area, generally during an out-patient procedure; the lead (which does not need to be removed to replace a generator with a depleted battery) is connected to the pulse generator and tunneled under the skin to the vagus nerve in the lower left side of the patient’s neck.
VNS therapy for the treatment of epilepsy. Globally, there are several broad types of treatment available to persons with epilepsy: multiple seizure medications, various forms of the ketogenic diet, vagus nerve stimulation, resective brain surgery, trigeminal nerve stimulation, responsive intracranial neurostimulation and deep brain stimulation. Seizure medications typically serve as a first-line treatment and are prescribed for virtually all patients diagnosed with epilepsy. After two seizure medications fail to deliver seizure control, the epilepsy is defined as drug-resistant, at which point, adjunctive non-drug options are considered, including VNS therapy, brain surgery and a ketogenic diet.
In the U.S., our VNS Therapy System was the first medical device treatment approved by the U.S. Food and Drug Administration (“FDA”) in 1997 for refractory, drug-resistant epilepsy in adults and adolescents over 12 years of age and is indicated for use as an adjunctive therapy in reducing the frequency of seizures. Other worldwide regulatory bodies have also approved the VNS Therapy System for the treatment of epilepsy, many without age restrictions or seizure-type limitations. Patients with epilepsy can also use a small, handheld magnet provided with our VNS Therapy System to activate or inhibit stimulation manually. We sell a number of VNS product models for the treatment of epilepsy, including our Model 102 (PulseTM), Model 102R (Pulse DuoTM), Model 103 (Demipulse®), Model 104 (Demipulse Duo®), Model 105 (AspireHC®) and Model 106 (AspireSR®) and the Model 1000 (SenTivaTM) pulse generators. To date, an estimated 110,000 patients have been treated with our VNS Therapy System for epilepsy.
Our AspireSR generator provides the benefits of VNS Therapy, with an additional feature: automatic stimulation in response to detection of changes in heart rate potentially indicative of a seizure. The AspireSR generator is capable of delivering additional stimulation automatically by responding to a patient’s relative heart-rate changes that exceed certain variable thresholds, which are adjustable. Heart-rate changes accompany seizure activity in certain patients. The thresholds are programmed by the patient’s physician and can be adjusted to suit the patient’s level of physical activity or for other reasons. In October 2017, we obtained FDA approval to market our SenTiva VNS Therapy System, which consists of the SenTiva implantable generator and the next-generation VNS Therapy Programming System. The SenTiva generator is the smallest and lightest device capable of delivering responsive therapy for epilepsy. The SenTiva VNS Therapy Programming System features a wireless wand and a new user interface on a small tablet. Together, these components offer patients with drug-resistant epilepsy a physician-directed, customizable therapy with smart technology that reducessome cases, limit the number of seizures, lessensvendors that can participate in a given purchasing program. Hospitals are also aligning their interests with those of physicians through employment and other arrangements, such as gainsharing, whereby a hospital agrees with physicians to share certain realized cost savings resulting from the durationphysicians’ collective change in practice patterns, such as standardization of seizuresdevices where medically appropriate, and enablesparticipation in affordable care organizations. Such alignment has created increased levels of price sensitivity among customers for LivaNova’s products.
Some third-party payers must also approve coverage and set reimbursement levels for new or innovative devices or therapies before they reimburse healthcare providers that use the medical devices or therapies. Even though a faster recovery.
In June 2017,new medical device may be cleared for commercial distribution, LivaNova may find limited demand for the FDA approved our VNS Therapy device for use in patients who are at least four years of ageuntil coverage and sufficient reimbursement levels have partial onset seizures that are refractory to antiepileptic medications. VNS Therapy is the firstbeen obtained from governmental and only FDA-approved device for drug-resistant epilepsy in this pediatric population. Previously, VNS Therapy was approved by the FDA for patients 12 years or older.
private third-party payers. In addition, some private third-party payers require that certain procedures or the use of certain products be authorized in June 2017, we received FDA approval, and in August 2017, we received CE Mark approval, for our VNS Therapy device for expanded magnetic resonance imaging (“MRI”) labeling affirming VNS Therapyadvance as the only epilepsy device approved by the FDA for MRI scans. Currently, SenTiva, AspireHC and AspireSR modelsa condition of VNS Therapy technology provide for this expanded MRI access.coverage.
VNS for the treatment of depression. In July 2005, the FDA approved the VNS Therapy System for the adjunctive treatment of chronic or recurrent depression for patients 18 years or older who are experiencing a major depressive episode and have not had an adequate response to four or more antidepressant treatments. In May 2007, the Centers for Medicare and Medicaid Services (“CMS”) issued a national determination of non-coverage within the United States with respect to reimbursement of the VNS Therapy System for patients with TRD, significantly limiting access to this therapeutic option for most patients. As the result of lack of access following this determination, we have not engaged in significant commercial efforts with respect to TRD in any of our markets. As a result of new clinical evidence, including the completion of a post-approval dosing studyLivaNova’s manufacturing efficiencies, cost controls and other studies that have resulted in more than five publications in peer-reviewed journals, we submitted a formal requestcost-savings initiatives, the Company believes it is well-positioned to CMS for reconsideration of VNS therapy for TRD. CMS declined our request for reconsideration in May 2013. In October 2013, tworespond to changes resulting from this worldwide trend toward cost containment. However, uncertainty
Medicare beneficiaries appealed the lack of coverage by Medicare through the Departmental Appeals Board (“DAB”) of the Department of Health and Human Services. In January 2015, the DAB concluded that the record relatingremains as to the non-coverage conclusion by CMSnature of any future legislation or other reforms, making it difficult for LivaNova to predict the potential impact of cost-containment trends on future operating results.
Applicability of Anti-Corruption Laws and Regulations
LivaNova’s worldwide business is complete and adequately supports the non-coverage determination.
Discontinued Operations Cardiac Rhythm Management Business Franchise
CRM, presented as discontinued operations in this Annual Report on Form 10-K, develops, manufactures and markets products for the diagnosis, treatment, and management of heart rhythm disorders and heart failure. For more information, see Note 4subject to the consolidated financial statementsFCPA, the UK Bribery Act and other anti-corruption laws and regulations applicable in “Item 8. Financial Statementsthe jurisdictions where LivaNova operates. The FCPA can be used to prosecute companies in the US for arrangements with physicians or other parties outside the US if the physician or party is a government official of another country and Supplementary Data” in this Annual Report on Form 10-K.
Corporate Activitiesprohibited payments are made to obtain or retain business. The UK Bribery Act prohibits both domestic and New Ventures
Corporate activities include shared services for finance, legal, human resources and information technology, corporate business development and New Ventures.
The New Ventures group evaluates growth opportunities and new potential areas of investment for the Company to expand our product portfolio to meet emerging patient needs. In particular, New Ventures focuses on innovative technologies to treat three main pathologies: heart failure, sleep apnea and mitral valve regurgitation, areas of unmet clinical need where there is no optimal therapeutic solution for the majority of patients. New Ventures partners withinternational bribery, as well as bribery across both public and private institutionssectors. There are similar laws and medical startupsregulations applicable to develop future therapeutic solutions in these areas.
ResearchLivaNova outside the US and Development (“R&D”)
The markets inthe UK, all of which we participate are subject to rapid technological advances. Product improvement and innovation are necessary to maintain market leadership. Our R&D efforts are directed toward maintaining or achieving technological leadership in each of the markets we serve to help ensure that patients using our devices and therapies receive the most advanced and effective treatment possible. We remain committed to developing technological enhancements and new uses for existing products and less invasive and new technologies for new and emerging markets to address unmet patient needs. That commitment leads us to initiate and participate in many clinical trials each fiscal year as the demand for clinical and economic evidence remains high. We also expect our development activities to help reduce patient care costs and the length of hospital stays in the future.
Approximately 20% of our employees work in R&D improving existing products and therapies, expanding their uses and applications and developing new products. We continue to focus on optimizing innovation and assessing the ability of our R&D programs to deliver economic value to the customer. More specifically, our current R&D expenses consist of product design and development efforts, clinical study programs and regulatory activities, which are essential to the Company’s strategic portfolio initiatives, including TMVR, Treatment Resistant Depression and Heart Failure.
During the years ended December 31, 2017 and December 31, 2016, the transitional period April 25, 2015 to December 31, 2015, and the fiscal year ended April 24, 2015, we spent $109.7 million, $82.5 million, $41.9 million and $42.2 million on R&D, respectively.
Acquisitions and Investments
Our strategy of providing a broad range of therapies requires a wide variety of technologies, products and capabilities. The rapid pace of technological development in the medical industry and the specialized expertise required in different areas of medicine make it difficult for one company alone to develop a broad portfolio of technological solutions. In addition to internally generated growth through research and development efforts, we have historically relied, and expect to continue to rely, on acquisitions, investments and alliances to provide access to new technologies in both new and existing markets.
We expect to further our strategic objectives and strengthen our existing businesses by making future acquisitions or investments in areas that we believe we can acquire or stimulate the development of new technologies and products. Mergers and acquisitions of medical technology companies are inherently risky and no assurance can be given that any of our previous or future acquisitions will be successful or will not materially adversely affect our consolidated operations, financial condition and/or cash flows.
Caisson Interventional, LLC
On May 2, 2017, we acquired the remaining 51% equity interests in Caisson Interventional, LLC (“Caisson”). 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 for treating mitral regurgitation through
replacement of the native mitral valve using a fully transvenous delivery system. The financial results of Caisson are included within New Ventures.
ImThera Medical, Inc.
On January 16, 2018, we acquired ImThera Medical, Inc. (“ImThera”). We previously held 14% of ImThera’s outstanding equity. Headquartered in San Diego, Calif., ImThera was a privately held company focused on neurostimulation for the treatment of obstructive sleep apnea (“OSA”). ImThera manufactures an implantable device that stimulates multiple tongue muscles via the hypoglossal nerve, which opens the airway while a patient is sleeping. The ImThera device is highly aligned with our Neuromodulation Business Franchise, and we plan to optimize the technology. In the near term, we plan to focus on expanding ImThera’s current commercial presence in the European market, while advancing enrollment in a U.S. Food and Drug Administration pivotal study.
Patents and Licenses
We rely on a combination of patents, trademarks, copyrights, trade secrets, and non-disclosure and non-competition agreements to protect our intellectual property. We generally file patent applications in the U.S. and countries where patent protection for our technology is appropriate and available. As of December 31, 2017, we held more than 1,900 issued patents worldwide, with approximately 400 pending patent applications that cover various aspects of our technology, including CRM. Patents typically have a 20-year term from the application filing date. In addition, we hold exclusive and non-exclusive licenses to a variety of third-party technologies covered by patents and pending patent applications. There can be no assurance that pending patent applications will result in the issuance of patents, that patents issued to or licensed by us will not be challenged or circumvented by competitors, or that these patents will be found to be valid or sufficiently broad to protect our technology or to provide us with a competitive advantage. We have also obtained certain trademarks and trade names for our products and maintain certain details about our processes, products and strategies as trade secrets. In the aggregate, these intellectual property assets are considered to be of material importance to our business segments and operations. We regularly review third-party patents and patent applications in an effort to protect our intellectual property and avoid disputes over proprietary rights.
We rely on non-disclosure and non-competition agreements with employees, consultants and other parties to protect, in part, trade secrets and other proprietary technology. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, that others will not independently develop equivalent proprietary information or that third parties will not otherwise gain access to our trade secrets and proprietary knowledge.
evolving interpretations. For additional information, please refer to Item“Item 1A. Risk FactorsFactors” of this Annual Report, on Form 10-K, under the section entitled “Risk Factors RelatingFailure to comply with anti-bribery laws could materially adversely affect LivaNova’s Business-We are substantially dependent on patentbusiness and result in civil and/or criminal sanctions.”
Environmental Regulation and Management
LivaNova is subject to various environmental laws, directives and regulations both in the US and abroad that have resulted in, and could lead to, increased environmental compliance expenditures and reporting. LivaNova’s ongoing manufacturing and other proprietary rightsoperations involve the use, storage and failingtransportation of hazardous and non-hazardous substances regulated under environmental health and safety laws. In addition, governmental authorities may seek to protecthold LivaNova liable for successor environmental liability violations committed by any companies in which LivaNova invests or acquires or may require LivaNova to clean and remove hazardous substances at its sites that were produced by the operations of prior owners and are unrelated to the Company’s current operations. For additional information, please refer to “Note 13. Commitments and Contingencies” in LivaNova’s consolidated financial statements under the sections entitled “Saluggia Site Hazardous Substances” and “SNIA Environmental Liability” and “Item 1A. Risk Factors” of this Report, under the section entitled “LivaNova is subject to environmental laws and regulations and the risk of environmental liabilities, violations, protest voting and litigation in multiple jurisdictions, any of which could have a material impact on LivaNova’s business, results of operations, cash flows, financial condition and liquidity.”
Healthcare Fraud and Abuse and Related Laws
The delivery of LivaNova’s products is subject to regulation by HHS and comparable state and non-US agencies responsible for reimbursement and regulation of healthcare products and services. LivaNova is subject to US federal and state government healthcare regulations and enforcement imposed primarily in connection with government healthcare programs, such rightsas the Medicare and Medicaid programs, as well as healthcare regulations and enforcement imposed by governments in other countries in which LivaNova conducts business.
US federal healthcare laws apply when LivaNova or to be successful in litigationcustomers submit claims for items or services that are reimbursed under government healthcare programs, including laws related to our rightskickbacks, false claims, self-referrals or other healthcare fraud. Specifically, the federal healthcare Anti-Kickback Statute prohibits persons from, among other things, knowingly and willfully offering or paying remuneration, directly or indirectly, to a person to induce them to order, purchase, lease, or recommend a good or service for which payment may be made in whole or in part under a federal healthcare program such as Medicare or Medicaid, unless the rightsarrangement fits within one of othersseveral statutory exemptions or regulatory “safe harbors.” Violations of the federal Anti-Kickback Statute may result in our paymentcivil monetary penalties up to $100,000 for each violation, plus up to three times the remuneration involved. Violations can also result in criminal penalties, including criminal fines of up to $50,000 and imprisonment for up to 10 years. Finally, violations can result in exclusion from participation in government healthcare programs, including Medicare and Medicaid.
Additionally, violations of the False Claims Act can result in significant monetary damagespenalties and treble damages. The US federal government utilizes the False Claims Act, the Anti-Kickback Statute and similar laws to investigate and prosecute device, pharmaceutical and biotechnology companies in connection with the promotion of products for unapproved uses, the provision of patient and provider support (e.g., reimbursement support), and other prohibited sales and marketing practices. The US government has obtained multi-million and multi-billion-dollar settlements under the False Claims Act, in addition to individual criminal convictions under applicable criminal statutes. Given the US government’s success in prosecuting claims under the False Claims Act, LivaNova anticipates that the US government will continue to devote substantial resources to investigating healthcare providers’ and manufacturers’ compliance with applicable fraud and abuse laws.
In addition to the Anti-Kickback Statute and False Claims Act, many states have their own laws related to kickbacks, false claims, self-referrals or other healthcare fraud. These laws do not always have the same exceptions or safe harbors as their federal corollaries and, in some states, apply with respect to all payers, including commercial health insurance companies.
HIPAA includes federal criminal statutes that prohibit, among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors; knowingly and willfully embezzling or stealing from a healthcare benefit program; willfully obstructing a criminal investigation of a healthcare offense; or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, products or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
There is also federal and state regulation of, and transparency with respect to, payments made to physicians and other healthcare providers. LivaNova is subject to, for example, the Physician Payments Sunshine Act, which requires the Company to report annually certain payments and other transfers of value it makes to US licensed physicians, nurse practitioners, physician assistants, or teaching hospitals. Any failure to comply with such laws and regulations may result in civil financial penalties.
In addition, as discussed above, the US and foreign government regulators enforce the FCPA and other anti-bribery laws. These laws and regulations are broad in scope and are subject to evolving interpretation. As a result, LivaNova has been, and will likely continue to be, required to incur substantial costs to investigate allegations, audit and monitor compliance, and/or royalty payments, negatively impact ouralter the Company’s practices with respect to these laws. Violations or alleged violations of these laws could result in litigation, and LivaNova may be subject to criminal or civil penalties and sanctions, including substantial fines, imprisonment of current or former employees and exclusion from participation in governmental healthcare programs.
The evolving commercial compliance environment and the resulting need to build and maintain robust systems to comply with different compliance and/or reporting requirements in multiple jurisdictions increases the possibility that a healthcare company may violate one or more of these requirements and be required to allocate significant resources to its compliance program. If LivaNova’s operations are found to be in violation of any such laws or any other governmental regulations that apply to the Company, LivaNova may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, entry into corporate integrity agreements or other monitoring agreements with governmental agencies, the curtailment or restructuring of its operations, and exclusion from participation in federal and state healthcare programs, any of which could adversely affect LivaNova’s financial results and the Company’s ability to sell current or future products, or prohibit us from enforcingoperate its patentbusiness.
Disclosure Pursuant to Section 13(r) of the Exchange Act of 1934
Section 13(r) of the Exchange Act requires issuers to disclose in their annual reports, among other things, certain types of dealings with Iran and other proprietary rightsentities, including transactions or dealing with government-owned entities, even when those activities are lawful and do not involve US persons. Two of LivaNova’s non-US subsidiaries currently sell medical devices, including cardiopulmonary and neuromodulation products, to distributors and non-governmental organizations in Iran to support patient care in that country. LivaNova has limited visibility into the identity of the customers of these distributors’ and non-governmental organizations in Iran. It is possible that their customers include entities, such as government-owned hospitals or sub-distributors, that are owned or controlled directly or indirectly by the Iranian government. However, to the best of its knowledge at this time, LivaNova does not have any contracts or commercial arrangements with the Iranian government or other relevant entities.
LivaNova’s gross revenues and net profits attributable to the above-mentioned Iranian activities were $1.0 million and $0.5 million for the three months ended December 31, 2023, respectively, and $4.3 million and $1.9 million for the year ended December 31, 2023, respectively.
LivaNova believes its activities are consistent with applicable law, including US, UK, EU, and other applicable sanction laws, though such laws are complex and continue to evolve rapidly. The Company intends to continue its business in Iran.
Human Capital Management
LivaNova has approximately 2,900 employees worldwide, representing 75 nationalities and located in 32 countries. These employees are crucial in achieving the Company’s mission to provide hope to its patients and their families. LivaNova encourages its employees to live by LivaNova’s five core values: patients first, meaningful innovation, act with agility, commitment to quality and integrity, and collaborative culture. LivaNova evaluates itself against others.”these values and, ultimately, achieves success through them as an organization.
Compensation and Benefits
To meet the needs of LivaNova’s patients and customers, the Company strives to attract, retain, develop and reward exceptional talent. LivaNova’s proactive talent acquisition strategies, competitive compensation and benefits, collaborative and rewarding work environment, leadership development programs, and professional training opportunities have been a significant driver of the Company’s success. In addition to base pay, LivaNova’s rewards, compensation, and benefits programs may include, depending on jurisdiction, annual performance bonuses, stock awards, pensions, health and wellbeing programs, paid time off and parental leave, financial assistance for education-related purposes, flexible working schedules, hybrid and remote working, employee stock purchase plans, and employee rewards programs, among others.
Culture
LivaNova seeks to foster a culture of continuous learning, where open and direct communication is valued. Accordingly, LivaNova regularly conducts employee engagement surveys, called LivaNova4You, to measure overall employment engagement and satisfaction and to provide the Company with actionable data for potential opportunities for improvement.
The 2023 LivaNova4You survey results saw an increase in overall employee engagement since the last survey in 2021. With over 90% of employees completing the survey, the results indicate an increase in employee satisfaction and motivation. In response to feedback from the survey results, the executive leadership team has committed to improving, among other things, the digitization of work systems and the Company’s branding.
Performance Management, Leadership Development and Professional Training
LivaNova’s annual performance management process is designed to build employee skills and capabilities and develop and retain enterprise leaders for the future. It includes training to increase the quality of employee/manager talent review discussions and employee performance calibrations among leaders to drive consistency. All employees, which include full-time and part-time employees, start the year creating performance-aligned goals which are reviewed with their managers at both mid-year and year-end performance evaluation reviews.
Employees have access to an extensive training library called LivaNova University, which contains modules covering different aspects of the business. In addition, LivaNova has a range of tailored programs in place to develop and enhance employees’ career paths. The LivaNova Leadership Academy is a program that promotes development through three different learning forums, Manager Fundamentals, Emerging Leaders and Advanced Leadership, to accelerate the development and succession readiness for employees chosen for the program.
LivaNova also supports the continuing education of its employees externally. In the US and internationally, eligible employees can access financial aid through education reimbursement programs for approved courses and certifications completed independently. Additionally, the Company sponsors professional growth opportunities.
Finally, LivaNova offers internships and apprenticeships across functions around the globe, in partnership with universities and institutions, which regularly lead to full-time employment at the Company.
Diversity, Equity, and Inclusion
LivaNova recognizes the value in fostering a diverse, equitable and inclusive work environment and strives to provide a workplace free of harassment or discrimination. Accordingly, the Company closely monitors its gender metrics on a regular basis. As of December 31, 2023, LivaNova had nine Directors on its Board, of whom three (33%) are female and six (67%) are male. The executive leadership team at the end of 2023 consisted of twelve individuals, of whom two (17%) are female and ten (83%) are male. Of the Company’s senior leadership team, which includes the executive team, vice presidents and directors, as of December 31, 2023, approximately 30% are female and approximately 70% are male. Finally, as of December 31, 2023, of LivaNova’s approximately 2,900 employees, 51% are female and 49% are male.
LivaNova’s strategy for accelerating diversity begins with creating new ways to find extraordinary talent. Examples of the Company’s efforts include networking with historically black colleges and universities, posting job listings on diverse sites, ensuring diversity-focused interview panels, and training interviewers on how to conduct a fair, unbiased interview process.
In addition, LivaNova supports internal diversity affinity initiatives, including the Global Women’s Network which consists of female employees across the globe that convene to discuss topics that unite and celebrate the strength of diversity in the workplace. Similarly, the LivaNova Women’s Network, a mentorship program created by women and for women, facilitates pairings between mentors and mentees in the US and Latin America. Topics range from career and financial advice to performance management and connection to the Company’s strategy. These programs provide members with new perspectives, more personalized development, and an opportunity to network with other women across the organization.
Seasonality
The number of medical procedures incorporating LivaNova’s products is generally lower during the summer months, particularly in European countries, due to summer vacation schedules.
Markets and Distribution Methods
The three largest markets for our medical devices are Europe, the United States and Japan. Emerging markets are an area of increasing focus and opportunity. We sellLivaNova sells most of ourits medical devices through direct sales representatives in the United StatesUS and a combination of direct sales representatives and independent distributors in international markets. Europe and the APAC region are the Company’s largest international markets, outsidecomprising 19% and 13% of net revenue during the United States.year ended December 31, 2023, respectively.
OurLivaNova’s marketing and sales strategy is focused on rapid, cost-effective delivery of high-quality products to a diverse group of customers worldwide, including perfusionists, neurologists, neurosurgeons and other physicians, hospitals and other medical institutions and healthcare providers. To achieve this objective, we maintain a highly knowledgeableLivaNova’s sales team develops and dedicated sales staff that is able to fosterpreserves strong relationships with such a range of customers. We maintain excellentcustomers, and the Company cultivates and maintains close working relationships with professionals in the medical industry, which provides usindustry. These relationships provide LivaNova with a detailed understanding of therapeutic and diagnostic trends, developments, trends and emerging opportunities, enabling uswhich enables the Company to respond quickly to the changing needs of providers and patients. WeLivaNova actively participateparticipates in medical meetings and conductconducts comprehensive training and educational activities in an effort to enhance ourits presence in the medical community, and we believecommunities it serves. LivaNova believes that these activities also contribute to advancing the expertise of healthcare professionals’ expertise.professionals.
Due to the emphasis on cost-effectiveness in healthcare delivery, theThe current trend among hospitals and other medical device customers is to consolidate into larger purchasing groups in order to enhance purchasing power. As a result, customer transactions have become increasingly complex. Enhanced purchasing powercomplex, which has led, and may alsocontinue to lead, to downward pricing pressure on pricing and an increase in the use of preferred vendors. OurLivaNova’s global customer base continues to evolve in response to reflect suchthese and other economic changesdevelopments across the geographic markets we serve.
the Company serves.
Competition and Industry
We competeLivaNova competes in the global medical device market in more than 5,000 hospitalswith sales in more than 100 countries. This market is characterized by rapid change resulting from technological advances and scientific discoveries. Ourdiscoveries which can often trigger rapid changes in market dynamics. LivaNova’s competitors across our product portfolio range from large manufacturers with multiple business lines to small manufacturers offering a limited selection of specialized products. In addition, we faceLivaNova faces competition from, among others, providers of alternative medical therapies, such as pharmaceutical companiespharmaceuticals and providers of cannabis.surgical interventions.
Product problems, physicianPhysician advisories, regulatory safety alerts and publications about ourLivaNova’s products, or competitor products, can cause major shifts in industry market share, reflecting the importance of product quality, product efficacy and quality systems in the medical device industry. In addition, because of developments in managed care, economically motivated customers, consolidation among healthcare providers, increased competition and declining reimbursement rates we may be increasingly requiredrequire LivaNova to compete on the basis of price. In order to continue to compete effectively, we mustLivaNova will likely be required to continue to create or acquire advanced technology, incorporate this technology into proprietary products, obtain regulatory approvals in a timely manner, maintain high-quality manufacturing processes, and successfully market and sell these products.
Cardiac Surgery
OurLivaNova’s primary medical device competitors includein the Cardiopulmonary, Neuromodulation and ACS product groups are Terumo Medical Corporation, Maquet Medical Systems, Medtronic Plc,plc, Haemonetics Corporation, Edwards Lifesciences Corp.NeuroPace, Inc. and Abbott Laboratories, Inc. (formerly St. Jude Medical, Inc.), although not all competitors are present in all product lines.
Neuromodulation
Our primary medical device competitors in the Neuromodulation product group are NeuroPace, Inc. and Medtronic Plc.
Production, Quality Systems and Raw Materials
We manufactureLivaNova manufactures a majority of ourits products at 10 manufacturingin facilities located in the US, Italy, Germany, the United States, Canada, BrazilAustralia and Australia. We purchaseBrazil. LivaNova purchases raw materials and many of the components used in our manufacturing facilitiesits products from numerous suppliers located in various countries.countries worldwide. For quality assurance, sole source availability or cost effectiveness purposes, weLivaNova may procure certain components and raw materials from a sole supplier. We work closelyLivaNova takes countermeasures to reduce its supply chain risk, including working with our suppliers to ensure continuity of supply while maintaining high quality and reliability.
Thereliability and working to minimize the instances in which the Company relies on a sole supplier. LivaNova uses quality systems we utilize in the design, production,development, manufacturing, warehousing and distribution of ourits products are designed to ensure that ourits products are safe and effective. Some of the governmental agencies and quality system regulations with which we are required to comply are as follows:
The FDA’s Quality System Regulation (“QSR”) under section 520 of the federal Food, Drug and Cosmetic Act (“FDCA”) and its implementing regulations at 21 C.F.R. Part 820.
The International Standards Organization - (“ISO”) EN ISO 13485:2012, Medical devices - Quality management systems.
The independent certification bodies, DEKRA, LNE/G-MED and TUV SUD, which act as our notified bodies to ensure that our manufacturing quality systems comply with ISO 13485:2003.
The European Council Directives 93/42/EEC and 90/385/EEC, ISO 13485, which relates to medical devices and active implantable medical devices.
In addition, we utilizeLivaNova utilizes environmental management systems and safety programs to protect the environment and ourthe Company’s employees. SomeFor example, all of the regulations and governmental agencies with which we complyLivaNova’s manufacturing facilities are as follows:
The U.S. Environmental Protection Agency (“EPA”)
The Occupational Health and Safety Assessment System (“OSHAS”)
The European Union Registration, Evaluation, Authorization and Restriction of Chemicals (“REACH”)
Italian regulations under the Integrated Environmental Authorization acts
certified ISO 13485. Additionally, LivaNova’s Mirandola, Italy plant is ISO 14001 certification
and ISO 45001 certified, and its Munich, Germany plant is ISO 14001 certified. For additional information related to LivaNova’s manufacturing facilities, refer to “Item 2. Properties” in this Report.
Government Regulation and Other Considerations
OurLivaNova’s medical devices are subject to extensive government regulation by numerous government agencies, including the FDAboth within and counterpart agencies outside the United States. To varying degrees, each of theseUS. These agencies require usLivaNova to comply with laws and regulations governing the research, development, testing, manufacturing, labeling, pre-market clearance or approval, marketing, distribution, advertising, promotion, record keeping, reporting, tracking, and importing, and exporting of medical devices. OurLivaNova’s products. LivaNova’s business is also affected by patientdata privacy and security laws, cost containment initiatives, and environmental health and safety laws and regulations worldwide. The primaryLivaNova works to ensure compliance with such laws and regulations that affect our business are described below.
Theand continues to monitor the laws applicable to LivaNova, which are subject to changing and evolving interpretations. If a governmental authority were
Product Approval and Monitoring
Many countries in which LivaNova sells its products subject the Company’s medical devices to conclude that we are not in compliance with applicable lawstheir own product approval and regulations, werequirements regarding performance, safety and our officers and employees could be subject to severe civil and criminal penalties, including substantial fines and damages, and exclusion from participation as a supplier of product to beneficiaries covered by government programs, among other potential enforcement actions.
United States
Eachquality. For example, each medical device we seekthat LivaNova seeks to distribute commercially in the United StatesUS must first receive 510(k) clearance or pre-market approvalPMA from the FDA, unless specifically exempted by the agency. The FDA groups medical devices into one of three classes - Class I, Class II or Class III - depending on the degree of risk associated with each medical device and the extent of control needed to ensure safety and effectiveness. Devices deemed to pose lower risk are categorized510(k) process, also known as either Class I or II, which requires the manufacturer to submit to the FDA a 510(k) pre-market notification, requesting clearance for commercial distribution of the device in the United States. Some low-risk devices are exempted from this requirement. Devices deemed by the FDArequires LivaNova to pose the greatest risk, such as life sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously 510(k)-cleared device, are categorized as Class III, requiring approval of an application for pre-market approval (“PMA”).
510(k) Clearance Process
To obtain 510(k) clearance, LivaNova must submit a pre-market notification to the FDA demonstratingdemonstrate that the proposedits new medical device is substantially equivalent to a previously-cleared 510(k) device, a device that was in commercial distribution before May 28, 1976 forlegally marketed medical device. The PMA process, which the FDA has not yet called for the submission of approval PMA application, or a device that has been reclassified from Class III to either Class II or I. In rare cases, Class III devices may be cleared through the 510(k) process. The FDA’s 510(k) clearance process usually takes three to twelve months from the date the application is submittedmore costly and filed with the FDA, but may take significantly longer and clearance is never assured. Although many 510(k) pre-market notifications are cleared without clinical data, in some cases, the FDA requires significant clinical data to support substantial equivalence, which may significantly prolong the review process.
After a device receives 510(k) clearance, any subsequent device modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new 510(k) clearance or could require a PMA. The FDA requires each manufacturer to make this determination initially, but the FDA may review any such decision and may disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination, the FDA may require the manufacturer to cease marketing and/or recall the modified device until the manufacturer obtains a 510(k) clearance or approval of a PMA application. In addition, the FDA is currently evaluatingrigorous than the 510(k) process, and may make substantial changes to industry requirements, including which devices are eligible for 510(k) clearance, the ability to rescind previously granted 510(k) clearances and additional requirements that may significantly impact the process.
Pre-market Approval Process
Manufacturers must submit a PMA application for all Class III medical devices (although the FDA has the discretion to continue to allow certain pre-amendment Class III devices to use the 510(k) process) and all other medical devices that cannot be cleared through the 510(k) process. A PMA application typically must be supported by, among other things, extensive technical, pre-clinical and clinical study data, and manufacturing and labeling datarequires LivaNova to demonstrate the safetyindependently that a medical device is safe and effectiveness of the device to the FDA’s satisfaction.
After a manufacturer files a PMA application, the FDA begins an in-depth review process, which typically takes between one and three years, but may take significantly longer. During this review period, the FDA may request additional information or clarification of information already provided. Also during the review period, the FDA often convenes an advisory panel of experts from outside the FDA to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a pre-approval inspection of the manufacturing facility to ensure compliance with the QSR, which imposes elaborate design development, testing, control, documentation and other quality assurance procedures related to the design and manufacturing process. The FDA may approve a PMA application with post-
approval conditionseffective for its intended to ensure the safety and effectiveness of the device including, among other things, restrictions on labeling, promotion, sale, and distribution and collection of long-term follow-up data from patients in the clinical study that supported the approval. Failure to comply with the conditions of approval can result in a materially adverse enforcement action, including, among other things, the loss or withdrawal of the approval. Manufacturers must submit a new PMA application or a PMA supplement for approval of significant modifications to the design, indications, labeling or manufacturing process of a PMA-approved device. PMA supplements often require submission of the same type of information as an original PMA application, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA application, and may not require extensive clinical data as extensive as the original PMA application, the convening of an advisory panel or pre-approval inspections.
Clinical Studies
use. One or more clinical studies may be required to support a 510(k) application and are almost always required to support a PMA application. Manufacturers must conduct clinical studies of unapproved or uncleared medical devices or devices intended for uses for which they are not approved or cleared (investigational devices) in compliance with FDA requirements. If human clinical studies of a device are required and the device presents a significant risk, the sponsor of the study must file an investigational device exemption (“IDE”), application prior to commencing the study. The IDE application must be supported by data, typically including the results of animal and/or laboratory testing. If the IDE application is approved by the FDA and one or more institutional review boards (“IRBs”), human clinical studies may begin at a specific number of institutional investigational sites with the specific number of patients approved by the FDA. If the device presents a non-significant risk to the patient, a sponsor may begin the clinical study after obtaining approval for the study by one or more IRBs without separate approval from the FDA. During the study, the sponsor must comply with the FDA’s IDE requirements including, for example, investigator selection, monitoring of the clinical study sites, adverse event reporting and record keeping. The investigators must obtain patient informed consent, follow the investigational plan and study protocol, control the disposition of investigational devices and comply with reporting and record keeping requirements. We, the FDA and the IRB at each institution at which a clinical study is being conducted may suspend a clinical study at any time for various reasons, including a belief that the subjects are being exposed to an unacceptable risk.
Continuing Regulation
After a device is cleared or approved for marketing in the United States, numerous and pervasive regulatory requirements continue to apply, and we will continue to be subject to periodic inspections by the FDA to determine its compliance with these requirements, as will its suppliers, contract manufacturers and contract testing laboratories. These requirements include, among others:
the QSR, which governs, among other things, how manufacturers design, test, manufacture, modify, label, exercise quality control over and document manufacturing and quality issues regarding their products;
Establishment Registration, which requires establishments involved in the production and distribution of medical devices intended for commercial distribution in the United States, to register with the FDA;
Medical Device Listing, which requires manufacturers to list with the FDA the devices they have in commercial distribution;
Labeling and claims regulations, which require that all advertising and promotion of devices be truthful, not misleading and fairly balanced and provide adequate directions for use, and that all claims be substantiated;
Prohibition of marketing devices for off-label uses, including requirements relating to dissemination of articles and information and responding to unsolicited requests for off-label information;
Medical Device Reporting (“MDR”) regulations, which requires reporting to the FDA if a device may have caused or contributed to a death or serious injury, or if a device has malfunctioned and would be likely to cause or contribute to a death or serious injury if the malfunction were to recur;
Reporting and record keeping for certain corrections or removals initiated by a manufacturer to reduce a risk to health posed by a device or to remedy a violation of the FDCA caused by the device that may present a risk to health;
Statutory and regulatory requirements for Unique Device Identifiers (“UDIs”) on devices and submission of certain information about each device to the FDA’s Global Unique Device Identification Database (“GUDID”); and
In some cases, ongoing monitoring and tracking of a device’s performance and periodic reporting to the FDA of such performance results.
The FDA enforces these requirements by inspection and market surveillance. The FDA periodically inspects our manufacturing facilities, which potentially includes our suppliers. If the FDA observes conditions that may constitute violations, we must correct the conditions or satisfactorily demonstrate the absence of the violations. The FDA alsoEU has the authority to request repair, replacement or refund of the cost of any device manufactured or distributed by us. We continue to expend resources to maintain compliance with our obligations under the FDA’s regulations. Failure to comply with applicable regulatory requirements may result in enforcement action by the FDA, which may include one or more of the following sanctions:
untitled letters or warning letters;
fines, injunctions and civil penalties;
mandatory recall or seizure of our products;
administrative detention or banning of our products;
operating restrictions, partial suspension or total shutdown of production;
refusing our request for 510(k) clearance or pre-market approval of new product versions;
revocation of 510(k) clearance or pre-market approvals previously granted; and
criminal prosecution and penalties.
Other than the U.S.
Outside the United States, we are subject to government regulation in the countries in which we operate. Although many of the regulations applicable to our products in these countries are similar to those of the FDA, these regulations vary significantly from country to country and with respect to the nature of the particular medical device. The time required to obtain foreign approvals to market our products may be longer or shorter than the time required in the United States, and requirements for such approvals may differ from FDA requirements.
In the European Economic Area, or EEA, (which is composed of the 28 Member States of the European Union (“EU”) plus Norway, Liechtenstein and Iceland),established a single regulatory product approval process, exists, andpursuant to which a CE Mark certifies conformity with all of the legal requirements is represented byof the CE mark.regulatory process. To obtain a CE mark certification,Mark, defined products must meet minimum standards of performance, safety and quality (i.e., the essential requirements) set out in the EU Medical Devices Directives (Council Directive 93/42/EEC on Medical Devices and Council Directive 90/385/EEC on Active Implantable Medical Devices). To demonstrate compliance with the essential requirements, we must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Except for low-risk medical devices, where the manufacturer can issue an EC Declaration of Conformity based on, a self-assessment of the conformity of its products with the essential requirements of the EU Medical Devices Directives, a conformity assessment procedure requires the intervention of an organization accredited by a Member State of the EEA to conduct conformity assessments by a Notified Body. Depending on the relevant conformity assessment procedure, the Notified Body typically audits and examines the technical file and the quality system for the manufacture, design and final inspection of the manufacturer’s devices. Following successful completion of a conformity assessment procedure, the Notified Body issues a certificate that entitles the manufacturer to affix the CE mark to its medical devices after having prepared and signed a related EC Declaration of Conformity. Manufacturers with CE marked devices are subject to regular inspections by Notified Bodies to monitor continued compliance with the applicable directives and essential requirements.
As a general rule, demonstration of conformity of medical devices and their manufacturers with the essential requirements must be based, among other things, on the evaluation of clinical data supporting the safety and performance of the products during normal conditions of use. Specifically, a manufacturer must demonstrate that the device achieves its intended performance during normal conditions of use, that the known and foreseeable risks, and any adverse events, are minimized and acceptable when weighed against the benefits of its intended performance, and that any claims made about the performance and safety of the device (e.g., product labeling and instructions for use) are supported by suitable evidence.
In the EEA, clinical studies for medical devices usually require the approval of an Ethics Committee and approval by or notification to the national competent authorities. Both regulators and Ethics Committees also typically require the submission of adverse event reports during a study and may request a copy of the final study report.
The national competent authorities of the EEAEU countries generally in the form of their ministries or departments of health, overseeseparately regulate the clinical research for medical devices and are responsible forthe market surveillance of products once they are placed
on the market. We are required to report device failures and injuries potentially related to product use to these authorities in a timely manner. Various penalties exist for non-compliance with the laws setting forth the medical device directives.
In September 2012, the European Commission published proposals for the revision of the EU regulatory framework for medical devices. The proposal would replace the Medical Devices Directive and the Active Implantable Medical Devices Directive with a new regulation (the “Medical Devices Regulation”). Unlike the Directives that must be implemented into national laws, the Regulation would be directly applicable in all EEA Member States and so is intended to eliminate current national differences in regulation of medical devices.
In October 2013, the European Parliament approved a package of reforms to the European Commission’s proposals. Under the revised proposals, only designated “special notified bodies” would be entitled to conduct conformity assessments of high-risk devices, such as active implantable devices. These special notified bodies will need to notify the European Commission when they receive an application for a conformity assessment for a new high-risk device. The European Commission will then forward the notification and the accompanying documents on the device to the Medical Devices Coordination Group (“MDCG”), (a new, yet to be created, body chaired by the European Commission, and representatives of Member States) for an opinion. These new procedures may result in the re-assessment of our existing medical devices, or a longer or more burdensome assessment of our new products. In May 2016, a political agreement was reached and the tentatively agreed upon text was published in June 2016. In April 2017, Regulation 2017/745 on medical devices (“Reg MDR”) was published, beginning a three-year transition period. At the end of this transition period, national competent authorities, Notified Bodiesmarket, and manufacturers must implement and ensurewith CE marked devices are subject to regular inspections to monitor compliance with the changes enactedapplicable directives and essential
requirements. In 2017, for example, the EU published its MDR, which has resulted in significant additional pre- and post-market requirements. Certifications to EU MDR must be achieved by December 2027 or December 2028, based on the risk classification of the device. Penalties for regulatory non-compliance can be severe, including fines and revocation or suspension of a company’s business license, mandatory price reductions and criminal sanctions.
LivaNova is also required to comply with the regulations of every other country where it commercializes products before the Company can launch or maintain new products in the Reg MDR. Among other things, this new regulation imposes additional reporting requirements on manufacturers of high risk medical devices, imposes an obligation on manufacturers to appoint a “qualified person” responsible for regulatory compliance, and provides for stricter clinical evidence requirements. We have initiated activities to ensure compliance with the MDR by the end of the transition period.
market. To be sold in Japan, mostfor example, LivaNova’s medical devices must undergo thorough safety examinations and demonstrate medical efficacy before they are granted approval, or “shonin.” Thefrom the Japanese government through the Ministry of Health, Labour and Welfare (“MHLW”), regulates medical devices under the Pharmaceutical Affairs Law (“PAL”). Oversight for medical devices is conducted with participation by the Pharmaceutical and Medical Devices Agency (“PMDA”), a quasi-government organization performing many of the review functions for MHLW. Penalties for a company’s noncompliance with PAL can be severe, including revocation or suspension of a company’s business license and criminal sanctions. MHLW and PMDA also assess the quality management systems of the manufacturer and product conformity to thebefore they are granted approval. In China, regulatory requirements of the PAL. We are subject to compliance inspections by these agencies.
becoming more stringent. Many countries in which we operate (outside of the EU, United States and Japan) have their own regulatory requirements for medical devices. Most countries outside of the EU, United States and Japanalso require that product approvals be recertified on a regular basis, generally every four to five years. The recertification process requires that weLivaNova to evaluate any device changeschange and any new regulationsregulation or standardsstandard relevant to the device and, where needed,required, conduct appropriate testing to document continued compliance. Where recertification applications are required, they must be approved in order to continue selling our products in those countries. Because export control and economic sanctions laws and regulations are complex and constantly changing, we cannot ensure that laws and regulations may not be enacted, amended, enforced or interpreted in a manner materially impacting our ability to sell or distribute our products.
OurThe global regulatory environment is becoming increasingly more stringent and unpredictable, which could increase the time, cost and complexity of obtaining regulatory approvals for our products.unpredictable. Several countries that did not have regulatory requirements for medical devices have established such requirements in recent years, and other countries have expanded, or plan to expand, their existing regulations. Certain regulators are requiring local clinical data in addition to global clinical data. While some regulatory bodies have pursued harmonization of global regulations, has been pursued, requirements continue to differ significantly among countries. We expect thatLivaNova expects this global regulatory environment will continue to evolve, which could impact ourthe Company’s cost, approval lead time, or ability to maintain existing or obtain future approvals for our products, or could increase the costproduct approvals.
Product and time to obtain such approvals in the future. We cannot provide assurance that any new medical devices we develop will be approved in a timely or cost-effective manner, or approved at all.
Promotional Restrictions
Both before and after we releaseLivaNova releases a product for commercial distribution, we havethe Company has ongoing responsibilities under various laws and regulations governing medical devices. The FDA and other regulatory agencies in and outside the US review LivaNova’s design and manufacturing practices, labeling, record keeping, and required reports of adverse experiences and other information to identify potential problems with marketed medical devices. LivaNova is also subject to periodic inspections for compliance with applicable quality system regulations, which govern the methods used in, and the facilities and controls used for, the design, manufacture, packaging, and servicing of finished medical devices intended for human use. In addition, to FDA regulatory requirements, the FDA and other U.S.US regulatory bodies (including the Federal Trade Commission, the Office of the Inspector General of the Department of Health and Human Services, the Department of Justice and various state Attorneys General) monitor the manner in which we promoteLivaNova promotes and advertise ouradvertises its products. Although physicians are permitted to use their medical judgment to employprescribe medical devices for indications other than those cleared or approved by the FDA, we areLivaNova is prohibited from promoting products for such “off-label” uses and can only market ourthe Company’s products for cleared or approved uses.
Any adverse regulatory action, depending on its magnitude, may limit LivaNova’s ability to market and sell its products effectively, limit its ability to obtain future premarket approvals or result in a substantial modification to LivaNova’s business practices and operations. For additional information, see “Item 1A. Risk Factors” of this Report, under the section entitled “LivaNova’s products are subject to complex laws and regulations, and failure to obtain product approvals, clearance or reimbursement may materially adversely affect LivaNova’s business, results of operations, cash flows and financial condition.”
Governmental Trade Regulations
The sale and shipment of ourLivaNova’s products and services across international borders, as well as the purchase of components and products from international sources, subjects ussubject LivaNova to extensive governmental trade regulations. A variety of laws and regulations apply to the sale, shipment and provision of goods, services and technology across international borders. Many countries control the export and re-export of goods, technology and services for public health, national security, regional stability, antiterrorism and other reasons. Some governments may also impose economic sanctions against certain countries, persons or entities. In certain circumstances, governmental authorities may require that weLivaNova to obtain an approval before weLivaNova may export or re-export goods, technology or services to certain destinations, to certain end-users and for certain end-uses. Because we areLivaNova is subject to extensive regulations in the countries in which we operate, we areit operates, the Company is subject to the risk that laws and regulations could change in a way that would expose usLivaNova to additional costs, penalties or liabilities. These laws
LivaNova also sells and regulations govern, among other things, our import and export activities.
We also sell and provideprovides goods, technology and services to agents, representatives and distributors who may export such items to customers and end-users, and if these third parties violate applicable export control andor economic sanctions laws andor regulations when engaging in transactions involving ourthe Company’s products, weLivaNova may be subject to varying degrees of liability depending on the extent of ourits participation in the transaction. The activities of these third parties may cause disruption or delays in the distribution and salessale of ourLivaNova’s products or result in restrictions being placed on ourthe Company’s international distribution and sales of products, which may materially impact ourLivaNova’s business activities.
PatientData Privacy and Security Laws
VariousAs a global medical device technology company, LivaNova may be subject to various laws worldwide that protect the privacy, security and confidentiality of certain data, including employee data and patient health information including patient medical records, and restrict the use and
unauthorized disclosure of patient health information by healthcare providers.such information. Privacy standards in Europe and Asia are becoming increasingly strict, enforcement actionoften strict. Enforcement actions and financial penalties related to privacy issues in the EU are growing,continue to grow, and new privacy and data localization laws and restrictions are being passed.passed in other countries including the US. The management of cross-border transfers of personal information among and outside of EU member countries is becoming more complex, which may complicate ourLivaNova’s business and clinical research activities, as well as product offerings that involve transmission or use of clinical data. We will continue our effortspatient health information. LivaNova continues to adapt its business processes to comply with those standards and requirements andapplicable to adapt our business processes to those standards.it.
In the United States, the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”),US, HIPAA, as amended by the Health Information Technology and Clinical HealthHITECH Act (“HITECH”) and their respective implementing regulations, including the final omnibus rule published on January 25, 2013, imposes specified requirements relating to the privacy and security and transmission of certain individually identifiable health information. Among other things, HITECH makes certain of HIPAA’s privacy and security standards directly applicable to “business associates,” essentially defined as independent contractors or agentsservice providers of covered entities that create, receive, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties thatIn certain instances, LivaNova may be imposed against covered entities,considered a business associatesassociate. In such instances, the patient data that LivaNova receives may include protected health information, as defined under HIPAA. Related enforcement actions can be costly and possibly other persons, and gave state attorneys new general authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions.may also interrupt LivaNova’s regular business operations. In addition, state laws, such as the CCPA, govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways, thus complicating compliance and data protection efforts. We potentially operate as a business associateSince the CCPA was enacted, other US states have enacted privacy laws. The effects of the CCPA and other recently adopted laws include an increased ability of individuals to covered entities in a limited numbercontrol the use of instances. In those cases,their personal data, heightened transparency obligations, increased obligations of companies to maintain the patientsecurity of data, and increased exposure to fines or damages for companies that we receive may include protected healthviolate these laws, including by not providing individuals their specified privacy rights or, not maintaining data security safeguards at specified levels of quality, or that experience data breaches. For additional information, as definedsee “Item 1A. Risk Factors” of this Report, under HIPAA. Enforcement actions can be costlythe section entitled “Cyber-attacks or other disruptions to LivaNova’s information technology systems could lead to reduced revenue, increased costs, liability claims, fines, harm to LivaNova’s competitive position and interrupt regular operations of our business. While we have not been named in any such actions, if a substantial breach or loss of data from our records were to occur, we could become a target of such litigation.reputation.”
In the EU, Regulation 2016/679 on the protection of natural persons with regard to the processing of personalcertain data, including employee and on the free movement of such data (“General Data Protection Regulation” or “GDPR”) comes into force on 25 May 2018. The GDPR replaces Directive 95/46/EC (“Data Protection Directive”). While many of the principles of the GDPR reflect those of the Data Protection Directive, for example in relation to the requirements relatingpatient information, is subject to the privacy, security and transmissionconfidentiality provisions set forth in Regulation 2016/679. Under the GDPR, data concerning health constitutes sensitive data. The processing of
individually identifiable health information, there are sensitive data is subject to, among other obligations, appropriate notice and consent requirements. Additional requirements apply with respect to issues such as data sharing, cross-border data transfers, data security, and data breach notification. The GDPR also requires LivaNova to implement a number of changes. In particular: (1) pro-active complianceaccountability measures are introduced, such asin relation to the requirement to carryprocessing of sensitive data, including carrying out a PrivacyData Protection Impact AssessmentAssessments and to appointappointing a Data Protection Officer where health data is processed on a “large scale”. Although “large scale” is not defined, it is likely that clinical trials involving substantial numbers of patients (or healthy volunteers if applicable) would mean that such requirements apply to LivaNova; and (2) the administrativeOfficer. Administrative fines that canmay be levied are significantly increased,for non-compliance with the maximum beingGDPR’s requirements and can reach the higher of €20 million (approximately $22.1 million) or up to 4%, of theLivaNova’s total worldwide annual turnover ofnet revenue for the group in the previouspreceding financial year.
Cost Containment Initiatives
Government and private sector initiatives to limit the growth of healthcare costs, including price regulation, competitive pricing, bidding and tender mechanics, coverage and payment policies, comparative effectiveness of therapies, technology assessments and managed-care arrangements are continuing in many countries where LivaNova does business. These changes are causing the marketplacedriving customers to putplace increased emphasis on the delivery of more cost-effective medical devices and therapies. Government programs, private healthcare insurance and managed-care plans have attempted to control costs by limiting the extent of coverage or amount of reimbursement available for particular procedures or treatments, tyingby connecting reimbursement to outcomes, by shifting to population health management and through other mechanisms designed to constrain utilization and contain costs. Hospitals which purchase implants, are also seeking to reduce costs through a variety of mechanisms, including, for example, creating centralized purchasing functions that set pricing and, in some cases, limit the number of vendors that can participate in thea given purchasing program. Hospitals are also aligning their interests with thatthose of physicians through employment and other arrangements, such as gainsharing, whereby a hospital agrees with physicians to share certain realized cost savings resulting from the physicians’ collective change in practice patterns, such as standardization of devices where medically appropriate, and participation in affordable care organizations. Such alignment has created increasingincreased levels of price sensitivity among customers for ourLivaNova’s products.
Some third-party payers must also approve coverage and set reimbursement levels for new or innovative devices or therapies before they will reimburse healthcare providers whothat use the medical devices or therapies. Even though a new medical device may be cleared for commercial distribution, weLivaNova may find limited demand for the device until coverage and sufficient reimbursement levels have been obtained from governmental and private third-party payers. In addition, some private third-party payers require that certain procedures or the use of certain products be authorized in advance as a condition of coverage.
In the United States, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “Affordable Care Act”), for example, has the potential to substantially change healthcare financing and delivery by both governmental and private insurers, and significantly impact the pharmaceutical and medical device industries. The Affordable Care Act imposed, among other things, an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United States. Due to subsequent legislative amendments the excise tax has been suspended for the period January 1, 2016 to December 31, 2019, and, absent further legislative action, will be reinstated starting January 1, 2020.
In addition, the Affordable Care Act provided incentives to programs that increase the federal government’s comparative effectiveness research. The Affordable Care Act also implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models.
International examples of cost containment initiatives and healthcare reforms in markets significant to our business include Japan, where the government reviews reimbursement rate benchmarks every two years. Such reviews may significantly reduce reimbursement for procedures using our medical devices or result in the denial of coverage for those procedures. As a result of ourLivaNova’s manufacturing efficiencies, cost controls and other cost-savings initiatives, we believe we arethe Company believes it is well-positioned to respond to changes resulting from this worldwide trend toward cost containment; however,containment. However, uncertainty
remains as to the nature of any future legislation or other reforms, making it difficult for LivaNova to predict the potential impact of cost-containment trends on future operating results.
Applicability of Anti-Corruption Laws and Regulations
OurLivaNova’s worldwide business is subject to the U.S. Foreign Corrupt Practices Act of 1977 (the “FCPA”),FCPA, the United KingdomUK Bribery Act of 2010 (the “UK Bribery Act”) and other anti-corruption laws and regulations applicable in the jurisdictions where we operate.LivaNova operates. The FCPA can be used to prosecute companies in the United StatesUS for arrangements with physicians or other parties outside the United States,US if the physician or party is a government official of another country and the arrangement violates the law of that country.prohibited payments are made to obtain or retain business. The UK Bribery Act prohibits both domestic and international bribery, as well as bribery across both public and private sectorssectors. There are similar laws and regulations applicable to LivaNova outside the United States,US and the UK, all of which are subject to evolving interpretations. For additional information, please refer to Item“Item 1A. Risk FactorsFactors” of this Annual Report, on Form 10-K,under the section entitled “Failure to comply with anti-bribery laws could materially adversely affect LivaNova’s business and result in civil and/or criminal sanctions.”
Environmental Regulation and Management
LivaNova is subject to various environmental laws, directives and regulations both in the US and abroad that have resulted in, and could lead to, increased environmental compliance expenditures and reporting. LivaNova’s ongoing manufacturing and other operations involve the use, storage and transportation of hazardous and non-hazardous substances regulated under environmental health and safety laws. In addition, governmental authorities may seek to hold LivaNova liable for successor environmental liability violations committed by any companies in which LivaNova invests or acquires or may require LivaNova to clean and remove hazardous substances at its sites that were produced by the operations of prior owners and are unrelated to the Company’s current operations. For additional information, please refer to “Note 13. Commitments and Contingencies” in LivaNova’s consolidated financial statements under the sections entitled “Saluggia Site Hazardous Substances” and “SNIA Environmental Liability” and “Item 1A. Risk Factors” of this Report, under the section entitled “We areLivaNova is subject to substantial post-market government regulationenvironmental laws and regulations and the risk of environmental liabilities, violations, protest voting and litigation in multiple jurisdictions, any adverse regulatory action may materially adversely affect ourof which could have a material impact on LivaNova’s business, results of operations, cash flows, financial condition and business operations” and “Our failure to comply with rules relating to healthcare fraud and abuse, false claims and privacy and security laws may subject us to penalties and adversely impact our reputation and business operations.liquidity.”
Health CareHealthcare Fraud and Abuse and Related Laws
We are alsoThe delivery of LivaNova’s products is subject to U.S.regulation by HHS and comparable state and non-US agencies responsible for reimbursement and regulation of healthcare products and services. LivaNova is subject to US federal and state government healthcare regulationregulations and enforcement imposed primarily in connection with government healthcare programs, such as the Medicare and governmentMedicaid programs, as well as healthcare regulations and enforcement imposed by governments in non-U.S.other countries in which itLivaNova conducts its business.
The Anti-Kickback Statute is subject to evolving interpretations. In the past, the U.S. government has enforced the Anti-Kickback Statute to reach large settlements withUS federal healthcare companies based on sham consulting and other financial arrangements with physicians. The majority of states in the U.S. also have anti-kickback laws which establish similar prohibitions, and in some cases may apply towhen LivaNova or customers submit claims for items or services that are reimbursed by any third-party payor,under government healthcare programs, including commercial insurers.laws related to kickbacks, false claims, self-referrals or other healthcare fraud. Specifically, the federal healthcare Anti-Kickback Statute prohibits persons from, among other things, knowingly and willfully offering or paying remuneration, directly or indirectly, to a person to induce them to order, purchase, lease, or recommend a good or service for which payment may be made in whole or in part under a federal healthcare program such as Medicare or Medicaid, unless the arrangement fits within one of several statutory exemptions or regulatory “safe harbors.” Violations of the federal Anti-Kickback Statute may result in civil monetary penalties up to $100,000 for each violation, plus up to three times the remuneration involved. Violations can also result in criminal penalties, including criminal fines of up to $50,000 and imprisonment for up to 10 years. Finally, violations can result in exclusion from participation in government healthcare programs, including Medicare and Medicaid.
Additionally, violations of the False Claims Act can result in significant monetary penalties and treble damages. The US federal government is usingutilizes the False Claims Act, the Anti-Kickback Statute and the accompanying threat of significant financial liability, in its investigationsimilar laws to investigate and prosecution ofprosecute device, pharmaceutical and biotechnology companies throughout the country, for example, in connection with the promotion of products for unapproved uses, the provision of patient and provider support (e.g., reimbursement support), and other prohibited sales and marketing practices. The US government has obtained multi-million and multi-billion dollarmulti-billion-dollar settlements under the False Claims Act, in addition to individual criminal convictions under applicable criminal statutes. Given the significant size of actual and potential settlements, we anticipateUS government’s success in prosecuting claims under the False Claims Act, LivaNova anticipates that the US government will continue to devote substantial resources to investigating healthcare providers’ and manufacturers’ compliance with applicable fraud and abuse laws.
In addition to the Anti-Kickback Statute and False Claims Act, many states have their own laws related to kickbacks, false claims, self-referrals or other healthcare fraud. These laws do not always have the same exceptions or safe harbors as their federal corollaries and, in some states, apply with respect to all payers, including commercial health insurance companies.
HIPAA includes federal criminal statutes that prohibit, among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors; knowingly and willfully embezzling or stealing from a healthcare benefit program; willfully obstructing a criminal investigation of a healthcare offense; andor knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, itemsproducts or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
There hasis also been a recent trend of increased federal and state regulation of, and transparency with respect to, payments made to physicians and other healthcare providers. The Affordable CareLivaNova is subject to, for example, the Physician Payments Sunshine Act, amongwhich requires the Company to report annually certain payments and other things, imposes additional reporting requirements on certain device manufacturers for payments made by themtransfers of value it makes to US licensed physicians, nurse practitioners, physician assistants, or teaching hospitals. Any failure to comply with such laws and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. Failure to submit required informationregulations may result in civil monetary penalties of up to an aggregate of $150,000 per year (or up to an aggregate of $1 million per year for “knowing failures”), for all payments, transfers of value, or ownership or investment interests that are not timely, accuratelyfinancial penalties.
In addition, as discussed above, the US and completely reported in an annual submission. Device manufacturers must submit reports toforeign government regulators enforce the government by the 90th day of each calendar year. Certain states also mandate implementation of compliance programs, impose restrictions on device manufacturer marketing practices and/or require the tracking and reporting of gifts, compensationFCPA and other remunerationanti-bribery laws. These laws and regulations are broad in scope and are subject to physicians.evolving interpretation. As a result, LivaNova has been, and will likely continue to be, required to incur substantial costs to investigate allegations, audit and monitor compliance, and/or alter the Company’s practices with respect to these laws. Violations or alleged violations of these laws could result in litigation, and LivaNova may be subject to criminal or civil penalties and sanctions, including substantial fines, imprisonment of current or former employees and exclusion from participation in governmental healthcare programs.
The shiftingevolving commercial compliance environment and the resulting need to build and maintain robust systems to comply with different compliance and/or reporting requirements in multiple jurisdictions increaseincreases the possibility that a healthcare company may violate one or more of the requirements.these requirements and be required to allocate significant resources to its compliance program. If ourLivaNova’s operations are found to be in violation of any of such laws or any other governmental regulations that apply to it, wethe Company, LivaNova may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, entry into corporate integrity agreements or other monitoring agreements with governmental agencies, the curtailment or restructuring of its operations, and exclusion from participation in federal and state healthcare programs, and imprisonment, any of which could adversely affect ourLivaNova’s financial results and the Company’s ability to operate our business and our financial results.its business.
Disclosure Pursuant to Section 13(r) of the Exchange Act of 1934
Environmental Health and Safety Laws
We are also subjectSection 13(r) of the Exchange Act requires issuers to various environmental health and safety laws and regulations worldwide. Likedisclose in their annual reports, among other medical device companies, our manufacturingthings, certain types of dealings with Iran and other operationsentities, including transactions or dealing with government-owned entities, even when those activities are lawful and do not involve US persons. Two of LivaNova’s non-US subsidiaries currently sell medical devices, including cardiopulmonary and neuromodulation products, to distributors and non-governmental organizations in Iran to support patient care in that country. LivaNova has limited visibility into the useidentity of the customers of these distributors’ and transportation of substances regulated under environmental health and safety laws including those relatednon-governmental organizations in Iran. It is possible that their customers include entities, such as government-owned hospitals or sub-distributors, that are owned or controlled directly or indirectly by the Iranian government. However, to the transportation of hazardous materials. To the best of ourits knowledge at this time, we doLivaNova does not expect that compliancehave any contracts or commercial arrangements with environmental protectionthe Iranian government or other relevant entities.
LivaNova’s gross revenues and net profits attributable to the above-mentioned Iranian activities were $1.0 million and $0.5 million for the three months ended December 31, 2023, respectively, and $4.3 million and $1.9 million for the year ended December 31, 2023, respectively.
LivaNova believes its activities are consistent with applicable law, including US, UK, EU, and other applicable sanction laws, will have a material impact on our consolidated results of operations, financial position or cash flows.though such laws are complex and continue to evolve rapidly. The Company intends to continue its business in Iran.
WorkingHuman Capital PracticesManagement
Our goal isLivaNova has approximately 2,900 employees worldwide, representing 75 nationalities and located in 32 countries. These employees are crucial in achieving the Company’s mission to carry sufficient levels of inventoryprovide hope to ensure adequate supply of raw materials from suppliersits patients and meet the product delivery needs of our customers. their families. LivaNova encourages its employees to live by LivaNova’s five core values: patients first, meaningful innovation, act with agility, commitment to quality and integrity, and collaborative culture. LivaNova evaluates itself against these values and, ultimately, achieves success through them as an organization.
Compensation and Benefits
To meet the operational demandsneeds of ourLivaNova’s patients and customers, wethe Company strives to attract, retain, develop and reward exceptional talent. LivaNova’s proactive talent acquisition strategies, competitive compensation and benefits, collaborative and rewarding work environment, leadership development programs, and professional training opportunities have been a significant driver of the Company’s success. In addition to base pay, LivaNova’s rewards, compensation, and benefits programs may include, depending on jurisdiction, annual performance bonuses, stock awards, pensions, health and wellbeing programs, paid time off and parental leave, financial assistance for education-related purposes, flexible working schedules, hybrid and remote working, employee stock purchase plans, and employee rewards programs, among others.
Culture
LivaNova seeks to foster a culture of continuous learning, where open and direct communication is valued. Accordingly, LivaNova regularly conducts employee engagement surveys, called LivaNova4You, to measure overall employment engagement and satisfaction and to provide the Company with actionable data for potential opportunities for improvement.
The 2023 LivaNova4You survey results saw an increase in overall employee engagement since the last survey in 2021. With over 90% of employees completing the survey, the results indicate an increase in employee satisfaction and motivation. In response to feedback from the survey results, the executive leadership team has committed to improving, among other things, the digitization of work systems and the Company’s branding.
Performance Management, Leadership Development and Professional Training
LivaNova’s annual performance management process is designed to build employee skills and capabilities and develop and retain enterprise leaders for the future. It includes training to increase the quality of employee/manager talent review discussions and employee performance calibrations among leaders to drive consistency. All employees, which include full-time and part-time employees, start the year creating performance-aligned goals which are reviewed with their managers at both mid-year and year-end performance evaluation reviews.
Employees have access to an extensive training library called LivaNova University, which contains modules covering different aspects of the business. In addition, LivaNova has a range of tailored programs in place to develop and enhance employees’ career paths. The LivaNova Leadership Academy is a program that promotes development through three different learning forums, Manager Fundamentals, Emerging Leaders and Advanced Leadership, to accelerate the development and succession readiness for employees chosen for the program.
LivaNova also supports the continuing education of its employees externally. In the US and internationally, eligible employees can access financial aid through education reimbursement programs for approved courses and certifications completed independently. Additionally, the Company sponsors professional growth opportunities.
Finally, LivaNova offers internships and apprenticeships across functions around the globe, in partnership with universities and institutions, which regularly lead to full-time employment at the Company.
Diversity, Equity, and Inclusion
LivaNova recognizes the value in fostering a diverse, equitable and inclusive work environment and strives to provide payment terms to customers ina workplace free of harassment or discrimination. Accordingly, the normal course of business and rights to return product under warranty.
Employees
Company closely monitors its gender metrics on a regular basis. As of December 31, 2017, we employed2023, LivaNova had nine Directors on its Board, of whom three (33%) are female and six (67%) are male. The executive leadership team at the end of 2023 consisted of twelve individuals, of whom two (17%) are female and ten (83%) are male. Of the Company’s senior leadership team, which includes the executive team, vice presidents and directors, as of December 31, 2023, approximately 30% are female and approximately 70% are male. Finally, as of December 31, 2023, of LivaNova’s approximately 2,900 employees, 51% are female and 49% are male.
LivaNova’s strategy for accelerating diversity begins with creating new ways to find extraordinary talent. Examples of the Company’s efforts include networking with historically black colleges and universities, posting job listings on diverse sites, ensuring diversity-focused interview panels, and training interviewers on how to conduct a fair, unbiased interview process.
In addition, LivaNova supports internal diversity affinity initiatives, including the Global Women’s Network which consists of female employees across the globe that convene to discuss topics that unite and celebrate the strength of diversity in the workplace. Similarly, the LivaNova Women’s Network, a mentorship program created by women and for women, facilitates pairings between mentors and mentees in the US and Latin America. Topics range from career and financial advice to performance management and connection to the Company’s strategy. These programs provide members with new perspectives, more than 4,500 employees worldwide, inclusive of approximately 900 employed by our CRM Business Franchise. Our employees are vital to our success, and we are engaged in an ongoing effort to identify, hire, manage and maintain the talent necessary to meet our business objectives. We believe that we have been successful in attracting and retaining qualified personnel in a highly competitive labor market due, in large part, to our competitive compensation and benefits and our rewarding work environment, fostering employee professional training andpersonalized development, and providing employeesan opportunity to network with opportunities to contribute to our continued growth and success.other women across the organization.
Seasonality
For all product segments, theThe number of medical procedures incorporating our product salesLivaNova’s products is generally lower during the summer months, particularly in European countries, due to summer vacation schedules. This
Available Information
LivaNova’s executive headquarters are located at 20 Eastbourne Terrace, London, UK W2 6LG. The Company’s website address is particularly relevantwww.livanova.com. Free of charge through its website, LivaNova makes available its Proxy Statements on Schedule 14A, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to European countries.those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, and reports relating to beneficial ownership of the Company’s securities filed or furnished pursuant to Section 16 of the Exchange Act, as soon as reasonably practicable after electronically filing such material with the SEC. LivaNova’s website also contains the charters for each standing committee of its Board of Directors in addition to the Company’s Corporate Governance Guidelines.
LivaNova may from time to time provide important disclosures to investors by posting them in the Investor Relations section of its website, as allowed by SEC rules. Information on LivaNova’s website is not incorporated into this Report. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information about SEC registrants, including LivaNova.
Item 1A. Risk Factors
Our business and assets are subject to varying degrees of risk and uncertainty. An investor should carefully consider the risks described below, as well as other information contained in this Annual Report on Form 10-K and in ourLivaNova’s other filings with the SEC. Based on the information currently known to us, we believe the following information identifies the most significant risk factors affecting us, but the belowThe Company’s business, results of operations, cash flows and financial condition could be materially and adversely affected by any such risks and uncertainties are not the only ones related to our businesses and are not necessarily listed in the order of their significance.or uncertainties. Additional risks and uncertainties not presently known to usthe Company or that wethe Company currently believebelieves to be immaterial may also adversely affect ourits business.
Global healthcareRisks Relating to the Company’s Business and Operations
LivaNova is subject to the risks of conducting business internationally.
LivaNova designs, develops, manufactures, markets, and sells products globally, and the Company intends to continue to pursue growth opportunities worldwide. LivaNova’s international operations are subject to risks that are inherent in conducting business globally and under non-US laws, regulations and customs. These risks, many of which LivaNova has experienced first-hand, include: higher danger of terrorist activity, war or civil unrest; greater exposure to inflation; volatility in freight and labor costs; fluctuating interest and exchange rates; evolving sanctions; increased exposure to cyber-attacks and supply chain challenges; changing energy prices; local product changes and compliance requirements; longer payments terms and collection times for receivables in local jurisdictions; difficulty enforcing agreements; greater exposure to creditworthiness of customers and inconsistent local law enforcement of obligations; trade protection measures and import and export licensing requirements; ensuring compliance with anti-bribery laws; different labor regulations and workforce instability; selling its products through distributors and agents; and political and economic instability.
