(cid:21)(cid:19)(cid:20)(cid:28)(cid:3)(cid:41)(cid:82)(cid:85)(cid:80)(cid:3)(cid:20)(cid:19)(cid:16)(cid:46)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________
Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
or
Commission file number: 001-37599
LivaNova PLC
(Exact name of registrant as specified in its charter)
England and Wales ................... 98-1268150
(State or other jurisdiction of .......... (I.R.S. Employer
incorporation or organization) ........ Identification No.)
20 Eastbourne Terrace, London, United Kingdom, W2 6LG
(Address of principal executive offices) ....................... (Zip Code)
Registrant’s telephone number, including area code: (44) (0) 203 325-0660
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Ordinary Shares - £1.00 par value per share
LIVN
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None
_________________________________________________________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such
files). Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
Accelerated filer
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2019, the last business day of
the most recently completed second fiscal quarter, based upon the last sales price reported for such dates on the NASDAQ Global Market was approximately
$3.5 billion. For purposes of this disclosure, ordinary shares held by persons who hold more than 5% of the outstanding ordinary shares and shares held by
executive officers and directors of the registrant have been excluded as such persons may be deemed to be affiliates.
As of February 27, 2020, 48,445,251 ordinary shares were outstanding.
Portions of the definitive proxy statement of LivaNova PLC for the 2020 Annual General Meeting of Shareholders, which will be filed within 120 days of
December 31, 2019, are incorporated by reference into Part III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
1
LIVANOVA PLC
TABLE OF CONTENTS
PART I
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART IV
Item 15.
Item 16.
Exhibits, Financial Statement Schedules
Form 10-K Summary
PAGE NO.
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57
In this Annual Report on Form 10-K, “LivaNova,” “the Company,” “we,” “us” and “our” refer to LivaNova PLC and its
consolidated subsidiaries.
This report may contain references to our proprietary intellectual property, including among others:
• Trademarks for our VNS therapy systems: the VNS Therapy® System, the VITARIA® System and our proprietary
pulse generator products: Model 102 (Pulse®), Model 102R (Pulse Duo®), Model 103 (Demipulse®), Model 104
(Demipulse Duo®), Model 105 (AspireHC®), Model 106 (AspireSR®) and Model 1000 (SenTiva™).
• Trademarks for our Cardiopulmonary product systems: S5® heart-lung machine, S3® heart-lung machine, Inspire™,
Heartlink™, XTRA® Autotransfusion System, 3T Heater-Cooler®, Connect™ and Revolution®.
• Trademarks for our line of surgical tissue and mechanical valve replacements and repair products: Mitroflow®, Crown
PRT®, Solo Smart™, Perceval®, Miami Instruments™, Top Hat®, Reduced Series Aortic Valves™,
Carbomedics® Carbo-Seal®, Carbo-Seal Valsalva®, Carbomedics® Standard™, Orbis™ and Optiform®, Memo 3D®,
Memo 3D® ReChord™, MEMO 4D®, MEMO 4D® ReChord™, AnnuloFlo®, AnnuloFlex®, Bicarbon Slimline™,
Bicarbon Filtline™ and Bicarbon Overline®.
• Trademarks for our advanced circulatory support systems: TandemLife®, TandemHeart®, TandemLung®, ProtekDuo®,
and LifeSPARC™.
• Trademarks for our obstructive sleep apnea system: ImThera® and Aura6000®.
These trademarks and trade names are the property of LivaNova or the property of our consolidated subsidiaries and are
protected under applicable intellectual property laws. Solely for convenience, our trademarks and tradenames referred to in this
Annual Report on Form 10-K may appear without the ®or ™ symbols, but such references are not intended to indicate in any
way that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and tradenames.
________________________________________
2
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K, 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, as amended (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, 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 Annual Report on Form 10-K. Such risks, uncertainties and other important factors include, among others: the
risks, uncertainties and factors set forth in the “Risk Factors” section of this Annual Report on Form 10-K, previous or future
Quarterly Reports on Form 10-Q and Annual or Transitional Reports on Form 10-K as well as other documents that we have
filed or will file with the SEC.
The afore-referenced risks and uncertainties are not necessarily all the important factors that could cause our actual financial
results, performance, achievements or prospects to differ materially from those expressed in or implied by any of our 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 behalf 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, and we do not undertake or assume any obligation
to update publicly any of these forward-looking statements to reflect actual results, new information or future events, changes
in assumptions or changes in other factors affecting 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.
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 1A. Risk Factors,” “Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and elsewhere in this Annual Report on Form 10-K.
3
Item 1. Business
Description of the Business and Background
PART I
LivaNova PLC, headquartered in London, (collectively with its subsidiaries, the “Company,” “LivaNova,” “we” or “our”), 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 a global team of medical
professionals in the fields of cardiovascular disease 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.
We were organized under the laws of England and Wales on February 20, 2015 for the purpose of facilitating the business
combination of Cyberonics, Inc., a Delaware corporation, and Sorin S.p.A., a joint stock company organized under the laws of
Italy. The business combination became effective in October 2015. LivaNova’s ordinary shares are listed for trading on the
NASDAQ Global Market under the symbol “LIVN.”
Business Franchises
LivaNova is comprised of two principal business franchises, which are also our reportable segments: Cardiovascular and
Neuromodulation, corresponding to our primary therapeutic areas. Other corporate activities include corporate shared service
expenses for finance, legal, human resources, information technology and New Ventures. New Ventures is focused on new
growth platforms and identification of other opportunities for expansion.
For further information regarding our business segments, historical financial information and our methodology for the
presentation of financial results, please refer to “Item 15. Exhibits, Financial Statement Schedules” of this Annual Report on
Form 10-K.
Cardiovascular
Our Cardiovascular business franchise is engaged in the development, production and sale of cardiopulmonary products,
heart valves and advanced circulatory support products. Cardiopulmonary products include oxygenators, heart-lung machines,
autotransfusion systems, perfusion tubing systems, cannulae and other related accessories. Heart valves include mechanical
heart valves, tissue heart valves, related repair products and minimally invasive surgical instruments. Advanced circulatory
support includes temporary life support product kits that can include a combination of pumps, oxygenators and cannulae.
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 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.
Autotransfusion systems. One of the key elements for a complete blood management strategy is autologous blood
transfusion, which involves the collection, processing and reinfusion of the patient’s own blood lost at the surgical site
during the perioperative period.
Cannulae. Our cannulae product family, part of the oxygenator product group, is used to connect the extracorporeal
circulation to the heart of the patient during cardiac surgery.
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.
4
Heart Valves and Repair Products
We offer a comprehensive line of products to treat a variety of heart valve disorders, including a complete line of surgical
tissue and mechanical valve replacements and repair products for damaged or diseased heart valves. Our heart valves and repair
product offerings include:
Self-anchoring tissue heart valves. Perceval is our 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 to reduce the time the patient spends in cardiopulmonary bypass.
Other tissue heart valves. Other 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. 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.
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 valve regurgitation (“MR”). We offer a wide range of mitral valve repair products, including the
Memo 3D and Memo 3D ReChord, AnnuloFlo and AnnuloFlex.
Minimally invasive surgical instruments. Through the acquisition of the minimally invasive cardiac surgery business from
Miami Instruments in June 2019, we offer minimally invasive cardiac surgery instruments that support the
implantation of our heart valve products during surgery.
Advanced Circulatory Support Products
In 2018, we acquired the TandemLife business, which simplifies temporary extracorporeal cardiopulmonary life support
solutions for critically ill patients. Built around a common compact console and pump, LifeSPARC provides temporary support
for emergent rescue patients in a variety of settings. Designed for ease of use, the system offers power and versatility for multi-
disciplinary programs to support more patients. The system is accompanied by four specialized and ready-to-deploy kits, each
designed to support diverse cannulation strategies.
Neuromodulation
Our Neuromodulation business franchise designs, develops and markets neuromodulation-based medical devices for the
treatment of epilepsy, depression and obstructive sleep apnea. We are also developing and conducting clinical testing of the
VITARIA System for treating heart failure through vagus nerve stimulation (“VNS”).
Our seminal Neuromodulation product, the LivaNova Vagus Nerve Stimulation Therapy (“VNS Therapy”) System, is an
implantable device authorized for the treatment of drug-resistant epilepsy and difficult-to-treat depression (“DTD”). The VNS
Therapy System consists of an implantable pulse generator and connective lead that 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
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.
Epilepsy
Globally, there are several broad types of treatment available to patients with epilepsy: multiple seizure medications; various
forms of the ketogenic diet; VNS; 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
characterized as drug-resistant, at which point, adjunctive non-drug options are considered, including VNS therapy, brain
surgery and a ketogenic diet.
5
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. In June 2017, the FDA approved our VNS Therapy device for use
in patients who are at least four years of age and have partial onset seizures that are refractory to antiepileptic medications. At
the same time, our VNS Therapy device received FDA approval for expanded magnetic resonance imaging (“MRI”), affirming
VNS Therapy as the only epilepsy device FDA-approved for MRI scans. CE Mark approval followed shortly thereafter, in
August 2017. Currently, SenTiva, AspireHC and AspireSR models of VNS Therapy technology provide for this expanded MRI
access. Other worldwide regulatory bodies have also approved the VNS Therapy System for the treatment of epilepsy, many
without age restrictions or seizure-type limitations.
We sell a number of VNS Therapy System product models for the treatment of epilepsy, including our Model 102 (Pulse),
Model 102R (Pulse Duo), Model 103 (Demipulse), Model 104 (Demipulse Duo), Model 105 (AspireHC), Model 106
(AspireSR) and Model 1000 (SenTiva) pulse generators. Our AspireSR and SenTiva generators provide 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 SenTiva generator is the smallest and lightest device capable of delivering responsive therapy for
epilepsy.
Depression
In March 2017, the American Journal of Psychiatry published the results of the longest and largest naturalistic study on
effective treatments for patients experiencing chronic and severe depression. The findings showed that the addition of the VNS
Therapy System in conjunction with traditional treatment methods is effective in reducing symptoms in patients with DTD.
In January 2018, we announced the launch and enrollment of the first patient in our Global RESTORE-LIFE study, which
evaluates the use of our VNS Therapy System in patients who have DTD and failed to achieve an adequate response to standard
psychiatric management. We expect to enroll up to 500 patients at approximately 80 sites outside of the U.S. We are currently
enrolling patients in Germany, Belgium, and the United Kingdom (the “UK”).
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 United States (“U.S.”) Centers for Medicare and Medicaid Services (“CMS”)
issued a national determination of non-coverage within the U.S. with respect to reimbursement of the VNS Therapy System for
patients with DTD, significantly limiting access to this therapeutic option for most patients. However, in May 2018, CMS
published a tracking sheet to reconsider its National Coverage Determination (“NCD”) of our VNS Therapy System for DTD in
response to a letter that we submitted to CMS requesting a formal reconsideration of the NCD. We requested this review after a
significant body of new evidence emerged about DTD and the role of VNS Therapy in its treatment.
In February 2019, CMS finalized its National Coverage Determination (“NCD”) for the VNS Therapy System for DTD. This
final decision initiates coverage for Medicare beneficiaries through Coverage with Evidence Development (“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 device replacement. The CED also includes the possibility to extend the study to a
prospective longitudinal study.
In September 2019, CMS accepted the protocol for our RECOVER clinical study and the first patient was enrolled.
RECOVER will include up to 500 unipolar and up to 500 bipolar patients at a maximum of 100 sites in the United States.
Obstructive Sleep Apnea
In January 2018, we acquired ImThera Medical, Inc. (“ImThera”), a privately held emerging-growth company developing an
implantable neurostimulation device system for the treatment of obstructive sleep apnea. The Neuromodulation product line
now includes ImThera’s implantable device, which stimulates multiple tongue muscles via the hypoglossal nerve to open the
airway while a patient is sleeping. ImThera has a commercial presence in the European market, and an FDA pivotal study is
ongoing in the U.S.
Corporate Activities and New Ventures
Corporate activities include shared services for finance, legal, human resources and information technology and New
Ventures. The New Ventures group evaluates growth opportunities and new potential areas of investment to expand our product
portfolio to meet emerging patient needs.
6
Discontinued Operations
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. We previously concluded that the sale of CRM
represented a strategic shift in our business that has a major effect on future operations and financial results. 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. For further information, refer to “Note 5. Discontinued Operations” in our consolidated financial
statements and accompanying notes, beginning on page F-1 of this Annual Report on Form 10-K.
Research and Development (“R&D”)
The markets in which we participate are subject to rapid technological advances. Product improvement and innovation are
necessary to maintain market leadership. We direct our R&D efforts 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. We initiate and
participate in many clinical trials each 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 16% 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 our strategic portfolio
initiatives, including DTD and heart failure.
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 R&D 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 where 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 (“Caisson”)
In May 2017, we acquired the remaining 51% equity interest in Caisson, a clinical-stage medical device company focused on
the design, development and clinical evaluation of a novel transcatheter mitral valve replacement (“TMVR”) implant device.
The device is designed for treating mitral valve regurgitation (“MR”) through replacement of the native mitral valve using a
fully transvenous delivery system. As announced in November 2019, we ended our Caisson TMVR program effective
December 31, 2019.
ImThera
In January 2018, we acquired the remaining 86% outstanding interest in ImThera; we previously held 14% of ImThera’s
outstanding equity. ImThera is focused on neurostimulation for the treatment of obstructive sleep apnea. ImThera manufactures
an implantable device that stimulates multiple tongue muscles via the hypoglossal nerve, which opens the airway while a
patient is sleeping. The financial results of ImThera are included within Neuromodulation.
TandemLife
In April 2018, we acquired CardiacAssist, Inc., doing business as TandemLife. TandemLife is focused on the delivery of
leading-edge temporary life support systems, including cardiopulmonary and respiratory support solutions. The financial results
of TandemLife are included within Cardiovascular.
7
Miami Instruments
On June 12, 2019, we acquired Miami Instruments, LLC’s minimally invasive cardiac surgery instruments business and the
related operations are integrated into Cardiovascular as part of our Heart Valves portfolio.
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, 2019, we held more than 1,000 issued patents
worldwide, with approximately 300 pending patent applications that cover various aspects of our technology. 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, we consider these intellectual property
assets 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.
For additional information, please refer to “Item 1A. Risk Factors” of this Annual Report on Form 10-K, under the section
entitled “We are substantially dependent on patent and other proprietary rights and failing to protect such rights or to be
successful in litigation related to our rights or the rights of others may result in our payment of significant monetary damages
and/or royalty payments, negatively impact our ability to sell current or future products, or prohibit us from enforcing our
patent and other proprietary rights against others.”
Markets and Distribution Methods
The three largest markets for our medical devices are the U.S., Europe and Japan, though emerging markets are an area of
increasing focus and opportunity for us. We sell most of our medical devices through direct sales representatives in the U.S. and
a combination of direct sales representatives and independent distributors in markets outside the U.S.
Our 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 knowledgeable and dedicated sales staff
that is able to foster strong relationships with our broad range of customers. We maintain excellent working relationships with
professionals in the medical industry, which provide us with a detailed understanding of therapeutic and diagnostic
developments, trends and emerging opportunities, and which therefore enable us to respond quickly to the changing needs of
providers and patients. We actively participate in medical meetings and conduct comprehensive training and educational
activities to enhance our presence in the medical communities we serve, and we believe that these activities also contribute to
advancing healthcare professionals’ expertise.
Due to the emphasis on cost-effectiveness in healthcare delivery, 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. Enhanced purchasing power may also lead to pressure on pricing and an increase in the use of
preferred vendors. Our customer base continues to evolve to reflect such economic changes across the geographic markets we
serve.
Competition and Industry
We compete in the medical device market in more than 5,000 hospitals and in more than 100 countries. Technological
advances and scientific discoveries cause rapid change in this market. Our 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 face competition from providers of alternative medical therapies, such as pharmaceutical companies and providers
of cannabis derived products, among others.
8
Product problems, physician advisories, safety alerts and publications about our 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 required to compete on the basis
of price. In order to continue to compete effectively, we must 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 these products.
Our primary medical device competitors in the Cardiovascular and Neuromodulation product groups are Terumo Medical
Corporation, Maquet Medical Systems, Medtronic plc, Haemonetics Corporation, Edwards Lifesciences Corp., NeuroPace,
Inc., Abiomed, Inc. and Abbott Laboratories, Inc. (formerly St. Jude Medical, Inc.), although not all competitors are present in
all product lines.
Production, Quality Systems and Raw Materials
We manufacture a majority of our products at 11 manufacturing facilities located in Italy, Germany, the U.S., Canada, Brazil
and Australia. We purchase raw materials and many of the components used in our manufacturing facilities from numerous
suppliers in various countries. For quality assurance, sole source availability or cost effectiveness purposes, we may procure
certain components and raw materials from a sole supplier. We work closely with our suppliers to ensure continuity of supply
while maintaining high quality and reliability. We use quality systems in the design, production, warehousing and distribution
of our products to ensure our products are safe and effective. In addition, we utilize environmental management systems and
safety programs to protect the environment and our employees. For additional information related to our manufacturing
facilities, refer to “Item 2. Properties” in this Annual Report on Form 10-K.
Government Regulation and Other Considerations
Our medical devices are subject to regulation by numerous government agencies, including the FDA and counterpart
agencies outside the U.S. To varying degrees, each of these agencies requires us 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 our products. Our business is also
affected by patient privacy and security laws, cost containment initiatives, and environmental health and safety laws and
regulations worldwide.
The laws applicable to us are subject to changing and evolving interpretations. If a governmental authority were to conclude
that we are not in compliance with applicable laws and regulations, we 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
products to beneficiaries covered by government programs, among other potential enforcement actions.
Product Approval and Monitoring
Many countries where we sell our products subject such medical devices and technologies to their own approval and other
regulatory requirements regarding performance, safety and quality. The following provides a brief overview of the oversight
and requirements to which we are subject for the commercial distribution of our products in the U.S., Europe and Japan, the
largest markets for our medical devices.
Each medical device we seek to distribute commercially in the U.S. must receive 510(k) clearance or pre-market approval
(“PMA”) from the FDA, unless specifically exempted by the agency. The former, known as pre-market notification or the
510(k) process, requires us to demonstrate that our new medical device is substantially equivalent to a legally marketed medical
device. The latter, the more costly and rigorous PMA process, requires us 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 European Union (“EU”), established a single regulatory approval process, according to which a “Conformité
Européenne” (French for “European Conformity”) or 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
(i.e., the essential requirements), and then, according to their classification, comply with one or more of a selection of
conformity assessment routes. 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. As a general rule,
demonstration of conformity of medical devices and their manufacturers with the essential requirements must be 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
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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. The EU published its Medical
Device Regulation (“Reg MDR”) in 2017 that will impose significant additional premarket and post-market requirements for
our medical devices. Reg MDR has a three-year implementation period, at the end of which, national competent authorities and
manufacturers must implement and ensure compliance with the regulation. Among other things, Reg MDR imposes additional
reporting requirements on manufacturers of high-risk medical devices and provides additional clinical evidence requirements.
We have initiated activities and anticipate compliance with Reg MDR within the applicable timeframe.
To be sold in Japan, our medical devices must undergo thorough safety examinations and demonstrate medical efficacy
before they are granted approval. The Japanese government, through the Ministry of Health, Labour and Welfare, regulates
medical devices under the Pharmaceutical Affairs Law (“PAL”). Penalties for a company’s noncompliance with the PAL can be
severe, including revocation or suspension of a company’s business license and criminal sanctions. Japanese regulatory bodies
also assess the quality management systems of the manufacturer and product conformity to the requirements of the PAL. We
are subject to compliance investigations by these agencies.
Many countries in which we sell our products (outside of the U.S., the EU and Japan) have their own regulatory requirements
for medical devices. Most of these countries require that product approvals be recertified on a regular basis, generally every
four to five years. The recertification process requires that we evaluate any device changes and any new regulations or
standards relevant to the device and, where needed, 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.
The global regulatory environment is increasingly 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. We expect this global regulatory environment will continue to
evolve, which could impact the cost, the time needed to approve, and ultimately, our ability to maintain existing approvals or
obtain future approvals for our products.
Product and Promotional Restrictions
Both before and after we release a product for commercial distribution, we have ongoing responsibilities under various laws
and regulations governing medical devices. Regulations of the FDA and other regulatory agencies in and outside the U.S.
impose extensive compliance and monitoring obligations on our business. These agencies review our design and manufacturing
practices, labeling, record keeping, and required reports of adverse experiences and other information to identify potential
problems with marketed medical devices. We are 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 U.S. regulatory
bodies monitor the manner in which we promote and advertise our 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, we are
prohibited from promoting products for such “off-label” uses and can only market our products for cleared or approved uses.
Any adverse regulatory action, depending on its magnitude, may limit our ability to market and sell our products effectively,
limit our ability to obtain future premarket approvals or result in a substantial modification to our business practices and
operations. For additional information, see "Item 1A. Risk Factors" of this Annual Report on Form 10-K, under the section
entitled “Our products are subject to costly and complex laws and governmental regulations, and failure to obtain product
approvals or clearance may materially adversely affect our financial condition and business operations.”
Governmental Trade Regulations
The sale and shipment of our products and services across international borders, as well as the purchase of components and
products from international sources, subject us 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 we obtain an approval before we export or re-
export goods, technology or services to certain destinations, to certain end-users and for certain end-uses. Because we are
subject to extensive regulations in the countries in which we operate, we are subject to the risk that laws and regulations could
change in a way that would expose us to additional costs, penalties or liabilities.
We also sell and provide 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
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regulations when engaging in transactions involving our products, we may be subject to varying degrees of liability depending
on the extent of our participation in the transaction. The activities of these third parties may cause disruption or delays in the
distribution and sale of our products or result in restrictions being placed on our international distribution and sales of products,
which may materially impact our business activities.
Patient Privacy and Security Laws
We are subject to various laws worldwide that protect the security and confidentiality of certain patient health information,
including patient medical records, and that restrict the use and disclosure of patient health information. Privacy standards in
Europe and Asia are becoming increasingly strict; enforcement actions and financial penalties related to privacy issues in the
EU are growing; and new laws and restrictions are being passed in other countries including the U.S. The management of
cross-border transfers of information among and outside of EU member countries is becoming more complex, which may
complicate our clinical research activities, as well as product offerings that involve transmission or use of clinical data. We will
continue our efforts to comply with those requirements and to adapt our business processes to those standards.
In the U.S., the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health
Information Technology and Clinical Health Act (“HITECH”) and their respective implementing regulations impose specified
requirements relating to the privacy, security and transmission of individually identifiable health information. Among other
things, HITECH makes HIPAA’s privacy and security standards directly applicable to “business associates,” defined as
independent contractors or agents 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. We may be deemed to operate as a business associate
to covered entities in certain instances. In those cases, the patient data that we receive may include protected health
information, as defined under HIPAA. Enforcement actions can be costly and interrupt regular operations of our business. In
addition, state laws 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. For example, the California Consumer
Privacy Act (“CCPA”), a bill to enhance privacy rights and consumer protection for residents of California went into effect
January 1, 2020. For additional information, see "Item 1A. Risk Factors" of this Annual Report on Form 10-K, under the
section entitled “Cyber-attacks or other disruptions to our information technology systems could lead to reduced revenue,
increased costs, liability claims, fines, harm to our competitive position and loss of reputation.”
