UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

Form 10-Q

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ    No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Certain statements in this Quarterly Report on Form 10-Q, other than purely historical information, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements include, but are not limited to, LivaNova’s plans, objectives, strategies, financial performance and outlook, trends, the amount and timing of future cash distributions, prospects or future events and involve known and unknown risks that are difficult to predict. As a result, our actual financial results, performance, achievements or prospects may differ materially from those expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as “may,” “could,” “seek,” “guidance,” “predict,” “potential,” “likely,” “believe,” “will,” “should,” “expect,” “anticipate,” “estimate,” “plan,” “intend,” “forecast,” “foresee” or variations of these terms and similar expressions, or the negative of these terms or similar expressions. Such forward-looking statements are necessarily based on estimates and assumptions that, while considered reasonable by LivaNova and its management based on their knowledge and understanding of the business and industry, are inherently uncertain. These statements are not guarantees of future performance, and stockholders should not place undue reliance on forward-looking statements. There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q, and include but are not limited to the risks and uncertainties summarized below:

LIVANOVA PLC AND SUBSIDIARIES’SUBSIDIARIES

(UNAUDITED)

(In thousands, except per share amounts)

LIVANOVA PLC AND SUBSIDIARIES’SUBSIDIARIES

(UNAUDITED)

LIVANOVA PLC AND SUBSIDIARIES’SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

LIVANOVA PLC AND SUBSIDIARIES’SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

The accompanying condensed consolidated financial statements of LivaNova as of, and for the three and ninesix months ended SeptemberJune 30, 20172018 and SeptemberJune 30, 2016,2017, have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S.” and such principles, “U.S. GAAP”) GAAP for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The accompanying condensed consolidated balance sheet of LivaNova at December 31, 20162017 has been derived from audited financial statements contained in our 20162017 Form 10-K, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentationstatement of the operating results of LivaNova and its subsidiaries, for the three and ninesix months ended SeptemberJune 30, 2017,2018 and are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2018. The financial information presented herein should be read in conjunction with the audited consolidated financial statements and notes thereto accompanying our 20162017 Form 10-K.

We completed the sale of our Cardiac Rhythm Management (“CRM”) business franchise to MicroPort Cardiac Rhythm B.V. and MicroPort Scientific Corporation (the “CRM Sale”) on April 30, 2018 for total cash proceeds of $195.9 million, less cash transferred of $9.2 million, subject to certain closing adjustments. In conjunction with the CRM Sale, we entered into transition services agreements to provide certain support services for generally up to twelve months from the closing date of the Mergers

To conform the condensed consolidated statementWe have reclassified certain prior period amounts for comparative purposes. These reclassifications did not have a material effect on our financial condition, results of income (loss) for the three and nine months ended September 30, 2016, to the current period presentation, we reclassified $0.7 million and $2.2 million, respectively, of Litigation Related Expenses to the Product Remediation line, and $1.7 million and $2.5 million, respectively, of Litigation Related Expenses to Selling, General and Administrative Expenses.operations or cash flows.

To conform the condensed consolidated balance sheet as of December 31, 2016 to the current period presentation we reclassified $4.5 million of Assets Held for Sale, relating to our plan to exit the Costa Rica manufacturing operation, to a separate line item in the condensed consolidated balance sheet from Prepaid Expenses and Other Current Assets. We received $4.9 million in proceeds from the sale of our Costa Rica manufacturing operation during the nine months ended September 30, 2017.

We reclassified $34.0 million to contingent consideration from other long-term liabilities at December 31, 2017 Loans to Equity and Cost Method Investees of 6.9 million were presented as Investing Activities. To conform to the presentation on the condensed consolidated statement of cash flows for the nine months ended Septemberbalance sheet at June 30, 2016 to the current period presentation, Loans to Equity and Cost Method Investees of $6.6 million were reclassified from Financing Activities to Investing Activities.2018.

Our significant accounting policies are detailed in "Note 2: Basis of Presentation, Use of Accounting Estimates and Significant Accounting Policies" of our 20162017 Form 10-K. A further explanation

We recognize revenue when a performance obligation is satisfied by transferring the control of a product or providing service to a customer. Some of our Foreign Currency accounting policycontracts include the purchase of multiple products and/or services. In such cases, we allocate the transaction price based upon the relative estimated stand-alone price of each product and/or service sold. We record state and local sales taxes net; that is, discussed below:we exclude sales tax from revenue. Typically, our contracts do not have a significant financing component.