Conflicts, for example, including those in Ukraine and the Middle East, have caused the Company to assess its ability to source materials, sell product, collect payment, and comply with international sanctions in the aforementioned markets. These conflicts have increased economic and regulatory uncertainties, and a significant escalation or continuation of these conflicts could have a material impact on the Company’s operating results.
Certain of LivaNova’s subsidiaries have engaged in business dealings in countries subject to comprehensive sanctions, including Iran, Sudan and Syria in addition to Russia and Belarus. These business dealings represent an insignificant amount of LivaNova’s consolidated revenues and income but expose the Company to a heightened risk of violating applicable sanctions regulations. Violations of these regulations are punishable by civil and criminal penalties including fines, denial of export privileges, injunctions, asset seizures, debarment from government contracts and revocations or restriction of licenses, as well as criminal fines and imprisonment. Despite best efforts to comply, there can be no assurance that LivaNova’s policies and procedures will prevent the Company from violating these regulations in every transaction in which LivaNova may engage, and such a violation could adversely affect its reputation, business, results of operations, cash flows and financial condition.
LivaNova’s global operations result in revenues and expenses that are denominated in currencies other than LivaNova’s reporting currency, the USD. Fluctuations in exchange rates may impact, and have impacted, LivaNova’s results of operations and financial condition. Although LivaNova has in the past elected, and may in the future elect, to hedge certain foreign currency exposures, it is unlikely that any hedging strategy would eliminate its currency risk entirely.
In many of the countries where LivaNova operates, employees are covered by various laws and/or collective bargaining agreements that endow them, through their local or national representatives, with the right to be consulted in relation to specific issues, including reorganizations and staff reductions. The laws and/or collective bargaining agreements that are applicable to these agreements could have an impact on LivaNova’s flexibility, as they apply to programs to redefine and/or strategically reposition the Company’s activities. LivaNova’s ability to implement staff reduction programs or even temporary interruptions of employment relationships is predicated on the approval of government entities and the consent of labor unions. A negative response from a works council or union-organized work stoppages by employees could have a negative impact on LivaNova’s business.
Any of the aforementioned risks could adversely affect LivaNova’s business, results of operations, cash flows and financial condition.
Cyber-attacks or other disruptions to LivaNova’s information technology systems could lead to reduced revenue, increased costs, liability claims, fines, harm to LivaNova’s competitive position and loss of reputation.
LivaNova is increasingly dependent on its information technology systems and those of third parties to operate its business, and certain products of the Company include integrated software and information technology. Such dependencies have been exacerbated by remote working practices. LivaNova relies on information technology systems to collect and process customer orders, manage product manufacturing and shipping, and support regulatory compliance. The Company routinely processes, stores and transmits large amounts of data, including sensitive personal information, patient health information and confidential business information. The secure processing, maintenance and transmission of this information is critical to LivaNova’s operations. The quantity and complexity of the Company’s products and information technology systems make such systems vulnerable to cyber-attacks, breakdown, interruptions, destruction, loss or compromise of data, obsolescence or incompatibility among systems or other significant disruptions. The Company has experienced, and is continually at risk of being subject to cyber-attacks and other disruptions. Programs and systems may require frequent updates or may no longer be supported, which may impact the ability of the Company’s information technology systems to operate properly or without disruption. Unauthorized persons routinely attempt to access LivaNova’s systems to disrupt, disable or degrade services, obtain proprietary or confidential information, make ransom demands, and/or remotely disrupt or access the systems of large health care providers by exploiting the Company’s systems. Furthermore, LivaNova’s security assessments of third-party vendors may be inadequate to determine whether their security protocols are sufficient to withstand a cyber-attack or other security breach. LivaNova also cannot be certain that the Company will receive timely notification of such cyber-attacks or other security breaches. Cyber-attacks or other security breaches could remain undetected for an extended period, which could potentially result in significant harm to the Company’s information technology systems, as well as unauthorized access to the information stored on and transmitted by the Company’s information technology systems. In addition, to access LivaNova’s products and services, its clients may use computers and other devices that are beyond the Company’s security control safeguards.
Unauthorized disclosure or use of, denial of access to, or other incidents involving sensitive or confidential customer, patient, employee, vendor or Company data, whether through systems failure, employee negligence, fraud, misappropriation, or cybersecurity, ransomware or malware attacks, or other intentional or unintentional acts, could expose the Company to liability under various laws and regulations across jurisdictions and increase the risk of litigation and governmental or regulatory investigation, damage LivaNova’s reputation and its competitive positioning in the marketplace, disrupt its, or the Company’s customers’ businesses, or cause LivaNova to lose customers, resulting in significant financial exposure and legal liability. Similarly, unauthorized access to or through, denial of access to, or other incidents involving LivaNova or its vendors’ information systems, whether by the Company’s employees or third parties, including a cyber-attack by criminal hackers, members of organized crime groups or state-sponsored organizations, who continuously develop and deploy viruses, ransomware, malware or other malicious software programs or social engineering attacks, has resulted and could in the future result in negative publicity, significant remediation costs, legal liability, notification requirements, and damage to LivaNova’s reputation, which could have a material adverse effect on the Company’s business, results of operations, cash flows and financial condition. Cybersecurity threats are constantly expanding and evolving, becoming increasingly sophisticated and complex, increasing the difficulty of detecting and defending against them and maintaining effective security measures and protocols. Even when a cyber-attack or other security incident is detected, the full extent of the incident may not be determined immediately. The costs to the Company to mitigate cyber-attacks and security incidents could be significant and, while the Company has implemented security measures to protect its information technology systems, its efforts to address these problems may not be successful. LivaNova’s cyber risk insurance may be insufficient to cover all losses, such as litigation costs or financial losses that exceed the Company’s policy limits or are not covered under any of its current insurance policies. Cyber risk insurance has also become more difficult and expensive to obtain, and LivaNova cannot be certain that the Company’s current levels of insurance will be available in the future on economically reasonable terms.
As previously disclosed, in November 2023, LivaNova detected a cybersecurity incident that resulted in a disruption of portions of the Company’s information technology systems. Promptly after detecting the issue, LivaNova began an investigation with assistance from external cybersecurity experts and notified law enforcement. LivaNova continues to assess the full impact of the cybersecurity event on its business, and these impacts may materially affect its results of operations, cash flows and financial condition.
The costs of complying with the requirements of federal, state, and foreign laws pertaining to the privacy and security of personal information, including health-related information and the potential liability associated with failure to do so, could materially adversely affect LivaNova’s business and results of operations.
There is significant regulatory and enforcement focus on data protection in the US (at both the federal and state level) and abroad, and an actual or alleged failure to comply with applicable US or foreign data protection regulations or other data protection standards may expose LivaNova to litigation, including class action litigation, fines, sanctions or other penalties, which could harm the Company’s reputation and adversely impact LivaNova’s business, results of operations, cash flows and financial condition. The Company collects, stores, and handles employee and patient data, including sensitive patient health information, which may present material obligations and risks to LivaNova’s business, including significantly expanded compliance burdens, costs and enforcement risks. If LivaNova does not lawfully collect, store, handle or otherwise process personal information and does not prevent data breaches, particularly given the increased risks associated with sensitive health information, LivaNova may suffer legal and regulatory consequences in addition to business consequences. As a result of its worldwide operations, the Company may be subject to various data protection and cyber-security laws and regulations in many jurisdictions, including HIPAA, the CCPA and similar state laws, and the GDPR. Other governments have enacted, amended, or are enacting similar data protection laws, including data localization laws that require data to stay within their borders and other technical and operational adaptions that may be required given the rapid changes including U.S. healthcare reform legislation,in data protection regulation where LivaNova conducts business. The enactment of such laws could have potentially conflicting requirements that would make compliance challenging. LivaNova’s efforts to comply with applicable laws and regulations may be inadequate, and the Company may be unable to avoid enforcement actions by governmental bodies. Enforcement actions may be costly and could interrupt regular operations of LivaNova’s business. Moreover, LivaNova’s insurance coverage may be insufficient to cover all losses. In addition, there is a trend of civil lawsuits and class actions relating to compromises of personal data or other cyber-attacks pursuant to laws such as the CCPA. While LivaNova has not been named in any such lawsuits, the Company could become a target of civil litigation or government enforcement actions as a result of a compromise to or loss of data.
Reductions and interruptions in LivaNova’s supply chain have had, and may continue to have, adverse effects on LivaNova’s business, results of operations, cash flows and financial condition.
LivaNova purchases many of the components and raw materials used in manufacturing its products from numerous suppliers in various countries. In some cases, LivaNova purchases specific components and raw materials from primary or main suppliers (or in some cases, a single or sole supplier) for reasons related to quality assurance, cost-effectiveness and availability. Any problem affecting a supplier (whether due to external or internal causes) could have a negative impact on LivaNova. Difficulties and delays in manufacturing, internally, externally or otherwise within the supply chain, may lead to voluntary or involuntary business interruptions or shutdowns, product shortages, withdrawals or suspensions of products from the market, and potential regulatory action.
While LivaNova works closely with its suppliers to ensure supply continuity and minimize the instances in which LivaNova relies on a sole supplier, the Company cannot guarantee that its efforts will always be successful. Moreover, due to strict standards and regulations governing the manufacture and marketing of LivaNova’s products, the Company may not be able to locate new supply sources quickly or at all in response to a supply reduction or interruption, resulting in negative effects on its ability to manufacture products effectively and timely. To date, the Company’s supply of raw materials and the production and distribution of finished products have not been materially affected, but to the extent the Company is unsuccessful in managing its supply chain, any such issues could have a material adverse effect on LivaNova’s business, results of operations, cash flows and financial condition.
The global medical device industry is highly competitive, and LivaNova may be unable to compete effectively.
LivaNova operates in a highly competitive market characterized by increasingly complex products that are expensive and time-consuming to develop and manufacture. In the product lines in which LivaNova competes, the Company faces a mixture of competitors ranging from large manufacturers with multiple business lines to small manufacturers that offer a limited selection of specialized products. Development by other companies of new or improved products, processes, or technologies may make LivaNova’s products or proposed products less competitive. In addition, LivaNova faces competition from providers of alternative medical therapies, pharmaceuticals, and surgical interventions, among others. Competitive factors include: product quality, reliability and performance; product technology and innovation; breadth of product lines and product services; ability to identify new market trends; changes to the regulatory environment; cost-effectiveness and price; customer support and training; capacity to recruit engineers, scientists and other qualified employees; ability to navigate the regulatory approval process in the markets in which LivaNova operates; reimbursement approval; and effectiveness of systems and processes. Difficulties in any of these areas may have a material adverse effect on us.LivaNova’s business, results of operations, cash flows and financial condition.
The rapid pace of technological development in the medical industry and the specialized expertise required in different areas of medicine make it difficult for one company alone to develop a broad portfolio of technological solutions. As a result, LivaNova also relies on investments and investment collaborations to provide the Company access to new technologies. If LivaNova fails to develop new and enhanced products and services on a timely basis, the Company’s offerings will become obsolete over time, and its business and financial results would be negatively impacted. LivaNova’s success depends on several factors, including its ability to appropriately allocate the Company’s R&D funding to products and services with higher growth prospects, for example, further incorporation of software; hiring and retaining the necessary R&D talent; stimulating customer demand for and convincing customers to adopt new technologies; innovating and developing new technologies and applications; and acquiring or obtaining third-party technologies that may have valuable applications in the markets that LivaNova serves.
LivaNova expects to make investments where it believes that the Company can develop, or acquire, new technologies and products to further LivaNova’s strategic objectives and strengthen LivaNova’s existing businesses. Investments and investment collaborations in and with medical technology companies are inherently risky, and LivaNova cannot guarantee that any of its previous or future acquisitions, investments or investment collaborations will be successful or will not materially adversely affect LivaNova’s business, results of operations, cash flows and financial condition.
The success and continuing development of LivaNova’s products depend on maintaining strong relationships with physicians and healthcare professionals. If LivaNova fails to maintain its working relationships with physicians and other healthcare professionals, the Company’s products may not be developed and marketed in line with the needs and expectations of the professionals who use and support LivaNova’s products. Physicians assist LivaNova as researchers, marketing consultants, product consultants, inventors and public speakers, and LivaNova relies on these professionals to provide the Company with considerable knowledge and experience. If LivaNova is unable to maintain these strong relationships, the development and marketing of the Company’s products could suffer, which could have a material adverse effect on LivaNova’s business, results of operations, cash flows and financial condition.
LivaNova’s products are subject to complex laws and regulations, and failure to obtain product approvals, clearance or reimbursement may materially adversely affect LivaNova’s business, results of operations, cash flows and financial condition.
LivaNova’s medical devices and technologies, as well as its business activities, are subject to a complex set of regulations and rigorous enforcement, including by the FDA, US Department of Justice, HHS, and numerous other federal, state, and non-US governmental authorities. The time required to obtain approvals from foreign countries may be longer or shorter than that required for FDA clearance, and requirements for such approvals may differ from FDA requirements. To varying degrees, each of these agencies requires LivaNova to comply with laws and regulations governing the development, testing, manufacturing, labeling, reimbursement, marketing, and distribution of LivaNova’s products. As a part of the approval, marketing clearance or reimbursement process for new products and new indications for existing products, LivaNova may conduct clinical trials and studies. Unfavorable or inconsistent clinical data from existing or future clinical trials, or the interpretation of such clinical data by customers and/or regulatory authorities, may adversely impact LivaNova’s ability to obtain product approvals and receive reimbursement.
LivaNova, for example, is currently conducting clinical studies, and any delays or news regarding unfavorable or inconsistent data could have a material adverse effect on LivaNova’s business. Success in pre-clinical testing and early clinical studies does not always ensure that later clinical studies will be successful, as LivaNova experienced and announced, for instance, in connection with stopping enrollment of the ANTHEM-HFrEF clinical trial, and LivaNova cannot be sure that later studies will replicate the results of prior studies. Any delay or termination of LivaNova’s clinical studies will delay or preclude the filing of
regulatory submissions or requests for coverage determinations and, ultimately, LivaNova’s ability to commercialize new products or product modifications and obtain reimbursement for the Company’s products. It is also possible that patients enrolled in clinical studies will experience adverse side effects that are not currently part of the product’s profile, which could inhibit further marketing and development of such products.
Even if LivaNova is able to obtain approval, marketing clearance and reimbursement, it may take a significant amount of time, require the expenditure of substantial resources, involve stringent clinical and pre-clinical testing and increased post-market surveillance, and/or involve modifications, repairs or replacements of LivaNova’s products or limitations on the proposed uses of its products. Ultimately, LivaNova cannot guarantee that its clinical trials will be successful or that the Company will be able to obtain or maintain marketing clearance and/or reimbursement for new products or modifications to existing products. Any such issues, whether in relation to trials, approvals, clearances or reimbursement, could have a material adverse effect on LivaNova’s business, results of operations, cash flows and financial condition.
Failure to comply with product-related government regulations may materially adversely affect LivaNova’s business, results of operations, cash flows and financial condition.
Both before and after a product is commercially released, LivaNova has ongoing responsibilities under FDA and other applicable non-US government agency regulations. For instance, many of LivaNova’s facilities and procedures and those of its suppliers are subject to periodic inspections by the FDA, which can result, and in the past has resulted, in inspectional observations on the FDA’s Form-483, warning letters, or other forms of enforcement. If the FDA were to conclude that LivaNova is not in compliance with applicable laws or regulations, or that any of the Company’s medical products are ineffective or pose an unreasonable health risk, the FDA could ban such medical products, detain or seize adulterated or misbranded medical products, order a recall, repair, replacement or refund of such products, refuse to grant pending PMA applications, and/or require LivaNova to notify health professionals and others that the devices present unreasonable risks of substantial harm to the public health. Similar consequences could follow, such as audits by non-US regulators and notified bodies.
The FDA and other non-US government agencies could also assess civil or criminal penalties against LivaNova, the Company’s officers, or other employees and/or impose operating restrictions on a company-wide basis. The FDA could also recommend prosecution to the US Department of Justice. An adverse regulatory action could restrict LivaNova from effectively marketing and selling its products, limit its ability to obtain future pre-market clearances or PMAs, and result in a substantial modification to LivaNova’s business practices and operations. These potential consequences, as well as any adverse outcome from government investigations, could have a material adverse effect on LivaNova’s business, results of operations, cash flows and financial condition.
In addition, device manufacturers are prohibited from promoting their products for uses and indications that are not set forth in the approved product labeling (so called “off-label uses”). While physicians may exercise their discretion in prescribing a device off-label, a device manufacturer’s failure to comply with the related applicable regulations could subject LivaNova to significant civil or criminal exposure, administrative obligations and costs, and/or other potential penalties. The EU MDR, for example, prohibits manufacturers from misleading users and patients by suggesting uses for the device other than those stated as part of the intended purpose for which the conformity assessment was carried out.
Governmental regulations outside the US have, and may continue to, become increasingly stringent and common as well. For example, the EU MDR has resulted in significant additional premarket and post-market requirements. Certifications to EU MDR must be achieved by December 2027 or December 2028, based on the risk classification of the device. In the interim, the European Commission is allowing companies to use their MDD certifications. LivaNova is working to obtain all appropriate approvals as required, as penalties for regulatory non-compliance can be severe, including fines and revocation or suspension of a company’s business license. The development and implementation of future laws and regulations may also have a material adverse effect on LivaNova.
Global healthcare policy changes and reduction in reimbursement for products may have a material adverse effect on LivaNova.
In response to perceived increases in healthcare costs, there have been and continue to be proposals by governments, regulators and third-party payers to control these costs. The adoption of some or all of these proposals could have a material adverse effect on our financial position and results of operations. These proposals have resulted in efforts to enact U.S. healthcare system reforms that may lead to pricing restrictions, payback requirements, limits on the amounts of reimbursement available for ourLivaNova’s products and could limitlimits on the acceptance and availabilityuse of ourLivaNova’s products.
In the United States, the federal government enacted legislation, including the Affordable Care Act of 2010, to overhaul the nation’s healthcare system. Among other things, the Affordable Care Act:
imposes an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale For example, in the United States. Due to subsequent legislative amendments, the excise tax has been suspended for the period January 1, 2016 to December 31, 2019, and absent further legislative action, will be reinstated starting January 1, 2020; and
implements payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models.
The Affordable Care Act also focuses on a number of Medicare provisions aimed at decreasing costs. It is uncertain at this point what unintended consequences these provisions will have on patient access to new technologies. The Medicare provisions include value-based payment programs, increased funding of comparative effectiveness research, reduced hospital payments for avoidable readmissions and hospital-acquired conditions, and pilot programs to evaluate alternative payment methodologies that promote care coordination (such as bundled physician and hospital payments). Additionally, the law includes a reduction in the annual rate of inflation for hospitals that began in 2011 and the establishment of an independent payment advisory board to recommend ways of reducing the rate of growth in Medicare spending beginning in 2014. We cannot predict what healthcare
programs and regulations will be implemented at the global level or the U.S. federal or state level, or the effect of any future legislation or regulation; however, any changes that lower reimbursement for our products or reduce medical procedure volumes could adversely affect our business and results of operations.
In 2015, the Italian Parliament introduced new rules for entities that supply goods and services to the Italian National Healthcare System. This healthcare law impactsSystem, impacting the business and financial reporting of medical technology sector companies that sell medical devices in Italy. A key provision of the law is a ‘payback’“payback” measure, requiring companies selling medical devices in Italy to make payments to the Italian state if medical device expenditures exceed regional maximum ceilings. Companies are required to make payments equal torepay a percentage of the healthcare expenditures exceeding the regional
maximum regional caps. Therecaps for medical devices. While LivaNova is still considerable uncertainty about howappealing the law will operate and what the exact timeline will be for finalization. Our current assessmentimposition of the Italian Medical Device Payback legislation involves significant judgment regardingguidelines and requests for payment pursuant to the expected scope and actual implementation termsrule as well as waiting on the Constitutional Court in Italy to determine the constitutionality of the measure asrule, the latter have not been clarified to date by Italian authorities. We account for the estimated cost of the Medical Device Payback as a deduction from revenue.
The success and continuing development of our products depend on maintaining strong relationships with physicians and healthcare professionals.
If we fail to maintain our working relationships with physicians, our productsCompany may not be developedsuccessful. See “Note 13. Commitments and marketedContingencies” in line with the needs and expectations of the professionals who use and support our products. Physicians assist us as researchers, marketing consultants, product consultants, inventors and public speakers, and we rely on these professionals to provide us with considerable knowledge and experience. If we are unable to maintain these strong relationships, the development and marketing of our products could suffer, which could have a material adverse effect on ourLivaNova’s consolidated financial condition and results of operations.statements included in this Report for additional information.
We may be unable to obtain and maintain adequate third-party reimbursement on our products, which could have a significant negative impact on our future operating results.
OurLivaNova’s ability to profitably commercialize ourthe Company’s products is dependent, in large part, on whether third-party payors,payers, including private healthcare insurers, managed care plans, governmental programs and others, agree to cover the costs and services associated with ourLivaNova’s products and related medical procedures in the United StatesUS and internationally.
Our Third-party payers, including private and government insurers, are increasingly requiring evidence that medical devices are cost-effective. If LivaNova is unable to demonstrate that the Company’s devices are cost-effective, third-party payers may not reimburse the use of LivaNova’s products are purchased principally byor provide sufficient reimbursement for LivaNova’s products, which could reduce sales of the Company’s products to healthcare providers that typically bill various third-party payors, such as governmental programs (e.g., Medicare and Medicaid in the United States) and private insurance plans for the healthcare services provided to their patients. The ability of customers to obtain appropriatedepend upon reimbursement for payment for their services and the products they provide is critical to the success of medical technology companies. The availability of adequate reimbursement affects the decision as to which procedures are performed, which products are purchased and what prices customers are willing to pay. After we develop a promising new product, we may find limited demand for the product if reimbursement approval is not obtained from private and governmental third-party payors. In addition,services. Similarly, periodic changes to reimbursement methodologies could have an adverse impact on ourLivaNova’s business.
Outside the United States, Adoption of some or all of such healthcare policy and reimbursement systems vary significantly by country. Many foreign markets have government-managed healthcare systems that govern reimbursement for medical devices and procedures. Additionally, some foreign reimbursement systems provide for limited payments in a given period and, as a consequence, result in extended payment periods. If adequate levels of reimbursement from third‑party payors outside of the United States are not obtained, international sales of our products may decline.
Patient confidentiality and federal and state privacy and security laws and regulations in the United States and around the world may adversely impact our selling model.
U.S. HIPAA establishes federal rules protecting the privacy and security of personal health information. The privacy and security rules address the use and disclosure of individual healthcare information and the rights of patients to understand and control how such information is used and disclosed. HIPAA provides both civil and criminal fines and penalties for covered entities or business associates that fail to comply. If we fail to comply with the applicable regulations, we could suffer civil penalties up to or exceeding $50,000 per violation, with a maximum of $1.5 million for multiple violations of an identical requirement during a calendar year and criminal penalties with fines up to $250,000 and potential imprisonment.
In addition to HIPAA, virtually every U.S. state has enacted one or more laws to safeguard privacy, and these laws vary significantly from state to state and change frequently. Because the operation of our business involves the collection and use of substantial amounts of “protected health information,” we endeavor to conduct our business as a “covered entity” under HIPAA, and consistent with state privacy laws, we obtain HIPAA-compliant patient authorizations where required to support our use and disclosure of patient information. We also sometimes act as a “business associate” for a covered entity. Regardless, the Office for Civil Rights of the Department of Health and Human Services or another government enforcement agency may
determine that our business model or operations are not in compliance with HIPAA or other related state laws, which could subject us to penalties, severely limit our ability to market and sell our products under our existing business model and harm our business growth and consolidated financial position.
The EU’s GDPR, in force from 25 May 2018, protects the privacy and security of personal health information relating to individuals within the EU. Like HIPAA, GDPR addresses the use and disclosure of individual healthcare information and the rights of patients to understand and control how such information is used and disclosed. It will also subject us to a rigorous pro-active compliance regime. If we fail to comply with GDPR, we could be sued for compensation by individuals who have suffered material or non-material damage and could suffer administrative “effective, proportionate and dissuasive” administrative fines up to the higher of $204 million, or 4%, of the total worldwide annual turnover of the group in the previous financial year. We may also be subject to criminal sanctions.
Cyber-attacks or other disruptions to our information technology systems could lead to reduced revenue, increased costs, liability claims, fines or harm to our competitive position.
We are increasingly dependent on sophisticated information technology systems to operate our business, and certain of our products include integrated software and information technology. We rely on information technology systems to collect and process customer orders, manage product manufacturing and shipping, and support regulatory compliance, and we routinely process, store, and transmit large amounts of data, including sensitive personal information, protected health information, and business information. Many of our products incorporate software and information technology that allow patients and physicians to be connected and collect data regarding a patient and the therapy he or she is receiving, or that otherwise allow the products or services to operate as intended. We could experience attempted or actual interference with the integrity of, and interruptions in, our technology systems, as well as data breaches. We could also experience attempted or actual interference with the integrity of our products and data. These incidents could materially harm our business and our reputation.
As is the case with other large enterprises, the size and complexity of our products and information technology systems can make them vulnerable to cyber-attacks, breakdown, interruptions, destruction, loss or compromise of data, obsolescence or incompatibility among systems, or other significant disruptions. Unauthorized persons routinely attempt to access our products or systems in order to disrupt, disable or degrade such products or services, or to obtain proprietary or confidential information. Such unauthorized access or interference with our products or services, if successful, could create issues with product functionality, which could pose a risk to patient safety, and a risk of product recall or field activity.
We have programs, processes and technologies in place to attempt to prevent, detect, contain, respond to and mitigate security-related threats and potential incidents. We undertake ongoing improvements to our systems, connected devices and information-sharing products in order to minimize vulnerabilities, in accordance with industry and regulatory standards; however, because the techniques used to obtain unauthorized access change frequently and can be difficult to detect, and because the integration of two global cross-border companies takes time and entails risks pertaining to the integration of disparate information technology systems. anticipating, identifying or preventing these intrusions or mitigating them if and when they occur is challenging and makes us more vulnerable to cyber-attacks than other companies not similarly situated.
We also rely on third-party vendors to supply and/or support certain aspects of our information technology systems. Third-party systems may contain defects in design or manufacture or other problems that could result in system disruption or could unexpectedly compromise the information security of our own systems, and we are dependent on these third parties to provide reliable systems and software and to deploy appropriate security programs to protect their systems.
In addition, we continue to grow in part through new business acquisitions. As a result of acquisitions, we may face risks due to implementation, modification, or remediation of controls, procedures, and policies relating to data privacy and cybersecurity at the acquired company. We continue to consolidate and over time integrate the number of systems we operate, and to upgrade and expand our information system capabilities for stable and secure business operations.
If we are unable to maintain secure, reliable information technology systems and prevent disruptions, outages, or data breaches, we may suffer regulatory consequences in addition to business consequences. Our worldwide operations mean that we are subject to laws and regulations, including data protection and cyber-security laws and regulations, in many jurisdictions. For example, if we are in breach of the GDPR’s requirement that we ensure a level of security, both in terms of technology and other organizational measures, appropriate to the risk that the confidentiality, integrity or availability of personally identifiable data is compromised, we could be subject to fines of up to $12.0 million or 2% of our annual worldwide group turnover, whichever is higher. Despite programs to comply with such laws and regulations, there is no guarantee that we will avoid enforcement actions by governmental bodies. Enforcement actions may be costly and interrupt regular operations of our business. In addition, there is a trend of civil lawsuits and class actions relating to breaches of consumer data other cyber-
attacks. While we have not been named in any such lawsuits, if a substantial breach or loss of data occurs, we could become a target of civil litigation or government enforcement actions.
Our information technology systems require an ongoing commitment of significant resources to maintain, protect, and enhance existing systems and to develop new systems to keep pace with continuing changes in information processing technology, evolving legal and regulatory standards, the increasing need to protect patient and customer information, and the information technology needs associated with our changing products and services. There can be no assurance that our process of consolidating, protecting, upgrading and expanding our systems and capabilities, continuing to build security into the design of our products, and developing new systems to keep pace with continuing changes in information processing technology will be successful or that additional systems issues will not arise in the future. Any significant breakdown, intrusion, interruption, corruption, or destruction of these systems, as well as any data breaches,proposals could have a material adverse effect on our business. If our information technology systems, products or sensitive data are compromised, patients or employees could be exposed to financial or medical identity theft or suffer a loss of product functionality, and we could lose existing customers, have difficulty attracting new customers, have difficulty preventing, detecting, and controlling fraud, be exposed to the loss or misuse of confidential information, have disputes with customers, physicians, and other health care professionals, suffer regulatory sanctions or penalties under federal laws, state laws, or the laws of other jurisdictions, experience increases in operating expenses or an impairment in our ability to conduct our operations, incur expenses or lose revenues as a result of a data privacy breach, product failure, information technology outages or disruptions, or suffer other adverse consequences including lawsuits or other legal action and damage to our reputation.
We are subject to extensive and dynamic medical device regulation, which may impede or hinder the approval or sale of our products and in some cases, may ultimately result in an inability to obtain approval of certain products or may result in the recall or seizure of previously approved products.
Our medical device products and operations are subject to extensive regulation by the FDA and various other federal, state and foreign government authorities. Government regulation of medical devices is meant to assure their safety and effectiveness and includes regulation of, among other things, design, development and manufacturing; clinical studies; product safety; pre-market clearance and approval; marketing, sales and distribution; reimbursement; and post-market surveillance. The pathway to obtaining clearance from the FDA and comparable agencies in foreign countries for new products is described above in “Item 1. Business - Government Regulation and Other Considerations.” Such processes can take a significant amount of time; require the expenditure of substantial resources; involve rigorous pre-clinical and clinical testing, as well as increased post-market surveillance; require changes to products; and result in limitations on the indicated uses of products.
In addition, exported devices are subject to the regulatory requirements of each country to which the device is exported. Some countries do not have medical device regulations, but in most foreign countries, medical devices are regulated. Frequently, regulatory approval may first be obtained in a foreign country prior to application in the U.S. due to differing regulatory requirements; however, other countries, such as China, for example, require approval in the country of origin or legal manufacturer as a condition for approval in that country. Most countries outside of the U.S. require that product approvals be renewed or recertified on a regular basis, generally every four to five years. The renewal or recertification process requires that we evaluate any device changes and any new regulations or standards relevant to the device and conduct appropriate testing to document continued compliance. Where renewal or recertification applications are required, they may need to be renewed and/or approved in order to continue selling our products in those countries. There can be no assurance that we will receive the required approvals for new products or modifications to existing products on a timely basis or that any approval will not be subsequently withdrawn or conditioned upon extensive post-market study requirements.
Our global regulatory environment is becoming increasingly stringent, and unpredictable, which could increase the time, cost and complexity of obtaining regulatory approvals for our products, as well as the clinical and regulatory costs of supporting those approvals. Several countries that did not have regulatory requirements for medical devices have established such requirements in recent years and other countries have expanded on existing regulations. Certain regulators are exhibiting less flexibility and are requiring local preclinical and clinical data in addition to global data. While harmonization of global regulations has been pursued, requirements continue to differ significantly among countries. We expect this global regulatory environment will continue to evolve, which could impact our ability to obtain future approvals for our products, or could increase the cost and time to obtain such approvals in the future.
The FDA and other worldwide regulatory agencies actively monitor compliance with local laws and regulations through review and inspection of design and manufacturing practices, recordkeeping, reporting of adverse events, labeling and promotional practices. The FDA can ban certain medical devices; detain or seize adulterated or misbranded medical devices; order repair, replacement or refund of these devices; and require notification of health professionals and others with regard to medical devices that present unreasonable risks of substantial harm to the public health. The FDA can take action against a
company that promotes "off-label" uses. Any adverse regulatory action, depending on its magnitude, may restrict a company from effectively marketing and selling its products, may limit a company's ability to obtain future premarket clearances or approvals, and could result in a substantial modification to the company'sLivaNova’s business, practices and operations. International sales of U.S. manufactured medical devices that are not approved by the FDA for use in the U.S., or that are banned or deviate from lawful performance standards, are subject to FDA export requirements.
Regulations regarding the development, manufacture and sale of medical devices are evolving and subject to future change. We cannot predict what impact, if any, those changes might have on our business. Failure to comply with regulatory requirements could have a material adverse effect on our business, financial condition and results of operations. Later discovery of previously unknown problems with a product or manufacturer could result in fines, delays or suspensions of regulatory clearances or approvals, seizures or recalls of products, physician advisories or other field actions, operating restrictions and/or criminal prosecution. We may also initiate field actions as a result of a failure to strictly comply with our internal quality policies. The failure to receive product approval clearance on a timely basis, suspensions of regulatory clearances, seizures or recalls of products, physician advisories or other field actions, or the withdrawal of product approval by the FDA or by comparable agencies in foreign countries could have a material adverse effect on our business, financial condition or results of operations.
Modifications to our marketed products may require new clearances or approvals, and may require us to cease marketing or recall the modified products until required clearances or approvals are obtained.
An element of our strategy is to continue to upgrade our products, add new features and expand clearance or approval of our current products to new indications. In the United States, any modification to a PMA-approved device generally requires an additional approval by the FDA. Similarly, any modification to a 510(k)-cleared device that could significantly affect its safety or efficacy, or that would constitute a major change in its intended use, technology, materials, packaging and certain manufacturing processes, may require a new 510(k) clearance or, possibly, PMA approval. The FDA requires every manufacturer to make the determination regarding the need for a new 510(k) clearance or PMA approval in the first instance; but the FDA may (and often does) review the manufacturer’s decision, and, where the FDA does not agree, may retroactively require the manufacturer to submit a 510(k) or PMA, and may require a recall of the affected device until clearance or approval is obtained. We have made modifications to our products in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. No assurance can be given that the FDA will agree with any of our decisions not to seek 510(k) clearance or PMA approval.
If the FDA requires us to cease marketing and to recall a modified device until we obtains a new 510(k) clearance or PMA approval, our business, financial condition, operating results and future growth prospects could be materially adversely affected. Any recall or FDA requirement that we seek additional clearances or approvals could result in significant delays, fines, increased costs associated with modification of a product, loss of revenue and potential operating restrictions imposed by the FDA.
Furthermore, the FDA’s ongoing review of the 510(k) clearance process may make it more difficult for us to make modifications to our previously cleared products, either by imposing stricter requirements as to when a new 510(k) notification for a modification to a previously cleared product must be submitted, or by applying more onerous review criteria to such submissions.
If our marketed medical devices are defective or otherwise pose safety risks, the FDA and similar foreign governmental authorities could require their recall, or we may initiate a recall of our products voluntarily.
The FDA and similar foreign governmental authorities may require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture or in the event that a product poses an unacceptable risk to health. Manufacturers, on their own initiative, may recall a product with material deficiency. We have initiated voluntary product recalls in the past. A future recall announcement in the United States, EEA or elsewhere could harm our reputation with customers and negatively affect our revenue.
A government-mandated recall or voluntary recall by us or one of our sales agencies could occur as a result of an unacceptable risk to health, component failures, manufacturing errors, design or labeling defects or other deficiencies or issues. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and operating results. Any recall could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers’ demands. We also may be required to bear other costs or take other actions that may have a negative impact on our future revenue and our ability to generate profits. In the future, we may initiate voluntary withdrawal, removal or repair actions that we determine do not require notification of the FDA as a recall. If the FDA disagrees
with our determinations, it could require us to report those actions as recalls. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted.
In addition, depending on the corrective action we take to redress a device’s deficiencies or defects, the FDA may require, or we may decide, that we need to obtain new approvals or clearances for the device before we market or distribute the corrected device. Seeking such approvals or clearances may delay our ability to replace the recalled devices in a timely manner. Moreover, if we do not adequately address problems associated with our devices, we may face additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties, or civil or criminal fines.
In the EEA, our European operations must comply with the EU Medical Device Vigilance System, the purpose of which is to improve the protection of health and safety of patients, users and others by reducing the likelihood of reoccurrence of incidents related to the use of a medical device. Under this system, incidents must be reported to the Competent Authorities of the EEA Member States. An incident is defined as any malfunction or deterioration in the characteristics and/or performance of a device, as well as any inadequacy in labeling or instructions that may, directly or indirectly, lead or have led to death or serious health deterioration of a patient. Incidents are evaluated by the EEA Competent Authorities to whom they have been reported, and where appropriate, information is disseminated between them in the form of National Competent Authority Reports (“NCARs”). The Medical Device Vigilance System is further intended to facilitate a direct, early and harmonized implementation of Field Safety Corrective Actions (“FSCAs”), across the EEA Member States where the device is in use. An FSCA is an action taken by a manufacturer to reduce a risk of death or serious deterioration in the state of health associated with the use of a medical device that is already placed on the market. An FSCA may include the recall, modification, exchange, destruction or retrofitting of the device. FSCAs must be communicated by the manufacturer or its legal representative to its customers and/or to the end users of the device through Field Safety Notices.
If our products cause or contribute to a death or a serious injury, or malfunction in certain ways, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions.
Under the FDA MDR regulations, we are required to report to the FDA any incident in which our products have or may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury. If we fail to report these events to the FDA within the required timeframes, or at all, the FDA could take enforcement action against us. Any adverse event involving our products could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection, mandatory recall or other enforcement action. Any corrective action, whether voluntary or involuntary, or litigation, will require the dedication of our time and capital, distract management from operating the business, and may harm our reputation and financial results.
Product liability claims could adversely impact our consolidated financial condition and our earnings and impair our reputation.
Our business exposes us to potential product liability risks that are inherent in the design, manufacture and marketing of medical devices. In addition, many of the medical devices we manufacture and sell are designed to be implanted in the human body for long periods of time. Component failures, manufacturing defects, design flaws or inadequate disclosure of product-related risks or product-related information with respect to these or other products we manufacture or sell could result in an unsafe condition or injury to, or death of, a patient. The occurrence of such an event could result in product liability claims or a recall of, or safety alert relating to, one or more of our products. We have elected to self-insure with respect to a portion of our product liability risks and hold global insurance policies in amounts we believe are adequate to cover future losses. Product liability claims or product recalls in the future, regardless of their ultimate outcome, could have a material adverse effect on our business and reputation and on our ability to attract and retain customers for our products, and losses from product liability claims in the future could exceed our product liability insurance coverage and lead to a material adverse effect on our financial condition.
We currently are involved in litigation that could adversely affect our business and financial results, divert management’s attention from our business, and subject us to significant liabilities.
As described under “Note 12. Commitments and Contingencies - Litigation” in our consolidated financial statements included in this Annual Report on Form 10-K, we are involved in various litigation, which may adversely affect our financial condition and may require us to devote significant resources to our defense of these claims.
Such litigation involves a class action complaint in the U.S. District Court for the Middle District of Pennsylvania, federal multi-district litigation in the U.S. District Court for the Middle District of Pennsylvania and cases in various state courts and jurisdictions outside the U.S. relating to our 3T heater-cooler product. As of February 27, 2017, we are involved in
approximately 110 claims worldwide, with the majority of the claims in various federal or state courts throughout the United States. The complaints generally seek damages and other relief based on theories of strict liability, negligence, breach of express and implied warranties, failure to warn, design and manufacturing defect, fraudulent and negligent misrepresentation/concealment, unjust enrichment, and violations of various state consumer protection statutes.
Although we are defending these matters vigorously, we cannot predict with certainty the outcome or effect of any claim or other litigation matter, and there can be no assurance as to the ultimate outcome of any litigation or proceeding. Litigation may have a material adverse effect on us because of potential adverse outcomes, defense costs, the diversion of our management's resources, availability of insurance coverage and other factors.
Our insurance policies may not be adequate to cover future losses.
Our insurance policies (including general and products liability) provide insurance in such amounts and against such risks we have reasonably determined to be prudent in accordance with industry practices or as is required by law or regulation. Although, based on historical loss trends, we believe that our insurance coverage will be adequate to cover future losses, we cannot guarantee that this will remain true. Historical trends may not be indicative of future losses, and losses from unanticipated claims could have a material adverse impact on our consolidated earnings, financial condition, and/or cash flows.
Our manufacturing operations require us to comply with the FDA’s and other governmental authorities’ laws and regulations regarding the manufacture and production of medical devices, which is costly and could subject us to enforcement action.
We and certain of our third-party manufacturers are required to comply with the FDA’s current Good Manufacturing Practice (“GMP”) requirements, as embodied in the QSR, which covers the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of medical device products in the United States. We and certain of our suppliers also are subject to the regulations of foreign jurisdictions regarding the manufacturing process for products marketed outside of the United States. The FDA enforces the QSR through periodic announced (routine) and unannounced (for cause or directed) inspections of manufacturing facilities, during which the FDA may issue Forms FDA-483 listing inspectional observations which, if not addressed to the FDA’s satisfaction, can result in further enforcement action. Similar inspections are carried out in the EEA by Notified Bodies and EEA Competent Authorities. Our failure, or the failure of one of our suppliers, to comply with applicable statutes and regulations administered by the FDA and other regulatory bodies, or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues could result in:
untitled letters, warning letters, fines, injunctions or consent decrees;
customer notifications or repair, replacement, refund, recall, detention or seizure of products;
operating restrictions or partial suspension or total shutdown of production;
refusal to grant or delay in granting 510(k) clearance or PMA approval of new products or modified products;
withdrawing 510(k) clearances or PMA approvals that have already been granted;
refusal to grant export approval for our products; or
civil penalties or criminal prosecution.
Any of these actions could impair our ability to produce our products in a cost-effective and timely manner in order to meet customers’ demands. We also may be required to bear other costs or take other actions that may have a negative impact on our future revenue and ability to generate profits. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements, which could result in failure to produce products on a timely basis or in the required quantities, if at all.
Quality problems with our processes, goods, and services could harm our reputation for producing high-quality products and erode our competitive advantage, sales, and market share.
Quality is extremely important to us and our customers due to the serious and costly consequences of product failure. Our quality certifications are critical to the marketing success of our goods and services. If we fail to meet these standards, our reputation could be damaged, we could lose customers, and our revenue and results of operations, could decline. Aside from specific customer standards, our success depends generally on our ability to manufacture to exact tolerances precision-engineered components, subassemblies,cash flows and finished devices from multiple materials. If our components fail to meet these standards or fail to adapt to evolving standards, our reputation as a manufacturer of high-quality components will be harmed, our competitive advantage could be damaged, and we could lose customers and market share.financial position.
We are subject to substantial post-market government regulation and any adverse regulatory action may materially adversely affect our financial condition and business operations.
Our medical devices remain subject to regulation by numerous government agencies following clearance or approval, including the global device regulatory bodies. To varying degrees, each of these agencies requires us to comply with laws and regulations governing manufacturing, labeling, marketing, distribution, reporting, importing and exporting of our medical devices. In recent years, the FDA in particular has significantly increased its oversight of companies subject to its regulations, including medical device companies, by hiring new investigators and stepping up inspections of manufacturing facilities. The FDA has recently also significantly increased the number of warning letters issued to companies.
Device manufacturers are permitted to promote products solely for the uses and indications set forth in the approved product labeling. A number of enforcement actions have been taken against manufacturers that promote products for “off-label” uses, including actions alleging that federal healthcare program reimbursement of products promoted for “off-label” uses are false and fraudulent claims to the government. The failure to comply with “off-label” promotion restrictions can result in significant administrative obligations and costs, and potential penalties from, and/or agreements with, the federal government.
We use many distributors, agents and independent sales representatives in certain territories and thus rely on their compliance with applicable laws and regulations, such as the FCPA, the U.S. Anti-Kickback Statute (“Anti-Kickback Statute”), the U.S. False Claims Act (“False Claims Act”), the U.S. Sunshine Act, similar laws in countries located outside the United States and other applicable federal, state or applicable international laws. If a global regulatory body were to conclude that we are not in compliance with applicable laws or regulations, or that any of our medical devices are ineffective or pose an unreasonable health risk, it could ban the medical devices, detain or seize adulterated or misbranded medical devices, order a recall, repair, replacement, or refund of the devices, refuse to grant pending pre-market approval applications or require certificates of foreign governments for exports, and/or require us to notify healthcare professionals and others that the devices present unreasonable risks of substantial harm to public health. The global device regulatory bodies may also impose operating restrictions on a company-wide basis, enjoin and/or restrain certain conduct resulting in violations of applicable law pertaining to medical devices, and assess civil or criminal penalties against, or recommend prosecution of, our officers, employees, or our company itself. Any adverse regulatory action, depending on its magnitude, may restrict us from effectively marketing and selling our products.
We are also subject to various environmental laws and regulations worldwide. Our operations involve the use of substances regulated under environmental laws, primarily those used in manufacturing and sterilization processes. We cannot provide assurance that a potential non-compliance with environmental protection laws and regulations will not have a material impact on our consolidated earnings, financial condition, and/or cash flows.
Finally, any governmental law or regulation imposed in the future may have a material adverse effect on us. From time to time, legislation is drafted and introduced that could significantly change the statutory provisions governing the clearance or approval, manufacture and marketing of medical devices. In addition, global regulatory bodies’ regulations and guidance can be revised or reinterpreted in ways that may significantly affect our business and products. It is impossible to predict whether legislative changes will be enacted or regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be.
Our failureFailure to comply with rules relating to reimbursement of healthcare goods and services, healthcare fraud and abuse, false claims and privacy and securityother applicable laws or regulations may subject usLivaNova to penalties and limit patient access to its devices, thereby adversely impact ourimpacting the Company’s reputation and business operations.
OurLivaNova’s devices and therapies are subject to regulation regarding quality and cost by various governmental agencies worldwide that are responsible for coverage, reimbursement and regulation ofregulating healthcare goods and services. In the United States, for example, federal government healthcare laws apply when a customer submits a claim for an item or service that is reimbursable under a U.S. federal government-funded healthcare program, such as Medicare or Medicaid. The principal U.S. federal laws implicated include:
the Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs, such as the Medicare and Medicaid programs. A person or entity does not need to have actual knowledge of the Anti-Kickback Statute or specific intent to violate it to have committed a violation; in addition, the government may assert that a claimservices, including items or services resulting from a violation of the Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act;
federal civil and criminal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other federal third-party payors that are false or fraudulent. Actions under the False Claims Act can be brought by the Attorney General or as qui-tam actions by private individuals acting in the name of the government. Such private individuals, commonly known as “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each separate false claim;
the federal Civil Monetary Penalties Law, which prohibits, among other things, offering or transferring remuneration to a federal healthcare beneficiary that a person knows or should know is likely to influence the beneficiary’s decision to order or receive items or services reimbursable by the government from a particular provider or supplier;
federal criminal laws that prohibit executing a scheme to defraud any federal healthcare benefit program or making false statements relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation;
HIPAA, as amended by HITECH, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information. This is the same significant risk further described in the Annual Report Form 10-K, Item 1A, under the heading above “Risk Factors: Patient Confidentiality and federal and state privacy and security laws and regulations in the United States may adversely impact our selling model”;
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• | the U.S. Sunshine Act, which requires manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the Centers for Medicare & Medicaid Services (“CMS”) information related to payments or other “transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and requires applicable manufacturers and group purchasing organizations to report annually to the government ownership and investment interests held by the physicians described above and their immediate family members and payments or other “transfers of value” to such physician owners. Manufacturers are required to submit reports to CMS by the 90th day of each calendar year. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (or up to an aggregate of $1 million per year for “knowing failures”), for all payments, transfers of value or ownership or investment interests that are not timely, accurately, and completely reported in an annual submission;
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the FCPA, which prohibits corporations and individuals from paying, offering to pay or authorizing the payment of anything of value to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity;
the UK Bribery Act, which prohibits both domestic and international bribery, as well as bribery across both public and private sectors; and bribery provisions contained in the German Criminal Code, which, pursuant to draft legislation being prepared by the German government, may make the corruption and corruptibility of physicians in private practice and other healthcare professionals a criminal offense; and
analogous state and foreign law equivalents of each of the above federal laws, such as anti-kickback andkickbacks, false claims, self-referrals and healthcare fraud. Because LivaNova’s marketing practices involve direct promotion to patients in certain jurisdictions, the Company is subject to additional laws which may applyand regulations intended to items or services reimbursed by any third-party payor, including commercial insurers; state laws that require device companiesprevent misleading of patients and consumers through unethical promotional activities and related data collection practices. Any failure to comply with these laws and regulations could subject the industry’s voluntary compliance guidelinesCompany or its officers and the applicable compliance guidance promulgated by the federal government or otherwise restrict payments that may be madeemployees to healthcare providerscriminal and other potential referral sources; state laws that require device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.civil financial penalties.
The risk of being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts and their provisions are open to a variety of interpretations. Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under such laws, it is possible that some of ourLivaNova’s business activities, including ourthe Company’s relationships with surgeons and other healthcare providers, some of whom recommend, purchase and/or prescribe ourLivaNova’s devices, group purchasing organizations and ourLivaNova’s independent sales agents and distributors, could be subject to challenge under one or more of such laws. WeEven an unsubstantiated allegation of impropriety could adversely impact LivaNova’s reputation and/or business operations.
Furthermore, LivaNova’s devices, products and therapies are purchased principally by hospitals or physicians that typically bill various third-party payers, such as governmental healthcare programs (e.g., Medicare, Medicaid and comparable non-US programs), private insurance plans and managed care plans for the healthcare services provided to their patients. The ability of LivaNova’s customers to obtain appropriate reimbursement for products and services from third-party payers is critical because it affects which products customers purchase and the prices they are willing to pay. LivaNova’s devices, products and therapies are subject to regulation regarding quality and cost by HHS, including CMS, as well as comparable state and non-US agencies responsible for reimbursement and regulation of healthcare goods and services, including laws and regulations related to kickbacks, false claims, self-referrals and healthcare fraud. In addition, as a manufacturer of US FDA-approved devices reimbursable by federal healthcare programs, LivaNova is subject to the Physician Payments Sunshine Act, which requires the Company to annually report certain payments and other transfers of value LivaNova makes to US-licensed physicians, US teaching hospitals or other covered recipients. Any failure to comply with these laws and regulations could subject the Company or its officers and employees to criminal and civil financial penalties.
Finally, LivaNova is subject to risks relating to changes in government and private medical reimbursement programs and policies and changes in legal regulatory requirements in the US and around the world. Implementation of further legislative or administrative reforms to these reimbursement systems, or adverse decisions relating to coverage of or reimbursement for LivaNova’s products by administrators of these systems, could have a material adverse impact on the acceptance of and demand for the Company’s products and the prices that LivaNova’s customers are willing to pay for them.
If LivaNova’s marketed medical devices are defective or otherwise pose safety risks, the FDA and similar non-US governmental authorities could require their recall or initiate an enforcement action, or LivaNova may initiate a recall of the Company’s products voluntarily.
The FDA and similar non-US governmental authorities may require the recall of commercialized products in the event of material deficiencies or defects in design, software or manufacture, or in the event that a product poses an unacceptable risk to
patients’ health. Manufacturers, on their own initiative, may recall a product with a material deficiency, and the Company has initiated voluntary product recalls in the past. Any recall announcement could harm LivaNova’s reputation with customers and negatively affect LivaNova’s reputation, business, results of operations, cash flows and financial position. A recall could also impair LivaNova’s ability to produce its products in a cost-effective and timely manner. In the future, LivaNova may initiate voluntary withdrawal, removal or repair actions that the Company determines do not require notification as a recall. If a regulating authority were to disagree with LivaNova’s determinations, it could require the Company to report those actions as recalls.
In addition, depending on the corrective action taken to redress a device’s deficiencies or defects, regulators may require, or LivaNova may decide, that the Company needs to obtain new approvals or clearances before it markets or distributes the corrected device. Seeking such approvals or clearances may delay LivaNova’s ability to replace the recalled device in a timely manner. Any corrective action, whether voluntary or involuntary, or related litigation will require investment of the Company’s time and capital, distract management from operating the business, and may harm LivaNova’s reputation and financial results. Moreover, if LivaNova does not adequately address problems associated with its devices, the Company may face additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties, or civil or criminal fines, any of which could have a material adverse effect on LivaNova’s business.
Failure to comply with anti-bribery laws could materially adversely affect LivaNova’s business and result in civil and/or criminal sanctions.
LivaNova’s operations are subject to anti-corruption laws, including the UK Bribery Act, the FCPA and other anti-corruption laws that apply in countries where the Company does business. These laws generally prohibit LivaNova and its employees and intermediaries from bribing, being bribed or making other prohibited payments to government officials or other persons to obtain or retain business or gain some other business advantage. Because of the predominance of government-administered healthcare systems in many parts of the world outside the US, many of LivaNova’s customer relationships are potentially subject to such laws.
LivaNova is, therefore, exposed to the risk that ourits employees, independent contractors, principal investigators, consultants, vendors, independent sales agents, and distributors may engage in fraudulent or other illegal activity. While we haveactivity in violation of these laws and LivaNova’s Code of Conduct. LivaNova maintains policies and proceduresprograms to educate its employees and agents on these legal requirements, and to prevent and prohibit improper practices. However, existing safeguards and any future improvements may not always be effective, and LivaNova’s employees, consultants, sales agents, or distributors may engage in place prohibiting such activity, misconductconduct for which LivaNova could be held responsible. In addition, regulators could seek to hold LivaNova liable for conduct committed by these parties could include, among other infractionscompanies in which LivaNova invests or violations, intentional, reckless and/or negligentacquires. The FCPA can pose unique challenges for manufacturers who operate in foreign cultures where conduct or unauthorized activity that
violates FDA regulations, including those laws that requireprohibited by the reporting of true, complete and accurate information to the FDA, manufacturing standards, federal and state healthcare fraud and abuse laws and regulations, laws that require the true, complete and accurate reporting of financial information or data or other commercial or regulatory laws or requirements.FCPA may not be viewed as illegal in local jurisdictions. It is not always possible to identify and deter misconduct by ourLivaNova’s employees and other third parties, and the precautions we takethe Company takes to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting usLivaNova from governmental investigations or other actions or lawsuits stemming from a failure to be in compliancecomply with such laws or regulations.
There are similar laws and regulations applicable to us outside the United States, all of which are subject to evolving interpretations. Global enforcement of anti-corruption laws including but not limited to the UK Bribery Act, the Brazil Clean Companies Act, and continued enforcement in the Europe, Middle East and Asia Pacific has increased substantially in recent years, with more frequent voluntary self-disclosuresself- disclosures by companies, aggressive investigations and enforcement proceedings by governmental agencies, and assessment of significant fines and penalties against companies and individuals. OurLivaNova cannot predict the nature, scope or effect of future regulatory requirements to which the Company’s international operations create the risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents, or distributors because these parties are not always subject to our control. It is our policy to implement safeguards to discourage these practices; however, our existing safeguards and any future improvements may prove to be less than effective, and our employees, consultants, sales agents, or distributors may engage in conduct for which we might be held responsible.subject or the manner in which existing laws might be administered or interpreted. Any alleged or actual violations of these laws and regulations may subject usLivaNova to government scrutiny, severe criminal or civil sanctions and other liabilities, including exclusion from government contracting or government healthcare programs, and could negatively affect ourLivaNova’s reputation, business, results of operations, cash flows and financial condition.
Quality concerns with LivaNova’s processes, products, and services could harm the Company’s reputation for producing high-quality products and erode LivaNova’s competitive advantage, revenue, and market share.
Quality is extremely important to LivaNova and its customers due to the serious and costly consequences of product failure. LivaNova’s quality certifications are critical to the marketing success of the Company’s products and services. If LivaNova fails to meet these standards, the Company’s reputation could be damaged, the Company could lose customers and LivaNova’s revenue and results of operations could decline. Aside from specific customer standards, LivaNova’s success depends generally on the Company’s ability to manufacture precision-engineered components, sub-assemblies, and finished products to exact tolerances with certified materials. If LivaNova’s components fail to meet these standards or fail to adapt to evolving standards, the Company’s reputation as a manufacturer of high-quality components will be harmed, its competitive advantage could be damaged, and LivaNova could lose customers and market share.
LivaNova may not successfully execute or achieve the expected benefits of the Company’s 2024 Restructuring Plan and other cost saving measures the Company may take in the future which may adversely affect the Company’s business, financial condition and results of operations.
On January 5, 2024, LivaNova’s Board of Directors approved the 2024 Restructuring Plan to enhance the Company’s focus on its core Cardiopulmonary and Neuromodulation segments. As part of the 2024 Restructuring Plan, the Company will wind down the ACS segment, which is anticipated to be substantially complete by the end of 2024. The 2024 Restructuring Plan is based on the Company’s current estimates, assumptions and forecasts, which are subject to known and unknown risks and uncertainties, including assumptions regarding cost savings, cash burn rate, and effectiveness of the Company’s reduced spend. Additionally, LivaNovamay not fully achieve the expected cost savings, enhanced liquidity and other benefits anticipated from the 2024 Restructuring Plan. To the extent that the Company is unsuccessful in implementing the 2024 Restructuring Plan or other, future cost saving measures, such issues could have a material adverse effect on LivaNova’s business, reputation, operating results,result of operations, cash flows, and financial condition. For additional information on the 2024 Restructuring Plan, please refer to “Note 6. Restructuring” in LivaNova’s consolidated financial statements included in this Report.
Legal and Intellectual Property Risks
As a manufacturer of medical devices, LivaNova is exposed to product liability claims that could adversely affect its consolidated financial condition and tarnish the Company’s reputation.
LivaNova designs, develops, manufactures, markets, and sells medical devices, both equipment and implantables, that pose product liability risks. Component failures, manufacturing defects, software errors, design flaws or inadequate disclosure of product-related risks or product or use-related information, or physician misuse with respect to these or other products the Company manufactures or sells could result in an unsafe condition for, injury to, or death of, a patient. Such an event could result in product liability claims or a recall of, or safety alert relating to, one or more of LivaNova’s products. For example, as described in “Note 13. Commitments and Contingencies” in LivaNova’s consolidated financial statements included in this Report, the Company is involved in product liability litigation relating to its cardiopulmonary 3T Heater-Cooler product that may adversely affect LivaNova’s financial condition and may require the Company to devote significant resources to its defense and/or settlement of these claims. Although the Company is defending these matters vigorously, the outcome could have a material adverse effect on LivaNova’s business.
LivaNova holds global insurance policies to cover a portion of future potential product liability losses and has elected to self-insure with respect to a significant portion of the Company’s product liability risks. Product liability claims or product recalls in the future, regardless of their ultimate outcome, could have a material adverse effect on LivaNova’s business and reputation and on the Company’s ability to attract and retain customers for its products, and future losses from product liability claims could exceed LivaNova’s product liability insurance coverage and lead to a material adverse effect on the Company’s financial condition and liquidity. In addition, future unanticipated large liability claims may raise substantial doubt about LivaNova’s ability to continue as a going concern.
LivaNova is subject to environmental laws and regulations and the risk of environmental liabilities, violations, and litigation in multiple jurisdictions, any of which could have a material impact on LivaNova’s business, results of operations, cash flows, financial condition and liquidity.
Certain environmental laws assess liability on current, prior and/or related owners or operators of real property for the costs of investigation, removal, or remediation of hazardous substances on their properties or at properties on which they have disposed of hazardous substances. For example, LivaNova’s Saluggia campus contains hazardous substances as a result of nuclear installations built in 1960 under previous ownership, and the Italian Government has stated that LivaNova will eventually be responsible for dismantling the nuclear installation on Company property, as well as delivering the aforementioned waste to a national repository. It is also possible that a governmental authority may seek to hold usLivaNova liable for successor liability violations committed by any companies in which we investLivaNova invests or that we acquire.
Ifacquires. For example, LivaNova is currently in litigation with the government in Italy stemming from a governmental authority werecivil action where the Court of Appeal declared LivaNova (formed through a merger with Sorin) liable for environmental liabilities incurred by SNIA’s (a former parent company of Sorin) other subsidiaries. See “Note 13. Commitments and Contingencies” in LivaNova’s consolidated financial statements included in this Report for additional information regarding these two matters. LivaNova’s business, results of operations, cash flows, financial condition and liquidity could be materially adversely affected by a negative decision in the case of SNIA and could be adversely affected by an increase in anticipated costs relating to conclude that we are notdisposal of hazardous waste in compliance with applicable laws and regulations, we and our officers and employeesSaluggia. Private parties could also be subjectbring personal injury or other claims due to exclusion from participationthe presence of, or exposure to, hazardous substances.
In addition, LivaNova’s operations involve the use of substances regulated under environmental laws, including for purposes of sterilization. Regulations require sterilization of LivaNova’s products, and the Company operates a sterilization facility in
Colorado allowing the Company to sterilize certain of its products in-house. The US Environmental Protection Agency and certain states have begun scrutinizing the levels of community exposure to EtO, which is used in the sterilization process. Certain medical device operating facilities have been designated as a supplier of product to beneficiaries. If we are excluded from participation“elevated risk” facilities based on such an interpretationemission levels of EtO. LivaNova is not on the “elevated risk” list, nor is it could adversely affect our reputation and business operations. Any action against us forin violation of these laws, even if we successfully defend against it, could cause usany current local or federal regulations. However, to incur significant legal expenses and divert our management’s attention from the operationextent LivaNova or its contract sterilizers are unable to sterilize LivaNova’s products, whether due to regulatory, legislative, or other constraints, including on the use of our business.
While we believe we haveEtO, LivaNova may be unable to transition to alternative internal or external resources or methods in a strong culture of compliance and adequate systems of control, and we seek continuously to improve our systems of internal controls and to remedy any weaknesses identified, there can be no assurance that the policies and procedures will be followedtimely or cost-effective manner or at all, times or will effectively detect and prevent violations of the applicable laws by one or more of our employees, consultants, agents or partners and, as a result, we may be subject to penalties and material adverse consequences on our business, financial condition or results of operations.
Laws and/or collective bargaining agreements relating to employees may impact our flexibility to redefine and/or strategically reposition our activities.
In many of the countries where we operate, employees are covered by various laws and/or collective bargaining agreements that endow them, through their local or national representatives, with the right to be consulted in relation to specific issues, including the downsizing or closing of departments and staff reductions. The laws and/or collective bargaining agreements that are applicable to these agreements could have an impact on our flexibility, as they apply to programs to redefine and/or strategically reposition our activities. Our ability to implement staff downsizing programs or even temporary interruptions of employment relationships is predicated on the approval of government entities and the consent of labor unions. Union-organized work stoppages by employeeswhich could have a negativematerial impact on our business.LivaNova’s results of operations and financial condition.
We areLivaNova is substantially dependent on patent and other proprietary rights and failing to protect such rights or to be successful in litigation related to ourLivaNova’s rights or the rights of others may result in ourthe Company’s payment of significant monetary damages and/or royalty payments, negatively impact ourLivaNova’s ability to sell current or future products or prohibit usthe Company from enforcing its patent and other proprietary rights against others.
We operate in an industry characterized by extensive patent litigation. Physician customers have historically moved quickly to new products and new technologies. As a result, intellectual property rights, particularly patents and trade secrets, play a significant role in product development and differentiation; however, intellectual property litigation is inherently complex and unpredictable and appellate courts can overturn lower court decisions. Furthermore, as our business increasinglyLivaNova relies on technology systems and infrastructure, our intellectual property, other proprietary technology and other sensitive data are potentially vulnerable to loss, damage or misappropriation.
Competing parties in our industry frequently file multiple lawsuits to leverage patent portfolios across product lines, technologies and geographies and to balance risk and exposure between the parties. In some cases, several competitors are parties in the same proceeding, or in a series of related proceedings, or litigate multiple features of a single class of devices. These forces frequently
drive settlement not only of individual cases, but also of a series of pending and potentially related and unrelated cases. In addition, although monetary and injunctive relief is typically sought, remedies and restitution are generally not determined until the conclusion of the proceedings. Accordingly, the outcomes of individual cases are difficult to time, predict or quantify.
Third parties have asserted, and may in the future assert, that our current and former product offerings infringe patents owned or licensed by them. We have similarly asserted, and may in the future assert, that products sold by our competitors infringe patents owned or licensed by us. Adverse outcomes in one or more of the proceedings against us could limit our ability to sell certain products in certain jurisdictions, or reduce our operating margin on the sale of these products and could have a material adverse effect on our financial condition, results of operations or liquidity.
We also rely on a combination of patents, trade secrets, and non-disclosure and non-competition agreements to protect ourthe Company’s proprietary intellectual property, and weLivaNova will continue to do so. While we intendLivaNova intends to defend against any threats to ourthe Company’s intellectual property, theseany litigation to counter the infringement, misappropriation, or unauthorized use of LivaNova’s intellectual property may require the expenditure of significant financial and managerial resources, which may adversely affect LivaNova’s business, results of operations, cash flows and financial condition. Additionally, LivaNova’s patents, trade secrets, or other agreements may not prevent competitors from independently developing or selling similar products and services and may not adequately protect our intellectual property.deter misappropriation or improper use of the Company’s technology. Further, pending patent applications may not result in patents being issued to us.LivaNova. Patents issued to or licensed by usLivaNova in the past or in the future may be challenged or circumvented by competitors and such patents may be found invalid, unenforceable or insufficiently broad to protect ourthe Company’s technology, and may limit ourLivaNova’s competitive advantage. Third parties could obtain patents that may require usLivaNova to negotiate licenses to conduct our business, and the required licenses may not be available on reasonable terms or at all. We
LivaNova also relyrelies on non-disclosure and non-competition agreements with certain employees, consultants and other parties to protect, in part, trade secrets and other proprietary rights. WeLivaNova cannot be certain that these agreements will not be breached, that wethe Company will have adequate remedies for any breach, that others will not independently develop substantially equivalent proprietary information, or that third parties will not otherwise gain access to ourLivaNova’s trade secrets or proprietary knowledge. Further, new proposed regulations in the US would prohibit certain competition agreements, and if final regulations are adopted as proposed and enforced, LivaNova may not be able to rely on such agreements with certain of the Company’s employees or other parties.
LivaNova operates in an industry characterized by extensive patent litigation and has been, and is, subject to patent claims from time to time. While LivaNova intends to defend against any third-party intellectual property threats, intellectual property litigation is inherently complex and unpredictable. Such litigation can result in significant damage awards and injunctions that could prevent LivaNova’s manufacture and sale of affected products or require the Company to pay significant royalties in order to continue to manufacture or sell affected products.
In addition, the laws and intellectual property systems of certain countries in which we market ourLivaNova markets some of its products are not uniform and maydo not protect ourthe Company’s intellectual property rights equally.to the same extent as in the US, which may impact its market position in those countries. LivaNova could also face competition in countries where the Company has not invested in an intellectual property portfolio, or where the Company has not invested in the same protection as in the US. If we arethe Company is unable to protect ourLivaNova’s intellectual property in particularthose countries, it could have a material adverse effect on ourLivaNova’s reputation, business, financial condition or results of operations.operations, cash flows and financial condition.
Furthermore, our intellectual property, other proprietary technologyInadequate funding for US federal government agencies and other sensitive data are potentially vulnerablegovernment shutdowns could negatively affect LivaNova’s business, results of operations, cash flows and financial condition.
The ability of the FDA to loss, damage or misappropriation from system malfunction, computer viruses, unauthorized access to our data or misappropriation or misuse thereof by those with permitted access,review and other events. While we have invested to protect our intellectual property and other data, and continue to work diligently in this area, thereapprove new products can be no assurance that our precautionary measures will prevent breakdowns, breaches, cyber-attacks or other events. Such eventsaffected by a variety of factors, including government funding levels, the ability to hire and retain key personnel, government shutdowns, and statutory, regulatory and policy changes. In addition, a portion of LivaNova’s revenue is dependent on US federal government healthcare program reimbursement. Any disruption in US federal government operations, including government shutdowns, could have a material adverse effect on our reputation,LivaNova’s business, financial condition or results of operations.operations, cash flows and financial condition.
Risks Related to LivaNova’s Indebtedness
Paying amounts due with respect to LivaNova’s outstanding Notes on interest payment dates, at maturity and development efforts rely on investmentsupon exchange thereof will require a cash payment. LivaNova may not have sufficient cash flow from its business operations to pay when due or be able to raise the funds necessary to pay when due, amounts owed with respect to the Notes and/or any amounts owed under the Company’s revolving credit facility and investment collaborations, and we cannot guarantee that any previous or future investments or investment collaborations will be successful.
Our strategy to provide a broad range of therapies to restore patients to fuller, healthier lives requires a wide variety of technologies, products, and capabilities. The rapid pace of technological development in the medical industry and the specialized expertise required in different areas of medicine make it difficult for one company alone to develop a broad portfolio of technological solutions. As a result, we also rely on investments and investment collaborations to provide us access to new technologies both in areas served by our existing or legacy businesses as well as in new areas.
We expect to make future investments where we believe that we can stimulate the development of, or acquire new technologies and products to further our strategic objectives and strengthen our existing businesses. Investments and investment collaborations in and with medical technology companies are inherently risky, and we cannot guarantee that any of our previous or future investments or investment collaborations will be successful or will not materiallyterm facilities, which could adversely affect our consolidated earnings, financial condition and/or cash flows.
Our products are the subject of clinical studies conducted by us, our competitors, or other third parties, the results of which may be unfavorable, or perceived as unfavorable, and could have a material adverse effect on ourLivaNova’s business financial condition, and results of operations.
As a partOn June 17, 2020, LivaNova’s wholly-owned subsidiary, LivaNova USA, issued the Notes. The ability to make scheduled payments of interest on, and principal of, to satisfy exchanges for cash in respect of, and/or to refinance LivaNova’s outstanding Notes or other indebtedness (including any indebtedness under LivaNova’s revolving credit facility or term facilities) depends on the regulatory processCompany’s future performance, which is subject to economic, financial, competitive and other factors beyond its control. For further information on LivaNova’s term facilities, please refer to “Item 7. Management’s Discussion and Analysis of obtaining marketing clearance or approval for new productsFinancial Condition and modifications to or new indications for existing products, we conduct and participate in numerous clinical studies with a varietyResults of study designs, patient populations, and trial endpoints. Unfavorable or inconsistent clinical data from existing or future clinical studies conducted by us, by our competitors, or by third parties, or the market’s or global regulatory bodies’ perceptionOperations” of this clinical data,Report under the section entitled “Liquidity and Capital Resources.” If LivaNova is unable to generate enough cash flow to make payments on the Notes or other indebtedness when due, the Company may adversely impact ourbe required to adopt one or more alternatives, such as selling assets or obtaining additional debt financing or equity capital on terms that may be onerous or highly dilutive. LivaNova’s ability to obtain product clearancesrefinance the Notes or approvals, our positionother indebtedness, which the Company may need to do in order to satisfy its obligations thereunder, will depend on the capital markets and share of, the markets in which we participate, and our business,LivaNova’s financial condition and results of operations. Success in pre-clinical testing and early clinical studies does not always ensure that later clinical studies will be successful, and we cannot be sure that later studies will replicate the results of prior studies. Clinical studies must also be conducted in compliance with Good Clinical Practice (“GCP”) requirements administered by the FDA and other foreign regulatory authorities, and global regulatory bodies may
undertake enforcement action against us based on a failure to adhere to these requirements. Any delay or termination of our clinical studies will delay the filing of product submissions and, ultimately, our ability to commercialize new products or product modifications. It is also possible that patients enrolled in clinical studies will experience adverse side effects that are not currently part of the product’s profile, which could inhibit further marketing and development ofat such products.