In the EU, Regulation 2016/679 on the protection of natural persons with regard to the processing of personal data and on the
free movement of such data (“General Data Protection Regulation” or “GDPR”) came into effect in 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 relating to the privacy, security and transmission of
individually identifiable health information, there are a number of changes. In particular: (1) proactive compliance measures
are introduced, such as the requirement to carry out a Privacy Impact Assessment and to appoint 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 us; and (2) the
administrative fines that can be levied are significantly increased, the maximum being the higher of €20 million (approximately
$22.4 million), or 4% of our total worldwide revenue in the previous 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 we do business. These changes are
causing the marketplace to put 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, tying reimbursement to
outcomes, shifting to population health management, and 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
the 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 increasing levels of price sensitivity among
customers for our 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 who use the medical devices or therapies. Even though a new medical device
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may be cleared for commercial distribution, we 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 our manufacturing efficiencies, cost controls and other cost-savings initiatives, we believe we are 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 us to predict the potential impact of cost-
containment trends on future operating results.
Applicability of Anti-Corruption Laws and Regulations
Our worldwide business is subject to the U.S. Foreign Corrupt Practices Act of 1977 (the “FCPA”), the UK Bribery Act of
2010 (the “UK Bribery Act”) and other anti-corruption laws and regulations applicable in the jurisdictions where we operate.
The FCPA can be used to prosecute companies in the U.S. for arrangements with physicians or other parties outside the U.S. 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 us outside the U.S. and the UK, all of which are subject to
evolving interpretations. For additional information, please refer to “Item 1A. Risk Factors” of this Annual Report on Form 10-
K, under the section entitled “The failure to comply with anti-bribery laws could materially adversely affect our business and
result in civil and/or criminal sanctions.”
Environmental Regulation and Management
We are subject to various environmental laws, directives and regulations both in the U.S. and abroad. Our operations involve
the use of substances regulated under environmental laws, primarily in manufacturing and sterilization processes. We believe
that sound environmental, health and safety performance contribute to our competitive strength while benefiting our customers,
stockholders and employees. We are focused on continuous improvement in these areas by reducing pollution, depletion of
natural resources and our overall environmental footprint. Specifically, we are working to optimize energy and resource usage,
ultimately reducing greenhouse gas emissions and waste. We have implemented trigeneration in our plant in Mirandola, Italy
which is designed to reduce CO2, reduce energy consumption, generate energy savings, and reduce costs, and we have moved
from using oil to methane, reducing considerably the air pollution from our plant in Saluggia, Italy. We replaced fluorescent
light in our plants in Arvada, Colorado and Mirandola with LED to reduce overall energy consumption, and we are continually
working to improve the efficiency of our machinery, e.g., by replacing HVAC units with more efficient equivalents. Finally,
our Saluggia plant was awarded ISO 14001 certification in 2018, becoming our second ISO-certified plant alongside Munich,
Germany.
Health Care Fraud and Abuse Laws
We are also subject to U.S. federal and state government healthcare regulation and enforcement and government regulations
and enforcement in other countries in which we conduct our business. 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 the purchase, order, lease, or recommendation of a good or service for which payment may be made in whole or 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 $100,000 and imprisonment for up to 10 years. Finally, violations can result in
exclusion from participation in government healthcare programs, including Medicare and Medicaid.
In addition to the Anti-Kickback Statute, many states have their own anti-kickback laws. Often, these laws closely follow the
language of the federal law, although they do not always have the same exceptions or safe harbors. In some states, these anti-
kickback laws apply with respect to all payers, including commercial health insurance companies.
Additionally, violations of the U.S. False Claims Act (the “False Claims Act”) can result in significant monetary penalties
and treble damages. The U.S. federal government is using the False Claims Act, and the accompanying threat of significant
financial liability, in its investigation and prosecution of device and biotechnology companies throughout the U.S., for example,
in connection with the promotion of products for unapproved uses and other sales and marketing practices. The U.S.
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 significant size of actual and potential settlements,
we anticipate that the U.S. government will continue to devote substantial resources to investigating healthcare providers’ and
manufacturers’ compliance with applicable fraud and abuse laws.
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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;
and 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, items 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 has also been a recent trend of increased federal and state regulation of payments made to physicians and other
healthcare providers. We are subject, for example, to the Physician Payments Sunshine Act, which requires us to annually
report annually certain payments and other transfers of value we make to U.S. licensed physicians or U.S. teaching hospitals.
Any failure to comply with such laws and regulations hold the potential for criminal and civil financial penalties.
The shifting commercial compliance environment and the need to build and maintain robust systems to comply with different
compliance and/or reporting requirements in multiple jurisdictions increase the possibility that a healthcare company may
violate one or more of the requirements. If our operations are found to be in violation of any of such laws or any other
governmental regulations that apply to us, we may be subject to penalties, including, without limitation, civil and criminal
penalties, damages, fines, the curtailment or restructuring of our operations, and exclusion from participation in federal and
state healthcare programs, any of which could adversely affect our ability to operate our business and our financial results.
Environmental Health and Safety Laws
We are also subject to various environmental health and safety laws and regulations worldwide. Like other medical device
companies, our manufacturing and other operations involve the use, storage and transportation of substances regulated under
environmental health and safety laws, including those related to the transportation of hazardous materials. To the best of our
knowledge at this time, we do not expect that compliance with environmental protection laws will have a material impact on
our consolidated results of operations, financial position or cash flows.
Working Capital Practices
Our goal is to carry sufficient levels of inventory to ensure adequate supply of raw materials from suppliers and meet the
product delivery needs of our customers. To meet the operational demands of our customers, we also provide payment terms to
customers in the normal course of business and rights to return product under warranty.
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 certain types of dealings with Iran,
including transactions or dealing with government-owned entities, even when those activities are lawful and do not involve
U.S. persons. Two of our non-U.S. subsidiaries currently sell medical devices, including cardiac surgery and cardiopulmonary
products, to privately held distributors in Iran.
We have limited visibility into the identity of these distributors’ customers 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. To the best of our knowledge at this time, we do not have any contracts or commercial arrangements with
the Iranian government.
Our gross revenues and net profits attributable to the above-mentioned Iranian activities were $1.6 million and $0.5 million
for the three months ended December 31, 2019, respectively, and $10.3 million and $3.6 million for the twelve months ended
December 31, 2019, respectively.
We believe our activities are consistent with applicable law, including U.S., EU, and other applicable sanctions laws, though
such laws are complex and continue to evolve rapidly. We intend to continue our business in Iran.
Employees
As of December 31, 2019, we employed approximately 4,000 employees worldwide. 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 and development and providing employees with opportunities to contribute to our continued
growth and success.
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Seasonality
For both of our segments, the number of medical procedures incorporating our products is generally lower during the
summer months, particularly in European countries, due to summer vacation schedules.
Available Information
Our executive headquarters are located at 20 Eastbourne Terrace, London, UK W2 6LG. Our website address is
www.livanova.com. We make available free of charge on 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, amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, and reports relating to beneficial ownership of our
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. Our website also contains the charters for each standing committee of our Board of
Directors.
We may from time to time provide important disclosures to investors by posting them in the Investor Relations section of our
website, as allowed by SEC rules. Information on our website is not incorporated into this Annual Report on Form 10-K.
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 our other filings with the
SEC. Based on the information currently known to us, we believe the following information identifies the most significant risks
affecting us, but the risks and uncertainties included below are not the only ones related to our businesses. Additional risks and
uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.
Risks Relating to the Company
The global medical device industry is highly competitive and we may be unable to compete effectively.
We are in highly competitive markets characterized by increasingly complex products that are expensive to develop and
manufacture with significant price competition. 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. Competitive factors include:
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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 as a result of product issues, physician advisories, safety alerts, and publications
about our products. The importance of product quality, product efficacy, and quality systems in the medical device industry
cannot be overstated. 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.
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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 locate new
supply sources quickly in response to a supply reduction or interruption, with negative effects on our ability to manufacture our
products effectively and in a timely fashion.
Our products are subject to costly and complex laws and governmental regulations, and failure to obtain product approvals
or clearance may materially adversely affect our financial condition and business operations.
Our medical devices and technologies, as well as our business activities, are subject to a complex set of regulations and
rigorous enforcement, including by the FDA, U.S. Department of Justice, Health and Human Services - Office of the Inspector
General, and numerous other federal, state, and non-U.S. governmental authorities. To varying degrees, each of these agencies
requires us to comply with laws and regulations governing the development, testing, manufacturing, labeling, marketing and
distribution of our products. As a part of the regulatory process of obtaining marketing clearance or approval for new products
and new indications for existing products, we conduct and participate in numerous clinical trials with a variety of study designs,
patient populations, and trial endpoints. Unfavorable or inconsistent clinical data from existing or future clinical trials or the
market’s or FDA’s perception of this clinical data, may adversely impact our ability to obtain product approvals, our position in,
and share of, the markets in which we participate, and our business, financial condition, results of operations and cash flows.
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 requirements administered by the FDA and other non-U.S. 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 of such products.
We cannot guarantee that we will be able to obtain or maintain marketing clearance for our new products or enhancements or
modifications to existing products, and the failure to maintain approvals or obtain approval or clearance could have a material
adverse effect on our business, results of operations, financial condition and cash flows. Even if we are able to obtain approval
or clearance, it may take a significant amount of time; require the expenditure of substantial resources; involve stringent clinical
and pre-clinical testing, as well as increased post-market surveillance; and involve modifications, repairs or replacements of our
products, or limit the proposed uses of our products.
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. 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 regulators will agree with any of our decisions not to seek clearance or approval.
If regulators require us to cease marketing and to recall a modified device until we obtain a new clearance or approval, our
business, financial condition, operating results and future growth prospects could be materially adversely affected. Any recall
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, reputational damage and potential operating restrictions imposed by regulators.
Failure to comply with product-related government regulations may materially adversely affect our financial condition and
business operations.
Both before and after a product is commercially released, we have ongoing responsibilities under FDA and other applicable
non-U.S. government agency regulations. For instance, many of our facilities and procedures and those of our suppliers are also
subject to periodic inspections by the FDA to determine compliance with applicable regulations. The results of these
inspections can include inspectional observations on FDA’s Form-483, warning letters, or other forms of enforcement. If the
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FDA were to conclude that we are not in compliance with applicable laws or regulations, or that any of our 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 or require certificates of non-U.S. governments for exports, and/or require us to notify health professionals and
others that the devices present unreasonable risks of substantial harm to the public health. The FDA and other non-U.S.
government agencies may also assess civil or criminal penalties against us, our officers or employees and impose operating
restrictions on a company-wide basis. The FDA may also recommend prosecution to the U.S. Department of Justice. Any
adverse regulatory action, depending on its magnitude, may restrict us from effectively marketing and selling our products and
limit our ability to obtain future pre-market clearances or PMAs, and could result in a substantial modification to our business
practices and operations. These potential consequences, as well as any adverse outcome from government investigations, could
have a material adverse effect on our business, results of operations, financial condition, and cash flows.
In addition, in the U.S., device manufacturers are prohibited from promoting their products other than for the uses and
indications set forth in the approved product labeling, and any failure to comply could subject us to significant civil or criminal
exposure, administrative obligations and costs, and/or other potential penalties from, and/or agreements with, the federal
government.
Governmental regulations outside the U.S. have, and may continue to, become increasingly stringent and common. In the
EU, for example, Reg MDR, when it enters into full force in 2020, will include significant additional premarket and post-
market requirements. Penalties for regulatory non-compliance could be severe, including fines and revocation or suspension of
a company’s business license, mandatory price reductions and criminal sanctions. Future laws and regulations may also have a
material adverse effect on us.
If our marketed medical devices are defective or otherwise pose safety risks, the FDA and similar non-U.S. governmental
authorities could require their recall or initiate an enforcement action, or we may initiate a recall of our products
voluntarily.
The FDA and similar non-U.S. 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 a material deficiency. We have initiated voluntary product
recalls in the past. A future recall announcement 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. 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 as a recall. If the regulating authority disagrees with our determinations, it could
require us to report those actions as recalls. In addition, if we conduct a recall but fail to report it, we could be subject to
enforcement action.
In addition, depending on the corrective action we take to redress a device’s deficiencies or defects, the regulators 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.
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. 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.
As a manufacturer of medical devices, we will continue to be exposed to product liability claims that could adversely affect
our consolidated financial condition and tarnish 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 significant
portion of our product liability risks and also hold global insurance policies to cover a portion of future potential losses. Product
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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. In addition, future unanticipated large liability claims may raise substantial doubt about our ability to continue as a
going concern.
We are currently 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 14. Commitments and Contingencies” in our consolidated financial statements included in this
Annual Report on Form 10-K, we are involved in various litigation matters that may adversely affect our financial condition
and may require us to devote significant resources to our defense of these claims.
Such litigation includes a 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 March 2,
2020, we are aware of approximately 95 filed and unfiled claims worldwide, with the majority of the claims filed in various
federal or state courts throughout the U.S. The number includes cases that have settled but have not yet been dismissed. 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. In the fourth quarter of the year ended
December 31, 2018, we recognized a $294.1 million litigation provision and in the fourth quarter of the year ended December
31, 2019 we recognized an additional $33.2 million litigation provision related to these claims. Although we are defending
these matters vigorously, we cannot predict the outcome or effect of any claim or other litigation matter.
Global healthcare policy changes and tightening of reimbursement for products may have a material adverse effect on us.
In response to increases in healthcare costs, there have been and continue to be proposals by governments, regulators and
third-party payors to control these costs. These proposals have resulted in efforts to enact healthcare system reforms that may
lead to pricing restrictions, limits on the amounts of reimbursement available for our products and could limit the acceptance
and use of our products. The adoption of some or all of these proposals could have a material adverse effect on our financial
position and results of operations.
Our ability to commercialize our products is dependent, in large part, on whether third-party payors, including private
healthcare insurers, managed care plans, governmental programs and others agree to cover the costs and services associated
with our products and related procedures in the U.S. and internationally.
Our products are purchased principally by healthcare providers that typically bill various third-party payors, such as
governmental programs (e.g., Medicare and Medicaid in the U.S.) and private insurance plans for the healthcare services
provided to their patients. 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, periodic changes to reimbursement methodologies could have an adverse impact on our
business.
Our failure to comply with rules relating to reimbursement of healthcare goods and services, healthcare fraud and abuse,
false claims and other applicable laws or regulations may subject us to penalties and adversely impact our reputation and
business operations.
Our devices and therapies are subject to regulation by various governmental agencies worldwide responsible for coverage,
reimbursement and regulation of healthcare goods and services, including laws and regulations related to kickbacks, false
claims, self-referrals and health care fraud. Any failure to comply with these laws and regulations could subject us or our
officers and employees to criminal and 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
our business activities, including our relationships with surgeons and other healthcare providers, some of whom recommend,
purchase and/or prescribe our devices, group purchasing organizations and our independent sales agents and distributors, could
be subject to challenge under one or more of such laws.
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Patient confidentiality and federal and state privacy and security laws and regulations may adversely impact our financial
position and reputation.
HIPAA establishes federal rules protecting the privacy and security of personal health information in the U.S. In addition to
HIPAA, virtually every U.S. state has enacted laws to safeguard privacy, and these laws vary significantly from state to state
and change frequently. 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. The operation of our business
involves the collection and use of substantial amounts of “protected health information.” 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.
Similarly, the EU’s GDPR protects the privacy and security of “personally identifiable information” and personal health
information relating to individuals within the EU and, 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
subjects us to a rigorous proactive compliance scheme, and if we fail to comply with the GDPR, we could be sued for
compensation by individuals who have suffered material or non-material damage and could suffer administrative fines up to the
higher of €20.0 million (approximately $22.4 million), or 4% of the total worldwide annual revenue 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, harm to our competitive position and loss of reputation.
We are increasingly dependent on our own sophisticated information technology systems and those of third parties to operate
our business, and certain products of ours 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 confidential 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. The secure processing, maintenance and
transmission of this information is critical to our operations but the size and complexity of our products and the information
technology systems on which we rely 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, to obtain
proprietary or confidential information, or to remotely disrupt or access the systems of large health care providers by exploiting
our products or systems. Any such breach could compromise our networks and the information stored there could be accessed,
publicly disclosed, lost or stolen. The negative publicity resulting from such disruptions could significantly impact our
reputation and stock price.
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. 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, could have a
material adverse effect on our business.
If we are unable to maintain secure, reliable information technology systems and prevent disruptions, outages, or data
breaches, we may suffer legal and 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 or CCPA’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 and enforcement actions. 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 or other cyber-attacks pursuant to laws such as CCPA. While we have
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not been named in any such lawsuits, if a breach or loss of data occurs, we could become a target of civil litigation or
government enforcement actions.
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 precision-engineered components,
sub-assemblies, and finished products to exact tolerances and 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.
Our R&D efforts rely on investments 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 materially adversely affect our consolidated
earnings, financial condition or cash flows.
We are substantially dependent on patent and other proprietary rights and failing to protect such rights or to be successful in
litigation related to our rights or the rights of others may result in our payment of significant monetary damages and/or
royalty payments, negatively impact our ability to sell current or future products, or prohibit us from enforcing our patent
and other proprietary rights against others.
We rely on a combination of patents, trade secrets, and non-disclosure and non-competition agreements to protect our
proprietary intellectual property, and we will continue to do so. Physician customers have historically moved quickly to new
products and new technologies, and intellectual property rights, particularly patents and trade secrets, play a significant role in
product development and differentiation. We operate in an industry characterized by extensive patent litigation, and intellectual
property litigation is inherently complex and unpredictable. Patent litigation can result in significant damage awards and
injunctions that could prevent our manufacture and sale of affected products or require us to pay significant royalties in order to
continue to manufacture or sell affected products. While we intend to defend against any threats to our intellectual property,
these patents, trade secrets, or other agreements may not adequately protect our intellectual property.
Further, pending patent applications may not result in patents being issued to us. Patents issued to or licensed by us 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 our technology and may limit our competitive advantage. Third parties could obtain patents that
may require us to negotiate licenses to conduct our business, and the required licenses may not be available on reasonable terms
or at all. We also rely on non-disclosure and non-competition agreements with certain employees, consultants and other parties
to protect, in part, trade secrets and other proprietary rights. We cannot be certain that these agreements will not be breached,
that we 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 our trade secrets or proprietary knowledge.
The laws and intellectual property systems of certain countries in which we market some of our products do not protect our
intellectual property rights to the same extent as in the U.S., which may impact our market position in those countries. If we are
unable to protect our intellectual property in those countries, it could have a material adverse effect on our business, financial
condition, cash flows and reputation.
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We may experience volatility in the trading price of our shares due to fluctuations in our quarterly operating results or other
factors.
We experienced volatility in the trading price of our shares during 2019, including following the pre-release of our earnings
for the first quarter thereof. In the future, our operating results may vary significantly from quarter to quarter due to many
factors, including factors beyond our control, which may cause further volatility in the trading price of our shares. A number of
other factors may also cause future volatility in our stock price, including the items discussed in this Item 1A. Risk Factors.
We are subject to environmental laws and regulations and the risk of environmental liabilities, violations and litigation in
multiple jurisdictions.
Our operations involve the use of substances regulated under environmental laws, primarily those used in manufacturing and
sterilization processes in the various jurisdictions where we operate. Certain environmental laws assess liability on current,
prior and/or related owners or operators of real property for the costs or investigation, removal or remediation of hazardous
substance at their properties or at properties on which they have disposed of hazardous substances. In addition, a governmental
authority may seek to hold us liable for successor liability violations committed by any companies in which we invest or that
we acquire. In addition to cleanup actions brought by governmental authorities, private parties could bring personal injury or
other claims due to the presence of, or exposure to, hazardous substances. The ultimate cost of site cleanup and timing or future
cash outflows is difficult to predict, given the uncertainties regarding the extent of the required cleanup and the interpretation of
applicable laws and regulations. The costs of complying with current or future environmental protection and health and safety
laws and regulations, or liabilities arising from past or future releases of, or exposures to, hazardous substances, may exceed our
estimates, or have a material adverse effect on our business, results of operations, financial condition and cash flows.
We are subject to the risks of conducting business internationally.
We develop, manufacture, distribute and sell our products globally and we intend to continue to pursue growth opportunities
worldwide. Our international operations are subject to risks that are inherent in conducting business overseas and under non-
U.S. laws, regulations and customs. These risks include possible nationalization, negative consequences associated with Brexit,
expropriation, importation limitations, pricing restrictions and violations of laws. Our profitability and operations are, and will
continue to be, subject to a number of risks and potential costs, including:
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local product preferences and product requirements;
longer-term receivables than are typical in the EU or the U.S.;
difficulty enforcing agreements;
creditworthiness of customers;
trade protection measures and import and export licensing requirements;
different labor regulations and workforce instability;
higher danger of terrorist activity, war or civil unrest;
selling our products through distributors and agents;
political and economic instability; and
the risks further described above in the section entitled “The failure to comply with anti-bribery laws could materially
adversely affect our business and result in civil and/or criminal sanctions.”
We transact business in numerous countries around the world and expect that a significant portion of our business will
continue to take place in international markets. Consolidated financial statements are prepared in our functional currency, while
the financial statements of each of our subsidiaries are prepared in the functional currency of that entity. Accordingly,
fluctuations in the exchange rate of the functional currencies of our foreign currency entities against our functional currency
will impact our results of operations and financial condition. Although we may elect to hedge certain foreign currency
exposure, we cannot be certain that the hedging activity will eliminate our currency risk.
In addition, 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.
A negative response from a works council or union-organized work stoppages by employees could have a negative impact on
our business.
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We have significant global sales and operations and face risks related to health epidemics that could impact our sales and
operating results.
Our business could be adversely affected by the effects of a widespread outbreak of contagious disease, including the recent
outbreak of respiratory illness caused by a novel coronavirus first identified in China. Any outbreak of contagious diseases, and
other adverse public health developments, could have a material adverse effect on our business operations. These could include
disruptions or restrictions on our ability to travel or to distribute our products, as well as temporary closures of our facilities or
the facilities of our suppliers or customers, the deferral of procedures in impacted countries or the temporary suspension of
operations by us or our suppliers or customers. At the end of February 2020, for example, we temporarily closed a small
administrative office in Milan, Italy and we continue to monitor the rapidly evolving situation. While we have not closed our
two manufacturing plants in Italy as they are not in the impacted regions, there can be no assurance that they will not need to
shut down. Any disruption of our operations, or those of our suppliers or customers, could impact our sales and operating
results. In addition, a significant outbreak of contagious diseases in the human population could result in a widespread health
crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn
that could affect demand for our products and likely impact our operating results.
The failure to comply with anti-bribery laws could materially adversely affect our business and result in civil and/or
criminal sanctions.
Our operations are subject to anti-corruption laws, including the UK Bribery Act, FCPA and other anti-corruption laws that
apply in countries where we do business. The UK Bribery Act, FCPA and these other laws generally prohibit us and our
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 U.S., many of our customer relationships are potentially
subject to such laws.