Cardiopulmonary products may include performance obligations associated with assembly and installation of equipment. Accordingly, we allocate a portion of the revenues earnedsales prices to installation obligations and expenses incurred by certainrecognize that revenue when the service is provided. We recognize revenue for equipment and accessory product sales when control of the equipment or product passes to the customer.

Due to the nature of our subsidiariesproducts and services, revenue producing activities may result in contract assets and contract liabilities which are denominated in currencies other thaninsignificant to our financial position and results of operations. These activities relate primarily to CS 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 U.S. dollar. We determine the functional currency of our subsidiaries that exist and operate in different economic and currency environments based on the primary economic environment in which the subsidiary operates, that is, the currency of the environment in which an entity primarily generates and expends cash. Our significant foreign subsidiaries are located in Europe and the U.S. The functional currency of our significant European subsidiaries is the Euro and the functional currency of our significant U.S. subsidiaries is the U.S. dollar.customer. Contract

Acquired goodwill of $9.6 millionGoodwill arising from the ImThera acquisition, which is expected to benot deductible for tax purposes. Additionally, $3.0 millionpurposes, primarily represents the synergies anticipated between ImThera and our existing neuromodulation business. The assets acquired, including goodwill, are recognized in our Neuromodulation segment.

During the second quarter of 2018, we determined that developments in the ImThera clinical trial will result in a minimum 12-month delay of regulatory approval. This delay constituted a triggering event that required evaluation of the initial cash payment was deposited in escrowin-process research and development asset 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’impairment. Based on the condensed consolidated balance sheet asquantitative impairment evaluation, the in-process research and development asset was not impaired; however, a further delay or a change in management’s estimates could result in a fair value that is below the carrying amount for such an asset. We will continue to monitor any changes in circumstances for indicators of Septemberimpairment.

The results of the ImThera acquisition added $0.1 million and $0.2 million in revenue and $2.6 million and $3.6 million in operating losses during the three and six months ended June 30, 2017.

The results of the TandemLife acquisition added $6.0 million in revenue and $6.1 million in operating losses during each of the three and six months ended June 30, 2018. Additionally, we recognized TandemLife acquisition-related expenses of approximately $1.6 million and $1.9 million for legal and valuation expenses during the three and six months ended June 30, 2018, respectively. These expenses are included within “Selling, general and administrative” expenses in the condensed consolidated statement of income. Pro forma financial information assuming the TandemLife acquisition had occurred as of the beginning of the calendar year prior to the year of acquisition was not material for disclosure purposes.

Our 2015 and 2016 Reorganization Plans (the “Plans”) were initiated October 2015 and March 2016, respectively, in conjunction with the completion of the Mergers.merger of Cyberonics, Inc. and Sorin S.p.A. in October 2015. We initiated these plans to leverage economies of scale, streamline distribution and logistics and strengthen operational and administrative effectiveness in order to reduce overall costs. Costs associated with these plans wereare reported as ‘Restructuring expenses’ in our operating results in the condensed consolidated statements of income (loss). We estimate that the Plans will result in a net reduction of 326 personnel of which 292 have occurred as of September 30, 2017.income.

In March 2017, we committed to a plan to sell our Suzhou Industrial Park facility in Shanghai, China. As a result of this exit plan we recorded an impairment of the building and equipment of $4.6 million and accrued $0.5 million of additional costs, primarily related to employee severance, during the ninesix months ended SeptemberJune 30, 2017. In addition, the remaining carrying value of theThe land, building and equipment was reclassified to ‘Assetswere recorded as Assets held for sale’ in March 2017, with a balance of $14.1 million as of September 30, 2017,sale on the condensed consolidated balance sheet.

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 the remainder of 2017.2018 and beyond until all devices are upgraded. As part of the remediation plan, we also intend to perform a no-charge deep disinfection service (deep cleaning 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. On April 12, 2018, the FDA agreed to allow us to move forward with the deep cleaning service in the U.S., adding to the growing list of countries around the world in which we offer this service. 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.