Consolidation in the healthcare industry could have an adverse effect on our revenue and results of operations.
Many healthcare industry companies, including medical device companies, are consolidating to create new companies with greater market power. As the healthcare industry consolidates, competition to provide goods and services to industry participants will become more intense. These industry participants may try to use their market power to negotiate price concessions or reductions for medical devices that incorporate components we produce. Increasing pricing pressures as a result of industry consolidation could have an adverse effect on our revenue, results of operations, financial position and cash flows.
The global medical device industry is highly competitive andtime. LivaNova may be unable to compete effectively.
In the product lines in which we compete, we face a mixture of competitors ranging from large manufacturers with multiple business lines to small manufacturers that offer a limited selection of specialized products. Development by other companies of new or improved products, processes, or technologies, as discussed above, may make our products or proposed products less competitive. In addition, we face competition from providers of alternative medical therapies such as pharmaceutical companies. We face increasing competition for our indication specific patents for certain products. Competitive factors include:
product quality, reliability and performance;
product technology;
breadth of product lines and product services;
ability to identify new market trends;
customer support;
price;
capacity to recruit engineers, scientists and other qualified employees; and
reimbursement approval from governmental payors and private healthcare insurance providers.
Shifts in industry market share can occur in connection with product issues, physician advisories, safety alerts, and publications about our products reflecting the importance of product quality, product efficacy, and quality systems in the medical device industry. In the current environment of managed care, consolidation among healthcare providers, increased competition, and declining reimbursement rates, we are increasingly required to compete on the basis of price. In order to continue to compete effectively, we must continue to create, invest in, or acquire advanced technology, incorporate this technology into our proprietary products, obtain regulatory approvals in a timely manner, and manufacture and successfully market our products. Additionally, we may experience design, manufacturing, marketing or other difficulties that could delay or prevent our development, introduction or marketing of new products or new versions of our existing products. As a result of such difficulties and delays, our development expenses may increase and, as a consequence, our results of operations could suffer.
Risks related to the reduction or interruption in supply and an inability to develop alternative sources for supply may adversely affect our manufacturing operations and related product sales.
We maintain manufacturing operations in six countries located throughout the world and purchase many of the components and raw materials used in manufacturing these products from numerous suppliers in various countries. Any problem affecting a supplier (whether due to external or internal causes) could have a negative impact on us.
In a few limited cases, specific components and raw materials are purchased from primary or main suppliers (or in some cases, a single supplier) for reasons related to quality assurance, cost-effectiveness ratio and availability. While we work closely with our suppliers to ensure supply continuity, we cannot guarantee that our efforts will always be successful. Moreover, due to strict standards and regulations governing the manufacture and marketing of our products, we may not be able to quickly locate new supply sourcesengage in response to a supply reductionthese activities on desirable terms or interruption, with negative effects on our ability to manufacture our products effectively andat all, which could result in a timely fashion.default on the Notes and/or LivaNova’s revolving credit facility and term facilities.
We manufacture our products at production facilities in Italy, Germany,The holders of the United States, Canada, Brazil and Australia, all of which are exposedNotes have the right to the risk of production stoppages caused by exceptional or accidental events (fires, shutdowns of access roads, etc.) or natural calamities (floods, earthquakes, etc.). Even though we have implemented what we believerequire LivaNova to be appropriate preventive actions and insurance coverage, the possibility thatrepurchase their Notes upon the occurrence of eventsa fundamental change (as defined in the Indenture) at a repurchase price equal to 100% of exceptional severitythe principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any. Upon repurchase of the Notes, LivaNova will be required to make cash payments as required by the Indenture. LivaNova may not have enough available cash or durationbe able to obtain financing at the time the Company is required to make repurchases of, or exchange of, the Notes for cash. LivaNova’s failure to repurchase the Notes or exchange the Notes for cash at a time when the repurchase or exchange is required by the Indenture governing the Notes would constitute a default under such Indenture.
In addition, LivaNova’s indebtedness including under the Notes, combined with the Company’s other financial obligations and contractual commitments including those under LivaNova’s revolving credit facility or term facilities, could have an impact on our performance cannot be excluded.other important consequences. For example, it could:
Natural disasters, war, acts of terrorism and other events could adversely affect our future revenue and operating income.
Natural disasters (including pandemics), war, terrorism, labor disruptions and international conflicts, and actions taken by governmental entities or by our customers or suppliers•Make LivaNova more vulnerable to adverse changes in response to such events, could cause significant economic disruption and political and social instability in the areas in which we operate. These events could result in decreased demand for our products, adversely affect our manufacturing and distribution capabilities, or increase the costs for or cause interruptions in the supply of materials from our suppliers.
We are subject to the risks of international economic and political conditions.
Our international operations are subject to risks that are inherent in conducting business overseas and under foreign laws,government regulations and customs. These risks include possible nationalization, exit from the European Union, expropriation, importation limitations, violations of U.S. or local laws, including, but not limited to, the U.S. FCPA, pricing restrictions, and other restrictive governmental actions. Following a referendum in June 2016 in which voters in the United Kingdom (UK) approved an exit from the EU for example, the UK government is expected to initiate a process to withdraw from the EU (“Brexit”) and begin negotiating the terms of the UK’s future relationship with the EU. A withdrawal could, among other outcomes, result in the deterioration of economic conditions, volatility in currency exchange rates, and increased regulatory complexities. Any significant changes in the competitive, political, legal, regulatory, reimbursement or economic environment where we conduct international operations may have a material impact on our business and our consolidated financial condition or results of operations.
Deterioration in the global economy, couldhealthcare and competitive environment;
•Limit the Company’s flexibility in planning for, or reacting to, changes in LivaNova’s business and its markets;
•Place the Company at a disadvantage compared to LivaNova’s competitors who have a significant impact on our business. Customers and vendors may experience financial difficulties or be unableless debt;
•Limit LivaNova’s ability to borrow moneyadditional amounts for working capital, to fund theiracquisitions and for other general corporate purposes; and
•Make a sale of the Company less attractive to buyers or more difficult to complete.
Any of these factors could harm LivaNova’s business, results of operations, whichcash flows and financial condition. In addition, if LivaNova incurs additional indebtedness under the revolving credit facility or term facilities, the risks related to LivaNova’s business and its ability to repay the Company’s indebtedness, including under the Notes, would increase. For additional information, please refer to “Note 10. Financing Arrangements” in LivaNova’s consolidated financial statements included in this Report.
The conditional exchange features of the Notes, if triggered, may adversely impact their ability to purchase our products or to pay for our products on a timely basis, if at all. As with our customersaffect LivaNova’s liquidity and vendors, these economic conditions make it more difficult for us to accurately forecast and plan future business activities. In addition, a significant amount of our trade receivables are either with third party intermediaries marketing, selling and distributing our products or with national healthcare systems in many countries, and repayment of these receivables is dependent uponoperating results.
If the financial stabilityconditional exchange feature of the economiesNotes is triggered, holders of those countries.
In lightthe Notes are entitled to exchange the Notes at any time during specified periods, at their option. Holders of these global economic fluctuations, we continuethe Notes for example, are entitled to monitorexchange the creditworthinessNotes during the current calendar quarter if the closing price of allLivaNova’s ordinary shares for at least 20 trading days (whether or not consecutive) during the last 30 consecutive trading days of our customers worldwide. Failurethe immediately preceding calendar quarter is greater than or equal to receive130% of the exchange price – the exchange price being $60.98 per share and the “conversion trigger” (subject to other conditions per the Indenture) being $79.27 per share – on each applicable trading day. The exchange condition was not satisfied on December 31, 2023, and therefore, exchangeability is not an option from January 1, 2024, through March 31, 2024. If holders elect to exchange their Notes during future periods following the satisfaction of an exchange condition as laid out in the Indenture, LivaNova would be required to settle its exchange obligation through the payment of all or a significant portion of receivablescash, which could adversely affect results of operations and cash flows. Deterioration in the creditworthiness of the Eurozone countries, the withdrawal of one or more member countries from the EU or the failure of the euro as a common European currency could adversely affect our revenue, financial condition or results of operations.
We intend to continue to pursue growth opportunities in sales worldwide, including in emerging markets outside Europe and the United States, which could expose us to greater risks associated with sales and operations in these regions. Emerging economies have less mature product regulatory systems and can have more volatile financial markets. Our profitability and operations are, and will continue to be, subject to a number of risks and potential costs, including:
local product preferences and product requirements;
longer-term receivables than are typical in the EU or the United States;
fluctuations in foreign currency exchange rates;
less intellectual property protection in some countries outside the EU or the United States;
trade protection measures and import and export licensing requirements;
workforce instability;
political and economic instability; andCompany’s liquidity.
The risk further described in “Risk Factors:Our failure27
LivaNova’s debt instruments require LivaNova to comply with rules relating to healthcare fraud and abuse, false claims and privacy and security laws may subject us to penalties and adversely impact our reputation and business operations.”
Changes in tax laws or exposure to additional income tax liabilities could have a material impact on our financial condition andLivaNova’s results of operations.operations and financial condition.
Not applicable.
|
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Equivalent Prior Period January 24, 2015 to December 31, 2015 | | Fiscal Year Ended April 24, 2015 |
| | | | | | (Unaudited) | | |
Net sales | | $ | 1,012,277 |
| | $ | 964,858 |
| | $ | 437,309 |
| | $ | 291,558 |
|
Cost of sales | | 353,403 |
| | 367,818 |
| | 120,999 |
| | 27,311 |
|
Product remediation | | 7,254 |
| | 37,534 |
| | — |
| | — |
|
Gross profit | | 651,620 |
| | 559,506 |
| | 316,310 |
| | 264,247 |
|
Operating expenses: | | | | | | | | |
Selling, general and administrative | | 380,560 |
| | 356,807 |
| | 176,715 |
| | 123,619 |
|
Research and development | | 109,662 |
| | 82,467 |
| | 52,605 |
| | 42,245 |
|
Merger and integration expenses | | 15,528 |
| | 20,377 |
| | 64,468 |
| | 8,692 |
|
Restructuring expenses | | 17,056 |
| | 37,377 |
| | 10,494 |
| | — |
|
Amortization of intangibles | | 33,144 |
| | 31,035 |
| | 7,715 |
| | 1,039 |
|
Total operating expenses | | 555,950 |
| | 528,063 |
| | 311,997 |
| | 175,595 |
|
Operating income from continuing operations | | 95,670 |
| | 31,443 |
| | 4,313 |
| | 88,652 |
|
Interest income | | 1,318 |
| | 1,698 |
| | 354 |
| | 184 |
|
Interest expense | | (7,797 | ) | | (10,616 | ) | | (1,502 | ) | | (21 | ) |
Gain on acquisition of Caisson Interventional, LLC | | 39,428 |
| | — |
| | — |
| | — |
|
Impairment of cost-method investments | | (8,565 | ) | | — |
| | (5,062 | ) | | — |
|
Foreign exchange and other gains (losses) | | 1,084 |
| | 3,141 |
| | (7,523 | ) | | 479 |
|
Income (loss) from continuing operations before tax | | 121,138 |
| | 25,666 |
| | (9,420 | ) | | 89,294 |
|
Income tax expense (benefit) | | 49,954 |
| | 5,113 |
| | (7,151 | ) | | 31,446 |
|
Losses from equity method investments | | (16,719 | ) | | (18,679 | ) | | (2,223 | ) | | — |
|
Net income (loss) from continuing operations | | 54,465 |
| | 1,874 |
| | (4,492 | ) | | 57,848 |
|
Discontinued Operations: | | | | | | | | |
Loss from discontinued operations, net of tax | | (1,271 | ) | | (64,663 | ) | | (14,893 | ) | | — |
|
Impairment of discontinued operations, net of tax | | (78,283 | ) | | — |
| | — |
| | — |
|
Net loss from discontinued operations | | (79,554 | ) | | (64,663 | ) | | (14,893 | ) | | — |
|
Net (loss) income | | $ | (25,089 | ) | | $ | (62,789 | ) | | $ | (19,385 | ) | | $ | 57,848 |
|
Net SalesRevenue by Segment and Geographic Area:
The following table below illustratespresents net salesrevenue by operating segment and market geographygeographic region for the years ended December 31, 2023, 2022 and 2021 (in thousands, except for percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | % Change |
| | 2023 | | 2022 | | 2021 | | 2023 vs 2022 | | 2022 vs 2021 |
Cardiopulmonary | | | | | | | | | | |
United States | | $ | 188,299 | | | $ | 159,489 | | | $ | 154,073 | | | 18.1 | % | | 3.5 | % |
Europe (1) | | 156,606 | | | 127,064 | | | 134,562 | | | 23.2 | % | | (5.6) | % |
Rest of World | | 244,072 | | | 213,761 | | | 194,344 | | | 14.2 | % | | 10.0 | % |
| | 588,977 | | | 500,314 | | | 482,979 | | | 17.7 | % | | 3.6 | % |
Neuromodulation | | | | | | | | | | |
United States | | 407,493 | | | 374,542 | | | 358,476 | | | 8.8 | % | | 4.5 | % |
Europe (1) | | 57,435 | | | 50,291 | | | 51,435 | | | 14.2 | % | | (2.2) | % |
Rest of World | | 54,782 | | | 52,160 | | | 46,261 | | | 5.0 | % | | 12.8 | % |
| | 519,710 | | | 476,993 | | | 456,172 | | | 9.0 | % | | 4.6 | % |
Advanced Circulatory Support | | | | | | | | | | |
United States | | 39,252 | | | 37,527 | | | 53,821 | | | 4.6 | % | | (30.3) | % |
Europe (1) | | 751 | | | 1,447 | | | 1,120 | | | (48.1) | % | | 29.2 | % |
Rest of World | | 319 | | | 327 | | | 518 | | | (2.4) | % | | (36.9) | % |
| | 40,322 | | | 39,301 | | | 55,459 | | | 2.6 | % | | (29.1) | % |
Other Revenue (2) | | 4,536 | | | 5,197 | | | 40,755 | | | (12.7) | % | | (87.2) | % |
Totals | | | | | | | | | | |
United States | | 635,044 | | | 571,558 | | | 571,299 | | | 11.1 | % | | 0.0 | % |
Europe (1) | | 214,792 | | | 178,802 | | | 201,524 | | | 20.1 | % | | (11.3) | % |
Rest of World | | 303,709 | | | 271,445 | | | 262,542 | | | 11.9 | % | | 3.4 | % |
Total | | $ | 1,153,545 | | | $ | 1,021,805 | | | $ | 1,035,365 | | | 12.9 | % | | (1.3) | % |
|
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Equivalent Prior Period January 24, 2015 to December 31, 2015 | | Year 2017 Year 2016 % Change | | Year 2016 Equivalent Year 2015 % Change |
| | | | | | (Unaudited) | | | | |
Cardiac Surgery | | | | | | | | | | |
United States | | $ | 177,805 |
| | $ | 182,105 |
| | $ | 48,960 |
| | (2.4 | )% | | 271.9 | % |
Europe (1) | | 175,705 |
| | 172,772 |
| | 40,272 |
| | 1.7 | % | | 329.0 | % |
Rest of world | | 282,007 |
| | 256,838 |
| | 58,403 |
| | 9.8 | % | | 339.8 | % |
| | 635,517 |
| | 611,715 |
| | 147,635 |
| | 3.9 | % | | 314.3 | % |
Neuromodulation | | | | | | | | | | |
United States | | 316,916 |
| | 298,453 |
| | 240,138 |
| | 6.2 | % | | 24.3 | % |
Europe (1) | | 34,765 |
| | 31,942 |
| | 30,219 |
| | 8.8 | % | | 5.7 | % |
Rest of world | | 23,295 |
| | 21,011 |
| | 18,476 |
| | 10.9 | % | | 13.7 | % |
| | 374,976 |
| | 351,406 |
| | 288,833 |
| | 6.7 | % | | 21.7 | % |
Other | | 1,784 |
| | 1,737 |
| | 841 |
| | 2.7 | % | | 106.5 | % |
| | $ | 1,012,277 |
| | $ | 964,858 |
| | $ | 437,309 |
| | 4.9 | % | | 120.6 | % |
(1)Includes countries in Europe where the Company has a direct sales presence. Countries where sales are made through distributors are included in “Rest of World.” | |
(1) | Includes those countries in Europe where LivaNova has a direct sales presence. Countries where sales are made through distributors are included in ‘Rest of world’. |
(2)Other revenue primarily includes rental income not allocated to segments. For the year ended December 31, 2021, other revenue also includes the net revenue of the Company’s Heart Valve business, which was divested on June 1, 2021.
The following table below illustratespresents segment income from continuing operationsfor the years ended December 31, 2023, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | % Change |
| | 2023 | | 2022 | | 2021 | | 2023 vs 2022 | | 2022 vs 2021 |
Cardiopulmonary | | $ | 20,004 | | | $ | 11,247 | | | $ | (6,429) | | | 77.9 | % | | NM |
Neuromodulation | | 153,384 | | | 172,775 | | | 169,499 | | | (11.2) | % | | 1.9 | % |
Advanced Circulatory Support | | (117,418) | | | (142,590) | | | 2,195 | | | NM | | NM |
| | | | | | | | | | |
Segment income (1) | | $ | 55,970 | | | $ | 41,432 | | | $ | 165,265 | | | 35.1 | % | | (74.9) | % |
|
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Equivalent Prior Period January 24, 2015 to December 31, 2015 | | Year 2017 Year 2016 % Change | | Year 2016 Equivalent Year 2015 % Change |
| | | | | | (Unaudited) | | | | |
Cardiac Surgery | | $ | 81,001 |
| | 16,578 |
| | 13,091 |
| | 388.6 | % | | 26.6 | % |
Neuromodulation | | 188,352 |
| | 174,579 |
| | 113,029 |
| | 7.9 | % | | 54.5 | % |
Other | | (107,955 | ) | | (70,925 | ) | | (39,815 | ) | | 52.2 | % | | 78.1 | % |
Total reportable segment income from continuing operations (1) | | $ | 161,398 |
| | $ | 120,232 |
| | $ | 86,305 |
| | 34.2 | % | | 39.3 | % |
| |
(1) | For a reconciliation of segment income from continuing operations to our consolidated continuing operating income, refer to “Note 18. Geographic and Segment Information” in this Annual Report on Form 10-K, except for the Equivalent Prior Period January 24, 2015 to December 31, 2015, which includes the period January 24, 2015 to April 24, 2015, as compared to the Transitional period April 25, 2015 to December 31, 2015 used in the consolidated financial statements.
|
Cardiac Surgery(1)For a reconciliation of segment income to consolidated loss before tax, refer to “Note 19. Geographic and Segment Information” in LivaNova’s consolidated financial statements included in this Report.
Cardiac SurgeryNM Indicates that variance as a percentage is not meaningful.
Cardiopulmonary
Cardiopulmonary net sales increased $23.8 million, or 3.9%,revenue for the year ended December 31, 2017, as2023 increased 17.7% to $589.0 million compared to the year ended December 31, 2016 due primarily2022 with growth across all regions, driven by increased HLM sales, including from Essenz Perfusion System installations, and strong oxygenator demand.
Cardiopulmonary segment income for the year ended December 31, 2023 was $20.0 million, compared to growthsegment income of $22.9 million in cardiopulmonary product revenue. Cardiopulmonary product sales increased year over year due to continued progress towards upgrading customers from our S3 heart-lung machines to our current S5 device, strong sales of our Inspire oxygenator and favorable foreign currency exchange rate fluctuations. Heart valve sales increased by $0.9$11.2 million for the year ended December 31, 20172022. The increase in segment income was primarily due to the increase in net revenue, as described above, partially offset by an increase in sales and marketing expense associated with the launch of Essenz, as well as a $12.7 million increase in the litigation provision related to LivaNova’s 3T Heater-Cooler device.
Neuromodulation
Neuromodulation net revenue for the year ended December 31, 2023 increased 9.0% to $519.7 million compared to the year ended December 31, 2016, due to favorable foreign currency exchange rate fluctuations, which more than offset continuing global declines2022 with growth across all regions, including new and replacement implants in traditional tissue and mechanical heart valves.the US region.
Cardiac Surgery operatingNeuromodulation segment income increased by $64.4 million orfor the year ended December 31, 20172023 was $153.4 million compared to $172.8 million for the year ended December 31, 2022. The decrease in segment income was primarily due to a $29.0 million net unfavorable change in fair value of the sales-based and milestone-based contingent consideration arrangement associated with the acquisition of ImThera, as well as an increase in SG&A expense of $16.3 million driven by an increase in sales and marketing expense, and an increase in R&D expense of $12.5 million primarily associated with the Company’s RECOVER clinical study and OSPREY clinical trial. These increases in expense were partially offset by the increase in net revenue, as described above.
Advanced Circulatory Support
ACS net revenue for the year ended December 31, 2023 increased 2.6% to $40.3 million compared to the year ended December 31, 2016 primarily2022 driven by increased sales of $23.8 million combined with inventory fair value step-up amortization of $25.2 million that was recognized during the nine months ended September 30, 2016. The inventory fair value step-up was fully amortized by September 30, 2016.an increase in case volumes.
Cardiac Surgery net salesACS segment loss for the year ended December 31, 2016 as2023 was $117.4 million compared to the equivalent prior period January 24, 2015 to December 31, 2015 increased by 314.3% because sales in the prior equivalent period were limited to the period October 19, 2015 (acquisition date for the Mergers) through December 31, 2015. Additionally, Cardiac Surgery operating income for the year ended December 31, 2016 as compared to the equivalent prior period January 24, 2015 to December 31, 2015 increased by 26.6% due to the acquisition date for the Mergers.
Neuromodulation
Neuromodulation net sales increased $23.6 million, or 6.7%, for the year ended December 31, 2017 as compared to the prior year ended December 31, 2016 primarily due to strong demand for the AspireSR VNS Therapy System and the launch of the SenTiva VNS Therapy System in October 2017.
The increase in Neuromodulation operating income for the year ended December 31, 2017, as compared to the prior-year period, was primarily driven by increased operating leverage as a result of higher net sales, partially offset by the increased costs associated with sales force expansion and marketing efforts in the U.S.
Neuromodulation net sales for the year ended December 31, 2016 increased $62.6 million, or 21.7%, as compared to the equivalent prior period January 24, 2015 to December 31, 2015, due primarily to pricing increases in the U.S. and to 17 fewer working days in the equivalent prior period.
Neuromodulation operating income increased $61.6$142.6 million for the year ended December 31, 2016, as compared2022. The decrease in segment loss was primarily due to the equivalent prior period January 24, 2015 togoodwill impairment of $129.4 million recorded in the year ended December 31, 2015, due primarily2022 in connection with a revised estimate of the segment’s fair value, partially offset by the impairment of long-lived assets of $90.0 million and the inventory obsolescence adjustment of $12.6 million recorded in the year ended December 31, 2023 associated with the wind down of the ACS segment, along with the favorable change in fair value of a regulatory milestone-based contingent consideration arrangement associated with the TandemLife acquisition of $11.6 million. For additional information, please refer to reporting corporate“Note 6. Restructuring,” “Note 7. Goodwill and intangible amortization expense for Cyberonics prior to the Mergers as Neuromodulation Business Franchise expenses rather than as ‘Other’ expenses.Intangible Assets” and “Note 9. Fair Value Measurements” in LivaNova’s consolidated financial statements included in this Report.
Cost of SalesCosts and Expenses
The following table below illustrates our cost of salespresents costs and major expenses as a percentage of net sales:revenue for the years ended December 31, 2023, 2022 and 2021:
|
| | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Equivalent Prior Period January 24, 2015 to December 31, 2015 |
| | | | | | (Unaudited) |
Cost of sales | | 34.9 | % | | 38.1 | % | | 27.7 | % |
Product remediation | | 0.7 | % | | 3.9 | % | | — | % |
Gross profit | | 64.4 | % | | 58.0 | % | | 72.3 | % |
Operating expenses: | | | | | | |
Selling, general and administrative | | 37.6 | % | | 37.0 | % | | 40.4 | % |
Research and development | | 10.8 | % | | 8.5 | % | | 12.0 | % |
Merger and integration expenses | | 1.5 | % | | 2.1 | % | | 14.7 | % |
Restructuring expenses | | 1.7 | % | | 3.9 | % | | 2.4 | % |
Amortization of intangibles | | 3.3 | % | | 3.2 | % | | 1.8 | % |
Total operating expenses | | 54.9 | % | | 54.7 | % | | 71.3 | % |
| | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 | |
Cost of sales | | 33.1 | % | | 30.8 | % | | 31.8 | % | |
Selling, general and administrative | | 44.9 | % | | 45.9 | % | | 45.6 | % | |
Research and development | | 16.8 | % | | 15.2 | % | | 17.7 | % | |
Impairment of goodwill | | — | % | | 12.7 | % | | — | % | |
Impairment of long-lived assets | | 7.8 | % | | — | % | | — | % | |
Other operating expenses | | 3.3 | % | | 2.9 | % | | 5.0 | % | |
Cost of Sales
Cost of sales consistedconsists primarily of direct labor, allocated manufacturing overhead, and the acquisition cost of raw materials, and components.
Cost of sales as a percentage of net salesrevenue was 34.9%33.1% for the year ended December 31, 2017; a decrease2023, an increase of 3.2% as2.3 percentage points compared to the prior year ended December 31, 2016. This decrease was due to the decrease in amortization of inventory written-up in the Mergers related to the Cardiac Surgery Segment of $25.2 million, which accounted for 2.6% of net sales for the year ended December 31, 2016.
Cost of sales as a percentage of net sales was 38.1% for the year ended December 31, 2016; an increase of 10.4% as compared to the equivalent period ended December 31, 2015. This2022. The increase was primarily due to the inclusionnet impact of Sorin’s Cardiac Surgery Business Franchise activities for the fullchange in fair value of sales-based contingent consideration arrangements totaling $14.2 million as well as an inventory obsolescence adjustment of $12.6 million during the year in 2016 as compared to its inclusion in the prior equivalent period for October 19, 2015 (acquisition date for the Mergers) throughended December 31, 2015.2023 associated with the wind down of LivaNova’s ACS segment.
Selling, General and Administrative (“SG&A”) Expenses&A
SG&A expenses are comprised of sales, marketing, general and administrative activities. SG&A expenses exclude expenses incurred in connection with the merger between Cyberonics and Sorin, integration costs after the Mergers and restructuring costs under the Restructuring Plans initiated after the Mergers.
SG&A expenses as a percentage of net salesrevenue was 44.9% for the year ended December 31, 2017 increased 0.6% to 37.6% as2023, a decrease of 1.0 percentage points compared to the prior year ended December 31, 2016. This increase was largely attributable to litigation related to our 3T devices, costs associated with acquisitions and other legal matters.
SG&A expenses as a percentage of net sales for the year ended December 31, 2016 decreased 3.4% to 37.0% as compared to the equivalent prior period ended December 31, 2015. This reduction was2022, primarily due to our integrationlower stock-based compensation expense of $6.2 million in 2023, driven by the forfeiture of share-based awards associated with the departure of the Company’s former CEO, as well as recovery of legal costs associated with the Caisson litigation of $3.0 million in 2023. For additional information, please refer to “Note 13. Commitments and re-organization efforts that capitalized on synergies between Cyberonics and Sorin’s Cardiac Surgery segment.Contingencies” in LivaNova’s consolidated financial statements included in this Report. These decreases were partially offset by the $2.6 million increase in costs associated with the previously mentioned November 2023 cybersecurity incident.
Research and Development (“
R&D”)&D Expenses
R&D expenses consist of product design and development efforts, clinical study programs and regulatory activities, which are essential to the Company’s strategic portfolio initiatives, including TMVR, Treatment Resistant Depression and Heart Failure.activities.
R&D expenses as a percentage of net salesrevenue was 16.8% for the year ended December 31, 2017 increased by 2.3% to 10.8% as2023, an increase of 1.6 percentage points compared to the prior year ended December 31, 2016.2022. The increase was primarily due to the acquisitionnet unfavorable change in the fair value of Caisson in May 2017, inclusive of $5.8milestone-based contingent consideration arrangements totaling $27.8 million, in post-combination compensation expense recognized concurrent with the acquisition of Caisson, and $7.2 million in compensation expenseas well as increased expenses associated with the retentionCompany’s RECOVER clinical study and OSPREY clinical trial totaling $12.4 million.
Impairments of Goodwill and Long-Lived Assets
LivaNova tests goodwill for impairment on an annual basis on October 1, or when events or changes in circumstances indicate that a potential impairment exists.
On January 5, 2024, the Board of Directors of LivaNova PLC approved the 2024 Restructuring Plan to enhance the Company’s focus on its core Cardiopulmonary and Neuromodulation segments. The main component of this plan is to wind down the ACS segment, which the Company anticipates will be substantially complete by the end of 2024. The Company determined that it was more likely than not that the carrying amounts associated with the ACS segment, including the long-lived assets (asset group), may not be recoverable. This was determined to be a triggering event occurring in the fourth quarter of 2023 requiring an impairment assessment, based on certain factors, including the results of an updated long-term financial outlook for the ACS segment. As such, LivaNova recorded impairments of the employeesfollowing long-lived assets during the year ended December 31, 2023 (in thousands):
| | | | | | | | |
| | 2023 |
Intangible assets: | | |
Developed technology | | $ | 78,067 | |
Trade names | | 7,117 | |
Property, plant and equipment | | 3,894 | |
Operating lease assets | | 896 | |
Total impairment of long-lived assets | | $ | 89,974 | |
In addition, as part of Caisson. The additional increase asLivaNova’s third-quarter 2022 assessment, the Company considered that revenue for its ACS reporting unit during the nine months ended September 30, 2022 had declined by approximately 29% compared to the prior year period, primarily as a result of a reduction in severe COVID-19 cases, hospital-related challenges and product mix. As a result, the Company lowered its future revenue projections for the ACS reporting unit. Based on these circumstances, LivaNova concluded it was due to increased investment in clinicalmore likely than not that the goodwill of LivaNova’s ACS reporting unit was impaired and registries pertaining to TMVRperformed a quantitative assessment of the goodwill as of September 30, 2022, using management’s then current estimate of future cash flows. Based on the valuation performed, LivaNova determined that the fair value of the ACS reporting unit was less than the carrying value and Heart Failure.recognized a goodwill impairment of $129.4 million.
R&DOther Operating Expenses
Other operating expenses primarily consists of the provision for litigation involving LivaNova’s 3T Heater-Cooler device, the Saluggia site remediation provision, restructuring expense, and merger and integration expense.
Other operating expenses as a percentage of net salesrevenue was 3.3% for the year ended December 31, 2016 decreased by 3.5% to 8.5% as compared to the prior equivalent period ended December 31, 2015. This decrease was primarily due to completion2023, an increase of work, adaption to longer developmental schedules or cancellation of work in 2016.
Merger and Integration Expenses
Merger and integration expenses consisted primarily of consulting costs associated with computer systems integration efforts, organization structure integration, synergy and tax planning, as well as the integration of internal controls for the two legacy organizations. In addition, integration expenses include retention bonuses, branding and renaming efforts and lease cancellation penalties in Milan and Brussels.
Merger and integration expenses as a0.4 percentage of net sales decreased to 1.5% for the year ended December 31, 2017 as compared 2.1% for the year ended December 31, 2016, and 14.7% for the equivalent period ended December 31, 2015, due to the continued decline in integration activities associated with the Mergers.
Restructuring Expenses
Our restructuring plans (the “Plans”) leverage economies of scale, eliminate duplicate corporate expenses and streamline distributions, logistics and office functions in order to reduce overall costs. Restructuring expenses are detailed in “Note 5. Restructuring Plans” in the consolidated financial statements in this Annual Report on Form 10-K. Our 2015 and 2016 Reorganization Plans (the “Plans”) were initiated October 2015 and March 2016, respectively, in conjunction with the completion of the Mergers. The Plans included the Costa Rica manufacturing operation exit plan, initiated in December 2016 and completed during 2017, and the Suzhou, China exit plan, initiated in March 2017.
Restructuring expenses as a percentage of net sales decreased to 1.7% from 3.9% for the year ended December 31, 2017 aspoints compared to the year ended December 31, 2016 as our restructuring activities declined and continue2022. The increase was primarily due to decline. For the equivalent period ended December 31, 2015, restructuring expenses were 2.4% as a percentage of net sales.
Amortization of Intangibles
Amortization of intangibles includes the amortization of finite-lived intangible assets, primarily intellectual property and customer relationships, acquired at fair valuean increase in the Mergers in October 2015. Amortization of intangibles does not include amortization of the step-up of inventory to fair value at the Mergers, which was reported as a component of cost of sales. Prior to the Mergers, Cyberonics’ intangible asset amortization was primarilylitigation provision related to intellectual property utilizedLivaNova’s 3T Heater-Cooler device of $12.7 million, partially offset by a reduction in R&D activities.restructuring expense of $5.7 million. For additional information, please refer to “Note 13. Commitments and Contingencies” and “Note 6. Restructuring” in LivaNova’s consolidated financial statements included in this Report.
Interest Expense
WeLivaNova incurred interest expense of $7.8$58.9 million for the year ended December 31, 2017, as2023, compared to $10.6$48.3 million for the year ended December 31, 2016.2022. The decreaseincrease was primarily due a reductionto an increase in income tax related interest expense for our inter-company salerates and average borrowings, partially offset by reduced amortization of intellectual property fordebt issuance costs. For further information on the year ended December 31, 2017, as comparedCompany’s debt refer to the prior year as a result of a reduction“Note 10. Financing Arrangements” in the income tax liability. We incurred interest expense of $1.5 million for the equivalent prior period January 24, 2015 to December 31, 2015 based on third-party debt acquired in the Mergers on October 19, 2015 .
Gain on Caisson Acquisition
On May 2, 2017, we acquired the remaining 51% equity interests in Caisson, which we previously accounted for under the equity method. On the acquisition date, we remeasured our notes receivable due 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.
Impairment of Cost-Method Investments
During December 2017, we impaired our cost-method investments in Respicardia and Rainbow Medical, in the amounts of $5.5 million and $3.0 million, respectively. Refer to Note 8 to theLivaNova’s consolidated financial statements in “Item 8. Financial Statements and Supplementary Data”included in this Annual Report on Form 10-K.Report.
During the equivalent prior period January 24, 2015 to December 31, 2015, we fully impaired our cost-method investment in Cerbomed, a European company developing a t-VNS device for epilepsy treatment, for a loss of $5.1 million.
Foreign Exchange (“FX”) and Other
Due to the global nature of our continuing operations, we are exposed to foreign currency exchange rate fluctuations. Foreign exchange and other gains were $1.1 million for the year ended December 31, 2017, consisting of net FX losses of $2.1 million associated with intercompany debt and third-party financial assets and liabilities denominated in foreign currencies, net of the impact of foreign currency derivative contracts established to hedge against exchange rate movements, offset by a $3.2 million gain on a sale of the cost-method investment, Istituto Europeo di Oncologia S.R.L.
Foreign Exchange and Other consistedIncome/(Expense)
Foreign exchange and other income/(expense) consists primarily of netgains and losses arising from transactions denominated in a currency different from an entity’s functional currency, FX derivative gains and losses, and changes in the fair value of $3.1embedded and capped call derivatives.
Foreign exchange and other income/(expense) was income of $46.1 million and $49.9 million for the yearyears ended December 31, 2016, primarily the result of our inter-company financing arrangements,2023 and third-party financial assets and liabilities denominated2022, respectively. For further details, refer to “Note 20. Supplemental Financial Information” in foreign currencies, net of the impact of foreign currency derivative contracts established to hedge against exchange rate movements.
Foreign Exchange and Other consisted of net FX losses of $7.5 million for the equivalent prior period ended December 31, 2015, which included a loss of $5.6 million from foreign currency derivative contracts established to hedge against exchange rate movements on the loan from the European Investment Bank and other loans. The loss on the hedge was recorded in our consolidated statements of income (loss), whereas the hedged instruments’ gains were recorded in comprehensive income in ourLivaNova’s consolidated financial statements.statements included in this Report.
Income Taxes
LivaNova PLC is domiciled and resident in the UK. OurThe Company’s subsidiaries conduct operations and earn income in numerous countries and are subject to the varying laws and income tax rates of the taxing jurisdictions within those countries, and the income tax rates imposed in the tax jurisdictions in which our subsidiaries conduct operations vary.countries. As a result of the changes in the overall level of ourthe Company’s taxable income, the deploymentmix of taxable income in various jurisdictions, changes in tax strategiesvaluation allowances, and the changes in tax laws, ourLivaNova’s consolidated effective income tax rate may vary substantially from one reporting period to another.
DuringLivaNova’s effective income tax rate was (121.7%) and 14.7% for the years ended December 31, 20172023 and December 31, 2016, we recorded income tax expense from continuing operations of $50.0 million and $5.1 million, respectively,2022, respectively.
Compared with effective income tax rates of 41.2% and 19.9%, respectively. During the equivalent prior period ended December 31, 2015, we recorded an income tax benefit from continuing operations of $7.2 million and an effective income tax rate of 75.9%.
Our 41.2% effective income tax rate for the year ended December 31, 2017 included2022, the impacteffective tax rate benefit for 2023 was primarily attributable to the release of variousa $110.8 million UK valuation allowance, and changes in other valuation allowances, partially offset by other discrete tax items including the non-cash net charge of $27.5 million recorded as a resultimpairment of the U.S. Tax Cuts and Jobs Act and the acquisition of
Caisson, inclusive of the $38.1 million non-taxable gain recognizedACS long-lived assets. For additional information, please refer to re-measure our existing equity investments“Note 17. Income Taxes” in Caisson at fair value on the acquisition date.
Our 19.9% effective income tax rate for the year ended December 31, 2016 included the impact of various discrete tax items, primarily related to a reduction in valuation allowances in the U.S. related to capital loss carryforwards, partially offset by an increase in tax expense related to an unrecognized tax benefit from a tax position taken in prior years.
Our 75.9% effective income tax rate for the equivalent prior period January 24, 2015 to December 31, 2015, included the impact of various discrete tax items, primarily related to an increase in tax expense resulting from non-deductible transaction costs associated with the merger of Cyberonics and Sorin and an increase in tax expense due to the change in the corporate income tax rate in Italy.
U.S. Tax Reform
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”). The Act, which is also commonly referred to as “U.S. tax reform”, significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% commencing in 2018. In addition, the Act created a one-time mandatory tax, a toll charge, on previously deferred foreign earnings of non-U.S. subsidiaries controlled by a U.S. corporation, or, in our case, a non-U.S. subsidiary controlled by one of our U.S. subsidiaries. We recorded no toll charge for the year ended December 31, 2017 as we had no previously deferred foreign earnings of U.S. controlled foreign subsidiaries as of the measurement dates. As a result of the Act, we recorded a non-cash net charge of $27.5 million during the fourth quarter of 2017, which isLivaNova’s consolidated financial statements included in Income tax expense (benefit) in the consolidated statement of (loss) income. This amount primarily consists of two components: (i) $12.8 million relating to the impairment of foreign tax credits, and (ii) a net $14.7 million charge resulting from the remeasurement of our deferred tax assets and liabilities in the U.S. based on the change in the U.S. federal corporate income tax rate.this Report.
The Act also establishes various other new U.S. corporate income tax laws that will affect 2018, including, but not limited to, (1) elimination of the corporate alternative minimum tax (AMT); (2) the creation of the base erosion anti-abuse tax (BEAT), a new minimum tax; (3) a new provision designed to tax global intangible low-taxed income (GILTI); (4) a new limitation on deductible interest expense; (5) the repeal of the domestic production activity deduction; (6) limitations on the deductibility of certain executive compensation; and (7) limitations on net operating losses (NOLs) generated after December 31, 2017, to 80 percent of taxable income. The extent to which these and other provisions of the Act, or future legislation or regulations, could impact our consolidated effective income tax rate in future periods depends on many factors including, but not limited to, the amount of profit generated by our subsidiaries operating in the U.S., the impact of the Company’s current or contemplated tax planning strategies, the impact of new or amended tax laws or regulations by countries outside the U.S., and other factors beyond our control.
Further regulations and notices and state conformity could be issued as a result of U.S. tax reform covering various issues that may affect our tax position including, but not limited to, an increase in the corporate state tax rate and elimination of the interest deduction. The content of any future legislation, the timing for regulations, notices, and state conformity, and the reporting periods that would be impacted cannot be determined at this time. Although we believe the net charge of $27.5 million is a reasonable estimate of the impact of the income tax effects of the Act on LivaNova as of December 31, 2017, the estimate is provisional. Once we finalize certain tax positions for our 2017 U.S. consolidated tax return, we will be able to conclude whether any further adjustments to our tax positions are required.
Brexit
On June 23, 2016, the UK held a referendum in which voters approved an exit from the EU, commonly referred to as “Brexit.” On March 29, 2017, the UK government gave formal notice of its intention to leave the EU, formally commencing the negotiations regarding the terms of withdrawal between the UK and the EU. The withdrawal must occur within two years, unless the deadline is extended. The negotiation process will determine the future terms of the UK’s relationship with the EU. The notification does not change the application of existing tax laws, and does not establish a clear framework for what the ultimate outcome of the negotiations and legislative process will be.
Various tax reliefs and exemptions that apply to transactions between EU Member States under existing tax laws may cease to apply to transactions between the UK and EU Member States when the UK ultimately withdraws from the EU. It is unclear at this stage if or when any new tax treaties between the UK and the EU or individual EU Member States will replace those reliefs and exemptions. It is also unclear at this stage what financial, trade and legal implications will ensue from Brexit and how Brexit may affect us, our customers, suppliers, vendors, or our industry.
Several of our wholly owned subsidiaries that are domiciled either in the UK, various EU Member States, or in the United States, and our parent company, LivaNova PLC, are party to intercompany transactions and agreements under which we receive
various tax reliefs and exemptions in accordance with applicable international tax laws, treaties and regulations. If certain treaties applicable to our transactions and agreements are not renegotiated or replaced with new treaties containing terms, conditions and attributes similar to those of the existing treaties, Brexit may have a material adverse impact on our future financial results and results of operations. During the two-year negotiation period, we will monitor and assess the potential impact of this event and explore possible tax-planning strategies that may mitigate or eliminate any such potential adverse impact. We will not account for the impact of Brexit in our income tax provisions until changes in tax laws or treaties between the UK and the EU or individual EU Member States with the UK and/or the U.S. are enacted or the withdrawal becomes effective.
European Union State Aid Challenge
On October 26, 2017, the European Commission (“EC”) announced that an investigation will be opened with respect to the UK’s controlled foreign company (“CFC”) rules. The CFC rules under investigation provide certain tax exceptions to entities controlled by UK parent companies that are subject to lower tax rates if the activities being undertaken by the CFC relate to financing. The EC is investigating whether the exemption is a breach of EU State Aid rules. The investigation is in its early stages and is unlikely to be completed within the next twelve months with an appeal process likely to follow. It is unclear as to whether the UK will be part of the EU once a decision has been finalized due to Brexit and what impact, if any, Brexit will have on the outcome of the investigation or the enforceability of a decision. Due to the many uncertainties related to this matter, including the preliminary state of the investigation, the pending Brexit negotiations and political environment and the unknown outcome of the investigation and resulting appeals, no uncertain tax position reserve has been recognized related to this matter and we are unable to reasonably estimate the potential liability.
Equity Method Investments
Losses from equity method investments were $16.7 million during the year ended December 31, 2017 were due to investee losses of Highlife, MicroPort and Caisson and the impairment of our investment in, and notes receivable from Highlife of $13.0 million; consisting of investment impairment of $4.7 million and the notes receivable impairment of $8.3 million. In May 2017, we acquired the remaining equity interests in Caisson and we began consolidating the results of Caisson as of the acquisition date.
We recognized equity method losses of $18.7 million for the year ended December 31, 2016 due to investee losses of Caisson, Highlife, Microport and Respicardia and the impairment of our investment in Respicardia of $9.2 million. In November 2016, we terminated our distributor agreement with Respicardia. The distributor agreement had been a key component in the determination of whether our influence over Respicardia was significant, and as a result, we determined that we no longer had significant influence over Respicardia and transferred the investment to our cost method investments.
We recognized losses of $2.2 million from our share of investee losses at Highlife, Caisson, Respicardia and MicroPort during the equivalent prior period ended December 31, 2015. All the equity method investments were acquired in the Mergers and therefore investee losses were included in our consolidated statement of (loss) income in “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K beginning October 19, 2015.
Results of Discontinued Operations
The table below illustrates the results of discontinued operations (in thousands):
|
| | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period April 25, 2015 to December 31, 2015 |
Discontinued Operations: | | | | | | |
Loss from discontinued operations, net of tax | | (1,271 | ) | | (64,663 | ) | | (14,893 | ) |
Impairment of discontinued operations, net of tax | | (78,283 | ) | | — |
| | — |
|
Net loss from discontinued operations | | (79,554 | ) | | (64,663 | ) | | (14,893 | ) |
On November 20, 2017, we entered into a letter of intent (“LOI”) to sell our CRM Business Franchise (“CRM”) to MicroPort Scientific Corporation for $190.0 million in cash. Completion of the transaction is subject to receipt of relevant regulatory approvals, including fulfilling the requirements of the Hong Kong Stock Exchange’s Major Transaction requirements, and other customary closing conditions. We expect the transaction to close in the second quarter of 2018.
CRM develops, manufactures and markets products for the diagnosis, treatment and management of heart rhythm disorders and heart failures. CRM products include high-voltage defibrillators, cardiac resynchronization therapy devices and low-voltage pacemakers. CRM has approximately 900 employees, with operations in Clamart, France; Saluggia, Italy; and Santo Domingo, Dominican Republic.
We concluded that the sale of CRM represents a strategic shift and therefore qualifies as a discontinued operation under GAAP. As a result, we classified the operating results of CRM as discontinued operations in our consolidated statements of (loss) income. Additionally, we tested the long-lived assets of CRM for impairment and recognized an impairment to tangible and intangible assets of $78.3 million, net of a $15.3 million tax benefit. The assets and liabilities of CRM are classified as assets (or liabilities) of discontinued operations on the consolidated balance sheets at December 31, 2017 and December 31, 2016 in “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
Significant Accounting Policies and Critical Accounting Estimates
We haveLivaNova has adopted various accounting policies to prepare the consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). OurUS GAAP. The Company’s most significant accounting policies are disclosed in “Note 2. Basis of Presentation, Use of Accounting Estimates and Significant Accounting Policies” and “Note 3. Revenue Recognition” in theLivaNova’s consolidated financial statements. New accounting pronouncements are disclosedstatements included in “Note 21. New Accounting Pronouncements” in the consolidated financial statements.this Report.
To prepare ourLivaNova’s consolidated financial statements in conformity with U.S.US GAAP, management makes estimates and assumptions that may affect the reported amounts of ourthe Company’s assets and liabilities, the disclosure of contingent liabilities as of the date of ourits consolidated financial statements and the reported amounts of ourits revenue and expenses during the reporting period. OurLivaNova’s actual results may differ from these estimates. We considerLivaNova considers estimates to be critical if we arethe Company is required to make assumptions about material matters that are uncertain at the time of estimation, or if materially different estimates could have been made or it is reasonably likely that the accounting estimate willmay change from period to period. The following are areas requiring management’s judgment that we considerLivaNova considers critical:
Business CombinationsGoodwill and Long-Lived Assets
We allocateLivaNova allocates the amounts we pay for eachpurchase price consideration of an acquisition to the assets we acquireacquired and liabilities we assumeassumed based on their fair values at the datesdate of acquisition, including property, plant and equipment, inventories, accounts receivable, long-term debt, and identifiable intangible assets and in-process research and development which either arise from a contractual or legal right or are separable from goodwill. We baseLivaNova allocates any excess purchase price over the fair value of the net tangible and identifiable intangible assets acquired to goodwill. LivaNova bases the fair value of identifiable intangible assets acquired in a business combination, including in-process research and development,IPR&D, on detailed valuations that use information and assumptions provided by management, which consider management’s best estimates of inputs and assumptions that a market participant would use. We allocate any excess purchase price over the fair value of the net tangible and identifiable intangible assets acquired to goodwill. Transaction costs associated with these acquisitions are expensed as incurred and are reported as operating expenses.
Intangible Assets
Intangible assets shown on the consolidated balance sheetsheets consist of finite-lived and indefinite-lived assets expected to generate future economic benefits and are finite-lived assets. Developed technology rightsrecorded at their respective fair values as of their acquisition date. Finite-lived intangible assets consist primarily of purchaseddeveloped technology and technical capabilities, including patents, related know-how and licensed patent rights. Tradenames include the Sorinrights, trade name acquired as part of the Mergers.names and customer relationships. Customer relationships consist of relationships with hospitals and physicianssurgeons in the countries where we operate. We amortize ourLivaNova operates. Indefinite-lived intangible assets over their useful lives using the straight-line method.other than goodwill are composed of IPR&D assets acquired in acquisitions.
Amortization expense for developed technology is recorded in research and development and cost of goods sold. When the product is marketed, we amortize the remaining carrying value of the intangible asset to cost of goods sold. Amortization expense for trade name and customer relationships is recorded in selling, general and administrative expense. We evaluate our intangible assets eachEach reporting period, to determine whether events andLivaNova reviews if there are circumstances indicate either a different useful life or impairment. If we change our estimatethat warrant an evaluation of the useful life of an asset, we amortize the carrying amount over the revised remaining useful life.
Impairment of Property and Equipment and Intangible Assets
We review, when circumstances warrant, the carrying amounts of ourLivaNova’s property and equipment and ourits finite-lived intangible assets to determine whether such carrying amounts continue to be recoverable. Such changes in circumstance may include, among other items, (i) an expectation of a sale or disposal of a long-lived asset or asset group, (ii) adverse changes in market or competitive conditions, (iii) an adverse change in legal factors or business climate in the markets in which we operateLivaNova operates and (iv) operating or cash flow losses. For purposes ofLong-lived assets held and used are assessed for possible impairment testing, long-lived assets are grouped atby comparing their carrying values with their associated undiscounted, future cash flows. In
order to calculate the lowest level for which cash flows are largely independent of other assets and liabilities,impairment charge, LivaNova generally at or below the reporting unit level. If the carrying amount of the asset or asset group is greater than the expected undiscounted cash flows to be generated by such asset or asset group, an
impairment adjustment is recognized. Such adjustment is measured by the amount that the carrying value of such asset or asset group exceeds its fair value. We generally measuremeasures fair value by considering (a) sale prices for similar assets, (b) discounted estimated future cash flows using an appropriate discount rate and/or (c) estimated replacement cost. Assets
LivaNova estimates the useful lives of its finite-lived intangible assets, which requires significant management judgment, and evaluates its intangible assets each reporting period to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs to sell.determine whether events and circumstances indicate a different useful life.
We evaluateLivaNova evaluates the goodwill and indefinite-lived intangible assets for impairment at least annually on October 1st and whenever other facts and circumstances indicate that the carrying amounts of goodwill and other indefinite-lived intangible assets may not be recoverable. For impairment evaluations with respect to bothEstimating the fair value of goodwill and other indefinite-lived intangibles, we first makeintangible assets requires various assumptions, including revenue growth rates and discount rates. LivaNova performed a qualitativequantitative impairment assessment for its Cardiopulmonary and Neuromodulation reporting units as of October 1, 2023. The assessment was performed using management’s current estimate of future cash flows. LivaNova concluded that the fair value of its Cardiopulmonary and Neuromodulation reporting units exceeded their carrying value by 23% and 528%, respectively. Therefore, LivaNova concluded that its Cardiopulmonary and Neuromodulation reporting units’ goodwill and indefinite-lived intangible assets were not impaired on the October 1, 2023 test date. LivaNova also performed a sensitivity analysis of the revenue growth rate for the Company’s Cardiopulmonary and Neuromodulation reporting units as of October 1, 2023, and determined that a 0.5% decrease in the Cardiopulmonary or Neuromodulation growth rate would not result in an impairment of goodwill for the respective reporting units or indefinite-lived intangible assets. Similarly, LivaNova performed a sensitivity analysis of the discount rate for the same reporting units as of October 1, 2023 and determined that a 0.5% increase in the Cardiopulmonary or Neuromodulation discount rate would not result in an impairment of goodwill for the respective reporting units or indefinite-lived intangible assets.
As part of LivaNova’s third-quarter 2022 assessment, the Company considered that revenue for its ACS reporting unit during the nine months ended September 30, 2022, had declined by approximately 29% compared to determine ifthe prior year period, primarily as a result of a reduction in severe COVID-19 cases, hospital-related challenges and product mix. As a result, the Company lowered its future revenue projections for the ACS reporting unit. Based on these circumstances, LivaNova concluded it was more likely than not that the goodwill or other indefinite-lived intangible may be impaired. Inof the caseCompany’s ACS reporting unit was impaired, and performed a quantitative assessment of the goodwill if it is more-likely-than-notas of September 30, 2022, using management’s then current estimate of future cash flows. Based on the valuation performed, LivaNova determined that a reporting unit’s fair value is less than its carrying value, we then compare the fair value of the ACS reporting unit to its respective carrying amount. A reporting unit is an operating segment or one level below an operating segment (referred to as a “component”). Our operating segments are deemed to be our reporting units. Ifwas less than the carrying value and recognized a goodwill impairment of a reporting unit were to exceed its fair value, we would then compare the implied fair value of the reporting unit’s goodwill to its carrying amount, and any excess of the carrying amount over the fair value would be charged to operations as an impairment loss. With respect to indefinite-lived intangible assets, if it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying value, we then estimate its fair value and any excess of the carrying value over the fair value of the indefinite-lived intangible asset is also charged to operations as an impairment loss.
Derivatives
U.S. GAAP requires companies to recognize all derivatives as assets and liabilities on the balance sheet and to measure the instruments at fair value through earnings unless the derivative qualifies for hedge accounting. 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 comprehensive income (loss) until the hedged item is recognized in earnings upon settlement/termination. The changes in the fair value of the derivative are intended to offset the change in fair value of the hedged asset, liability or probable commitment. 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 any, is recorded in earnings. Cash flows from derivative contracts are reported as operating activities in the consolidated statements of cash flows.
We use currency exchange rate derivative contracts and interest rate derivative instruments, to manage the impact of currency exchange and interest rate changes on earnings and cash flows. In order to minimize earnings and cash flow volatility resulting from currency exchange rate changes, we enter into derivative instruments, principally forward currency exchange rate contracts. These contracts are designed to hedge anticipated foreign currency transactions and changes in the value of specific assets and liabilities. At inception of the forward contract, the derivative is designated as either a freestanding derivative or a cash flow hedge. We do not enter into currency exchange rate derivative contracts for speculative purposes. All derivative instruments that qualify for hedge accounting are recorded at fair value on the consolidated balance sheets, as financial asset or liabilities (current or non-current) depending upon the gain or loss position of the contract and contract maturity date.
Forward contracts designated as cash flow hedges are designed to hedge the variability of cash flows associated with forecasted transactions denominated in a foreign currency that will take place in the future.$129.4 million. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings to offset exchange differences originated by the hedged item or to adjust the value of operating income (expense).
We use freestanding derivative forward contracts to offset exposure to the variability of the value associated with assets and liabilities denominated in a foreign currency. These derivatives are not designated as hedges, and therefore changes in the value of these forward contracts are recognized in earnings, thereby offsetting the current earnings effect of the related change in value of foreign currency denominated assets and liabilities.
We use interest rate derivative instruments designated as cash flow hedges to manage the exposure to interest rate movements and to reduce the risk of an increase in borrowing costs by converting floating-rate debt into fixed-rate debt. Under these agreements, we agree to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to agreed-upon notional principal amounts. The interest rate swaps are structured to mirror the payment terms of the underlying loan. The fair value of the interest rate swaps is reported in the consolidated balance sheets financial assets or liabilities (current or non-current) depending upon the gain or loss position of the contract and the maturity of the future cash flows of the fair value of each contract. The effective portion of the gain or loss on these derivatives is reported as a component of accumulated other comprehensive income and reclassified to interest expense in the consolidated statement of (loss) income when the underlying position is settled. The non-effective portion is reported in interest expense in consolidated statement of (loss) income.
Cost and Equity Method Investments
Certain of the Company’s investments in equity and other securities are strategic investments in companies that are in varied stages of development. These investments are included in Investments on the consolidated balance sheets. The Company accounts for these investments under the cost or the equity method of accounting, as appropriate. The valuation of equity and other securities accounted for under the cost method considers all available financialadditional information, related to the investee, including valuations based on recent third-party equity investments in the investee. If an unrealized loss for any investment is considered to be other-than-temporary, the loss is recognized in the consolidated statements of income in the period the determination is made. Equity securities accounted for under the equity method are initially recorded at the amount of the Company’s investment and are adjusted each period for the Company’s share of the investee’s income or loss and dividends paid. Equity securities accounted for under both the cost and equity methods are reviewed quarterly for changes in circumstance or the occurrence of events that suggest the Company’s investment may not be recoverable.
Stock-Based Compensation
Our stock option awards and stock appreciation rights compensation expense is based on the fair market value of our awards and is amortized ratably over the award vesting period. The fair market value is determined using the Black-Scholes option pricing methodology at the grant date. This methodology takes into account variables such as the future expected volatility of our stock price, the amount of time expected to elapse between the date of grant and the date of exercise and a risk-free interest rate. Fair values of stock option awards and stock appreciation rights issued in the future may vary significantly from fair values of awards issued in the current period depending on our estimates, and judgments regarding these variables, and therefore expense in future periods, may differ significantly from current-period expense. Referplease refer to “Note 2. Basis of Presentation, Use of Accounting Estimates4. Business Combinations” and Significant Accounting Policies” accompanying the“Note 7. Goodwill and Intangible Assets” in LivaNova’s consolidated financial statements for further information related to key assumptions.included in this Report.
Income Taxes
We areLivaNova is a UK corporation, and we operateoperates through ourthe Company’s various subsidiaries in a number of countries throughout the world. OurLivaNova’s provision for income taxes is based on the tax laws and rates applicable in the jurisdictions in which we operatethe Company operates and earnearns income. We useLivaNova uses significant judgment and estimates in accounting for ourthe Company’s income taxes. This involves assessing changes inThe Company recognizes deferred tax assets and liabilities for the anticipated future tax effects of temporary differences resulting from differing treatmentbetween the financial statements basis and the tax basis of events for tax and accounting purposes. These assessments result in deferred taxLivaNova’s assets and liabilities, which are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Actual tax expense may significantly differ from our expectations if, for example, judicial interpretations of tax law, tax regulations or tax rates change.
We fileLivaNova files federal and local tax returns in many jurisdictions throughout the world and areis subject to income tax examinations for ourits fiscal year 19922018 and subsequent years, with certain exceptions. TaxWhile LivaNova believes that its tax return positions are fully supported, tax authorities may disagree with certain positions we havethe Company has taken and assess additional taxes, and, as a result, weLivaNova may establish reserves for uncertain tax positions, which require a significant degree of management judgment. WeLivaNova regularly assessassesses the likely outcomes of ourits tax positions in order to determine the appropriateness of our reserves for uncertain tax positions;the Company’s reserves; however, the actual outcome of an audit can be significantly different than ourLivaNova’s expectations, which could have a material impact on ourthe Company’s tax provision. The total amount of unrecognized tax benefit, as of December 31, 2017,2023, if recognized, would reduce ourLivaNova’s income tax expense by approximately $26.1$5.4 million.
We are required toLivaNova periodically assessassesses the recoverability of ourits deferred tax assets by considering whether it is more likely than notmore-likely-than-not that some or all of the actual benefit of those assets will be realized. To the extent that realization does not meet the “more-likely-than-not” criterion, we establishthe Company establishes a valuation allowance. WeLivaNova periodically reviewreviews the adequacy and necessity of the valuation allowance by considering significant positive and negative evidence relative to ourits ability to recover deferred tax assets and to determine the timing and amount of valuation allowance that should be released. ChangesThis evidence includes: profitability in our assessmentthe most recent quarters; internal profitability forecasts for the current and next two future years; the
amount of the factors related to the recoverability of our deferred tax assets could result in materially different income tax provisions. Asasset relative to estimated profitability; the potential effects on future profitability from increasing competition, healthcare reforms and overall economic conditions; limitations and potential limitations on the use of December 31, 2017, we had valuation allowances of $47.4 million that were primarily related toLivaNova’s net operating losses due to ownership changes, pursuant to IRC Section 382; and the implementation of prudent and feasible tax planning strategies, if any. For additional information, please refer to “Note 17. Income Taxes” in certain jurisdictionsLivaNova’s consolidated financial statements included in this Report.
Legal and U.S. tax credits. If these valuation allowances were to be released our tax expense would be reduced by $47.4 million.Other Contingencies
On December 22, 2017,Provisions for legal contingencies are recognized when the Tax CutsCompany determines it is probable that a loss has been incurred and Jobs Act was signed into U.S. lawthe amount is reasonably estimable, the determination of which provided numerous amendments torequires significant judgment. Estimates are used in assessing the Internal Revenue Codelikelihood of 1986. The Tax Cutsa loss being incurred and Jobs Act may impact our U.S. income tax expense (benefit) from continuing operations in future periods.
Foreign Currency
Our functional currency is the U.S. dollar, however,when determining a portionreasonable estimate of the revenues earnedloss for each claim. Final settlement amounts may be materially different from the provision recorded. For additional information, please refer to “Note 13. Commitments and expenses incurred by certainContingencies” in LivaNova’s consolidated financial statements included in this Report.
Contingent Consideration Liabilities
Contingent consideration liabilities result from acquisition agreements that include potential future payment of our subsidiariesconsideration that is contingent upon the achievement of performance milestones and/or sales-based earn-outs. Contingent consideration liabilities are denominated in currencies other thanmeasured at fair value each reporting period, the U.S. dollar. We determine the functional currencydetermination of our subsidiaries
that existwhich requires significant judgments and operate in different economic and currency environmentsestimates. The fair value of contingent consideration is determined based on the primary economic environmentconsideration expected to be transferred based on estimated future cash flows of the acquired business, discounted to present value in whichaccordance with accepted valuation methodologies. For additional information, please refer to “Note 9. Fair Value Measurements” in LivaNova’s consolidated financial statements included in this Report.
Embedded Exchange Feature and Capped Call Derivatives
In June 2020, the subsidiary operates,Company issued the Notes and entered into related capped call transactions. The Notes include an embedded exchange feature that is bifurcated from the currency ofNotes. The embedded exchange feature derivative is measured at fair value using a binomial lattice model and estimated discounted cash flows that utilize observable and unobservable market data. The capped call derivative is measured at fair value using the environmentBlack-Scholes model utilizing observable and unobservable market data, including stock price, remaining contractual term, expected volatility, risk-free interest rate and expected dividend yield, as applicable. The Company uses historical volatility and implied volatility from options traded to determine expected stock price volatility which is an unobservable input that is significant to the valuation. For additional information, please refer to “Note 9. Fair Value Measurements” and “Note 10. Financing Arrangements” 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 ‘Accumulated other comprehensive income (loss)’ (“AOCI”) in theLivaNova’s consolidated balance sheets. Gains and losses arising from transactions denominated in a currency different from an entity’s functional currency arefinancial statements included in Foreign exchangethis Report.
New Accounting Pronouncements
For a discussion of new accounting standards and other gains (losses)disclosure requirements, please refer to “Note 21. New Accounting Pronouncements” in ourLivaNova’s consolidated financial statements of income (loss). Taxes are not provided on cumulative translation adjustments, as substantially all translation adjustments are related to earnings which are intended to be indefinitely reinvestedincluded in the countries where earned.this Report.
Liquidity and Capital Resources
Based on ourLivaNova’s current business plan, we believethe Company believes that our existingits sources of liquidity, which primarily consist of cash and cash equivalents, and future cash generated from operations, and available borrowings under its revolving credit facility, will be sufficient to fund our expectedits uses of liquidity, primarily consisting of day-to-day operating needs,expenses, working capital, requirements, R&D opportunities, capital expenditures, acquisition earn-outs and debt service requirements over the next 12 months. We regularly review ourtwelve-month period beginning from the issuance date of this Report. From time to time, LivaNova may access debt and/or equity markets to optimize its capital needs and consider various investing and financing alternatives to support our requirements. Refer to “Note 10. Financing Arrangements” in the consolidated financial statements in this Annual Report on Form 10-K forstructure, raise additional information regarding our debt. Ourcapital, or increase liquidity as necessary. LivaNova’s liquidity could be adversely affected by the factors affecting future operating results, including those referred to in “Item 1A. Risk Factors” above.above and by the contingencies referred to in “Note 13. Commitments and Contingencies” in LivaNova’s consolidated financial statements included in this Report.
LivaNova’s operating and working capital obligations primarily consist of liabilities arising from the normal course of business including inventory supply contracts, the future settlement of derivative instruments, and future payments of operating leases, as well as contingent consideration arrangements resulting from acquisitions, and obligations associated with legal and other accruals.
The following table presents selected financial information related to LivaNova’s liquidity as of December 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | |
| | 2023 | | 2022 |
Available Short-term Liquidity | | | | |
Cash and cash equivalents | | $ | 266,504 | | | $ | 214,172 | |
Availability under the 2021 First Lien Credit Agreement | | 125,000 | | | 125,000 | |
Availability under the Delayed Draw Term Facility (1) | | — | | | 50,000 | |
| | $ | 391,504 | | | $ | 389,172 | |
| | | | |
Working Capital | | | | |
Current assets | | $ | 988,158 | | | $ | 886,136 | |
Current liabilities | | 334,983 | | | 297,398 | |
| | $ | 653,175 | | | $ | 588,738 | |
| | | | |
Debt Obligations | | | | |
Current portion of long-term debt | | $ | 17,484 | | | $ | 20,892 | |
Short-term unsecured borrowing arrangements | | 627 | | | 2,542 | |
Current debt obligations | | 18,111 | | | 23,434 | |
Long-term debt obligations | | 568,543 | | | 518,067 | |
Total debt obligations | | $ | 586,654 | | | $ | 541,501 | |
(1)On April 6, 2023, LivaNova drew the full $50 million under the Delayed Draw Term Facility to be used for general corporate purposes.
Debt and Capital
LivaNova’s capital structure consists of debt and equity. As of December 31, 2023, LivaNova’s total debt of $586.7 million was 45.9% of its total equity of $1,277.6 million. As of December 31, 2022, LivaNova’s total debt of $541.5 million was 44.8% of its total equity of $1,207.6 million.
During the year ended December 31, 2023, LivaNova received $50.0 million in proceeds from the issuance of long-term debt and repaid $21.6 million in long-term debt.
During the year ended December 31, 2022, LivaNova received $507.5 million in proceeds from the issuance of long-term debt and repaid $223.5 million in long-term debt.
On June 17, 2020, LivaNova’s wholly-owned subsidiary, LivaNova USA, issued the Notes. Holders of the Notes are entitled to exchange the Notes at any time during specified periods, at their option. This includes the right to exchange the Notes during any calendar quarter, if the last reported sale price of LivaNova’s ordinary shares, with a nominal value of £1.00 per share, is greater than or equal to 130% of the exchange price, or $79.27 per share for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter. The exchange condition was not satisfied on December 31, 2023. As a result, LivaNova has included its obligations from the Notes and the associated embedded exchange feature derivative as a long-term liability on the consolidated balance sheets as of December 31, 2023. The Notes are exchangeable solely into cash and are not exchangeable into ordinary shares of LivaNova or any other security under any circumstances. The initial exchange rate for the Notes is 16.3980 ordinary shares per $1,000 principal amount of Notes (equivalent to an initial exchange price of approximately $60.98 per share). The exchange rate is subject to adjustment in certain circumstances, as set forth in the indenture governing the Notes. If holders elect to exchange their Notes during any future periods in the event an exchange condition is met, LivaNova would be required to settle its exchange obligation through the payment of cash, which could adversely affect the Company’s liquidity.
The Company has also entered into privately negotiated capped call transactions with terms substantially similar to those applicable to the Notes. The capped call transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Notes, the number of LivaNova’s ordinary shares underlying the Notes and are expected generally to offset any cash payments the Company is required to make upon exchange of the Notes in excess of the principal amount thereof in the event that the market value per ordinary share, as measured under the capped call transactions, is greater than the strike price of the capped call transactions, with such offset being subject to an initial cap price of $100.00 per share. If the Company’s share price exceeds the cap price, the proceeds under the capped call transactions would not fully offset the excess principal amount due to the holders of the Notes. The capped call transactions expire on December 15, 2025 and must be settled in cash. If the capped call transactions are converted or redeemed early, settlement occurs at their termination value, which is equal to their fair value at the time of the conversion or redemption. The capped call transactions are included at their estimated fair value as of December 31, 2023 within long-term derivative assets on the consolidated balance sheets.
On August 6, 2021, the Company closed an offering and issued 4,181,818 ordinary shares, par value ₤1.00 per share, at an offering price of $82.50 per share. Net proceeds from the offering were approximately $322.6 million, after deducting underwriting discounts, commissions and offering expenses. Proceeds from the offering were used to repay the Company’s $450 million 2020 senior secured term loan.
On August 13, 2021, LivaNova PLC and the Borrower entered into a First Lien Credit Agreement with the lenders and issuing banks party thereto and Goldman Sachs Bank USA, as First Lien Administrative Agent and First Lien Collateral Agent, relating to a $125 million senior secured multi-currency revolving credit facility to be made available to the Borrower. The 2021 First Lien Credit Agreement is available for working capital and other general corporate purposes and, if drawn, can be repaid at any time without premium or penalty. There were no outstanding borrowings under the 2021 First Lien Credit Agreement as of December 31, 2023.