We are, therefore, exposed to the risk that our employees, independent contractors, principal investigators, consultants,
vendors, independent sales agents and distributors may engage in fraudulent or other illegal activity in violation of these laws
and our Code of Conduct. It is not always possible to identify and deter misconduct by our employees and other third parties,
and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks
or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in
compliance with such laws or regulations.
Global enforcement of anti-corruption laws has increased substantially in recent years, with more frequent voluntary self-
disclosures by companies, aggressive investigations and enforcement proceedings by governmental agencies, and assessment of
significant fines and penalties against companies and individuals. In addition, we cannot predict the nature, scope or effect of
future regulatory requirements to which our international operations might be subject or the manner in which existing laws
might be administered or interpreted. Any alleged or actual violations of these regulations may subject us to government
scrutiny, severe criminal or civil sanctions and other liabilities, including exclusion from government contracting or government
healthcare programs, and could negatively affect our business, reputation, operating results and financial condition.
Our debt instruments require us to comply with affirmative covenants and specified financial covenants and ratios.
Certain restrictions and covenants in our debt instruments could affect our ability to operate and may limit our ability to react
to market conditions or to take advantage of potential business opportunities as they arise. For example, such restrictions could
adversely affect our ability to finance our operations, make strategic acquisitions, investments or alliances, restructure our
organization or finance capital needs. Additionally, our ability to comply with these covenants and restrictions may be affected
by events beyond our control, such as prevailing economic, financial, regulatory and industry conditions. If any of these
restrictions or covenants is breached, we could be in default under one or more of our debt instruments, which, if not cured or
waived, could result in acceleration of the indebtedness under such agreements and cross defaults under our other debt
instruments. Any such actions could result in the enforcement of our lenders’ security interests and/or force us into bankruptcy
or liquidation, which could have a material adverse effect on our financial condition and results of operations.
Our inability to integrate recently acquired businesses or to successfully complete and integrate future acquisitions could
limit our future growth or otherwise be disruptive to our ongoing business.
From time to time, we acquire businesses and expect to pursue acquisitions in support of our strategic goals. There can be no
assurance that acquisition opportunities will be available on acceptable terms or at all, or that we will be able to obtain
necessary financing or regulatory approvals to complete potential acquisitions. The success of any acquisition, investment or
alliance may be affected by a number of factors, including our ability to properly assess and value the potential business
opportunity or to successfully integrate any businesses we may acquire into our existing business. The integration of the
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operations of acquired businesses requires significant efforts, including the coordination of information technologies, human
resources, R&D, sales and marketing, operations, manufacturing, legal, compliance and finance. These efforts result in
additional expenses and involve significant amounts of management’s time that cannot then be dedicated to other projects.
Failure to manage and coordinate the growth of the combined company successfully could also have an adverse impact on our
business. In addition, we cannot be certain that our investments, alliances and acquired businesses will become profitable or
remain so. If our investments, alliances or acquisitions are not successful, we may record unexpected impairment charges.
We may incur impairments of intangible assets and goodwill, primarily acquired in acquisitions, including the merger
between Sorin and Cyberonics, that adversely affect our financial results.
As of December 31, 2019, the carrying value of our net intangible assets and goodwill totaled $1.5 billion, which represents
63.2% of our total assets. As of December 31, 2018, the carrying value of our net intangible assets and goodwill totaled $1.7
billion, which represented 67.7% of our total assets. During the year ended December 31, 2019, we determined that the In
Process Research and Development (“IPR&D”) asset relating to ImThera was impaired and as a result, recorded an impairment
of $50.3 million, and we also fully impaired the goodwill and the IPR&D asset associated with the discontinuation of the
Caisson business by recording a $42.4 million impairment to goodwill and a $89.0 million impairment to the IPR&D asset.
We review, when circumstances warrant, the carrying amounts of our intangible assets to determine whether those carrying
amounts continue to be recoverable in accordance with U.S. generally accepted accounting principles. Significant negative
industry or economic trends, disruptions to our businesses, significant unexpected or planned changes in the use of assets,
divestitures and market capitalization declines, among other events, may result in impairments to goodwill and other intangible
assets. Current impairments have significantly affected our financial results and future impairments could significantly affect
reported financial results.
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 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 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 and other healthcare professionals, our products may not be
developed and marketed 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 our
consolidated financial condition and results of operations.
Inadequate funding for U.S. federal government agencies and government shutdowns could negatively affect our business,
results of operations and financial condition.
The ability of the FDA to review and approve new products can be affected by a variety of factors, including government
budget and funding levels, ability to hire and retain key personnel, government shutdowns and statutory, regulatory and policy
changes. Disruptions at the FDA and in other U.S. federal agencies may increase the time necessary for new medical devices to
be reviewed and/or approved which would adversely affect our business.
In addition, a portion of our revenue is dependent on U.S. federal government healthcare program reimbursement. Any
disruption in U.S. federal government operations, including government shutdowns, could have a material adverse effect on our
business, results of operations and financial condition.
Risks from Tax, Residency and Jurisdiction of Incorporation
Changes in tax laws or exposure to additional income tax liabilities could have a material impact on our financial condition
and results of operations.
We are subject to income taxes as well as non-income based taxes, in the U.S., the UK, the EU and various other
jurisdictions. No assurances can be given as to what our worldwide effective corporate tax rate will be because of, among other
things, uncertainty regarding the tax regulations and laws, enactment and enforceability thereof and policies of the jurisdictions
where we operate. Our actual effective tax rate may vary from our expectations or from historical trends and that variance may
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be material. Our effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax
rates, changes in the valuation of deferred tax assets and liabilities or changes in tax laws or their interpretation. We are also
subject to ongoing tax audits in various non-U.S. jurisdictions. Tax authorities may disagree with certain positions we have
taken and assess additional taxes. We believe that our accruals reflect the probable outcome of known contingencies. However,
there can be no assurance that we will accurately predict the outcomes of ongoing audits, and the actual outcomes of these
audits could have a material impact on our consolidated statements of income (loss) or financial condition.
The IRS may not agree with the conclusion that we should be treated as a foreign corporation for U.S. federal tax purposes,
and we may be required to pay substantial U.S. federal income taxes.
Based on our management and organizational structure, we believe that we should be regarded as a resident exclusively in the
UK for tax purposes and that we are appropriately treated as a foreign corporation for U.S. federal tax purposes. Although we
are incorporated in the UK, the U.S. Internal Revenue Service (the “IRS”) may assert that we should be treated as a U.S.
corporation (and, therefore, a U.S. tax resident) for U.S. federal tax purposes. If we were to be treated as a U.S. corporation for
U.S. federal income tax purposes, we could be subject to substantially greater U.S. tax liability than currently contemplated as a
non-U.S. corporation.
The IRS may limit Cyberonics’ and its U.S. affiliates’ ability to utilize their U.S. tax attributes and impose an excise tax on
gains recognized by certain individuals as a result of the merger of Cyberonics and Sorin.
The merger of Cyberonics and Sorin is considered an inversion for tax purposes. The U.S. Internal Revenue Code (“IRC”)
and regulations under the IRC impose a minimum level of tax on any “inversion gain” of a U.S. corporation (and any U.S.
person related to the U.S. corporation) depending on the resulting percentage ownership by U.S. persons of the merged
company. The effect of this provision in the IRC is to deny the use of certain U.S. tax attributes (including net operating losses
and certain tax credits) to offset U.S. tax liability, if any, attributable to such inversion gain. In addition, an excise tax may be
imposed on certain individuals. In our case, we believe that the former stockholders of Cyberonics own less than the IRC’s
stated percentage of the Company. However, the final regulations relating to calculating the ownership percentage are new and
subject to interpretation, and thus it cannot be assured that the IRS will agree with our position.
The UK’s withdrawal from the EU, commonly referred to as “Brexit,” could lead to increased market volatility and make it
more difficult for us to do business in Europe or have other adverse effects on our business.
On January 31, 2020, the UK departed from the EU and has entered a transition period that is scheduled to end on December
31, 2020, unless extended. Brexit could adversely affect UK, European and worldwide economic and market conditions and
could contribute to instability in global financial and foreign exchange markets, including volatility in the value of the British
Pound and Euro. For the three months and full year ended December 31, 2019, net sales generated from our European
operations constituted approximately 20% and 21%, respectively, of total net sales. Although the long-term effects of Brexit
will depend on any agreements the UK makes to retain access to the EU markets during the transition period, Brexit has created
additional uncertainties that may ultimately result in new regulatory costs and challenges for medical device companies and
increased restrictions on imports and exports throughout Europe. In addition, we and several of our wholly owned subsidiaries
that are domiciled either in the UK, various EU Member States, or in the U.S., are parties to intercompany transactions and
agreements under which we receive various tax reliefs and exemptions in accordance with applicable international tax laws,
treaties and regulations that could be materially changed by Brexit. Any of the foregoing could adversely affect our ability to
conduct and expand our operations in Europe and may have an adverse effect on our business, financial condition and results of
operations.
As an English public limited company, certain capital structure decisions will require shareholder approval, which may limit
our flexibility to manage our capital structure.
We are a public limited company incorporated under the laws of England and Wales. Under English law, our board of
directors may only allot shares with the prior authorization of shareholders. Our articles of association currently authorize the
allotment of additional shares for a period of five years up to an aggregate of approximately 9.8 million shares. English law also
generally provides shareholders with preemptive rights when new shares are issued for cash; which rights may be excluded by
shareholders. Our articles currently exclude preemptive rights in relation to the allotment of shares for cash. In addition, English
law also generally prohibits a public company from repurchasing its own shares without the prior approval of shareholders. The
approval of the allotment of additional shares, the exemption of statutory preemptive rights and the restriction on repurchase of
shares must all be renewed by shareholders at least every five years. We cannot provide any assurance that these authorizations
will always be approved, which could limit our ability to issue equity and thereby adversely affect the holders of our securities.
23
Transfers of our shares, other than ones effected by means of the transfer of book-entry interests in the Depository Trust
Company (“DTC”), may be subject to UK stamp duty or UK stamp duty reserve tax (“SDRT”).
Transfers of our shares effected by means of the transfer of book-entry interests in DTC are not subject to UK stamp duty or
SDRT. However, if a shareholder holds our shares directly rather than through DTC, any transfer of shares could be subject to
UK stamp duty on SDRT at a rate of 0.5% of the consideration paid for the transfer and certain issues or transfers of shares to
depositories or into clearance services are charged at a rate of 1.5% of the consideration paid for the transfer. The transferee
generally pays the UK stamp duty or SDRT. The potential for UK stamp duty or SDRT could adversely affect the trading price
of our shares.
The facilities of DTC are a widely used mechanism that allow for rapid electronic transfers of securities between the
participants in the DTC system, which include many large banks and brokerage firms. Our shares are at present, subject to
certain conditions, generally eligible for deposit and clearing within the DTC system. However, DTC generally has discretion to
cease to act as a depository and clearing agency for our shares. If DTC determines at any time that our shares are not eligible
for continued deposit and clearance within its facilities, then we believe that our shares would not be eligible for continued
listing on a U.S. securities exchange and trading in our shares would be disrupted. While we would pursue alternative
arrangements to preserve the listing and maintain trading, any such disruption could have a material adverse effect on the
trading price of our shares.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal executive office is located in the UK and is leased by us. Our business franchises, corresponding to our main
therapeutic areas, Neuromodulation and Cardiovascular, have headquarters located in U.S. and Italy, respectively. The locations
in the U.S. and Italy are owned by us. Manufacturing and research facilities are located in Brazil, Canada, Germany, Italy,
Australia and the U.S. Manufacturing and research facilities are approximately 1.3 million square feet. Approximately 34% of
our manufacturing and research facilities by square feet are located within the U.S. Approximately 66% of our manufacturing
and research facilities by square feet are owned by us and the balance is leased.
We also maintain 23 primary administrative offices in 18 countries. Most of these locations are leased. We are using
substantially all of our currently available productive space to develop, manufacture and market our products. Our facilities are
in good operating condition, suitable for their respective uses and adequate for current needs.
Item 3. Legal Proceedings
Discussion of our material pending legal and regulatory proceedings and settlements is incorporated herein by reference to
“Note 14. Commitments and Contingencies” in our consolidated financial statements and accompanying notes, beginning on
page F-1 of this Annual Report on Form 10-K and should be considered an integral part of “Item 3 of Part I” of this Annual
Report on Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
24
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our ordinary shares are quoted on the NASDAQ Global Market under the symbol “LIVN.”
As of February 27, 2020, according to data provided by our transfer agent, there were 23 stockholders of record. However,
we believe that the actual number of beneficial holders of our shares may be substantially greater than the stated number of
holders of record because a substantial portion of the shares are held in street name.
Recent Sales of Unregistered Securities
During the past fiscal year, we did not issue any securities that were not registered under the Securities Act.
Dividend Policy
As a company organized under the laws of England and Wales, we must have "distributable reserves" to make share
repurchases or pay dividends to shareholders. Distributable reserves may be created through the earnings of the UK parent
company and, amongst other methods, through a reduction in share capital approved by the English Companies Court.
Distributable reserves are not linked to a U.S. GAAP reported amount. In addition to having sufficient distributable reserves,
English law requires a public company’s net worth to be at least equal to the amount of its capital. Accordingly, a public
company can only make a distribution: (a) if, at the time that the distribution is made, the amount of its net assets (that is, the
total excess of assets over liabilities) is not less than the total of its called-up share capital and undistributable reserves; and (b)
if, and to the extent that, the distribution itself, at the time that it is made, does not reduce the amount of the net assets to less
than that total.
We currently have no intention to declare and pay dividends.
Issuer Purchases of Securities
On August 1, 2016, the Board of Directors of LivaNova approved the authorization of a share repurchase plan (the
"Share Repurchase Program") pursuant to an authority granted by shareholders at the 2016 annual general meeting held
on June 15, 2016. The authority granted by the shareholders has a five-year expiration. The Share Repurchase Program
was structured to enable us to buy back up to $150.0 million of our shares on NASDAQ between September 1, 2016
through December 31, 2016. On November 15, 2016, the Board of Directors approved an amendment (the "Amended
Share Repurchase Program") to the Share Repurchase Program authorizing the Company to repurchase up to $150.0
million of our shares between September 1, 2016 and December 31, 2018. No shares were repurchased under the Share
Repurchase Program or the Amended Share Repurchase Program after December 31, 2018.
25
Stock Performance Graph
The following graph illustrates our 51-month cumulative total return compared with the S&P 500 Index and the S&P Health
Care Equipment Index over the same period.
The information under the caption “Stock Performance Graph” above is not deemed to be “filed” as part of the Annual
Report on Form 10-K and is not subject to the liability provisions of Section 18 of the Exchange Act. Such information will not
be deemed incorporated by reference into any filing we make under the Securities Act unless we explicitly incorporate it into
such filing at such time.
26
Item 6. Selected Financial Data
The following table summarizes certain selected financial data and is qualified by reference to, and should be read in
conjunction with, the consolidated financial statements and related notes under the section entitled “Item 15. Exhibits, Financial
Statement Schedules” included in this Annual Report on Form 10-K. The selected financial data and the related notes for the
years ended December 31, 2019, December 31, 2018, December 31, 2017 and December 31, 2016 are derived from audited
consolidated financial statements that are included in this Annual Report on Form 10-K. The selected financial data and the
related notes for the transitional period April 25, 2015 to December 31, 2015, and for the fiscal year ended April 24, 2015 are
derived from audited consolidated financial statements that are included in the Annual Report on Form 10-KT for the
transitional period ended December 31, 2015.
Consolidated Statements of
Operations Data
(In thousands, except per share data)
Year Ended
December
31, 2019
Year Ended
December
31, 2018
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
$ 1,084,170
$ 1,106,961
$ 1,012,277
$
964,858
$
363,237
$
291,558
Net sales
Costs and expenses:
Cost of sales - exclusive of amortization
Product remediation
Selling, general and administrative
Research and development
Merger and integration expenses
Restructuring expenses
Impairment of goodwill
Impairment of intangible assets
Amortization of intangibles
Litigation provision, net
Operating (loss) income from
continuing operations
Interest (expense) income, net
Gain on acquisitions
Impairment of investments
323,635
15,777
506,542
149,889
23,457
12,254
42,417
139,295
40,375
(601)
361,812
10,680
464,967
146,024
24,420
15,915
—
—
37,194
294,021
(168,870)
(248,072)
(14,288)
—
—
(8,978)
11,484
—
353,192
7,254
380,100
109,516
15,528
17,056
—
—
33,144
—
96,487
(6,479)
39,428
(8,565)
267
367,845
37,534
355,164
82,078
20,377
37,377
—
—
31,035
—
33,448
(8,918)
—
—
1,136
25,666
5,113
113,404
—
27,311
—
147,025
123,619
41,916
55,776
10,494
—
—
7,030
—
(12,408)
(1,117)
—
(5,062)
(7,411)
(25,998)
(13,501)
(2,223)
42,245
8,692
—
—
—
1,039
—
88,652
163
—
—
479
89,294
31,446
—
Foreign exchange and other (losses) gains
(2,536)
(1,881)
(Loss) income from continuing operations
before tax
Income tax (benefit) expense
(185,694)
(247,447)
(30,153)
(69,629)
121,138
49,954
Losses from equity method investments
—
(644)
(16,719)
(18,679)
Net (loss) income from continuing
operations
Discontinued Operations:
Income (loss) from discontinued
operations, net of tax
Impairment of discontinued operations,
net of tax
Net income (loss) from discontinued
operations, net of tax
(155,541)
(178,462)
54,465
1,874
(14,720)
57,848
365
—
365
(10,937)
(1,271)
(64,663)
(14,893)
—
(78,283)
—
—
(10,937)
(79,554)
(64,663)
(14,893)
—
—
—
Net (loss) income
$
(155,176) $
(189,399) $
(25,089) $
(62,789) $
(29,613) $
57,848
27
Consolidated Statements of
Operations Data
(In thousands, except per share data)
Basic (loss) income per share:
Continuing operations
Discontinued operations
Diluted (loss) income per share:
Continuing operations
Discontinued operations
Year Ended
December
31, 2019
Year Ended
December
31, 2018
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
$
$
$
$
(3.22) $
(3.68) $
1.13
$
0.04
$
(0.45) $
0.01
(0.23)
(1.65)
(1.33)
(0.45)
(3.21) $
(3.91) $
(0.52) $
(1.29) $
(0.90) $
(3.22) $
(3.68) $
1.12
$
0.04
$
(0.45) $
0.01
(0.23)
(1.64)
(1.32)
(0.45)
(3.21) $
(3.91) $
(0.52) $
(1.28) $
(0.90) $
2.19
—
2.19
2.17
—
2.17
Shares used in computing basic (loss)
income per share
Shares used in computing diluted (loss)
income per share
Consolidated Balance Sheet Data
(In thousands)
Cash, cash equivalent and short-term
investments
Working capital
Total assets (1)
Long-term debt, net of current portion
Accumulated (deficit) earnings
Stockholders’ equity
48,349
48,497
48,157
48,860
32,741
26,391
48,349
48,497
48,501
49,014
32,741
26,626
December
31, 2019
December
31, 2018
December
31, 2017
December
31, 2016
December 31,
2015
April 24,
2015
$
61,137
$
47,204
$
93,615
$
39,789
$
119,610
$
151,207
36,890
36,551
463,842
462,800
314,293
2,411,797
2,549,701
2,503,891
2,342,631
2,558,739
260,330
139,538
61,958
(406,755)
(251,579)
(39,664)
75,215
(14,575)
91,791
48,214
1,383,717
1,503,738
1,815,314
1,706,909
1,811,462
209,272
315,944
—
77,827
276,574
(1) The selected financial data for fiscal year 2019 reflects the adoption of ASU 2016-02. Leases (Topic 842). For additional
information refer to “Note 2. Basis of Presentation, Use of Accounting Estimates and Significant Accounting Policies.” The
selected financial data for the periods prior to 2019 do not reflect the adoption of ASU 2016-02.
28
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis together with the sections entitled “Business” and “Risk Factors” in
Part I of this Annual Report on Form 10-K, the matters set forth in “Cautionary Statement About Forward-Looking Statements”
and our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K as of
and for the years ended December 31, 2019, December 31, 2018 (“2018”) and December 31, 2017 (“2017”).
We have elected to omit certain discussions on the earliest of the three years covered in this Annual Report on Form 10-K.
Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations located in our Form
10-K for the year ended December 31, 2018, filed on March 18, 2019, for reference to discussion of the fiscal year ended
December 31, 2017, the earliest of the three fiscal years presented.
Description of the Business
We are a public limited company organized under the laws of England and Wales, headquartered in London, England. We are
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 Cardiovascular 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.
Background
We were organized under the laws of England and Wales on February 20, 2015 for the purpose of facilitating the business
combination of Cyberonics, Inc., a Delaware corporation, and Sorin S.p.A., a joint stock company organized under the laws of
Italy. The business combination became effective in October 2015. LivaNova’s ordinary shares are listed for trading on the
NASDAQ Global Market under the symbol “LIVN.”
Business Franchises
LivaNova is comprised of two principal business franchises, which are also our reportable segments: Cardiovascular and
Neuromodulation, corresponding to our primary therapeutic areas. Other corporate activities include corporate shared service
expenses for finance, legal, human resources, information technology and New Ventures.
Cardiovascular
Our Cardiovascular business franchise is engaged in the development, production and sale of cardiopulmonary products,
heart valves and advanced circulatory support products. Cardiopulmonary products include oxygenators, heart-lung machines,
autotransfusion systems, perfusion tubing systems, cannulae and other related accessories. Heart valves include mechanical
heart valves, tissue heart valves, related repair products and minimally invasive surgical instruments. Advanced circulatory
support includes temporary life support product kits that can include a combination of pumps, oxygenators and cannulae.
Cardiopulmonary
In July 2019, we launched Bi-Flow, our innovative arterial femoral cannula. Bi-Flow received CE Mark in early 2019 and is
the only bidirectional arterial cannula designed to prevent leg ischemia during cardiac surgery procedures requiring femoral
artery cannulation.
Product Remediation
FDA Warning Letter
On December 29, 2015, the FDA issued a Warning Letter alleging certain violations of FDA regulations applicable to
medical device manufacturers at our Munich, Germany and Arvada, Colorado facilities and issued inspectional observations on
FDA’s Form-483 applicable to our Munich, Germany facility.
The Warning Letter further stated that our 3T Heater-Cooler devices (the “3T devices”) and other devices we manufactured at
our Munich facility were 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 informed us that the import alert was limited to the 3T devices, but that the agency reserved the right
to expand the scope of the import alert if future circumstances warranted such action. The Warning Letter did not request that
existing users cease using the 3T device, and manufacturing and shipment of all our products other than the 3T device were
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.
29
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 were reasonably related would not be approved until the violations had
been corrected; however, this restriction applied only to the Munich and Arvada facilities, which do not manufacture or design
devices subject to Class III premarket approval.
On February 25, 2020, LivaNova received clearance for K191402, a 510(k) for the 3T devices that addressed issues
contained in the 2015 Warning Letter along with design changes that further mitigate the potential risk of aerosolization.