It is reasonably possible that our estimate of the remediation liability could materially change in future periods dueFor further information, please refer to the various significant assumptions involved, such as customer behavior, market reaction“Note 11. Commitments and the timing of approvals or clearance by regulatory authorities worldwide. We recognize changes in estimates on a prospective basis.Contingencies.” At this stage, we have recognized no liability has

The outstanding principal amount of our short-term unsecured revolving credit agreements and other agreements with various banks was $28.0$89.0 million and $26.4$58.2 million, at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively, with interest rates ranging from 0.2%0.1% to 10.5%9.3% and loan terms ranging from one day to 365180 days.

In connection with the CRM sale, the borrowing capacity under our June 2017 finance contract with the European Investment Bank Financingdecreased from €100.0 million (approximately $116.4 million) to €90.0 million (approximately $104.8 million) and the availability for drawdowns was extended through December 31, 2020.

On June 29, 2017, weIn connection with the April 2018 acquisition of TandemLife, LivaNova entered into a new finance contractbridge facility agreement (the “Finance Contract”“Bridge Facility Agreement”) providing a term loan facility with the EIB to support financing of certain R&D projects. The Finance Contract has a borrowing base of €100 million (or approximately $118 million USD equivalent) and can be drawn in up to two tranches, each in a minimumaggregate principal amount of €50$190.0 million. On April 3, 2018, we borrowed $190.0 million (or approximately $59 million USD equivalent). Drawdowns must occur by December 30, 2018, andunder the last repayment dateBridge Facility Agreement to facilitate the initial payment for our acquisition of any tranche will be no earlier than four years and no later than eight years afterTandemLife. We used the disbursementproceeds from the sale of the relevant tranche. LoansCRM business franchise to repay the borrowings under the Finance Contract are subject to certain covenants and other terms and conditions. No loan drawdowns have occurred asBridge Facility Agreement in full during the second quarter of September 30, 2017.2018.

Due to the global nature of our operations, we are exposed to foreign currency exchange rate fluctuations. In addition, due to certain loans with floating interest rates, we are also subject to the impact of changes in interest rates on our interest payments. We enter into foreign currency exchange rate (“FX”) derivative contracts and interest rate swap contracts to reduce the impact of foreign currency rate and interest rate fluctuations on earnings and cash flow. We measure all outstanding derivatives each period end at fair value and report the fair value as either financial assets or liabilities in the condensed consolidated balance sheets. We do not enter into derivative contracts for speculative purposes. At inception of the contract, the derivative is designated as either a freestanding derivative or a hedge. Derivatives that are not designated as hedging instruments are referred to as freestanding derivatives with changes in fair value included in earnings.

If the derivative qualifies for hedge accounting, depending on the nature of the hedge and hedge effectiveness, changes in the fair value of the derivative will either be recognized immediately in earnings or recorded in accumulated other AOCIcomprehensive income (“AOCI”) until the hedged item is recognized in earnings upon settlement/termination. FX derivative gains and losses in AOCI are reclassified to the condensed consolidated statementstatements of income (loss) as shown in the tables below and interest rate swap gains and losses in AOCI are reclassified to interest expense in the condensed consolidated statementstatements of income (loss).income. 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

The gross notional amount of freestanding derivativesFX derivative contracts, not designated as hedging instruments, outstanding at SeptemberJune 30, 20172018 and December 31, 20162017 was $239.0$256.0 million and $489.1$231.9 million, respectively. These derivative contracts are designed to offset the FX effects in earnings of various intercompany loans, our EIB loan, and trade receivables. We recorded net losses for these freestanding derivatives of $0.7$4.1 million and $7.9$5.4 million for the three and nine months ended SeptemberJune 30, 2018 and June 30, 2017, respectively and net gains (losses)losses of $(1.8)$11.7 million and $0.4$7.2 million for the three and ninesix months ended SeptemberJune 30, 2016,2018 and June 30, 2017, respectively. These gains andThe net losses are included in ‘Foreign“Foreign exchange and other gains (losses)’ gains” in the condensed consolidated statements of income (loss).income.