On February 21, 2022, the Court of Appeal notified the Company that it granted the Company a suspension with respect to the payment of damages in the amount of €453.6 million (approximately $502.0 million at December 31, 2023) in the SNIA litigation until a decision has been reached on LivaNova’s appeal to the Italian Supreme Court. This suspension was subject to LivaNova providing a first demand bank guarantee of €270.0 million (approximately $298.8 million at December 31, 2023) within 30 calendar days.
On February 24, 2022, LivaNova PLC and the Borrower entered into an Incremental Facility Amendment No. 1 to the 2021 First Lien Credit Agreement, relating to a €200 million bridge loan facility. On March 16, 2022, LivaNova entered into Amendment No. 2 to the 2021 First Lien Credit Agreement, which converted the available borrowings under the Bridge Loan Facility from €200 million to $220 million and converted the EURIBOR rate in the 2021 First Lien Credit Agreement to SOFR. LivaNova delivered a borrowing notice for $220 million in connection with the Bridge Loan Facility, which was funded on March 17, 2022. LivaNova used the proceeds of the Bridge Loan Facility to post a portion of the cash collateral supporting the SNIA Litigation Guarantee.
On March 18, 2022, LivaNova PLC, acting through its Italian branch, entered into an Indemnity Letter and an Account Pledge Agreement with Barclays, further to which Barclays issued the €270.0 million SNIA Litigation Guarantee. As security for the SNIA Litigation Guarantee, LivaNova is required to grant cash collateral to Barclays in USD in an amount equal to the USD equivalent of 105% of the amount of the SNIA Litigation Guarantee calibrated on a biweekly basis. On December 31, 2023, the cash collateral classified as restricted cash on the consolidated balance sheets was $311.4 million.
On March 21, 2022, LivaNova delivered the SNIA Litigation Guarantee as required by the Court of Appeal, thereby satisfying the condition to obtain the suspension for the payment of damages in connection with the SNIA litigation until review of such judgment by the Italian Supreme Court.
On July 6, 2022, LivaNova and the Borrower entered into Incremental Facility Amendment No. 2, which provides for the Borrower to, among other things, obtain commitments for term loan facilities from a syndicate of lenders in an aggregate principal amount of $350 million consisting of (i) the Initial Term Facility with an aggregate principal amount of $300 million and (ii) the Delayed Draw Term Facility with an additional aggregate principal amount of $50 million. On April 6, 2023, LivaNova drew $50 million under the Delayed Draw Term Facility for general corporate purposes.
Proceeds from the Initial Term Facility were used to repay in full the Bridge Loan Facility on July 6, 2022, with the remainder used for general corporate purposes of the Company. The Term Facilities have a maturity of the earlier of (i) five years or (ii) 91 days prior to December 15, 2025, the maturity date of the Notes, unless by that date LivaNova USA will have either redeemed or refinanced the Notes, or set aside an amount of cash equal to the then-outstanding principal amount of the Notes.
For additional information on LivaNova’s debt and debt transactions, please refer to “Note 10. Financing Arrangements” in LivaNova’s consolidated financial statements included in this Report.
Cash Flows
NetThe following table presents net cash and cash equivalents provided by (used in) operating, investing and financing activities and the net increase (decrease) in the balance of cash and cash equivalents were as followsfor the years ended December 31, 2023, 2022 and 2021 (in thousands):
| | | | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period April 25, 2015 to December 31, 2015 | | Fiscal Year Ended April 24, 2015 |
| | 2023 | | | | 2023 | | 2022 | | 2021 |
Operating activities | | $ | 91,339 |
| | $ | 90,151 |
| | $ | (9,288 | ) | | $ | 79,676 |
|
Investing activities | | (52,855 | ) | | (44,516 | ) | | 16,182 |
| | (9,765 | ) |
Financing activities | | 11,294 |
| | (118,039 | ) | | (18,127 | ) | | (48,256 | ) |
Effect of exchange rate changes on cash and cash equivalents | | 4,048 |
| | (420 | ) | | (341 | ) | | (767 | ) |
Net (decreases) increase | | $ | 53,826 |
| | $ | (72,824 | ) | | $ | (11,574 | ) | | $ | 20,888 |
|
Net increase (decrease) | |
Operating Activities
Cash provided by operating activities for the year ended December 31, 2017 $91.32023 increased $5.0 million compared to the prior year primarily due to adjustments toresulting from improvements in working capital and an increase in net income of $220.0 millionadjusted for non-cash items, which included a non-cash loss of $93.6 million related to the impairment of tangible and intangible assets of our discontinued operations, and depreciation and amortization of $82.9 million,partially offset by utilizationan increase in 3T Heater-Cooler litigation payments of cash for operating assets and liabilities of $103.6$24.8 million.
Cash provided by operating activities for the year ended December 31, 2016 was $90.2 million, primarily due to a net loss of $62.8 million offset by $161.3 million of non-cash items. Non-cash items were principally composed of $85.4 million in depreciation and amortization and $19.6 million in stock-based compensation.
During the transitional period April 25, 2015 to December 31, 2015, cash utilized in operating activities was $9.3 million, which was net of amortization of $36.3 million related to Sorin’s inventory written-up in the Mergers. In connection with the Mergers we acquired $233.8 million of Sorin inventory as of October 19, 2015. In addition, we utilized operating cash for payment of accrued merger costs, which primarily accounted for the decrease in our balance of accounts payable and accrued liabilities of $32.8 million.
Cash provided by operating activities for the historical Cyberonics fiscal year ended April 24, 2015 was $79.7 million, which was primarily attributable to net income of $57.8 million and non-cash operating expense and FX losses of $28.2 million, offset by $6.3 million utilized by operating assets and liabilities, primarily to build inventories.
Investing Activities
Cash used in investing activities was $52.9 million during the year ended December 31, 2017. We invested $34.12023 increased $1.9 million compared to the prior year largely due to increases in purchases of property, plant and equipment. We also utilized cashequipment and investments of $27.9 million related to our investments in privately held medical start-up companies, which included the purchase of the 51% of the remaining interest in Caisson utilizing cash of $14.2$8.5 million and investments in, and loans to, our equity and cost method investees of $13.7 million.
Cash used in investing activities was $44.5$3.6 million, respectively, partially offset by $8.9 million paid during the year ended December 31, 2016, primarily due to $38.4 million invested in property, plant and equipment and investments in, and loans to, our equity and cost method investees2022 associated with the acquisition of $14.3 million. These amounts were partially offset by the transfer of $7.0 million to cash and cash equivalents from short-term investments.
Cash provided in investing activities of $16.2 million during the transitional period April 25, 2015 to December 31, 2015 was due to the transfer of $20.0 million to cash and cash equivalents from short-term investments and an increase in cash of $12.5 million obtained in the Mergers, offset by net investment activity of $16.3 million, primarily for property, plant and equipment.
Cash used in investing activities was $9.8 million during the fiscal year ended April 24, 2015. We invested $1.9 million in commercial paper. We also invested $6.7 million in property, plant and equipment primarily due to construction of the Costa Rica manufacturing facility. We also invested $1.2 million in Cerbomed, which was fully impaired during the transitional period April 25, 2015 to December 31, 2015. ALung.
Financing Activities
Cash used inprovided by financing activities during the year ended December 31, 2017 was $11.32023 decreased $258.6 million which includes $32.4 million in borrowings under our revolving credit facilities and repayment of long-term debt of $22.8 million. We also borrowed $2.0 million in additional long-term debt.
Cash used in financing activities duringcompared to the year ended December 31, 2016 was $118.0 million, which includes $54.5 million to repurchase shares, a $33.7 million reduction in revolving credit facilities, repayment of advances on customer receivables of $23.8 million and repayment of long-term debt of $21.1 million. We also borrowed $7.2 million in additional long-term debt.
Cash used in financing activities during the transitional period April 25, 2015 to December 31, 2015 was $18.1 million, which included the repayment of long-term debt of $32.0 million, and the purchase of treasury shares for $7.3 million, partially offset by cash proceeds from net short-term debt borrowing of $11.1 million and stock based compensation activities of $8.8 million.
Cash used in financing activities during the year ended April 24, 2015 was $48.3 million, whichprior year. The decrease was primarily due to stock repurchasesa reduction in proceeds from net long and short-term debt borrowings and repayments of $55.0$257.5 million.
Debt and Capital
Our capital structure consists of debt and equity. As of December 31, 2017, our total debt of $146 million was 8.0% of total equity of $1.8 billion. As of December 31, 2016, our total debt of $123 million was 7.2% of total equity of $1.7 billion.
Debt Acquired in the Mergers
At the consummation of the Mergers on October 19, 2015, LivaNova acquired all of the outstanding debt of Sorin in the aggregate principal amount of $203.0 million payable to various financial and non-financial institutions. Prior to the Mergers Cyberonics had no debt.
Debt - Post Mergers
During the year ended December 31, 2017, we increased our outstanding revolving credit facilities by $32.4 million, repaid $22.8 million of long-term debt obligations and borrowed $2.0 million in additional long-term debt.
During the year ended December 31, 2016, we reduced our outstanding revolving credit facilities by $33.7 million, repaid $21.1 million of long-term debt obligations and borrowed $7.2 million in additional long-term debt.
Factoring
During the year ended December 31, 2016, we reduced our obligation for advances on customer receivables by $23.8 million, thereby eliminating this form of financing.
Contractual Obligations
We have various contractual commitments that we expect to fund from existing cash, future operating cash flows and borrowings under our revolving credit facilities. The actual timing of the clinical commitment payments may vary based on the completion of milestones which are beyond our control. The following table summarizes our significant contractual obligations as of December 31, 2017 and the periods in which such obligations are due (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Less Than One Year | | One to Three Years | | Three to Five Years | | Thereafter | | Total Contractual Obligations |
Principal payments on short-term debt | | $ | 58,190 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 58,190 |
|
Principal payments on long-term debt | | 25,844 |
| | 46,793 |
| | 13,828 |
| | 1,337 |
| | 87,802 |
|
Interest payments on long-term debt | | 788 |
| | 848 |
| | 161 |
| | 19 |
| | 1,816 |
|
Operating leases | | 13,584 |
| | 21,198 |
| | 12,917 |
| | 24,632 |
| | 72,331 |
|
Caisson deferred consideration | | 14,300 |
| | — |
| | — |
| | — |
| | 14,300 |
|
Inventory supply contract obligations | | 2,136 |
| | 22,678 |
| | — |
| | — |
| | 24,814 |
|
Derivative instruments | | 1,294 |
| | 719 |
| | 32 |
| | — |
| | 2,045 |
|
Other commitments | | 588 |
| | 16 |
| | — |
| | 502 |
| | 1,106 |
|
Total contractual obligations (1) | | $ | 116,724 |
| | $ | 92,252 |
| | $ | 26,938 |
| | $ | 26,490 |
| | $ | 262,404 |
|
| |
(1) | Contractual obligations do not include $26.1 million of unrecognized tax benefits, inclusive of interest and penalties, included on our consolidated balance sheet as of December 31, 2017. We are unable to specify with certainty the future periods in which we may be obligated to settle such amounts. |
We have other commitments that we are contractually obligated to fulfill with cash under certain circumstances. These commitments include letters of credit to guarantee our performance as it relates to our contract bidding, VAT tax, tax appeals, and other obligations in various jurisdictions. Obligations under these guarantees are not normally called, as we typically comply with underlying performance requirements. As of December 31, 2017, no liability has been recorded in the financial statements associated with these obligations.
The following table summarizes our guarantees as of December 31, 2017 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Less Than One Year | | One to Three Years | | Three to Five Years | | Thereafter | | Total Guarantees |
Guarantees on governmental bids (1) | | $ | 17,574 |
| | $ | 8,193 |
| | $ | 5,431 |
| | $ | 863 |
| | $ | 32,061 |
|
Guarantees - commercial (2) | | 962 |
| | 3,165 |
| | 29 |
| | 481 |
| | 4,637 |
|
Guarantees to tax authorities (3) | | 242 |
| | 1,291 |
| | 10,833 |
| | — |
| | 12,366 |
|
Guarantees to third-parties (4) | | — |
| | — |
| | — |
| | 153 |
| | 153 |
|
Total guarantees | | $ | 18,778 |
| | $ | 12,649 |
| | $ | 16,293 |
| | $ | 1,497 |
| | $ | 49,217 |
|
| |
(1) | Government bid guarantees include such items as unconditional bank guarantees, irrevocable letters of credit and bid bonds. |
| |
(2) | Commercial guarantees include our lease and tenancy guarantees. |
| |
(3) | The guarantees to the governmental tax authorities consist primarily of the guarantee issued to the Italian VAT Authority. |
| |
(4) | Guarantees to third-parties consist primarily of irrevocable letters of credit and tenancy guarantees. |
Market Risk
We areLivaNova is exposed to certain market risks as part of ourits ongoing business operations, including risks from foreign currency exchange rates, interest rate risks and concentration of procurement suppliers, that could adversely affect ourLivaNova’s consolidated balance sheets, net (loss) income andfinancial position, results of operations or cash flow.
We manageflows. LivaNova manages these risks through regular operating and financing activities and, at certain times, derivative financial instruments.
Foreign Currency Exchange Rate Risk
Due to the global nature of ourLivaNova’s operations, we arethe Company is exposed to foreign currency exchange rateFX fluctuations. We maintainHistorically, LivaNova has maintained a foreign currency exchange rate risk management strategy that utilizes cash flow hedges and freestanding foreign currency derivatives to reduce ourthe Company’s exposure to unanticipated fluctuations in forecastforecasted revenue and costs, and fair values of debt, inter-company debt, bank deposits, accounts receivable, and accounts receivablespayable caused by changes in foreign currency exchange rates. Upon the settlement of LivaNova’s foreign currency cash flow hedges in the fourth quarter of 2022 and following an in-depth analysis of the utility of the Company’s cash flow hedging program, LivaNova discontinued its foreign currency cash flow hedging program. LivaNova continues to use freestanding derivative forward contracts to offset exposure to the variability of the value associated with assets and liabilities denominated in a foreign currency.
We mitigate ourLivaNova mitigates its credit risk relating to counter-partiescounterparties of ourits derivatives through a variety of techniques, including transacting with multiple, high-quality financial institutions, thereby limiting ourthe Company’s exposure to individual counter-partiescounterparties and by entering into International Swaps and Derivatives Association, Inc. (“ISDA”)ISDA Master Agreements, which include provisions for a legally enforceable master netting agreement, with almost all of ourLivaNova’s derivative counter-parties.counterparties. The terms of the ISDA agreements may also include credit support requirements, cross default provisions, termination events, orand set-off provisions. Legally enforceable master netting agreements reduce credit risk by providing protection in bankruptcy in certain circumstances and generally permitting the closeout and netting of transactions with the same counter-partycounterparty upon the occurrence of certain events.
Interest Rate Risk
We areLivaNova is subject to interest rate risk on ourits investments and debt. WeHistorically, LivaNova has entered into interest rate derivative instruments designated as cash flow hedges to manage the exposure to interest rate movements and to reduce the risk of increased borrowing costs by converting floating-rate debt into fixed-rate debt. Under these agreements, LivaNova agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to agreed-upon notional principal amounts. These interest rate swaps are structured to mirror the payment terms of the underlying loan. The Company’s outstanding interest rate swaps expired on April 6, 2023. LivaNova elected not to renew the interest rate swaps as interest expense associated with the Initial Term Facility is principally offset by holding a significant portion of our interestthe Initial Term Facility in a depository account, which earns a floating rate risk with contracts that swap floating-rate interest payments for fixed rate interest payments. of interest.
If interest rates associated with LivaNova’s variable-rate financing arrangements were to increase or decreaseincrease/(decrease) by 0.5%,100 basis points, the effectseffect on ourinterest expense within LivaNova’s consolidated statement of income (loss) would be an increase/(decrease) of approximately $3.5 million, respectively. Conversely, if the interest rate associated with LivaNova’s variable-rate depository account were to increase/(decrease) by 100 basis points, the effect on foreign exchange and other income/(expense) within LivaNova’s consolidated statements of income (loss) would not be material.an increase/(decrease) of approximately $3.5 million, respectively.
Concentration of Credit Risk
OurLivaNova’s trade accounts receivable represent potential concentrations of credit risk. This risk is limited due to the large number of customers and their dispersion across a number of geographic areas, as well as ourLivaNova’s efforts to control ourits exposure to credit risk by monitoring ourits receivables and the use of credit approvals and credit limits. In addition, we haveLivaNova has historically had strong collections and minimal write-offs. While we believeLivaNova believes that ourits reserves for credit losses are adequate, essentially all of ourthe Company’s trade receivables are concentrated in the hospital and healthcare sectors worldwide, and accordingly, we areLivaNova is exposed to their respective business, economic and country-specific variables. Although we doLivaNova does not currently foresee a concentrated credit risk associated with these receivables, repayment is dependent on the financial stability of these industry sectors and the respective countries’ national economies and healthcare systems.
Factors Affecting Future Operating Results and Share Price
The material factors affecting ourLivaNova’s future operating results and share prices are disclosed in “Item 1A. Risk Factors” included inof this Annual Report on Form 10-K.
Report.
Item 7A. Quantitativeand Qualitative Disclosures aboutAbout Market Risk
InformationThe information required under 7A. has been incorporated intoby reference to the information contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Operations” of this Report under the section entitled “Market Risk.”
Item 8. FinancialStatements and Supplementary Data
The information required by this Item is incorporated by reference to theLivaNova’s audited consolidated financial statements and notes thereto included in “Item 15. Exhibits, Financial Statement Schedules” of this Report, beginning on page F-1.F-1 of this Report, are incorporated herein by reference.
Item 9. Changesin and Disagreements with Accountants on Accounting andFinancial Disclosure
None.
Item 9A. Controlsand Procedures
Disclosure Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We maintainLivaNova maintains a system of disclosure controls and procedures, as defined in RulesRule 13a-15(e) and 15d-15(e) ofunder the Exchange Act, that are designed to ensure that information required to be disclosed in ourthe Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. ThisDisclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information is also accumulated and communicated to management, including our Chief Executive Officer (“CEO”)LivaNova’s CEO and Chief Financial Officer (“CFO”),CFO, as appropriate, to allow timely decisions regarding required disclosure. OurLivaNova’s management, under the supervision and with the participation of ourthe Company’s CEO and CFO, evaluated the effectiveness of the design and operation of ourLivaNova’s disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K.Report. Based on that evaluation, ourLivaNova’s CEO and CFO concluded that ourLivaNova’s disclosure controls and procedures were effective as of December 31, 2017.2023.
(b) Management’s Report on Internal Control Over Financial Reporting
OurLivaNova’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in RulesRule 13a-15(f) and 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of ourLivaNova’s internal control over financial reporting as of December 31, 20172023 using the criteria set forth in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Management’s assessment included an evaluation of the design and testing of the operational effectiveness of our internal control over financial reporting.Commission. Based on that evaluation, managementthis assessment, LivaNova concluded that ourthe Company’s internal control over financial reporting was effective as of December 31, 2017.2023.
The effectiveness of ourLivaNova’s internal control over financial reporting as of December 31, 20172023 has been audited by PricewaterhouseCoopers S.p.A.,LLP, an independent registered public accounting firm. Their report dated February 28, 2018, is included inafter “Item 15. Exhibits, Financial Statement Schedules”16. Form 10-K Summary” in this Annual Report on Form 10-K.Report.
(c) Changes in Internal Control Over Financial Reporting
We deployed a new enterprise resource planning (ERP) software system, SAP,During the fourth quarter of 2023, there were no changes to our U.S. locations during the year ended December 31, 2017. In conjunction with the implementation of SAP, we reorganized certain U.S. legal entities were to align with our strategic and operational focus. Our internal controls have been updated to reflect these changes. There have been no other changes in ourLivaNova’s internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or that are reasonably likely to materially affect, ourthe Company’s internal control over financial reporting.
Item 9B. OtherInformation
None.
During the three months ended December 31, 2023, none of the Company’s directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934) adopted, terminated or modified a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act).
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Pursuant to general instruction G to Form 10-K, we incorporateThe information required for this Item 10 is incorporated by reference intofrom LivaNova’s 2024 Proxy Statement, which the Company anticipates filing within 120 days of December 31, 2023.
LivaNova has adopted a Code of Conduct that applies to all employees, officers and directors of the Company. A copy of the Code of Conduct is publicly available on the Company’s website, www.livanova.com. LivaNova intends to post any amendments to the Code of Conduct or any grant of a waiver from a provision of the Code of Conduct requiring disclosure under applicable SEC rules on the Company’s website.
Item 11. ExecutiveCompensation
The information required for this item the information to be disclosed in our definitive proxy statement for our 2018 Annual Meeting of Stockholders.
Item 11. ExecutiveCompensation
Pursuant to general instruction G to Form 10-K, we incorporate11 is incorporated by reference into thisfrom LivaNova’s 2024 Proxy Statement except as to information required pursuant to Item 402(v) of the informationSEC Regulation S-K relating to be disclosed in our definitive proxy statement for our 2018 Annual Meetingpay versus performance. The Company anticipates filing LivaNova’s 2024 Proxy Statement within 120 days of Stockholders.December 31, 2023.
Item 12. SecurityOwnership of Certain Beneficial Owners and Managementand Related Stockholder Matters
Pursuant to general instruction G to Form 10-K, we incorporateThe information required for this Item 12 is incorporated by reference into this Itemfrom LivaNova’s 2024 Proxy Statement, which the information to be disclosed in our definitive proxy statement for our 2018 Annual MeetingCompany anticipates filing within 120 days of Stockholders.December 31, 2023.
Item 13. CertainRelationships and Related Transactions, and DirectorIndependence
Pursuant to general instruction G to Form 10-K, we incorporateThe information required for this Item 13 is incorporated by reference into this Itemfrom LivaNova’s 2024 Proxy Statement, which the information to be disclosed in our definitive proxy statement for our 2018 Annual MeetingCompany anticipates filing within 120 days of Stockholders.December 31, 2023.
Item 14. PrincipalAccounting Fees and Services
Pursuant to general instruction G to Form 10-K, we incorporateThe information required for this Item 14 is incorporated by reference into this Itemfrom LivaNova’s 2024 Proxy Statement, which the information to be disclosed in our definitive proxy statement for our 2018 Annual MeetingCompany anticipates filing within 120 days of Stockholders.
December 31, 2023.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(1) Financial Statements
The Consolidated Financial Statements of LivaNova PLC and its subsidiaries and the Report of Independent Registered Public Accounting Firms are included in this Annual Report on Form 10-K beginning on page F-1:
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Description | |
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(2) Financial Statement Schedules
All schedules required by Regulation S-X have been omitted as not applicable or not required, or the information required has been included in the notes to the consolidated financial statements.
(3) Index to Exhibits
The exhibits marked with the asterisk symbol (*) are filed or furnished (in the case of Exhibit 32.1) with this Form 10-K. The exhibits marked with the cross symbol (†) are management contracts or compensatory plans or arrangements filed pursuant to Item 601(b)(10)(iii) of Regulation S-K.
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Exhibit Number | Document Description | | Report or Registration Statement | SEC File or Registration Number | Exhibit Reference |
| Transaction Agreement, dated March 23, 2015, by and among LivaNova PLC (f/k/a Sand Holdco Limited), Cyberonics, Inc., Sorin S.p.A. and Cypher Merger Sub, Inc. | | LivaNova PLC Registration Statement on Form S-4, filed on April 20, 2015, as amended | 333-203510 | Annex A-1 |
| Letter of Intent, dated as of November 20, 2017, by and among LivaNova PLC, MicroPort Cardiac Rhythm B.V. and MicroPort Scientific Corporation (including the form of Stock and Asset Purchase Agreement attached as Exhibit A thereto) | | LivaNova PLC Current Report on Form 8-K, filed on November 20, 2017 | 001-37599 | 2.1 |
| Amended Articles of Association of LivaNova PLC, effective as from 14 June 2017
| | | | |
| Service Agreement, dated September 8, 2015, between LivaNova PLC and Vivid Sehgal | | LivaNova PLC Current Report on Form 8-K, filed on September 14, 2015 | 333-203510 | 10.1 |
| Amendment and Restatement Agreement, dated October 2, 2015, by and among LivaNova PLC, Sorin S.p.A., Sorin CRM S.A.S., Sorin Group Italia S.r.l. and the European Investment Bank | | LivaNova PLC Current Report on Form 8-K, filed on October 19, 2015 | 001-37599 | 10.1 |
| Amended and Restated Finance Contract, dated October 19, 2015, by and among LivaNova PLC, Sorin CRM S.A.S., Sorin Group Italia S.r.l. and the European Investment Bank | | LivaNova PLC Current Report on Form 8-K, filed on October 19, 2015 | 001-37599 | 10.2 |
| | | | | |
Exhibit Number | Document Description |
| Share and Asset Purchase Agreement, dated as of December 2, 2020, by and between LivaNova PLC and Mitral Holdco S.à.r.l., incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K, filed on December 3, 2020 |
| Amended and Restated Share and Asset Purchase Agreement, dated as of April 9, 2021, by and between LivaNova PLC and Mitral Holdco S.à.r.l., incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K, filed on April 15, 2021 |
| Amended Articles of Association, incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 |
| Description of Securities Registered Under Section 12 of the Securities Exchange Act of 1934, as amended |
| Indenture, dated as of June 17, 2020, among LivaNova USA, Inc., as Issuer, LivaNova PLC, as Guarantor, and Citibank, N.A., as Trustee, incorporated by reference to Exhibit 4.1 of the Company’s current Report on Form 8-K, filed on June 17, 2020 |
| Form of 3.00% Cash Exchangeable Senior Notes due 2025 (included in Exhibit 4.1 of the Company’s current Report on Form 8-K, filed on June 17, 2020) |
| Form of Deed of Indemnification (Directors), each effective October 19, 2015, incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K, filed on October 19, 2015 |
| Form of Deed of Indemnification (Officers), each effective October 19, 2015, incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K, filed on October 19, 2015 |
| 2015 Incentive Award Plan and related Sub-Plan for UK Participants, adopted on October 16, 2015, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on October 19, 2015 |
| Cyberonics, Inc. 2009 Stock Plan, as amended, incorporated by reference to Appendix A to Cyberonics, Inc.’s Proxy Statement on Schedule 14A, filed on August 2, 2012 |
| Amended and Restated Cyberonics, Inc. New Employee Equity Inducement Plan, as amended, incorporated by reference to Exhibit 10.3 of Cyberonics, Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 24, 2008 |
|
| | | | | | | |
| Form of Deed of Indemnification (Directors), each effective October 19, 2015 | | LivaNova PLC Current Report on Form 8-K, filed on October 19, 2015 | 001-37599 | 10.3 |
| Form of Deed of Indemnification (Officers), each effective October 19, 2015 | | LivaNova PLC Current Report on Form 8-K, filed on October 19, 2015 | 001-37599 | 10.4 |
| LivaNova PLC 2015 Incentive Award Plan and related Sub-Plan for U.K. Participants, adopted on October 16, 2015 | | LivaNova PLC Current Report on Form 8-K, filed on October 19, 2015 | 001-37599 | 10.1 |
| Form of Stock Appreciation Right Grant Notice and Stock Appreciation Right Agreement under the LivaNova PLC 2015 Incentive Award Sub-Plan (Non-U.S. Form) | | LivaNova PLC Current Report on Form 8-K, filed on October 19, 2015 | 001-37599 | 10.2 |
| Form of Stock Appreciation Right Grant Notice and Stock Appreciation Right Agreement under the LivaNova PLC 2015 Incentive Award Plan (U.S. Form) | | LivaNova PLC Current Report on Form 8-K, filed on October 19, 2015 | 001-37599 | 10.3 |
| Director Appointment Letters for Non-Employee Directors, dated the dates indicated therein | | LivaNova PLC Current Report on Form 8-K, filed on October 19, 2015 | 001-37599 | 10.5 |
| Form of Director Restricted Stock Unit Award Grant Notice and Director Restricted Stock Unit Award Agreement under the LivaNova PLC 2015 Incentive Award Plan (Non-Employee Directors) | | LivaNova PLC Current Report on Form 8-K, filed on October 19, 2015 | 001-37599 | 10.6 |
| Joint Venture Contract, dated January 9, 2014 between Sorin CRM Holdings SAS and Shanghai MicroPort Medical (Group) Co., Ltd. | | LivaNova Plc Annual Report on Form 10-K/T, filed on March 4, 2016. | 001-37599 | 10.20 |
| Capital Increase and Accession Agreement in relation to MicroPort WeiBo Medical Devices (Shanghai) Co. Ltd., dated January 9, 2014, by and among Shanghai MicroPort Medical (Group) Co., Ltd., Sorin CRM Holdings SAS and MicroPort WeiBo Medical Devices (Shanghai) Co. Ltd. | | LivaNova Plc Annual Report on Form 10-K/T, filed on March 4, 2016. | 001-37599 | 10.21 |
| Amendment Agreement, dated May 19, 2014, to the Joint Venture Contract and Articles of Association in respect of MicroPort Sorin CRM (Shanghai) Co., Ltd. | | LivaNova Plc Annual Report on Form 10-K/T, filed on March 4, 2016. | 001-37599 | 10.22 |
| Amendment Agreement (2), dated 9 January 2014 to the Joint Venture Contract in respect of MicroPort Sorin CRM (Shanghai) Co., Ltd. | | LivaNova Plc Annual Report on Form 10-K/T, filed on March 4, 2016. | 001-37599 | 10.23 |
| Employment Letter, dated January 12, 2016, to R. Jason Richey | | LivaNova Plc Annual Report on Form 10-K/T, filed on March 4, 2016. | 001-37599 | 10.24 |
| Gruppo Sorin R&D Finance Contract, dated May 6, 2014, between the European Investment Bank and Sorin S.p.A., Sorin CRM S.A.S. and Sorin Group Italia S.r.l. | | LivaNova Plc Annual Report on Form 10-K/T, filed on March 4, 2016. | 001-37599 | 10.25 |
| Amendment to Restricted Stock Unit Agreement, dated February 17, 2016, between LivaNova PLC and André-Michel Ballester | | LivaNova Plc Annual Report on Form 10-K/T, filed on March 4, 2016. | 001-37599 | 10.26 |
| Cyberonics, Inc. 2009 Stock Plan, as amended, | | Cyberonics, Inc. Proxy Statement on Schedule 14A, filed on August 2, 2012 | 000-19806 | Appendix A |
|
| | | | | | | |
| Amended and Restated Cyberonics, Inc. New Employee Equity Inducement Plan, as amended | | Cyberonics, Inc. Quarterly Report on Form 10-Q for the Cyberonics, Inc. fiscal quarter ended October 24, 2008 | 000-19806 | 10.3 |
| Employment Letter, dated November 14, 2003, to Brian Sheridan | | LivaNova Plc Annual Report on Form 10-K/T, filed on March 4, 2016. | 001-37599 | 10.42 |
| Employment Agreement, effective January 1, 2015 between David S. Wise and Cyberonics, Inc. | | LivaNova Plc Annual Report on Form 10-K/T, filed on March 4, 2016. | 001-37599 | 10.43 |
| Letter Agreement dated July 1, 2016 between Mr. Douglas Manko and Cyberonics Inc., a wholly owned subsidiary of LivaNova Plc | | LivaNova Plc Quarterly Report on Form 10-Q, filed on November 2, 2016. | 001-37599 | 10.48 |
| Service Agreement dated October 3, 2016 between Mr. Damien McDonald and LivaNova Plc | | LivaNova Plc Current Report on Form 8-K, filed on August 1, 2016. | 001-37599 | 10.1 |
| Side Letter effective October 3, 2016 between Mr. Damien McDonald and LivaNova Plc | | LivaNova Plc Current Report on Form 8-K, filed on August 1, 2016. | 001-37599 | 10.2 |
| Form of Share Repurchase Contract approved by shareholders at the 2016 Annual Meeting of Shareholders | | LivaNova Plc Proxy Statement on Schedule 14A, filed on May 16, 2016 | 001-37599 | Appendix A |
| Form of Rule 10b5-1 Repurchase Plan approved by shareholders at the 2016 Annual Meeting of Shareholders | | LivaNova Plc Proxy Statement on Schedule 14A, filed on May 16, 2016 | 001-37599 | Appendix B |
| Board approval of Share Repurchase Programme on August 2, 2016 | | LivaNova Plc Current Report on Form 8-K, filed on August 2, 2016 | 001-37599 | Form 8-K |
| $40m Revolving Facility Agreement between LivaNova Plc and Barclays Bank Plc | | LivaNova Plc Quarterly Report on Form 10-Q, filed on November 2, 2016 | 001-37599 | 10.57 |
| Settlement Agreement between Andre-Michel Ballester and LivaNova Plc dated December 21, 2016 | | LivaNova Plc Annual Report on Form 10-K, filed on March 1, 2017. | 001-37599 | 10.58 |
| Consultancy Agreement between Andre-Michel Ballester and LivaNova Plc dated December 26, 2016 | | LivaNova Plc Annual Report on Form 10-K, filed on March 1, 2017. | 001-37599 | 10.59 |
| Form of LivaNova Plc 2017 Service-Based Restricted Share Unit (“RSU”) Agreement | | LivaNova Plc Current Report on Form 8-K, filed on May 11, 2017 | 001-37599 | 10.1 |
| Form of LivaNova Plc 2017 Performance-Based RSU Agreement | | LivaNova Plc Current Report on Form 8-K, filed on May 11, 2017 | 001-37599 | 10.2 |
| CEO Employment Agreement effective January 1, 2017 between LivaNova Plc and Mr. Damien McDonald | | LivaNova Plc Current Report on Form 8-K, filed on February 28, 2017 | 001-37599 | 10.2 |
| Side Letter dated January 1, 2017 between LivaNova Plc and Mr. Damien McDonald | | LivaNova Plc Current Report on Form 8-K, filed on February 28, 2017 | 001-37599 | 10.3 |
| LivaNova Plc 2017 Short-Term Incentive Plan | | LivaNova Plc Current Report on Form 8-K, filed on February 28, 2017 | 001-37599 | 10.1 |
| Termination Agreement dated April 3, 2017 between LivaNova Plc and Mr. Jacques Gutedel | | LivaNova Plc Current Report on Form 8-K, filed on April 6, 2017 | 001-37599 | 10.1 |
| Description of Payment Under the 2016 Bonus Plan | | LivaNova Plc Current Report on Form 8-K, filed on April 25, 2017 | 001-37599 | Form 8-K |
|
| | | | | | | |
| Mutual termination agreement of the employment contract and full settlement, effective February 8, 2017, between LivaNova PLC - Italian branch and Mr. Brian Sheridan | | LivaNova Plc Quarterly Report on Form 10-Q, filed on May 3, 2017 | 001-37599 | 10.67 |
| Consultancy Agreement, effective February 8, 2017, between LivaNova Plc and Mr. Brian Sheridan | | LivaNova Plc Quarterly Report on Form 10-Q, filed on May 3, 2017 | 001-37599 | 10.68 |
| Settlement Agreement effective May 31, 2017 between LivaNova PLC and Vivid Sehgal | | LivaNova Plc Quarterly Report on Form 10-Q, filed on May 3, 2017 | 001-37599 | 10.69 |
| Service Agreement, by and between LivaNova Plc and Thad Huston, dated April 27, 2017 | | LivaNova Plc Current Report on Form 8-K, filed on May 16, 2017 | 001-37599 | 10.1 |
| Side Letter dated April 27, 2017 from LivaNova Plc to Thad A. Huston | | LivaNova Plc Current Report on Form 8-K, filed on May 16, 2017 | 001-37599 | 10.2 |
| LivaNova R&D Finance Contract between the European Investment Bank and LivaNova PLC and Sorin CRM S.A.S. and Sorin Group Italia S.r.l., effective 29 June 2017 | | LivaNova Plc Current Report on Form 8-K, filed on July 6, 2017 | 001-37599 | 10.1 |
| Keyna Skeffington service agreement effective May 24, 2017, between LivaNova PLC and Keyna Skeffington | | LivaNova Plc Quarterly Report on Form 10-Q, filed on August 9, 2017 | 001-37599 | 10.6 |
| LivaNova PLC Non-Employee Director Compensation Policy, adopted December 2017 | | | | |
| Form of Share Repurchase Contract approved by shareholders at the 2017 Annual Meeting of Shareholders | | LivaNova Plc Proxy Statement on Schedule 14A, filed on May 16, 2017 | 001-37599 | Appendix A |
| Form of Rule 10b5-1 Repurchase Plan approved by shareholders at the 2017 Annual Meeting of Shareholders | | LivaNova Plc Proxy Statement on Schedule 14A, filed on May 16, 2017 | 001-37599 | Appendix B |
| List of Subsidiaries of LivaNova PLC | | | | |
| Consent of PricewaterhouseCoopers S.p.A. | | | | |
| Consent of KPMG LLP | | | | |
| Certification of the Chief Executive Officer of LivaNova PLC pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | |
| Certification of the Chief Financial Officer of LivaNova PLC pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | |
| Certification of the Chief Executive Officer and of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | |
| | | | | |
| Form of Stock Option Award Notification and Agreement under the Cyberonics, Inc. 2009 Stock Plan, as amended, incorporated by reference to Exhibit 10.6 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 |
| | | | | | | CEO Employment Agreement effective January 1, 2017 between the Company and Damien McDonald, incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K, filed on February 28, 2017 |
101* | Side Letter dated January 1, 2017 between the Company and Damien McDonald, incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K, filed on February 28, 2017 |
| Damien McDonald Settlement Agreement, dated April 14, 2023, incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 |
| Description of 2018 Long Term Incentive Plan, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on March 16, 2018 |
| Form of 2018 Long Term Incentive Plan SAR Award Agreement, incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K, filed on March 16, 2018 |
| General Provisions of the Company’s Global Employee Share Purchase Plan dated 12 June 2018, incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 |
| Description of 2019 Long Term Incentive Plan approved March 29, 2019, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on April 1, 2019 |
| Form of the Company’s 2019 Long Term Incentive Plan RSU Award Agreement, incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K, filed on April 1, 2019 |
| Form of the Company’s 2019 Long Term Incentive Plan SAR Award Agreement, incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K, filed on April 1, 2019 |
| Form of the Company’s 2019 Long Term Incentive Plan PSU Award Agreement (rTSR condition), incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K, filed on April 1, 2019 |
| Form of the Company’s 2019 Long Term Incentive Plan PSU Award Agreement (FCF condition), incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K, filed on April 1, 2019 |
| Service Agreement, dated January 2, 2019, between Trui Hebbelinck and LivaNova PLC, incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 |
| Form of Capped Call Confirmation incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on June 17, 2020 |
| Amendment to Outstanding 2019 and 2020 Restricted Stock Unit Awards under the LivaNova PLC 2015 Incentive Award Plan, dated June 15, 2020, incorporated by reference to Exhibit 10.10 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 |
| Amendment to Outstanding 2018 Restricted Stock Unit Awards under the LivaNova PLC 2015 Incentive Award Plan dated June 15, 2020, incorporated by reference to Exhibit 10.11 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 |
| Amendment to Outstanding 2018, 2019 and 2020 Performance Stock Unit Awards under the LivaNova PLC 2015 Incentive Award Plan, dated June 15, 2020, incorporated by reference to Exhibit 10.12 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 |
| Form of Long Term Incentive Plan Restricted Stock Unit Award Agreement, incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 |
| Form of Long Term Incentive Plan Performance Stock Unit Award Agreement, incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 |
| Form of Long Term Incentive Plan Stock Appreciation Right Award Agreement, incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 |
| Form of Director Restricted Stock Unit Award Grant Notice, dated June 2020 and Director Restricted Stock Unit Award Agreement under the Company’s 2015 Incentive Award Plan (Non-Employee Directors), incorporated by reference to Exhibit 10.42 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 |
| Form of Non-Executive Director Appointment Letter incorporated by reference to Exhibit 10.43 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 |
| Alex Shvartsburg offer of employment in the role of Vice President Strategy and Innovation, dated 21 September 2017 incorporated by reference to Exhibit 10.44 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 |
| Alex Shvartsburg letter, dated January 2019, regarding compensation increase incorporated by reference to Exhibit 10.45 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 |
| Alex Shvartsburg letter, dated October 2020, regarding additive compensation package for interim CFO position incorporated by reference to Exhibit 10.46 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 |
| Service Agreement, effective August 1, 2021, between the Company and Alex Shvartsburg, incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 |
| | | | | |
| Letter, dated December 14, 2022, to Alex Shvartsburg regarding an increase in gross annual base salary, effective January 1, 2023, incorporated by reference to Exhibit 10.50 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 |
| Marco Dolci Confirmation Letter, effective January 1, 2020, as SVP Global Operations & Global Research and Development, incorporated by reference to Exhibit 10.2 of the Company Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 |
| Executive Employment Contract between Sorin Group Italia S.r.l. and Marco Dolci, effective April 20, 2017, incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 |
| Marco Dolci Retirement Agreement, dated September 18, 2023 incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 |
| First Lien Credit Agreement dated as of August 13, 2021 among LivaNova PLC, LivaNova USA, Inc., the lenders and issuing banks party thereto and Goldman Sachs Bank USA as First Lien Administrative Agent and First Lien Collateral Agent, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on August 16, 2021 |
| Incremental Facility Amendment No. 1 to Credit Agreement, dated as of February 24, 2022, by and among LivaNova Plc, LivaNova USA, Inc., the lenders and issuing banks party thereto and Goldman Sachs Bank USA as First Lien Administrative Agent, incorporated by reference to Exhibit 10.51 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 |
| Letter of indemnity in respect of the issuance of Trade Finance guarantee by Barclays Bank Ireland PLC, Italy Branch dated March 18, 2022, by and among LivaNova PLC Italian Branch and Barclays Bank Ireland PLC, Italy Branch, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on March 21, 2022 |
| Pledge Agreement dated as of March 18, 2022, among LivaNova PLC Italian Branch and Barclays Bank Ireland PLC, Italy Branch, incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K, filed on March 21, 2022 |
| Amendment 2 to the Credit Agreement, dated as of March 16, 2022, by and among LivaNova PLC, LivaNova USA, Inc., the Lenders and Goldman Sachs Bank USA as First Lien Administrative Agent, incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q, filed on May 4, 2022 |
| Incremental Facility Amendment No. 2 to Credit Agreement, dated as of July 6, 2022, by and among LivaNova Plc, LivaNova USA, Inc., the Second Incremental Term Lenders, Delayed Draw Incremental Leaders, Goldman Sachs Bank USA, the Revolving Lenders and Issuing Banks, and for purposes of Sections 8 and 10 only, the other Loan Parties as of the date hereof., incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on July 6, 2022 |
| Amendment to the LivaNova Plc 2015 Incentive Award Plan, dated 13 June 2022, incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q, filed on August 3, 2022 |
| Form of LivaNova Plc 2022 Incentive Award Plan Stock Appreciation Right Grant Notice and Agreement, incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q, filed on August 3, 2022 |
| Form of LivaNova Plc 2022 Incentive Award Plan Restricted Stock Unit Award Grant Notice and Agreement, incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q, filed on August 3, 2022 |
| Form of LivaNova Plc 2022 Incentive Award Plan Performance Stock Unit Award Grant Notice and Agreement, incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q, filed on August 3, 2022 |
| Amendment to Outstanding 2021 and 2022 Performance Stock Unit Awards under the LivaNova PLC 2015 Incentive Award Plan, incorporated by reference to Exhibit 10.7 of the Company’s Quarterly Report on Form 10-Q, filed on August 3, 2022 |
| Amendment to relevant 2020, 2021, and 2022 Restricted Stock Unit Awards under the LivaNova PLC 2015 Incentive Award Plan, incorporated by reference to Exhibit 10.8 of the Company’s Quarterly Report on Form 10-Q, filed on August 3, 2022 |
| Form of LivaNova PLC 2022 Incentive Award Plan Stock Appreciation Right Grant Notice and Agreement, effective February 2023, incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 |
| Form of LivaNova PLC 2022 Incentive Award Plan Restricted Stock Unit Award Grant Notice and Agreement, effective February 2023, incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 |
| | | | | |
| Form of LivaNova PLC 2022 Incentive Award Plan Performance Stock Unit Award Grant Notice and Agreement, effective February 2023, incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 |
| Amendment to Form of LivaNova Plc 2022 Incentive Award Plan Stock Appreciation Right Grant Notice and Agreement, incorporated by reference to Exhibit 10.51 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 |
| Amendment to Form of LivaNova Plc 2022 Incentive Award Plan Restricted Stock Unit Award Grant Notice and Agreement, incorporated by reference to Exhibit 10.52 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 |
| Amendment to Form of LivaNova Plc 2022 Incentive Award Plan Performance Stock Unit Award Grant Notice and Agreement, incorporated by reference to Exhibit 10.53 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 |
| Amended and Restated LivaNova PLC 2022 Incentive Award Plan, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on June 16, 2023 |
| Michael Hutchinson Employment Agreement, dated November 2, 2022 |
| William Kozy Offer Letter, dated April 19, 2023, incorporated by reference to Exhibit 10.26 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 |
| List of Subsidiaries of LivaNova PLC |
| Consent of PricewaterhouseCoopers LLP |
| Certification of the Chief Executive Officer of LivaNova PLC pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| Certification of the Chief Financial Officer of LivaNova PLC pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| Certification of the Chief Executive Officer and of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| LivaNova Incentive Clawback Policy, dated July 19, 2023 |
101* | Interactive Data Files Pursuant to Rule 405 of Regulation S-T:S-T formatted in Inline XBRL: (i) the Consolidated StatementStatements of Income (Loss) Income for the years ended December 31, 20172023, December 31, 2022 and December 31, 2016, the transitional period April 25, 2015 to December 31, 2015 and the fiscal year ended April 24, 2015,2021, (ii) the Consolidated StatementStatements of Comprehensive Income (Loss) for the years ended December 31, 20172023, December 31, 2022 and December 31, 2016, the transitional period April 25, 2015 to December 31, 2015, and the fiscal year ended April 24, 2015,2021, (iii) the Consolidated Balance Sheets as of December 31, 20172023 and December 31, 2016,2022, (iv) the Consolidated StatementStatements of Stockholders’ Equity for the years ended December 31, 20172023, December 31, 2022 and December 31, 2016, the transitional period April 25, 2015 to December 31, 2015, and the fiscal year ended April 24, 2015,2021, (v) the Consolidated StatementStatements of Cash Flows for the years ended December 31, 20172023, December 31, 2022 and December 31, 2016, the transitional period April 25, 2015 to December 31, 2015, and the fiscal year ended April 24, 2015,2021, and (vi) the Notes to the Consolidated Financial Statements. |
104* | | | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by the Company in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs at the date they were made or at any other time.
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| LIVANOVA PLC |
| | |
| LIVANOVA PLCBy: | /s/ WILLIAM A. KOZY |
| | William A. Kozy |
| By: | /s/ DAMIEN MCDONALD |
| | Damien McDonald |
| | Interim Chief Executive Officer and Chair of the Board of Directors |
| | (Principal Executive Officer) |
| | | | | | | | |
| LIVANOVA PLC |
| | |
| LIVANOVA PLCBy: | /s/ ALEX SHVARTSBURG |
| | Alex Shvartsburg |
| By: | /s/ THAD HUSTON |
| | Thad Huston |
| | Chief Financial Officer |
| | (Principal Accounting and Financial Officer) |
Date: February 28, 201829, 2024
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| | | | | | | | | | | | | | |
Signature | | Title | | Date |
| | | | |
Signature | Title | Date |
| | |
/s/ DANIEL J. MOORE
Daniel J. Moore WILLIAM A. KOZY | | ChairmanInterim Chief Executive Officer and Chair of the Board of Directors | February 28, 2018 |
| | |
/s/ DAMIEN MCDONALD
Damien McDonald
| Director, Chief Executive Officer
(Principal Executive Officer)
| | February 28, 201829, 2024 |
William A. Kozy | | |
| | | | |
/s/ THAD HUSTON
Thad Huston ALEX SHVARTSBURG | | Chief Financial Officer
(Principal Financial Officer) | February 28, 2018 |
| | |
/s/ DOUG MANKO
Doug Manko
| Chief Accounting Officer
(Principal Accounting and Financial Officer)
| | February 28, 201829, 2024 |
Alex Shvartsburg | | |
| | | | |
/s/ J. CHRISTOPHER BARRY | | Director | | February 29, 2024 |
J. Christopher Barry | | |
| | | | |
/s/ FRANCESCO BIANCHI
Francesco Bianchi | | Director | | February 28, 201829, 2024 |
Francesco Bianchi | | |
| | | | |
/s/ STACY ENXING SENG | | Director | | February 29, 2024 |
Stacy Enxing Seng | | |
| | | | |
/s/ STEFANO GIANOTTI
Stefano GianottiDANIEL J. MOORE | | Director | | February 28, 201829, 2024 |
Daniel J. Moore | | |
| | | | |
/s/ HUGH M. MORRISON
Hugh M. Morrison
| Director | February 28, 2018 |
| | |
/s/ ALFRED J. NOVAK
Alfred J. Novak
| Director | February 28, 2018 |
| | |
/s/ SHARON O'KANE
Sharon O'Kane, Ph.D. O’KANE | | Director | | February 28, 201829, 2024 |
Sharon O’Kane, Ph.D. | | |
| | | | |
/s/ TODD C. SCHERMERHORN | | Director | | February 29, 2024 |
Todd C. Schermerhorn | | |
| | | | |
/s/ ARTHUR ROSENTHAL
Arthur Rosenthal, Ph.D.BROOKE STORY | | Director | | February 28, 201829, 2024 |
Brooke Story | | |
| | | | |
/s/ PETER M. WILVER | | Director | | February 29, 2024 |
/s/ ANDREA L. SAIA
Andrea L. Saia Peter M. Wilver | | Director | February 28, 2018
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and December 31, 2016, the transitional period ended December 31, 2015, and the fiscal year ended April 24, 2015
TOGETHER WITH REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors and Stockholders of LivaNova PLC:PLC
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of LivaNova PLC and its subsidiaries (the “Company”) as of December 31, 20172023 and 2016,2022, and the related consolidated statements of income (loss), of comprehensive income (loss), of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2017 and December 31, 2016 and the transitional period from April 25, 2015 to December 31, 2015,2023, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172023 and 2016,2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017 and December 31, 2016 and the transitional period from April 25, 2015 to December 31, 20152023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control -Integrated- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).COSO.
Basis for Opinions
The Company’sCompany's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting.Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’sCompany's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessment – Cardiopulmonary (CP) Reporting Unit
As described in Notes 2 and 7 to the consolidated financial statements, the Company’s consolidated goodwill balance was $782.9 million as of December 31, 2023, and the amount of goodwill associated with the CP reporting unit was $384.2 million. Management conducts impairment testing of goodwill on October 1st each year. If management determines that goodwill is more-likely-than-not impaired, management compares the fair value of the reporting unit to its carrying amount, including goodwill. Fair value refers to the price that would be received if management were to sell the unit as a whole in an orderly transaction. Fair value is estimated using a discounted cash flow model and requires various assumptions, including revenue growth rates and discount rates.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the CP reporting unit is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate of the CP reporting unit; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions relating to revenue growth rates and the discount rate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the CP reporting unit. These procedures also included, among others (i) testing management’s process for developing the fair value estimate of the reporting unit; (ii) evaluating the appropriateness of the discounted cash flow model; (iii) testing the completeness and accuracy of underlying data used in the discounted cash flow model; and (iv) evaluating the reasonableness of the significant assumptions used by management related to revenue growth rates and the discount rate. Evaluating management’s assumptions related to revenue growth rates involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluating (i) the appropriateness of the discounted cash flow model and (ii) the reasonableness of the discount rate assumption.
/s/ PricewaterhouseCoopers SpALLP
Milan, ItalyHouston, Texas
February 28, 201829, 2024
PricewaterhouseCoopers SpA has
We have served as the Company’s auditor since 2015.2018.
Report of Independent Registered Public Accounting Firm
Cyberonics, Inc.:
We have audited the accompanying consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows of Cyberonics, Inc and subsidiaries for the fifty-two weeks ended April 24, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits providea reasonable basis for our opinion.
In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the results of their operations of Cyberonics, Inc. and their cash flowsfor the fifty-two weeks ended April 24, 2015, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Houston, Texas
June 15, 2015
LIVANOVA PLC AND SUBSIDIARIES’SUBSIDIARIES
CONSOLIDATEDSTATEMENTS OF INCOME (LOSS) INCOME
(In thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
Net revenue | | $ | 1,153,545 | | | $ | 1,021,805 | | | $ | 1,035,365 | |
Cost of sales | | 382,295 | | | 314,577 | | | 329,371 | |
Gross profit | | 771,250 | | | 707,228 | | | 705,994 | |
Operating expenses: | | | | | | |
Selling, general and administrative | | 518,129 | | | 469,243 | | | 471,904 | |
Research and development | | 193,817 | | | 155,805 | | | 183,414 | |
Impairment of goodwill | | — | | | 129,396 | | | — | |
Impairment of long-lived assets | | 89,974 | | | — | | | — | |
Other operating expenses | | 37,828 | | | 29,536 | | | 51,460 | |
Operating loss | | (68,498) | | | (76,752) | | | (784) | |
Interest expense | | (58,853) | | | (48,250) | | | (50,151) | |
Loss on debt extinguishment | | — | | | — | | | (60,238) | |
Foreign exchange and other income/(expense) | | 46,125 | | | 49,860 | | | (13,299) | |
Loss before tax | | (81,226) | | | (75,142) | | | (124,472) | |
Income tax (benefit) expense | | (98,876) | | | 11,051 | | | 11,198 | |
Losses from equity method investments | | (104) | | | (53) | | | (148) | |
Net income (loss) | | $ | 17,546 | | | $ | (86,246) | | | $ | (135,818) | |
| | | | | | |
Basic income (loss) per share | | $ | 0.33 | | | $ | (1.61) | | | $ | (2.68) | |
Diluted income (loss) per share | | $ | 0.32 | | | $ | (1.61) | | | $ | (2.68) | |
| | | | | | |
Shares used in computing basic income (loss) per share | | 53,939 | | | 53,472 | | | 50,633 | |
Shares used in computing diluted income (loss) per share | | 54,212 | | | 53,472 | | | 50,633 | |
See accompanying notes to the consolidated financial statements
F-2
|
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period April 25, 2015 to December 31, 2015 | | Fiscal Year Ended April 24, 2015 |
Net sales | | $ | 1,012,277 |
| | $ | 964,858 |
| | $ | 363,237 |
| | $ | 291,558 |
|
Cost of sales | | 353,403 |
| | 367,818 |
| | 113,404 |
| | 27,311 |
|
Product remediation | | 7,254 |
| | 37,534 |
| | — |
| | — |
|
Gross profit | | 651,620 |
| | 559,506 |
| | 249,833 |
| | 264,247 |
|
Operating expenses: | | | | | | | | |
Selling, general and administrative | | 380,560 |
| | 356,807 |
| | 147,025 |
| | 123,619 |
|
Research and development | | 109,662 |
| | 82,467 |
| | 41,916 |
| | 42,245 |
|
Merger and integration expenses | | 15,528 |
| | 20,377 |
| | 55,776 |
| | 8,692 |
|
Restructuring expenses | | 17,056 |
| | 37,377 |
| | 10,494 |
| | — |
|
Amortization of intangibles | | 33,144 |
| | 31,035 |
| | 7,030 |
| | 1,039 |
|
Total operating expenses | | 555,950 |
| | 528,063 |
| | 262,241 |
| | 175,595 |
|
Operating income (loss) from continuing operations | | 95,670 |
| | 31,443 |
| | (12,408 | ) | | 88,652 |
|
Interest income | | 1,318 |
| | 1,698 |
| | 392 |
| | 184 |
|
Interest expense | | (7,797 | ) | | (10,616 | ) | | (1,509 | ) | | (21 | ) |
Gain on acquisition of Caisson Interventional, LLC | | 39,428 |
| | — |
| | — |
| | — |
|
Impairment of cost-method investments | | (8,565 | ) | | — |
| | (5,062 | ) | | — |
|
Foreign exchange and other gains (losses) | | 1,084 |
| | 3,141 |
| | (7,411 | ) | | 479 |
|
Income (loss) from continuing operations before tax | | 121,138 |
| | 25,666 |
| | (25,998 | ) | | 89,294 |
|
Income tax expense (benefit) | | 49,954 |
| | 5,113 |
| | (13,501 | ) | | 31,446 |
|
Losses from equity method investments | | (16,719 | ) | | (18,679 | ) | | (2,223 | ) | | — |
|
Net income (loss) from continuing operations | | 54,465 |
| | 1,874 |
| | (14,720 | ) | | 57,848 |
|
Discontinued Operations: | | | | | | | | |
Loss from discontinued operations, net of tax | | (1,271 | ) | | (64,663 | ) | | (14,893 | ) | | — |
|
Impairment of discontinued operations, net of tax | | (78,283 | ) | | — |
| | — |
| | — |
|
Net loss from discontinued operations | | (79,554 | ) | | (64,663 | ) | | (14,893 | ) | | — |
|
Net (loss) income | | $ | (25,089 | ) | | $ | (62,789 | ) | | $ | (29,613 | ) | | $ | 57,848 |
|
| | | | | | | | |
Basic income (loss) per common share: | | | | | | | | |
Continuing operations | | $ | 1.13 |
| | $ | 0.04 |
| | $ | (0.45 | ) | | $ | 2.19 |
|
Discontinued operations | | (1.65 | ) | | (1.33 | ) | | (0.45 | ) | | — |
|
| | $ | (0.52 | ) | | $ | (1.29 | ) | | $ | (0.90 | ) | | $ | 2.19 |
|
| | | | | | | | |
Diluted income (loss) per common share: | | | | | | | | |
Continuing operations | | $ | 1.12 |
| | $ | 0.04 |
| | $ | (0.45 | ) | | $ | 2.17 |
|
Discontinued operations | | (1.64 | ) | | (1.32 | ) | | (0.45 | ) | | — |
|
| | $ | (0.52 | ) | | $ | (1.28 | ) | | $ | (0.90 | ) | | $ | 2.17 |
|
| | | | | | | | |
Shares used in computing basic income (loss) per share | | 48,157 |
| | 48,860 |
| | 32,741 |
| | 26,391 |
|
Shares used in computing diluted income (loss) per share | | 48,501 |
| | 49,014 |
| | 32,741 |
| | 26,626 |
|
LIVANOVA PLC AND SUBSIDIARIES’SUBSIDIARIES
CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME (LOSS)
(In thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
Net income (loss) | | $ | 17,546 | | | $ | (86,246) | | | $ | (135,818) | |
Other comprehensive income (loss): | | | | | | |
Net change in unrealized (loss) gain on derivatives | | (966) | | | 1,911 | | | (3,997) | |
Tax effect | | — | | | — | | | 733 | |
Net of tax | | (966) | | | 1,911 | | | (3,264) | |
Foreign currency translation adjustment, net of tax | | 21,202 | | | (42,853) | | | (31,722) | |
Total other comprehensive income (loss) | | 20,236 | | | (40,942) | | | (34,986) | |
Total comprehensive income (loss) | | $ | 37,782 | | | $ | (127,188) | | | $ | (170,804) | |
See accompanying notes to the consolidated financial statements
F-3
|
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period April 25, 2015 to December 31, 2015 | | Fiscal Year Ended April 24, 2015 |
Net (loss) income | | $ | (25,089 | ) | | $ | (62,789 | ) | | $ | (29,613 | ) | | $ | 57,848 |
|
Other comprehensive (loss) income: | | | | | | | | |
Net change in unrealized gain on derivatives | | (6,413 | ) | | 3,930 |
| | 1,274 |
| | — |
|
Tax effect | | 1,875 |
| | (1,199 | ) | | (386 | ) | | — |
|
Net of tax | | (4,538 | ) | | 2,731 |
| | 888 |
| | — |
|
Foreign currency translation adjustment, net of tax | | 118,338 |
| | (16,990 | ) | | (51,715 | ) | | (3,856 | ) |
Total other comprehensive income (loss) | | 113,800 |
| | (14,259 | ) | | (50,827 | ) | | (3,856 | ) |
Total comprehensive income (loss) | | $ | 88,711 |
| | $ | (77,048 | ) | | $ | (80,440 | ) | | $ | 53,992 |
|
LIVANOVA PLC AND SUBSIDIARIES’SUBSIDIARIES
CONSOLIDATEDBALANCE SHEETS
December 31, 2023 and 2022
(In thousands, except share data)
| | | | | | | | | | | | | | |
ASSETS | | 2023 | | 2022 |
Current Assets: | | | | |
Cash and cash equivalents | | $ | 266,504 | | | $ | 214,172 | |
Restricted cash | | 311,368 | | | 301,446 | |
Accounts receivable, net of allowance of $12,019 at December 31, 2023 and $11,862 at December 31, 2022 | | 215,072 | | | 183,110 | |
Inventories | | 147,887 | | | 129,379 | |
Prepaid and refundable taxes | | 20,145 | | | 31,708 | |
| | | | |
| | | | |
Prepaid expenses and other current assets | | 27,182 | | | 26,321 | |
Total Current Assets | | 988,158 | | | 886,136 | |
Property, plant and equipment, net | | 154,181 | | | 147,187 | |
Goodwill | | 782,941 | | | 768,787 | |
Intangible assets, net | | 261,178 | | | 368,559 | |
Operating lease assets | | 50,845 | | | 35,830 | |
Investments | | 22,843 | | | 16,266 | |
Deferred tax assets | | 118,858 | | | 1,384 | |
Long-term derivative assets | | 38,496 | | | 54,393 | |
Other assets | | 12,063 | | | 16,231 | |
Total Assets | | $ | 2,429,563 | | | $ | 2,294,773 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
Current Liabilities: | | | | |
Current debt obligations | | $ | 18,111 | | | $ | 23,434 | |
Accounts payable | | 80,845 | | | 74,310 | |
Accrued liabilities and other | | 107,301 | | | 81,481 | |
| | | | |
Current litigation provision liability | | 10,756 | | | 29,481 | |
Taxes payable | | 23,340 | | | 16,505 | |
Accrued employee compensation and related benefits | | 94,630 | | | 72,187 | |
| | | | |
Total Current Liabilities | | 334,983 | | | 297,398 | |
Long-term debt obligations | | 568,543 | | | 518,067 | |
Contingent consideration | | 80,902 | | | 85,292 | |
Deferred tax liabilities | | 11,567 | | | 8,516 | |
Long-term operating lease liabilities | | 45,388 | | | 29,548 | |
Long-term employee compensation and related benefits | | 17,254 | | | 16,804 | |
Long-term derivative liabilities | | 45,569 | | | 85,675 | |
Other long-term liabilities | | 47,729 | | | 45,849 | |
Total Liabilities | | 1,151,935 | | | 1,087,149 | |
Commitments and contingencies (Note 13) | | | | |
Stockholders’ Equity: | | | | |
Ordinary Shares, £1.00 par value: unlimited shares authorized; 53,942,151 shares issued and 53,918,222 shares outstanding at December 31, 2023; 53,851,979 shares issued and 53,564,664 shares outstanding at December 31, 2022 | | 82,533 | | | 82,424 | |
Additional paid-in capital | | 2,189,517 | | | 2,157,724 | |
Accumulated other comprehensive loss | | (27,883) | | | (48,119) | |
Accumulated deficit | | (966,484) | | | (984,030) | |
Treasury stock at cost, 23,929 ordinary shares at December 31, 2023, 287,315 ordinary shares at December 31, 2022 | | (55) | | | (375) | |
Total Stockholders’ Equity | | 1,277,628 | | | 1,207,624 | |
Total Liabilities and Stockholders’ Equity | | $ | 2,429,563 | | | $ | 2,294,773 | |
See accompanying notes to the consolidated financial statements
F-4
|
| | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
ASSETS | | | | |
Current Assets: | | | | |
Cash and cash equivalents | | $ | 93,615 |
| | $ | 39,789 |
|
Accounts receivable, net | | 282,145 |
| | 213,256 |
|
Inventories | | 144,470 |
| | 133,017 |
|
Prepaid and refundable taxes | | 46,274 |
| | 50,577 |
|
Assets held for sale | | 13,628 |
| | 4,477 |
|
Assets of discontinued operations | | 250,689 |
| | 319,922 |
|
Prepaid expenses and other current assets | | 39,037 |
| | 51,652 |
|
Total Current Assets | | 869,858 |
| | 812,690 |
|
Property, plant and equipment, net | | 192,359 |
| | 203,708 |
|
Goodwill | | 784,242 |
| | 691,712 |
|
Intangible assets, net | | 535,397 |
| | 441,608 |
|
Investments | | 34,492 |
| | 56,226 |
|
Deferred tax assets, net | | 11,559 |
| | 6,017 |
|
Other assets | | 75,984 |
| | 130,670 |
|
Total Assets | | $ | 2,503,891 |
| | $ | 2,342,631 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | |
Current Liabilities: | | | | |
Current debt obligations | | $ | 84,034 |
| | $ | 47,650 |
|
Accounts payable | | 85,915 |
| | 71,934 |
|
Accrued liabilities and other | | 78,942 |
| | 71,047 |
|
Taxes payable | | 12,826 |
| | 18,381 |
|
Accrued employee compensation and related benefits | | 66,224 |
| | 57,635 |
|
Liabilities of discontinued operations | | 78,075 |
| | 83,243 |
|
Total Current Liabilities | | 406,016 |
| | 349,890 |
|
Long-term debt obligations | | 61,958 |
| | 75,215 |
|
Deferred income taxes liability | | 123,342 |
| | 152,532 |
|
Long-term employee compensation and related benefits | | 28,177 |
| | 23,014 |
|
Other long-term liabilities | | 69,084 |
| | 35,071 |
|
Total Liabilities | | 688,577 |
| | 635,722 |
|
Commitments and contingencies (Note 12) | | — |
| | — |
|
Stockholders’ Equity: | | | | |
Ordinary Shares, £1.00 par value: unlimited shares authorized; 48,290,276 shares issued and 48,287,346 outstanding at December 31, 2017; 48,156,690 shares issued and 48,028,413 outstanding at December 31, 2016 | | 74,750 |
| | 74,578 |
|
Additional paid-in capital | | 1,735,048 |
| | 1,719,893 |
|
Accumulated other comprehensive income (loss) | | 45,313 |
| | (68,487 | ) |
Accumulated loss | | (39,664 | ) | | (14,575 | ) |
Treasury stock at cost, 2,930 shares at December 31, 2017; 128,277 shares at December 31, 2016 | | (133 | ) | | (4,500 | ) |
Total Stockholders’ Equity | | 1,815,314 |
| | 1,706,909 |
|
Total Liabilities and Stockholders’ Equity | | $ | 2,503,891 |
| | $ | 2,342,631 |
|
LIVANOVA PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Ordinary Shares | | Ordinary Shares - Amount | | Additional Paid-In Capital | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total Stockholders’ Equity |
December 31, 2020 | | 49,447 | | | $ | 76,300 | | | $ | 1,768,156 | | | $ | (1,034) | | | $ | 27,809 | | | $ | (761,966) | | | $ | 1,109,265 | |
Issuance of shares | | 4,182 | | | 5,808 | | | 316,733 | | | — | | | — | | | — | | | 322,541 | |
Stock-based compensation plans | | 133 | | | 187 | | | 33,072 | | | 384 | | | — | | | — | | | 33,643 | |
Net loss | | — | | | — | | | — | | | — | | | — | | | (135,818) | | | (135,818) | |
Other comprehensive loss | | — | | | — | | | — | | | — | | | (34,986) | | | — | | | (34,986) | |
December 31, 2021 | | 53,762 | | | 82,295 | | | 2,117,961 | | | (650) | | | (7,177) | | | (897,784) | | | 1,294,645 | |
Stock-based compensation plans | | 90 | | | 129 | | | 39,763 | | | 275 | | | — | | | — | | | 40,167 | |
Net loss | | — | | | — | | | — | | | — | | | — | | | (86,246) | | | (86,246) | |
Other comprehensive loss | | — | | | — | | | — | | | — | | | (40,942) | | | — | | | (40,942) | |
December 31, 2022 | | 53,852 | | | 82,424 | | | 2,157,724 | | | (375) | | | (48,119) | | | (984,030) | | | 1,207,624 | |
Stock-based compensation plans | | 90 | | | 109 | | | 31,793 | | | 320 | | | — | | | — | | | 32,222 | |
Net income | | — | | | — | | | — | | | — | | | — | | | 17,546 | | | 17,546 | |
Other comprehensive income | | — | | | — | | | — | | | — | | | 20,236 | | | — | | | 20,236 | |
December 31, 2023 | | 53,942 | | | $ | 82,533 | | | $ | 2,189,517 | | | $ | (55) | | | $ | (27,883) | | | $ | (966,484) | | | $ | 1,277,628 | |
See accompanying notes to the consolidated financial statements
F-5
LIVANOVA PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OFCASH FLOWS
(In thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
Operating Activities: | | 2023 | | 2022 | | 2021 |
Net income (loss) | | $ | 17,546 | | | $ | (86,246) | | | $ | (135,818) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
Deferred tax expense | | (114,428) | | | 1,409 | | | 2,852 | |
Impairment of long-lived assets | | 89,974 | | | — | | | — | |
Stock-based compensation | | 36,352 | | | 44,809 | | | 40,564 | |
Amortization | | 25,472 | | | 25,198 | | | 26,517 | |
Depreciation | | 24,737 | | | 22,373 | | | 24,536 | |
Remeasurement of derivative instruments | | (22,911) | | | (38,656) | | | 17,618 | |
Amortization of debt issuance costs | | 19,053 | | | 21,334 | | | 16,657 | |
ACS inventory obsolescence adjustment | | 12,621 | | | — | | | — | |
Amortization of operating lease assets | | 10,647 | | | 10,225 | | | 16,935 | |
Remeasurement of contingent consideration to fair value | | 9,360 | | | (29,881) | | | 564 | |
Impairment of goodwill | | — | | | 129,396 | | | — | |
Loss on debt extinguishment | | — | | | — | | | 60,238 | |
Impairment of disposal group and loss on sale | | — | | | — | | | 1,942 | |
Other | | 1,111 | | | 1,653 | | | 717 | |
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable, net | | (28,864) | | | (4,810) | | | (15,745) | |
Inventories | | (28,478) | | | (25,679) | | | 4,484 | |
Other current and non-current assets | | 15,302 | | | 7,486 | | | 24,127 | |
Accounts payable and accrued current and non-current liabilities | | 19,190 | | | (3,510) | | | 12,993 | |
Taxes payable | | 7,361 | | | 1,378 | | | 103 | |
Litigation provision liability | | (19,131) | | | (6,558) | | | 3,260 | |
Net cash provided by operating activities | | 74,914 | | | 69,921 | | | 102,544 | |
Investing Activities: | | | | | | |
Purchases of property, plant and equipment | | (34,981) | | | (26,517) | | | (25,478) | |
Purchase of investments | | (6,504) | | | (2,952) | | | (3,653) | |
Acquisitions, net of cash acquired | | — | | | (8,857) | | | (1,694) | |
Proceeds from sale of Heart Valves, net of cash disposed | | — | | | — | | | 42,945 | |
Proceeds from sale of Respicardia investment and loan | | — | | | — | | | 23,057 | |
Other | | 1,154 | | | (88) | | | 1,727 | |
Net cash (used in) provided by investing activities | | (40,331) | | | (38,414) | | | 36,904 | |
Financing Activities: | | | | | | |
Proceeds from long-term debt obligations | | 50,000 | | | 507,547 | | | — | |
Repayment of long-term debt obligations | | (21,624) | | | (223,541) | | | (452,256) | |
Shares repurchased from employees for minimum tax withholding | | (7,503) | | | (8,671) | | | (12,942) | |
Repayments of short-term borrowings (maturities greater than 90 days) | | (1,974) | | | — | | | — | |
Proceeds from deferred consideration from sale of Heart Valves, net of working capital adjustments | | — | | | 4,596 | | | — | |
Debt issuance costs | | — | | | (3,292) | | | (2,450) | |
Proceeds from issuance of ordinary shares, net | | — | | | — | | | 322,557 | |
Payment of make-whole premium on long-term debt obligations | | — | | | — | | | (35,594) | |
Payment of contingent consideration | | — | | | — | | | (5,249) | |
Other | | 2,585 | | | 3,491 | | | 4,451 | |
Net cash provided by (used in) financing activities | | 21,484 | | | 280,130 | | | (181,483) | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | | 6,187 | | | (4,011) | | | (2,805) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | | 62,254 | | | 307,626 | | | (44,840) | |
Cash, cash equivalents and restricted cash at beginning of period | | 515,618 | | | 207,992 | | | 252,832 | |
Cash, cash equivalents and restricted cash at end of period | | $ | 577,872 | | | $ | 515,618 | | | $ | 207,992 | |
| | | | | | | | | | | | | | | | | | | | |
| | |
Supplementary Disclosures of Cash Flow Information: | | | | | | |
Cash paid for interest | | $ | 36,910 | | | $ | 19,044 | | | $ | 32,569 | |
Cash paid for income taxes, net | | (1,620) | | | 1,221 | | | (13,583) | |
See accompanying notes to the consolidated financial statements
F-6
LIVANOVA PLC AND SUBSIDIARIES’
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Ordinary Stock | | | | | | | | | | |
| | Shares | | Amount | | Additional Paid-In Capital | | Treasury Stock | | Accumulated Other Comprehensive (Loss) | | Accumulated Earnings (Loss) | | Total Stockholders' Equity |
Balance at December 31, 2015 | | 48,868 |
| | $ | 75,444 |
| | $ | 1,742,032 |
| | $ | — |
| | $ | (54,228 | ) | | $ | 48,214 |
| | $ | 1,811,462 |
|
Stock-based compensation plans | | 282 |
| | 391 |
| | 26,591 |
| | (4,500 | ) | | — |
| | — |
| | 22,482 |
|
Share repurchases | | (993 | ) | | (1,257 | ) | | (48,730 | ) | | — |
| | — |
| | — |
| | (49,987 | ) |
Net loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (62,789 | ) | | (62,789 | ) |
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (14,259 | ) | | — |
| | (14,259 | ) |
Balance at December 31, 2016 | | 48,157 |
| | 74,578 |
| | 1,719,893 |
| | (4,500 | ) | | (68,487 | ) | | (14,575 | ) | | 1,706,909 |
|
Stock-based compensation plans | | 133 |
| | 172 |
| | 15,155 |
| | 4,367 |
| | — |
| | — |
| | 19,694 |
|
Net loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (25,089 | ) | | (25,089 | ) |
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 113,800 |
| | — |
| | 113,800 |
|
Balance at December 31, 2017 | | 48,290 |
| | $ | 74,750 |
| | $ | 1,735,048 |
| | $ | (133 | ) | | $ | 45,313 |
| | $ | (39,664 | ) | | $ | 1,815,314 |
|
LIVANOVA PLC AND SUBSIDIARIES’
CONSOLIDATED STATEMENTS OFCASH FLOWS
(In thousands)
|
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period April 25, 2015 to December 31, 2015 | | Fiscal Year Ended April 24, 2015 |
Operating Activities: | | | | |
| | |
| | |
Net (loss) income | | $ | (25,089 | ) | | $ | (62,789 | ) | | $ | (29,613 | ) | | $ | 57,848 |
|
Non-cash items included in net (loss) income: | | | | | | | | |
Depreciation | | 37,054 |
| | 39,852 |
| | 10,766 |
| | 5,768 |
|
Amortization | | 45,881 |
| | 45,511 |
| | 9,734 |
| | 1,039 |
|
Stock-based compensation | | 19,062 |
| | 19,569 |
| | 31,030 |
| | 11,940 |
|
Deferred income tax (benefit) expense | | (9,272 | ) | | (26,711 | ) | | (39,766 | ) | | 9,400 |
|
Losses from equity method investments | | 21,606 |
| | 22,612 |
| | 3,308 |
| | — |
|
Gain on acquisition of Caisson Interventional, LLC | | (39,428 | ) | | — |
| | — |
| | — |
|
Impairment of discontinued operations | | 93,574 |
| | — |
| | — |
| | — |
|
Impairment of goodwill | | — |
| | 18,348 |
| | — |
| | — |
|
Impairment of cost-method investments | | 8,565 |
| | — |
| | 5,127 |
| | — |
|
Impairment of property, plant and equipment | | 5,979 |
| | 5,971 |
| | — |
| | — |
|
Amortization of income taxes payable on inter-company transfers of property | | 31,784 |
| | 25,952 |
| | 12,719 |
| | — |
|
Other | | 5,240 |
| | 10,217 |
| | 10,492 |
| | 14 |
|
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable, net | | (48,934 | ) | | (16,448 | ) | | (15,850 | ) | | (2,654 | ) |
Inventories | | 7,187 |
| | 26,703 |
| | 36,326 |
| | (7,113 | ) |
Other current and non-current assets | | (6,180 | ) | | (32,686 | ) | | (10,390 | ) | | (2,112 | ) |
Restructuring reserve | | (14,557 | ) | | 12,405 |
| | (4,720 | ) | | — |
|
Accounts payable and accrued current and non-current liabilities | | (41,133 | ) | | 1,645 |
| | (28,451 | ) | | 5,546 |
|
Net cash provided by (used in) operating activities | | 91,339 |
| | 90,151 |
| | (9,288 | ) | | 79,676 |
|
Investing Activities: | | | | | | | | |
Purchases of property, plant, equipment and other | | (34,107 | ) | | (38,362 | ) | | (17,286 | ) | | (6,687 | ) |
Acquisition of Caisson Interventional, LLC, net of cash acquired | | (14,194 | ) | | — |
| | — |
| | — |
|
Proceeds from sale of cost-method investment | | 3,192 |
| | — |
| | — |
| | — |
|
Proceeds from asset sales | | 5,935 |
| | 1,145 |
| | 948 |
| | — |
|
Purchases of cost and equity method investments | | (6,255 | ) | | (8,026 | ) | | — |
| | (1,182 | ) |
Loans to cost and equity method investees | | (7,426 | ) | | (6,270 | ) | | — |
| | — |
|
Purchases of short-term investments | | — |
| | (7,054 | ) | | (13,990 | ) | | (31,985 | ) |
Maturities of short-term investments | | — |
| | 14,051 |
| | 34,013 |
| | 30,089 |
|
Cash obtained in the Merger | | — |
| | — |
| | 12,497 |
| | — |
|
Net cash (used in) provided by investing activities | | (52,855 | ) | | (44,516 | ) | | 16,182 |
| | (9,765 | ) |
Financing Activities: | | | | | | | | |
Change in short-term borrowing, net | | 12,396 |
| | (33,708 | ) | | 11,112 |
| | — |
|
Proceeds from short-term borrowing (maturities greater than 90 days) | | 20,000 |
| | — |
| | — |
| | — |
|
Proceeds from long-term debt obligations | | 2,048 |
| | 7,231 |
| | — |
| | — |
|
Repayment of long-term debt obligations | | (22,755 | ) | | (21,109 | ) | | (31,968 | ) | | — |
|
Proceeds from exercise of stock options | | 4,973 |
| | 8,332 |
| | 6,480 |
| | 3,184 |
|
Repayment of trade receivable advances | | — |
| | (23,779 | ) | | — |
| | — |
|
Share repurchases | | — |
| | (54,487 | ) | | (7,350 | ) | | (55,015 | ) |
Other | | (5,368 | ) | | (519 | ) | | 3,599 |
| | 3,575 |
|
Net cash provided by (used) in financing activities | | 11,294 |
| | (118,039 | ) | | (18,127 | ) | | (48,256 | ) |
Effect of exchange rate changes on cash and cash equivalents | | 4,048 |
| | (420 | ) | | (341 | ) | | (767 | ) |
Net increase (decrease) in cash and cash equivalents | | 53,826 |
| | (72,824 | ) | | (11,574 | ) | | 20,888 |
|
Cash and cash equivalents at beginning of period | | 39,789 |
| | 112,613 |
| | 124,187 |
| | 103,299 |
|
Cash and cash equivalents at end of period | | $ | 93,615 |
| | $ | 39,789 |
| | $ | 112,613 |
| | $ | 124,187 |
|
|
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period April 25, 2015 to December 31, 2015 | | Fiscal Year Ended April 24, 2015 |
Supplementary Disclosures of Cash Flow Information: | | | | | | | | |
Cash paid for interest | | $ | 7,510 |
| | $ | 7,371 |
| | $ | 515 |
| | $ | 1 |
|
Cash paid for income taxes | | 38,974 |
| | 47,808 |
| | 22,738 |
| | 15,577 |
|
Supplementary Disclosure of Non-Cash Operating Transactions: | | | | | | | | |
Acquisition financed by ordinary shares of LivaNova | | — |
| | — |
| | 1,589,083 |
| | — |
|
LIVANOVA PLC AND SUBSIDIARIES’
NOTESTO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Note 1. Nature of Operations
BackgroundDescription of the Business
LivaNova PLC (collectivelyis a market-leading global medical technology company. The Company designs, develops, manufactures, markets and sells products and therapies that are consistent with its subsidiaries, the “Company”, “LivaNova”, “we” or “our”) wasLivaNova’s mission to provide hope for patients and their families through innovative medical technologies that deliver life-changing improvements. LivaNova is a public limited company organized under the laws of England and Wales on February 20, 2015 for the purpose of facilitating the business combination (the “Merger”) of Cyberonics, Inc., a Delaware corporation (“Cyberonics”) and Sorin S.p.A., a joint stock company organized under the laws of Italy (“Sorin”). As a result of the business combination, LivaNova,is headquartered in London, became the holding company of the combined businesses of Cyberonics and Sorin. This business combination became effective on October 19, 2015, at which timeEngland. LivaNova’s ordinary shares wereare listed for trading on the NASDAQ Global Market (“NASDAQ”) and on the London Stock Exchange (the “LSE”) as a standard listingNasdaq under the trading symbol “LIVN.” Upon
Business Segments
For the consummationperiods presented herein, LivaNova was comprised of three reportable segments: Cardiopulmonary, Neuromodulation and ACS. For additional information, please refer to “Note 22. Subsequent Event.”