Concurrent with this clearance, (1) 3T devices manufactured in accordance with K191402 will not be subjected to the import
alert and (2) LivaNova initiated a correction to distribute the updated Operating Instructions cleared under K191402.
We continue to work diligently to remediate the FDA’s inspectional observations for the Munich facility, as well as the
additional issues identified in the Warning Letter. We take these matters seriously and intend to respond timely and fully to the
FDA’s requests. For further information refer to “Note 14. Commitments and Contingencies” in our consolidated financial
statements and accompanying notes, beginning on page F-1 of this Annual Report on Form 10-K.
Centers for Disease Control and Prevention (“CDC”) and FDA Safety Communications, Company Field Safety Notice
Update and Product Remediation Plan
On October 13, 2016, the CDC and the 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 the
CDC and its affiliates indicate that there appears to be genetic similarity between both patient and 3T device strains of the non-
tuberculous mycobacterium bacteria M. chimaera isolated in hospitals in Iowa and Pennsylvania. Citing the geographic
separation between the two hospitals referenced in the investigation, the report asserts that 3T devices manufactured prior to
August 18, 2014 could have been contaminated during the manufacturing process. The CDC’s HAN and FDA’s Safety
Communication, issued contemporaneously with the MMWR report, each assess certain risks associated with 3T devices and
provide guidance for providers and patients. The CDC notification states that the decision to use the 3T device during a surgical
operation is to be taken by the surgeon based on a risk approach and on patient need. Both the CDC’s and FDA’s
communications confirm that 3T devices are critical medical devices and enable doctors to perform life-saving cardiac surgery
procedures.
Also on October 13, 2016, concurrent with the CDC’s HAN and FDA’s Safety Communication, we issued a Field Safety
Notice Update for U.S. users of 3T devices to proactively and voluntarily contact facilities to aid in implementation of the CDC
and FDA recommendations. In the fourth quarter of 2016, we initiated a program to provide existing 3T device users with a
new loaner 3T device at no charge pending regulatory approval and implementation of additional risk mitigation strategies
worldwide, including a vacuum canister and internal sealing upgrade program and a deep disinfection service. This loaner
program began in the U.S. and is being made available progressively on a global basis, prioritizing and allocating devices to 3T
device users based on pre-established criteria. We anticipate that this program will continue until we are able to address
customer needs through a broader solution that includes implementation of the risk mitigation strategies described above. We
are currently implementing the vacuum and sealing upgrade program in as many countries as possible until all devices are
upgraded. 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. On October 11, 2018, after review of information
provided by us, the FDA concluded that we could commence the vacuum and sealing upgrade program in the U.S., and on
February 25, 2020, LivaNova received clearance for K191402, a 510(k) for the 3T devices that addressed issues contained in
the 2015 Warning Letter along with design changes that further mitigate the potential risk of aerosolization. Furthermore, we
continue to offer a no-charge deep disinfection service (deep cleaning service) for 3T device users as we receive the required
regulatory approvals.
On December 31, 2016, we recognized a liability for our product remediation plan related to our 3T device. We concluded
that it was probable that a liability had been incurred upon management’s approval of the plan and the commitments made by
management to various regulatory authorities globally in November and December 2016, and furthermore, the cost associated
with the plan was reasonably estimable. At December 31, 2019, the product remediation liability was $3.3 million. For further
information, refer to “Note 7. Product Remediation Liability” in our consolidated financial statements and accompanying notes,
beginning on page F-1 of this Annual Report on Form 10-K.
Heart Valves
In January 2018, we announced that we had started enrollment in our BELIEVE study. This study focuses on the overall
incidence of reduced leaflet motion identified by CT imaging in patients receiving our aortic heart valve. We are planning to
enroll a minimum of 75 patients at 11 sites in the U.S. and Canada.
30
In March 2018, we announced that we had started enrollment in PERFECT, a Perceval valve clinical study in China. The
study is being conducted to demonstrate the safety and effectiveness of Perceval in the Chinese population. We plan to enroll
up to 160 patients at 8 investigational sites.
In June 2018, we announced that Japan’s Ministry of Health, Labour and Welfare approved our Perceval sutureless aortic
heart valve to treat aortic valve disease, which will enable us to provide patients and clinicians in Japan with a new option for
aortic heart valve replacement. In February 2019, Japan’s Ministry of Health, Labour and Welfare granted national
reimbursement for the Perceval sutureless aortic heart valve to treat aortic valve disease.
In June 2018, we announced FDA 510(k) clearance of the MEMO 4D semi-rigid mitral annuloplasty ring and confirmed the
first implantation of the device. In October 2018, we received CE mark approval for Memo 4D. This next-generation of the
MEMO device family offers several innovations, such as broader range of ring sizes, a new ring design and true semi-rigid
stability and flexibility that allows us to reach a larger patient population with MR for treatment with the potential to improve
patient outcomes.
In June 2019, we acquired Miami Instruments, LLC’s minimally invasive cardiac surgery instruments business for cash
consideration of up to $17.0 million. The related operations are integrated into our Cardiovascular business franchise as part of
our Heart Valves portfolio.
Advanced Circulatory Support
In April 2018, we acquired TandemLife, which is focused on the delivery of leading-edge temporary life support products,
including cardiopulmonary and respiratory support solutions. For further information, refer to “Note 4. Business
Combinations” in our consolidated financial statements and accompanying notes, beginning on page F-1 of this Annual Report
on Form 10-K.
In July 2019, the FDA approved our LifeSPARC system, a new generation of the Advanced Circulatory Support pump and
controller. In the fourth quarter of 2019, we began a limited commercial release in the U.S. and expect a full commercial launch
in the second half of 2020.
Neuromodulation
Our Neuromodulation business franchise designs, develops and markets Neuromodulation therapy for the treatment of drug-
resistant epilepsy, DTD and obstructive sleep apnea. We are also developing and conducting clinical testing of the VITARIA
System for treating heart failure through vagus nerve stimulation.
Epilepsy
Our product development efforts are directed toward improving the VNS Therapy System and developing new products that
provide additional features and functionality. We are conducting ongoing product development activities to enhance the VNS
Therapy System pulse generator, lead and programming software, and we support studies for our product development efforts
and to build clinical evidence for the VNS Therapy System.
In October 2017, we obtained FDA approval and in April 2018, we received CE mark approval for our SenTiva VNS
Therapy System, which consists of the SenTiva implantable generator and the next-generation VNS Therapy Programming
System. SenTiva is the smallest and lightest responsive therapy for epilepsy. The new VNS Therapy Programming System
features a wireless wand and 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 reduces the number of seizures, lessens the
duration of seizures and enables a faster recovery.
In March 2018, we announced the launch and enrollment of the first patient in a clinical study to examine the use of our VNS
Therapy System using Microburst technology. This feasibility study will determine the initial safety and effectiveness of
delivering VNS Therapy using high frequency bursts of stimulation in patients who have drug-resistant epilepsy. The study
consists of two cohorts, enrolling up to 40 patients at approximately 15 sites in the U.S. and Europe.
In August 2018, we announced a new cost analysis that found our VNS Therapy System results in lower resource utilization
and lower cost for drug-resistant epilepsy patients when compared to continued treatment with anti-epileptic drugs. The
analysis showed initial costs for the VNS Therapy device, including placement and programming, were estimated to be offset
1.7 years post-implant and equated to an estimated net cost savings of $77,480 per patient over five years. The net cost savings
are due primarily to a reduction in seizure-related hospitalizations, resulting in a 21.5% decrease in costs compared to treatment
with anti-epileptic drugs alone.
31
Depression
In March 2017, the American Journal of Psychiatry published the results of the longest and largest naturalistic study on
effective treatments for patients experiencing chronic and severe depression. The findings showed that the use of a VNS
Therapy System in conjunction with traditional treatment methods is effective in reducing symptoms in patients with DTD.
In January 2018, we announced the launch and enrollment of the first patient in our Global RESTORE-LIFE study, which
evaluates the use of our VNS Therapy System in patients who have DTD and failed to achieve an adequate response to standard
psychiatric management. We expect to enroll up to 500 patients at approximately 80 sites outside of the U.S. We are currently
enrolling patients in Germany and will expand to other countries during the remainder of the year.
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, CMS issued a national determination of non-coverage within the U.S. with
respect to reimbursement of the VNS Therapy System for patients with DTD, significantly limiting access to this therapeutic
option for most patients. In May 2018, CMS published a tracking sheet to reconsider its National Coverage Determination
(“NCD”) of our VNS Therapy System for DTD in response to a letter that we submitted to CMS requesting a formal
reconsideration of the NCD. We requested this review after a significant body of new evidence emerged about DTD and the
role of VNS Therapy in its treatment.
In February 2019, CMS finalized its NCD for the VNS Therapy System for DTD. This final decision initiates coverage
for Medicare beneficiaries through Coverage with Evidence Development (“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 for VNS Therapy
device replacement. The CED also includes the possibility to extend the study to a prospective longitudinal study.
In September 2019, CMS accepted the protocol for our RECOVER clinical study, evaluating VNS Therapy for DTD.
RECOVER is a double-blind randomized, placebo-controlled study with a follow-up duration of at least one year. The CED
framework also includes the possibility to extend the study to a prospective registry. RECOVER will include up to 500 unipolar
and up to 500 bipolar patients at a maximum of 100 sites in the United States. On September 27, 2019, the first patient was
enrolled in the RECOVER study. Separate from the study, CMS is also covering device replacement for patients with a VNS
Therapy device for DTD.
Obstructive Sleep Apnea
We have invested in ImThera, a privately held, emerging-growth company developing an implantable neurostimulation
device system for the treatment of obstructive sleep apnea, since 2011. On January 16, 2018, we acquired the remaining 86%
outstanding equity interests in ImThera for up to approximately $225 million. Up-front costs were approximately $78 million
with the balance paid on a schedule driven by regulatory and sales milestones. ImThera manufactures an implantable device
that stimulates multiple tongue muscles via the hypoglossal nerve, which opens the airway while a patient is sleeping. ImThera
has a commercial presence in the European market, and an FDA pivotal study is ongoing in the U.S.
Heart Failure
We are focused on the development and clinical testing of the VITARIA System for treating heart failure through vagus nerve
stimulation.
The VITARIA System provides a specific method of VNS called autonomic regulation therapy (“ART”), and it includes the
same elements as the VNS Therapy System. We conducted a pilot study, ANTHEM-HF, outside the U.S., which concluded in
2014. The study results support the safety and efficacy of ART delivered by the VITARIA System. During 2014, we also
initiated a second pilot study, ANTHEM-HFPEF, to study ART in patients experiencing symptomatic heart failure with
preserved ejection fraction. This pilot study is currently underway outside the U.S. The VITARIA System is not approved in the
U.S.
In September 2018, we announced the first successful implantation of the VITARIA System in a patient enrolled in
the ANTHEM-HFrEF pivotal study. ANTHEM-HFrEF is an international, multi-center, randomized trial to evaluate the
VITARIA System for the treatment of advanced heart failure.
Discontinued Operations
We completed the sale of our 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 a closing working capital adjustment. In conjunction with the CRM Sale, we entered into transition services
agreements to provide certain support services generally for up to twelve months from the closing date of the sale. We
32
previously concluded that the sale of CRM represented a strategic shift in our business that has a major effect on future
operations and financial results. 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. For further information, refer to “Note 5.
Discontinued Operations” in our consolidated financial statements and accompanying notes, beginning on page F-1 of this
Annual Report on Form 10-K.
Corporate Activities and New Ventures Update
Corporate activities include shared services for finance, legal, human resources and information technology, corporate
business development and New Ventures.
Mitral Valve Regurgitation
MR occurs when the heart’s mitral valve does not close tightly, which allows blood to flow backwards in the heart. This
reduces the amount of blood that flows to the rest of the body, making the patient feel tired or out of breath. Treatment depends
on the nature and the severity of MR. In certain cases, heart surgery may be needed to repair or replace the valve. Left
untreated, severe MR can cause heart failure or heart rhythm problems (arrhythmias).
In May 2017, we acquired the remaining 51% outstanding equity interests in Caisson, a clinical-stage medical device
company focused on the design, development and clinical evaluation of a novel TMVR implant device with a fully transvenous
delivery system for the treatment of MR for a purchase price of up to $72.0 million. As a result of our acquisition of Caisson,
we began consolidating the results of Caisson as of May 2, 2017.
As we announced in November 2019, we ended our Caisson TMVR program effective December 31, 2019, and as a result,
we fully impaired the IPR&D asset and goodwill of $89.0 million and $42.4 million, respectively. Patients who participated in
clinical trials related to TMVR will continue to be followed within the parameters of the trial.
We are also invested in two mitral valve startups, Cardiosolutions, Inc. (“Cardiosolutions”) and Highlife S.A.S. (“Highlife”).
Cardiosolutions, a startup headquartered in the U.S. in which we have held an interest since 2012, is developing an innovative
spacer technology for treating MR. Highlife, headquartered in France, is focused on developing devices for treating MR
through percutaneous replacement of the native mitral valve. We recognized an impairment of our equity method investment in,
and notes receivable from, Highlife during the year ended December 31, 2017, due to certain factors including a revision in our
investment strategy indicating 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 and recorded an aggregate impairment of $13.0 million. For further
information regarding Highlife, refer to “Note 9. Investments” in our consolidated financial statements and accompanying
notes, beginning on page F-1 of this Annual Report on Form 10-K.
Central Sleep Apnea
We are invested in Respicardia Inc. (“Respicardia”), a U.S.-based developer of implantable therapies designed to improve
Respiratory Rhythm Management and cardiovascular health. Respicardia’s remed System is an implantable device system
designed to restore a more natural breathing pattern during sleep in patients with central sleep apnea by transvenously
stimulating the phrenic nerve. The remed System received CE Mark certification in 2010 and in October 2017, Respicardia
received U.S. FDA market approval. In December 2017, certain factors, including an additional round of external financing
with a new investor, indicated that the carrying value of our investment might not be recoverable and the decrease in value of
our investment was other than temporary. Our estimate of the fair value of our investment using the income approach was
below our carrying value and as a result, we recorded an impairment of $5.5 million. This impairment was recorded in
impairment of investments in our consolidated statement of income (loss) for our fiscal year 2017.
33
Results of Operations
The following table summarizes our consolidated results for the years ended December 31, 2019, 2018 and 2017 (in
thousands):
Year Ended December 31,
2019
2018
2017
$
1,084,170
$
1,106,961
$
1,012,277
Net sales
Costs and expenses:
Cost of sales - exclusive of amortization
Product remediation
Selling, general and administrative
Research and development
Merger and integration expenses
Restructuring expenses
Impairment of goodwill
Impairment of intangible assets
Amortization of intangibles
Litigation provision, net
Operating (loss) income from continuing operations
Interest income
Interest expense
Gain on acquisitions
Impairment of investments
Foreign exchange and other (losses) gains
(Loss) income from continuing operations before tax
Income tax (benefit) expense
Losses from equity method investments
Net (loss) income from continuing operations
Discontinued Operations:
Income (loss) from discontinued operations, net of tax
Impairment of discontinued operations, net of tax
Net income (loss) from discontinued operations, net of tax
323,635
15,777
506,542
149,889
23,457
12,254
42,417
139,295
40,375
(601)
(168,870)
803
(15,091)
—
—
(2,536)
(185,694)
(30,153)
—
(155,541)
365
—
365
361,812
10,680
464,967
146,024
24,420
15,915
—
—
37,194
294,021
(248,072)
847
(9,825)
11,484
—
(1,881)
(247,447)
(69,629)
(644)
(178,462)
(10,937)
—
(10,937)
353,192
7,254
380,100
109,516
15,528
17,056
—
—
33,144
—
96,487
1,318
(7,797)
39,428
(8,565)
267
121,138
49,954
(16,719)
54,465
(1,271)
(78,283)
(79,554)
(25,089)
Net loss
$
(155,176) $
(189,399) $
34
Net Sales by segments and geographic area:
The tables below present net sales by operating segment and geographic region (in thousands, except for percentages):
Year Ended December 31,
2018
2019
2017
% Change
2019 vs 2018
% Change
2018 vs 2017
Cardiopulmonary
United States
Europe
Rest of World
Heart Valves
United States
Europe
Rest of World
Advanced Circulatory
Support
United States
Europe
Rest of World
Cardiovascular
United States
Europe
Rest of World
Neuromodulation
United States
Europe
Rest of World
Other
Totals
United States
Europe (1)
Rest of World
Total
$
161,471
$
161,134
$
135,632
207,613
504,716
18,900
40,548
60,559
120,007
30,781
741
401
31,923
211,152
176,921
268,573
656,646
335,332
46,262
42,953
424,547
141,720
233,554
536,408
24,709
44,258
56,989
125,956
18,588
580
293
19,461
204,431
186,558
290,836
681,825
348,980
42,443
31,567
422,990
152,828
133,585
210,911
497,324
24,977
42,120
71,096
138,193
—
—
—
—
177,805
175,705
282,007
635,517
316,916
34,765
23,295
374,976
0.2 %
(4.3)%
(11.1)%
(5.9)%
(23.5)%
(8.4)%
6.3 %
(4.7)%
65.6 %
27.8 %
36.9 %
64.0 %
3.3 %
(5.2)%
(7.7)%
(3.7)%
(3.9)%
9.0 %
36.1 %
0.4 %
5.4 %
6.1 %
10.7 %
7.9 %
(1.1)%
5.1 %
(19.8)%
(8.9)%
—
—
—
—
15.0 %
6.2 %
3.1 %
7.3 %
10.1 %
22.1 %
35.5 %
12.8 %
2,977
2,146
1,784
38.7 %
20.3 %
546,484
223,183
314,503
553,411
229,001
324,549
494,721
210,470
307,086
$
1,084,170
$
1,106,961
$
1,012,277
(1.3)%
(2.5)%
(3.1)%
(2.1)%
11.9 %
8.8 %
5.7 %
9.4 %
(1)
Includes those countries in Europe where we have a direct sales presence. Countries where sales are made through
distributors are included in ‘Rest of World’.
35
The table below presents segment (loss) income from continuing operations (in thousands):
Cardiovascular
Neuromodulation
Other
Total reportable segment (loss)
income from continuing
operations (1)
$
$
Year Ended December 31,
2018
2017
2019
% Change
2019 vs 2018
% Change
2018 vs 2017
28,460
$
83,483
(204,727)
(258,493) $
184,674
(96,724)
81,412
183,228
(102,425)
(111.0)%
(54.8)%
111.7 %
(417.5)%
0.8 %
5.6 %
(92,784) $
(170,543) $
162,215
(45.6)%
(205.1)%
(1) For a reconciliation of segment (loss) income from continuing operations to our consolidated (loss) income from continuing
operations before tax, refer to “Note 20. Geographic and Segment Information” in our consolidated financial statements and
accompanying notes, beginning on page F-1 of this Annual Report on Form 10-K.
Cardiovascular
Cardiovascular net sales for the year ended December 31, 2019 compared to the year ended December 31, 2018 decreased
3.7%. The decline in net sales for the year ended December 31, 2019 was due to declines in Cardiopulmonary and Heart Valves
sales of 5.9% and 4.7%, respectively, partially offset by a $12.5 million increase in Advanced Circulatory Support sales due to
strong growth in the first half of 2019 and the inclusion of the operating results of TandemLife starting from the acquisition
date in April 2018. Cardiopulmonary sales of $504.7 million were negatively impacted as a result of exiting a Canadian
distribution agreement on January 1, 2019 that accounted for $32.9 million in sales during the year ended December 31, 2018.
Growth in sales of oxygenators, autotransfusion systems and heart-lung machines were mostly offset by the impacts of foreign
currency. Growth in oxygenator sales was impacted by an unexpected component supplier issue that occurred during the fourth
quarter of 2019. Heart Valves sales declined as Rest of World growth was more than offset by softness in the U.S. and the
impacts of foreign currency.
Cardiovascular segment operating income increased for the year ended December 31, 2019 as compared to the year ended
December 31, 2018, primarily due to the recording of a $294.1 million litigation provision liability related to our 3T device
during 2018.
Cardiovascular segment net sales increased $46.3 million, or 7.3% for the year ended December 31, 2018, as compared to the
year ended December 31, 2017, primarily due to growth of $39.1 million in cardiopulmonary product revenue and $19.5
million from the acquisition of TandemLife on April 4, 2018, partially offset by a $12.2 million decline in heart valve net sales.
Cardiopulmonary product sales increased year-over-year primarily due to strong heart-lung machine sales as customers
continued in 2018 to upgrade from our legacy S3 device to our current S5 device and as well as strong sales of the Inspire
oxygenator. With respect to heart valves, the expected termination of a manufacturing contract resulted in a decrease in heart
valve net sales of $8.4 million for the year ended December 31, 2018 as compared to 2017. Additionally, increased sales of our
Perceval sutureless aortic heart valves were more than offset by a non-recurring sales return reserve of $3.4 million recorded
during 2018 and continuing global declines in traditional tissue heart valve and mechanical heart valve sales.
Cardiovascular segment operating income decreased for the year ended December 31, 2018 as compared to 2017, primarily
due to the $294.1 million litigation provision related to our 3T device that was recorded during 2018. Additionally, positive
impacts to operating income associated with the increases in net sales were more than offset by increased sales and marketing
expenses related to our efforts to expand market share in international markets, increased R&D investments in support of the
next generation heart-lung machine and increased legal costs associated with our 3T litigation. The inclusion of the operating
results of TandemLife also resulted in a $10.8 million decrease in operating income for the year ended December 31, 2018 as
compared to 2017.
Neuromodulation
Neuromodulation net sales for the year ended December 31, 2019 compared to the year ended December 31, 2018 increased
0.4%. The increase in net sales for the year ended December 31, 2019 was due to adoption of the Sentiva VNS Therapy System
and strong growth in Europe and Rest of World, offset by a decline in U.S. sales principally due to competitive dynamics and
sales force turnover during the first half of 2019.
Neuromodulation segment operating income decreased for the year ended December 31, 2019 compared to the year ended
December 31, 2018 primarily due to a $50.3 million impairment of an IPR&D asset associated with obstructive sleep apnea,
increased selling costs in the U.S. and increased R&D expenses associated with DTD, heart failure and obstructive sleep apnea.
36
Neuromodulation segment net sales increased $48.0 million or 12.8% for the year ended December 31, 2018 compared to
2017 primarily due to strong adoption of the SenTiva VNS Therapy System in the U.S. Net sales in 2018 also benefited from
increased sales in Europe following the approval and launch of the SenTiva VNS Therapy System in April 2018, and strong
growth in the Rest of World region despite the short-term impact of business model changes.
Neuromodulation segment operating income slightly increased for the year ended December 31, 2018 compared to 2017
primarily due to increased sales, partially offset by increased marketing expenses related to efforts to market direct to
consumer, increased R&D expenses for new projects surrounding our SenTiva VNS Therapy System, DTD and heart failure
and the inclusion of the operating results of ImThera in 2018 which represented a loss of $8.8 million.