Macroeconomic Environment
The current macroeconomic environment, including foreign exchange volatility, inflationary pressures, geopolitical instability, and supply chain challenges, has impacted and may continue to impact LivaNova’s business and profitability. Furthermore, LivaNova continues to experience supply chain delays and interruptions, labor shortages, inflationary pressures and logistical and capacity constraints, though, to date, the Company’s supply of raw materials and the production and distribution of finished products have not been materially affected. Moreover, freight and labor costs at LivaNova’s manufacturing facilities have increased substantially in the wake of inflation globally. The Company continues to respond to such challenges, and while LivaNova has business continuity plans in place, the impact of the Mergers,ongoing challenges the historical financial statementsCompany is navigating, along with their potential escalation, may adversely affect its business.
Cybersecurity Incident
As previously disclosed, in November 2023, LivaNova detected a cybersecurity incident that resulted in a disruption of Cyberonics becameportions of the Company’s historicalinformation technology systems. Promptly after detecting the issue, LivaNova began an investigation with assistance from external cybersecurity experts and coordinated with law enforcement. LivaNova took action to remediate the issue by, for example, taking certain systems offline. As a result of these and other measures, the Company believes it has contained the cybersecurity threat, though its investigation and mitigation efforts are ongoing. At this time, all of LivaNova’s manufacturing sites worldwide are operating at normal levels. The Company continues to assess the full impact of the cybersecurity event on its business, results of operations, cash flows and financial statements. Accordingly,condition.
LivaNova incurred direct costs of approximately $2.6 million during the historical financial statements of Cyberonics arethree and twelve months ended December 31, 2023, in connection with this incident. These costs primarily included external cybersecurity experts, legal counsel, and system restoration costs. These costs do not include business interruption or other non-direct costs, and the Company expects to incur additional costs related to this incident in the comparative prior periods. For further information regarding the acquisition, refer to “Item 1. Business” and “Note 3. Business Combinations” to the consolidated financial statements included in this Annual Report on Form 10-K. On February 23, 2017, we announced our voluntary cancellation of our standard listing of our shares with the London Stock Exchange due to the low trading volume of our shares and trading ceased at the close of business on April 4, 2017. We continue to serve our shareholders through our listing on the NASDAQ Stock Market.
Description of the Business
future. LivaNova is a global medical device company focused on the development and delivery of important therapeutic solutions for the benefit of patients, healthcare professionals and healthcare systems throughout the world. Working closely with medical professionals in the fields of Cardiac Surgery and Neuromodulation, we design, develop, manufacture and sell innovative therapeutic solutions that are consistent with our mission to improve our patients’ quality of life, increase the skills and capabilities of healthcare professionals and minimize healthcare costs.
On November 20, 2017, we entered into a Letter of Intent (“LOI”) to sell our Cardiac Rhythm Management Business Franchise (“CRM”) to MicroPort Scientific Corporation for $190 million in cash. We expect to enter into the definitive acquisition agreement contemplated by the LOI following completion of the notification and consultation process with CRM’s employee works councils as required by local laws. Completion of the transactionmaintains insurance, including cyber insurance, which is subject to entry intocertain retentions and policy limitations that may serve to limit the definitive acquisition agreement, receiptamount that the insurers may pay the Company when the Company makes a claim. LivaNova plans to file for reimbursement of relevant regulatory approvals, including fulfillingcovered costs related to this incident, but the requirements ofCompany’s insurance coverage may be insufficient to cover all costs and expenses related to this cybersecurity incident, and the Hong Kong Stock Exchange’s Major Transaction requirements,insurance carrier may not cover all submitted costs and other customary closing conditions. We expect the transactionexpenses related to close in the second quarter of 2018. Accordingly, the results of operations of the CRM Business Franchise are reflected as discontinued operations for all periods presented in this Annual Report on Form 10-K and related assets and liabilities are presented as held for sale.cybersecurity incident.
Business Franchises
LivaNova is comprised of two principal Business Franchises, which are also our reportable segments: Cardiac Surgery and Neuromodulation, corresponding to our primary therapeutic areas. Other corporate activities include corporate business development and New Ventures, focused on new growth platforms and identification of other opportunities for expansion.
Note 2. Basis of Presentation, Use of Accounting Estimates and Significant Accounting Policies
The Mergers
On October 19, 2015, as further described herein, LivaNova became the holding company of the combined businesses of Cyberonics and Sorin. Based on the structure of the Mergers, management determined that Cyberonics was considered to be the accounting acquirer and predecessor for accounting purposes.
Sale of our Cardiac Rhythm Management Business Franchise
On November 20, 2017, we entered into a letter of intent (“LOI”) to sell the CRM Business Franchise to MicroPort Scientific Corporation for $190.0 million in cash. We expect to enter into the definitive acquisition agreement contemplated by the LOI in the second quarter of 2018. As a result of the commitment to undertake the proposed transaction, we recognized an impairment of $78.3 million, net of a $15.3 million tax benefit, related to the intangible and tangible assets of the CRM Business Franchise. The impairment is included in impairment of discontinued operations, net of tax within the consolidated statements of (loss)
income. We concluded that the sale of the CRM Business Franchise represents a strategic shift in our business that will have a major effect on future operations and financial results and therefore qualifies as a discontinued operation under U.S. GAAP. The results of operations of the CRM Business Franchise are reflected as discontinued operations for all periods presented in the Annual Report on Form 10-K and the assets and liabilities of the CRM Business Franchise are classified as held for sale and presented as assets and liabilities of discontinued operations on the consolidated balance sheets dated December 31, 2017 and December 31, 2016.
Basis of Presentation
The accompanying consolidated financial statements of LivaNova at December 31, 2017 have been prepared in accordance with generally accepted accounting principles in the United States (“U.S.” and such principles, “U.S. GAAP”) and the instructions to Form 10-K and Article 3 and Article 5 of Regulation S-X.
Reporting Periods
In this Annual Report on Form 10-K, LivaNova, as the successor company to Cyberonics, is reporting the results for:
LivaNova and its consolidated subsidiaries for the years ended December 31, 2017 and December 31, 2016.
A transitional period, April 25, 2015 to December 31, 2015, filed on Form 10-K/T. This transitional report is the result of the change from Cyberonics’ fiscal year ending the last Friday in April before the Mergers to a calendar year ending December 31st after the Mergers. The transitional period included the business activities of Cyberonics and its consolidated subsidiaries for the period April 25, 2015 to October 18, 2015, and the consolidated results of the combined businesses of LivaNova (Cyberonics and Sorin) for the period October 19, 2015 through December 31, 2015.
LivaNova is also reporting the historical results of Cyberonics and its consolidated subsidiaries, our predecessor, for the fiscal year ended April 24, 2015.US GAAP.
Consolidation
The accompanying consolidated financial statements for LivaNova include LivaNova’s wholly owned subsidiaries and the LivaNova PLC Employee Benefit Trust (“the Trust”). The accompanying consolidated financial statements for Cyberonics include Cyberonics’ wholly owned subsidiaries.Trust. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of ourLivaNova’s consolidated financial statements in conformity with U.S.US GAAP requires management to make estimates and assumptions that affect the amounts reported in such financial statements and accompanying notes. These estimates are based on management’s best knowledge of current events and actions wethat LivaNova may undertake in the future. Estimates are used in accounting for, among other items, valuation and amortization of intangible assets, goodwill, other long-lived assets (asset group), measurement of deferred tax assets and liabilities, uncertain income tax positions, contingent consideration arrangements, legal and other contingencies, stock-based compensation, obsolete and slow-moving inventories, models, such as an impairment analysis, and in general, allocations to provisions and the fair value of assets and liabilities recorded in a business combination. Actual results could differ materially from those estimates.
Reclassifications
The following reclassifications have been made to conform theCompany has reclassified certain prior year consolidated statements of (loss) income, consolidated balance sheets and consolidated statements of cash flows with current year presentation:
Having entered into a letter of intent (“LOI”) to sell our CRM Business Franchise to MicroPort Scientific Corporationperiod amounts on November 20, 2017, we have classified CRM’s assets and liabilities as held for sale in the consolidated balance sheets as assets and liabilities of discontinued operations and CRM’s operating results in the consolidated statement of net (loss) income into discontinued operations for all prior periods presented. In addition, to conform the consolidated statement of net (loss) income and “Note 18. Geographic and Segment Information” for the year ended December 31, 2016 to the current period presentation, we reclassified operating expense of $6.0 million from the CRM segment to the Neuromodulation segment. In addition, we reclassified operating expense of $1.0 million from the CRM segment to the Neuromodulation segment for the transitional period ended December 31, 2015.
To conform the consolidated balance sheet as of December 31, 2016 to the current period presentation, we reclassified $4.5 million of assets held for sale, related to our plan to exit the Costa Rica manufacturing operation, to a separate line item in the 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 year ended December 31, 2017.
For the year ended December 31, 2017, Loans to Equity and Cost Method Investees of $7.4 million was presented as an Investing Activities and to conform the presentation for the prior year ended December 31, 2016, Loans to Equity and Cost Method Investees of $6.3 million was reclassified to Investing Activities from Financing Activities. For the year ended December 31, 2017 ‘Intangible asset purchases’ were reported as ‘Purchases of property, plant and equipment and other’ and we conformed the presentation for the prior year and the transitional period ended December 31, 2016 and December 31, 2015, respectively. Certain financing activities were reported as Other for the year ended December 31, 2017 and we conformed the presentation for the prior year and the transitional period ended December 31, 2016 and December 31, 2015, respectively.
Merger, Integration and Restructuring Charges
As a result of the Mergers and acquisitions, we incurred merger, integration and restructuring charges and reported them separately as operating expenses in the consolidated statements of (loss) income.
Merger expenses consisted of expenses directly related to the Mergers, such as professional fees for legal services, accounting services, due diligence, a fairness opinion and the preparation of registration and regulatory filings in the United States and Europe, as well as investment banking fees.
Integration expenses consisted of consultancy fees with regard to: our systems integration, organization structure integration, finance, synergy and tax planning, the transition to U.S. GAAP for Sorin, our London Stock Exchange listing and certain re-branding efforts.
After the consummation of the Mergers between Cyberonics and Sorin in October 2015, we initiated several restructuring plans (the “Restructuring Plans”) to combine our business operations. We identified costs incurred and liabilities assumed for the Restructuring Plans. The Restructuring Plans are intended to leverage economies of scale, eliminate duplicate corporate expenses, streamline distributions and logistics and office functions in order to reduce overall costs.comparative purposes. These reclassifications had no impact on LivaNova’s financial condition.
Cash and Cash Equivalents
We considerLivaNova considers all highly liquid investments with an original maturity of three months or less, consisting of demand deposit accounts and money market mutual funds, to be cash equivalents. Cash equivalents and are carried inon the consolidated balance sheetsheets at cost, which approximatedapproximates their fair value.
Restricted Cash
The Company classifies cash that is not available for use in its operations as restricted cash within current assets on the consolidated balance sheets. As of December 31, 2023, LivaNova’s restricted cash balance totaled $311.4 million and was comprised of cash deposits with Barclays held as collateral for the SNIA Litigation Guarantee. As security for the SNIA Litigation Guarantee, LivaNova is required to grant cash collateral to Barclays in USD in an amount equal to the USD equivalent of 105% of the amount of the SNIA Litigation Guarantee calibrated on a biweekly basis. For additional information regarding the SNIA litigation, please refer to “Note 13. Commitments and Contingencies.”
Accounts Receivable
Our accountsAccounts receivable consistedconsists of trade receivables from direct customers and distributors. We maintainThe Company maintains an allowance for doubtful accounts for potential credit losses based on ourits estimates of the ability of customers to make required payments, historical credit experience, existing economic conditions and expected future trends. We writeLivaNova writes off uncollectible accounts against the allowance when all reasonable collection efforts have been exhausted.
Inventories
We state ourLivaNova states its inventories at the lower of cost, using the first-in first-out (“FIFO”)FIFO method, or market. Ournet realizable value. The Company’s calculation of cost includes the acquisition cost of raw materials and components, direct labor and overhead. We reduceoverhead, including depreciation of manufacturing related assets. LivaNova reduces the carrying value of inventories for those items that are potentially excess, obsolete or slow moving based on changes in customer demand, technology developments or other economic factors.
Property, Plant and Equipment (“PP&E”)
Assets held and used&E
PP&E is carried at cost, less accumulated depreciation. Maintenance, repairs and minor replacements are charged to expense as incurred, while significant renewals and improvements are capitalized. We computeLivaNova computes depreciation using the straight-line method over estimated useful lives. Leasehold improvements are depreciated over the shorter of the following terms: the useful life of the asset or a term that includes required lease periods and renewals that are deemed to be reasonably assured at the date the leasehold improvements are purchased. Capital improvements to the building are added as building components and depreciated over the useful life of the improvement or the building, whichever is less.
Assets held for sale
We classify long-lived assets as held for sale in the period in which we commit to a plan to sell the asset, the asset is available for immediate sale, the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value and the sale of the asset is probable within the next twelve months and when actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. A long-lived asset classified as
held for sale is measured at the lower of its carrying amount or fair value less cost to sell and depreciation is discontinued. We recognize a loss for any excess of carrying value over the fair value less cost to sell.
Business Combinations and Goodwill
We allocateLivaNova allocates the amounts we paythe Company pays for an acquisition to the assets we acquireacquired and liabilities we assumeassumed based on their fair values at the date of acquisition, including property, plant and equipment, inventories, accounts receivable, long-term debt, and identifiable intangible assets which either arise from a contractual or legal right or are separable from goodwill. We baseThe Company bases the fair value of identifiable intangible assets acquired in a business combination, including in-process research and development,IPR&D, on valuations that use information and assumptions provided by management, which consider management’s best estimates of inputs and assumptions that a market participant would use. We allocateLivaNova allocates any excess purchase price over the fair value of the net tangible and identifiable intangible assets acquired to goodwill. Transaction costs associated with these acquisitions are
expensed as incurred and are reported as operating expenses. We recognizein SG&A on the consolidated statements of income (loss). LivaNova recognizes adjustments to the provisional amounts identified during the measurement period with a corresponding adjustment to goodwill in the reporting period in which the adjustment amounts are determined. The effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts are recorded in the same period’s consolidated financial statements, calculated as if the accounting had been completed at the acquisition date.
Intangible Assets, Other than Goodwill
Intangible assets shown on the consolidated balance sheets consist of finite-lived and indefinite-lived assets. Developed technology rights consist primarily of existing technologyassets expected to generate future economic benefits and technical capabilities acquired from Sorin in the Mergers that wereare recorded at their respective fair values as of thetheir acquisition date which includesdate. Finite-lived intangible assets consist primarily of developed technology and technical capabilities, including patents, related know-how and licensed patent rights, that represent assets expected to generate future economic benefits. Trademarks andas well as trade names include the Sorin trade name acquired as part of the Mergers. In-process R&D was recognized as part of the acquisition of Caisson Interventional, LLC (“Caisson”).and customer relationships. Customer relationships consist of relationships with hospitals and cardiac surgeons in the countries where we operate. OtherLivaNova operates. Indefinite-lived intangible assets consistother than goodwill are composed of favorable leasesIPR&D assets acquired from Sorin in the Mergers. We amortize ouracquisitions. LivaNova amortizes its finite-lived intangible assets over their useful lives using the straight-line method. Estimating the useful lives of intangible assets requires LivaNova to apply significant judgment.
Amortization expense is disclosed separately inincluded on LivaNova’s consolidated statements of income (loss) within cost of sales or SG&A based on the consolidated statementnature of net (loss) income. We evaluate ourthe underlying intangible asset. LivaNova evaluates its intangible assets each reporting period to determine whether events and circumstances indicate either a different useful life or impairment. If we change ourLivaNova changes its estimate of the useful life of an asset, we amortizethe Company amortizes the carrying amount over the revised remaining useful life.
Impairments of Long-LivedLong-lived Assets Investments and Goodwill
PP&E, intangible assetsLong-lived Assets Impairment
Assets Held and investmentsUsed
We evaluateLivaNova evaluates the carrying value of ourits long-lived assets and investments for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Such changes in circumstance may include, among other items, (i) an expectation of a sale, discontinuation or disposal of a long-lived asset or asset group, (ii) adverse changes in market or competitive conditions, (iii) an adverse change in legal factors or business climate in the markets in which we operateLivaNova operates and (iv) operating or cash flow losses.
For PP&E and intangible assets used in ourLivaNova’s operations, recoverability generally is determined by comparing the carrying value of an asset or group of assets to their expected undiscounted future cash flows. If the carrying value of an asset, (asset group)or group of assets is not recoverable, the amount of impairment loss is measured as the difference between the carrying value of the asset (asset group)or group of assets and its estimated fair value. The asset grouping as well as the determination of expected undiscounted cash flow amounts requires significant judgments, estimates, and assumptions, including with regard to cash flows generated upon disposition. We generally measureLivaNova measures fair value by considering sale prices for similar assets.as the price that would be received if the Company were to sell the assets in an orderly transaction. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs to sell.
Goodwill
We conductLivaNova conducts impairment testing of our goodwillits indefinite-lived intangible assets on October 1st each year. We test goodwillLivaNova tests indefinite-lived intangible assets for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduceindicate the carrying amount may be impaired. An impairment loss is recognized when the asset’s carrying value exceeds its fair valuevalue.
Goodwill Impairment
LivaNova conducts impairment testing of a reporting unit below its carrying amount.
goodwill on October 1st each year. Testing is performed at the reporting unit level, which is defined as an operating segment or a component of an operating segment that constitutes a business for which financial information is available and is regularly viewed by management. Neuromodulation and Cardiac SurgeryLivaNova’s operating segments are deemed to be ourits reporting units for purposes of goodwill impairment testing. LivaNova tests goodwill for impairment between annual tests if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount.
If we determineLivaNova determines that goodwill is more-likely-than-not impaired, we perform the first step of a two-step goodwill impairment test. We first identify potential impairment by comparingCompany compares the fair value of the reporting unit to its carrying amount, including goodwill. Fair value refers to the price that would be received if weLivaNova were to sell the unit as a whole in an orderly transaction. Fair value is estimated using a discounted cash flow model and requires various assumptions, including revenue growth rates and discount rates. If
the carrying amount of ourthe Company’s reporting unit is greater than zero and its fair value exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying value of the reporting unit exceeds its fair value, we perform step 2 of the goodwill impairment test and determine if the carrying amount of the reporting unit exceeds the implied fair value of the goodwill.impaired. An
impairment loss is recognized when the carrying amount of the reporting unit’s net assets exceeds the impliedestimated fair value of the reporting unit, up to and including the carrying amount of the goodwill.
If the aggregate fair value of ourLivaNova’s reporting units exceeds ourits market capitalization, we evaluatethe Company evaluates the reasonableness of the implied control premium which includes a comparison to implied control premiums from recent market transactions within ourits industry or other relevant benchmark data.
Goodwill impairment evaluations are highly subjective. In most instances, they involve expectations of future cash flows that reflect ourLivaNova’s judgments and assumptions regarding future industry conditions and operations. The estimates, judgments and assumptions used in the application of ourLivaNova’s goodwill impairment policies reflect both historical experience and an assessment of current operational, industry, market, economic and political environments. The use of different estimates, judgments, assumptions and expectations regarding future industry and market conditions and operations would likelycould result in materially different asset carrying values and operating results.
Quantitative factors used to determine the fair value of the reporting units reflect ourLivaNova’s best estimates, and we believethe Company believes they are reasonable. Future declines in the reporting unit'sunits’ operating performance or ourLivaNova’s anticipated business outlook may reduce the estimated fair value of ourthe Company’s reporting unitunits and result in additional impairments.an impairment in the future. Factors that could have a negative impact on the fair value of the reporting units include, but are not limited to:
•Decreasesdecreases in revenue as a result of the inability of ourLivaNova’s sales force to effectively market and promote ourthe Company’s products;
•Increasedincreased competition, patent expirations or new technologies or treatments;treatments commercialized by competitors;
•Declinesdeclines in anticipated growth rates;
•Thethe outcome of litigation, legal proceedings, investigations or other claims resulting in significant cash outflows; and
•Increasesincreases in the market-participant risk-adjusted Weighted Average Cost of Capital (“WACC”).WACC.
Derivatives and Risk Management
U.S.US GAAP requires companies to recognize all derivatives as assets and liabilities on the balance sheet and to measure the instruments at fair value through earnings unless the derivative qualifies for hedge accounting. 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 comprehensive income (loss)OCI until the hedged item is recognized in earnings upon settlement/termination.earnings. The changes in the fair value of the derivative are intended to offset the change in fair value of the hedged asset, liability or probable commitment. We evaluateLivaNova evaluates 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 any, is recorded in earnings.inception. Cash flows from derivative contracts are reported as operating activities inon the consolidated statements of cash flows.
We useLivaNova uses currency exchange rate derivative contracts and interest rate derivative instruments to manage the impact of currency exchange and interest rate changes on earnings and cash flows. In order to minimize earnings and cash flow volatility resulting fromForward currency exchange rate changes, we enter into derivative instruments, principally forward currency exchange rate contracts. These contracts are designed to hedge anticipated foreign currency transactions and changes in the value of specific assets and liabilities. At inception of the forward contract, the derivative is designated as either a freestanding derivative or a cash flow hedge. We doLivaNova does not enter into currency exchange rate derivative contracts for speculative purposes. All derivative instruments that qualify for hedge accounting are recorded at fair value on the consolidated balance sheets, as financial assets or liabilities (current or non-current) depending upon the gain or loss position of the contract and contract maturity date.
Forward contracts designated as cash flow hedges are designed to hedge the variability of cash flows associated with forecasted transactions denominated in a foreign currency that will take place in the future. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income (loss)AOCI and reclassified into earnings to offset exchange differences originated by the hedged item or to adjust the valuecurrent earnings effect of operating income (expense). Wethe hedged item.
Upon the settlement of LivaNova’s foreign currency cash flow hedges in the fourth quarter of 2022 and following an in-depth analysis of the utility of the Company’s cash flow hedging program, LivaNova discontinued its foreign currency cash flow hedging program. LivaNova continues to use freestanding derivative forward contracts to offset exposure to the variability of the value associated with assets and liabilities denominated in a foreign currency. These derivatives are not designated as hedges, and therefore changes in the value of these forward contracts are recognized in earnings, thereby offsetting the current earnings effect of the related change in value of foreign currency denominated assets and liabilities.
We useHistorically, LivaNova has entered into interest rate derivative instruments designated as cash flow hedges to manage the exposure to interest rate movements and to reduce the risk of increased borrowing costs by converting floating-rate debt into fixed-rate debt. Under these agreements, we agreeLivaNova agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to agreed-upon notional principal amounts. TheThese interest rate swaps are structured to mirror the payment terms of the underlying loan. The fair value of the interest rate swaps is reported inon the
consolidated balance sheets as financial assets or liabilities (current or non-current) depending upon the gain or loss position of the contract and the maturity of the future cash flows of the fair value of each contract. The effective portion of the gain or loss on these derivatives is reported as a component of accumulated other comprehensive income. The non-effective portion is reported inAOCI and reclassified to interest expense during the period of the respective interest payment. The Company’s interest rate swaps expired on April 6, 2023. LivaNova elected not to renew the interest rate swaps as interest expense associated with the Initial Term Facility is principally offset by holding a significant portion of the Initial Term Facility in consolidated statementsa depository account, which earns a floating rate of income (loss).interest.
Fair Value Measurements
We followLivaNova follows the authoritative guidance on fair value measurements and disclosures with respect to assets and liabilities that are measured at fair value on both a recurring and nonrecurring basis. Under this guidance, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The authoritative guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability, based on market data obtained from sources independent of us.LivaNova. Unobservable inputs are inputs that reflect ourLivaNova’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The categorization of financial assets and financial liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is broken down into three levels defined as follows:
•Level 1 - Inputs are quoted prices in active markets for identical assets or liabilities.liabilities;
•Level 2 - Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly.indirectly; and
•Level 3 - Inputs are unobservable for the asset or liability.
FinancialLivaNova’s financial assets and liabilities that are classified as Level 2 include derivative instruments, primarily forward and option currency contracts and interest rate swapsswap contracts, which are valued using standard calculations and models that use readily observable market data as their basis.
FinancialLivaNova’s financial assets and liabilities that are classified as Level 3 include contingent consideration liability arrangements, resultingderivative and embedded derivative instruments and convertible notes receivable.
Contingent consideration liabilities result from acquisitionsacquisition agreements that involveinclude potential future payment of consideration that is contingent upon the achievement of performance milestones.milestones and/or sales-based earn-outs. Contingent consideration is recognized at fair value at the date of acquisition date based on the consideration expected to be transferred and estimated as the probability of future cash flows, discounted to present value in accordance with accepted valuation methodologies. The discount rate used is determined at the time of measurement. Contingent consideration is remeasured each reporting period with the change in fair value, including accretion for the passage of time, recorded in earnings. The change in fair value of contingent consideration based on the achievement of regulatory milestones is recorded as research and development expense while the change in fair value of sales-based earnout contingent consideration is recorded as cost of sales. Contingent consideration payments made soon after the acquisition date are classified as an investing activity. Contingent consideration payments that are not made soon after the acquisition date are classified as a financing activity up to the amount of the contingent consideration liability recognized at the acquisition date, with any excess classified as an operating activity. For further information on LivaNova’s Level 3 contingent consideration liability arrangements, please refer to “Note 9. Fair Value Measurements.” For further information on LivaNova’s Level 3 derivative and embedded derivative instruments, please refer to “Note 10. Financing Arrangements” and “Note 9. Fair Value Measurements.” For further information on LivaNova’s Level 3 convertible notes receivable, please refer to “Note 8. Investments.”
Investments in Equity Securities
Cost and Equity Method Investments
OurLivaNova’s investments in equity instruments,securities, and related loans, comprise investments in affiliates that are not publicly traded and are in various stages of development. The Company’s equity investments are reported in investments, and related loans are strategicreported in other assets, on the consolidated balance sheets.
LivaNova elects to measure investments that do not have readily determinable fair values, at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or a similar investment of the same issuer.
LivaNova’s investments in companies thataffiliates in which the Company has significant influence but not control are in varied stagesaccounted for using the equity method. LivaNova’s share of developmentnet income or loss is reflected as one line item on the Company’s consolidated statements of income (loss) under losses from equity-method investments and not publicly traded. Ourwill increase or decrease, as applicable, the carrying value of the Company’s equity method investments are reported under Investments, and related loans under Prepaid Expenses and Other Current Assets and Other Assets,investments on the consolidated balance sheets. We account for our equity investments and related loans under the cost or the equity method, as appropriate, depending on our level of control over the investee. We use the equity method if we exercise significant influence over the investee but do not control the investee, and we use the cost method if we exercise less than significant influence, which is generally under 20% ownership.
Cost Method Investments
We initially record the amount of our cost method investments at cost andLivaNova regularly review ourreviews its investments for changes in circumstance or the occurrence of events that suggest our investment may not be recoverable. This evaluation considers all available financial information related to the investee, including valuations based on recent third-party equityits investments in the investees. If an impairment is considered to be other-than-temporary, the loss is recognized in the consolidated statements of income in the period the determination is made. Impairments are reported as Impairment of cost-method investments in the consolidated statement of (loss) income.
Equity Method Investments
The cost of our investments accounted for under the equity method may give rise to a difference between the cost of the investment and our share of the investee’s net book value, or a basis difference. A basis difference is assigned to assets and liabilities of the investee with remaining unassigned basis assigned to goodwill. We amortize finite lived basis differences over the life of the asset or liability. We adjust our investment carrying value each period for our share of the investee’s income or loss. We report our share of the investee’s losses and the amortization of basis differences in the consolidated statements of income (loss) as Income (Loss) from Equity Method Investments. We regularly review our investments for changes in circumstance or the occurrence of events that suggest our investment may not be recoverable, and if an impairment is considered to be other-than-temporary, the loss is recognized inon the consolidated statements of income (loss) in the period the determination is made and reported as Losseslosses from Equity Method Investments.equity-method investments.
Warranty Obligation
We offerLivaNova offers a warranty on various products. We estimateThe Company estimates the costs that may be incurred under warranties and recordrecords a liability in the amount of such costs at the time the product is sold. The amount of the reserve recorded is equal to the estimated net costs to repair or otherwise satisfy the claim. We includeLivaNova includes the warranty obligation in accrued liabilities and other on the consolidated balance sheets. Warranty expense is recorded to cost of goods sold in ouron LivaNova’s consolidated statements of income (loss).
Retirement Benefit Plan Assumptions
We sponsorLivaNova sponsors various retirement benefit plans, including defined benefit pension plans (pension benefits), defined contribution savings plans and termination indemnity plans, covering substantially all U.S.US employees and employees outside the United States.US. Pension benefit costs include assumptions for the discount rate, retirement age, compensation rate increases and the expected return on plan assets.
Product Liability Accruals
Accruals for product liability claims are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information. Accruals for product liability claims are adjusted periodically as additional information becomes available.
Revenue Recognition
ProductRefer to “Note 3. Revenue
We sell our products through a direct sales force and independent distributors. We recognize revenue when persuasive evidence of a sales arrangement exists, title to the goods and risk of loss transfers to customers or to independent distributors, the selling price is fixed or determinable and collectability is reasonably assured. We estimate expected sales returns based on historical data and record a reduction of sales with a return reserve. We record state and local sales taxes net; that is, we exclude sales tax from revenue.
Service Revenue
Services largely consist of technical assistance services provided to hospitals for the installation, maintenance and support in the operation of heart-lung machines and autotransfusion systems. Service related revenue is recognized on the basis of progress of the services, when services are rendered, when collectability is reasonably assured and when the amount is fixed and determinable.Recognition.”
Research and Development (“R&D”)
All R&D costs are expensed as incurred. R&D includes costs of basic research activities as well as engineering and technical effort required to develop a new product or make significant improvementimprovements to an existing product or manufacturing process. R&D costs also include regulatory and clinical study expenses, including post-market clinical studies.
Leases
We accountLivaNova determines if an arrangement is or contains a lease at its inception. For operating leases with a term greater than 12 months, LivaNova recognizes operating lease assets and operating lease liabilities based on the present value of the future minimum lease payments over the lease term at the latter of the Company’s lease standard adoption date of January 1, 2019, or the lease commencement date. LivaNova does not record an operating lease asset and corresponding liability for leases that transfer substantially all benefitswith terms of 12 months or less. The Company recognizes the lease payments for such short-term leases within profit and risks incidental to the ownership of property as an acquisition of an asset and the incurrence of an obligation, and we account for all other leases as operating leases. Certain of our leases provide for tenant improvement allowances that have been recorded as deferred rent and amortized, using theloss on a straight-line method,basis over the lifelease term. Variable lease payments, such as common area rent, maintenance charges, and rent escalations not known upon lease commencement, are not included in the determination of the minimum lease aspayments and are expensed in the period in which the obligation for those payments is incurred. Operating lease assets also includes any lease payments made in advance and excludes lease incentives. LivaNova’s lease terms may include options to extend or terminate a reduction to rent expense. In addition, scheduled rent increases and rent holidays arelease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the termlease term.
As most of LivaNova’s leases do not provide a readily determinable implicit rate, LivaNova uses its IBR based on the information available at the lease commencement date in determining the present value of future payments. LivaNova’s IBR represents an estimate of the lease.interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the lease term within a particular currency environment. LivaNova used the IBR available nearest to the Company’s adoption date for leases that commenced prior to that date.
Additionally, LivaNova monitors for events or changes in circumstances that may require a reassessment of the Company’s leases to determine if a remeasurement is required. For additional information, refer to “Note 12. Leases.”
Stock-Based Compensation
Stock-Based Incentive Awards
WeLivaNova may grant stock-based incentive awards to directors, officers and key employees and consultants. We measureemployees. The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair market value of the award. We recognizeLivaNova recognizes equity-based compensation expense ratably over the period that an employee is required to provide
serviceservices are provided in exchange for the entire award (all vesting periods). We issueLivaNova issues treasury shares for vesting of RSUs and the exercise of SARs and new shares upon stock option exercises, otherwise issuance of stock for vesting of restricted stock, restricted stock units or stock appreciation rights are issued from treasury shares. We haveexercises. The Company has the right to elect to pay the cash value of vested restricted stock units in lieu of the issuance of new shares.
Stock Appreciation RightsSARs
A stock appreciation right (“SAR”) confersLivaNova may grant SARs that confer upon an employeethe grantee the contractual right to receive an amount of cash, stock, or a combination of both, that equals the appreciation in the company’s stock from anthe award’s grant date to the exercise date. SARs may be exercised at the employee’sgrantee’s discretion during the exercise period and do not give the employeegrantee an ownership right in the underlying stock. SARs do not involve payment of an exercise price. We useLivaNova uses the Black-Scholes option pricing methodology to calculate the grant date fair market value of SARs. We determineSARs and compensation is expensed ratably over the service period. The Company determines the expected volatility of the awards based on historical volatility. Calculation of compensation for SAR stock awards requires estimation of employee turnoverthe Company to estimate historical volatility and forfeiture rates.
Restricted Stock and Restricted Stock Units RSUs
WeLivaNova may grant restricted stock and restricted stock unitsservice-based RSUs at no purchase cost to the grantee. The grantees of unvested restricted stock units have no voting rights noror rights to dividends. Sale or transfer of the stock and stock units areis restricted until they are vested. The fair market value of service-based restricted stock and restricted stock units areRSUs is determined using the market closing price on the grant date, and compensation is expensed ratably over the vestingservice period. Calculation of compensation for RSU stock awards requires estimationthe Company to estimate forfeiture rates.
Market Performance-Based RSU’s
LivaNova may grant market performance-based RSUs at no purchase cost to the grantee. The grantees of employee turnoverunvested units have no voting rights or rights to dividends and sale or transfer of the units is restricted until they are vested. The number of shares that are ultimately transferred to the grantee is dependent upon the Company’s percentile rank of total shareholder return relative to a peer group. The fair market value of market performance-based RSUs is determined utilizing a Monte Carlo simulation on the grant date and compensation is then expensed ratably over the service period. Calculation of compensation for market performance-based stock awards requires the Company to estimate historical volatility and forfeiture rates.
Operating Performance-Based Awards RSU’s
LivaNova may grant operating performance-based RSUs at no purchase cost to the grantee. The grantees of unvested units have no voting rights or rights to dividends and sale or transfer of the units is restricted until they are vested. The number of shares that are ultimately transferred to the grantee is dependent upon the Company’s percent achievement of certain targets for cumulative adjusted free cash flow and adjusted return on invested capital. The fair market value of operating performance-based RSUs is determined using the market closing price on the grant date. Compensation is expensed ratably over the service period and is adjusted based upon the estimated and actual percent achievement of cumulative adjusted free cash flow and return on invested capital as compared to target.
Income Taxes
We areLivaNova is a U.K.UK corporation and we operateoperates through ourthe Company’s various subsidiaries in a number of countries throughout the world. OurLivaNova’s provision for income taxes is based on the tax laws and rates applicable in the jurisdictions in which we operatethe Company operates and earnearns income. We useLivaNova uses significant judgment and estimates in accounting for ourits income taxes. We recognizeThe Company recognizes deferred tax assets and liabilities for the anticipated future tax effects of temporary differences between the financial statementsstatement basis and the tax basis of ourLivaNova’s assets and liabilities, which are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Income tax expense compared to pre-tax income yields an effective tax rate.
We file federal and local tax returns in many jurisdictions throughout the world and are subject to income tax examinations for our fiscal year 1992 and subsequent years, with certain exceptions. While we believe that our tax return positions are fully supported, tax authorities may disagree with certain positions we have taken and assess additional taxes. Therefore, we regularly assess our tax positions in previously filed tax returns and positions we expect to take in future tax returns. Out tax positions are evaluated for recognition using a more-likely-than-not threshold. Those tax positions requiring recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information. We regularly monitor our tax positions and tax liabilities, and we reevaluate the technical merits of our tax positions. Some of the reasons a reserve for an uncertain tax benefit may be reversed are: (i) completion of a tax audit, (ii) a change in applicable tax law including a tax case or legislative guidance, or (iii) an expiration of the statute of limitations. We recognize interest and penalties associated with unrecognized tax benefits and record interest in interest expense, and penalties in selling, general and administrative expense, in the consolidated statements of income (loss).
WeLivaNova periodically assessassesses the recoverability of ourits deferred tax assets by considering whether it is more likely than notmore-likely-than-not that some or all of the actual benefit of those assets will be realized. To the extent that realization does not meet the “more-likely-than-not” criterion, we establishthe Company establishes a valuation allowance. WeLivaNova periodically reviewreviews the adequacy and necessity of the valuation allowance by considering significant positive and negative evidence relative to ourits ability to recover deferred tax assets and to determine the timing and amount of valuation allowance that should be released. This evidence includes: (i) profitability in the most recent quarters, (ii)quarters; internal profitability forecasts for the current and next two future years, (iii) sizeyears; the
amount of deferred tax asset relative to estimated profitability, (iv)profitability; the potential effects on future profitability from increasing competition, healthcare reforms and overall economic conditions, (v)conditions; limitations and potential limitations on the use of ourLivaNova’s net operating losses due to ownership changes, pursuant to IRC Section 382,382; and (vi) the implementation of prudent and feasible tax planning strategies, if any.
LivaNova files federal and local tax returns in many jurisdictions throughout the world and is subject to income tax examinations for its fiscal year 2018 and subsequent years, with certain exceptions. While LivaNova believes that its tax return positions are fully supported, tax authorities may disagree with certain positions the Company has taken and assess additional taxes, and as a result, LivaNova may establish reserves for uncertain tax positions, which require a significant degree of management judgment. LivaNova regularly assesses the likely outcomes of its tax positions in order to determine the appropriateness of the Company’s reserves; however, the actual outcome of an audit can be significantly different than LivaNova’s expectations, which could have a material impact on the Company’s tax provision. LivaNova’s tax positions are evaluated for recognition using a more-likely-than-not threshold. Uncertain tax positions requiring recognition are measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information. Some of the reasons a reserve for an uncertain tax benefit may be reversed are: completion of a tax audit; a change in applicable tax law including a tax case or legislative guidance; or an expiration of the statute of limitations. LivaNova recognizes interest and penalties associated with unrecognized tax benefits and records interest in interest expense, and penalties in SG&A, on LivaNova’s consolidated statements of income (loss).
Foreign Currency
Our functionalLivaNova’s reporting currency is the U.S. dollar,USD; however, a portion of the revenues earned and expenses incurred by certain of ourLivaNova’s subsidiaries are denominated in currencies other than the U.S. dollar. We determineUSD. LivaNova determines the functional currency of ourits 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. OurLivaNova’s significant
foreign subsidiaries are located in Europe and the U.S.US. The functional currency of ourLivaNova’s significant European subsidiaries is the Euro, and the functional currency of ourLivaNova’s significant U.S.US subsidiaries is the U.S. dollar.USD.
Assets and liabilities forof subsidiaries whose functional currency is not the U.S. dollarUSD are translated into U.S. dollarsUSD based on a combination of both current and historical exchange rates, while their revenues earned and expenses incurred are translated into U.S. dollarsUSD at average period exchange rates. Translation adjustments are included as ‘Accumulated other comprehensive income (loss)’ (“AOCI”) in theAOCI on LivaNova’s consolidated balance sheets. Gains and losses arising from transactions denominated in a currency different from an entity’s functional currency are included in Foreignforeign exchange and other gains (losses) in ourincome/(expense) on LivaNova’s consolidated statements of income (loss). Taxes are not provided on cumulative translation adjustments, as substantially all translation adjustments are related to earnings which are intended to be indefinitely reinvested in the countries where earned.
Segments
Prior to the Mergers we had one operating and reportable segment. Upon completion of the Mergers, we reorganized our reporting structure and aligned the segments of Sorin and Cyberonics and the underlying divisions and businesses. We currently have two operating and reportable segments, Neuromodulation and Cardiac Surgery. Refer to “Note 18. Geographic and Segment Information” for additional information.
Contingencies
The CompanyLivaNova is subject to product liability claims, environmental obligations, government investigations and other legal proceedings in the ordinary course of business. Legal fees and other expenses related to litigation are expensed as incurred and included in Selling, general and administrative expenses in the Consolidated StatementsSG&A on LivaNova’s consolidated statements of Income.income (loss). Contingent accrualsliabilities are recorded when the CompanyLivaNova determines that a loss is both probable and reasonably estimable. Due to the fact that legal proceedings and other contingencies are inherently unpredictable, ourLivaNova’s assessments involve significant judgment regarding future events.
Note 3. Business CombinationsRevenue Recognition
LivaNova generates revenue through contracts with customers consisting primarily of hospitals, healthcare institutions and distributors. Revenue is measured based on consideration specified in customer contracts and excludes amounts collected on behalf of third parties. The MergersCompany measures the consideration based upon the estimated amount to be received. The amount of consideration LivaNova ultimately receives varies depending upon the return terms, sales rebates, discounts, and other incentives the Company may offer, which are accounted for as variable consideration when estimating the amount of revenue to recognize. The estimate of variable consideration requires significant judgment.
On October 19, 2015,LivaNova has historically experienced a low rate of product returns, and pursuantthe total dollar value of product returns has not been significant to the termsCompany’s consolidated financial statements.
LivaNova recognizes revenue when a performance obligation is satisfied by transferring the control of a product or providing service to a customer. Some of LivaNova’s contracts include the purchase of multiple products and/or services. In such cases, LivaNova allocates the transaction price based upon the relative estimated stand-alone price of each product and/or service sold.
LivaNova records state and local sales taxes net; that is, the Company excludes sales tax from revenue. Typically, LivaNova’s contracts do not have a significant financing component.
LivaNova incurs incremental commission fees paid to the sales force associated with the sale of products. LivaNova applies the practical expedient within ASC 606-10-50-22 and has elected to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the Merger Agreement, Sorin merged with and into LivaNova, with LivaNova continuing asasset the surviving company, immediately followed by the merger of Merger Sub with and into Cyberonics, with Cyberonics continuing as the surviving company and as a wholly owned subsidiary of LivaNova. Following the completion of the Mergers, LivaNova became the holding company of the combined businesses of Cyberonics and Sorin, and LivaNova’s ordinary shares were listed, under the ticker symbol “LIVN”, on NASDAQ and admitted for listing on the standard segment of the U.K. Financial Authority’s Official List and to trading on the LSE.entity would otherwise recognize is one year or less. As a result, no commissions have been capitalized as contract costs since adoption of ASC 606. The following is a description of the Mergers,principal activities (separated by reportable segments) from which LivaNova generates its revenue. For more detailed information about LivaNova’s reportable segments including disaggregated revenue results by major product line and primary geographic markets, see “Note 19. Geographic and Segment Information.”
Cardiopulmonary Products and Services
Cardiopulmonary products include HLMs, oxygenators, autotransfusion systems, perfusion tubing systems, cannulae and other related accessories.
Cardiopulmonary products may include performance obligations associated with assembly and installation of equipment. Accordingly, LivaNova allocates a portion of the sales prices to installation obligations and recognizes that revenue when the service is provided. LivaNova recognizes revenue for equipment and accessory product sales when control of the equipment or product passes to the customer.
Technical services include installation, repair and maintenance of cardiopulmonary equipment under service contracts or upon customer request. Technical service agreements generally provide for upfront payments in advance of rendering services or periodic billing over the contract term. Amounts billed in advance are deferred and recognized as revenue when the performance obligation is satisfied. Technical services are not a significant component of Cardiopulmonary revenue and have been presented with the related equipment and accessories revenue.
Neuromodulation Products
Neuromodulation products are comprised of neuromodulation therapy systems for the treatment of DRE and DTD. LivaNova’s Neuromodulation product line includes the VNS Therapy System, which consists of an implantable pulse generator, a lead that connects the generator to the vagus nerve, and other accessories. LivaNova recognizes revenue for Neuromodulation product sales when control passes to the customer.
Advanced Circulatory Support Products
LivaNova’s ACS segment was engaged in the design, development, manufacture, marketing and selling of temporary life support products. ACS’s products, which comprise the LifeSPARC and Hemolung systems, and standalone cannulae and accessories, including ProtekDuo and transseptal (TandemHeart) cannulae, simplify temporary extracorporeal cardiopulmonary life support solutions for critically ill patients.
ACS products are comprised of temporary life support products, including the LifeSPARC platform, ProtekDuo cannulae kits and the Hemolung RAS. ACS revenue is recognized when control passes to the customer, usually at the point of shipment.
During the first quarter of 2024, LivaNova transitioned all ACS standalone cannulae and accessories, including ProtekDuo and transseptal (TandemHeart) cannulae, into its Cardiopulmonary segment. Further sales of the LifeSPARC and Hemolung Systems were discontinued during the first quarter of 2024.
Contract Balances
Due to the nature of LivaNova’s products and services, revenue producing activities may result in contract assets and contract liabilities. These activities relate primarily to Cardiopulmonary technical services contracts for short-term and multi-year service agreements. Contract assets are primarily comprised of unbilled revenues, which occur when a performance obligation has been completed, but not billed to the customer. Contract liabilities are made up of deferred revenue, which occurs when a customer pays for a service, before a performance obligation has been completed. Contract assets are included within prepaid expenses and other current assets on October 19, 2015,the consolidated balance sheets and were insignificant as of December 31, 2023 and 2022. As of December 31, 2023 and 2022, contract liabilities of $15.3 million and $14.1 million, respectively, were included within accrued liabilities and other and other long-term liabilities on LivaNova’s consolidated balance sheets.
Note 4. Business Combinations
As of December 31, 2021, LivaNova issuedowned a 3% investment in ALung, a privately held medical device company focused on creating advanced medical devices for treating respiratory failure. On May 2, 2022, LivaNova acquired the remaining 97% of equity interests in ALung for a purchase price of up to $110.0 million, consisting of $10.0 million paid at closing, subject to
customary adjustments, and contingent consideration of up to $100.0 million payable upon achievement of certain sales-based milestones beginning in 2023 and ending in 2027. Total consideration included approximately 48.8$5.5 million ordinary shares.of non-cash consideration.
On October 19, 2015, each share of Sorin was converted intoThe following table presents the right to receive 0.0472 shares of LivaNova, (“Sorin Exchange Ratio”), and each share of common stock of Cyberonics was converted into the right to receive one share of LivaNova. Theacquisition date fair value of the shares issued as total consideration of the Mergers is based on Cyberonics' closing stock price of $69.95 per share on October 16, 2015, the last business day prior to the close of the Mergers. Based on the number of outstanding shares of Sorin and Cyberonics as of October 19, 2015, former Sorin and Cyberonics shareholders held approximately 46 percent and 54 percent, respectively, of LivaNova's shares after giving effect to the Mergers.
Based on the relative voting rights of Cyberonics and Sorin shareholders immediately following completion of the Mergers and the premium paid by Cyberonics for Sorin shares, and after taking into consideration all relevant facts, Cyberonics was considered to be the acquirer for accounting purposes. LivaNova accounted for the acquisition of Sorin as a business combination using the acquisition method of accounting. Under the acquisition method of accounting, the assets acquired and liabilities assumed are recorded at their estimated fair values as of the date of the Mergers. The excess of the consideration transferred over the estimated fair values of the net assets acquired was recorded as goodwill.
Total fair value of consideration transferred in the Mergers (in thousands except for shares and per share data and the Sorin Exchange Ratio):
|
| | | | |
Total Sorin shares outstanding as of October 16, 2015
| | 477,824,000 |
|
Sorin exchange ratio | | 0.0472 |
|
Shares of LivaNova issued | | 22,553,293 |
|
Value per share of Cyberonics as of October 16, 2015 | | $ | 69.95 |
|
Fair value of ordinary shares transferred to Sorin shareholders | | $ | 1,577,603 |
|
Fair value of ordinary shares issued to Sorin share award holders (1) | | $ | 9,231 |
|
Fair value of LivaNova stock appreciation rights issued to Sorin stock appreciation rights holders (2) | | $ | 2,249 |
|
Fair value of ordinary shares transferred to Sorin shareholders | | $ | 1,589,083 |
|
| |
(1) | Each Sorin share award (other than a Sorin stock appreciation right) granted prior to the Sorin merger effective time accelerated, vested and was converted into the right to receive LivaNova shares based on the Sorin Exchange Ratio. The total fair value of the replacement awards is $25.2 million, including $9.2 million attributable to pre-combination services and allocated to consideration transferred to acquire Sorin. Of the remaining $16.0 million, $8.3 million was recognized immediately in the post-combination period and $7.7 million was recognized over the post-combination service period to February 28, 2017 due to the service period requirements of the awards. Refer to “Note 14. Stock-Based Incentive Plans” for further discussion of treatment of equity awards. |
The consideration transferred in the Mergers was measured using the fair-value-based measure of the share awards as of the closing date. For purposes of calculating the consideration transferred, the fair-value-based measure of the Sorin share awards was determined to be the opening market price of LivaNova’s shares of $69.39 on October 19, 2015.
| |
(2) | As of October 16, 2015 there were 3,815,824 Sorin stock appreciation rights. Each Sorin stock appreciation right granted prior to the Sorin merger effective time accelerated, vested and was converted into the right to receive 0.0472 LivaNova stock appreciation right based on the Sorin Exchange Ratio. The total fair value of the replacement stock appreciation rights is $3.8 million, including $2.2 million attributable to pre-combination services and allocated to consideration transferred to acquire Sorin. The remaining $1.6 million was recognized immediately in the post-combination period. Refer to “Note 14. Stock-Based Incentive Plans” for further discussion of treatment of equity awards. |
The following table summarizes the fair value of LivaNova’s interest in ALung prior to the assets acquired and liabilities assumed in the Mergers on October 19, 2015,acquisition, including thecertain measurement period adjustments recognized since the fair values were presented in our report on Form 10-K/T for the transitional period ended December 31, 2015 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Initial Fair Value of Consideration | | Measurement Period Adjustments (1) | | Adjusted Fair Value of Consideration |
Cash and other considerations | | $ | 15,586 | | | $ | — | | | $ | 15,586 | |
Contingent consideration | | 26,369 | | | (9,578) | | | 16,791 | |
Fair value of consideration transferred | | $ | 41,955 | | | $ | (9,578) | | | $ | 32,377 | |
|
| | | | | | | | | | | | |
| | October 19, 2015 | | Adjustments | | October 19, 2015 (As Adjusted) |
Total fair value of consideration transferred | | $ | 1,589,083 |
| | $ | — |
| | $ | 1,589,083 |
|
Estimated fair value of assets acquired and liabilities assumed: | |
| | | | |
Cash and cash equivalents | | 12,495 |
| | — |
| | 12,495 |
|
Accounts receivable | | 224,466 |
| | — |
| | 224,466 |
|
Inventories | | 233,832 |
| | — |
| | 233,832 |
|
Other current assets | | 60,674 |
| | (84 | ) | | 60,590 |
|
Property, plant and equipment | | 207,639 |
| | (1,121 | ) | | 206,518 |
|
Intangible assets | | 688,729 |
| | — |
| | 688,729 |
|
Equity investments | | 67,059 |
| | (72 | ) | | 66,987 |
|
Other assets | | 7,483 |
| | (1,328 | ) | | 6,155 |
|
Deferred tax assets | | 135,370 |
| | (121,234 | ) | | 14,136 |
|
Total assets acquired | | 1,637,747 |
| | (123,839 | ) | | 1,513,908 |
|
| |
| | | | |
Current portion of debt and other obligations | | 110,601 |
| | — |
| | 110,601 |
|
Other current liabilities | | 237,855 |
| | 830 |
| | 238,685 |
|
Long-term debt | | 128,458 |
| | — |
| | 128,458 |
|
Deferred tax liabilities | | 279,328 |
| | (148,640 | ) | | 130,688 |
|
Other long-term liabilities | | 55,567 |
| | — |
| | 55,567 |
|
Total liabilities assumed | | 811,809 |
| | (147,810 | ) | | 663,999 |
|
Goodwill | | $ | 763,145 |
| | $ | (23,971 | ) | | $ | 739,174 |
|
(1)During the third quarter of 2022, measurement period adjustments were recorded based on information obtained about facts and circumstances that existed as of the acquisition date.The valuationpurchase price allocation at fair value for the ALung acquisition was finalized during the second quarter of 2023 and is presented in the following table, which includes certain measurement period adjustments (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | Initial Purchase Price Allocation | | Measurement Period Adjustments (1) | | Adjusted Purchase Price Allocation | |
Developed technology - 15-year life | | $ | 13,950 | | | $ | (11,050) | | | $ | 2,900 | | |
Goodwill | | 25,893 | | | 977 | | | 26,870 | | |
Other assets and liabilities, net | | 2,112 | | | 495 | | | 2,607 | | |
Net assets acquired | | $ | 41,955 | | | $ | (9,578) | | | $ | 32,377 | | |
(1)During the third quarter of 2022, measurement period adjustments were recorded based on information obtained about facts and circumstances that existed as of the intangible assets acquired in the Mergers and related amortization periods are as follows (in thousands, except years):
|
| | | | | | |
| | Valuation as of October 19, 2015 | | Amortization Period in Years |
Customer relationships | | $ | 464,019 |
| | 16-18 |
Developed technology | | 211,091 |
| | 9-15 |
Sorin trade-name | | 13,619 |
| | 4 |
| | $ | 688,729 |
| | |
The valuation of Other long-term liabilities acquired in the Mergers included $2.7 million of unfavorable leases with weighted average remaining lives of 5 years.acquisition date.
Goodwill was calculated as the excess of the consideration transferred over the net assets recognized and represents growth opportunities and expected cost synergies of the combined company. The Mergers were expected to provide both short-term and long-term revenue enhancements and cost savings and synergy opportunities, increase the diversity of our business mix, and accelerate the entry into three emerging market opportunities in the areas of heart failure, sleep apnea and less invasive mitral valves. The Mergers were also expected to allow us to utilize and integrate certain Sorin technologies into its existing and future product lines for epilepsy and we expected our reporting units to benefit, directly or indirectly, from the synergies arising from the business combination, and as a result, we assigned the goodwill arising from the SorinALung acquisition, to CS, Neuromodulation and CRM. This assignment was made by taking into consideration market participant rates of return for each acquired reporting unit, CS and CRM, in order to assess the respective fair values. The remaining goodwill, allocated to Neuromodulation, which is the accounting acquirer’s existing business unit, was supported by the synergies deriving from the
Mergers. Goodwill recognized as a result of the acquisition is not deductible for tax purposes. Referpurposes, primarily represents the anticipated synergies between ALung and LivaNova’s ACS business. The assets acquired, including goodwill, are recognized in LivaNova’s ACS segment. The goodwill for the ACS reporting unit was fully impaired during the third quarter of 2022. Please refer to “Note 7. Goodwill and Intangible Assets” for further discussion and details of the balance of goodwill.details.
Contingent liabilities assumed includes $9.2 million related to uncertain tax positions. Contingent liabilities also included $3.4 million for contingent payments at fair value related to two acquisitions completed by Sorin prior to the closing of the Mergers. The contingent payments for one acquisition are based on achievement of sales targets by the acquiree through June 30, 2018 and the contingent payments for the second acquisition are based on sales of cardiopulmonary disposable products and heart-lung machines through 2019 of the acquiree.
The measurement period adjustments shown in the table above were recorded prior to September 30, 2016, and reflect changes in the estimated fair values of certain assets and liabilities, primarily related to deferred income taxes, as a result of new information on facts and circumstances that existed at the time of acquisition. Adjustments were made to deferred income taxes as a result of the allocation of fair value to the legal entities. As a consequence of such push-down, deferred income taxes were presented on a net basis by jurisdiction.
We recorded reductions or (increases) to the following expenses due to the measurement period adjustments (in thousands):
|
| | | | |
| | Year Ended December 31, 2016 |
Amortization of intangible assets | | $ | 1,844 |
|
Depreciation | | 2,790 |
|
Other costs | | (40 | ) |
Total before income tax effect | | 4,594 |
|
Income tax | | (3,756 | ) |
Net | | $ | 838 |
|
LivaNova’s consolidated financial statements for the transitional period April 25, 2015 to December 31, 2015, include Sorin’s results of operations from the acquisition date through December 31, 2015. Net sales and operating loss attributable to Sorin during this period were $200.1 million and $6.0 million, respectively. In relation to the Mergers, we incurred $42.1 million of transaction costs and $13.7 million of integration costs during the transitional period April 25, 2015 to December 31, 2015. The transaction costs primarily related to advisory, legal, and accounting fees are included in the merger and integration expenses line item in the consolidated statement of (loss) income. The integration costs are also included in the merger and integration expenses line on the consolidated statement of (loss) income.
Caisson Interventional, LLC Acquisition
On May 2, 2017, we acquired the remaining 51% equity interests in 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 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 consolidated statements of income (loss). |
We have recorded no adjustments to the preliminary purchase price allocation at fair value for the Caisson acquisition, as presented in the following table (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’ in the consolidated balance sheet as of December 31, 2017.
WeLivaNova recognized ALung acquisition-related expenses of approximately $1.3$5.1 million for legal and valuation expenses during the year ended December 31, 2017. Additionally,2022, within SG&A on the Company’s consolidated statements of income (loss).
The Company’s consolidated financial statements include the operating results of CaissonALung from the acquisition date. Separate post-acquisition operating results and pro forma financial information for this acquisition have not been presented as the period of May 2, 2017 through December 31, 2017 added no revenue and $20.1 million in expenses in our consolidated statement of (loss) income.effect was not material.
The ALung contingent consideration arrangementspayments are composed of potential cash paymentstriggered upon the achievement of certain regulatory milestones and a sales-based earnoutthresholds associated with sales of products covered by the purchase agreement.agreement and are estimated to occur during the years reflected in the table below. The sales-based earnout was valued using projected sales from ourLivaNova’s internal strategic plans. Both arrangements areplan and is a Level 3 fair value measurements and includemeasurement, which includes 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 |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
ALung Acquisition | | Fair value at May 2, 2022 | | Valuation Technique | | Unobservable Input | | Ranges |
Sales-based earnout | | $ | 16,791 | | | Monte Carlo simulation | | Risk-adjusted discount rate | | 7.0% - 8.4% |
| | | | | | Credit risk discount rate | | 6.4% - 8.0% |
| | | | | | Revenue volatility | | 25.7% |
| | | | | | Projected years of earnout | | 2023 - 2027 |
The following table providesALung contingent consideration arrangement states that, in the event that LivaNova ceases the operations of ALung, LivaNova would be subject to a one-time phase-out payment of $13.8 million. In January 2024, LivaNova announced the wind down of ACS, including ALung, as part of the 2024 Restructuring Plan. As a result, the ALung contingent consideration arrangement liability was adjusted to the phase-out payment amount of $13.8 million as of December 31, 2023. For 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):liabilities, refer to “Note 9. Fair Value Measurements.”
|
| | | | |
Balance at December 31, 2016 | | $ | 3,890 |
|
Purchase price - Caisson contingent consideration | | 31,688 |
|
Payments | | (1,803 | ) |
Changes in fair value | | 56 |
|
Effect of changes in foreign currency exchange rates | | 142 |
|
Balance at December 31, 2017 (1) | | $ | 33,973 |
|
| |
(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 9. Fair Value Measurements.” |
Note 4. Discontinued Operations5. Divestiture of Heart Valve Business
On November 20, 2017, weDecember 2, 2020, LivaNova entered into a letterPurchase Agreement with Mitral, a company incorporated under the laws of intent (“LOI”) to sell CRM to MicroPort Scientific Corporation for $190.0 million in cash. We expect to enter into the definitive acquisition agreement contemplatedLuxembourg and wholly-owned and controlled by the LOI following completion of the notification and consultation process with CRM’s employee works councils as requiredfunds advised by local laws. Completion of the transaction is subject to entry into the definitive acquisition agreement, receipt of relevant regulatory approvals, including fulfilling the requirements of the Hong Kong Stock Exchange’s Major Transactions requirements, and other customary closing conditions. We expect the transaction to close in the second quarter of 2018.
CRM develops, manufactures and markets productsGyrus Capital S.A., a Swiss private equity firm. The Purchase Agreement provided for the diagnosis, treatment and managementdivestiture of heart rhythm disorders and heart failures. CRM products include high-voltage defibrillators, cardiac resynchronization therapy devices and low-voltage pacemakers. CRM has approximately 900 employees, with operations in Clamart, France; Saluggia, Italy; and Santo Domingo, Dominican Republic.
We concluded that the salecertain of CRM represents a strategic shift in our business that will have a major effect on future operations and financial results. As a result, we classified the operating results of CRMLivaNova’s subsidiaries, as discontinued operations in our consolidated statements of operations. Additionally we tested the long-lived assets of CRM for impairment and recognized an impairment of tangible and intangible assets of $78.3 million, net of a $15.3 million tax benefit. The impairment is presented separatelywell as Impairment of discontinued operations, net of tax on the consolidated statements of (loss) income since the impairment is significant and resulted from the agreement to sell CRM. Thecertain other assets and liabilities relating to the Company’s Heart Valve business and site management operations conducted by the Company’s subsidiary LSM at the Company’s Saluggia campus for $64.1 million.
On April 9, 2021, LivaNova and Mitral entered into an Amended & Restated Purchase Agreement to, among other things, defer the closing of CRM are classified as held forthe sale and presented as assets (or liabilities)purchase of discontinued operations onLSM by up to two years and include or amend certain additional terms relating to such deferral, including certain amendments relating to the consolidated balance sheets at December 31, 2017potential hazardous substances provision of LSM and December 31, 2016.
the related expense reimbursement provisions. On April 7, 2023, Mitral provided notice to LivaNova, consistent with the terms of the Amended & Restated Purchase Agreement, that they would not exercise their right to purchase LSM.
The following table represents assetssale of the Heart Valve business closed on June 1, 2021. LivaNova received $45.5 million in 2021, and liabilitiesthe remaining deferred purchase price of CRM are classified as held for sale$9.5 million in 2022. Also, in 2022, LivaNova made a $4.8 million payment to Mitral upon finalizing the trade working capital and presented as assets and liabilities of discontinued operations in the consolidated balance sheets:
|
| | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
Accounts receivable, net | | $ | 64,684 |
| | $ | 62,474 |
|
Inventories | | 54,097 |
| | 50,472 |
|
Prepaid taxes | | 14,725 |
| | 10,038 |
|
Prepaid and other assets | | 3,498 |
| | 4,349 |
|
Property, plant and equipment, net | | 12,104 |
| | 20,134 |
|
Deferred tax assets, net | | 2,517 |
| | — |
|
Investments | | 6,098 |
| | 4,866 |
|
Intangible assets, net | | 92,966 |
| | 167,589 |
|
Assets of discontinued operations | | $ | 250,689 |
| | $ | 319,922 |
|
| | | | |
Accounts payable | | 26,501 |
| | 21,018 |
|
Accrued liabilities and other | | 7,669 |
| | 8,936 |
|
Income taxes payable | | 5,084 |
| | 3,959 |
|
Accrued employee compensation and benefits | | 30,753 |
| | 29,321 |
|
Deferred income taxes liability | | 8,068 |
| | 20,009 |
|
Liabilities of discontinued operations | | $ | 78,075 |
| | $ | 83,243 |
|
The following table represents the financial results of CRM presented as net loss from discontinued operations in the consolidated statements of (loss) income:
|
| | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period April 25, 2015 to December 31, 2015 |
Revenues | | $ | 245,171 |
| | $ | 249,067 |
| | $ | 52,470 |
|
Cost of sales | | 92,609 |
| | 104,168 |
| | 30,439 |
|
Gross profit | | 152,562 |
| | 144,899 |
| | 22,031 |
|
Selling, general and administrative expenses | | 105,831 |
| | 112,427 |
| | 22,155 |
|
Research and development | | 37,936 |
| | 39,987 |
| | 9,504 |
|
Merger and integration expenses | | 22 |
| | 160 |
| | 11 |
|
Restructuring expenses | | (1,617 | ) | | 18,566 |
| | 829 |
|
Amortization of intangibles | | 12,737 |
| | 14,476 |
| | 2,704 |
|
Impairment of tangible and intangible assets | | 93,574 |
| | — |
| | — |
|
Goodwill impairment | | — |
| | 18,348 |
| | — |
|
Total operating expenses | | 248,483 |
| | 203,964 |
| | 35,203 |
|
Operating loss from discontinued operations | | (95,921 | ) | | (59,065 | ) | | (13,172 | ) |
Foreign exchange and other (losses) gains | | (381 | ) | | 350 |
| | (111 | ) |
Loss from discontinued operations, before income tax | | (96,302 | ) | | (58,715 | ) | | (13,283 | ) |
Income tax (benefit) expense | | (21,635 | ) | | 2,015 |
| | 525 |
|
Losses from equity method investments | | (4,887 | ) | | (3,933 | ) | | (1,085 | ) |
Net loss from discontinued operations | | $ | (79,554 | ) | | $ | (64,663 | ) | | $ | (14,893 | ) |
Cash flows attributable to our discontinued operations are included in our consolidated statements of cash flows. For the years ended December 31, 2017 and December 31, 2016 and for the transitional period April 25, 2015 to December 31, 2015, CRM’s depreciation and amortization was $18.3 million, $21.8 million and $4.3 million, capital expenditures were $6.1 million, $3.8 million and $5.0 million and stock-based compensation expense was $1.4 million, $2.1 million and $0.3 million, respectively. Fiscal year 2017 income tax benefit includes $15.3 million of benefit recognized on the impairment of CRM.
indebtedness adjustments. During the year ended December 31, 2017 we invested $4.52021, LivaNova recognized a loss from the sale of the Heart Valve business of $1.9 million, in MicroPort Sorin CRM (Shanghai) Co. Ltd. which is held in ‘Assets of discontinued operations’included within other operating expenses on the consolidated balance sheets.statements of income (loss).
The future minimum lease paymentsIn conjunction with the sale, LivaNova entered into a transition services agreement to provide certain support services generally for operating leasesup to twelve months from the closing date of CRM as ofthe sale. These services include, among others, accounting, information technology, human resources, quality assurance, regulatory affairs, supply chain, clinical affairs and customer support. During the year ended December 31, 2017 are (in thousands):2021, LivaNova recognized income of $1.9 million, for providing these services. Income recognized related to the transition services agreements is recorded as a reduction to the related expenses in the associated expense line items in the consolidated statements of income (loss).
|
| | | | |
2018 | | $ | 6,107 |
|
2019 | | 5,545 |
|
2020 | | 4,523 |
|
2021 | | 4,089 |
|
2022 | | 4,077 |
|
Thereafter | | 20,388 |
|
Total | | $ | 44,729 |
|
Note 5.6. Restructuring Plans
We initiateLivaNova initiates restructuring plans to leverage economies of scale, streamline distribution and logistics, and strengthen operational and administrative effectiveness in order to reduce overall costs. Costs
During the fourth quarter of 2020, LivaNova initiated a reorganization plan to reduce the Company’s cost structure. LivaNova incurred restructuring expense under the 2020 Restructuring Plan of $9.7 million during 2021, primarily associated with these Plans were reported asseverance costs for 27 employees terminated during 2021 and lease abandonment costs. The reorganization plan was completed during 2022.
During the second quarter of 2022, management committed to implement a cost-optimization and cost reduction program to adapt to current economic conditions, which included a workforce reduction to be completed by mid-2023. LivaNova recognized restructuring expenses inexpense under the operating results2022 Restructuring Plan of our consolidated statement of (loss) income.
Our 2015$0.9 million and 2016 Reorganization Plans (the “Plans”) were initiated October 2015$6.6 million during the years ended December 31, 2023 and March 2016, respectively, in conjunction2022, respectively. The total estimated restructuring costs associated with the completionplan were approximately $10.0 million including employee termination benefits, consulting fees and contract termination costs.
On January 5, 2024, the Board of Directors of LivaNova PLC approved the Mergers.2024 Restructuring Plan to enhance the Company’s focus on its core Cardiopulmonary and Neuromodulation segments. The Plans includemain component of this plan is to wind down the closureACS segment, which the Company anticipates will be substantially complete by the end of 2024. LivaNova recognized restructuring expense under the R&D facility2024 Restructuring Plan of $0.1 million in Meylan, Franceother operating expenses, and consolidation$12.6 million for inventory obsolescence in cost of sales on its research and development (“R&D”) capabilities into the Clamart, France facility. In addition,consolidated statements of income (loss) during the year ended December 31, 2016, we initiated2023. Additionally, the Company determined that it was more likely than not that the carrying amounts associated with the ACS segment, including the long-lived assets (asset group), may not be recoverable. This was determined to be a plan to exit the Costa Rica manufacturing operation and transfer its operations to Houston, Texas. We completed the exit of Costa Ricatriggering event occurring in the first halffourth quarter of 2017 and we plan to complete the 2015 and 2016 Reorganization Plans in the first half of 2018.
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 recorded2023 requiring an impairment assessment, based on certain factors, including the results of an updated long-term financial outlook for the ACS segment. As such, LivaNova recorded impairments of the building and equipment of $5.4 million and accrued $0.5 million of additional costs, primarily related to employee severance,following long-lived assets during the year ended December 31, 2017. 2023, included within impairment of long-lived assets on its consolidated statements of income (loss) (in thousands):
| | | | | | | | |
| | 2023 |
Intangible assets: | | |
Developed technology | | $ | 78,067 | |
Trade names | | 7,117 | |
Property, plant and equipment | | 3,894 | |
Operating lease assets | | 896 | |
Total impairment of long-lived assets | | $ | 89,974 | |
In addition,connection with the remaining carrying value2024 Restructuring Plan, LivaNova expects to incur pre-tax restructuring charges in the range of approximately $15 million to $20 million. The anticipated charges are comprised of approximately $10 million to $12 million in severance expenses and retention bonuses and approximately $5 million to $8 million in other expenses, including lease termination, facilities remediation, and asset disposal expenses. LivaNova expects the majority of the land, building and equipment was reclassifiedseverance expenses to ‘Assets held for sale’ in March 2017, with a balance of $13.6 million as of December 31, 2017be incurred in the consolidated balance sheet. In December, 2017, we executed a letterfirst half of intent for2024. Retention bonuses will be earned over the saleperiod of service, which is expected to be over the Suzhou facility.
We estimate thatfull year of 2024. All future cash payments related to these Plans will result in a net reduction of approximately 324 personnel of which 314 have occurred as of December 31, 2017.restructuring charges are expected to be paid out during 2024. These estimates are subject to change.
The following table presents a reconciliation of the Reorganization Plans’beginning and ending balance of the accruals inventory obsolescence and other reserves recorded in connection with LivaNova’s restructuring plans included within accrued liabilities and other on the Reorganization Plans includingconsolidated balance sheets for the balancesyears ended December 31, 2023, 2022 and activity related to the CRM Business Franchise,2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | Employee Severance and Termination Costs | | Other | | Total | |
As of December 31, 2020 | | $ | 5,749 | | | $ | 546 | | | $ | 6,295 | | |
Charges | | 7,963 | | | 1,750 | | | 9,713 | | |
Cash payments | | (12,876) | | | (2,296) | | | (15,172) | | |
As of December 31, 2021 | | 836 | | | — | | | 836 | | |
Charges | | 6,611 | | | — | | | 6,611 | | |
Cash payments | | (5,402) | | | — | | | (5,402) | | |
As of December 31, 2022 | | 2,045 | | | — | | | 2,045 | | |
Charges | | 956 | | | — | | | 956 | | |
Cash payments | | (2,090) | | | — | | | (2,090) | | |
As of December 31, 2023 (1) | | $ | 911 | | | $ | — | | | $ | 911 | | |
| | | | | | | |
| | | | | | | |
(1)Cumulative restructuring expense, inclusive of discontinued operations, since the merger of Cyberonics and Sorin in October 2015 totaled $136.4 million as of December 31, 2023.
|
| | | | | | | | | | | | |
| | Employee Severance and Other Termination Costs | | Other | | Total |
Balance at April 24, 2015 | | $ | — |
| | $ | — |
| | $ | — |
|
Charges | | 11,323 |
| | — |
| | 11,323 |
|
Cash payments | | (4,404 | ) | | — |
| | (4,404 | ) |
Balance at December 31, 2015 | | 6,919 |
| | — |
| | 6,919 |
|
Charges | | 46,678 |
| | 9,265 |
| | 55,943 |
|
Cash payments / write-downs | | (32,505 | ) | | (6,209 | ) | | (38,714 | ) |
Balance at December 31, 2016 | | $ | 21,092 |
| | $ | 3,056 |
| | $ | 24,148 |
|
Charges | | 10,076 |
| | 5,363 |
| | 15,439 |
|
Cash payments / write-downs | | (27,279 | ) | | (5,794 | ) | | (33,073 | ) |
Balance at December 31, 2017 | | $ | 3,889 |
| | $ | 2,625 |
| | $ | 6,514 |
|
The following table presents restructuring expense by reportable segment with discontinued operations includedfor the years ended December 31, 2023, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
Cardiopulmonary | | $ | (55) | | | $ | 697 | | | $ | 2,844 | |
Neuromodulation | | 504 | | | 2,651 | | | 1,531 | |
Advanced Circulatory Support | | 27 | | | 1,999 | | | — | |
Other (1) | | 480 | | | 1,264 | | | 5,338 | |
Total (2) | | $ | 956 | | | $ | 6,611 | | | $ | 9,713 | |
|
| | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period April 25, 2015 to December 31, 2015 |
Cardiac Surgery (1) | | $ | 8,819 |
| | $ | 11,042 |
| | $ | 1,211 |
|
Neuromodulation (2) | | 561 |
| | 14,769 |
| | 1,079 |
|
Other | | 7,676 |
| | 11,566 |
| | 8,204 |
|
Restructuring expense from continuing operations | | 17,056 |
| | 37,377 |
| | 10,494 |
|
Discontinued operations | | (1,617 | ) | | 18,566 |
| | 829 |
|
Total | | $ | 15,439 |
| | $ | 55,943 |
| | $ | 11,323 |
|
| |
(1) | Cardiac Surgery restructuring expense for the year ended December 31, 2017 included building and equipment impairment of $5.4 million related to the Suzhou, China facility exit plan. |
| |
(2) | Neuromodulation restructuring expense for the year ended December 31, 2016 included building and equipment impairment of $5.7 million related to the Costa Rica exit plan. |
(1)Other primarily includes restructuring expense not allocated to segments. Note 6. Product Remediation Liability(2)Restructuring expense is included within other operating expenses on the consolidated statements of income (loss).
In December 2015, we received an FDA Warning Letter (the “Warning Letter”) alleging certain violations of FDA regulations applicable to medical device manufacturing at our Munich, Germany and Arvada, Colorado facilities. On October 13, 2016 the Centers for Disease Control and Prevention (“CDC”) and FDA separately released safety notifications regarding the 3T Heater Cooler devices in response to which the Company issued a Field Safety Notice Update for U.S. users of 3T Heater Cooler devices to proactively and voluntarily contact facilities to facilitate implementation of the CDC and FDA recommendations.
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. 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. 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. 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.
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 2018 and beyond until all devices are upgraded. 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 | | 2,452 |
|
Remediation activity | | (11,283 | ) |
Effect of changes in foreign currency exchange rates | | 2,890 |
|
Balance at December 31, 2017 (1) | | $ | 27,546 |
|
| |
(1) | At December 31, 2017, the product remediation liability is included in ‘Accrued liabilities and other’ at $16.8 million and ‘Other long-term liabilities’ at $10.7 million, in the consolidated balance sheet. |
For further information, please refer to “Note 12. Commitments and Contingencies.” At this stage, we have recognized no liability with respect to any lawsuits related to the 3T Heater Cooler and our related legal costs are expensed as incurred.
Note 7. Goodwill and Intangible Assets
Detail ofThe following table presents LivaNova’s finite-lived and indefinite-lived intangible assets as of December 31, 2023 and 2022 (in thousands):
|
| | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
Finite-lived intangible assets: | | | | |
Customer relationships | | $ | 327,496 |
| | $ | 304,056 |
|
Developed technology | | 179,234 |
| | 160,775 |
|
Trademarks and trade names | | 14,391 |
| | 12,649 |
|
Other intangible assets | | 181 |
| | 1,177 |
|
Total | | 521,302 |
| | 478,657 |
|
Accumulated amortization | | 74,905 |
| | 37,049 |
|
Net | | $ | 446,397 |
| | $ | 441,608 |
|
Indefinite-lived intangible assets: | | | | |
In-process R&D | | $ | 89,000 |
| | $ | — |
|
Goodwill | | 784,242 |
| | 691,712 |
|
Total | | $ | 873,242 |
| | $ | 691,712 |
|
During the year ended December 31, 2017, we recognized $89.0 million of in-process R&D related to the acquisition of Caisson. | | | | | | | | | | | | | | |
| | 2023 | | 2022 |
Finite-lived intangible assets: | | | | |
Customer relationships | | $ | 187,196 | | | $ | 184,397 | |
Developed technology | | 103,490 | | | 217,205 | |
Trade names | | 13,280 | | | 24,368 | |
Other intangible assets | | 773 | | | 756 | |
Total gross finite-lived intangible assets | | 304,739 | | | 426,726 | |
Accumulated amortization - Customer relationships | | 84,647 | | | 72,820 | |
Accumulated amortization - Developed technology | | 56,921 | | | 80,219 | |
Accumulated amortization - Trade names | | 13,280 | | | 16,483 | |
Accumulated amortization - Other intangible assets | | 719 | | | 651 | |
Total accumulated amortization | | 155,567 | | | 170,173 | |
Net finite-lived intangible assets | | $ | 149,172 | | | $ | 256,553 | |
Indefinite-lived intangible assets: | | | | |
IPR&D | | $ | 112,006 | | | $ | 112,006 | |
Goodwill | | 782,941 | | | 768,787 | |
Total indefinite-lived intangible assets | | $ | 894,947 | | | $ | 880,793 | |
The following table presents the amortization periods for ourLivaNova’s finite-lived intangible assets as of December 31, 2017: 2023:
| | | | Minimum Life in years | | Maximum Life in years |
| | Minimum Life in years | | | | Minimum Life in years | | Maximum Life in years |
Customer relationships | | 16 | | 18 | Customer relationships | | 8 | | 18 |
Developed technology | | 9 | | 15 | Developed technology | | 14 | | 17 |
Trademarks and trade names | | 4 | | 4 |
Other intangible assets | | 5 | | 5 |
The following table presents estimated future amortization expense based on ourLivaNova’s finite-lived intangible assets atas of December 31, 20172023 (in thousands):
| | | | | | | | |
2024 | | $ | 17,566 | |
2025 | | 17,566 | |
2026 | | 17,566 | |
2027 | | 17,114 | |
2028 | | 17,114 | |
Thereafter | | 62,246 | |
Total | | $ | 149,172 | |
|
| | | | |
2018 | | $ | 34,720 |
|
2019 | | 34,739 |
|
2020 | | 34,761 |
|
2021 | | 35,019 |
|
2022 | | 35,019 |
|
Thereafter | | 272,139 |
|
Total | | $ | 446,397 |
|
In connection with the 2024 Restructuring Plan, as previously discussed in “Note 6. Restructuring,” LivaNova recorded impairments of the ACS developed technology and trade names intangible assets of $78.1 million and $7.1 million, respectively, during the year ended December 31, 2023, which is included within impairment of long-lived assets on the consolidated statements of income (loss).
Goodwill and Goodwill Impairment
Our business consists of two operating Segments (which are our reporting units for goodwill testing): Neuromodulation and Cardiac Surgery.
The following table presents the changes in the carrying amount of goodwill by Segmentreportable segment for the years ended December 31, 2023, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Cardiopulmonary | | Neuromodulation | | Advanced Circulatory Support | | Total | |
As of December 31, 2020 | | $ | 421,038 | | | $ | 398,754 | | | $ | 102,526 | | | $ | 922,318 | | |
Foreign currency adjustments | | (22,793) | | | — | | | — | | | (22,793) | | |
As of December 31, 2021 | | 398,245 | | | 398,754 | | | 102,526 | | | 899,525 | | |
Goodwill as a result of acquisition (1) | | — | | | — | | | 25,893 | | | 25,893 | | |
Measurement period adjustments | | — | | | — | | | 977 | | | 977 | | |
Impairment | | — | | | — | | | (129,396) | | | (129,396) | | |
Foreign currency adjustments | | (28,212) | | | — | | | — | | | (28,212) | | |
As of December 31, 2022 | | 370,033 | | | 398,754 | | | — | | | 768,787 | | |
Foreign currency adjustments | | 14,154 | | | — | | | — | | | 14,154 | | |
As of December 31, 2023 | | $ | 384,187 | | | $ | 398,754 | | | $ | — | | | $ | 782,941 | | |
|
| | | | | | | | | | | | | | | | |
| | Cardiac Surgery | | Neuromodulation | | Other | | Total |
December 31, 2016 | | $ | 375,769 |
| | $ | 315,943 |
| | $ | — |
| | $ | 691,712 |
|
Goodwill as a result of acquisitions (1) | | — |
| | — |
| | 42,417 |
| | 42,417 |
|
Foreign currency adjustments | | 50,113 |
| | — |
| | — |
| | 50,113 |
|
December 31, 2017 | | $ | 425,882 |
| | $ | 315,943 |
| | $ | 42,417 |
| | $ | 784,242 |
|
(1)Refer to “Note 4. Business Combinations” for additional information. | |
(1) | Goodwill recognized during the year ended 2017 was the result of the Caisson acquisition. Refer to “Note 3. Business Combinations.” |
WeAs part of LivaNova’s third-quarter 2022 goodwill impairment assessment, the Company considered that revenue for its ACS reporting unit during the nine months ended September 30, 2022 had declined by approximately 29% compared to the prior year period, primarily as a result of a reduction in severe COVID-19 cases, hospital-related challenges and product mix. As a result, the Company lowered its future revenue projections for the ACS reporting unit. Based on these circumstances, LivaNova concluded it was more likely than not that the goodwill of LivaNova’s ACS reporting unit was impaired and performed a quantitative assessment of the goodwill as of September 30, 2022, using management’s then current estimate of future cash flows. Based on the valuation performed, LivaNova determined that the fair value of the ACS reporting unit was less than the carrying value and recognized a goodwill impairment of $129.4 million in LivaNova’s consolidated statement of income (loss) during the year ended December 31, 2022.
LivaNova performed a quantitative assessment for ourits Cardiopulmonary and Neuromodulation and Cardiac Surgery reporting units as of October 1, 2017. We2023. The quantitative impairment assessment was performed using management’s current estimate of future cash flows. LivaNova concluded that the fair value of its Cardiopulmonary and Neuromodulation and Cardiac Surgery was substantially in excess ofreporting units exceeded the carrying value of the respective reporting units as evidenced by the estimated fair value of the Neuromodulation23% and Cardiac Surgery reporting units calculated for the purpose of reconciling the fair value of our reporting units to our market capitalization.528%, respectively. Therefore, weLivaNova concluded that it remains more-likely thanits Cardiopulmonary and Neuromodulation reporting units’ goodwill were not thatimpaired on the NeuromodulationOctober 1, 2023 test date.
Cumulative goodwill impairments from continuing operations since the merger of Cyberonics and Cardiac Surgery reporting units goodwill was not impaired.Sorin in October 2015 totaled $193.1 million as of December 31, 2023.
Note 8. Investments
Cost MethodThe following table presents the carrying value of LivaNova’s investments in equity securities of non-consolidated affiliates without readily determinable fair values and an investment accounted for under the equity method. Investments,
Our excluding the equity method investment, are reported at cost methodminus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. The below equity investments are included in Investments ininvestments on the consolidated balance sheets as of December 31, 2023 and consist of our equity positions in the following privately-held companies2022 (in thousands):
|
| | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
Respicardia Inc. (1) | | $ | 17,422 |
| | $ | 17,518 |
|
ImThera Medical, Inc. (2) | | 12,900 |
| | 12,000 |
|
Rainbow Medical Ltd. (3) | | 1,172 |
| | 3,733 |
|
MD Start II | | 1,199 |
| | 526 |
|
| | $ | 32,693 |
| | $ | 33,777 |
|
| |
(1) | 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 by transvenously stimulating the phrenic nerve. We have a loan outstanding to Respicardia with a carrying amount of $0.4 million, as of December 31, 2017, which is included in ‘Prepaid expenses and other current assets’ on the consolidated balance sheet. During the year ended December 31, 2017, we converted a loan to Respicardia of $1.5 million to equity, we recorded an impairment of $5.5 million and we recorded an FX gain of $3.9 million, Refer to the paragraph below for further details regarding the impairment. |
| |
(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 December 31, 2017 with a carrying amount of $1.0 million, which is included in ‘Other assets’ in the consolidated balance sheet. On January 16, 2018 we acquired the remaining outstanding interests in ImThera. Refer to “Note 22. Subsequent Events” for a discussion of our acquisition of ImThera. |
| |
(3) | Rainbow Medical (“Rainbow Medical”) is a private Israeli venture capital company that seeds and grows companies developing medical devices in a diverse range of medical fields. During the fourth quarter of 2017, we impaired our investment in Rainbow Medical. Refer to the paragraph below for further details. |
Respicardia Impairment | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | |
ShiraTronics, Inc. | | $ | 5,750 | | | $ | 5,000 | | |
Cadence Neuroscience, Inc. (1) | | 5,000 | | | — | | |
Noctrix Health, Inc. | | 3,159 | | | 3,159 | | |
Ceribell, Inc. | | 3,000 | | | 3,000 | | |
Rainbow Medical Ltd. | | 1,084 | | | 1,047 | | |
Highlife S.A.S. | | 1,049 | | | 1,013 | | |
MD Start II | | 865 | | | 1,069 | | |
| | 19,907 | | | 14,288 | | |
Equity method investment (2) | | 2,936 | | | 1,978 | | |
| | $ | 22,843 | | | $ | 16,266 | | |
We recognized an impairment(1)During the first quarter of our cost-method investment2023, LivaNova invested in Respicardia duringCadence Neuroscience, Inc., a privately held medical device company focusing on advancements in neuromodulation to detect specific signals from the year endedbrain and deliver electrical stimulation to modify the activity of neural circuits.
(2)As of December 31, 2017. Terms2023 and 2022, LivaNova had commitments to fund follow-on investments up to approximately €1.9 million and €3.0 million (approximately $2.0 million and $3.2 million as of an additional round of financing with a new strategic investor 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 using the income approach. The estimated fair value of our investment was
below our carrying value by $5.5 million. This impairment was included in ‘Impairment of cost-method investments’ in the consolidated statement of (loss) income.
Rainbow Medical Impairment
We recognized an impairment of our cost-method investment in Rainbow Medical during the year ended December 31, 2017. An additional round of financing, which included a new investor, indicated that the carrying value of our aggregate investment might not be recoverable2023 and that the decrease in value of our aggregate investment was other than temporary. We, therefore, estimated the fair value of our investment using the income approach. The estimated fair value of our aggregate investment was below our carrying value by $3.0 million. This aggregate impairment was included in ‘Impairment of investments’ in the consolidated statement of (loss) income.2022, respectively) based on cash calls.
Istituto Europeo di Oncologia S.R.L Sale
During the year ended December 31, 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 consolidated statement of (loss) income.
Equity Method Investments
Our equity method investments are included in Investments in the consolidated balance sheets and consist of our equity position in the following entities (in thousands, except for percent ownership):
|
| | | | | | | | | | | | |
| | % Ownership (1) | | December 31, 2017 | | December 31, 2016 | |
Highlife S.A.S. (2) | | 25 | % | | $ | 1,782 |
| | $ | 6,009 |
| |
Caisson Interventional LLC (3) | | | | — |
| | 16,424 |
| |
Other | | | | 17 |
| | 16 |
| |
Total | | | | $ | 1,799 |
| | $ | 22,449 |
| |
| |
(1) | Ownership percentage as of December 31, 2017. |
| |
(2) | 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 year ended December 31, 2017, we recognized an impairment of our investment in, and notes receivable from, Highlife. Refer to the paragraph below for further details. In addition, due to additional investments by third parties and the conversion of our note receivable to equity our equity interest fell to 25% from 38% during the year ended December 31, 2017. |
| |
(3) | On May 2, 2017, we acquired the remaining 51% equity interests in Caisson Interventional LLC (“Caisson”), and we began consolidating the results of Caisson as of the acquisition date. Refer to “Note 3. Business Combinations” 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 year ended December 31, 2017. Certain factors, including a revision in our investment strategy and a new strategic investor, 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 consolidated statements of income (loss).
Note 9. Fair Value Measurements
We review theLivaNova reviews its fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. There were no transfers between Level 1, Level 2 or Level 3 during the yearyears ended December 31, 20172023, 2022 or December 31, 2016.2021.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table providestables provide information by level for assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | Fair Value Measurements Using Inputs Considered as: |
| | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | |
| | | | | | | | |
Derivative assets - capped call derivatives | | $ | 38,496 | | | $ | — | | | $ | — | | | $ | 38,496 | |
Convertible notes receivable | | 275 | | | — | | | — | | | 275 | |
| | $ | 38,771 | | | $ | — | | | $ | — | | | $ | 38,771 | |
| | | | | | | | |
Liabilities | | | | | | | | |
Derivative liabilities - freestanding instruments (FX) | | $ | 3,883 | | | $ | — | | | $ | 3,883 | | | $ | — | |
Derivative liabilities - embedded exchange feature | | 45,569 | | | — | | | — | | | 45,569 | |
Contingent consideration arrangements | | 94,652 | | | — | | | — | | | 94,652 | |
| | $ | 144,104 | | | $ | — | | | $ | 3,883 | | | $ | 140,221 | |
|
| | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using Inputs Considered as: |
| | Fair Value as of December 31, 2017 | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | |
Derivative assets - freestanding instruments (foreign currency exchange rate "FX") | | $ | 519 |
| | $ | — |
| | $ | 519 |
| | $ | — |
|
Total assets | | $ | 519 |
| | $ | — |
| | $ | 519 |
| | $ | — |
|
| | | | | | | | |
Liabilities: | | | | | | | | |
Derivative liabilities - designated as cash flow hedges (FX) | | $ | 460 |
| | $ | — |
| | $ | 460 |
| | $ | — |
|
Derivative liabilities - designated as cash flow hedges (interest rate swaps) | | 1,585 |
| | — |
| | 1,585 |
| | — |
|
Contingent consideration | | 33,973 |
| | — |
| | — |
| | 33,973 |
|
Total liabilities | | $ | 36,018 |
| | $ | — |
| | $ | 2,045 |
| | $ | 33,973 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | Fair Value Measurements Using Inputs Considered as: |
| | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | |
Derivative assets - designated as cash flow hedges (interest rate swaps) | | $ | 1,333 | | | $ | — | | | $ | 1,333 | | | $ | — | |
Derivative assets - capped call derivatives | | 54,393 | | | — | | | — | | | 54,393 | |
Convertible notes receivable | | 285 | | | — | | | — | | | 285 | |
| | $ | 56,011 | | | $ | — | | | $ | 1,333 | | | $ | 54,678 | |
| | | | | | | | |
Liabilities | | | | | | | | |
Derivative liabilities - freestanding instruments (FX) | | $ | 5,886 | | | $ | — | | | $ | 5,886 | | | $ | — | |
Derivative liabilities - embedded exchange feature | | 85,675 | | | — | | | — | | | 85,675 | |
Contingent consideration arrangements | | 85,292 | | | — | | | — | | | 85,292 | |
| | $ | 176,853 | | | $ | — | | | $ | 5,886 | | | $ | 170,967 | |
|
| | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using Inputs Considered as: |
| | Fair Value as of 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 |
| | — |
|
Total assets | | $ | 8,269 |
| | $ | — |
| | $ | 8,269 |
| | $ | — |
|
| | | | | | | | |
Liabilities: | | | | | | | | |
Derivative liabilities - designated as cash flow hedges (interest rate swaps)
| | $ | 2,334 |
| | $ | — |
| | $ | 2,334 |
| | $ | — |
|
Contingent consideration | | 3,890 |
| | — |
| | — |
| | 3,890 |
|
Total liabilities | | $ | 6,224 |
| | $ | — |
| | $ | 2,334 |
| | $ | 3,890 |
|
OurThe following table provides a reconciliation of the beginning and ending balances of LivaNova’s recurring fair value measurements, using significant unobservable inputs (level(Level 3), relate solely for the years ended December 31, 2023, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Capped Call Derivative Asset | | Convertible Notes Receivable | | Embedded Exchange Feature Derivative Liability | | Contingent Consideration Liability Arrangements |
As of December 31, 2021 | | $ | 106,629 | | | $ | 2,767 | | | $ | 181,700 | | | $ | 98,382 | |
Additions | | — | | | — | | | — | | | 26,369 | |
Utilized as business combination consideration | | — | | | (2,495) | | | — | | | — | |
Measurement period adjustments (1) | | — | | | — | | | — | | | (9,578) | |
Changes in fair value (2) (3) (4) | | (52,236) | | | 13 | | | (96,025) | | | (29,881) | |
As of December 31, 2022 | | 54,393 | | | 285 | | | 85,675 | | | 85,292 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Changes in fair value (2) (3) | | (15,897) | | | (10) | | | (40,106) | | | 9,360 | |
| | | | | | | | |
As of December 31, 2023 | | 38,496 | | | 275 | | | 45,569 | | | 94,652 | |
Less current portion at December 31, 2023 | | — | | | — | | | — | | | 13,750 | |
Long-term portion at December 31, 2023 | | $ | 38,496 | | | $ | 275 | | | $ | 45,569 | | | $ | 80,902 | |
(1)For further details refer to our“Note 4. Business Combinations.”
(2)During the year ended December 31, 2023, the contingent consideration liability. Referchange in fair value resulted in an increase of $3.8 million recorded to “Note 3. Business Combinations” forcost of sales and an increase of $5.6 million recorded to R&D. During the year ended December 31, 2022, the contingent consideration change in fair value resulted in a discussiondecrease of the changes$10.5 million recorded to cost of sales and a decrease of $19.4 million recorded to R&D.
(3)Changes in the fair value of ourthe embedded exchange feature derivative liability and capped call derivative asset are recognized in foreign exchange and other income/(expense) in the consolidated statements of income (loss). See the below section titled “Embedded Exchange Feature and Capped Call Derivatives” for further information on the changes in fair value as it relates to the embedded exchange feature and capped call derivatives.
(4)The decrease in fair value associated with contingent consideration liability.arrangements during the year ended December 31, 2022 was primarily related to the change in (i) the discount rates due to increasing interest rates, (ii) the probability of the regulatory milestone-based payment associated with the acquisition of TandemLife and (iii) the timing of projected achievement of a certain regulatory milestone and timing of sales-based earnout payments associated with the acquisition of ImThera.
Embedded Exchange Feature and Capped Call Derivatives
In June 2020, the Company issued $287.5 million in Notes and entered into related capped call transactions. The Notes include an embedded exchange feature that is bifurcated from the Notes. Please refer to “Note 10. Financing Arrangements” for further details. The embedded exchange feature derivative is measured at fair value using a binomial lattice model and estimated discounted cash flows that utilize observable and unobservable market data. The capped call derivative is measured at fair value
using the Black-Scholes model utilizing observable and unobservable market data, including stock price, remaining contractual term, expected volatility, risk-free interest rate and expected dividend yield, as applicable.
The embedded exchange feature and capped call derivatives are classified as Level 3 because the Company uses historical volatility and implied volatility from actual options traded to determine expected stock price volatility, an unobservable input that is significant to the valuation. In general, an increase in LivaNova’s stock price or stock price volatility would increase the fair value of the embedded exchange feature and capped call derivatives which would result in an increase in expense. As the remaining time to the expiration of the derivatives decreases, the fair value of the derivatives decreases. The future impact of the derivatives on net income depends on how significant inputs such as stock price, stock price volatility and time to the expiration of the derivatives change in relation to other inputs. Changes in the fair value of the embedded exchange feature and capped call derivatives are recognized in foreign exchange and other income/(expense) in the consolidated statements of income (loss).
The fair value of the embedded exchange feature derivative liability and the capped call derivative assets was $45.6 million and $38.5 million, respectively, as of December 31, 2023, and the stock price volatility was 38%. As of December 31, 2023, a 10% lower volatility, holding other inputs constant, would reduce the fair value for the embedded exchange feature derivative liability by $13.4 million, and a 10% higher volatility, holding other inputs constant, would increase the fair value by $13.3 million. As of December 31, 2023, a 10% lower volatility, holding other inputs constant, would decrease the fair value of the capped call derivatives by $9.1 million, and a 10% higher volatility, holding other inputs constant, would increase the fair value by $4.8 million.
Contingent Consideration Arrangements
The following table presents the fair value of LivaNova’s Level 3 contingent consideration arrangements by acquisition as of December 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | |
| | 2023 | | 2022 |
ImThera | | $ | 80,902 | | | $ | 69,389 | |
ALung | | 13,750 | | | 15,903 | |
| | | | |
| | $ | 94,652 | | | $ | 85,292 | |
The ImThera business combination involved contingent consideration arrangements composed of potential cash payments upon the achievement of a certain regulatory milestone and a sales-based earnout associated with sales of products. The sales-based earnouts are valued using projected sales from LivaNova’s internal strategic plan. These arrangements are Level 3 fair value measurements and include the following significant unobservable inputs as of December 31, 2023:
| | | | | | | | | | | | | | | | | | | | |
ImThera Acquisition | | Valuation Technique | | Unobservable Input | | Inputs |
Regulatory milestone-based payment | | Discounted cash flow | | Discount rate | | 7.2% |
| | | | Probability of payment | | 85% |
| | | | Projected payment year | | 2026 |
| | | | | | |
Sales-based earnout | | Monte Carlo simulation | | Risk-adjusted discount rate | | 13.6% - 14.0% |
| | | | Credit risk discount rate | | 7.4% - 7.9% |
| | | | Revenue volatility | | 30.8% |
| | | | Probability of payment | | 85% |
| | | | Projected years of earnout | | 2026 - 2029 |
The ALung business combination involved a contingent consideration arrangement composed of potential cash payments upon the achievement of certain sales-based thresholds associated with sales of products. The ALung contingent consideration arrangement states that, in the event that LivaNova ceases the operations of ALung, LivaNova would be subject to a one-time phase-out payment of $13.8 million. In January 2024, LivaNova announced the wind down of ACS, including ALung, as part of the 2024 Restructuring Plan. As a result, the ALung contingent consideration arrangement liability was adjusted to the phase-out payment amount of $13.8 million as of December 31, 2023.
The TandemLife business combination involved a contingent consideration arrangement composed of potential cash payments upon the achievement of certain regulatory milestones. The probability of payment for the final regulatory milestone was reduced to 0% during the year ended December 31, 2022.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
OurLivaNova’s investments in equity securities of non-consolidated affiliates without readily determinable fair values are reported at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment in entities accounted for underof the cost-method and the equity method have no quoted market prices. Thesesame issuer. LivaNova’s investments and ourin non-financial assets such as:as goodwill, intangible assets, and PP&E are measured at fair value if there is an indication of impairment and recorded at fair value only when an impairment is recognized. We classifyLivaNova classifies the measurement input for these assets as Level 3 inputs within the fair value hierarchy. Refer to “Note 8. Investments” for further information.
Other
The carrying values of ourLivaNova’s cash, and cash equivalents and restricted cash, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to the short-term nature of these items.
The carrying value of ourLivaNova’s long-term debt including the short-termcurrent portion as of December 31, 2017,2023 and 2022 was $87.8$586.0 million which we believeand $539.0 million, respectively. The fair value of the Notes as of December 31, 2023 and 2022 was $314.4 million and $328.1 million, respectively. For all other long-term debt obligations, LivaNova believes the carrying value approximates fair value.
Note 10. Financing Arrangements
The following table presents the remaining outstanding principal amountamounts of LivaNova’s long-term debt facilities as of December 31, 2023 and 2022 (in thousands, except interest rates):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | Maturity | | Interest Rate |
Term Facilities | | $ | 328,459 | | | $ | 289,294 | | | July 2027 | | 9.02% |
2020 Cash Exchangeable Senior Notes | | 255,500 | | | 239,568 | | | December 2025 | | 3.00% |
Bank of America, US | | 1,500 | | | 1,500 | | | January 2025 | | 8.09% |
Bank of America Merrill Lynch Banco Múltiplo S.A. | | — | | | 6,462 | | | N/A | | N/A |
Mediocredito Italiano | | — | | | 1,601 | | | N/A | | N/A |
Other | | 568 | | | 534 | | | | | |
Total long-term facilities | | 586,027 | | | 538,959 | | | | | |
Less current portion of long-term debt | | 17,484 | | | 20,892 | | | | | |
Total long-term debt obligations | | $ | 568,543 | | | $ | 518,067 | | | | | |
The following table presents the contractual annual principal maturities of LivaNova’s long-term debt facilities as of December 31, 2023 (in thousands):
| | | | | | | | |
2024 | | $ | 17,484 | |
2025 | | 311,029 | |
2026 | | 30,625 | |
2027 | | 265,313 | |
2028 | | — | |
Thereafter | | 338 | |
Total payments | | 624,789 | |
Less: Debt issuance costs | | (38,762) | |
Total long-term facilities | | $ | 586,027 | |
|
| | | | | | | | | | | | | |
| | Principal Amount at December 31, 2017 | | Principal Amount at December 31, 2016 | | Maturity | | Effective Interest Rate |
European Investment Bank (1) | | $ | 69,893 |
| | $ | 78,987 |
| | June 2021 | | 0.95 | % |
Mediocredito Italiano (2) | | 9,118 |
| | 7,276 |
| | December 2023 | | 0.50% - 3.10% |
|
Banca del Mezzogiorno (3) | | 5,499 |
| | 6,747 |
| | December 2019 | | 0.50% - 3.15% |
|
Bpifrance (ex-Oséo) | | 1,450 |
| | 1,909 |
| | October 2019 | | 2.58 | % |
Region Wallonne | | 845 |
| | 798 |
| | December 2023 and June 2033 | | 0.00% - 2.45% |
|
Mediocredito Italiano - mortgages and other | | 997 |
| | 799 |
| | September 2021 and September 2026 | | 0.80% -1.30% |
|
Total long-term facilities | | 87,802 |
| | 96,516 |
| | | | |
Less current portion of long-term debt | | 25,844 |
| | 21,301 |
| | | | |
Total long-term debt | | $ | 61,958 |
| | $ | 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) | 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. |
| |
(3) | 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. |
Revolving Credit
The outstanding principal amount of ourLivaNova’s short-term unsecured revolving credit agreements and other agreements with various banks was $58.2$0.6 million and $26.3$2.5 million atas of December 31, 20172023 and December 31, 2016,2022, respectively, with an average interest rates ranging from 0.1% to 9.3%rate of 4.94% and loan terms ranging from one dayovernight to 180 days.364 days as of December 31, 2023.
European InvestmentOn August 13, 2021, LivaNova PLC and its wholly-owned subsidiary, LivaNova USA as borrower, entered into a First Lien Credit Agreement with the lenders and issuing banks party thereto and Goldman Sachs Bank FinancingUSA, as First Lien Administrative Agent and First Lien Collateral Agent, relating to a $125 million senior secured multi-currency revolving credit facility to be made available to the borrower, referred to as the 2021 First Lien Credit Agreement. The 2021 First Lien Credit Agreement, as amended from time to time, expires on August 13, 2026, and bears interest at a rate equal to, for USD-denominated loans, an adjusted SOFR with a floor of 0.00%, or a Base Rate, plus, in each case, a variable margin based on the Company’s Total Net Leverage Ratio, as defined in the agreement. Interest is paid monthly or quarterly, as selected by the borrower, with any outstanding principal due at maturity. The 2021 First Lien Credit Agreement also contemplates the payment of commitment fees on the unused portion of the commitments, at a variable percentage based on the Company’s Total Net Leverage Ratio. As of each of December 31, 2023 and 2022, the applicable commitment fee percentage was 0.5% per annum. The 2021 First Lien Credit Agreement is available for working capital and other general corporate purposes and, if drawn, can be repaid at any time without premium or penalty. As of December 31, 2023, the Company was in compliance with the financial covenants contained in its 2021 First Lien Credit Agreement.
There were no outstanding borrowings under the 2021 First Lien Credit Agreement’s $125 million revolving credit facility as of December 31, 2023 and 2022.
On August 12, 2021, the Company terminated its previous $50.0 million revolving credit facility agreement with ACF FINCO I LP, which was undrawn, resulting in a loss on debt extinguishment of $1.6 million recognized during the year ended December 31, 2021 primarily associated with the write-off of unamortized debt issuance costs, and is included within loss on debt extinguishment on the consolidated statements of income (loss).
Bridge Loan Facility
On February 24, 2022, LivaNova PLC and its wholly-owned subsidiary LivaNova USA entered into the €200 million Bridge Loan Facility. On March 16, 2022, LivaNova entered into Amendment No. 2 to the 2021 First Lien Credit Agreement, which converted the available borrowings under the Bridge Loan Facility from €200 million to $220 million and converted the EURIBOR rate in the 2021 First Lien Credit Agreement to SOFR. LivaNova delivered a borrowing notice for $220 million in connection with the Bridge Loan Facility, which was funded on March 17, 2022.
On March 18, 2022, LivaNova PLC, acting through its Italian branch, entered into an Indemnity Letter and an Account Pledge Agreement with Barclays, further to which Barclays issued the SNIA Litigation Guarantee. As security for the SNIA Litigation Guarantee, LivaNova is required to grant cash collateral to Barclays in USD in an amount equal to the USD equivalent of 105% of the amount of the SNIA Litigation Guarantee calibrated on a biweekly basis. The proceeds of the Bridge Loan Facility were used by LivaNova to post a portion of the cash collateral supporting the SNIA Litigation Guarantee. Cash collateral classified as restricted cash on the consolidated balance sheets as of December 31, 2023 and 2022 was $311.4 million and $301.4 million, respectively. For additional information regarding the SNIA litigation, please refer to “Note 13. Commitments and Contingencies.”
Debt discounts and issuance costs related to the Bridge Loan Facility were approximately $4.5 million. Amortization of debt discount and issuance costs for the Bridge Loan Facility was $4.5 million for the year ended December 31, 2022 and is included in interest expense on the consolidated statements of income (loss).
The Bridge Loan Facility was repaid in full on July 6, 2022.
Term Facilities
On July 6, 2022, LivaNova and its wholly-owned subsidiary, LivaNova USA, entered into Incremental Facility Amendment No. 2, which provides for LivaNova USA to, among other things, obtain commitments for term loan facilities from a syndicate of lenders in an aggregate principal amount of $350 million consisting of (i) the Initial Term Facility with an aggregate principal amount of $300 million and (ii) the Delayed Draw Term Facility with an additional aggregate principal amount of $50 million. On April 6, 2023, LivaNova drew $50 million under the Delayed Draw Term Facility for general corporate purposes.
Proceeds from the Initial Term Facility were used to repay in full the Bridge Loan Facility on July 6, 2022, with the remainder used for general corporate purposes of the Company. The Term Facilities have a maturity of the earlier of (i) five years or (ii)
91 days prior to December 15, 2025, the maturity date of the 2020 Cash Exchangeable Senior Notes, unless by that date LivaNova USA will have either redeemed or refinanced the Notes, or set aside an amount of cash equal to the then-outstanding principal amount of the Notes. The Term Facilities bear interest at a rate equal to an adjusted term SOFR plus a variable margin based on the Company’s consolidated total net leverage ratio. As of December 31, 2023, the applicable margin over adjusted term SOFR was equal to 3.5% per annum. The Term Facilities are subject to an original issue discount of 1.5% of their principal amount. The Term Facilities are subject to quarterly principal repayment, based on the following amortization schedule: (i) during the first year from the initial funding date: 1.9%; (ii) year two: 5.0%; (ii) year three: 5.0%; (iv) year four: 7.5%; and (v) year five: 10.0%, with the remainder to be paid at maturity. The effective interest rate of the Term Facilities at December 31, 2023 was 6.53%.
The 2021 First Lien Credit Agreement, as amended, contains customary representations, warranties and covenants, including the requirement to maintain a Senior Secured First Lien Net Leverage Ratio, calculated as the ratio of Consolidated Senior Secured First Lien Net Indebtedness to Consolidated EBITDA, as defined in the credit agreement, for the period of four consecutive fiscal quarters ended on the calculation date, of not more than 3.50 to 1.00 and an Interest Coverage Ratio, calculated as the ratio of Consolidated EBITDA to Consolidated Interest Expense, both as defined in the credit agreement, for the period of four consecutive fiscal quarters ended on the calculation date, of not less than 3.00 to 1.00. As of December 31, 2023, the Company was in compliance with the financial covenants contained in the 2021 First Lien Credit Agreement.
Debt discounts and issuance costs related to the Initial Term Facility were approximately $9.6 million. Amortization of debt discount and issuance costs for the Initial Term Facility was $2.0 million and $0.8 million for the years ended December 31, 2023 and 2022, respectively, and is included in interest expense on the consolidated statements of income (loss). The unamortized discount and issuance costs related to the Initial Term Facility as of December 31, 2023 and 2022 was $6.8 million and $8.7 million, respectively. Issuance costs related to the Delayed Draw Term Facility were approximately $1.6 million. Amortization of issuance costs for the Delayed Draw Term Facility was $0.5 million and $1.1 million for the years ended December 31, 2023 and 2022, respectively, and is included in interest expense on the consolidated statements of income (loss). The issuance costs related to the Delayed Draw Term Facility were fully amortized as of December 31, 2023. The unamortized issuance cost related to the Delayed Draw Term Facility as of December 31, 2022 was $0.5 million, and is included within prepaid expenses and other current assets on the consolidated balance sheets.
2020 Cash Exchangeable Senior Notes
On June 29, 2017, we17, 2020, LivaNova’s wholly-owned subsidiary, LivaNova USA, issued $287.5 million aggregate principal amount of 3.00% Notes by private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The sale of the Notes resulted in approximately $278.0 million in net proceeds to the Company after deducting issuance costs. Interest is payable semiannually in arrears on June 15 and December 15 of each year. The effective interest rate of the Notes at December 31, 2023 was 9.95%. The Notes mature on December 15, 2025 unless earlier exchanged, repurchased, or redeemed.
Debt discounts and issuance costs related to the Notes were approximately $82.0 million and included $75.0 million of discount attributable to the embedded exchange feature, discussed below, and $7.0 million of allocated issuance costs to the Notes related to legal, bank and accounting fees. Amortization of debt discount and issuance costs for the Notes was $15.9 million, $14.4 million and $13.1 million for the years ended December 31, 2023, 2022 and 2021, respectively, and is included in interest expense on the consolidated statements of income (loss). The unamortized discount related to the Notes as of December 31, 2023 and 2022 was $32.0 million and $47.9 million, respectively.
Holders of the Notes are entitled to exchange the Notes at any time during specified periods, at their option. This includes the right to exchange the Notes during any calendar quarter, if the last reported sale price of LivaNova’s ordinary shares, with a nominal value of £1.00 per share, is greater than or equal to 130% of the exchange price, or $79.27 per share for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter. The exchange condition was not satisfied on December 31, 2023. As a result, the Company has included its obligations from the Notes and the associated embedded exchange feature derivative as a long-term liability on the consolidated balance sheets as of December 31, 2023. The Notes are exchangeable solely into cash and are not exchangeable into ordinary shares of LivaNova or any other security under any circumstances. The initial exchange rate for the Notes is 16.3980 ordinary shares per $1,000 principal amount of Notes (equivalent to an initial exchange price of approximately $60.98 per share). The exchange rate is subject to adjustment in certain circumstances, as set forth in the indenture governing the Notes.
The Company may redeem the Notes at its option on or after June 20, 2023 and prior to the 51st scheduled trading day immediately preceding the maturity date, in whole or in part, if the last reported sale price per ordinary share has been at least 130% of the exchange price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day
period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. Additionally, the Company may redeem the Notes at its option, prior to their stated maturity, in whole but not in part, in connection with certain tax-related events.
Embedded Exchange Feature
The embedded exchange feature of the Notes requires bifurcation from the Notes and is accounted for as a derivative liability. The fair value of the Notes’ embedded exchange feature derivative at the time of issuance was $75.0 million and was recorded as debt discount on the Notes. This discount is amortized as interest expense using the effective interest method over the term of the Notes. The Notes’ embedded exchange feature derivative is carried on the consolidated balance sheets at its estimated fair value and is adjusted at the end of each reporting period, with the unrealized gain or loss reflected within foreign exchange and other income/(expense) in the consolidated statements of income (loss). The fair value of the embedded exchange feature derivative liability was $45.6 million and $85.7 million as of December 31, 2023 and 2022, respectively.
Capped Call Transactions
In connection with the pricing of the Notes, the Company entered into a new finance contract (the “Finance Contract”)privately negotiated capped call transactions with certain of the EIBinitial purchasers of the Notes or their respective affiliates. The capped call transactions cover, subject to support financinganti-dilution adjustments substantially similar to those applicable to the Notes, the number of certain R&D projects.LivaNova’s ordinary shares underlying the Notes and are expected generally to offset any cash payments the Company is required to make upon exchange of the Notes in excess of the principal amount thereof in the event that the market value per ordinary share, as measured under the capped call transactions, is greater than the strike price of the capped call transactions, with such offset being subject to an initial cap price of $100.00 per share. If the Company’s share price exceeds the cap price, the proceeds under the capped call transactions would not fully offset the excess principal amount due to the holders of the Notes. The Finance Contract has a borrowing base of €100.0 million (approximately $119.9 million)capped call transactions expire on December 15, 2025 and canmust be drawnsettled in upcash. If the capped call transactions are converted or redeemed early, settlement occurs at their termination value, which is equal to two tranches, each in a minimum amount of €50.0 million (approximately $60.0 million). The fixed rate tranche accrues interest at an annual interest rate determined by the EIBtheir fair value at the time of the borrowing whileconversion or redemption. The capped call transactions are carried on the variable rate tranche accrues EUR or USD denominated borrowingsconsolidated balance sheets as a derivative asset at their estimated fair value and are adjusted at the Euro Interbank Offered Rateend of each reporting period, with unrealized gain or London Interbank Offered Rate, respectively, plus 0.68%loss reflected within foreign exchange and other income/(expense) in the consolidated statements of income (loss). 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 disbursementThe fair value of the relevant tranche. Loans under the Finance Contract are subject to certain covenantscapped call derivative assets was $38.5 million and other terms and conditions. No loan drawdowns have occurred$54.4 million as of December 31, 2017.2023 and 2022, respectively. As of December 31, 2023, the capped call derivative assets were classified as long-term.
2020 Senior Secured Term Loan On August 12, 2021, the Company repaid in full and terminated its previously outstanding $450 million 2020 senior secured term loan, resulting in a loss on debt extinguishment of $58.6 million recognized during the year ended December 31, 2021, which is comprised of a $35.6 million make-whole premium and $23.0 million associated with the write-off of unamortized debt issuance costs, and is included within loss on debt extinguishment on the consolidated statements of income (loss).
Note 11. Derivatives and Risk Management
Due to the global nature of ourLivaNova’s operations, we arethe Company is exposed to foreign currency exchange rateFX 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 enterHistorically, LivaNova has entered into foreign currency exchange rate (“FX”)FX derivative contracts and interest rate swap contracts to reduce the impact of foreign currency rateFX and interest rate fluctuations, respectively, on earnings and cash flow. We measure
LivaNova is also exposed to equity price risk in connection with its Notes, including exchange and settlement provisions based on the price of its ordinary shares at exchange or maturity of the Notes. The capped call transactions associated with the Notes also include settlement provisions that are based on the price of LivaNova’s ordinary shares, subject to a capped price per share. LivaNova does not enter into derivative contracts for speculative purposes.
LivaNova measures all outstanding derivatives each
period end at fair value and reportreports the fair value as either financial assets or liabilities inon 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. These derivatives are intended to serve as economic hedges and follow the cash flows of the economic hedged item. The cash flows from these derivative contracts are reported as operating activities on LivaNova’s consolidated statements of cash flows.
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’ (“AOCI”)AOCI until the hedged item is recognized in earnings upon settlement/termination. FX derivative gains and losses in AOCI are reclassified to theLivaNova’s consolidated statementstatements of income (loss) income as shown in the tables below, and interest rate swap gains and losses in
AOCI are reclassified to interest expense in theon LivaNova’s consolidated statementstatements of income (loss) income. We evaluate. LivaNova evaluates 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 any, is recorded in earnings. Cash flows from derivative contracts are reported as operating activities in the consolidated statements of cash flows.inception.
Freestanding FX Derivative FX Contracts
The gross notional amount of FX derivative contracts not designated as hedging instruments outstanding atas of December 31, 20172023 and December 31, 20162022 was $231.9$223.4 million and $489.1$154.5 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. WeLivaNova recorded a net gains (losses)loss for these freestanding derivatives of $(11.7)$1.3 million for the year ended December 31, 2023 and net gains of $4.5 million and $11.0$10.9 million for the years ended December 31, 20172022 and December 31, 2016,2021, respectively. These gains and losses are included in ‘Foreignforeign exchange and other gains (losses)’ in theincome/(expense) on LivaNova’s consolidated statements of income (loss).
Counterparty Credit Risk
LivaNova is exposed to credit risk in the event of non-performance by the counterparties to the Company’s derivatives.
The two counterparties to the capped call transactions are financial institutions. To limit LivaNova’s credit risk, the Company selected financial institutions with a minimum long-term investment grade credit rating. LivaNova’s exposure to the credit risk of the counterparties is not secured by any collateral. If a counterparty becomes subject to insolvency proceedings, LivaNova will become an unsecured creditor in those proceedings, with a claim equal to the Company’s exposure at that time under the capped call transactions with that counterparty.
To manage credit risk with respect to LivaNova’s other derivatives, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors their respective market positions. However, if one or more of these counterparties were in a liability position to the Company and were unable to meet their obligations, any transactions with the counterparty could be subject to early termination, which could result in substantial losses for the Company.
Cash Flow Hedges
Foreign Currency Risk
We utilizeHistorically, LivaNova utilized FX derivative contracts, designed as cash flow hedges, to hedge the variability of cash flows associated with our 12 monthLivaNova’s 12-month USD forecasts of revenues and costs denominated in British Pound, Japanese Yen and Canadian Dollars. We transferthe Euro. LivaNova transfers to earnings from accumulated other comprehensive income (loss),AOCI the gain or loss realized on the FX derivative contracts at the time of invoicing.
There was no hedge ineffectiveness Upon the settlement of LivaNova’s foreign currency cash flow hedges in the fourth quarter of 2022 and there were no componentsfollowing an in-depth analysis of the FX derivative contracts excluded inutility of the measurement of hedge effectiveness during the years ended December 31, 2017 and December 31, 2016.
During the year ended December 31, 2016, weCompany’s cash flow hedging program, LivaNova discontinued and settled certain of our FX derivative contracts due to changes in ourits foreign currency revenue forecast that resulted in a gain of $0.2 million reclassified to earnings from accumulated other comprehensive (loss).cash flow hedging program.
Interest Rate Risk
In July 2014, SorinHistorically, LivaNova entered into a European Investment Bank (“EIB”) long-term loan agreement that matures in June 2021 with variable interest payments due quarterly based on the Euribor 3 month floating interest rate. To minimize the impact of changes in the interest rate we entered into an interest rate swap agreement program to swapswaps associated with the EIB floating-rate interest payments for fixed-rate interest payments. The interest rate swap contracts qualifyInitial Term Facility, which qualified for and arewere designated as cash flow hedges.
There was no The Company’s outstanding interest rate swap hedge ineffectiveness or componentswaps expired on April 6, 2023. LivaNova elected not to renew the interest rate swaps as interest expense associated with the Initial Term Facility is principally offset by holding a significant portion of the swap contract excludedInitial Term Facility in the measurementa depository account, which earns a floating rate of hedge effectiveness during the years ended December 31, 2017 and December 31, 2016.interest.
NotionalThe gross notional amounts of open derivative contracts designated as cash flow hedges as of December 31, 2023 and 2022 were as follows (in thousands):
| | | | | | | | | | | | | | |
Description of Derivative Contract | | 2023 | | 2022 |
Interest rate swap contracts | | $ | — | | | $ | 210,000 | |
| | | | |
|
| | | | | | | | |
Description of derivative contract: | | December 31, 2017 | | December 31, 2016 |
FX derivative contracts to be exchanged for British Pounds | | $ | 16,847 |
| | $ | 6,663 |
|
FX derivative contracts to be exchanged for Japanese Yen | | 32,302 |
| | 57,840 |
|
FX derivative contracts to be exchanged for Canadian Dollars | | 16,494 |
| | — |
|
Interest rate swap contracts | | 55,965 |
| | 63,246 |
|
| | $ | 121,608 |
| | $ | 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):
|
| | | | | | | | |
| | December 31, 2017 | | Amount Expected to be Reclassified to Earnings in Next 12 Months |
FX derivative contracts | | $ | (712 | ) | | $ | (712 | ) |
Interest rate swap contracts | | (207 | ) | | (59 | ) |
| | $ | (919 | ) | | $ | (771 | ) |
Pre-taxThe pre-tax gains (losses) for derivative contracts designated as cash flow hedges recognized in ‘Other comprehensive income (loss)’ (“OCI”)OCI and the amount reclassified to earnings from AOCI for the years ended December 31, 2023, 2022 and 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | 2023 |
Description of Derivative Contract | | Location in Earnings of Reclassified Gain or Loss | | Loss Recognized in OCI | | Gain Reclassified from AOCI to Earnings |
| | | | | | |
| | | | | | |
Interest rate swap contracts | | Interest expense | | $ | (433) | | | $ | 533 | |
| | | | | | |
| | | | Year Ended December 31, 2017 |
| | | | 2022 | | | | | | 2022 |
Description of Derivative Contract | | Location in Earnings of Reclassified Gain or Loss | | Losses Recognized in OCI | | Gains (Losses) Reclassified from OCI to Earnings: | Description of Derivative Contract | | Location in Earnings of Reclassified Gain or Loss | | (Loss) Gain Recognized in OCI | | Loss Reclassified from AOCI to Earnings |
FX derivative contracts | | Foreign Exchange and Other | | $ | (9,861 | ) | | $ | (6,471 | ) |
FX derivative contracts | | SG&A | | — |
| | 2,084 |
|
Interest rate swap contracts | | Interest expense | | — |
| | 939 |
|
| | $ | (9,861 | ) | | $ | (3,448 | ) |
| | | | $ | |
| | | | | | | | | | | | | | | | | | | | |
| | | | 2021 |
Description of Derivative Contract | | Location in Earnings of Reclassified Gain or Loss | | Loss Recognized in OCI | | (Loss) Gain Reclassified from AOCI to Earnings |
FX derivative contracts | | Foreign exchange and other income/(expense) | | $ | (3,922) | | | $ | (2,333) | |
FX derivative contracts | | SG&A | | — | | | 2,408 | |
| | | | $ | (3,922) | | | $ | 75 | |
|
| | | | | | | | | | |
| | | | Year Ended December 31, 2016 |
Description of Derivative Contract | | Location in Earnings of Reclassified Gain or Loss | | Gains Recognized in OCI | | Gains (Losses) Reclassified from OCI to Earnings: |
FX derivative contracts | | Foreign Exchange and Other | | $ | 2,874 |
| | $ | 3,705 |
|
FX derivative contracts | | SG&A | | — |
| | (4,218 | ) |
Interest rate swap contracts | | Interest expense | | 85 |
| | (458 | ) |
| | | | $ | 2,959 |
| | $ | (971 | ) |
LivaNova offsets fair value amounts associated with its derivative instruments that are executed with the same counterparty under master netting arrangements on the Company’s consolidated balance sheets. Master netting arrangements include a right to set off or net together purchases and sales of similar products in the settlement process.
The following tables present the fair value and the location of derivative contracts reported inon the consolidated balance sheets as of December 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
2023 | | Asset Derivatives | | Liability Derivatives |
Derivatives Not Designated as Hedging Instruments | | Balance Sheet Location | | Fair Value (1) | | Balance Sheet Location | | Fair Value (1) |
Capped call derivatives | | Long-term derivative assets | | $ | 38,496 | | | | | |
FX derivative contracts | | | | | | Accrued liabilities and other | | $ | 3,883 | |
Embedded exchange feature | | | | | | Long-term derivative liabilities | | 45,569 | |
Total derivatives not designated as hedging instruments | | | | 38,496 | | | | | 49,452 | |
Total derivatives | | | | $ | 38,496 | | | | | $ | 49,452 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
2022 | | 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 | | $ | 1,333 | | | | | |
Total derivatives designated as hedging instruments | | | | 1,333 | | | | | |
Derivatives Not Designated as Hedging Instruments | | | | | | | | |
Capped call derivatives | | Long-term derivative assets | | 54,393 | | | | | |
FX derivative contracts | | | | | | Accrued liabilities and other | | $ | 5,886 | |
Embedded exchange feature | | | | | | Long-term derivative liabilities | | 85,675 | |
Total derivatives not designated as hedging instruments | | | | 54,393 | | | | | 91,561 | |
Total derivatives | | | | $ | 55,726 | | | | | $ | 91,561 | |
(1)For the classification of inputs used to evaluate the fair value of LivaNova’s derivatives, refer to “Note 9. Fair Value Measurements.”
|
| | | | | | | | | | | | |
December 31, 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 | | $ | 834 |
|
Interest rate swap contracts | | Other assets | | — |
| | Other long-term liabilities | | 751 |
|
FX derivative contracts | | Prepaid expenses and other current assets | | — |
| | Accrued liabilities | | 460 |
|
Total derivatives designated as hedging instruments | | | | — |
| | | | 2,045 |
|
Derivatives Not Designated as Hedging Instruments | | | | | | | | |
FX derivative contracts | | Prepaid expenses and other current assets | | 519 |
| | Accrued liabilities | | — |
|
Total derivatives not designated as hedging instruments | | | | 519 |
| | | | — |
|
Total derivatives | | | | $ | 519 |
| | | | $ | 2,045 |
|
|
| | | | | | | | | | | | |
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 |
| | | | — |
|
Total derivatives | | | | $ | 8,269 |
| | | | $ | 2,334 |
|
| |
(1) | For the classification of input used to evaluate the fair value of our derivatives, refer to “Note 9. Fair Value Measurements.” |
Note 12. Leases
LivaNova has operating leases primarily for (i) office space, (ii) manufacturing, warehouse and R&D facilities and (iii) vehicles. LivaNova’s leases have remaining lease terms up to 15 years, some of which include options to extend the leases, and some of which include options to terminate the leases at the Company’s sole discretion. The following table presents the components of operating lease assets and liabilities as of December 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | |
| | 2023 | | 2022 |
Assets | | | | |
Operating lease right-of-use assets | | $ | 50,845 | | | $ | 35,830 | |
Liabilities | | | | |
Accrued liabilities and other | | $ | 8,362 | | | $ | 9,379 | |
Long-term operating lease liabilities | | 45,388 | | | 29,548 | |
Total lease liabilities | | $ | 53,750 | | | $ | 38,927 | |
The following table presents the components of operating lease cost for the years ended December 31, 2023, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
Operating lease cost | | $ | 10,286 | | | $ | 10,408 | | | $ | 18,070 | |
Variable lease cost | | 871 | | | 580 | | | 1,200 | |
Short-term lease cost | | 644 | | | 468 | | | 1,084 | |
Total lease cost | | $ | 11,801 | | | $ | 11,456 | | | $ | 20,354 | |
The following table presents the contractual maturities of LivaNova’s lease liabilities as of December 31, 2023 (in thousands):
| | | | | | | | |
2024 | | $ | 10,938 | |
2025 | | 9,517 | |
2026 | | 6,888 | |
2027 | | 5,997 | |
2028 | | 5,139 | |
Thereafter | | 32,167 | |
Total lease payments | | 70,646 | |
Less: Amount representing interest | | 16,896 | |
Present value of lease liabilities | | $ | 53,750 | |
The following table presents the weighted average remaining lease term and discount rate as of December 31, 2023 and 2022:
| | | | | | | | | | | | | | |
| | 2023 | | 2022 |
Weighted Average Remaining Lease Term | | 9.6 years | | 6.5 years |
Weighted Average Discount Rate | | 5.7% | | 3.9% |
The following table presents the supplemental lease information for the years ended December 31, 2023, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
Operating cash flows for operating leases | | $ | 11,652 | | | $ | 12,468 | | | $ | 13,650 | |
Operating lease assets obtained in exchange for lease liabilities | | $ | 24,800 | | | $ | 7,820 | | | $ | 9,037 | |
Note 13. Commitments and Contingencies
FDA Warning LetterSaluggia Site Hazardous Substances
On December 29,LSM, formerly a subsidiary of Sorin, one of the companies that merged into LivaNova PLC in 2015, manages site services for the FDA issuedcampus in Saluggia, Italy. In addition to being a Warning Letter (the “Warning Letter”) alleging certain violationsformer LivaNova manufacturing facility, the Saluggia campus is also the location of FDA regulations applicable to medical device manufacturers at our Munich, Germanymanufacturing facilities of third parties, a cafeteria for workers, and Arvada, Colorado facilities.