Costs and Expenses
The table below illustrates our costs and expenses as a percentage of net sales:
Cost of sales - exclusive of amortization
Product remediation
Selling, general and administrative
Research and development
Merger and integration expenses
Restructuring expenses
Impairment of goodwill
Impairment of intangible assets
Amortization of intangibles
Litigation provision, net
Cost of Sales
Year Ended December 31,
2018
2017
2019
29.9 %
1.5 %
46.7 %
13.8 %
2.2 %
1.1 %
3.9 %
12.8 %
3.7 %
(0.1)%
32.7%
1.0%
42.0%
13.2%
2.2%
1.4%
—%
—%
3.4%
26.6%
34.9%
0.7%
37.5%
10.8%
1.5%
1.7%
—%
—%
3.3%
—%
Cost of sales consisted primarily of direct labor, allocated manufacturing overhead, the acquisition cost of raw materials and
components.
Cost of sales as a percentage of net sales was 29.9% for the year ended December 31, 2019, a decrease of 2.8% as compared
to 2018. This decrease was primarily due to the amortization of inventory step-up value associated with the acquisition of
TandemLife of $8.0 million for the twelve months ended December 31, 2018, reduced expense associated with the change in
the fair value of sales-based contingent consideration arrangements, favorable product mix and the impacts of foreign currency.
Cost of sales as a percentage of net sales was 32.7% for the year ended December 31, 2018, a decrease of 2.2% as compared
to 2017. This decrease was primarily due to favorable product mix, pricing discipline and our focus on cost efficiencies.
Product Remediation
Product remediation as a percentage of net sales was 1.5%, 1.0% and 0.7% for the years ended December 31, 2019, 2018 and
2017, respectively. Product remediation expenses include internal labor costs, costs to remediate certain inspectional
observations made by the FDA at our Munich facility and costs associated with the incorporation of the modification of the 3T
device design into the next generation heater cooler device.
Selling, General and Administrative (“SG&A”) Expenses
SG&A expenses are comprised of sales, marketing, general and administrative activities. SG&A expenses exclude integration
costs incurred following the merger between Cyberonics and Sorin and restructuring costs under the restructuring plans.
SG&A expenses as a percentage of net sales increased for the year ended December 31, 2019 as compared to 2018 primarily
due to increased litigation expenses related to our 3T devices, the full impact of expanding Advanced Circulatory Support
commercial capabilities, increased investment in Neuromodulation, strengthening our commercial organization in international
markets, costs associated with material weakness remediation, expenses associated with the expiration of a contract with one of
our distributors and overall lower sales.
SG&A expenses as a percentage of net sales increased for the year ended December 31, 2018 as compared to 2017 primarily
due to key growth driver investments in the U.S., including efforts to market directly to consumers within our Neuromodulation
37
business, acquisition costs and additional SG&A costs from the acquisitions of TandemLife and ImThera. Increased sales and
marketing expenses internationally for general market expansion, increased litigation expenses primarily related to our 3T
devices and the overall strengthening of our organizational capabilities to support growth also contributed to the increase in
SG&A expenses as a percentage of net sales.
Research and Development Expenses
R&D expenses consist of product design and development efforts, clinical study programs and regulatory activities, which
are essential to our strategic portfolio initiatives, including DTD, obstructive sleep apnea and heart failure.
R&D expenses as a percentage of net sales increased for the year ended December 31, 2019 as compared to 2018 primarily
due to additional R&D expenses associated with obstructive sleep apnea, heart failure and DTD, offset by reductions in fair
value of milestone-based contingent consideration arrangements.
R&D expenses as a percentage of net sales increased for the year ended December 31, 2018 as compared to 2017 primarily
due to additional R&D expenses for our development of next generation products, including heart-lung machines, the SenTiva
VNS Therapy System and TandemLife and clinical trials and investments in DTD, TMVR, obstructive sleep apnea and heart
failure.
Merger and Integration (“M&I”) Expenses
M&I expenses consist primarily of costs associated with computer systems integration efforts, organizational structure
integration, synergy and tax planning.
M&I expenses as a percentage of net sales for the year ended December 31, 2019 was consistent with the year ended
December 31, 2018.
M&I expenses as a percentage of net sales increased 0.7% to 2.2% for the year ended December 31, 2018 as compared to
2017, primarily due to efforts to improve and standardize product pricing and procurement strategies.
Restructuring Expenses
Our restructuring 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 6. Restructuring” in
our consolidated financial statements and accompanying notes, beginning on page F-1 of this Annual Report on Form 10-K.
Our 2015 and 2016 Reorganization Plans (the “Prior Plans”) were initiated in October 2015 and March 2016, respectively, in
conjunction with the completion of the merger of Sorin and Cyberonics. The Prior 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 and completed during 2018.
In December 2018, we initiated a reorganization plan (the “2018 Plan”) in order to reduce manufacturing and operational
costs associated with our Cardiovascular facilities in Saluggia and Mirandola, Italy and Arvada, Colorado. The 2018 Plan
resulted in a net reduction of approximately 75 personnel and was completed at the end of 2019.
In November 2019, we initiated a reorganization plan (the “2019 Plan”) to streamline our organizational structure in order to
address new regulatory requirements, create efficiencies, improve profitability and ensure business continuity. As a result, we
incurred restructuring expenses of $4.4 million during the year ended December 31, 2019, primarily associated with severance
costs for approximately 35 impacted employees.
Also in November 2019, we announced that we would be ending our Caisson TMVR program effective December 31, 2019
after determining that it was no longer viable to continue to invest in the program. As a result, we recognized restructuring
expenses of $3.5 million during the year ended December 31, 2019, primarily associated with severance costs for
approximately 50 impacted employees.
Impairment of Goodwill and Intangibles
During the second quarter of 2019, we determined that there would be a delay in the estimated commercialization date of the
Company’s obstructive sleep apnea product currently under development. This delay constituted a triggering event that required
evaluation of the IPR&D asset arising from the ImThera acquisition for impairment. Based on the assessment performed, we
determined that the IPR&D asset was impaired and as a result, recorded an impairment of $50.3 million, which is included in
our Neuromodulation segment. The estimated fair value of IPR&D was determined using the income approach. Future delays
in commercialization or changes in management estimates could result in further impairment.
38
Our announcement that we would be ending our Caisson TMVR program effective December 31, 2019, triggered an
evaluation of finite and indefinite lived assets for impairment. As a result, we fully impaired the goodwill and IPR&D asset of
$42.4 million and $89.0 million, respectively.
Amortization of Intangibles
Amortization of intangible assets for the years ended December 31, 2019, 2018 and 2017, consisted primarily of the
amortization of finite-lived intangible assets, primarily intellectual property and customer relationships.
Amortization of intangibles increased for the year ended December 31, 2019 to $40.4 million as compared to $37.2 million
for the year ended December 31, 2018 primarily due to amortization of developed technology associated with the acquisition of
TandemLife. The developed technology of $107.5 million was initially recorded to IPR&D assets upon acquisition in April
2018 but was reclassified to developed technology during the third quarter of 2019 upon receiving FDA approval of the
LifeSPARC system.
Amortization for the year ended December 31, 2018 increased by $4.1 million as compared to 2017 due primarily to the
amortization of intangible assets recognized as part of the acquisition of TandemLife in April 2018.
Litigation Provision, Net
During 2018, we recognized a $294.1 million litigation provision involving our 3T device. During 2019, we entered into
agreements with our insurance carriers to recover $33.8 million under our product liability insurance policies. The insurance
recovery was received and recognized in 2019. We recorded an additional liability of $33.2 million due to additional
information obtained in the fourth quarter of 2019, including but not limited to: the nature and quality of filed and unfiled
claims; certain settlement discussions with plaintiffs’ counsel; and the current stage of litigation in our remaining filed and
unfiled claims. For further information, refer to “Note 14. Commitments and Contingencies” in our consolidated financial
statements and accompanying notes, beginning on page F-1 of this Annual Report on Form 10-K.
Interest Expense
We incurred interest expense of $15.1 million for the year ended December 31, 2019, as compared to $9.8 million and $7.8
million for 2018 and 2017, respectively. The increase for the year ended December 31, 2019 as compared to 2018 was
primarily due to increased debt borrowings in 2019 mostly associated with 3T litigation settlements. The increase for the year
ended December 31, 2018 as compared to 2017 was also primarily due to increased debt borrowings in 2018.
Gain on Acquisitions
On January 16, 2018, we acquired the remaining outstanding interest of ImThera. On the acquisition date, we remeasured our
existing investment in ImThera at fair value and recognized a pre-tax non-cash gain of $11.5 million.
Income Taxes
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
earnings mix in various jurisdictions and the changes in tax laws, our consolidated effective income tax rate may vary
substantially from one reporting period to another.
Our effective income tax rate from continuing operations for the year ended December 31, 2019 was 16.2% compared with
28.1% for 2018. Our effective income tax rate fluctuates based on, among other factors, changes in pretax income in countries
with varying statutory tax rates, changes in valuation allowances, changes in tax credits and incentives and changes in
unrecognized tax benefits associated with uncertain tax positions.
Our effective income tax rate from continuing operations for the year ended December 31, 2018 was 28.1% compared with
41.2% for 2017. Our effective income tax rate fluctuates based on, among other factors, changes in pretax income in countries
with varying statutory tax rates, changes in valuation allowances, changes in tax credits and incentives and changes in
unrecognized tax benefits associated with uncertain tax positions.
Compared with the year ended December 31, 2018, the decrease in the effective tax rate for 2019 was primarily attributable
to the impact of a full valuation allowance for the U.S. losses, release of uncertain tax positions, change in our UK group filing
exemption and other discrete items.
Compared with the year ended December 31, 2017, the decrease in the effective tax rate for 2018 was primarily attributable
to the impact of the reduction to the U.S. federal statutory tax rate as a result of the Tax Act enacted on December 22, 2017, the
39
repeal of the U.S. domestic production activity deduction, certain tax law changes in the UK that occurred during the three
months ended December 31, 2017, the 2018 acquisitions of ImThera Medical Inc. and CardiacAssist, Inc., the sale of CRM,
audit settlements in Italy and Germany and the impact of other discrete tax items.
U.S. Tax Reform
The Tax Act, which is also commonly referred to as “U.S. tax reform,” significantly changed U.S. corporate income tax laws
by, among other things, reducing the U.S. corporate income tax rate to 21%, which commenced in 2018.
During the fourth quarter of 2018, we finalized our accounting under Staff Accounting Bulletin No. 118 for the
remeasurement of the deferred tax assets and liabilities and impairment of foreign tax credits related to the Tax Act. Our
accounting for the remeasurement is complete with a final non-cash net charge of $21.0 million.
The Tax Act also established various other new U.S. corporate income tax laws that came into effect in 2018 along with
proposed regulations issued in 2018 and final regulations issued in 2019. The extent to which these and other provisions of the
Tax Act, or future legislation or additional final regulations clarifying the Tax Act, 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 the U.S. and by countries outside the U.S., and other factors beyond our control.
Brexit
On January 31, 2020, the UK departed from the EU (in a move commonly referred to as “Brexit”), and the UK will now
enter a transition period that is scheduled to end on December 31, 2020, unless requested to be extended before July 1, 2020.
During the transition period, the UK will cease to be an EU member but the trading relationship will remain the same under the
EU's rules. Although the long-term effects of Brexit will depend on any agreements the UK makes to retain access to the EU
markets, Brexit has created additional uncertainties that may ultimately result in new regulatory costs and challenges for
medical device companies and increased restrictions on imports and exports throughout Europe. This could adversely affect our
ability to conduct and expand our operations in Europe and may have an adverse effect on our business, financial condition and
results of operations.
Passage of the withdrawal bill does not change the application of existing tax laws and does not establish a clear framework
for what the ultimate outcome of the transition period 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 transition period is over. 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 ultimately affect us, our customers, suppliers, vendors, or our
industry.
We and several of our wholly owned subsidiaries that are domiciled either in the UK, various EU Member States, or in the
U.S., 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 change materially, Brexit may have a material adverse impact on our future financial results and results of
operations. We continue to monitor and assess the potential impact of this event and explore possible tax-planning strategies
that may mitigate or eliminate potential adverse impacts.
We will not account for the impact of Brexit in our income tax provisions until there are material changes in tax laws or
treaties between the UK and other countries.
European Union State Aid Challenge
On October 26, 2017, the European Commission (“EC”) announced that an investigation would be opened with respect to the
UK’s controlled foreign company (“CFC”) rules for the period January 1, 2013 through December 31, 2018. Under the CFC
rules, financing profits of entities controlled by UK parent companies are taxed when the funding originates in the UK, or
Significant People Functions relating to the financing are located in the UK. The provisions under investigation provide group
finance exemptions related to the profits of entities involved in financing of the non-UK group activities. On April 2, 2019, the
EC concluded that “when financing income from a foreign group company, channeled through an offshore subsidiary, is
financed with UK connected capital and there are no UK activities involved in generating the finance profits, the group finance
exemption is justified and does not constitute State aid under EU rules.” However, in relation to Significant People Functions,
“when financing income from a foreign group company, channeled through an offshore subsidiary, derives from UK activities,
the group finance exemption is not justified and constitutes State aid under EU rules.” Her Majesty’s Revenue and Customs
(“HMRC”) has stated that they do not consider the timing and form of the UK’s exit from the EU will have a practical impact
40
on the requirement to recover the alleged aid. On June 14, 2019, the UK filed an appeal to the Commission’s decision. On July
5, 2019, HMRC began the first step in the recovery process to identify beneficiaries and sent letters asking for information.
Based upon our assessment of the technical arguments as to whether the exemption is State aid, together with no UK activities
involved in our financing, no uncertain tax position reserve has been recognized related to this matter. Furthermore, in
December 2019, we amended our 2017 tax return filing to avail ourselves of different rules to determine UK taxation, which
are not subject to the EU decision. We filed our 2018 tax return similarly, and therefore, we do not believe that the EU state aid
decision will result in a material liability.
Losses from Equity Method Investments
Due to an additional investment by a third party during the year ended December 31, 2018, our equity interest in Highlife
decreased to 7.8% from 24.6%. We determined that we no longer had significant influence over Highlife and, as a result, we
began to measure Highlife at cost minus 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. Losses from equity method investments were
$0.6 million for the year ended December 31, 2018, which was attributable to Highlife.
Results of Discontinued Operations
The table below illustrates the results of discontinued operations (in thousands):
Income (loss) from discontinued operations, net of tax
Impairment of discontinued operations, net of tax
Net income (loss) from discontinued operations, net of tax
Year Ended December 31,
2019
2018
2017
$
$
365
$
(10,937) $
—
—
365
$
(10,937) $
(1,271)
(78,283)
(79,554)
In November 2017, we concluded that the sale of CRM represented a strategic shift in our business that would have a major
effect on future operations and financial results. Accordingly, the operating results of CRM are classified as discontinued
operations in our consolidated statements of income (loss) for all the periods presented in this Annual Report on Form 10-K.
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 during the year ended December 31, 2017.
We completed the CRM Sale on April 30, 2018, for total cash proceeds of $195.9 million, less cash transferred of $9.2
million, subject to a closing working capital adjustment. In conjunction with the sale, we entered into transition services
agreements to provide certain support services generally for up to twelve months from the closing date of the sale. The services
include, among others, accounting, information technology, human resources, quality assurance, regulatory affairs, supply
chain, clinical affairs and customer support. For the year ended December 31, 2019 and December 31, 2018, we recognized
income of $0.9 million and $2.8 million, respectively, 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 our consolidated
statement of income (loss).
Significant Accounting Policies and Critical Accounting Estimates
We have adopted various accounting policies to prepare the consolidated financial statements in accordance with accounting
principles generally accepted in the U.S. (“U.S. GAAP”). Our most significant accounting policies are disclosed in “Note 2.
Basis of Presentation, Use of Accounting Estimates and Significant Accounting Policies” in our consolidated financial
statements and accompanying notes, beginning on page F-1 of this Annual Report on Form 10-K. New accounting
pronouncements are disclosed in “Note 23. New Accounting Pronouncements” in our consolidated financial statements and
accompanying notes, beginning on page F-1 of this Annual Report on Form 10-K.
To prepare our consolidated financial statements in conformity with U.S. GAAP, management makes estimates and
assumptions that may affect the reported amounts of our assets and liabilities, the disclosure of contingent liabilities as of the
date of our consolidated financial statements and the reported amounts of our revenue and expenses during the reporting period.
Our actual results may differ from these estimates. We consider estimates to be critical if we are 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 will change from period to period. The following are areas requiring
management’s judgment that we consider critical:
41
Leases
On January 1, 2019, we adopted ASC Update (“ASU”) No 2016-02, Leases, including subsequent related accounting updates
(collectively referred to as “Topic 842”), which supersedes the previous accounting model for leases. We adopted the standard
using the modified retrospective approach with an effective date as of January 1, 2019. Prior year financial statements were not
recast under the new standard. In addition, we elected the package of practical expedients permitted under the transition
guidance within the new standard, which among other things, allowed us to carry forward our historical assessment of whether
contracts are or contain leases and lease classification. We also elected the practical expedient to account for lease and non-
lease components together as a single combined lease component, which is applicable to all asset classes. We did not, however,
elect the practical expedient related to using hindsight in determining the lease term as this was not relevant following our
election of the modified retrospective approach.
In addition, we elect certain practical expedients on an ongoing basis, including the practical expedient for short-term leases
pursuant to which a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a
lease liability and operating lease asset for leases with a term of 12 months or less and that do not include an option to purchase
the underlying asset that the lessee is reasonably certain to exercise. We have applied this accounting policy to all asset classes
in our portfolio and will recognize the lease payments for such short-term leases within profit and loss on a straight-line basis
over the lease term.
Furthermore, from a lessor perspective, certain of our agreements that allow the customer to use, rather than purchase, our
medical devices will meet the criteria of being a lease in accordance with the new standard. While the amount of revenue and
expenses recognized over the contract term will not be impacted, the timing of revenue and expense recognition will be
impacted depending upon lease classification. We enacted appropriate changes to our business processes, systems and internal
controls to support identification, recognition and disclosure of leases under the new standard.
We determine if an arrangement is or contains a lease at inception. Operating lease assets and operating lease liabilities are
recognized based on the present value of the future minimum lease payments over the lease term at the latter of our lease
standard effective date for adoption or the lease commencement date. Variable lease payments, such as common area rent
maintenance charges and rent escalations not known upon lease commencement, are not included in determination of the
minimum lease payments and will be expensed in the period in which the obligation for those payments is incurred. As most of
our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at
commencement in determining the present value of future payments. The incremental borrowing rate represents an estimate of
the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized
basis over the term of a lease within a particular currency environment. We used the incremental borrowing rate available
nearest to our adoption date for leases that commenced prior to that date. The operating lease asset also includes any lease
payments made in advance and excludes lease incentives. Our lease terms may include options to extend or terminate the lease
when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a
straight-line basis over the lease term.
For additional information refer to “Note 13. Leases” in our consolidated financial statements and accompanying notes,
beginning on page F-1 of this Annual Report on Form 10-K.
Business Combinations and Goodwill
We allocate the amounts we pay for an acquisition to the assets we acquire and liabilities we assume 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 base the
fair value of identifiable intangible assets acquired in a business combination, including 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 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 in selling, general and administrative on the consolidated statements of income (loss). We recognize
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 expected to
generate future economic benefits and are recorded at their respective fair values as of their acquisition date. Finite-lived
42
intangible assets consist primarily of developed technology and technical capabilities, including patents, related know-how and
licensed patent rights, trade names and customer relationships. Customer relationships consist of relationships with hospitals
and surgeons in the countries where we operate. Indefinite-lived intangible assets other than goodwill are composed of IPR&D
assets acquired in acquisitions. We estimate the useful lives of our intangible assets, which requires significant management
judgment. We amortize our finite-lived intangible assets over their useful lives using the straight-line method.
Amortization expense is disclosed separately on our consolidated statements of income (loss). We evaluate our intangible
assets each reporting period to determine whether events and circumstances indicate either a different useful life or impairment.
If we change our estimate of the useful life of an asset, we amortize the carrying amount over the revised remaining useful life.
Impairment of Long-Lived Assets and Goodwill
We review, when circumstances warrant, the carrying amounts of our property and equipment and our intangible assets to
determine whether such carrying amounts continue to be recoverable. Such changes in circumstance may include, among other
items, an expectation of a sale or disposal of a long-lived asset or asset group, adverse changes in market or competitive
conditions, an adverse change in legal factors or business climate in the markets in which we operate and operating or cash
flow losses. For purposes of impairment testing, long-lived assets are grouped at the lowest level for which cash flows are
largely independent of other assets and liabilities, 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 measure fair value by considering sale prices for similar assets, discounted estimated
future cash flows using an appropriate discount rate and/or estimated replacement cost. Assets to be disposed of are carried at
the lower of their financial statement carrying amount or fair value less costs to sell.
We evaluate 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. In the case of goodwill, if it is more-likely-than-not that a reporting unit’s fair value is less than its carrying
value, we then compare the fair value of the 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. If the carrying value 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. Estimating the fair value requires various assumptions, including revenue and
gross margin growth rates and discount rates. 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. Estimating the fair value of indefinite-lived intangible assets requires various assumptions, including revenue growth
rates, timing and probability of commercialization, and discount rates.
Revenue
For the years presented in our consolidated statements of income (loss) prior to December 31, 2018, we recognized revenue
under the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification Topic 605, Revenue
Recognition. We recognized revenue when persuasive evidence of a sales arrangement existed, title to the goods and risk of
loss transferred to the customer or to an independent distributor, the selling price was fixed or determinable and collectability
was reasonably assured. We estimated expected sales returns based on historical data and recorded a reduction of sales with a
return reserve. We recorded state and local sales taxes net; that is, we excluded sales tax from revenue. Service-related revenue
was recognized on the basis of progress of the services, when services were rendered, when collectability was reasonably
assured and when the amount was fixed and determinable.
In May 2014, the FASB issued ASC Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic
606). Update No. 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the
transfer of promised goods or services to customers and 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
was insignificant.
We generate our revenue through contracts with customers. Our customers are primarily hospitals, healthcare institutions,
distributors and other organizations. Revenue is measured based on consideration specified in a contract with a customer, and
excludes amounts collected on behalf of third parties, such as sales tax. We measure the consideration based upon the estimated
amount to be received. The amount of consideration we ultimately receive varies depending upon the return terms, sales
43
rebates, discounts, and other incentives that we 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.
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 contracts 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. Typically,
our contracts do not have a significant financing component. We have historically experienced a low rate of product returns and
the total dollar value of product returns has not been significant to our consolidated financial statements.
We incur incremental commission fees paid to the sales force associated with the sale of products. We elected the practical
expedient within ASC 606-10-50-22 and recognize the incremental costs of obtaining a contract as an expense when incurred if
the amortization period of the asset the entity would otherwise recognize is one year or less. As a result, no commissions are
capitalized as contract costs at December 31, 2019.
Income Taxes
We are a UK corporation, and we operate through our various subsidiaries in a number of countries throughout the world.