The FDA inspectedstorage facilities for hazardous substances and equipment previously used in a nuclear research center, later turned nuclear medicine business, between the Munich facility from August 24, 2015 to August 27, 20151960s and the Arvada facilitylate 1990s. Pursuant to authorization from August 24, 2015the Italian government, LSM has, and continues to, September 1, 2015. On August 27, 2015,perform ordinary maintenance, secure 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 connectionfacilities, monitor air and water quality and file applicable reports with the FDA’s inspection ofcompetent environmental authorities.
In 2020, LSM received correspondence from ISIN requesting that, within five years, LSM demonstrate the Arvada facility. Following the receipt of the Form 483, we provided written responsesfinancial capacity to the FDA describing correctivemeet its obligations under Italian law to clean 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 responsesdismantle any contaminated buildings and identified other alleged violations related to the manufacture of our 3T Heater-Cooler device that were 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,equipment, as well as to deliver hazardous substances to a national repository. This repository will be built by the additional issues identified in the Warning Letter. We take these matters seriouslyItalian government at a location 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 appearstime yet to be genetic similarity between both patientdetermined. ISIN subsequently published Technical Guide n. 30, which identifies the technical criteria, and 3T device strainsgeneral safety and protection requirements for the design, construction, operation and dismantling of temporary storage facilities for the hazardous substances. In January 2021, a list of 67 potential sites for the national repository was published.
Although there is no legal obligation to begin any work or deliver the hazardous substances, as the performance of these obligations is contingent on the construction 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 surgeonas-yet unbuilt national repository, based on the aforementioned factors, the Company concluded its obligation to clean, dismantle, and deliver any hazardous substances to a risk approachnational repository is probable 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,reasonably estimable. Accordingly, in response to the Warning Letter and CDC’s HAN and FDA’s Safety Commission, 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 2020, LivaNova recognized a $42.2 million provision for this matter, which is included within other operating expenses on the consolidated statements of income (loss). The estimated liability as of December 31, 2023 was €35.8 million ($39.7 million), which represented the low end of the estimated range of loss of €35.8 million ($39.7 million) to €45.6 million ($50.5 million) as of December 31, 2023. The estimated liability as of December 31, 2022 was €34.2 million ($36.6 million). The increase in the Saluggia site remediation provision from December 31, 2022 was due to adjustments associated with expected disposal costs.
SNIA Environmental Liability
Sorin was created as a result of a spin-off from SNIA in 2004, and in 2015, Sorin was merged into LivaNova. SNIA subsequently became insolvent, and the Public Administrations sought compensation from SNIA in an aggregate amount of approximately $3.8 billion for remediation costs relating to the environmental damage at chemical sites previously operated by SNIA’s other subsidiaries.
There are proceedings relating to the SNIA bankruptcy to which LivaNova is not a party in the Bankruptcy Court of Udine and the Bankruptcy Court of Milan. In 2011, the Bankruptcy Court of Udine held that the Public Administrations were not creditors of either SNIA or its subsidiaries in connection with their claims in the Italian insolvency proceedings. The Public Administrations appealed. In 2016, we initiatedthe Court of Udine rejected the appeal, and the Public Administrations appealed to the Supreme Court. Similarly, in 2014, the Bankruptcy Court of Milan held that the Public Administrations were not creditors of either SNIA or its subsidiaries. The Public Administrations appealed. In April 2022, Bankruptcy Court of Milan declared the Public Administrations to be a programnon-privileged creditor of SNIA for up to €454 million, and the Public Administrations appealed to the Supreme Court.
In 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; the Public Administrations entered voluntarily into the proceeding, asking Sorin, as jointly liable with SNIA, to pay compensation for SNIA’s environmental damages. In 2016, the Court of Milan dismissed all legal actions of SNIA and of the Public Administrations further requiring the Public Administrations to pay Sorin approximately €292,000 (approximately $323,000 as of December 31, 2023) for legal fees. The Public Administrations appealed the 2016 Decision to the Court of Appeal. On March 5, 2019, the Court of Appeal issued a partial decision on the merits declaring Sorin/LivaNova jointly liable with SNIA for SNIA’s environmental liabilities in an amount up to the fair value of the net worth received by Sorin because of the Sorin spin-off, an estimated €572.1 million (approximately $633.1 million as of December 31, 2023). LivaNova appealed the partial decision on liability to the Italian Supreme Court in August 2019.
In November 2021, the Court of Appeal delivered the remainder of its decision, ordering LivaNova to pay damages of approximately €453.6 million (approximately $502.0 million as of December 31, 2023). LivaNova appealed the decision on damages in December 2021. On February 21, 2022, the Court of Appeal notified the Company that it granted the Company a suspension with respect to the payment of damages until a decision has been reached on the appeal to the Italian Supreme Court. This suspension was subject to LivaNova providing a first demand bank guarantee of €270.0 million (approximately $298.8 million as of December 31, 2023) within 30 calendar days, and on March 21, 2022, LivaNova delivered the guarantee, thereby satisfying the condition. Refer to “Note 10. Financing Arrangements” for information on the financing of the guarantee.
In November 2022, in response to one of a number of appeals asserted by LivaNova, the Supreme Court issued an ordinance, a procedural document, whereby the Supreme Court referred a question on interpretation of a European directive on demergers to the ECJ. Specifically, the ordinance asks the ECJ to provide a binding decision as to whether a company resulting from a demerger can be held jointly and severally liable not only for the established liabilities of the demerged company that were articulated at the time of demerger, but also for the environmental liabilities of the demerged company that materialized after the demerger which are derived from actions performed prior to the demerger. Following receipt of the binding decision from the ECJ, which is expected in 2024, the Supreme Court is expected to incorporate and issue a decision in response to all of the appeals of LivaNova and counter-appeals submitted by the Public Administrations. While the timing of the decisions by the ECJ and, subsequently, the Supreme Court are uncertain, the Company believes that the final decision from the Supreme Court is not expected until at least 2025.
In 2011, Caffaro, a SNIA subsidiary, sold its Brescia chemical business to Caffaro Brescia, a third party belonging to the Todisco group, and as part of the acquisition, Caffaro Brescia agreed to secure hydraulic barriers at the site and maintain existing 3T device usersenvironmental security measures. In 2020, Caffaro Brescia declared it was withdrawing from its agreement to maintain the environmental measures. In 2021, LivaNova (in addition to Caffaro Brescia, and other non-LivaNova entities) received an administrative order from the Italian Ministry of the Environment requiring the Company to ensure the maintenance of the environmental measures and to guarantee that such works remain fully operational, the annual management and maintenance for which is estimated at approximately €1 million per year. The receipt of the Order appears to be based on the aforementioned Court of Appeal decision regarding LivaNova’s alleged joint liability with a new loaner 3T device at no charge pending regulatory approval and implementation of additional risk mitigation strategies worldwide. This loaner program beganSNIA for SNIA’s environmental liabilities. LivaNova’s response, dated February 16, 2021, disputes the grounds upon which the Order is based. LivaNova also appealed the Order 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. We are also currently implementing a vacuum and sealing upgrade programAdministrative Court in as many countries as possible throughout 2018 and beyond until all devices are upgraded. Furthermore, we 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 isBrescia.
LivaNova has 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.
On December 31, 2016, we recognized a liability for our product remediation planin connection with these 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 December 31, 2017, the product remediation liability was $27.5 million. Refer to “Note 6. matters because any potential loss is not currently probable.
Product Remediation Liability” for additional information.
Liability Litigation
The Company is currentlycontinues to be involved in litigation involving ourLivaNova’s 3T heater-cooler product.device. The litigation includes a class action complaintthe cases remaining in the U.S. District Court for the Middle District of Pennsylvania, federal multi-district litigationMDL, various US state court cases, and in the U.S. District Court for the Middle District of Pennsylvania and cases in various state courts and jurisdictions outside the U.S.US. As of February 27, 2017, we are involved in29, 2024, the Company was aware of approximately 11070 filed and unfiled claims worldwide, with the majority of the claims in various federal or state courts throughout the United States.worldwide. The complaints generally seek damages and other relief based on theories of strict liability, negligence, breach of express and implied warranties, failure to warn, design and manufacturing defect, fraudulent and negligent misrepresentation/misrepresentation or concealment, unjust enrichment, and violations of various state consumer protection statutes. The class action consists
During the years ended December 31, 2023, 2022 and 2021 LivaNova recorded an additional liability of all Pennsylvania residents who underwent open heart surgery$34.5 million, $22.3 million and $38.1 million, respectively, due to new information received about the nature of certain claims. As of December 31, 2023, the provision for these matters was $13.9 million. While the amount accrued represents LivaNova’s best estimate for those filed and unfiled claims that LivaNova believes are both probable and estimable at WellSpan York Hospitalthis time, and Penn State Milton S. Hershey Medical Center between 2011 and 2015 and who currentlywhich are asymptomatic for NTM infection. Membersa subset of the class seek declaratory relief thatfiled and unfiled claims worldwide of which the 3T devices are defective and unsafeCompany is currently aware, the actual liability for intended uses, medical monitoring, damages, and attorneys’ fees. LivaNova has filed a petition for permission to appeal the class certification order with the U.S. Courtresolution of Appeals for the Third Circuit. We have not recognized an expense related to damages in connection with these matters because anymay vary from the Company’s provision. The remaining claims for which a provision has not been recorded are remote or the potential loss is not currently probable or reasonably estimable. In addition we cannot reasonably estimate a rangeestimable at this time.
The following table presents the changes in the carrying amount of potential loss, if any, that may result from these matters.the litigation provision liability for the years ended December 31, 2023, 2022 and 2021 (in thousands):
Civil Investigative Demand | | | | | | | | | |
As of December 31, 2020 | | $ | 36,490 | | |
Payments | | (34,808) | | |
Adjustments (1) | | 38,068 | | |
FX and other | | (280) | | |
As of December 31, 2021 | | 39,470 | | |
Payments | | (28,867) | | |
Adjustments (1) | | 22,309 | | |
FX and other | | (425) | | |
As of December 31, 2022 | | 32,487 | | |
Payments | | (53,652) | | |
Adjustments (1) | | 34,521 | | |
FX and other | | 504 | | |
As of December 31, 2023 | | 13,860 | | |
Less current portion as of December 31, 2023 | | 10,756 | | |
Long-term portion as of December 31, 2023 (2) | | $ | 3,104 | | |
(1)Adjustments to the litigation provision are included within other operating expenses on the consolidated statements of income (loss).
(2)Included within other long-term liabilities on the consolidated balance sheets.
Caisson Contract Litigation
On May 31, 2017,November 25, 2019, LivaNova received notice of a lawsuit initiated by former members of Caisson, a subsidiary of the Company received a Civil Investigative Demand (CID) fromacquired in 2017. The lawsuit, Todd J. Mortier, as Member Representative of the US Attorney’s Officeformer Members of Caisson Interventional, LLC v. LivaNova USA, Inc., was filed in the United States District Court for the Northern District of Georgia.Minnesota. The CID requested certain documents relating to sales and marketingcomplaint alleged (i) breach of VNS devices and related products in the State of Georgia. We have not recognized an expense related to 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 Legacy Sorin Matters
SNIA Litigation
Our subsidiary, Sorin S.p.A. was created as a result of a spin-off (the “Sorin spin-off”) from SNIA S.p.A. (“SNIA”) in January, 2004. SNIA subsequently became insolvent and the Italian Ministrycontract, (ii) breach of the Environmentcovenant of good faith and the Protection of Landfair dealing and Sea (the “Italian Ministry of the Environment”), sought compensation from SNIA in an aggregate amount of approximately $4 billion for remediation costs relating to the environmental damage at chemical sites previously operated by SNIA’s other subsidiaries.
In September 2011 and July 2014, the Bankruptcy Court of Udine and the Bankruptcy Court of Milan 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 or its subsidiaries(iii) unjust enrichment in connection with their claims in the Italian insolvency proceedings.Company’s operation of Caisson’s transcatheter mitral valve replacement program and the Company’s November 20, 2019 announcement that it was ending the program at the end of 2019. The Public Administrations appealedlawsuit sought damages arising out of the 2017 acquisition agreement, including various regulatory milestone payments. In May 2022, the District Court granted LivaNova’s motion for summary judgment, and in January 2016,June 2023, the Eighth Circuit Court of Udine rejectedAppeals affirmed the appeal.decision. The Public Administrations have also appealed that decision.Company now considers Caisson’s claim against LivaNova to be closed.
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. On April 1, 2016, the Court of Milan dismissed all legal actions of SNIA and of the Public Administrations further requiring the Public Administrations to pay Sorin approximately $360,000 for legal fees. The Public Administrations appealed the 2016 Decision to the Court of Appeal of Milan and a final hearing on the matter has been scheduled for March 21, 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.
Environmental Remediation OrderMitral Demand Letter
On July 28, 2015, Sorin29, 2022, LivaNova received an administrative order (the “Remediation Order”)a demand letter from Mitral for approximately €20.8 million ($23.0 million as of December 31, 2023) for breach of warranty claims under the A&R Purchase Agreement. Specifically, the claims allege failure to disclose certain information relating to a supplier, thereby allegedly impacting the profitability of Mitral’s business in China and Japan. On March 22, 2023, Mitral served a formal claim on LivaNova in the High Court of Justice Commercial Court (King’s Bench Division) alleging damages flowing from the aforementioned asserted breaches of warranties in the A&R Purchase Agreement, and the Company filed its Defense on May 17, 2023. In November 2023, the Company entered into a settlement agreement with Mitral regarding the aforementioned matter pursuant to which the Company paid to Mitral less than €1.0 million ($1.1 million as of December 31, 2023), including costs. The Company now considers this matter closed.
Italian MinistryMedTech Payback Measure
As previously disclosed, in 2015, the Italian Parliament introduced rules regarding public contracts with the National Healthcare System for the supply of goods and services. In particular, the law introduced a “payback” measure requiring companies selling medical devices in Italy to repay a percentage of the Environment directing prompt commencement of environmental remediationhealthcare expenditures exceeding the regional maximum caps for medical devices. In the intervening years since the rules were first issued, there has been considerable uncertainty about how the law will operate and what the exact timeline is for finalization. In August 2022, a decree was published which provided guidance and timetables for the rule. In response, LivaNova filed an appeal at the chemical sites previously operated by SNIA’s other subsidiaries. We challenged the Remediation Order before the Administrative Court against the Decree of Lazio in Rome (the “TAR”), and the TAR annulled the Remediation Order. The Italian Ministry of Health assessing the Environment appealed. We have not recognized an expenseamount payable and against the MedTech Payback Guidelines. LivaNova also filed appeals against the regions requesting payments. In August 2023, the Administrative Court upheld LivaNova’s request to suspend the effect of the requests for payment by the regions, pending the decision by the court on the merits of the case. In November 2023, the Administrative Court, in connectiona separate matter, asked the Constitutional Court whether
the payback law is compliant with the Italian Constitution and pending the decision by the Constitutional Court, all cases brought by medical device companies in 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 merger between Sorin and Cyberonics (the “Merger”), before the Commercial Courts of Milan.are suspended. 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. The Commercial Court of Milan delivered a decision in October 2016, fully rejecting the Public Administration’s request and awarding us approximately $480 thousand in damages for frivolous litigation and legal fees. The Public Administrations appealed to the Court of Appeal of Milan.
Tax Litigation
In a tax audit report received 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 $123.0 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) on February 3, 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.Company has accrued for the 2002, 2003“payback” law since 2015 based on market and 2004 tax periods,product information. As of December 31, 2023 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 ofDecember 31, 2022, the litigation regarding years 2004, 2005, and 2006. The total amount of losses in dispute is €62.6reserved for this matter was $8.2 million (approximately $75.1 million). We have continuously reassessed our potential exposure in these matters, taking into accountand $6.4 million, respectively; however, 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 $20.4 million).actual liability could vary.
Other Matters
Additionally, we areLivaNova is the subject of various pending or threatened legal actions and proceedings that arise in the ordinary course of ourLivaNova’s 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 ourLivaNova’s consolidated net (loss) income, financial position or liquidity.
Lease Agreements
We have operating leases for facilities and equipment. Rent expense from all operating leases amounted to approximately $18.8 million, $15.6 million, $3.1 million and $0.8 million for the years ended December 31, 2017 and December 31, 2016, for the transitional period from April 25, 2015 to December 31, 2015 and for the fiscal year ended April 24, 2015, respectively.
The future minimum lease payments for operating leases related to continuing operations as of December 31, 2017 are (in thousands):
|
| | | | |
2018 | | $ | 13,584 |
|
2019 | | 11,633 |
|
2020 | | 9,565 |
|
2021 | | 7,053 |
|
2022 | | 5,864 |
|
Thereafter | | 24,632 |
|
Total | | $ | 72,331 |
|
Note 13. Stockholders’14. Stockholders' Equity
Preferred stock
LivaNova is not authorized to issue preferred stockOn August 6, 2021, the Company closed an offering and no Cyberonics’ preferred stock was outstanding at the consummation of the Mergers on October 19, 2015.
Common stock of Cyberonics andissued 4,181,818 ordinary shares, of LivaNova
Prior to the Mergers, shares of Cyberonics common stock were registered pursuant to Section 12(b) of the Exchange Act and listed on NASDAQ under the ticker symbol “CYBX,” and Sorin Ordinary Shares were listed on the Mercato Telematico Azionario organized and managed by Borsa Italiana S.p.A. (the “Italian Stock Exchange”). Shares of Cyberonics common stock and the Sorin shares were suspended from trading on NASDAQ and the Italian Stock Exchange, respectively, prior to the open of trading on October 19, 2015. Following the completion of the Mergers, LivaNova became the holding company of the combined businesses of Cyberonics and Sorin, and LivaNova’s shares were listed on NASDAQ and listed on the Official List of the U.K.’s Financial Conduct Authority and admitted to trading on the Main Market of the London Stock Exchange under the ticker symbol “LIVN.” We announced on February 23, 2017 our voluntary cancellation of our standard listing of our shares with the London Stock Exchange (“LSE”). We took this action due to the low volume of ourpar value £1.00 per share, trading on the LSE and trading ceased at the close of business on April 4, 2017. We continue to serve our shareholders through our listing on the NASDAQ Stock Market.
Share repurchase plans
On August 1, 2016, the Board of Directors authorized a share repurchase plan pursuant to an authority granted by shareholders at the 2016 annual general meeting held on June 15, 2016. The repurchase program was structured to enable us to buy back up to $30 million of ordinary shares on NASDAQ in the period ended December 31, 2016 and an aggregate of $150 million of ordinary shares (inclusive of the $30 million of ordinary shares set out above) also on NASDAQ up to and including December 31, 2018. In November 2016, the share repurchase plan was amended to authorize the repurchase up to $50 million of ordinary shares through December 31, 2016 (instead of the originally authorized $30 million). Ordinary shares repurchased under the repurchase plan are canceled. As of December 31, 2016, we repurchased 993,339 shares under this plan at a cost of $50.0 million at an average price per share of $50.32. All repurchased shares were canceled and are no longer considered issued or outstanding. We did not repurchase any additional shares during the year ended December 31, 2017.
Share repurchase plans prior to the Mergers
Common shares were repurchased on the open market pursuant to the Cyberonics’ Board of Directors-approved repurchase plans during the fiscal year ended April 24, 2015. Cyberonics repurchased 875,121 common shares on the open market at an averageoffering price of $55.94.$82.50 per share. Net proceeds from the offering were approximately $322.6 million, after deducting underwriting discounts, commissions and offering expenses. Proceeds from the offering were used to repay the Company’s $450 million 2020 senior secured term loan. For additional information, please refer to “Note 10. Financing Arrangements.”
Accumulated other comprehensive income (loss)
The following table below presents the change in each component of accumulated other comprehensive income (loss),AOCI, net of tax and the reclassifications out of accumulated other comprehensive incomeAOCI into net income (loss) earnings for the years ended December 31, 20172023, 2022 and December 31, 20162021 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Change in Unrealized Gain (Loss) on Cash Flow Hedges | | Foreign Currency Translation Adjustments (1) | | Total |
As of December 31, 2020 | | $ | 2,319 | | | $ | 25,490 | | | $ | 27,809 | |
Other comprehensive loss before reclassifications, before tax | | (3,922) | | | (31,722) | | | (35,644) | |
Tax benefit | | 719 | | | — | | | 719 | |
Other comprehensive loss before reclassifications, net of tax | | (3,203) | | | (31,722) | | | (34,925) | |
Reclassification of gain from accumulated other comprehensive income, before tax | | (75) | | | — | | | (75) | |
Reclassification of tax expense | | 14 | | | — | | | 14 | |
Reclassification of gain from accumulated other comprehensive income, after tax | | (61) | | | — | | | (61) | |
Net current-period other comprehensive loss, net of tax | | (3,264) | | | (31,722) | | | (34,986) | |
As of December 31, 2021 | | (945) | | | (6,232) | | | (7,177) | |
Other comprehensive loss before reclassifications, before tax | | (3,688) | | | (42,853) | | | (46,541) | |
Tax expense | | — | | | — | | | — | |
Other comprehensive loss before reclassifications, net of tax | | (3,688) | | | (42,853) | | | (46,541) | |
Reclassification of loss from accumulated other comprehensive loss, before tax | | 5,599 | | | — | | | 5,599 | |
Reclassification of tax expense | | — | | | — | | | — | |
Reclassification of loss from accumulated other comprehensive loss, after tax | | 5,599 | | | — | | | 5,599 | |
Net current-period other comprehensive income (loss), net of tax | | 1,911 | | | (42,853) | | | (40,942) | |
As of December 31, 2022 | | 966 | | | (49,085) | | | (48,119) | |
Other comprehensive (loss) income before reclassifications, before tax | | (433) | | | 21,202 | | | 20,769 | |
Tax expense | | — | | | — | | | — | |
Other comprehensive (loss) income before reclassifications, net of tax | | (433) | | | 21,202 | | | 20,769 | |
Reclassification of gain from accumulated other comprehensive income (loss), before tax | | (533) | | | — | | | (533) | |
Reclassification of tax expense | | — | | | — | | | — | |
Reclassification of gain from accumulated other comprehensive income (loss), after tax | | (533) | | | — | | | (533) | |
Net current-period other comprehensive (loss) income, net of tax | | (966) | | | 21,202 | | | 20,236 | |
As of December 31, 2023 | | $ | — | | | $ | (27,883) | | | $ | (27,883) | |
|
| | | | | | | | | | | | |
| | Change in Unrealized Gain (Loss) on Cash Flow Hedges | | Foreign Currency Translation Adjustments (1) | | Total |
As of December 31, 2015 | | $ | 888 |
| | $ | (55,116 | ) | | $ | (54,228 | ) |
Other comprehensive income (loss) before reclassifications, before tax | | 2,959 |
| | (16,990 | ) | | (14,031 | ) |
Tax benefit (expense) | | (795 | ) | | — |
| | (795 | ) |
Other comprehensive income (loss) before reclassifications, net of tax | | 2,164 |
| | (16,990 | ) | | (14,826 | ) |
Reclassification of loss from accumulated other comprehensive income, before tax | | 971 |
| | — |
| | 971 |
|
Tax effect | | (404 | ) | | — |
| | (404 | ) |
Reclassification of loss from accumulated other comprehensive income, after tax | | 567 |
| | — |
| | 567 |
|
Net current-period other comprehensive income (loss), net of tax | | 2,731 |
| | (16,990 | ) | | (14,259 | ) |
As of December 31, 2016 | | 3,619 |
| | (72,106 | ) | | (68,487 | ) |
Other comprehensive income (loss) before reclassifications, before tax | | (9,861 | ) | | 118,338 |
| | 108,477 |
|
Tax benefit (expense) | | 2,653 |
| | — |
| | 2,653 |
|
Other comprehensive income (loss) before reclassifications, net of tax | | (7,208 | ) | | 118,338 |
| | 111,130 |
|
Reclassification of loss from accumulated other comprehensive income, before tax | | 3,448 |
| | — |
| | 3,448 |
|
Tax effect | | (778 | ) | | — |
| | (778 | ) |
Reclassification of loss from accumulated other comprehensive income, after tax | | 2,670 |
| | — |
| | 2,670 |
|
Net current-period other comprehensive income (loss), net of tax | | (4,538 | ) | | 118,338 |
| | 113,800 |
|
As of December 31, 2017 | | $ | (919 | ) | | $ | 46,232 |
| | $ | 45,313 |
|
(1)Taxes were 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. | |
(1) | Taxes were 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 14.15. Stock-Based Incentive Plans
Pre-Merger and the Mergers
Sorin awards exchanged for LivaNova awards
Prior to the Mergers, the Sorin Board of Directors adopted the Long-Term Incentive 2012-2014 (the “2012-2014 Plan), 2013-2015 (the “2013-2015 Plan”) and 2014-2016 (the “2014-2016 Plan”) stock grant plans in April 2012, April 2013 and April 2014, respectively. The stock grant plans authorized the issuance of stock appreciation rights (2014-2016 Plan only), performance share units and restricted stock units. The awards under these stock grant plans were converted into LivaNova awards pursuant to the terms of the Transaction Agreement as described below. Refer to “Note 3. Business Combinations” for additional details related to the Mergers.
Pursuant to the Transaction Agreement, 3,815,824 stock appreciation rights outstanding (2014-2016 Plan) and 3,365,931 restricted stock units (2013-2015 and 2014-2016 Plans) and performance stock units (2012-2014 Plan) that were unvested immediately prior to the Mergers were accelerated and vested upon the close of the Mergers and were converted into 180,076 LivaNova stock appreciation rights and 158,716 LivaNova ordinary shares, respectively, in a manner designed to preserve the intrinsic value of such awards. The accelerated vesting and share conversion constituted a modification under the authoritative guidance for accounting for stock-based compensation. The modification resulted in $8.8 million of incremental costs on the date of acquisition.
In addition, pursuant to the Transaction Agreement, 2,617,490 unvested performance share units granted under the 2014-2016 Plan and 2013-2015 Plan that were held by Sorin employees upon close of the Mergers were converted into 123,456 LivaNova ordinary shares in a manner designed to preserve the intrinsic value of such awards. For awards not yet earned based on performance achieved as of the date of the Mergers, a service requirement was added to the remaining awards and the performance conditions were removed, resulting in a modification to the award (see below for further details). A portion of the service awards vested on the date of the Mergers and of the remaining awards, 50% vested on February 26, 2016 and 50% vested on February 26, 2017, in each case subject to continued employment. The awards will continue to be governed in accordance with the terms and conditions as were applicable immediately prior to the completion of the Mergers, with the exception of the modified terms pursuant to the Transaction Agreement. The modifications made to the performance share units granted under the 2014-2016 Plan and 2013-2015 Plan constituted modifications under the authoritative guidance for accounting for stock-based compensation. The modification resulted in $8.6 million incremental costs of which $0.9 million was recognized on the acquisition date and the remaining $7.7 million will be recognized over the remaining service period of the awards. We recognized $4.9 million and $1.4 million stock-based compensation expense related to these modifications from the date of the acquisition for the year ended December 31, 2016 and through the transitional period ended December 31, 2015, respectively. We recognized $0.3 million stock-based compensation expense related to these modifications during the year ended December 31, 2017.
Further, pursuant to the Transaction Agreement, 1,721,530 deferred bonus shares held by Sorin employees that were outstanding immediately prior to the Mergers were accelerated and became vested upon the close of the Mergers, and were converted to 81,251 LivaNova ordinary shares in a manner designed to preserve the intrinsic value of such awards. The accelerated vesting and share conversion constituted a modification under the authoritative guidance for accounting for stock-based compensation. This guidance requires the Company to revalue the award upon the transaction close and allocate the revised fair value between consideration paid and post-combination expense based on the ratio of service performed through the transaction date over the total service period of the award. The revised fair value allocated to post-combination services resulted in $0.3 million of incremental costs which was recognized on the acquisition date.
Cyberonics awards exchanged for LivaNova awards
Prior to the Mergers, Cyberonics issued stock options and restricted stock awards under its Amended and Restated New Employee Equity Inducement Plan and 2009 Stock Plan. All of the awards under these plans accelerated and vested as a result of the Mergers. Cyberonics stock options (except as described below) and restricted shares were converted into 813,794 LivaNova share options and 209,043 LivaNova ordinary shares, respectively, in a manner designed to preserve the intrinsic value of such awards. The stock options will continue to become exercisable in accordance with the terms and conditions as were applicable immediately prior to the completion of the Mergers. Additionally, 146,105 Cyberonics stock options held by executive officers that were outstanding immediately prior to the Mergers were settled in cash in the amount of $5.0 million.
LivaNova StockStock-Based Plans
On October 16, 2015, the sole shareholder of LivaNova approved the adoption of the Company’s 2015 Incentive Award Plan (the “2015 Plan”). The Plan became effective as of October 19, 2015. IncentiveStock-based awards may be granted under the 2015 Plan and the 2022 Plan in the form of stock options, stock appreciation rights, restricted stock, restricted stock units,SARs, RSUs and other stock-based and cash-based awards and dividend equivalents.awards. As of December 31, 2017,2023, there were approximately 6,115,00012,098 shares available for future grants to LivaNova’s non-executive directors under the 2015 Plan and 1,422,656 shares pursuant to Options or Stock Appreciation Rights and 902,967 shares pursuant to other types of awards available for future grants to LivaNova’s non-executive directors and employees under the 2022 Plan. In June 2023, the Company’s shareholders approved the A&R 2022 Plan. The A&R 2022 Plan increases the aggregate number of ordinary shares that can be issued under the 2022 Plan pursuant to options or SARs from 1,900,000 to 2,250,000 and the number of ordinary shares that can be issued pursuant to awards other than options or SARs from 1,200,000 to 1,500,000.
During the year ended December 31, 2023, LivaNova issued stock-based compensatory awards with terms approved by the Compensation Committee of LivaNova’s Board of Directors. The awards with service conditions generally vest ratably over four years and are subject to forfeiture unless service conditions are met. The market performance-based awards that were issued cliff vest after three years subject to the rank of LivaNova’s total shareholder return for the three-year period ending December 31, 2025 relative to the total shareholder returns for a peer group of companies. The adjusted free cash flow and return on invested capital operating performance-based awards that were issued, cliff vest after three years subject to the achievement of certain thresholds of cumulative results for the three-year period ending December 31, 2025.
The stock-based compensation tables below includeCompany also provides an ESPP. Compensation expense and share activity related to discontinued operations.the ESPP for the years ended December 31, 2023, 2022 and 2021 was $1.1 million, $1.2 million and $1.5 million, respectively.
Stock-Based Compensation
AmountsThe following table presents the amounts of stock-based compensation recognized in theon LivaNova’s consolidated statements of income (loss), by expense category are as followsfor the years ended December 31, 2023, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
Cost of goods sold | | $ | 967 | | | $ | 1,455 | | | $ | 2,451 | |
Selling, general and administrative | | 29,421 | | | 35,638 | | | 29,449 | |
Research and development | | 5,964 | | | 7,716 | | | 8,664 | |
Total stock-based compensation expense | | 36,352 | | | 44,809 | | | 40,564 | |
Income tax benefit | | 1,845 | | | 706 | | | 588 | |
Total expense, net of income tax benefit | | $ | 34,507 | | | $ | 44,103 | | | $ | 39,976 | |
|
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period April 25, 2015 to December 31, 2015 | | Fiscal Year Ended April 24, 2015 |
Cost of goods sold | | $ | 450 |
| | $ | 709 |
| | $ | 452 |
| | $ | 559 |
|
Selling, general and administrative | | 16,118 |
| | 15,570 |
| | 15,588 |
| | 8,357 |
|
Research and development | | 1,119 |
| | 912 |
| | 1,664 |
| | 3,024 |
|
Merger-related expense | | — |
| | 271 |
| | 13,010 |
| | — |
|
Stock-based compensation from continuing operations | | 17,687 |
| | 17,462 |
| | 30,714 |
| | 11,940 |
|
Stock-based compensation from discontinued operations | | 1,375 |
| | 2,107 |
| | 316 |
| | — |
|
Total stock-based compensation expense | | 19,062 |
| | 19,569 |
| | 31,030 |
| | 11,940 |
|
Income tax benefit, related to awards, recognized in the consolidated statements of income | | 4,236 |
| | 4,645 |
| | 7,776 |
| | 3,944 |
|
Total expense, net of income tax benefit | | $ | 14,826 |
| | $ | 14,924 |
| | $ | 23,254 |
| | $ | 7,996 |
|
AmountsThe following table presents the amounts of stock-based compensation expense recognized in theon LivaNova’s consolidated statements of income (loss) by type of arrangement are as followsfor the years ended December 31, 2023, 2022 and 2021 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period April 25, 2015 to December 31, 2015 | | Fiscal Year Ended April 24, 2015 |
Service-based stock appreciation rights ("SARs") | | $ | 6,916 |
| | $ | 7,953 |
| | $ | 10,652 |
| | $ | 4,317 |
|
Service-based restricted stock units ("RSUs") | | 8,223 |
| | 9,388 |
| | 8,204 |
| | 6,119 |
|
Market performance-based restricted stock units | | 732 |
| | 31 |
| | — |
| | — |
|
Operating performance-based restricted stock units | | 1,816 |
| | 90 |
| | 11,858 |
| | 1,504 |
|
Total stock-based compensation expense from continuing operations | | $ | 17,687 |
| | $ | 17,462 |
| | $ | 30,714 |
| | $ | 11,940 |
|
| | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
RSUs | | $ | 20,493 | | | $ | 21,563 | | | $ | 19,614 | |
SARs | | 13,710 | | | 14,065 | | | 12,489 | |
Market performance-based restricted stock units | | 866 | | | 4,651 | | | 3,522 | |
Operating performance-based restricted stock units | | 162 | | | 3,338 | | | 3,434 | |
Employee share purchase plan | | 1,121 | | | 1,192 | | | 1,505 | |
Total stock-based compensation expense | | $ | 36,352 | | | $ | 44,809 | | | $ | 40,564 | |
Unrecognized Stock-Based Compensation
AmountsThe following table presents the amounts of stock-based compensation cost not yet recognized related to non-vested awards, including awards assumed or issued as a result of the MergersDecember 31, 2023 (in thousands):
| | | | | | | | | | | | | | |
| | Unrecognized Compensation Cost | | Weighted Average Remaining Vesting Period (in years) |
Service-based stock appreciation rights | | $ | 23,633 | | | 2.61 |
Service-based restricted stock unit awards | | 27,802 | | | 2.52 |
Performance-based restricted stock unit awards | | 4,473 | | | 1.78 |
Total stock-based compensation cost unrecognized | | $ | 55,908 | | | 2.30 |
|
| | | | | | |
| | December 31, 2017 |
| | Unrecognized Compensation Cost | | Weighted Average Remaining Vesting Period (in years) |
Service-based stock appreciation rights | | $ | 14,628 |
| | 3.00 |
Service-based restricted and restricted stock unit awards | | 20,754 |
| | 2.67 |
Performance-based restricted stock and restricted stock unit awards | | 7,926 |
| | 3.17 |
Total stock-based compensation cost unrecognized | | $ | 43,308 |
| | 2.92 |
Stock Options and Stock Appreciation Rights and Stock Options
We useLivaNova uses the Black-Scholes option pricing methodology to calculate the grant date fair market value of service-based stock option awards and stock appreciation rights.SARs. The following table lists the assumptions weLivaNova utilized as inputs to the Black-Scholes model: model for the years ended December 31, 2023, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
Dividend yield (1) | | — | | — | | — |
Risk-free interest rate (2) | | 3.7% | | 2.5% | | 1.0% |
Expected option term - in years (3) | | 5.3 | | 5.3 | | 5.6 |
Expected volatility at grant date (4) | | 45.1% | | 42.2% | | 42.1% |
|
| | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period April 25, 2015 to December 31, 2015 | | Fiscal Year Ended April 24, 2015 |
Dividend yield (1)(1)LivaNova has not paid dividends, and no future dividends have been approved.
(2)LivaNova uses yield rates on US Treasury securities for a period that approximates the expected term of the awards granted to estimate the risk-free interest rate. (3)LivaNova estimated the expected term of the awards granted using historic data of actual time elapsed between the date of grant and the exercise or forfeiture of options or SARs for employees. (4)LivaNova determines the expected volatility of the awards based on historical volatility. | | — | | — |
| | — |
| | — |
|
Risk-free interest rate - based on grant date (2)
| | 1.7% - 2.2% | | 1.0% - 1.8% |
| | 1.2% - 1.4% |
| | 1.6% - 2.0% |
|
Expected option term - in years per group of employees/consultants (3)
| | 4.6 - 5.2 | | 4.0 - 5.0 |
| | 4.0 - 5.0 |
| | 4.9 - 6.6 |
|
Expected volatility at grant date (4)
| | 29.6% - 30.4% | | 30.8% - 32.4% |
| | 34.1% |
| | 31.7% - 41.1% |
|
| |
(1) | We have not paid dividends and no future dividends have been approved. |
| |
(2) | We use yield rates on U.S. Treasury securities for a period that approximated the expected term of the award to estimate the risk-free interest rate. |
| |
(3) | We estimated the expected term of the awards granted using historic data of actual time elapsed between the date of grant and the exercise or forfeiture of options or SARs for employees. For consultants, the expected term is the remaining time until expiration of the option or SAR. |
| |
(4) | We determine the expected volatility of the awards based on historical volatility. |
The following tables detailpresent the activity for service-based SARs and stock option awardsawards:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
SARs and Stock Options | | Number of Optioned Shares | | Wtd. Avg. Exercise Price per Share | | Wtd. Avg. Remaining Contractual Term (years) | | Aggregate Intrinsic Value (in thousands) (1) |
Outstanding — as of December 31, 2022 | | 2,806,836 | | | $ | 68.46 | | | | | |
Granted | | 974,204 | | | $ | 42.71 | | | | | |
Exercised | | (232,980) | | | $ | 44.24 | | | | | |
Forfeited | | (297,831) | | | $ | 56.67 | | | | | |
Expired | | (295,927) | | | $ | 75.12 | | | | | |
Outstanding — as of December 31, 2023 | | 2,954,302 | | | $ | 62.40 | | | 6.85 | | $ | 12,005 | |
Fully vested and exercisable — end of year | | 1,455,930 | | | $ | 69.81 | | | 5.2 | | $ | 3,280 | |
Fully vested and expected to vest — end of year (2) | | 2,883,388 | | | $ | 62.67 | | | 6.8 | | $ | 11,513 | |
(1)The aggregate intrinsic value of SARs and stock appreciation rights, including awards assumed or issued as a resultoptions is based on the difference between the fair market value of the Mergers:underlying stock at December 31, 2023, using the market closing stock price, and exercise price for awards where the market closing stock price exceeds the exercise price.
(2)Includes the impact of expected future forfeitures. |
| | | | | | | | | | | | | |
Options and SARs | | Number of Optioned Shares | | Wtd. Avg. Exercise Price per Share | | Wtd. Avg. Remaining Contractual Term (years) | | Aggregate Intrinsic Value (in thousands) (1) |
Outstanding — at December 31, 2016 | | 1,949,328 |
| | $ | 57.07 |
| | | | |
Granted | | 654,478 |
| | 56.84 |
| | | | |
Exercised | | (345,513 | ) | | 56.60 |
| | | | |
Forfeited | | (154,381 | ) | | 59.52 |
| | | | |
Expired | | (78,790 | ) | | 58.90 |
| | | | |
Outstanding — at December 31, 2017 | | 2,025,122 |
| | 56.82 |
| | 6.8 | | $ | 46,796 |
|
Fully vested and exercisable — end of year | | 944,051 |
| | 58.37 |
| | 4.2 | | $ | 20,342 |
|
Fully vested and expected to vest — end of year (2) | | 1,990,317 |
| | $ | 56.82 |
| | 6.7 | | $ | 45,989 |
|
| |
(1) | The aggregate intrinsic value of options and SARs is based on the difference between the fair market value of the underlying stock at December 31, 2017, using the market closing stock price, and exercise price for in-the-money awards. |
| |
(2) | Factors in expected future forfeitures. |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
Weighted average grant date fair value of SARs granted during the year (per share) | | $ | 19.44 | | | $ | 34.13 | | | $ | 29.22 | |
Aggregate intrinsic value of SARs and stock options exercised during the year (in thousands) | | $ | 1,905 | | | $ | 2,143 | | | $ | 12,223 | |
|
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period April 25, 2015 to December 31, 2015 | | Fiscal Year Ended April 24, 2015 |
Weighted average grant date fair value of stock option awards and SARs granted during the year / period (per share) (1) | | $ | 17.19 |
| | $ | 15.03 |
| | $ | 21.05 |
| | $ | 18.64 |
|
Aggregate intrinsic value of stock option and SARs exercised during the year / period (in thousands) | | $ | 5,462 |
| | $ | 5,033 |
| | $ | 5,464 |
| | $ | 3,973 |
|
| |
(1) | Including weighted average Mergers date fair value of SARs assumed in the Mergers. |
Restricted Stock and Restricted Stock Units Awards
The following tables detailpresent the activity for service-based restricted stock and restricted stock unit awards, including activity from restricted stock units assumed or issued as a result of the Mergers:RSU awards:
| | | | | | | | | | | | | | |
RSUs | | Number of Shares | | Wtd. Avg. Grant Date Fair Value |
Non-vested shares as of December 31, 2022 | | 741,892 | | | $ | 68.02 | |
Granted | | 528,128 | | | $ | 43.31 | |
Vested | | (333,013) | | | $ | 66.37 | |
Forfeited | | (154,470) | | | $ | 56.09 | |
Non-vested shares as of December 31, 2023 | | 782,537 | | | $ | 54.40 | |
|
| | | | | | | |
| | Number of Shares | | Wtd. Avg. Grant Date Fair Value |
Non-vested shares at December 31, 2016 | | 506,219 |
| | $ | 56.56 |
|
Granted | | 131,442 |
| | 61.37 |
|
Vested | | (169,580 | ) | | 59.09 |
|
Forfeited | | (87,973 | ) | | 56.68 |
|
Non-vested shares at December 31, 2017 | | 380,108 |
| | $ | 57.07 |
|
|
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period April 25, 2015 to December 31, 2015 | | Fiscal Year Ended April 24, 2015 |
Weighted average grant date fair value of service-based share grants issued during the year / period (per share) | | $ | 61.37 |
| | $ | 55.53 |
| | $ | 57.55 |
| | $ | 56.85 |
|
Aggregate fair value of service-based share grants that vested during the year / period (in thousands) | | $ | 9,966 |
| | $ | 4,810 |
| | $ | 24,384 |
| | $ | 9,194 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
Weighted average grant date fair value of service-based RSUs issued during the year (per share) | | $ | 43.31 | | | $ | 76.35 | | | $ | 74.17 | |
Aggregate fair value of RSUs that vested during the year (in thousands) | | $ | 14,853 | | | $ | 22,793 | | | $ | 21,501 | |
The following tables detailpresent the activity for performance-based and market-based restricted stock and restricted stock unitRSU awards:
| | | | | | | | | | | | | | |
Performance-based RSUs | | Number of Shares | | Wtd. Avg. Grant Date Fair Value |
Non-vested shares as of December 31, 2022 | | 330,534 | | | $ | 70.45 | |
Granted | | 189,117 | | | $ | 40.63 | |
Vested | | (75,877) | | | $ | 40.94 | |
Forfeited | | (171,804) | | | $ | 65.83 | |
Performance adjustments (1) | | (64,950) | | | $ | 42.52 | |
Non-vested shares as of December 31, 2023 | | 207,020 | | | $ | 66.84 | |
|
| | | | | | | |
| | Number of Shares | | Wtd. Avg. Grant Date Fair Value |
Non-vested shares at December 31, 2016 | | 52,083 |
| | $ | 42.01 |
|
Granted | | 346,584 |
| | $ | 42.11 |
|
Vested | | (2,171 | ) | | $ | 57.60 |
|
Forfeited | | (55,109 | ) | | $ | 42.73 |
|
Non-vested shares at December 31, 2017 | | 341,387 |
| | |
(1)Represents the difference between the target units granted and the actual units awarded based upon the attainment of performance goals for the Company. | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
Weighted average grant date fair value of performance-based restricted share units granted during the year (per share) | | $ | 40.63 | | | $ | 92.53 | | | $ | 89.29 | |
Aggregate fair value of performance-based restricted share units that vested during the year (in thousands) | | $ | 3,641 | | | $ | 877 | | | $ | 8,268 | |
|
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period April 25, 2015 to December 31, 2015 | | Fiscal Year Ended April 24, 2015 |
Weighted average grant date fair value of performance-based share grants issued during the year / period (per share) | | $ | 42.11 |
| | $ | 42.01 |
| | $ | — |
| | $ | 57.39 |
|
Aggregate fair value of performance-based share grants that vested during the year / period (in thousands) | | $ | 110 |
| | $ | — |
| | $ | 9,648 |
| | $ | 10,519 |
|
Note 15.16. Employee Retirement Plans
Prior to the Mergers, Cyberonics did not sponsor any defined benefit pension plans. As a result of the Mergers, we assumedDefined Benefit Plans
LivaNova sponsors several defined benefit pension plans, which include plans in the U.S.,US, Italy, Germany, Japan and France. We maintainThe Company maintains a frozen cash balance retirement plan in the U.S.,US that is a contributory, defined benefit plan designed to provide the benefit in terms of a stated account balance dependent on the employer'semployer’s promised interest-crediting rate. In Italy and France, we maintainLivaNova maintains a severance pay defined benefit plan that obligates the employer to pay a severance payment in case of resignation, dismissal or retirement. In other jurisdictions, we sponsorLivaNova sponsors non-contributory, defined benefit plans designated to provide a guaranteed minimum retirement benefits to eligible employees.
Risks Related to Defined Benefit Plans
We carried forward Cyberonics’sThe defined contributionbenefit plans afterexpose LivaNova to various demographic and economic risks such as longevity risk, investment risks, currency and interest rate risks and in some cases inflation risk. Pension fund Trustees are responsible for and have full discretion over the Mergers, including the Cyberonics, Inc. Employee Retirement Savings Plan, which qualifies under Section 401(k)investment strategy of the IRC, covering U.S. employees,plan assets. In general, Trustees manage pension fund risks by diversifying the Cyberonics, Inc. Non-Qualified Deferred Compensation Plan (the “Deferred Compensation”), covering certain U.S. middleinvestments of plan assets and senior management andin some cases by matching the Belgium Defined Contribution Pension Plan for Cyberonics’s Belgium employees.interest rate risk of liabilities in whole or in part.
The expense relatedCompany has an active de-risking strategy in which it consistently looks for opportunities to thesereduce the risks associated with its defined benefit plans. The plans was $10.2 millionare governed by Trustees who have a legal obligation to evenly balance the interests of all stakeholders and $11.6 million foroperate under the years ended December 31, 2017 and December 31, 2016, respectively, $2.9 million for the transitional period from April 25, 2015 to December 31, 2015 and $1.8 million for the fiscal year ended April 24, 2015.local regulatory framework.
The following table presents the change in benefit obligations and funded status of our U.S.LivaNova’s US pension benefits for the years ended December 31, 2023, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | US Pension Benefits |
| | 2023 | | 2022 | | 2021 |
Accumulated benefit obligations at year end | | $ | 9,222 | | | $ | 9,790 | | | $ | 12,578 | |
Change in projected benefit obligation: | | | | | | |
Projected benefit obligation at beginning of year | | $ | 9,790 | | | $ | 12,578 | | | $ | 13,085 | |
Interest cost | | 409 | | | 254 | | | 224 | |
Plan settlement | | (245) | | | (1,369) | | | (972) | |
Actuarial (gain)/loss | | (416) | | | (1,361) | | | 527 | |
Benefits paid | | (316) | | | (312) | | | (286) | |
Projected benefit obligation at end of year | | $ | 9,222 | | | $ | 9,790 | | | $ | 12,578 | |
Change in plan assets: | | | | | | |
Fair value of plan assets at beginning of year | | $ | 5,516 | | | $ | 8,020 | | | $ | 8,688 | |
Actual return on plan assets | | 598 | | | (1,189) | | | 189 | |
Employer contributions | | 1,118 | | | 367 | | | 401 | |
Plan settlement | | (245) | | | (1,369) | | | (972) | |
Benefits paid | | (316) | | | (313) | | | (286) | |
Fair value of plan assets at end of year | | $ | 6,671 | | | $ | 5,516 | | | $ | 8,020 | |
Funded status at end of year: | | | | | | |
Fair value of plan assets | | $ | 6,671 | | | $ | 5,516 | | | $ | 8,020 | |
Projected benefit obligations | | 9,222 | | | 9,790 | | | 12,578 | |
Underfunded status of the plan | | 2,551 | | | 4,274 | | | 4,558 | |
Recognized liability | | $ | 2,551 | | | $ | 4,274 | | | $ | 4,558 | |
Amounts recognized on the consolidated balance sheets consist of: | | | | | | |
Non-current liabilities | | $ | 2,551 | | | $ | 4,274 | | | $ | 4,558 | |
Recognized liability | | $ | 2,551 | | | $ | 4,274 | | | $ | 4,558 | |
|
| | | | | | | | | | | | |
| | U.S. Pension Benefits |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period Ended December 31, 2015 |
Accumulated benefit obligations at year end: | | $ | 11,191 |
| | $ | 10,615 |
| | $ | 10,218 |
|
Change in projected benefit obligation: | | | | | | |
Projected benefit obligation at beginning of year | | $ | 10,425 |
| | $ | 10,218 |
| | $ | — |
|
Interest cost | | 361 |
| | 367 |
| | 86 |
|
Benefits obligations assumed in the Mergers | | — |
| | — |
| | 10,378 |
|
Plan curtailments and settlements | | — |
| | (609 | ) | | (59 | ) |
Actuarial (gain) loss | | 770 |
| | 698 |
| | (40 | ) |
Benefits paid | | (555 | ) | | (249 | ) | | (147 | ) |
Projected benefit obligation at end of year | | $ | 11,001 |
| | $ | 10,425 |
| | $ | 10,218 |
|
Change in plan assets: | | | | | | |
Fair value of plan assets at beginning of year | | $ | 5,925 |
| | $ | 5,858 |
| | $ | — |
|
Actual return on plan assets | | 444 |
| | 277 |
| | (33 | ) |
Plan assets acquired in the Mergers | | — |
| | — |
| | 6,097 |
|
Employer contributions | | 870 |
| | 648 |
| | — |
|
Plan settlements | | — |
| | (609 | ) | | (59 | ) |
Benefits paid | | (360 | ) | | (249 | ) | | (147 | ) |
Fair value of plan assets at end of year | | $ | 6,879 |
| | $ | 5,925 |
| | $ | 5,858 |
|
Funded status at end of year: | | | | | | |
Fair value of plan assets | | $ | 6,879 |
| | $ | 5,925 |
| | $ | 5,858 |
|
Projected Benefit obligations | | 11,001 |
| | 10,425 |
| | 10,218 |
|
Underfunded status of the plans | | 4,122 |
| | 4,500 |
| | 4,360 |
|
Recognized liability | | $ | 4,122 |
| | $ | 4,500 |
| | $ | 4,360 |
|
Amounts recognized on the consolidated balance sheets consist of: | | | | | | |
Non-current liabilities | | $ | 4,122 |
| | $ | 4,500 |
| | $ | 4,360 |
|
Recognized liability | | $ | 4,122 |
| | $ | 4,500 |
| | $ | 4,360 |
|
The following table presents the change in benefit obligations and funded status of our non-U.S.LivaNova’s non-US pension benefits for the years ended December 31, 2023, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Non-US Pension Benefits |
| | 2023 | | 2022 | | 2021 |
Accumulated benefit obligations at year end | | $ | 8,099 | | | $ | 8,248 | | | $ | 10,522 | |
Change in projected benefit obligation: | | | | | | |
Projected benefit obligation at beginning of year | | $ | 8,532 | | | $ | 10,817 | | | $ | 13,039 | |
Service cost | | 239 | | | 259 | | | 354 | |
Interest cost | | 239 | | | 83 | | | 56 | |
Actuarial gain | | 86 | | | (831) | | | (1,372) | |
Benefits paid | | (972) | | | (1,060) | | | (294) | |
Foreign currency exchange rate changes and other | | 136 | | | (736) | | | (966) | |
Projected benefit obligation at end of year | | $ | 8,260 | | | $ | 8,532 | | | $ | 10,817 | |
Change in plan assets: | | | | | | |
Fair value of plan assets at beginning of year | | $ | 3,232 | | | $ | 3,142 | | | $ | 2,816 | |
Actual return on plan assets | | (78) | | | (80) | | | 61 | |
Employer contributions | | 263 | | | 265 | | | 302 | |
Benefits paid | | (26) | | | (37) | | | (78) | |
Foreign currency exchange rate changes and other | | (101) | | | (58) | | | 41 | |
Fair value of plan assets at end of year | | $ | 3,290 | | | $ | 3,232 | | | $ | 3,142 | |
Funded status at end of year: | | | | | | |
Fair value of plan assets | | $ | 3,290 | | | $ | 3,232 | | | $ | 3,142 | |
Projected benefit obligations | | 8,260 | | | 8,532 | | | 10,817 | |
Underfunded status of the plans (1) | | 4,970 | | | 5,300 | | | 7,675 | |
Recognized liability | | $ | 6,367 | | | $ | 5,300 | | | $ | 7,675 | |
Amounts recognized on the consolidated balance sheets consist of: | | | | | | |
Non-current liabilities | | $ | 6,367 | | | $ | 5,300 | | | $ | 7,675 | |
Recognized liability | | $ | 6,367 | | | $ | 5,300 | | | $ | 7,675 | |
|
| | | | | | | | | | | | |
| | Non-U.S. Pension Benefits |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period Ended December 31, 2015 |
Accumulated benefit obligations at year end: | | $ | 23,785 |
| | $ | 27,845 |
| | $ | 21,116 |
|
Change in projected benefit obligation: | | | | | | |
Projected benefit obligation at beginning of year | | $ | 20,402 |
| | $ | 21,116 |
| | $ | — |
|
Service cost | | 503 |
| | 397 |
| | 92 |
|
Interest cost | | 291 |
| | 376 |
| | 83 |
|
Benefits obligations assumed in the Mergers | | — |
| | — |
| | 20,626 |
|
Employee contributions | | — |
| | — |
| | — |
|
Plan curtailments and settlements (1) | | — |
| | (20 | ) | | — |
|
Actuarial (gain) loss | | (27 | ) | | 889 |
| | 152 |
|
Benefits paid | | (2,222 | ) | | (1,911 | ) | | (201 | ) |
Foreign currency exchange rate changes and other | | 2,601 |
| | (445 | ) | | 364 |
|
Projected benefit obligation at end of year | | $ | 21,548 |
| | $ | 20,402 |
| | $ | 21,116 |
|
Change in plan assets: | | | | | | |
Fair value of plan assets at beginning of year | | $ | 2,898 |
| | $ | 2,689 |
| | $ | — |
|
Actual return on plan assets | | 54 |
| | 28 |
| | 6 |
|
Plan assets acquired in the Mergers | | — |
| | — |
| | 2,607 |
|
Employer contributions | | 369 |
| | — |
| | 81 |
|
Employee contributions | | — |
| | 358 |
| | — |
|
Plan settlements | | — |
| | — |
| | — |
|
Benefits paid | | (393 | ) | | (238 | ) | | (5 | ) |
Foreign currency exchange rate changes | | 147 |
| | 61 |
| | — |
|
Fair value of plan assets at end of year | | $ | 3,075 |
| | $ | 2,898 |
| | $ | 2,689 |
|
Reclassification of net obligation to Current liabilities of discontinued operations | | — |
| | — |
| | — |
|
Funded status at end of year: | | | | | | |
Fair value of plan assets | | $ | 3,075 |
| | $ | 2,898 |
| | $ | 2,689 |
|
Projected Benefit obligations | | 21,548 |
| | 20,402 |
| | 21,116 |
|
Underfunded status of the plans (2) | | 18,473 |
| | 17,504 |
| | 18,427 |
|
Recognized liability | | $ | 18,473 |
| | $ | 17,504 |
| | $ | 18,427 |
|
Amounts recognized on the consolidated balance sheets consist of: | | | | | | |
Non-current assets | | $ | — |
| | $ | — |
| | $ | — |
|
Current liabilities | | — |
| | — |
| | — |
|
Non-current liabilities | | 18,473 |
| | 17,504 |
| | 18,427 |
|
Recognized liability | | $ | 18,473 |
| | $ | 17,504 |
| | $ | 18,427 |
|
| |
(1) | Benefits to be accumulated in future periods in our French defined benefit plan were curtailed due to our Meylan, French facility restructuring. |
| |
(2) | In certain non-U.S. countries fully funding pension plans is not a common practice. Consequently, certain pension plans have been partially funded. |
Defined Benefit Plan Net Periodic Benefit Cost(1)In certain non-US countries, fully funding pension plans is not a common practice. Consequently, certain pension plans have been partially funded.
The following tables present US and non-US net periodic benefit cost of theLivaNova’s defined benefit pension plans includesby component for the following componentsyears ended December 31, 2023, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | US Pension Benefits |
| | 2023 | | 2022 | | 2021 |
Interest cost | | $ | 409 | | | $ | 254 | | | $ | 224 | |
Expected return on plan assets | | (209) | | | (298) | | | (358) | |
Settlement and curtailment loss | | — | | | 731 | | | 471 | |
Amortization of net actuarial loss | | 233 | | | 262 | | | 264 | |
Net periodic benefit cost | | $ | 433 | | | $ | 949 | | | $ | 601 | |
| | | | U.S. Pension Benefits |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period Ended December 31, 2015 |
| | Non-US Pension Benefits | | | | Non-US Pension Benefits |
| | 2023 | | | | 2023 | | 2022 | | 2021 |
Service cost | |
Interest cost | | $ | 361 |
| | $ | 367 |
| | $ | 86 |
|
Expected return on plan assets | | (282 | ) | | (277 | ) | | (77 | ) |
Settlement and curtailment loss (gains) | | — |
| | 259 |
| | 282 |
|
Amortization of net actuarial loss | | 527 |
| | 439 |
| | 96 |
|
Amortization of net actuarial loss (gain) | |
Net periodic benefit cost | | $ | 606 |
| | $ | 788 |
| | $ | 387 |
|
The following tables present the major actuarial assumptions used in determining the benefit obligations and net periodic benefit costs for LivaNova’s significant US and non-US defined benefit plans as of December 31, 2023, 2022 and 2021: |
| | | | | | | | | | | | |
| | Non-U.S. Pension Benefits |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period Ended December 31, 2015 |
Service cost | | $ | 503 |
| | $ | 397 |
| | $ | 92 |
|
Interest cost | | 291 |
| | 376 |
| | 83 |
|
Expected return on plan assets | | (54 | ) | | (28 | ) | | — |
|
Settlement and curtailment loss (gains) | | — |
| | (20 | ) | | — |
|
Amortization of net actuarial loss | | (27 | ) | | 889 |
| | — |
|
Net periodic benefit cost | | $ | 713 |
| | $ | 1,614 |
| | $ | 175 |
|
| | | | | | | | | | | | | | | | | | | | |
| | US Pension Benefits |
| | 2023 | | 2022 | | 2021 |
Weighted-average assumptions used to determine benefit obligation: | | | | | | |
Discount rate | | 4.93% | | 5.10% | | 2.41% |
Weighted-average assumptions used to determine net periodic benefit cost: | | | | | | |
Discount rate | | 5.10% | | 2.41% | | 1.91% |
Expected return on plan assets | | 5.00% | | 5.00% | | 5.00% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Non-US Pension Benefits |
| | 2023 | | 2022 | | 2021 |
Weighted-average assumptions used to determine benefit obligation: | | | | | | | | | | | | |
Discount rate | | 0.96% | - | 3.20% | | 0.45% | - | 3.70% | | 0.15% | - | 1.00% |
Rate of compensation increase | | 2.50% | - | 3.50% | | 2.50% | - | 3.50% | | 2.50% | - | 3.00% |
Weighted-average assumptions used to determine net periodic benefit cost: | | | | | | | | | | | | |
Discount rate | | 0.96% | - | 3.20% | | 0.45% | - | 3.70% | | 0.15% | - | 1.00% |
Rate of compensation increase | | 3.38% | - | 3.50% | | 2.50% | - | 3.50% | | 2.50% | - | 3.00% |
To determine the discount rate for our U.S.LivaNova’s US benefit plan, wethe Company used the Citigroup Above-median yield curve.FTSE Above Median Pension Discount Curve. For the discount rate used for the other non-U.S.non-US benefit plans, we considerLivaNova considers local market expectations of long-term returns.returns, primarily utilizing the Iboxx Corporate Index Bond rating AA, duration higher than 10 years. The resulting discount rates are consistent with the duration of plan liabilities.
The expected long-term rate of return on plan assets assumptions are determined usingassumption for LivaNova’s US defined benefit plan was derived from a building block approach, considering historical averagesstudy conducted by the Company’s investment managers. The study includes a review of the anticipated future long-term performance of individual asset classes and real returnsconsiders the appropriate asset allocation strategy, given the anticipated funding requirements of each asset class. In certain countries, where historical returns are not meaningful, consideration is giventhe plan, to local market expectationsdetermine the average rate of long-term returns.
Major actuarial assumptions used in determiningearnings expected on the benefit obligations and net periodic benefit cost for our significant U.S. benefit plans are presented in the following table:
|
| | | | | | |
| | U.S. Pension Benefits |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period Ended December 31, 2015 |
Actuarial assumptions used to determine benefit obligation and net periodic benefit cost: | | | | | | |
Discount rate | | 3.28% | | 3.63% | | 3.79% |
Actuarial assumptions used to determine net periodic benefit cost: | | | | | | |
Discount rate | | 3.63% | | 3.04% - 3.79% | | 3.64% |
Expected return on plan assets | | 5.00% | | 5.00% | | 5.00% |
Major actuarial assumptions used in determining the benefit obligations and net periodic benefit cost for our significant non-U.S. benefit plans are presented in the following table:
|
| | | | | | |
| | Non-U.S. Pension Benefits |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period Ended December 31, 2015 |
Actuarial assumptions used to determine benefit obligation and net periodic benefit cost: | | | | | | |
Discount rate | | 0.27% - 2.73% | | 0.27% - 1.50% | | 0.48% - 2.00% |
Rate of compensation increase | | 2.50% - 3.00% | | 2.50% - 3.89% | | 2.50% - 3.89% |
funds invested.Retirement Benefit Plan Investment Strategy
In the U.S., we haveUS, LivaNova has an account that holds the defined benefit frozen balance pension plan assets. The Qualified Plan Committee (the “Plan Committee”) sets investment guidelines for U.S.the US pension plans. The planplan. Plan assets in the U.S.US are invested in accordance with sound investment practices that emphasize long-term fundamentals. The investment objectivesobjective for the plan assets in the U.S. areUS is to achieve a positive rate of return that would be expected to close the current funding deficit and so enable usLivaNova to terminate the frozen pension plan at a reasonable cost. The Plan Committee also oversees the investment allocation process, selects the investment managers, and monitors asset performance. The investment portfolio containsplan investments consist of a diversified portfolio of fixed income and equity index funds. Securities are also diversified in terms of domesticinvestment location (domestic and international securities, short-international) tenor (short- and long-term securities, growthsecurities), investment objective (growth and value styles, large capvalue), and small cap stocks.size of market.
Outside the U.S.,US, pension plan assets are typically managed by decentralized fiduciary committees. There is a significant variation in policy asset allocation policy from country to country. Local regulations, local funding rules, and local financial and tax considerations are part ofinfluence the funding and investment allocation process in each country.
The following table presents LivaNova’s US and Non-US pension plan target allocations by asset category:category as of December 31, 2023 and 2022:
|
| | |
| | U.S. Pension Benefits as of December 31, 2017 |
Equity securities | | 27% |
Debt securities | | 63% |
Other | | 10% |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | US Pension Benefits | | Non-US Pension Benefits |
| | 2023 | | 2022 | | 2023 | | 2022 |
Equity securities | | 29% | | 29% | | 1% | | 1% |
Debt securities | | 70% | | 70% | | 79% | | 84% |
Other | | 1% | | 1% | | 20% | | 15% |
Retirement Benefit Fair Values
The following is a description of the valuation methodologies used for retirement benefit plan assets measured at fair value:
Equity Mutual Funds: Valued based on the year-end net asset values of the investment vehicles. The net asset values of the investment vehicles are based on the fair values of the underlying investments of the partnershipsmutual funds valued at the closing price reported in the active markets in which the individual security is traded. Equity mutual funds have a daily reported net asset value.
Fixed Income Mutual Funds: Valued based on the year-end net asset values of the investment vehicles. The net asset values of the investment vehicles are based on the fair values of the underlying investments of the partnershipsmutual funds valued based on inputs other than quoted prices that are observable.
Money Markets: Valued based on quoted prices in active markets for identical assets.
The following tables providepresent information by level for the US retirement benefit plan assets that are measured at fair value on a recurring basis as defined by U.S. GAAPof December 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | Fair Value Measurement Using Inputs Considered as: |
| | | Level 1 | | Level 2 | | Level 3 |
Equity mutual funds | | $ | 1,882 | | | $ | — | | | $ | 1,882 | | | $ | — | |
Fixed income mutual funds | | 4,571 | | | — | | | 4,571 | | | — | |
Money market funds and cash | | 85 | | | 85 | | | — | | | — | |
| | $ | 6,538 | | | $ | 85 | | | $ | 6,453 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | Fair Value Measurement Using Inputs Considered as: |
| | | Level 1 | | Level 2 | | Level 3 |
Equity mutual funds | | $ | 1,591 | | | $ | — | | | $ | 1,591 | | | $ | — | |
Fixed income mutual funds | | 3,843 | | | — | | | 3,843 | | | — | |
Money market funds | | 68 | | | 68 | | | — | | | — | |
| | $ | 5,502 | | | $ | 68 | | | $ | 5,434 | | | $ | — | |
The following tables present information by level for the Non-US retirement benefit plan assets that are measured at fair value on a recurring basis as of December 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | Fair Value Measurement Using Inputs Considered as: |
| | | Level 1 | | Level 2 | | Level 3 |
Equity mutual funds | | $ | (23) | | | $ | — | | | $ | (23) | | | $ | — | |
Fixed income mutual funds | | (1,530) | | | — | | | (1,530) | | | — | |
Money market funds and cash | | (378) | | | (378) | | | — | | | — | |
| | $ | (1,931) | | | $ | (378) | | | $ | (1,553) | | | $ | — | |
|
| | | | | | | | | | | | | | | | |
| | Fair Value as of December 31, 2017 | | Fair Value Measurement Using Inputs Considered as: |
| | | Level 1 | | Level 2 | | Level 3 |
Equity mutual funds | | $ | 1,879 |
| | $ | — |
| | $ | 1,879 |
| | $ | — |
|
Fixed income mutual funds | | 4,334 |
| | — |
| | 4,334 |
| | — |
|
Money market funds | | 666 |
| | 666 |
| | — |
| | — |
|
| | $ | 6,879 |
| | $ | 666 |
| | $ | 6,213 |
| | $ | — |
|
| | | | Fair Value as of December 31, 2016 | | Fair Value Measurement Using Inputs Considered as: |
| | | Level 1 | | Level 2 | | Level 3 |
| | 2022 | | | | 2022 | | Fair Value Measurement Using Inputs Considered as: |
| | | Level 1 | | | | | Level 1 | | Level 2 | | Level 3 |
Equity mutual funds | | $ | 1,660 |
| | $ | — |
| | $ | 1,660 |
| | $ | — |
|
Fixed income mutual funds | | 4,041 |
| | — |
| | 4,041 |
| | — |
|
Money market funds | | 224 |
| | 224 |
| | — |
| | — |
|
| | $ | 5,925 |
| | $ | 224 |
| | $ | 5,701 |
| | $ | — |
|
| | $ | |
Refer to “Note 2. Basis of Presentation, Use of Accounting Estimates and Significant Accounting Policies” for discussion of the fair value measurement terms of Levels 1, 2, and 3.
Defined Benefit Retirement Funding
We makeLivaNova makes the minimum required contribution to fund the U.S.US pension plan as determined by MAP - 21 and the Highway and Transportation Funding Act of 2014 (“HAFTA”). We2014. The Company contributed $1.2$1.4 million, $0.6 million and $0.6$0.7 million to the pension plans (U.S.(US and non-U.S.)non-US) during the years ended December 31, 20172023, 2022 and December 31, 2016,2021, respectively. DuringLivaNova anticipates the transitional period April 25, 2015 to December 31, 2015, we did not make a material contribution to the U.S. or non-U.S. pension plans. We anticipate that weCompany will make contributions to the U.S.US pension plan of approximately $0.9$0.2 million during the year ended December 31, 2018.2024.
BenefitThe following table presents benefit payments expected to be paid, including amounts to be paid from ourLivaNova’s assets, and reflecting expected future service, as appropriate, are expected to be paid as followsof December 31, 2023 (in thousands):
| | | | | | | | | | | | | | |
| | US Plans | | Non-US Plans |
2024 | | 3,495 | | | 514 | |
2025 | | 829 | | | 537 | |
2026 | | 877 | | | 657 | |
2027 | | 667 | | | 594 | |
2028 | | 509 | | | 664 | |
2029 - 2033 | | 2,105 | | | 3,886 | |
|
| | | | | | | | |
| | U.S. Plans | | Non-U.S. Plans |
2018 | | $ | 1,965 |
| | $ | 1,670 |
|
2019 | | 622 |
| | 801 |
|
2020 | | 1,034 |
| | 1,019 |
|
2021 | | 780 |
| | 911 |
|
2022 | | 1,033 |
| | 1,085 |
|
Thereafter | | $ | 5,757 |
| | $ | 16,062 |
|
Severance Indemnity
In Italy, upon termination of employment for any reason, employers are required to pay a termination indemnity (Trattamento di fine Rapporto or “TFR”) to all employees as required by Italian Civil Code. In Italy, the TFR serves as a backup in the event of redundancy or as an additional pension benefit after retirement. The TFR is considered a defined contribution plan with respect to amounts vesting as of January 1, 2007 for employees who have opted for supplementary pensions or who have chosen to maintain the TFR at the company, for companies with more than 50 employees. We have incurred expenses related to the Italian TFR of approximately $0.4 million and $1.1 million for the years ended December 31, 2017 and December 31, 2016, respectively, and $1.3 million for the transitional period April 25, 2015 to December 31, 2015.