Our provision for income taxes is based on the tax laws and rates applicable in the jurisdictions in which we operate and earn
income. We use significant judgment and estimates in accounting for our income taxes. We recognize deferred tax assets and
liabilities for the anticipated future tax effects of temporary differences between the financial statements basis and the tax basis
of our assets and liabilities, which are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
We file federal and local tax returns in many jurisdictions throughout the world and are subject to income tax examinations
for our fiscal year 2001 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 and as a result, we may
establish reserves for uncertain tax positions, which require a significant degree of management judgment. We regularly assess
the likely outcomes of our tax positions in order to determine the appropriateness of our reserves; however, the actual outcome
of an audit can be significantly different than our expectations, which could have a material impact on our tax provision. The
total amount of unrecognized tax benefit, as of December 31, 2019, if recognized, would reduce our income tax expense by
approximately $12.9 million. Our 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 position 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. 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 our consolidated statements of income (loss).
We periodically assess the recoverability of our deferred tax assets by considering whether it is more-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 establish a valuation allowance. We periodically review the adequacy and necessity of the valuation
allowance by considering significant positive and negative evidence relative to our ability to recover deferred tax assets and to
determine the timing and amount of valuation allowance that should be released. This evidence includes: profitability in the
most recent quarters; internal forecasts for the current and next two future years; size of deferred tax asset 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 our net operating losses due to ownership changes, pursuant to
IRC Section 382; and the implementation of prudent and feasible tax planning strategies, if any.
The Tax Act also established various other new U.S. corporate income tax laws that came into effect in 2018 along with
proposed regulations issued in 2018 and final regulations issued in 2019. The extent to which these and other provisions of the
Tax Act, or future legislation or additional final regulations clarifying the Tax Act, 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 the U.S. and by countries outside the U.S., and other factors beyond our control.
During the fourth quarter of 2018, we finalized our accounting under SAB 118 for the remeasurement of the deferred tax assets
and liabilities and impairment of foreign tax credits related to the Tax Act. Our accounting for the remeasurement is complete
with a final non-cash net charge of $21.0 million.
44
New Accounting Pronouncements
For a discussion of new accounting standards and disclosure requirements, please refer to “Note 23. New Accounting
Pronouncements” in our consolidated financial statements and accompanying notes, beginning on page F-1 of this Annual
Report on Form 10-K.
Liquidity and Capital Resources
Based on our current business plan, we believe that our existing cash and cash equivalents, future cash generated from
operations and borrowings under our existing credit facilities will be sufficient to fund our expected operating needs, working
capital requirements, R&D opportunities, capital expenditures, obligations associated with the litigation involving our 3T
device and debt service requirements over the 12-month period beginning from the issuance date of these financial statements.
We regularly review our capital needs and consider various investing and financing alternatives to support our requirements.
Refer to “Note 11. Financing Arrangements” in the consolidated financial statements in this Annual Report on Form 10-K for
additional information regarding our debt. Our liquidity could be adversely affected by the factors affecting future operating
results, including those referred to in “Item 1A. Risk Factors” above.
Cash Flows
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 follows (in thousands):
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease)
Operating Activities
Year Ended December 31,
2018
2017
2019
$
$
(91,142) $
(41,290)
146,581
(216)
13,933
$
$
120,489
(120,556)
(42,348)
(3,996)
(46,411) $
91,339
(52,855)
11,294
4,048
53,826
Cash used in operating activities for the year ended December 31, 2019 increased $211.6 million as compared to 2018,
primarily due to $156.9 million in 3T litigation settlement payments made during 2019 and the change in operating assets and
liabilities.
Cash provided by operating activities for the year ended December 31, 2018 increased $29.2 million as compared to 2017,
primarily due to improved working capital management offset by a decrease in net income adjusted for non-cash items.
Investing Activities
Cash used in investing activities during the year ended December 31, 2019 decreased $79.3 million as compared to 2018.
The decrease primarily resulted from a decrease in cash paid for acquisitions of $268.9 million, partially offset by cash received
from the sale of CRM in 2018 of $186.7 million.
Cash used in investing activities during the year ended December 31, 2018 increased $67.7 million as compared to 2017. The
increase primarily resulted from an increase in cash paid for acquisitions of $265.5 million, partially offset by cash received
from the sale of CRM of $186.7 million and an increase in proceeds from asset sales of $8.3 million.
Financing Activities
Cash provided by financing activities during the year ended December 31, 2019 increased $188.9 million as compared to
2018, primarily due to an increase in net borrowings of $139.0 million and cash used in 2018 of $50.0 million to repurchase
shares under a publicly announced repurchase plan.
Cash used in financing activities during the year ended December 31, 2018 increased $53.6 million as compared to 2017,
primarily due to $50.0 million in cash used to repurchase shares in 2018 under a publicly announced repurchase plan and a
$13.0 million payment for deferred consideration related to an acquisition, partially offset by an increase in net borrowings of
$17.3 million.
45
Debt and Capital
Our capital structure consists of debt and equity. As of December 31, 2019, our total debt of $337.7 million was 24.4% of
total equity of $1.4 billion. As of December 31, 2018, our total debt of $168.3 million was 11.2% of total equity of $1.5 billion.
During the year ended December 31, 2019, we borrowed $197.2 million in long-term debt, incurred $3.8 million in debt
issuance costs, and repaid $24.2 million in long-term debt. Additionally, we reduced our short-term unsecured revolving credit
agreements and other agreements with various banks by $1.2 million.
During the year ended December 31, 2018, we reduced our outstanding revolving credit facilities by $50.7 million, repaid
$23.8 million of long-term debt obligations and borrowed $103.6 million in additional long-term debt.
Off-Balance Sheet Arrangements
As of December 31, 2019, we did not have any off-balance sheet arrangements.
Contractual Obligations
We have various contractual commitments that we expect to fund from existing cash, future operating cash flows and
borrowings under our credit facilities. The following table summarizes our significant contractual obligations as of
December 31, 2019 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 debt obligations
$
77,710
$
203,300
$
33,610
$
24,261
$
338,881
Interest payments on long-term debt
3T litigation settlements
Operating leases
Inventory supply contract obligations
Derivative instruments
Contingent consideration (1)
Other commitments
8,623
90,000
12,399
21,538
3,619
22,953
489
9,991
—
19,626
1,343
61
893
50
2,943
—
13,499
—
—
113,503
50
798
—
16,907
—
—
—
113
22,355
90,000
62,431
22,881
3,680
137,349
702
Total contractual obligations (2)
$
237,331
$
235,264
$
163,605
$
42,079
$
678,279
(1)
Includes the fair value of our current and non-current positions of contingent consideration. While it is not certain if and/or
when payments will be made, the maturity dates and amounts included in this table reflect our best estimates.
(2) Contractual obligations above do not include $4.3 million of unrecognized tax benefits, inclusive of interest and penalties,
included on our consolidated balance sheet as of December 31, 2019, because we are unable to specify with certainty the
future periods in which we may be obligated to settle such amounts.
Guarantees and Other Commitments
We have other commitments that we are contractually obligated to fulfill with cash under certain circumstances. Obligations
under these guarantees are not normally called, as we typically comply with underlying performance requirements. As of
December 31, 2019, no liability has been recorded in the consolidated financial statements associated with these obligations.
The following table summarizes our guarantees as of December 31, 2019 (in thousands):
Guarantees on government bids (1)
Guarantees - commercial (2)
Guarantees to tax authorities (3)
Guarantees to third-parties
Total guarantees
Less Than
One Year
One to
Three Years
Three to
Five Years
Thereafter
Total
Guarantees
$
$
6,479
$
10,148
$
1,141
$
1,275
$
814
976
2
1,361
4,015
14
—
—
1
1,028
12,710
483
19,043
3,203
17,701
500
8,271
$
15,538
$
1,142
$
15,496
$
40,447
(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) Guarantees to tax authorities consist of guarantees issued to the Italian Revenue Agency.
46
Market Risk
We are exposed to certain market risks as part of our ongoing business operations, including risks from foreign currency
exchange rates, interest rate risks and concentration of procurement suppliers, that could adversely affect our consolidated
financial position, results of operations or cash flows.
We manage 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 our operations, we are exposed to foreign currency exchange rate fluctuations. We maintain a
foreign currency exchange rate risk management strategy that utilizes derivatives to reduce our exposure to unanticipated
fluctuations in forecast revenue and costs and fair values of debt, inter-company debt and accounts receivable caused by
changes in foreign currency exchange rates.
We mitigate our credit risk relating to counter-parties of our derivatives through a variety of techniques, including
transacting with multiple, high-quality financial institutions, thereby limiting our exposure to individual counter-parties and by
entering into International Swaps and Derivatives Association, Inc. (“ISDA”) Master Agreements, which include provisions for
a legally enforceable master netting agreement, with almost all of our derivative counter-parties. The terms of the ISDA
agreements may also include credit support requirements, cross default provisions, termination events, and 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-party upon the
occurrence of certain events.
Interest Rate Risk
We are subject to interest rate risk on our investments and debt. We manage a portion of our interest rate risk with contracts that
swap floating-rate interest payments for fixed rate interest payments. If interest rates were to increase or decrease by 0.5%, the
effects on our consolidated statement of income (loss) would not be material.
Concentration of Credit Risk
Our 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 our efforts to control our exposure to credit risk
by monitoring our receivables and the use of credit approvals and credit limits. In addition, we have historically had strong
collections and minimal write-offs. While we believe that our reserves for credit losses are adequate, essentially all of our trade
receivables are concentrated in the hospital and healthcare sectors worldwide, and accordingly, we are exposed to their
respective business, economic and country-specific variables. Although we do 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 our future operating results and share prices are disclosed in “Item 1A. Risk Factors” of this
Annual Report on Form 10-K.
47
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required under 7A. has been incorporated by reference to the information contained in “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K
under the section entitled “Market Risk.”
Item 8. Financial Statements and Supplementary Data
Our audited consolidated financial statements and notes thereto included in “Item 15. Exhibits, Financial Statement
Schedules” of this Annual Report on Form 10-K, beginning on page F-1 of this Annual Report on Form 10-K, are incorporated
herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, that are
designed to ensure that information required to be disclosed in our 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. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure that information is accumulated
and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as
appropriate, to allow timely decisions regarding required disclosure. Our management, under the supervision and with the
participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, our CEO and
CFO concluded that our disclosure controls and procedures were effective as of December 31, 2019.
(b) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined
in Rule 13a-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 our internal control over financial reporting as of December 31, 2019 using the
criteria set forth in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on this assessment, we concluded that the Company’s internal control over financial
reporting was effective as of December 31, 2019.
The effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm. Their report is included after “Item 16. Form
10-K Summary” in this Annual Report on Form 10-K.
(c) Changes in Internal Control Over Financial Reporting
During the fourth quarter of 2019, there were no changes to our internal control over financial reporting (as defined in Rules
13a-15(f) under the Exchange Act) that have materially affected, or that are reasonably likely to materially affect, our internal
control over financial reporting.
(d) Remediation of the Material Weaknesses
As of December 31, 2019, we determined that we remediated the previously disclosed material weaknesses related to:
1. A deficiency in the design and maintenance of our controls related to access to our primary financial system by certain
members of our Information Technology (IT) group and end-users. Specifically, we did not design and maintain user
access controls that adequately restrict end-user and privileged access to, and ensure segregation of duties within, our
primary financial system and data, and
48
2. A deficiency in the design and maintenance of our controls, related to the accounting for revenue and related accounts,
to ensure accuracy in price and quantity during the billing and revenue processes. This deficiency was impacted by the
deficiency related to the design and maintenance of our user access controls.
Item 9B. Other Information
None.
49
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required for this Item 10 is incorporated by reference to the information set forth under the headings
“Election of Directors,” “Executive Compensation,” “Corporate Governance,” and “Share Ownership Information” in our
Definitive Proxy Statement for the 2020 Annual General Meeting of Shareholders.
We have adopted a Code of Business Conduct and Ethics (the “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 our website, www.livanova.com. We intend 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 Investor Relations section of our website.
Item 11. Executive Compensation
The information required for this Item 11 is incorporated by reference to the information set forth under the heading
“Executive Compensation” in our Definitive Proxy Statement for the 2020 Annual General Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required for this Item 12 is incorporated by reference to the information set forth under the headings
“Executive Compensation” and “Share Ownership Information” in our Definitive Proxy Statement for the 2020 Annual General
Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required for this Item 13 is incorporated by reference to the information set forth under the heading
“Corporate Governance” in our Definitive Proxy Statement for the 2020 Annual General Meeting of Shareholders.
Item 14. Principal Accounting Fees and Services
The information required for this Item 14 is incorporated by reference to the information set forth under the heading “Audit
Matters” in our Definitive Proxy Statement for the 2020 Annual General Meeting of Shareholders.
50
Item 15. Exhibits, Financial Statement Schedules
(1) Financial Statements
PART IV
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:
Description
Reports of Independent Registered Public Accounting Firms
Consolidated Statements of Income (Loss) for the Years Ended December 31, 2019, December 31, 2018 and
December 31, 2017
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2019, December
31, 2018 and December 31, 2017
Consolidated Balance Sheets as of December 31, 2019 and December 31, 2018
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2019, December 31, 2018
and December 31, 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, December 31, 2018 and
December 31, 2017
Notes to Consolidated Financial Statements
Page No.
F-2
F-7
F-8
F-9
F-10
F-11
F-13
(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.
Exhibit
Number
2.1
2.2
2.3
3.1
4.1*
10.1
10.2†
10.3†
Transaction Agreement, dated March 23, 2015, by and among the Company (f/k/a Sand Holdco Limited),
Cyberonics, Inc., Sorin S.p.A. and Cypher Merger Sub, Inc., incorporated by reference to Annex A-1 of the
Company’s Registration Statement on Form S-4, filed on April 20, 2015, as amended
Document Description
Letter of Intent, dated as of November 20, 2017, by and among the Company, MicroPort Cardiac Rhythm B.V. and
MicroPort Scientific Corporation (including the form of Stock and Asset Purchase Agreement attached as Exhibit A
thereto), incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K, filed on
November 20, 2017
Stock and Asset Purchase Agreement, dated as of March 8, 2018, by and among the Company, MicroPort Cardiac
Rhythm B.V. and MicroPort Scientific Corporation (excluding schedules and exhibits, which the Company agrees to
furnish supplementally to the Securities and Exchange Commission upon request), incorporated by reference to
Exhibit 2.1 of the Company’s Current Report on Form 8-K, filed on March 8, 2018
Amended Articles of Association, incorporated by reference to Exhibit 3.1 of the Company’s Current Report on
Form 8-K, filed on June 15, 2017
Description of Securities Registered Under Section 12 of the Exchange Act
Amendment and Restatement Agreement, dated October 2, 2015, by and among the Company, Sorin S.p.A., Sorin
CRM S.A.S., Sorin Group Italia S.r.l. and the European Investment Bank, incorporated by reference to Exhibit 10.1
of the Company’s Current Report on Form 8-K, filed on October 19, 2015
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
51
10.4†
10.5†
10.6†
10.7†
10.8†
2015 Incentive Award Plan and related Sub-Plan for U.K. 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
Form of Stock Appreciation Right Grant Notice and Stock Appreciation Right Agreement under the Company’s
2015 Incentive Award Sub-Plan (Non-U.S. Form), incorporated by reference to Exhibit 10.2 of the Company’s
Current Report on Form 8-K12B, filed on October 19, 2015
Form of Stock Appreciation Right Grant Notice and Stock Appreciation Right Agreement under the Company’s
2015 Incentive Award Plan (U.S. Form), incorporated by reference to Exhibit 10.3 of the Company’s Current Report
on Form 8-K12B, filed on October 19, 2015
Director Appointment Letters for Non-Employee Directors, dated the dates indicated therein, incorporated by
reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K12B, filed on October 19, 2015
Form of Director Restricted Stock Unit Award Grant Notice and Director Restricted Stock Unit Award Agreement
under the Company’s 2015 Incentive Award Plan (Non-Employee Directors), incorporated by reference to Exhibit
10.6 of the Company’s Current Report on Form 8-K12B, filed on October 19, 2015
10.9†
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
10.10† 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
10.11† Letter Agreement dated July 1, 2016 between Douglas Manko and Cyberonics Inc., a wholly owned subsidiary of
the Company, incorporated by reference to Exhibit 10.48 of the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2016
10.12
10.13
10.14
10.15†
Form of Share Repurchase Contract, incorporated by reference to Appendix A of the Company’s Proxy Statement on
Schedule 14A, filed on May 16, 2016
Form of Rule 10b5-1 Repurchase Plan, incorporated by reference to Appendix B of the Company’s Proxy Statement
on Schedule 14A, filed on May 16, 2016
Board approval of Share Repurchase Programme on August 2, 2016, incorporated by reference to the Company’s
Current Report on Form 8-K, filed on August 2, 2016
Settlement Agreement between Andre-Michel Ballester and the Company dated December 21, 2016, incorporated
by reference to Exhibit 10.58 of the Company’s Annual Report on Form 10-K for the year ended December 31,
2016
10.16† Consultancy Agreement between Andre-Michel Ballester and the Company dated December 26, 2016, incorporated
by reference to Exhibit 10.59 of the Company’s Annual Report on Form 10-K for the year ended December 31,
2016
Form of the Company’s 2017 Service-Based RSU Agreement, incorporated by reference to Exhibit 10.1 of the
Company’s Current Report on Form 8-K, filed on May 11, 2017
Form of the Company’s 2017 Performance-Based RSU Agreement, incorporated by reference to Exhibit 10.2 of the
Company’s Current Report on Form 8-K, filed on May 11, 2017
10.17†
10.18†
10.19† 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
10.20†
10.21†
10.22†
10.23†
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
Service Agreement, by and between the Company and Thad Huston, dated April 27, 2017, incorporated by reference
to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on May 16, 2017
Side Letter dated April 27, 2017 from the Company to Thad Huston, incorporated by reference to Exhibit 10.2 of the
Company’s Current Report on Form 8-K, filed on May 16, 2017
Service Agreement effective May 24, 2017, between the Company and Keyna Skeffington, incorporated by
reference to Exhibit 10.6 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017
10.24† Non-Employee Director Compensation Policy, adopted December 2017, incorporated by reference to Exhibit 10.74
of the Company’s Annual Report on Form 10-K for the year ended December 31. 2017
10.25
10.26
Form of Share Repurchase Contract, incorporated by reference to Appendix A of the Company’s Proxy Statement on
Schedule 14A, filed on May 16, 2017
Form of Rule 10b5-1 Repurchase Plan, incorporated by reference to Appendix B of the Company’s Proxy Statement
on Schedule 14A, filed on May 16, 2017
10.27† 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
52
10.28†
10.29†
10.30†
10.31†
10.32†
Form of 2018 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 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
Form of 2018 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 March 16, 2018
Form of 2018 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 March 16, 2018
2018 Director RSU Agreement, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on
Form 8-K, filed on June 15, 2018
10.33† 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
10.34†
10.35†
10.36
Form of Letter of Appointment as Non-Executive Director, dated 18 July 2018, incorporated by reference to Exhibit
10.5 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018
2019 LivaNova Short-Term Incentive Plan approved February 20, 2019, incorporated by reference to Exhibit 10.1
of the Company’s Current Report on Form 8-K/A, filed on March 6, 2019
US$350 million multicurrency term facilities agreement dated March 26, 2019, by and among LivaNova PLC, the
lenders, arrangers and bookrunners, documentation agent and co-ordinator parties thereto and Barclays Bank PLC
as agent, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed March 29,
2019
10.37† 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
10.38†
10.39†
10.40†
10.41†
10.42†
10.43†
10.44
10.45
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 February 28, 2017, between Alistair Simpson and LivaNova PLC, incorporated by
reference to Exhibit 10.9 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 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
Amendment and Restatement Agreement, dated June 6, 2019, in relation to the Finance Contract originally dated
May 6, 2014, between the European Investment Bank, Sorin Group Italia S.r.l., and LivaNova PLC, incorporated by
reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019
Amendment and Restatement Agreement, dated June 6, 2019, in relation to the Finance Contract originally dated
June 29, 2017, between the European Investment Bank, Sorin Group Italia S.r.l., and LivaNova PLC, incorporated
by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019
10.46*† Separation and Settlement Agreement, dated November 2019, between Alistair Simpson and LivaNova PLC
10.47*† Separation Agreement, dated December 2019, between Edward S. Andrle and LivaNova USA, Inc.
16.1
21.1*
23.1*
23.2*
31.1*
31.2*
32.1*
Letter from PricewaterhouseCoopers SpA to the Securities and Exchange Commission, dated March 26, 2018,
incorporated by reference to Exhibit 16.1 of the Company’s Current Report on Form 8-K, filed on March 26, 2018
List of Subsidiaries of LivaNova PLC
Consent of PricewaterhouseCoopers LLP
Consent of PricewaterhouseCoopers SpA
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.
53
101*
Interactive Data Files Pursuant to Rule 405 of Regulation S-T formatted in Inline XBRL: (i) the Consolidated
Statements of Income (Loss) for the years ended December 31, 2019, December 31, 2018 and December 31, 2017,
(ii) the Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019,
December 31, 2018 and December 31, 2017, (iii) the Consolidated Balance Sheets as of December 31, 2019 and
December 31, 2018, (iv) the Consolidated Statements of Stockholders’ Equity for the years ended December 31,
2019, December 31, 2018 and December 31, 2017, (v) the Consolidated Statements of Cash Flows for the years
ended December 31, 2019, December 31, 2018 and December 31, 2017, and (vi) the Notes to the Consolidated
Financial Statements.
104*
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
54
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.
SIGNATURES
LIVANOVA PLC
By:
/s/ DAMIEN MCDONALD
Damien McDonald
Chief Executive Officer
(Principal Executive Officer)
LIVANOVA PLC
By:
/s/ THAD HUSTON
Thad Huston
Chief Financial Officer
(Principal Financial Officer)
Date: March 2, 2020
55
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
/s/ DANIEL J. MOORE
Daniel J. Moore
Chairman of the Board of Directors
March 2, 2020
March 2, 2020
March 2, 2020
March 2, 2020
March 2, 2020
March 2, 2020
March 2, 2020
March 2, 2020
March 2, 2020
March 2, 2020
March 2, 2020
March 2, 2020
/s/ DAMIEN MCDONALD
Damien McDonald
Director, Chief Executive Officer
(Principal Executive Officer)
/s/ THAD HUSTON
Thad Huston
/s/ DOUG MANKO
Doug Manko
/s/ FRANCESCO BIANCHI
Francesco Bianchi
/s/ WILLIAM A. KOZY
William A. Kozy
/s/ HUGH M. MORRISON
Hugh M. Morrison
/s/ ALFRED J. NOVAK
Alfred J. Novak
/s/ SHARON O'KANE
Sharon O'Kane, Ph.D.
/s/ ARTHUR L. ROSENTHAL
Arthur L. Rosenthal, Ph.D.
/s/ ANDREA L. SAIA
Andrea L. Saia
/s/ STACY ENXING SENG
Stacy Enxing Seng
Chief Financial Officer
(Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
56
Item 16. Form 10-K Summary
None.
57
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019, December 31, 2018 and December 31, 2017
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of LivaNova 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, 2019 and 2018, and the related consolidated statements of income (loss), of comprehensive income (loss), of
stockholders’ equity and of cash flows for the years then ended, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for the years
then ended 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, 2019,
based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Notes 2 and 23 to the consolidated financial statements, the Company changed the manner in which it accounts
for leases in 2019 and the manner in which it accounts for the income tax effects of intra-entity transfers of assets other than
inventory in 2018, respectively.
Basis for Opinions
The Company'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 appearing under Item 9A. Our responsibility is to
express opinions on the Company’s consolidated financial statements and on the Company'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) 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
F-2
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 matters communicated below are matters arising from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that (i) relate 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 matters below, providing separate
opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessment - Cardiovascular Reporting Unit
As described in Notes 2 and 8 to the consolidated financial statements, the Company’s consolidated goodwill balance was
$915.8 million as of December 31, 2019, and the amount of goodwill associated with the Cardiovascular reporting unit was
$517.0 million. Management conducts impairment testing of goodwill on October 1 each year. Management 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. Fair value refers to the price that would be received if management were to
sell the unit as a whole in an orderly transaction. An impairment loss is recognized when the carrying amount of the reporting
unit’s net assets exceeds the estimated fair value of the reporting unit, up to and including the carrying amount of the goodwill.
Fair value is estimated by management using a discounted cash flow model. Estimating the fair value requires various
assumptions, including revenue and gross margin growth rates and discount rates.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment
of the Cardiovascular reporting unit is a critical audit matter are there was significant judgment by management when
developing the estimated fair value of the reporting unit. This led to a high degree of auditor judgment, subjectivity, and effort
in performing procedures relating to management’s projected financial information and significant assumptions, including the
revenue and gross margin growth rates and discount rates. In addition, the audit effort involved the use of professionals with
specialized skill and knowledge in performing these procedures and evaluating the audit evidence obtained.
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 Company’s reporting units. These
procedures also included, among others, testing management’s process for developing the fair value of the Cardiovascular
reporting unit. Testing management’s process included evaluating the appropriateness of the discounted cash flow model and
the reasonableness of management’s projected financial information and significant assumptions, including the revenue and
gross margin growth rates and discount rates. Evaluating the reasonableness of the revenue and gross margin growth rates
involved considering the current and past performance of the reporting unit, consistency with third-party industry data, and
whether the assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill
and knowledge were used to assist in the evaluation of the discounted cash flow model and the reasonableness of certain
significant assumptions, including the discount rates.
Long-Lived Intangible Asset Impairment Assessment - ImThera IPR&D
As described in Notes 2 and 8 to the consolidated financial statements, the Company’s consolidated In-Progress Research &
Development (IPR&D) indefinite-lived intangible asset balance was $115.8 million as of December 31, 2019. Management
conducts impairment testing of indefinite-lived intangible assets on October 1 each year. Management tests indefinite-lived
intangible assets for impairment between annual tests if an event occurs or circumstances change that would indicate the
carrying amount may be impaired. An impairment loss is recognized when the asset’s carrying value exceeds its fair value.
During the second quarter of 2019, management determined that there would be a delay in the estimated commercialization
date of the Company’s obstructive sleep apnea product currently under development. This delay constituted a triggering event
that required evaluation of the IPR&D asset arising from the ImThera Medical Inc. (“ImThera”) acquisition for impairment.
F-3
Based on the assessment performed, management determined that the IPR&D asset was impaired and as a result, recorded an
impairment of $50.3 million, which was included in the Neuromodulation segment. The estimated fair value of IPR&D was
determined using the multi-period excess earnings income approach. Estimating the fair value of the ImThera IPR&D asset
requires various assumptions, including revenue growth rates, timing and probability of commercialization, and the discount
rate.
The principal considerations for our determination that performing procedures relating to the long-lived intangible asset
impairment assessment - ImThera IPR&D is a critical audit matter are there was significant judgment by management when
developing the estimated fair value of the IPR&D. This in turn led to a high degree of auditor judgment, subjectivity, and effort
in performing procedures relating to management’s significant assumptions, including the revenue growth rates, timing and
probability of commercialization, and the discount rate. In addition, the audit effort involved the use of professionals with
specialized skill and knowledge in performing these procedures and evaluating the audit evidence obtained.
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 long-lived intangible asset impairment assessment, including controls over the valuation of the Company’s
IPR&D assets. These procedures also included, among others, testing management’s process for estimating the fair value of
IPR&D. Testing management’s process included evaluating the reasonableness of significant assumptions, including the
revenue growth rates, timing and probability of commercialization, and the discount rate. Evaluating the reasonableness of the
revenue growth rate and timing and probability of commercialization involved considering the historical results of peer
companies, consistency with third-party industry data, and whether the assumptions were consistent with evidence obtained in
other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness
of the multi-period excess earnings income approach and the reasonableness of certain significant assumptions, including the
discount rate.
Litigation Provision Liability - 3T Heater-Cooler Device
As described in Notes 2 and 14 to the consolidated financial statements, the Company recognizes product liability accruals for
the resolution of pending litigation when it is probable that a liability has been incurred and the amount of the loss can be
reasonably estimated. Accruals for product liability claims are adjusted periodically as additional information becomes
available. The Company is currently involved in litigation involving the 3T Heater-Cooler device. On March 29, 2019, the
Company announced a settlement framework that provides for a comprehensive resolution of the personal injury cases pending
in the multi-district litigation in U.S. federal court, the related class action pending in federal court, as well as certain cases in
state courts across the United States. Cases covered by the settlement are being dismissed as amounts are disbursed to
individual plaintiffs from the qualified settlement fund. In the fourth quarter of 2019, the Company recorded an additional
liability of $33.2 million due to additional information obtained, including but not limited to: the nature and quantity of filed
and unfiled claims; certain settlement discussions with plaintiffs’ counsel; and the current stage of litigation in the remaining
filed and unfiled claims. As of December 31, 2019, the litigation provision liability was $170.4 million.
The principal considerations for our determination that performing procedures relating to the 3T Heater-Cooler device litigation
provision liability is a critical audit matter are there was significant judgment by management when assessing the likelihood of
a loss being incurred and when determining a reasonable estimate of the loss for each claim. This in turn led to a high degree of
auditor judgment, subjectivity and effort in evaluating management’s assessment of the loss contingencies associated with this
litigation.
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 evaluation of the 3T Heater-Cooler device litigation and estimation of the provision for losses, including
controls over determining whether a loss is probable and whether the amount of loss can be reasonably estimated. These
procedures also included, among others, gaining an understanding of the Company’s process around the accounting and
reporting for the 3T Heater-Cooler device litigation, obtaining and evaluating the letters of audit inquiry with internal and
external legal counsel, assessing the completeness of the population of claims, evaluating the reasonableness of management’s
assessment regarding whether an unfavorable outcome is reasonably possible or probable and reasonably estimable, and
evaluating the sufficiency of the Company’s litigation contingency disclosures.
F-4
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 2, 2020
We have served as the Company’s auditor since 2018.
F-5
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of LivaNova PLC
Opinion on the Financial Statements
We have audited the consolidated statements of income (loss), comprehensive income (loss), stockholders’ equity and cash
flows of LivaNova PLC and its subsidiaries (the “Company”) for the year ended December 31, 2017, including the related
notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements
present fairly, in all material respects, the results of operations and cash flows of the Company for the year ended December 31,
2017 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (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 audit of these consolidated financial statements in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud.
Our audit 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 audit 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. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers SpA
Milan, Italy
February 28, 2018
PricewaterhouseCoopers SpA served as the Company’s auditor from 2015 to 2018.
F-6
LIVANOVA PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In thousands, except per share amounts)
Year Ended December 31,
2019
2018
2017
$
1,084,170
$
1,106,961
$
1,012,277
Net sales
Costs and expenses:
Cost of sales - exclusive of amortization
Product remediation
Selling, general and administrative
Research and development
Merger and integration expenses
Restructuring expenses
Impairment of goodwill
Impairment of intangible assets
Amortization of intangibles
Litigation provision, net
Operating (loss) income from continuing operations
Interest income
Interest expense
Gain on acquisitions
Impairment of investments
Foreign exchange and other (losses) gains
(Loss) income from continuing operations before tax
Income tax (benefit) expense
Losses from equity method investments
Net (loss) income from continuing operations
Discontinued Operations:
Income (loss) from discontinued operations, net of tax
Impairment of discontinued operations, net of tax
Net income (loss) from discontinued operations, net of tax
Net loss
Basic (loss) income per share:
Continuing operations
Discontinued operations
Diluted (loss) income per share:
Continuing operations
Discontinued operations
323,635
15,777
506,542
149,889
23,457
12,254
42,417
139,295
40,375
(601)
(168,870)
803
(15,091)
—
—
(2,536)
(185,694)
(30,153)
—
(155,541)
361,812
10,680
464,967
146,024
24,420
15,915
—
—
37,194
294,021
(248,072)
847
(9,825)
11,484
—
(1,881)
(247,447)
(69,629)
(644)
(178,462)
365
—
365
(155,176) $
(10,937)
—
(10,937)
(189,399) $
(3.22) $
0.01
(3.21) $
(3.22) $
0.01
(3.21) $
(3.68) $
(0.23)
(3.91) $
(3.68) $
(0.23)
(3.91) $
$
$
$
$
$
Shares used in computing basic (loss) income per share
Shares used in computing diluted (loss) income per share
48,349
48,349
48,497
48,497
See accompanying notes to the consolidated financial statements
F-7
353,192
7,254
380,100
109,516
15,528
17,056
—
—
33,144
—
96,487
1,318
(7,797)
39,428
(8,565)
267
121,138
49,954
(16,719)
54,465
(1,271)
(78,283)
(79,554)
(25,089)
1.13
(1.65)
(0.52)
1.12
(1.64)
(0.52)
48,157
48,501
LIVANOVA PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Net loss
Other comprehensive (loss) income:
Net change in unrealized gain (loss) on derivatives
Tax effect
Net of tax
Foreign currency translation adjustment, net of tax
Total other comprehensive income (loss)
Total comprehensive (loss) income
Year Ended December 31,
2018
2019
2017
$
(155,176) $
(189,399) $
(25,089)
1,917
(460)
1,457
3,627
5,084
(150,092) $
$
(33)
8
(25)
(69,764)
(69,789)
(259,188) $
(6,413)
1,875
(4,538)
118,338
113,800
88,711
See accompanying notes to the consolidated financial statements
F-8
LIVANOVA PLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2019 and 2018
(In thousands, except share data)
ASSETS
Current Assets:
Cash and cash equivalents
2019
2018
$
61,137
$
Accounts receivable, net of allowance of $13,105 at December 31, 2019 and $11,598
at December 31, 2018
Inventories, net
Prepaid and refundable taxes
Prepaid expenses and other current assets
Total Current Assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Operating lease assets (Note 13)
Investments
Deferred tax assets
Other assets
Total Assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current debt obligations
Accounts payable
Accrued liabilities and other
Current litigation provision liability
Taxes payable
Accrued employee compensation and related benefits
Total Current Liabilities
Long-term debt obligations
Contingent consideration
Litigation provision liability
Deferred tax liabilities
Long-term operating lease liabilities (Note 13)
Long-term employee compensation and related benefits
Other long-term liabilities
Total Liabilities
Commitments and contingencies (Note 14)
Stockholders’ Equity:
257,769
164,154
37,779
28,604
549,443
181,354
915,794
607,546
54,372
27,256
68,676
7,356
47,204
256,135
153,535
46,852
29,571
533,297
191,400
956,815
770,439
—
24,823
68,146
4,781
$
$
2,411,797
$
2,549,701
77,396
$
85,892
120,100
146,026
12,719
70,420
512,553
260,330
114,396
24,378
32,219
46,027
22,797
15,380
28,794
76,735
124,285
161,851
22,530
82,551
496,746
139,538
161,381
132,210
68,189
—
25,264
22,635
1,028,080
1,045,963
Ordinary Shares, £1.00 par value: unlimited shares authorized; 49,411,016 shares issued
and 48,443,830 shares outstanding at December 31, 2019; 49,323,418 shares issued and
48,205,783 shares outstanding at December 31, 2018
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Treasury stock at cost, 967,186 and 1,117,635 shares at December 31, 2019 and 2018
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
76,257
1,734,870
(19,392)
(406,755)
(1,263)
1,383,717
$
2,411,797
$
76,144
1,705,111
(24,476)
(251,579)
(1,462)
1,503,738
2,549,701
See accompanying notes to the consolidated financial statements
F-9
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F
LIVANOVA PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
2019
2018
2017
$
(155,176) $
(189,399) $
(25,089)
Operating Activities:
Net loss
Non-cash items included in net loss:
Impairment of intangible assets
Impairment of goodwill
Amortization
Stock-based compensation
Depreciation
Remeasurement of contingent consideration to fair value
Deferred tax benefit
Amortization of operating lease assets
Impairment of property, plant and equipment
Amortization of income taxes payable on inter-company transfers of property
Losses from equity method investments
Gain on acquisitions
Impairment of discontinued operations
Impairment of investments
Other
Changes in operating assets and liabilities:
Accounts receivable, net
Inventories, net
Other current and non-current assets
Accounts payable and accrued current and non-current liabilities
Taxes payable
Litigation provision liability, net
Restructuring reserve
Net cash (used in) provided by operating activities
Investing Activities:
Purchases of property, plant and equipment
Acquisitions, net of cash acquired
Purchases of intangible assets
Purchases of investments
Proceeds from asset sales
Proceeds from the sale of CRM business franchise, net of cash disposed
Proceeds from sale of investment
Loans to investees
Other
Net cash used in investing activities
Financing Activities:
Proceeds from long-term debt obligations
Repayment of long-term debt obligations
Payment of contingent consideration
Shares repurchased from employees for minimum tax withholding
Proceeds from share issuances under ESPP
Debt issuance costs
Change in short-term borrowing, net
Proceeds from exercise of stock options
Proceeds from short-term borrowing (maturities greater than 90 days)
Repayment of short-term borrowing (maturities greater than 90 days)
Share repurchases under share repurchase program
Payment of deferred consideration - acquisition of Caisson Interventional, LLC
Other
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
139,295
42,417
40,375
32,553
30,317
(29,406)
(26,277)
12,297
3,222
2,575
—
—
—
—
5,412
(5,321)
(10,608)
(2,103)
(31,830)
(8,442)
(123,695)
(6,747)
(91,142)
(24,691)
(10,750)
(3,289)
(2,500)
1,261
—
—
—
(1,321)
(41,290)
197,160
(24,210)
(18,955)
(7,064)
4,468
(3,795)
(1,188)
372
—
—
—
—
(207)
146,581
(216)
13,933
47,204
61,137
$
$
—
—
37,194
26,923
32,746
(4,311)
(95,050)
—
567
13,370
1,855
(11,484)
—
—
2,791
21,181
(10,647)
(12,989)
4,526
2,651
294,061
6,504
120,489
(37,188)
(279,691)
(809)
(3,770)
14,220
186,682
—
—
—
(120,556)
103,570
(23,827)
(651)
(11,611)
—
—
(30,745)
4,178
240,000
(260,000)
(50,000)
(12,994)
(268)
(42,348)
(3,996)
(46,411)
93,615
47,204
$
—
—
45,881
19,062
37,054
56
(9,272)
—
5,979
31,784
21,606
(39,428)
93,574
8,565
5,240
(48,934)
7,187
(6,180)
7,522
(48,711)
—
(14,557)
91,339
(32,933)
(14,194)
(1,174)
(6,255)
5,935
—
3,192
(7,426)
—
(52,855)
2,048
(22,755)
(1,097)
(4,083)
—
—
12,396
4,973
20,000
—
—
—
(188)
11,294
4,048
53,826
39,789
93,615
See accompanying notes to the consolidated financial statements
F-11
Supplementary Disclosures of Cash Flow Information:
Cash paid for interest
Cash paid for income taxes
Year Ended December 31,
2019
2018
2017
$
$
15,828
2,011
$
9,278
26,393
7,510
38,974
See accompanying notes to the consolidated financial statements
F-12
LIVANOVA PLC AND SUBSIDIARIES’
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Note 1. Nature of Operations
Description of the Business
LivaNova PLC, headquartered in London, (collectively with its subsidiaries, the “Company,” “LivaNova,” “we” or “our”) 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 cardiovascular disease 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. We are a public limited company organized under the laws of England
and Wales, and headquartered in London, England.
Business Franchises
LivaNova is comprised of two principal business franchises, which are also our reportable segments: Cardiovascular and
Neuromodulation, corresponding to our primary therapeutic areas. Other corporate activities include corporate shared service
expenses for finance, legal, human resources, information technology and New Ventures.
Note 2. Basis of Presentation, Use of Accounting Estimates and Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements of LivaNova 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.
Consolidation
The accompanying consolidated financial statements for LivaNova include LivaNova’s wholly owned subsidiaries and the
LivaNova PLC Employee Benefit Trust (“the Trust”). All intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the amounts reported in such financial statements and accompanying notes. These
estimates are based on management’s best knowledge of current events and actions we may undertake in the future. Estimates
are used in accounting for, among other items, valuation and amortization of intangible assets, goodwill, measurement
of deferred tax assets and liabilities, uncertain income tax positions, 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
We have reclassified certain prior period amounts for comparative purposes. These reclassifications did not have a material
effect on our financial condition, results of operations or cash flows.
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less, consisting of demand deposit
accounts and money market mutual funds, to be cash equivalents. Cash equivalents are carried on the consolidated balance
sheet at cost, which approximated their fair value.
Accounts Receivable
Our accounts receivable consisted of trade receivables from direct customers and distributors. We maintain an allowance for
doubtful accounts for potential credit losses based on our estimates of the ability of customers to make required payments,
historical credit experience, existing economic conditions and expected future trends. We write off uncollectible accounts
against the allowance when all reasonable collection efforts have been exhausted.
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Inventories
We state our inventories at the lower of cost, using the first-in first-out (“FIFO”) method, or net realizable value. Our
calculation of cost includes the acquisition cost of raw materials and components, direct labor and overhead, including
depreciation of manufacturing related assets. We reduce 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
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 compute 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 an impairment for any excess of carrying value over the fair value less cost to sell.
Goodwill
We allocate the amounts we pay for an acquisition to the assets we acquire and liabilities we assume 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 base the
fair value of identifiable intangible assets acquired in a business combination, including 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 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 in selling, general and administrative on the consolidated statements of income (loss). We recognize
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 expected to
generate future economic benefits and are recorded at their respective fair values as of their acquisition date. Finite-lived
intangible assets consist primarily of developed technology and technical capabilities, including patents, related know-how and
licensed patent rights, trade names and customer relationships. Customer relationships consist of relationships with hospitals
and surgeons in the countries where we operate. Indefinite-lived intangible assets other than goodwill are composed of IPR&D
assets acquired in acquisitions. We estimate the useful lives of our intangible assets, which requires significant management
judgment. We amortize our finite-lived intangible assets over their useful lives using the straight-line method.
Amortization expense is disclosed separately on our consolidated statements of income (loss). We evaluate our intangible
assets each reporting period to determine whether events and circumstances indicate either a different useful life or impairment.
If we change our estimate of the useful life of an asset, we amortize the carrying amount over the revised remaining useful life.
Impairments of Long-Lived Assets and Goodwill
Long-lived Assets Impairment
We evaluate the carrying value of our 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 or disposal of a long-lived asset or asset group, (ii) adverse changes in
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market or competitive conditions, (iii) an adverse change in legal factors or business climate in the markets in which we operate
and (iv) operating or cash flow losses.
For PP&E and intangible assets used in our 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) is not recoverable, the amount of impairment loss is measured as the difference between the carrying value of the asset
(asset group) 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 cash flows generated upon disposition. We
measure fair value as the price that would be received if we 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.
We conduct impairment testing of our indefinite-lived intangible assets on October 1st each year. We test indefinite-lived
intangible assets for impairment between annual tests if an event occurs or circumstances change that would indicate the
carrying amount may be impaired. An impairment loss is recognized when the asset's carrying value exceeds its fair value.
Goodwill Impairment
We conduct impairment testing of our goodwill on October 1st each year. We test 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. 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. Our operating segments are deemed to be our reporting units for purposes of goodwill impairment testing.
If we determine 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 comparing the fair value of the reporting unit to its carrying amount, including
goodwill. Fair value refers to the price that would be received if we were to sell the unit as a whole in an orderly transaction. If
the carrying amount of our 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. An impairment loss is recognized when
the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit, up to and including
the carrying amount of the goodwill. Fair value is estimated using a discounted cash flow model. Estimating fair value requires
various assumptions, including revenue and gross margin growth rates and discount rates.
If the aggregate fair value of our reporting units exceeds our market capitalization, we evaluate the reasonableness of the
implied control premium which includes a comparison to implied control premiums from recent market transactions within our
industry or other relevant benchmark data.
Goodwill impairment evaluations are highly subjective. In most instances, they involve expectations of future cash flows that
reflect our judgments and assumptions regarding future industry conditions and operations. The estimates, judgments and
assumptions used in the application of our 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 likely result in materially
different asset carrying values and operating results.
Quantitative factors used to determine the fair value of the reporting units reflect our best estimates, and we believe they are
reasonable. Future declines in the reporting units’ operating performance or our anticipated business outlook may reduce the
estimated fair value of our reporting units and result in an impairment. Factors that could have a negative impact on the fair
value of the reporting units include, but are not limited to:
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•
•
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decreases in revenue as a result of the inability of our sales force to effectively market and promote our products;
increased competition, patent expirations or new technologies or treatments;
declines in anticipated growth rates;
the outcome of litigation, legal proceedings, investigations or other claims resulting in significant cash outflows; and
increases in the market-participant risk-adjusted Weighted Average Cost of Capital (“WACC”).
Derivatives and Risk Management
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 (“OCI”) until the hedged item is
recognized in earnings. The changes in the fair value of the derivative are intended to offset the change in fair value of the
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hedged asset, liability or probable commitment. We evaluate hedge effectiveness at inception. Cash flows from derivative
contracts are reported as operating activities on 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. Forward currency exchange rate 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 derivative
contracts for speculative purposes. All derivative instruments are recorded at fair value on the consolidated balance sheets, as
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 gain or loss on the derivative instrument is reported as a component
of accumulated other comprehensive income (“AOCI”) and reclassified into earnings to offset exchange differences originated
by the hedged item or the current earnings effect of the hedged item. 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 increased 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 on the consolidated balance sheets as 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 each contract. The gain or loss on these derivatives is reported as a component of AOCI.
Fair Value Measurements
We follow 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. Unobservable inputs are inputs that reflect our
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;
• 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; and
• Level 3 - Inputs are unobservable for the asset or liability.
Financial assets and liabilities that are classified as Level 2 include derivative instruments, primarily forward and option currency
contracts and interest rate swaps contracts, which are valued using standard calculations and models that use readily observable
market data as their basis.
Financial liabilities that are classified as Level 3 include contingent consideration arrangements resulting from acquisitions that
involve potential future payment of consideration that is contingent upon the achievement of performance milestones and sales-
based earn-outs. Contingent consideration is recognized at fair value at the date of acquisition 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
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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.
Investments in Equity Securities
Our investments in equity securities, and related loans, are investments in affiliates that are in varied stages of development
and not publicly traded. Our equity investments are reported in investments, and related loans in other assets, on the
consolidated balance sheets.