Defined Contribution Plans
WeLivaNova sponsors defined contribution plans in the US including the Cyberonics Employee Retirement Savings Plan, which qualifies under Section 401(k) of the IRC covering US employees and the Cyberonics Non-Qualified Deferred Compensation Plan, covering certain US middle and senior management. In addition, LivaNova sponsors the Belgium Defined Contribution Pension Plan for Cyberonics’ Belgium employees. LivaNova incurred expenses for ourthe Company’s defined contribution plans of $7.8$11.1 million, $9.0 million and $10.0$10.2 million for the years ended December 31, 20172023, 2022 and December 31, 2016, respectively, and $2.9 million for the transitional period April 25, 2015 to December 31, 2015.2021, respectively.
Note 16.17. Income Taxes
Earnings Before Income Taxes and Components of Income Tax ExpenseProvision
The U.S.following table presents the US and non-U.S.non-US components of income (loss) from continuing operations before income taxes and ourLivaNova’s income tax provisionexpense (benefit) from continuing operations are as followsfor the years ended December 31, 2023, 2022 and 2021 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period April 25, 2015 to December 31, 2015 | | Fiscal Year Ended April 24, 2015 |
Income (loss) from continuing operations before income taxes: | | | | | | | | |
UK and Non-United States | | $ | 71,980 |
| | $ | (36,997 | ) | | $ | (27,491 | ) | | $ | 2,020 |
|
United States | | 49,158 |
| | 62,663 |
| | 1,493 |
| | 87,274 |
|
| | $ | 121,138 |
| | $ | 25,666 |
| | $ | (25,998 | ) | | $ | 89,294 |
|
Total income tax provision (benefit) from continuing operations consisted of the following: | | | | | | | | |
Current: | | | | | | | | |
UK and Non-United States | | $ | 12,771 |
| | $ | 13,876 |
| | $ | 2,454 |
| | $ | 1,065 |
|
United States | | 26,743 |
| | 19,706 |
| | 23,544 |
| | 21,104 |
|
| | $ | 39,514 |
| | $ | 33,582 |
| | $ | 25,998 |
| | $ | 22,169 |
|
Deferred: | | | | | | | | |
UK and Non-United States | | $ | (4,140 | ) | | $ | (28,607 | ) | | $ | (18,690 | ) | | $ | 834 |
|
United States | | 14,580 |
| | 138 |
| | (20,809 | ) | | 8,443 |
|
| | $ | 10,440 |
| | $ | (28,469 | ) | | $ | (39,499 | ) | | $ | 9,277 |
|
Total provision for income tax expense (benefit) from continuing operations | | $ | 49,954 |
| | $ | 5,113 |
| | $ | (13,501 | ) | | $ | 31,446 |
|
| | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
Income (loss) before income taxes: | | | | | | |
UK and Non-US | | $ | 60,799 | | | $ | 22,570 | | | $ | 22,094 | |
US | | (142,025) | | | (97,712) | | | (146,566) | |
| | $ | (81,226) | | | $ | (75,142) | | | $ | (124,472) | |
Total income tax expense (benefit) consisted of the following: | | | | | | |
Current: | | | | | | |
UK and Non-US | | $ | 10,954 | | | $ | 4,782 | | | $ | 4,296 | |
US | | 4,598 | | | 4,860 | | | 4,050 | |
| | $ | 15,552 | | | $ | 9,642 | | | $ | 8,346 | |
Deferred: | | | | | | |
UK and Non-US | | $ | (114,428) | | | $ | 1,409 | | | $ | 2,852 | |
| | | | | | |
| | | | | | |
Total income tax (benefit) expense | | $ | (98,876) | | | $ | 11,051 | | | $ | 11,198 | |
Effective Income Tax Rate Reconciliation
LivaNova PLC is resident in the UK for tax purposes. LivaNova’s subsidiaries conduct operations and earn income in numerous countries and are subject to the laws of taxing jurisdictions within those countries, and the income tax rates imposed in the tax jurisdictions in which LivaNova’s subsidiaries conduct operations vary. As a result of the changes in the overall level of the Company’s income, the earnings mix in various jurisdictions and the changes in tax laws, LivaNova’s consolidated effective income tax rate may vary from one reporting period to another.
LivaNova is subject to income taxes as well as non-income-based taxes in the US, the UK, the EU and various other jurisdictions. LivaNova continues to monitor the adoption of Pillar Two by the taxing jurisdictions in which it operates. The UK has enacted legislation providing for a minimum effective tax rate of 15% through a multinational top-up tax and a domestic top-up tax for accounting periods beginning on or after December 31, 2023. Draft UK legislation has also been published for an undertaxed profits rule to be introduced, although not before accounting periods beginning on or after December 31, 2024. A UTPR would be a backstop rule intended to ensure that amounts of multinational top-up tax that are not collected under foreign global minimum tax rules can in certain circumstances be collected instead in the UK. LivaNova is assessing the full implications on 2024 financial results and will continue to monitor legislative developments and related guidance in the UK and other jurisdictions that may impact LivaNova’s operations.
The following istable presents a reconciliation of the statutory income tax rate to ourLivaNova’s effective income tax rate expressed as a percentage of income from continuing operationsloss before income taxes:
|
| | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period April 25, 2015 to December 31, 2015 | | Fiscal Year Ended April 24, 2015 |
Statutory tax rate at U.S. Rate | | — | % | | — | % | | — | % | | 35.0 | % |
Statutory tax rate at U.K. Rate | | 19.0 |
| | 20.0 |
| | 19.1 |
| | — |
|
Effect of changes in tax rate
| | (19.9 | ) | | (0.2 | ) | | (12.9 | ) | | — |
|
Deferred tax valuation allowance | | 10.6 |
| | 5.1 |
| | 12.6 |
| | — |
|
Transaction costs (1) | | 2.0 |
| | 10.2 |
| | (20.9 | ) | | — |
|
Sale of Intellectual Property | | 44.3 |
| | 17.6 |
| | — |
| | — |
|
U.S. state and local tax provision, net of federal benefit | | 1.2 |
| | 7.9 |
| | — |
| | 2.7 |
|
Foreign tax rate differential | | 10.7 |
| | 101.5 |
| | 37.5 |
| | 1.5 |
|
Notional interest deduction | | (13.5 | ) | | (68.4 | ) | | 12.0 |
| | — |
|
U.S. Subpart F | | 1.5 |
| | 7.9 |
| | (7.6 | ) | |
|
|
Research and development tax credits | | (1.6 | ) | | (4.0 | ) | | 6.0 |
| | (2.1 | ) |
Distribution of subsidiary earnings | | (0.3 | ) | | (55.1 | ) | | — |
| | — |
|
Reserve for uncertain tax positions | | 1.2 |
| | 8.4 |
| | — |
| | — |
|
Domestic manufacturing deduction | | (1.8 | ) | | (2.8 | ) | | 3.0 |
| | — |
|
Tax on UK CFC interest pick-up | | — |
| | 1.3 |
| | — |
| | — |
|
Write-off/impairment of investments | | (14.8 | ) | | (30.3 | ) | | (0.9 | ) | | — |
|
Other, net | | 2.6 |
| | 0.8 |
| | 4.0 |
| | (1.9 | ) |
Effective tax rate | | 41.2 | % | | 19.9 | % | | 51.9 | % | | 35.2 | % |
| |
(1) | Included in transitional period April 25, 2015 to December 31, 2015 is the reversal of the deferred tax asset established during the fiscal year ended April 24, 2015 based on the assumption that these otherwise non-deductible transaction costs would be deductible if the business combination was not consummated. Because the transaction was ultimately consummated, the deferred tax asset was reversed as a non-deductible transaction cost in the amount of $2.3 million. |
U.S. Tax Reform
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”). The Act, which is also commonly referred to as “U.S. tax reform”, significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% commencing in 2018. In addition, the Act created a one-time mandatory tax, a toll charge, on previously deferred foreign earnings of non-U.S. subsidiaries controlled by a U.S. corporation, or in our case, a non-U.S. subsidiary controlled by one of our U.S. subsidiaries. We recorded no toll charge for the yearyears ended December 31, 2017 as we had no previously deferred foreign earnings of U.S. controlled foreign subsidiaries as of the measurement dates. As a result of the Act, we recorded a non-cash net charge of $27.5 million during the fourth quarter of 2017, which is included in “Income tax expense (benefit)” in the consolidated statement of (loss) income. This amount primarily consists of two components: (i) $12.8 million relating to the impairment of foreign tax credits,2023, 2022 and (ii) a net $14.7 million charge resulting from the remeasurement of our deferred tax assets and liabilities in the U.S. based on a change in the corporate income tax rate.2021:
Further regulations and notices and state conformity could be issued as a result of U.S. tax reform covering various issues that may affect our tax position including, but not limited to, an increase in the corporate state tax rate and elimination of the interest deduction. The content of any future legislation, the timing for regulations, notices, and state conformity, and the reporting periods that would be impacted cannot be determined at this time. Although we believe the net charge of $27.5 million is a reasonable estimate of the impact of the income tax effects of the Act on us as of December 31, 2017, the estimate is provisional. Once we finalize certain tax positions for our 2017 U.S. consolidated tax return, we will be able to conclude whether any further adjustments to our tax positions are required. | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
Statutory tax rate at UK Rate | | 23.5 | % | | 19.0 | % | | 19.0 | % |
Deferred tax valuation allowance | | 100.5 | | | (18.8) | | | (47.7) | |
Foreign tax rate differential | | 5.2 | | | 10.6 | | | 7.1 | |
US state and local tax expense, net of federal benefit | | (3.5) | | | (1.4) | | | (0.3) | |
Effect of changes in tax rate | | 1.2 | | | 6.2 | | | 18.9 | |
Write-off/impairment of investments | | (3.1) | | | (27.6) | | | (1.8) | |
| | | | | | |
Research and development tax credits | | 0.3 | | | 1.2 | | | 0.3 | |
| | | | | | |
| | | | | | |
Base erosion anti-abuse tax | | — | | | (2.9) | | | (3.1) | |
| | | | | | |
| | | | | | |
| | | | | | |
Disallowable professional fees | | (2.6) | | | (0.4) | | | (1.5) | |
Compensation related items | | 1.4 | | | (0.1) | | | (0.1) | |
Other, net | | (1.2) | | | (0.5) | | | 0.2 | |
Effective tax rate | | 121.7 | % | | (14.7) | % | | (9.0) | % |
Deferred Income Tax Assets and Liabilities
SignificantThe following table presents the significant components of ourLivaNova’s deferred tax assets and liabilities including amounts related to discontinued operations, are as follows,of December 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | |
| | 2023 | | 2022 |
Deferred tax assets: | | | | |
Net operating loss carryforwards | | $ | 130,097 | | | $ | 142,456 | |
Tax credit carryforwards | | 39,732 | | | 41,918 | |
Interest expense carryforward | | 87,308 | | | 65,497 | |
Accruals and reserves | | 33,911 | | | 35,132 | |
Deferred compensation | | 16,565 | | | 16,081 | |
Inventories | | 13,584 | | | 9,073 | |
Capitalized/Deferred R&D | | 26,744 | | | 29,796 | |
Other | | 3,970 | | | 6,898 | |
Gross deferred tax assets | | 351,911 | | | 346,851 | |
Valuation allowance | | (182,464) | | | (264,754) | |
Net deferred tax assets | | 169,447 | | | 82,097 | |
Deferred tax liabilities: | | | | |
Property, equipment & intangible assets | | (61,511) | | | (76,419) | |
Gain on sale of intellectual property | | — | | | (12,810) | |
| | | | |
Other | | (645) | | | — | |
Gross deferred tax liabilities: | | (62,156) | | | (89,229) | |
Net deferred tax assets (liabilities) | | $ | 107,291 | | | $ | (7,132) | |
Reported on the consolidated balance sheets as (after valuation allowance and jurisdictional netting): | | | | |
Net deferred tax assets | | $ | 118,858 | | | $ | 1,384 | |
Net deferred tax liabilities | | (11,567) | | | (8,516) | |
Net deferred tax assets (liabilities) | | $ | 107,291 | | | $ | (7,132) | |
|
| | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
Deferred tax assets: | | | | |
Net operating loss carryforwards | | $ | 132,615 |
| | $ | 131,904 |
|
Tax credit carryforwards | | 18,585 |
| | 17,242 |
|
Deferred compensation | | 4,697 |
| | 6,521 |
|
Accruals and reserves | | 27,146 |
| | 28,520 |
|
Inventory | | 2,759 |
| | 4,441 |
|
Investments | | 3,858 |
| | — |
|
Other | | 3,310 |
| | 10,306 |
|
Gross deferred tax assets | | 192,970 |
| | 198,934 |
|
Valuation allowance | | (93,333 | ) | | (36,277 | ) |
Total deferred tax assets | | 99,637 |
| | 162,657 |
|
Deferred tax liabilities: | | | | |
Gain on sale of intellectual property | | (75,624 | ) | | (136,117 | ) |
Investments | | (3,135 | ) | | (12,553 | ) |
Property, equipment & intangible assets | | (137,031 | ) | | (164,090 | ) |
Other | | (1,181 | ) | | (16,421 | ) |
Gross deferred tax liabilities: | | (216,971 | ) | | (329,181 | ) |
Total deferred tax (liabilities) assets, net | | $ | (117,334 | ) | | $ | (166,524 | ) |
Reported in the consolidated balance sheet as (after valuation allowance and jurisdictional netting): | | | | |
Net deferred tax asset | | $ | 14,076 |
| | $ | 6,017 |
|
Deferred tax liability | | (131,410 | ) | | (172,541 | ) |
Net deferred tax (liabilities) assets | | $ | (117,334 | ) | | $ | (166,524 | ) |
Refer to “Note 4. Discontinued Operations” forLivaNova reviews the amountsrealizability of its deferred tax assets by jurisdictions at each balance sheet date by weighing the positive and liabilities includednegative evidence including cumulative losses and impacts of transactions or other events. As of December 31, 2023 and 2022, LivaNova had valuation allowances against deferred tax assets of $182.5 million and $264.8 million, respectively. These valuation allowances were primarily related to continuing operations and are a result of significant negative evidence in the above schedule relatedform of cumulative losses in certain jurisdictions. The decrease in valuation allowance in 2023 primarily relates to discontinued operations. Valuation allowance related to discontinued operations includedthe release of valuation allowances in the schedule above was $48.7UK of $110.8 million and $26.8 millionother jurisdictions, partially offset by continued valuation allowance accruals in the US and Brazil. Any changes to the realizability of the deferred tax assets due to transactions and other events in 2024 will be accounted for during the quarter in which they occur.
The following table provides a reconciliation of the beginning and ending balances of LivaNova’s deferred tax asset valuation allowances for the years ended December 31, 20172023, 2022 and December 31, 2016, respectively.2021 (in thousands):
We remeasured certain deferred | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
Balance at beginning of year | | $ | 264,754 | | | $ | 244,978 | | | $ | 189,864 | |
Additions | | 38,278 | | | 24,896 | | | 67,814 | |
Deductions | | (120,568) | | | (5,120) | | | (12,700) | |
Balance at end of year | | $ | 182,464 | | | $ | 264,754 | | | $ | 244,978 | |
The following table presents NOL and tax assets and liabilities based on the rates at which they are expected to reverse in the future. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.
We utilized $2.5 million and $5.3 million of U.S. capital loss carryforward for the years ended December 31, 2017 and December 31, 2016, respectively. We have $12.8 million of foreign tax credits in the U.S., $3.4 million of U.S. State tax credits and $2.4 million of other credits.
Net Operating Loss Carryforwards
We had the following net operating loss (“NOL”)credit carryforwards as of December 31, 2017,2023, which can be used to reduce ourLivaNova’s income tax payable in future years (in thousands):
|
| | | | | | | | | | | | | | |
Region | | Gross Amount | | Gross Amount with No Expiration | | With Expiration | | Starting Expiration Year |
Europe | | $ | 153,350 |
| | $ | 141,774 |
| | $ | 11,576 |
| | 2022 |
South America | | 14,815 |
| | 14,815 |
| | — |
| | n/a |
U.S. Federal | | 134,415 |
| | — |
| | 134,415 |
| | 2021 |
U.S. State | | 106,555 |
| | — |
| | 106,555 |
| | 2018 |
Far East | | 12,174 |
| | — |
| | 12,174 |
| | 2018 |
As of December 31, 2017, we had a valuation allowance of $93.3 million, which includes $48.7 million related to discontinued operations and $44.6 million primarily related to net operating losses in certain jurisdictions and U.S. foreign tax credits.
As of December 31, 2016, we had a valuation allowance of $51.5 million, primarily related to net operating losses acquired in the Merger. As a result of the business combination during the transitional period April 25, 2015 to December 31, 2015, the historic NOL’s of Sorin U.S. are limited by IRC section 382. The annual limitation is approximately $14.2 million, which is sufficient to absorb the U.S. net operating losses prior to their expiration. Thus no additional valuation allowance has been recorded.
In 2016, we consolidated certain of our intangible assets into an entity organized under the laws of England and Wales. Because the intangible assets were sold and purchased inter-company, the tax expense on the inter-company gain was deferred, and will be amortized to current income tax expense in the consolidated statement of net (loss) income over an eight year period, which represents the estimated useful life of the intangible assets that were consolidated into the U.K. entity. Approximately $19.4 million and $11.6 million were amortized to current income tax expense during the year ended December 31, 2017 and December 31, 2016, respectively. The amount of tax to be paid over the eight years is not fixed and we remeasured the unamortized balance on December 22, 2017 as a result of U.S. tax reform. The tax asset is included in ‘Prepaid expenses and other current assets’ and ‘Other assets’ in the consolidated balance sheet as of December 31, 2017, in the amount of $12.6 million and $68.1 million, respectively. The cash taxes expected to be paid on the inter-company gain were remeasured on December 22, 2017 as a result of U.S. tax reform and is recorded as a deferred tax liability and reclassified to income taxes payable as cash taxes become payable. As of December 31, 2017, the current income tax payable and the deferred income tax liability associated with the intercompany gain was $19.4 million and $75.6 million, respectively.
A significant portion of the net deferred tax liability worldwide included above relates to the tax effect of the step-up in value of the assets acquired in the combination with Sorin. Refer to “Note 3. Business Combinations” for additional information. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Region | | Gross Amount | | Tax Benefit | | Amount with No Expiration | | Amount with Expiration | | Carryforward Period |
UK NOL | | $ | 375,044 | | | $ | 93,760 | | | $ | 93,760 | | | $ | — | | | Unlimited |
Europe, excluding UK, NOL | | 67,160 | | | 11,048 | | | 11,048 | | | — | | | Unlimited |
US Federal NOL | | 32,100 | | | 6,741 | | | 35 | | | 6,706 | | | 2028 | - | 2034 |
US State NOL | | 182,335 | | | 10,842 | | | 2,349 | | | 8,493 | | | 2023 | - | 2042 |
S. America & other regions NOL | | 21,802 | | | 7,318 | | | 7,229 | | | 89 | | | 2028 | - | 2042 |
Far East NOL | | 1,404 | | | 388 | | | 349 | | | 39 | | | 2025 | - | 2032 |
US foreign tax credits | | — | | | 15,850 | | | — | | | 15,850 | | | 2025 | - | 2030 |
US tax credits | | — | | | 15,857 | | | — | | | 15,857 | | | 2023 | - | 2043 |
US State research & development tax credits | | — | | | 6,780 | | | 5,416 | | | 1,364 | | | 2030 | - | 2042 |
Other non-US tax credits | | — | | | 1,245 | | | 243 | | | 1,002 | | | 2024 | - | 2034 |
| | | | | | | | | | | | |
| | $ | 679,845 | | | $ | 169,829 | | | $ | 120,429 | | | $ | 49,400 | | | | | |
No provision has been made for income taxes on undistributed earnings of foreign subsidiaries as of December 31, 20172023 because it is ourLivaNova’s intention to indefinitely reinvest undistributed earnings of ourits foreign subsidiaries. In the event of the distribution of those earnings in the form of dividends, a sale of the subsidiaries, or certain other transactions, weLivaNova may be liable for income taxes. There should be no material tax liability on future distributions as most jurisdictions with undistributed earnings have various participation exemptions / notaxes and withholding tax.taxes. As of December 31, 2017,2023, it was not practicable to determine the exact amount of the deferred income tax liability related to those investments.
Uncertain Income Tax Positions
The following istable presents a roll-forwardreconciliation of ourLivaNova’s total gross unrecognized tax benefit for the years ended December 31, 2023, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
Balance at beginning of year | | $ | 1,640 | | | $ | 1,741 | | | $ | 3,433 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Tax positions related to prior years for settlement with tax authorities | | 5,406 | | | — | | | (1,434) | |
Tax positions related to prior years for lapses of statute of limitations | | (1,698) | | | — | | | — | |
Impact of foreign currency exchange rates | | 58 | | | (101) | | | (258) | |
Balance at end of year (1) | | $ | 5,406 | | | $ | 1,640 | | | $ | 1,741 | |
|
| | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 |
Balance at beginning of year | | $ | 22,374 |
| | $ | 20,224 |
|
Tax positions related to current year | | 324 |
| | — |
|
Tax positions related to prior year | | 1,153 |
| | 2,548 |
|
Impact of foreign currency exchange rates | | 2,286 |
| | (398 | ) |
Balance at end of year | | $ | 26,137 |
| | $ | 22,374 |
|
Unrecognized(1)The unrecognized tax benefitsbenefit balance as of $12.2 million and $10.7 million at December 31, 2017 and 2016, respectively, included in2023 includes $4.9 million, which is presented on the table above are presented in theconsolidated balance sheetsheets as a reduction to the related deferred tax assets for net operating loss carryforwards.
Accrued interest and penalties totaled $8.0$0.7 million, $0.3 million and $6.3$0.2 million as of December 31, 20172023, 2022 and 2016,2021, respectively, and were included in Otherother long-term liabilities on ourLivaNova’s consolidated balance sheets. LivaNova records accrued interest and penalties related to unrecognized tax benefits in interest expense and foreign exchange and other income/(expense), respectively, on LivaNova’s consolidated statements of income (loss).
DuringLivaNova operates in multiple jurisdictions with complex legal and tax regulatory environments, and the fiscal year ended April 24, 2015, based upon ourCompany’s tax returns are periodically audited or subjected to review by tax authorities. LivaNova monitors tax law changes and reworkthe potential impact on its results of certain prior-year R&D tax credits, we believe that the credits are more likely than not to be sustained upon examination and as a result we released the reserve against these R&D tax credits.
operations. Tax authorities may disagree with certain positions we haveLivaNova has taken and assess additional taxes. WeLivaNova regularly assessassesses the likely outcomes of ourthe Company’s tax positions in order to determine the appropriateness of ourits reserves for uncertain tax positions. However, there can be no assurance that weLivaNova will accurately predict the outcome of these audits, and the actual outcome of an audit could have a material impact on ourLivaNova’s consolidated results of income, financial position or cash flows. If all of ourLivaNova’s unrecognized tax benefits as of December 31, 20172023 were recognized, $22.8$0.5 million would impact ourthe Company’s effective tax rate. We are unable to estimate the amount of changerate and $4.9 million would be in the majorityform of oura net operating loss carryforward, which is expected to require a full valuation allowance based on present circumstances. LivaNova does not anticipate the balance in unrecognized tax benefits over the next 12 months. Refer to “Note 12. Commitments and Contingencies” for additional information regarding the status of current tax litigation.
We record accrued interest and penalties related to unrecognized tax benefits in ‘Interest expense’ and ‘Foreign exchange and other gains (losses)’, respectively, in the consolidated statements of income (loss).
On October 26, 2017, the European Commission (“EC”) announced that an investigation will be opened with respect to the UK’s controlled foreign company (“CFC”) rules. The CFC rules under investigation provide certain tax exceptions to entities controlled by UK parent companies that are subject to lower tax rates if the activities being undertaken by the CFC relate to financing. The EC is investigating whether the exemption is a breach of EU State Aid rules. The investigation is in its early stages and is unlikely to be completed withinchange significantly during the next twelve months as a results of settlement with an appeal process likely to follow. It is unclear as to whether the UK will be part of the EU once a decision has been finalized due to Brexit and what impact, if any, Brexit will have on the outcome of the investigationtax authorities or the enforceabilityexpiration of a decision. Due to the many uncertainties related to this matter, including the preliminary state of the investigation, the pending Brexit negotiations and political environment and the unknown outcome of the investigation and resulting appeals, no uncertain tax position reserve has been recognized related to this matter and we are unable to reasonably estimate the potential liability for this matter.
LivaNova PLC is domiciled and resident in the UK. Our subsidiaries conduct operations and earn income in numerous countries and are subject to the laws of taxing jurisdictions within those countries, and the income tax rates imposed in the tax jurisdictions in which our subsidiaries conduct operations vary. As a result of the changes in the overall level of our income, the deployment of various tax strategies and the changes in tax laws, our consolidated effective income tax rate may vary from one reporting period to another.statutes or limitations.
The major jurisdictions where we areLivaNova is subject to income tax examinations are as follows:
| | | | | | | | | |
Jurisdiction | | |
Jurisdiction | | Earliest Year Open | |
U.S.US - federal and state | | 2020 | | 1992
Italy | | 2018 | | 2012
Germany | | 2019 | | 2010
England and Wales | | 2019 | | 2013
Canada | | 2019 | | 2013
In April 2016, the U.S. Internal Revenue Service (“IRS”) and U.S. Treasury Department issued new rules that materially change the manner in which the determination is made as to whether the U.S. anti-inversion rules under Section 7874 will apply. The new rules have the effect of linking with the Mergers certain future acquisitions of U.S. businesses made in exchange for LivaNova equity, and such linkage may impact LivaNova’s ability to engage in particular acquisition strategies. For example, the new temporary regulations would impact certain acquisitions of U.S. companies in an exchange for stock in LivaNova during the 36 month period beginning October 19, 2015 by excluding from the Section 7874 calculations the portion of shares of LivaNova that are allocable to the legacy Cyberonics shareholders. This new rule would generally have the effect of increasing the otherwise applicable Section 7874 fraction with respect to future acquisitions of a U.S. business, thereby increasing the risk that such acquisition could cause LivaNova to be treated as a U.S. corporation for U.S. federal income tax purposes.
On October 13, 2016, the U.S. IRS and U.S. Treasury Department released final and temporary regulations under section 385. In response to comments, the final regulations significantly narrow the scope of the proposed regulations previously issued on April 4, 2016. Like the proposed regulations, the final regulations establish extensive documentation requirements that must be satisfied for a debt instrument to constitute debt for U.S. federal tax purposes and re-characterizes a debt instrument as stock if the instrument is issued in one of a number of specified transactions. Moreover, while these new rules are not retroactive, they will impact our future intercompany transactions and our ability to engage in future restructuring.
Executive Order 13789, issued in April 2017, ordered the US Treasury to examine tax regulations for excessive cost, complexity or whether such regulation exceeded IRS’s statutory authority, which included IRC Sec. 385.
Note 17. Income (Loss)18. Earnings Per Share
The following table sets forthpresents the basic and diluted weighted-average shares outstanding used in the computation of basic and diluted net (loss) income per share or share of common stock,for the years ended December 31, 2023, 2022 and 2021 (in thousands exceptof shares):
| | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
Basic weighted average shares outstanding | | 53,939 | | | 53,472 | | | 50,633 | |
Add effects of stock-based compensation instruments (1) | | 273 | | | — | | | — | |
Diluted weighted average shares outstanding | | 54,212 | | | 53,472 | | | 50,633 | |
(1)Excluded from the computation of diluted earnings per share data):for the years ended December 31, 2023, 2022 and 2021 were shares for stock options, SARs and RSUs totaling 3.0 million, 3.9 million and 3.9 million because to include them would have been anti-dilutive under the treasury stock method.
|
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period April 25, 2015 to December 31, 2015 | | Fiscal Year Ended April 24, 2015 |
Numerator: | | | | | | | | |
Net income (loss) from continuing operations | | $ | 54,465 |
| | $ | 1,874 |
| | $ | (14,720 | ) | | $ | 57,848 |
|
Net loss from discontinued operations | | (79,554 | ) | | (64,663 | ) | | (14,893 | ) | | — |
|
Net (loss) income | | $ | (25,089 | ) | | $ | (62,789 | ) | | $ | (29,613 | ) | | $ | 57,848 |
|
| | | | | | | | |
Denominator: | | | | | | | | |
Basic weighted average shares outstanding | | 48,157 |
| | 48,860 |
| | 32,741 |
| | 26,391 |
|
Add effects of stock-based compensation instruments (1) | | 344 |
| | 154 |
| | — |
| | 235 |
|
Diluted weighted average shares outstanding | | 48,501 |
| | 49,014 |
| | 32,741 |
| | 26,626 |
|
| | | | | | | | |
Basic income (loss) per share: | | | | | | | | |
Continuing operations | | $ | 1.13 |
| | $ | 0.04 |
| | $ | (0.45 | ) | | $ | 2.19 |
|
Discontinued operations | | (1.65 | ) | | (1.33 | ) | | (0.45 | ) | | — |
|
| | $ | (0.52 | ) | | $ | (1.29 | ) | | $ | (0.90 | ) | | $ | 2.19 |
|
| | | | | | | | |
Diluted income (loss) per share: | | | | | | | | |
Continuing operations | | $ | 1.12 |
| | $ | 0.04 |
| | $ | (0.45 | ) | | $ | 2.17 |
|
Discontinued operations | | (1.64 | ) | | (1.32 | ) | | (0.45 | ) | | — |
|
| | $ | (0.52 | ) | | $ | (1.28 | ) | | $ | (0.90 | ) | | $ | 2.17 |
|
| |
(1) | Excluded from the computation of diluted earnings per share for the year ended December 31, 2017 were stock options, SARs and restricted share units outstanding at December 31, 2017 to purchase 24 thousand shares because to include them would have been anti-dilutive. Excluded from the computation of diluted earnings per share for the year ended December 31, 2016 were stock options, SARs and restricted share units outstanding at December 31, 2016 to purchase 1.6 million shares because to include them would have been anti-dilutive. Excluded from the computation of diluted earnings per share for the transitional period April 25, 2015 to December 31, 2015, were stock options, SARs and restricted share units outstanding at December 31, 2015 to purchase 1.6 million shares because to include them would have been anti-dilutive due to the net loss. Excluded from the computation of diluted earnings per share for the fiscal year ended April 24, 2015 were stock options, SARs and restricted shares and restricted share units outstanding at April 24, 2015 to purchase 281 thousand common shares of Cyberonics because to include them would have been anti-dilutive.
|
Note 18.19. Geographic and Segment Information
Segment Information
We identifyLivaNova identifies operating segments based on the way we manage, evaluatehow it manages, evaluates and internally report ourreports its business activities for purposes of allocatingto allocate resources, develop and assessingexecute its strategy and assess performance. We have twoFor the periods presented herein, LivaNova had three reportable segments: Cardiac SurgeryCardiopulmonary, Neuromodulation and Neuromodulation.
The Cardiac Surgery segment generates itsACS. Net revenue of the Company’s reportable segments includes revenues from the development, production and sale of cardiovascular surgery products. Cardiac Surgery products include oxygenators, heart-lung machines, autotransfusion systems, mechanical heart valvesthat each reportable segment develops and tissue heart valves.manufactures or distributes.
The NeuromodulationLivaNova’s Cardiopulmonary segment generates its revenue fromis engaged in the design, development, manufacture, marketing and selling of cardiopulmonary products, including heart-lung machines, oxygenators, autotransfusion systems, perfusion tubing systems, cannulae and other related accessories.
LivaNova’s Neuromodulation segment is engaged in the design, development, manufacture, marketing and selling of devices that deliver neuromodulation therapy for the treatment of drug-resistant epilepsytreating DRE and treatment resistant depression.DTD. 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 equipmentand other accessories. It also includes the development and management of clinical testing of LivaNova’s aura6000 System for treating obstructive sleep apnea. LivaNova’s Neuromodulation segment also includes costs associated with LivaNova’s former heart failure program, which, as previously disclosed, the Company began to assist withwind down during the implant procedure, equipmentfirst quarter of 2023.
LivaNova’s ACS segment was engaged in the design, development, manufacture, marketing and selling of temporary life support products. ACS’s products, which comprise the LifeSPARC and Hemolung systems, and standalone cannulae and accessories, including ProtekDuo and transseptal (TandemHeart) cannulae, simplify temporary extracorporeal cardiopulmonary life support solutions for critically ill patients. For additional information, please refer 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.
“Other” includes corporate shared service expenses for finance, legal, human resources and information technology and corporate business development (“New Ventures”). New Ventures is focused on new growth platforms and identification of other opportunities for expansion.
Net sales of our reportable segments include revenues from the sale of products they each develop and manufacture or distribute. We define segment income as operating income before merger and integration, restructuring, amortization and litigation settlement.
Net sales and operating income (loss) by segment are as follows (in thousands):“Note 22. Subsequent Event.”
|
| | | | | | | | | | | | | | | | |
Net Sales | | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period April 25, 2015 to December 31, 2015 | | April 24, 2015 |
Cardiac Surgery | | $ | 635,517 |
| | $ | 611,715 |
| | $ | 147,635 |
| | $ | — |
|
Neuromodulation | | 374,976 |
| | 351,406 |
| | 214,761 |
| | 291,558 |
|
Other | | 1,784 |
| | 1,737 |
| | 841 |
| | — |
|
Total Net Sales | | $ | 1,012,277 |
| | $ | 964,858 |
| | $ | 363,237 |
| | $ | 291,558 |
|
|
| | | | | | | | | | | | | | | | |
Operating Income (Loss) From Continuing Operations: | | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period April 25, 2015 to December 31, 2015 | | Fiscal Year Ended April 24, 2015 |
Cardiac Surgery (including product remediation) | | $ | 81,001 |
| | $ | 16,578 |
| | $ | 13,091 |
| | $ | — |
|
Neuromodulation | | 188,352 |
| | 174,579 |
| | 87,616 |
| | 97,344 |
|
Other | | (107,955 | ) | | (70,925 | ) | | (39,815 | ) | | — |
|
Total reportable segment income from continuing operations | | 161,398 |
| | 120,232 |
| | 60,892 |
| | 97,344 |
|
Merger and integration expenses | | 15,528 |
| | 20,377 |
| | 55,776 |
| | 8,692 |
|
Restructuring expenses | | 17,056 |
| | 37,377 |
| | 10,494 |
| | — |
|
Amortization of intangibles | | 33,144 |
| | 31,035 |
| | 7,030 |
| | — |
|
Operating income (loss) from continuing operations | | $ | 95,670 |
| | $ | 31,443 |
| | $ | (12,408 | ) | | $ | 88,652 |
|
Assets by reportable segment (in thousands):
|
| | | | | | | | |
Assets: | | December 31, 2017 | | December 31, 2016 |
Cardiac Surgery | | $ | 1,386,032 |
| | $ | 1,277,799 |
|
Neuromodulation | | 533,067 |
| | 611,085 |
|
Other | | 334,103 |
| | 133,825 |
|
Discontinued operations | | 250,689 |
| | 319,922 |
|
Total Assets | | $ | 2,503,891 |
| | $ | 2,342,631 |
|
Capital expenditures by segment (in thousands):
|
| | | | | | | | | | | | | | | | |
Capital Expenditures: | | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period April 25, 2015 to December 31, 2015 | | Fiscal Year Ended April 24, 2015 |
Cardiac Surgery | | $ | 18,985 |
| | $ | 21,190 |
| | $ | 10,402 |
| | $ | — |
|
Neuromodulation | | 2,504 |
| | 8,098 |
| | 1,418 |
| | 6,687 |
|
Other | | 7,010 |
| | 5,265 |
| | 512 |
| | — |
|
Discontinued operations | | 5,608 |
| | 3,809 |
| | 4,954 |
| | — |
|
Total | | $ | 34,107 |
| | $ | 38,362 |
| | $ | 17,286 |
| | $ | 6,687 |
|
Geographic Information
We operateLivaNova operates under three geographic regions: United States,US, Europe, and Rest of world.World. The table below presents net revenue by operating segment and geographic region for the years ended December 31, 2023, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
Cardiopulmonary | | | | | | |
United States | | $ | 188,299 | | | $ | 159,489 | | | $ | 154,073 | |
Europe (1) | | 156,606 | | | 127,064 | | | 134,562 | |
Rest of World | | 244,072 | | | 213,761 | | | 194,344 | |
| | 588,977 | | | 500,314 | | | 482,979 | |
Neuromodulation | | | | | | |
United States | | 407,493 | | | 374,542 | | | 358,476 | |
Europe (1) | | 57,435 | | | 50,291 | | | 51,435 | |
Rest of World | | 54,782 | | | 52,160 | | | 46,261 | |
| | 519,710 | | | 476,993 | | | 456,172 | |
Advanced Circulatory Support | | | | | | |
United States | | 39,252 | | | 37,527 | | | 53,821 | |
Europe (1) | | 751 | | | 1,447 | | | 1,120 | |
Rest of World | | 319 | | | 327 | | | 518 | |
| | 40,322 | | | 39,301 | | | 55,459 | |
Other Revenue (2) | | 4,536 | | | 5,197 | | | 40,755 | |
Totals | | | | | | |
United States | | 635,044 | | | 571,558 | | | 571,299 | |
Europe (1) | | 214,792 | | | 178,802 | | | 201,524 | |
Rest of World | | 303,709 | | | 271,445 | | | 262,542 | |
Total net revenue (3) (4) | | $ | 1,153,545 | | | $ | 1,021,805 | | | $ | 1,035,365 | |
(1)Includes countries in Europe where the Company has a direct sales presence. Countries where sales are made through distributors are included in “Rest of World.”
(2)Other revenue primarily includes rental income not allocated to segments. For the year ended December 31, 2021, other revenue also includes the net revenue of the Company’s Heart Valve business, which was divested on June 1, 2021.
(3)Net salesrevenue to external customers by geography are determined based onincludes $41.5 million, $32.3 million and $35.8 million in the UK, LivaNova’s country of domicile, for the products are shippedyears ended December 31, 2023, 2022 and 2021, respectively.
(4)No single customer represented over 10% of the Company’s consolidated net revenue. No country’s net revenue exceeded 10% of the Company’s consolidated revenue except for the US.
The following table presents a reconciliation of segment income to consolidated loss before tax for the years ended December 31, 2023, 2022 and are as follows:2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
Cardiopulmonary (1) | | $ | 20,004 | | | $ | 11,247 | | | $ | (6,429) | |
Neuromodulation | | 153,384 | | | 172,775 | | | 169,499 | |
Advanced Circulatory Support (2) | | (117,418) | | | (142,590) | | | 2,195 | |
Segment income | | 55,970 | | | 41,432 | | | 165,265 | |
Other income/(expense) (3) | | (124,468) | | | (118,184) | | | (166,049) | |
| | | | | | |
| | | | | | |
Operating loss | | (68,498) | | | (76,752) | | | (784) | |
Interest expense | | (58,853) | | | (48,250) | | | (50,151) | |
Loss on debt extinguishment | | — | | | — | | | (60,238) | |
Foreign exchange and other income/(expense) | | 46,125 | | | 49,860 | | | (13,299) | |
Loss before tax | | $ | (81,226) | | | $ | (75,142) | | | $ | (124,472) | |
|
| | | | | | | | | | | | | | | | |
Net sales: | | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Transitional Period April 25, 2015 to December 31, 2015 | | Fiscal Year Ended April 24, 2015 |
United States | | $ | 494,724 |
| | $ | 480,558 |
| | $ | 229,724 |
| | $ | 235,712 |
|
Europe (1) (2) | | 210,470 |
| | 204,846 |
| | 61,595 |
| | 41,484 |
|
Rest of world | | 307,083 |
| | 279,454 |
| | 71,918 |
| | 14,362 |
|
Total (3) | | $ | 1,012,277 |
| | $ | 964,858 |
| | $ | 363,237 |
| | $ | 291,558 |
|
| |
(1) | Net sales to external customers includes $30.8 million, $37.3 million and $14.3 million in the United Kingdom, our country of domicile, for the years ended December 31, 2017, December 31, 2016 and the transitional period April 25, 2015 to December 31, 2015, respectively. Prior to the Mergers, we were domiciled in the United States. |
| |
(2) | Europe sales include those countries in which we have a direct sales presence, whereas European countries in which we sell through distributors are included in ‘Rest of world’. |
| |
(3) | No single customer represented over 10% of our consolidated net sales and no country’s net sales exceeded 10% of our consolidated sales except for the U.S. |
Property, plant,(1)The Cardiopulmonary results for the years ended December 31, 2023, 2022 and equipment,2021 include an increase in the litigation provision, net by geography are as follows (in thousands):
|
| | | | | | | | |
PP&E | | December 31, 2017 | | December 31, 2016 |
United States | | $ | 62,154 |
| | $ | 61,071 |
|
Europe | | 119,133 |
| | 111,735 |
|
Rest of world | | 11,072 |
| | 30,902 |
|
Total | | $ | 192,359 |
| | $ | 203,708 |
|
Note 19. Supplemental Financial Information
Accounts receivable, net consistedrelated to LivaNova’s 3T Heater-Cooler device of the following (in thousands):
|
| | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
Trade receivables from third parties | | $ | 288,127 |
| | $ | 216,993 |
|
Allowance for bad debt | | (5,982 | ) | | (3,737 | ) |
| | $ | 282,145 |
| | $ | 213,256 |
|
Our customers consist of hospitals, other healthcare institutions, distributors, organized purchase groups and government and private entities. Actual collection periods for trade receivables vary significantly as a function of the nature of the customer (e.g., government or private) and its geographic location.
Inventories consisted of the following (in thousands):
|
| | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
Raw materials | | $ | 39,810 |
| | $ | 37,243 |
|
Work-in-process | | 18,206 |
| | 17,474 |
|
Finished goods | | 86,454 |
| | 78,300 |
|
| | $ | 144,470 |
| | $ | 133,017 |
|
Inventories are reported net of the provision for obsolescence. The provisions, which reflects normal obsolescence and includes components that are phased out or expired, totaled $10.5$34.5 million, $21.7 million and $7.2$38.1 million, at December 31, 2017respectively. Refer to “Note 13. Commitments and December 31, 2016, respectively.Contingencies” for additional information.
Prepaid expenses and other current assets consisted of the following (in thousands):
|
| | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
Prepaid expenses | | $ | 13,905 |
| | $ | 8,657 |
|
Income taxes payable on inter-company transfers of property (1) | | 12,604 |
| | 19,445 |
|
Earthquake grant receivable | | 4,064 |
| | 4,748 |
|
Deposits and advances to suppliers | | 4,551 |
| | 3,440 |
|
Escrow deposit - Caisson | | 2,000 |
| | — |
|
Current loans and notes receivable | | 1,395 |
| | 7,093 |
|
Derivative contract assets | | 518 |
| | 8,269 |
|
| | $ | 39,037 |
| | $ | 51,652 |
|
| |
(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. |
PP&E detail (in thousands):
|
| | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 | | Lives in Years |
Land | | $ | 16,293 |
| | $ | 14,420 |
| | |
Building and building improvements | | 80,280 |
| | 92,092 |
| | 3 to 50 |
Equipment, software, furniture and fixtures | | 182,968 |
| | 152,864 |
| | 3 to 20 |
Other | | 6,082 |
| | 1,296 |
| | 3 to 10 |
Capital investment in process | | 9,944 |
| | 15,009 |
| | |
Total | | 295,567 |
| | 275,681 |
| | |
Accumulated depreciation | | (103,208 | ) | | (71,973 | ) | | |
Net | | $ | 192,359 |
| | $ | 203,708 |
| | |
During 2017, we initiated a plan to sell our Suzhou Industrial Park facility in Shanghai, China and as a result of this exit plan we recorded impairments of the building and equipment of $5.4 million, which were recorded in ‘Restructuring expenses’ in the consolidated statement of net (loss) income. In addition, we classified the remaining carrying value of the land, building and equipment of our Suzhou facility, of $13.6 million, to ‘Assets held for sale’ in the consolidated balance sheet(2)The ACS results for the year ended December 31, 2017.2023 include an impairment of long-lived assets of $90.0 million, and an inventory obsolescence adjustment of $12.6 million. Refer to “Note 6. Restructuring” for additional information. The ACS results for the year ended December 31, 2022 include a goodwill impairment of $129.4 million. Refer to “Note 7. Goodwill and Intangible Assets” for additional information.
(3)Other income/(expense) primarily includes rental income, non-allocated corporate expenses, and amortization of intangible assets. For the year ended December 31, 2021, other income/(expense) also includes the results of the Company’s Heart Valve business, which was divested on June 1, 2021. DetailThe following table presents assets by reportable segment as of Other assetsDecember 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | |
| | 2023 | | 2022 |
Cardiopulmonary | | $ | 961,976 | | | $ | 874,143 | |
Neuromodulation | | 647,391 | | | 646,633 | |
Advanced Circulatory Support (1) | | 9,886 | | | 121,454 | |
Other assets (2) | | 810,310 | | | 652,543 | |
Total | | $ | 2,429,563 | | | $ | 2,294,773 | |
|
| | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
Taxes payable on inter-company transfers of property (1) | | $ | 68,127 |
| | $ | 124,551 |
|
Investments (2) | | 2,943 |
| | 2,537 |
|
Loans and notes receivable | | 1,276 |
| | 2,029 |
|
Escrow deposit - Caisson | | 1,000 |
| | — |
|
Guaranteed deposits | | 725 |
| | 940 |
|
Other | | 1,913 |
| | 613 |
|
| | $ | 75,984 |
| | $ | 130,670 |
|
| |
(1) | The ‘taxes payable on intercompany transfers of property’ is an asset account created to defer the income tax effect of an intercompany intellectual property sale pursuant to ASC 810-10-45-8. |
| |
(2) | Primarily cash surrender value of company owned life insurance policies. |
Accrued liabilities consisted(1)During the year ended December 31, 2023, LivaNova recorded an impairment of the ACS reportable segment’s long-lived assets (asset group) of $90.0 million, and an inventory obsolescence adjustment of $12.6 million. Refer to “Note 6. Restructuring” for additional information.
(2)Other assets primarily include corporate assets not allocated to segments.
The following table presents capital expenditures by segment for the years ended December 31, 2023, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
Cardiopulmonary | | $ | 22,326 | | | $ | 13,828 | | | $ | 14,824 | |
Neuromodulation | | 1,201 | | | 369 | | | 179 | |
Advanced Circulatory Support | | 1,210 | | | 1,773 | | | 1,326 | |
Other capital expenditures (1) | | 10,370 | | | 10,622 | | | 5,984 | |
Total | | $ | 35,107 | | | $ | 26,592 | | | $ | 22,313 | |
(1)Other capital expenditures primarily include corporate capital expenditures not allocated to segments. For the year ended December 31, 2021, other capital expenditures also includes capital expenditures of the Company’s Heart Valve business, which was divested on June 1, 2021.
Geographic Information
The following table presents property, plant and equipment, net by geographic region as of December 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | |
| | 2023 | | 2022 |
United States | | $ | 62,701 | | | $ | 63,458 | |
Europe | | 85,606 | | | 79,654 | |
Rest of World | | 5,874 | | | 4,075 | |
Total | | $ | 154,181 | | | $ | 147,187 | |
Note 20. Supplemental Financial Information
The following table presents the components of inventories as of December 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | |
| | 2023 | | 2022 |
Raw materials | | $ | 81,878 | | | $ | 70,027 | |
Work-in-process | | 12,901 | | | 15,508 | |
Finished goods | | 53,108 | | | 43,844 | |
Total inventories | | $ | 147,887 | | | $ | 129,379 | |
Inventories includes adjustments totaling $24.4 million and $8.2 million as of December 31, 2023 and 2022, respectively, to record balances at lower of cost or net realizable value.
The following table presents the components of property, plant and equipment, net as of December 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | Lives in Years |
Land | | $ | 14,902 | | | $ | 14,637 | | | | | |
Building and building improvements | | 84,543 | | | 80,611 | | | 5 | to | 36 |
Equipment, software, furniture and fixtures | | 233,337 | | | 206,892 | | | 2 | to | 20 |
Other | | 6,690 | | | 8,861 | | | 5 | to | 10 |
Capital investment in process | | 10,745 | | | 11,307 | | | | | |
Total gross property, plant and equipment | | 350,217 | | | 322,308 | | | | | |
Accumulated depreciation | | (196,036) | | | (175,121) | | | | | |
Total property, plant and equipment, net | | $ | 154,181 | | | $ | 147,187 | | | | | |
|
| | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
Product remediation(1) | | $ | 16,811 |
| | $ | 23,464 |
|
Deferred compensation - Caisson acquisition | | 14,300 |
| | — |
|
Restructuring related liabilities | | 3,560 |
| | 16,859 |
|
Provisions for agents, returns and other | | 8,134 |
| | 7,271 |
|
Legal and other administrative costs | | 6,082 |
| | 6,184 |
|
Royalty costs | | 3,615 |
| | 2,503 |
|
Deferred income | | 2,900 |
| | — |
|
Uncertain tax positions | | 2,536 |
| | — |
|
Escrow indemnity liability - Caisson | | 2,000 |
| | — |
|
Product warranty obligations | | 1,476 |
| | 2,360 |
|
Derivative contract liabilities (2) | | 1,294 |
| | 942 |
|
Government grants | | 1,174 |
| | 1,708 |
|
Research and development costs | | 797 |
| | 839 |
|
Other accrued expenses | | 14,263 |
| | 8,917 |
|
| | $ | 78,942 |
| | $ | 71,047 |
|
| |
(1) | Refer to “Note 6. Product Remediation Liability.” |
| |
(2) | Refer to “Note 11. Derivatives and Risk Management.” |
We include warranty obligations within ‘AccruedThe following table presents the components of accrued liabilities and other’ inother as of December 31, 2023 and 2022 (in thousands): | | | | | | | | | | | | | | | | |
| | 2023 | | | 2022 | |
Legal and professional costs | | $ | 17,794 | | | | $ | 8,653 | | |
Contingent consideration | | 13,750 | | | | — | | |
Contract liabilities | | 10,725 | | | | 10,226 | | |
Operating lease liabilities (1) | | 8,362 | | | | 9,379 | | |
Italian medical device payback law | | 8,223 | | | | 6,414 | | |
Interest payable | | 7,840 | | | | (76) | | |
Royalty accrual | | 4,441 | | | | 3,950 | | |
Current derivative liabilities | | 3,883 | | | | 5,886 | | |
Provisions for agents, returns and other | | 4,464 | | | | 1,678 | | |
Research and development costs | | 2,462 | | | | 7,020 | | |
Restructuring liabilities (2) | | 911 | | | | 2,045 | | |
Other accrued expenses | | 24,446 | | | | 26,306 | | |
Total accrued liabilities and other | | $ | 107,301 | | | | $ | 81,481 | | |
(1)Refer to “Note 12. Leases.”
(2)Refer to “Note 6. Restructuring.”
The following table presents the items included within foreign exchange and other income/(expense) on the consolidated statements of income (loss) for the years ended December 31, 2023, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
Notes fair value adjustment (1) | | $ | 40,106 | | | $ | 96,025 | | | $ | (59,944) | |
Capped call fair value adjustment (1) | | (15,897) | | | (52,236) | | | 34,327 | |
Interest income | | 22,012 | | | 4,697 | | | 435 | |
Foreign exchange rate fluctuations | | (705) | | | 378 | | | (1,243) | |
Dividend income | | 1,540 | | | 305 | | | 3,415 | |
Investment revaluation | | — | | | — | | | 4,642 | |
Other derivative liabilities fair value adjustment | | — | | | — | | | 4,290 | |
Other | | (931) | | | 691 | | | 779 | |
Total foreign exchange and other income/(expense) | | $ | 46,125 | | | $ | 49,860 | | | $ | (13,299) | |
(1)Refer to “Note 9. Fair Value Measurements.”
The following table presents a reconciliation of cash, cash equivalents and restricted cash reported on the consolidated balance sheets. Changes insheets that sum to the carrying amount of our warranty obligation consistedtotal of the followingamounts shown on the consolidated statements of cash flows as of December 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | |
| | 2023 | | 2022 |
Cash and cash equivalents | | $ | 266,504 | | | $ | 214,172 | |
Restricted cash (1) | | 311,368 | | | 301,446 | |
Cash, cash equivalents and restricted cash | | $ | 577,872 | | | $ | 515,618 | |
(1)Restricted cash represents funds held as collateral for the SNIA Litigation Guarantee. Refer to “Note 13. Commitments and Contingencies.”
|
| | | | |
Balance at December 31, 2015 | | $ | 1,828 |
|
Product warranty accrual | | 1,172 |
|
Settlements | | (657 | ) |
Effect of changes in currency exchange rates | | 17 |
|
Balance at December 31, 2016 | | 2,360 |
|
Product warranty accrual | | 707 |
|
Settlements | | (1,897 | ) |
Effect of changes in currency exchange rates and other | | 306 |
|
As of December 31, 2017 | | $ | 1,476 |
|
Other long-term liabilities consisted of the following (in thousands):
|
| | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
Contingent consideration (1) | | $ | 33,973 |
| | $ | 3,890 |
|
Product remediation liability (2) | | 10,735 |
| | 10,023 |
|
Uncertain tax positions (inclusive of penalties and interest) | | 18,306 |
| | 12,086 |
|
Escrow indemnity liability - Caisson | | 1,000 |
| | — |
|
Government grants | | 918 |
| | 3,631 |
|
Financial derivatives (3) | | 751 |
| | 1,392 |
|
Unfavorable operating leases (4) | | 252 |
| | 1,672 |
|
Other | | 3,149 |
| | 2,377 |
|
| | $ | 69,084 |
| | $ | 35,071 |
|
| |
(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. Refer to “Note 9. Fair Value Measurements.” The third acquisition, Caisson, occurred in May 2017. Refer to “Note 3. Business Combinations.” |
| |
(2) | Refer to “Note 6. Product Remediation Liability.” |
| |
(3) | Refer to “Note 11. Derivatives and Risk Management.” |
| |
(4) | Unfavorable operating leases represent the adjustment to recognize future lease obligations at their estimated fair value in conjunction with the Mergers. |
Note 20. Quarterly Financial Information (unaudited) |
| | | | | | | | | | | | | | | | | | | | |
(in thousands except per share data) | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Total |
Year Ended December 31, 2017 (1) | | | | | | | | | | |
Net sales | | $ | 226,825 |
| | $ | 255,843 |
| | $ | 251,253 |
| | $ | 278,356 |
| | $ | 1,012,277 |
|
Gross profit | | 147,640 |
| | 170,042 |
| | 161,869 |
| | 172,069 |
| | 651,620 |
|
Operating income from continuing operations | | 19,718 |
| | 27,573 |
| | 30,045 |
| | 18,334 |
| | 95,670 |
|
Net income (loss) from continuing operations | | 13,227 |
| | 45,694 |
| | 27,000 |
| | (31,456 | ) | | 54,465 |
|
Discontinued Operations: | | | | | | | | | | |
(Loss) Income from discontinued operations, net of tax | | (1,956 | ) | | 1,804 |
| | 830 |
| | (1,949 | ) | | (1,271 | ) |
Impairment of discontinued operations, net of tax | | — |
| | — |
| | — |
| | (78,283 | ) | | (78,283 | ) |
Net loss from discontinued operations | | (1,956 | ) | | 1,804 |
| | 830 |
| | (80,232 | ) | | (79,554 | ) |
Net income (loss) | | $ | 11,271 |
| | $ | 47,498 |
| | $ | 27,830 |
| | $ | (111,688 | ) | | $ | (25,089 | ) |
Diluted earnings (loss) per share: | | | | | | | | | | |
Continuing operations | | $ | 0.27 |
| | $ | 0.95 |
| | $ | 0.56 |
| | $ | (0.65 | ) | | $ | 1.12 |
|
Discontinued operations | | (0.04 | ) | | 0.03 |
| | 0.01 |
| | (1.67 | ) | | (1.64 | ) |
| | $ | 0.23 |
| | $ | 0.98 |
| | $ | 0.57 |
| | $ | (2.32 | ) | | $ | (0.52 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2016 (1) | | | | | | | | | | |
Net sales | | $ | 225,238 |
| | $ | 251,489 |
| | $ | 238,500 |
| | $ | 249,631 |
| | $ | 964,858 |
|
Gross profit | | 131,734 |
| | 148,452 |
| | 153,901 |
| | 125,419 |
| | 559,506 |
|
Operating (loss) income from continuing operations | | (9,074 | ) | | 25,019 |
| | 30,373 |
| | (14,875 | ) | | 31,443 |
|
Net (loss) income from continuing operations | | (10,988 | ) | | 12,737 |
| | 6,431 |
| | (6,306 | ) | | 1,874 |
|
Net loss from discontinued operations | | (29,390 | ) | | (3,780 | ) | | (8,000 | ) | | (23,493 | ) | | (64,663 | ) |
Net (loss) income | | $ | (40,378 | ) | | $ | 8,957 |
| | $ | (1,569 | ) | | $ | (29,799 | ) | | (62,789 | ) |
Diluted (loss) earnings per share: | | | | | | | | | | |
Continuing operations | | $ | (0.22 | ) | | $ | 0.26 |
| | $ | 0.13 |
| | $ | (0.13 | ) | | $ | 0.04 |
|
Discontinued operations | | (0.61 | ) | | (0.08 | ) | | (0.16 | ) | | (0.48 | ) | | (1.32 | ) |
| | $ | (0.83 | ) | | $ | 0.18 |
| | $ | (0.03 | ) | | $ | (0.61 | ) | | $ | (1.28 | ) |
| |
(1) | Sales, cost of sales and operating expenses associated with our discontinued operation, the Cardiac Rhythm Management segment, for the first three quarters of the current year and all quarters of the previous year have been reclassified to ‘Discontinued operations’. Refer to ‘Note 4. Discontinued Operations’. |
Note 21. New Accounting Pronouncements
In May 2014, the FinancialAdoption of New Accounting Standards Board (“FASB”) issued ASC Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. Update No. 2014-09 requiresPronouncements
The following table provides a description of future adoptions of new accounting standards that may have an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers and replaces most existing revenue recognition guidance. We adopted the new revenue guidance on January 1, 2018. We elected the cumulative effect transition method, however, we recognized no cumulative effect to the opening balance of retained earnings because the impact on the timing of when revenue is recognized within our Cardiac Surgery segment, specifically related to heart-lung machines and preventative maintenance contracts on cardiopulmonary equipment was insignificant. The timing of revenue recognition for products and related revenue streams within our Neuromodulation segment and discontinued operations will not change. Upon adoption of the new standard, we implemented new internal controls related to our accounting policies and procedures, including review controls to ensure contractual terms and conditions that may require consideration under the standard are properly identified and analyzed.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Update 2016-01 requires equity investments that do not result in consolidation and are not accounted for under the equity method to be measured at fair value with changes recognized in net income. However, an entity may elect to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The amendments, in addition, reduce complexity of the impairment assessment of equity investments without readily determinable fair values with regard to the other-than-temporary impairment guidance. The amendments also require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset and liability. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application of certain provisions is permitted. We are currently evaluating the effect this standard will have on our consolidatedLivaNova’s financial statements and related disclosures.when adopted:
In February 2016, the FASB issued ASU No. 2016-02, Leases. This guidance requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. While many aspects of lessor accounting remain the same, the new standard makes some changes, such as eliminating the current real estate-specific guidance. The new standard requires lessees and lessors to classify most leases using a principle generally consistent with that of “IAS 17 - Leases,” which is similar to U.S. GAAP but without the use of bright lines. The standard also changes what is considered initial direct costs. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The standard is effective for annual periods beginning after December 15, 2018 and interim periods within that year. Early adoption is permitted. We are currently evaluating the effect this standard will have on our consolidated financial statements and related disclosures. | | | | | | | | | | | | | | | | | | | | |
Issue Date & Standard | | Description | | Adoption | | Assessment |
November 2023 ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures | | This ASU expands public entities’ reportable segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the CODM and included within each reported measure of segment profit or loss, the amount and description of other segment items, and the title and position of the Company’s CODM, as well as an explanation of how the CODM uses the Company’s reported measures of segment profit or loss in assessing segment performance and deciding how to allocate resources. | | This ASU will be effective for annual periods beginning after December 15, 2023 and subsequent interim periods, on a retrospective basis. | | LivaNova is currently evaluating the effect this standard will have on its consolidated financial statements and related disclosures. |
December 2023 ASU NO. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures | | This ASU expands annual income tax disclosures primarily related to the rate reconciliation and income taxes paid. | | This ASU will be effective for annual periods beginning after December 15, 2024, on a prospective basis, with early adoption and retrospective application permitted. | | LivaNova is currently evaluating the effect this standard will have on its consolidated financial statements and related disclosures. |
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In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting. This simplified the accounting for certain aspects of share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. We adopted the amendments of ASU 2016-09 (each “an Amendment”) effective January 1, 2017, using the following methods:
We adopted the Amendment that requires all of the tax effects related to the settlement of share based compensation awards to be recorded through the income statement on a prospective basis. The adoption of this Amendment did not have a material effect on income tax expense for the year ended December 31, 2017.
We adopted the Amendment related to cash flow presentation of tax-related cash flows resulting from share based payments on a prospective basis. The Amendment stipulates that all tax-related cash flows resulting from share based payments are to be reported as operating activities in the statement of cash flows, rather than, under past requirements, to present gross windfall tax benefits as an inflow from financing activities and an outflow from operating activities.
Under the Amendment related to forfeitures, entities are permitted to make a company-wide accounting policy election to either estimate forfeitures each period, as required prior to this Amendment’s effective date, or to account for forfeitures as they occur. We elected to continue to account for forfeitures using the estimation method.
We adopted the Amendment related to the timing of when excess tax benefits are recognized, which requires that all windfalls and shortfalls be recognized when they arise. There were no unrecognized excess tax benefits prior to the adoption of the Amendment.
In June 2016, the FASB issued ASC Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Only subsequent changes in the allowance for credit losses are recorded as a credit loss expense for these assets. In addition, credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. The amendments limit the amount of the allowance for credit losses to the amount by which fair value is below amortized cost, require that credit losses be presented as an allowance rather than as a write-down and will allow an entity to record reversals of credit losses in current period earnings in situations in which the estimate of credit losses declines in current period. Current GAAP prohibits reflecting those improvements in current period earnings. The amendments in this update are effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as of the fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years. The modified-retrospective approach is generally applicable through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We are currently evaluating the effect this standard will have on our consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments(Topic 230 -Statement of Cash Flows). Update 2016-15 provides guidance on the presentation and classification of certain cash receipts and cash payments in the statement of cash flows including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method investees. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. We are currently evaluating the effect this standard will have on our consolidated financial statements and related disclosures.
In October 2016, the FASB issued ASU No. 2016-16,Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory (Topic 740). This update simplifies the accounting for the income tax consequences of transfers of assets from one unit of a corporation to another unit or subsidiary by eliminating an accounting exception that prevents the recognition of current and deferred income tax consequences for such “intra-entity transfers” until the assets have been sold to an outside party. The amendment should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment directly to retained earnings as of the beginning of the period in which the guidance is adopted. The rule is effective for annual periods after December 15, 2017, including interim periods within those annual reporting periods. We currently estimate the cumulative-effect reduction to retained earnings to be approximately $21.4 million upon adoption at January 1, 2018.
In January 2017, the FASB issued ASU No. 2017-04,Intangibles-Goodwill and Other - Simplifying the Test for Goodwill Impairment (Topic 350). This update removes step 2 of the goodwill impairment test that compares the implied fair value of goodwill with its carrying amount. Instead, an impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge will be recorded by the amount a reporting unit’s carrying amount exceeds its fair value. The rule is effective for annual periods after December 15, 2019, including interim periods within those annual reporting periods. We are currently evaluating the impact of adopting this update on our consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805)—Clarifying the Definition of a Business. This update clarifies when a set of assets and activities is a business. The amendments provide a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is not met, the amendments in this Update (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. This update is effective for annual periods after December 15, 2017, including interim periods within those annual reporting periods. We are currently evaluating the impact of adopting this update on our consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post Retirement Benefit Cost. This update requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments in this Update also allow only the service cost component to be eligible for capitalization when applicable. This Update is effective for annual periods after December 15, 2017, including interim periods within those annual reporting periods. We are currently evaluating the impact of adopting this update on our consolidated financial statements.
Note 22. Subsequent EventsEvent
ImThera AcquisitionRestructuring
On January 16, 2018, we acquiredDuring the remaining 86% outstanding interests in ImTherafirst quarter of 2024, the Company reorganized its operating and reporting structure upon initiating the 2024 Restructuring Plan and transitioned all ACS standalone cannulae and accessories, including ProtekDuo and transseptal (TandemHeart) cannulae, into its Cardiopulmonary segment. Operations for up to approximately $225 million. Up-front costs are approximately $78 million with the balance paid based on achieving regulatoryother ACS products, including LifeSPARC and sales milestones. Headquartered in San Diego, California, ImThera manufactures an implantable device for the treatment of obstructive sleep apnea that stimulates multiple tongue muscles via the hypoglossal nerve, which opens the airway while a patient is sleeping. The ImThera device is aligned with our Neuromodulation Business Franchise. ImThera has a commercial presence in the European market, and weHemolung systems, will be advancing ImThera’s enrollment in an FDA pivotal study.discontinued by the end of 2024. For additional information, please refer to “Note 6. Restructuring.”
TandemLife Acquisition
On February 14, 2018, we entered into an agreement to pay up to $250 million to acquire CardiacAssist, Inc. dba TandemLife, a privately-held Delaware corporation (“TandemLife”), focused on advanced cardiopulmonary temporary support solutions. Upfront costs are approximately $200 million with up to $50 million in contingent consideration based on achieving regulatory milestones. The transaction is expected to closeEffective in the first halfquarter of 2018, subject to approvals and other customary closing conditions.
Bridge Facility Agreement
In connection with the TandemLife acquisition, on February 14, 2018,2024, LivaNova entered into a bridge facility agreement (the “Bridge Facility Agreement”) providing a term loan facility with the aggregate principal amount of $170 million. The Bridge Facility Agreement will terminate on August 14, 2018, but may be extended to February 13, 2019, subject to delivery of prior notice and satisfaction of other conditions. Borrowings under the Bridge Facility Agreement will bear interest at a variable annual rate based on LIBOR plus an applicable margin. In addition, a facility fee is assessed on the commitment amount.
The Bridge Facility Agreement contains financial covenants that require LivaNova to maintain a maximum semi-annual leverage ratio and a minimum semi-annual interest coverage ratio. The Bridge Facility Agreement also contains customary representations and warranties, covenants, and events of default.
The proceeds of the Bridge Facility are intended to be used to fund the acquisition and pay related expenses, refinance certain indebtedness and for general corporate and working capital purposes.
Note 23. Transition Period Financial Information
Priorchanged its reportable segments corresponding to the Mergers, Cyberonics’ fiscal year ended onabove-mentioned restructuring and changes in how the last Friday in April of each year.Company’s CODM regularly reviews information, allocates resources and assesses performance. The fiscal year of LivaNova, which becameCompany’s changes to its reportable segments are summarized as follows:
•LivaNova’s ACS segment will be included within “Other,” excluding the successor issuer to Cyberonics on October 19, 2015, begins on January 1stACS standalone cannulae and ends on December 31st of each year. The change of fiscal year, effective as of October 19, 2015, resulted in a transitional period which began April 25, 2015accessories business.
•LivaNova’s ACS standalone cannulae and ended December 31, 2015.
On November, 20 2017, we announced that we entered into a LOI to sell our CRM Business Franchise to MicroPort Scientific Corporation, and as a result,accessories business will be included within the operating activity for the CRM Business Franchise for the transitional period ended December 31, 2015. as shown in the table below, was reclassified to discontinued operations. Refer to “Note 4. Discontinued Operations” for further information.
The comparable amounts for the equivalent prior period, April 26, 2014 to December 26, 2014 (unaudited), are as follows (in thousands, except per share data):Cardiopulmonary reportable segment.
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| | Transitional Period April 25, 2015 to December 31, 2015 | | Equivalent Prior Period April 26, 2014 to December 26, 2014 |
| | | | (unaudited) |
Net sales | | $ | 363,237 |
| | $ | 181,641 |
|
Cost of sales | | 113,404 |
| | 16,835 |
|
Gross profit | | 249,833 |
| | 164,806 |
|
Operating expenses: | | | | |
Selling, general and administrative | | 147,025 |
| | 83,045 |
|
Research and development | | 41,916 |
| | 28,125 |
|
Merger and integration expenses | | 55,776 |
| | — |
|
Restructuring expenses | | 10,494 |
| | — |
|
Amortization of intangibles | | 7,030 |
| | — |
|
Total operating expenses | | 262,241 |
| | 111,170 |
|
Operating (loss) income from continuing operations | | (12,408 | ) | | 53,636 |
|
Interest income | | 392 |
| | 125 |
|
Interest expense | | (1,509 | ) | | (8 | ) |
Impairment of cost-method investments | | (5,062 | ) | | — |
|
Foreign exchange and other (losses) gains | | (7,411 | ) | | 109 |
|
(Loss) income from continuing operations before tax | | (25,998 | ) | | 53,862 |
|
Income tax (benefit) expense | | (13,501 | ) | | 18,791 |
|
Losses from equity method investments | | (2,223 | ) | | — |
|
Net (loss) income from continuing operations | | (14,720 | ) | | 35,071 |
|
Net loss from discontinued operations | | (14,893 | ) | | — |
|
Net (loss) income | | $ | (29,613 | ) | | $ | 35,071 |
|
| | | | |
Basic income (loss) per common share: | | | | |
Continuing operations | | $ | (0.45 | ) | | $ | 1.32 |
|
Discontinued operations | | (0.45 | ) | | — |
|
| | $ | (0.90 | ) | | $ | 1.32 |
|
| | | | |
Diluted income (loss) per common share: | | | | |
Continuing operations | | $ | (0.45 | ) | | $ | 1.31 |
|
Discontinued operations | | (0.45 | ) | | — |
|
| | $ | (0.90 | ) | | $ | 1.31 |
|
| | | | |
Shares used in computing basic (loss) income per share | | 32,741 |
| | 26,552 |
|
Shares used in computing diluted (loss) income per share | | 32,741 |
| | 26,775 |
|
Item 16. Form 10-K Summary
None.