We elect 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.
Our investments in affiliates in which we have significant influence but not control are accounted for using the equity
method. Our share of net income or loss is reflected as one line item on our consolidated statements of income (loss) under
losses from losses from equity-method investments and will increase or decrease, as applicable, the carrying value of our equity
method investments reported under investments on the consolidated balance sheets. 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 on the consolidated statements of income (loss) in the period
the determination is made and reported as losses from equity-method investments.
Warranty Obligation
We offer a warranty on various products. We estimate the costs that may be incurred under warranties and record 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 net costs to repair or
otherwise satisfy the claim. We include the warranty obligation in accrued liabilities and other on the consolidated balance
sheets. Warranty expense is recorded to cost of goods sold on our consolidated statements of income (loss).
Retirement Benefit Plan Assumptions
We sponsor various retirement benefit plans, including defined benefit pension plans (pension benefits), defined contribution
savings plans and termination indemnity plans, covering substantially all U.S. employees and employees outside the U.S.
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
Refer to “Note 3. Revenue Recognition.”
Research and Development
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 improvements to an existing product or manufacturing process.
R&D costs also include regulatory and clinical study expenses, including post-market clinical studies.
Leases
On January 1, 2019, we adopted ASC Update (“ASU”) No 2016-02, Leases, including subsequent related accounting updates
(collectively referred to as “Topic 842”), which supersedes the previous accounting model for leases. We adopted the standard
using the modified retrospective approach with an effective date as of January 1, 2019. Prior year financial statements were not
recast under the new standard. In addition, we elected the package of practical expedients permitted under the transition
guidance within the new standard, which among other things, allowed us to carry forward our historical assessment of whether
contracts are or contain leases and lease classification. We also elected the practical expedient to account for lease and non-
lease components together as a single combined lease component, which is applicable to all asset classes. We did not, however,
elect the practical expedient related to using hindsight in determining the lease term as this was not relevant following our
election of the modified retrospective approach.
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In addition, we elect certain practical expedients on an ongoing basis, including the practical expedient for short-term leases
pursuant to which a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a
lease liability and operating lease asset for leases with a term of 12 months or less and that do not include an option to purchase
the underlying asset that the lessee is reasonably certain to exercise. We have applied this accounting policy to all asset classes
in our portfolio and will recognize the lease payments for such short-term leases within profit and loss on a straight-line basis
over the lease term.
Furthermore, from a lessor perspective, certain of our agreements that allow the customer to use, rather than purchase, our
medical devices meet the criteria of being a lease in accordance with the new standard. While the amount of revenue and
expenses recognized over the contract term will not be impacted, the timing of revenue and expense recognition will be
impacted depending upon lease classification. We enacted appropriate changes to our business processes, systems and internal
controls to support identification, recognition and disclosure of leases under the new standard.
We determine if an arrangement is or contains a lease at inception. Operating lease assets and operating lease liabilities are
recognized based on the present value of the future minimum lease payments over the lease term at the latter of our lease
standard effective date for adoption or the lease commencement date. Variable lease payments, such as common area rent
maintenance charges and rent escalations not known upon lease commencement, are not included in determination of the
minimum lease payments and will be expensed in the period in which the obligation for those payments is incurred. As most of
our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at
commencement in determining the present value of future payments. The incremental borrowing rate represents an estimate of
the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized
basis over the term of a lease within a particular currency environment. We used the incremental borrowing rate available
nearest to our adoption date for leases that commenced prior to that date. The operating lease asset also includes any lease
payments made in advance and excludes lease incentives. Our lease terms may include options to extend or terminate the lease
when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a
straight-line basis over the lease term.
For additional information refer to “Note 13. Leases.”
Prior to the adoption of ASU No. 2016-02, Leases (Topic 842) and subsequent amendments on January 1, 2019, we
accounted for leases that transfer substantially all benefits and risks incidental to the ownership of property as an acquisition of
an asset and the incurrence of an obligation, and we accounted for all other leases as operating leases. Certain of our leases
provide for tenant improvement allowances that were recorded as deferred rent and amortized using the straight-line method
over the life of the lease as a reduction to rent expense. In addition, scheduled rent increases and rent holidays were recognized
on a straight-line basis over the term of the lease.
Stock-Based Compensation
Stock-Based Incentive Awards
We may grant stock-based incentive awards to directors, officers, key employees and consultants. We measure 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 recognize equity-based compensation expense ratably over the period that an employee is required to provide
service in exchange for the entire award (all vesting periods). We issue new shares upon stock option exercises, otherwise
issuance of stock for vesting of restricted stock units or exercises of stock appreciation rights are issued from treasury shares.
We have the right to elect to pay the cash value of vested restricted stock units in lieu of the issuance of new shares.
Stock Appreciation Rights (“SARs”)
A SAR confers upon an employee 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 an award’s grant date to the exercise date. SARs may be exercised at the
employee’s discretion during the exercise period and do not give the employee an ownership right in the underlying stock.
SARs do not involve payment of an exercise price. We use the Black-Scholes option pricing methodology to calculate the grant
date fair market value of SARs and compensation is expensed ratably over the service period. We determine the expected
volatility of the awards based on historical volatility. Calculation of compensation for stock awards requires estimation of
volatility, employee turnover and forfeiture rates.
Restricted Stock Units (“RSUs”)
We may grant RSUs at no purchase cost to the grantee. The grantees of unvested RSUs have no voting rights or rights to
dividends. Sale or transfer of the stock and stock units is restricted until they are vested. The fair market value of service-based
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RSUs is determined using the market closing price on the grant date, and compensation is expensed ratably over the service
period. Calculation of compensation for stock awards requires estimation of employee turnover and forfeiture rates.
Income Taxes
We are a UK corporation, and we operate through our various subsidiaries in a number of countries throughout the world.
Our provision for income taxes is based on the tax laws and rates applicable in the jurisdictions in which we operate and earn
income. We use significant judgment and estimates in accounting for our income taxes. We recognize deferred tax assets and
liabilities for the anticipated future tax effects of temporary differences between the financial statements basis and the tax basis
of our assets and liabilities, which are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
We periodically assess the recoverability of our deferred tax assets by considering whether it is more-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 establish a valuation allowance. We periodically review the adequacy and necessity of the valuation
allowance by considering significant positive and negative evidence relative to our ability to recover deferred tax assets and to
determine the timing and amount of valuation allowance that should be released. This evidence includes: profitability in the
most recent quarters; internal forecasts for the current and next two future years; size of deferred tax asset 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 our net operating losses due to ownership changes, pursuant to
IRC Section 382; and the implementation of prudent and feasible tax planning strategies, if any.
We file federal and local tax returns in many jurisdictions throughout the world and are subject to income tax examinations
for our fiscal year 2001 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 and as a result, we may
establish reserves for uncertain tax positions, which require a significant degree of management judgment. We regularly assess
the likely outcomes of our tax positions in order to determine the appropriateness of our reserves; however, the actual outcome
of an audit can be significantly different than our expectations, which could have a material impact on our tax provision. Our
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. We recognize interest and penalties associated with
unrecognized tax benefits and record interest in interest expense, and penalties in selling, general and administrative expense,
on our consolidated statements of income (loss).
Foreign Currency
Our functional currency is the U.S. dollar; however, a portion of the revenues earned and expenses incurred by certain of our
subsidiaries are denominated in currencies other than the U.S. dollar. We determine the functional currency of our subsidiaries
that exist and operate in different economic and currency environments based on the primary economic environment in which
the subsidiary operates, that is, the currency of the environment in which an entity primarily generates and expends cash. Our
significant foreign subsidiaries are located in Europe and the U.S. The functional currency of our significant European
subsidiaries is the Euro, and the functional currency of our significant U.S. subsidiaries is the U.S. dollar.
Assets and liabilities of 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 AOCI on the consolidated balance
sheets. Gains and losses arising from transactions denominated in a currency different from an entity’s functional currency are
included in foreign exchange and other (losses) gains on our 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.
Contingencies
We are subject to product liability claims, 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 on our consolidated statements of income (loss). Contingent liabilities are recorded when we determine
that a loss is both probable and reasonably estimable. Due to the fact that legal proceedings and other contingencies are
inherently unpredictable, our assessments involve significant judgment regarding future events.
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Note 3. Revenue Recognition
We generate our revenue through contracts with customers that primarily consist of hospitals, healthcare institutions,
distributors and other organizations. Revenue is measured based on consideration specified in a contract with a customer, and
excludes amounts collected on behalf of third parties. We measure the consideration based upon the estimated amount to be
received. The amount of consideration we ultimately receive varies depending upon the return terms, sales rebates, discounts,
and other incentives that we 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.
We have historically experienced a low rate of product returns, and the total dollar value of product returns has not been
significant to our consolidated financial statements.
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 contracts 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, we exclude sales tax from revenue. Typically, our contracts do not have a significant financing
component.
We incur incremental commission fees paid to the sales force associated with the sale of products. We apply the practical
expedient within ASC 606-10-50-22 and have elected to recognize the incremental costs of obtaining a contract as an expense
when incurred if the amortization period of the asset the 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 principal
activities (separated by reportable segments) from which we generate our revenue. For more detailed information about our
reportable segments including disaggregated revenue results by major product line and primary geographic markets, see “Note
20. Geographic and Segment Information.”
Cardiovascular Products and Services
Our Cardiovascular segment has three primary product lines: cardiopulmonary products, heart valves and advanced
circulatory support.
Cardiopulmonary products include oxygenators, heart-lung machines, autotransfusion systems, perfusion tubing systems,
cannulae and other related accessories. Heart valves include mechanical heart valves, tissue heart valves, related repair products
and minimally invasive surgical instruments. Advanced circulatory support includes temporary life support product kits that can
include a combination of pumps, oxygenators, and cannulae.
Cardiopulmonary products may include performance obligations associated with assembly and installation of equipment.
Accordingly, we allocate a portion of the sales prices to installation obligations and recognize 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.
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 Cardiovascular revenue and have
been presented with the related equipment and accessories revenue.
Heart valve revenue is recognized when control passes to the customer, usually at the point of surgery.
Advanced circulatory support revenue is recognized when control passes to the customer, usually at the point of shipment.
Neuromodulation Products
Neuromodulation segment products are comprised of Neuromodulation therapy systems for the treatment of drug-resistant
epilepsy, DTD and obstructive sleep apnea. Our 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. Our
Neuromodulation product line also includes 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. We recognize revenue
for Neuromodulation product sales when control passes to the customer.
Contract Balances
Due to the nature of our products and services, revenue producing activities may result in contract assets and contract
liabilities which are insignificant to our financial position and results of operations. These activities relate primarily to
Cardiovascular technical services contracts for short-term and multi-year service agreements. Contract assets are primarily
F-20
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
the consolidated balance sheets and were insignificant at December 31, 2019 and 2018. As of December 31, 2019 and
December 31, 2018, contract liabilities of $8.6 million and $4.8 million, respectively, were included within accrued liabilities
and other and other long-term liabilities on the consolidated balance sheets.
Note 4. Business Combinations
ImThera
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. ImThera has a commercial presence in
the European market, and an FDA pivotal study is ongoing in the U.S.
On January 16, 2018, we acquired the remaining 86% outstanding interest in ImThera for cash consideration of up to $225
million. Cash in the amount of $78.3 million was paid at closing with the balance to be paid based on achievement of a certain
regulatory milestone and a sales-based earnout.
The following table presents the acquisition date fair value of the consideration transferred and the fair value of our interest
in ImThera prior to the acquisition (in thousands):
Cash
Contingent consideration
Fair value of our interest in ImThera prior to the acquisition (1)
Fair value of consideration transferred
$
$
78,332
112,744
25,580
216,656
(1) The fair value of our previously held interest in ImThera was determined based on the fair value of total consideration
transferred and application of a discount for lack of control. As a result, we recognized a gain of $11.5 million for the fair
value in excess of our carrying value of $14.1 million. The gain is included in Gain on acquisitions on our consolidated
statement of income (loss) for the year ended December 31, 2018.
The following table presents the purchase price allocation at fair value for the ImThera acquisition including certain
measurement period adjustments (in thousands):
In-process research and development (2)
Developed technology
Goodwill
Deferred income tax liabilities, net (3)
Other assets and liabilities, net
Net assets acquired
Measurement
Period
Adjustments (1)
10,677
$
(5,661)
(4,467)
1,278
Initial Purchase
Price Allocation
$
151,605
5,661
87,063
27,980
836
$
217,185
$
200
(529) $
Adjusted
Purchase Price
Allocation
$
162,282
—
82,596
29,258
1,036
216,656
(1) During the second quarter of 2018, measurement period adjustments were recorded based upon new information obtained
about facts and circumstances that existed as of the acquisition date.
(2) The fair value of IPR&D was determined using the income approach, which is a valuation technique that provides a fair
value estimate based on the market participant expectations of cash flows the asset would generate. The cash flows were
discounted commensurate with the level of risk associated with the asset. The discount rates were developed after assigning
a probability of success to achieving the projected cash flows based on the current stage of development, inherent
uncertainty in reaching certain regulatory milestones and risks associated with commercialization of the product. The
IPR&D amount is included in intangible assets, net on the consolidated balance sheets as of December 31, 2019 and 2018.
(3) The amounts are presented net of deferred tax assets acquired.
Goodwill arising from the ImThera acquisition, which is not deductible for tax purposes, primarily represents the synergies
anticipated between ImThera and our existing Neuromodulation business. The assets acquired, including goodwill, are
recognized in our Neuromodulation segment.
The results of the ImThera acquisition added $0.3 million in revenue and $8.8 million in operating losses during the year
ended December 31, 2018. Additionally, we recognized ImThera acquisition-related expenses of approximately $0.7 million for
legal and valuation expenses during the year ended December 31, 2018. These expenses are included within “Selling, general
F-21
and administrative” expenses on our consolidated statement of income (loss). Pro forma financial information, assuming the
ImThera acquisition had occurred as of the beginning of the calendar year prior to the year of acquisition, was not material for
disclosure purposes.
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 covered by
the purchase agreement. The sales-based earnout was valued using projected sales from our internal strategic plan. Both
arrangements are Level 3 fair value measurements and include the following significant unobservable inputs (in thousands):
ImThera Acquisition
Fair value at
January 16,
2018
Valuation Technique
Unobservable Input
Ranges
Regulatory milestone-based payment
$
50,429 Discounted cash flow
Discount rate
4.3% - 4.7%
Sales-based earnout
62,315
Monte Carlo
simulation
Probability of payment
85% - 95%
Projected payment years
2020 - 2021
Risk-adjusted discount
rate
Credit risk discount rate
Revenue volatility
11.5%
4.7% - 5.8%
29.3%
Probability of payment
85% - 95%
Projected years of
earnout
2020 - 2025
For a reconciliation of the beginning and ending balance of contingent consideration liabilities refer to “Note 10. Fair Value
$
112,744
Measurements.”
TandemLife
TandemLife is focused on the delivery of leading-edge temporary life support systems, including cardiopulmonary and
respiratory support solutions. TandemLife complements our Cardiovascular segment portfolio and expands our existing product
line of cardiopulmonary products.
On April 4, 2018, we acquired CardiacAssist, Inc., doing business as TandemLife for cash consideration of up to $254
million. Cash of $204 million was paid at closing with up to $50 million in contingent consideration based on the achievement
of regulatory milestones.
The following table presents the acquisition date fair value of the consideration transferred (in thousands):
Cash
Contingent consideration
Fair value of consideration transferred
$
$
203,671
40,190
243,861
F-22
The following table presents the purchase price allocation at fair value for the TandemLife acquisition including certain
measurement period adjustments (in thousands):
In-process research and development (2) (3)
Trade names (2)
Developed technology (2)
Goodwill
Inventory
Other assets and liabilities, net
Deferred income tax liabilities, net (4)
Net assets acquired
Initial Purchase
Price Allocation
$
110,977
$
11,539
6,387
118,917
10,296
3,632
(17,887)
243,861
$
Measurement
Period
Adjustments (1)
Adjusted
Purchase Price
Allocation
(3,474) $
—
—
(797)
(140)
242
4,169
107,503
11,539
6,387
118,120
10,156
3,874
(13,718)
243,861
$
— $
(1) During the third quarter of 2018, measurement period adjustments were recorded based upon new information regarding
future estimates of R&D expenses that existed as of the acquisition date. In addition, during the first quarter of 2019,
measurement period adjustments related to finalizing our tax attributes were recorded, which resulted in an increase of $3.3
million in deferred tax assets and a commensurate decrease to goodwill.
(2) The amounts are included in intangible assets, net on the consolidated balance sheets as of December 31, 2019 and 2018.
Trade names and developed technology are amortized over remaining useful lives of 15 and 2 years, respectively.
(3) The fair value of IPR&D was determined using the income approach, which is a valuation technique that provides a fair
value estimate based on the market participant expectations of cash flows the asset would generate. The cash flows were
discounted commensurate with the level of risk associated with the asset. The discount rates were developed after assigning
a probability of success to achieving the projected cash flows based on the current stage of development, inherent
uncertainty in reaching certain regulatory milestones and risks associated with commercialization of the product.
(4) The amounts are presented net of deferred tax assets and include deferred tax assets acquired.
Goodwill arising from the TandemLife acquisition, which is not deductible for tax purposes, primarily represents the
synergies anticipated between TandemLife and our existing Cardiovascular business. The assets acquired, including goodwill,
are recognized in our Cardiovascular segment.
The results of the TandemLife acquisition added $19.5 million in revenue and $14.0 million in operating losses during the
year ended December 31, 2018. Additionally, we recognized TandemLife acquisition-related expenses of approximately $2.1
million for legal and valuation expenses during the year ended December 31, 2018. These expenses are included within selling,
general and administrative expenses on our consolidated statement of income (loss). 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.
The TandemLife business combination involved a contingent consideration arrangement composed of potential cash
payments upon the achievement of certain regulatory milestones. The arrangement is a Level 3 fair value measurement and
includes the following significant unobservable inputs (in thousands):
TandemLife Acquisition
Fair value at
April 4, 2018
Valuation Technique
Unobservable Input
Ranges
Regulatory milestone-based payments
$
40,190 Discounted cash flow
Discount rate
4.2% - 4.8%
Probability of payments
75% - 95%
Projected payment years
2019 - 2020
For a reconciliation of the beginning and ending balance of contingent consideration liabilities refer to “Note 10. Fair Value
Measurements.”
Miami Instruments
On June 12, 2019, we acquired the minimally invasive cardiac surgery instruments business from Miami Instruments, LLC
(“Miami Instruments”) for cash consideration of up to $17.0 million. The related operations have been integrated into our
Cardiovascular business franchise as part of our Heart Valves portfolio. Cash of $10.8 million was paid at closing with up
to $6.0 million in contingent consideration based on achieving certain milestones. In connection with this acquisition, we
recognized $14.7 million in developed technology and IPR&D intangible assets and $1.5 million in goodwill.
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Note 5. Discontinued Operations
In November 2017, we concluded that the sale of CRM represented a strategic shift in our business that would have a major
effect on future operations and financial results. Accordingly, the operating results of CRM are classified as discontinued
operations on our consolidated statements of income (loss) for all the periods presented in this Annual Report on Form 10-K.
We completed the CRM Sale on April 30, 2018 to MicroPort Cardiac Rhythm B.V. and MicroPort Scientific Corporation for
total cash proceeds of $195.9 million, less cash transferred of $9.2 million, subject to a closing working capital adjustment that
could result in a negative adjustment of up to $10.0 million in addition to $14.9 million recorded within accrued liabilities and
other at December 31, 2019. In conjunction with the sale, we entered into transition services agreements to provide certain
support services generally for up to twelve months from the closing date of the sale. The 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, 2019 and December 31, 2018 we recognized income of $0.9 million
and $2.8 million, respectively, 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 on our consolidated statements of income
(loss).
The following table represents the financial results of CRM presented as net income (loss) from discontinued operations, net
of tax on our consolidated statements of income (loss) (in thousands):
Year Ended December 31,
2018
2017
2019
$
— $
77,366
$
245,171
Revenues
Costs and expenses:
Cost of sales
Selling, general and administrative expenses
Research and development
Merger and integration expenses
Restructuring expenses
Amortization of intangibles
Impairment of tangible and intangible assets
Revaluation gain on assets and liabilities held for sale
Loss on sale of CRM
Operating income (loss) from discontinued operations
Foreign exchange and other gains (losses)
Income (loss) from discontinued operations, before tax
Income tax benefit
Losses from equity method investments
(43)
(161)
(161)
—
—
—
—
—
—
365
—
365
—
—
28,028
43,382
16,592
—
651
—
—
(1,213)
214
(10,288)
102
(10,186)
(460)
(1,211)
(10,937) $
92,609
105,831
37,936
22
(1,617)
12,737
93,574
—
—
(95,921)
(381)
(96,302)
(21,635)
(4,887)
(79,554)
Net income (loss) from discontinued operations
$
365
$
Cash flows attributable to our discontinued operations are included on our consolidated statements of cash flows. For the
years ended December 31, 2018 and December 31, 2017, CRM’s capital expenditures were $1.0 million and $6.1 million,
respectively, and stock-based compensation expense was $2.0 million and $1.4 million, respectively. For the year ended
December 31, 2017, CRM’s depreciation and amortization was $18.3 million. Income tax benefit for the year ended
December 31, 2017 includes a $15.3 million tax benefit recognized on the impairment of CRM.
Note 6. Restructuring
We initiate restructuring plans to leverage economies of scale, streamline distribution and logistics and strengthen operational
and administrative effectiveness in order to reduce overall costs. Costs associated with these plans were reported as
restructuring expenses in the operating results of our consolidated statements of income (loss).
Our 2015 and 2016 Reorganization Plans (the “Prior Plans”) were initiated October 2015 and March 2016, respectively, in
conjunction with the completion of the merger of Cyberonics, Inc. and Sorin S.p.A. in October 2015. The Prior Plans include
the closure of the R&D facility in Meylan, France and consolidation of its R&D capabilities into the Clamart, France facility. In
addition, during the year ended December 31, 2016, we initiated a plan to exit the Costa Rica manufacturing operation and
F-24
transfer its operations to Houston, Texas. We completed the exit of the Costa Rica manufacturing operation in the first half of
2017 and substantially completed the Prior Plans during 2018.
Included in Prior Plans was our commitment to sell our Suzhou Industrial Park facility in Shanghai, China, which we
announced in March 2017. As a result of this exit plan we recorded an impairment of the building and equipment of $5.4
million and accrued $0.5 million of additional costs, primarily related to employee severance, during the year ended
December 31, 2017. We completed the sale of the Suzhou facility in April 2018 and received cash proceeds from the sale of
$13.3 million.
In December 2018, we initiated a reorganization plan (the “2018 Plan”) in order to reduce manufacturing and operational
costs associated with our Cardiovascular facilities in Saluggia and Mirandola, Italy and Arvada, Colorado. The 2018 Plan
resulted in a net reduction of approximately 75 personnel and was completed prior to the end of 2019.
In November 2019, we initiated a reorganization plan (the “2019 Plan”) to streamline our organizational structure in order to
address new regulatory requirements, create efficiencies, improve profitability and ensure business continuity. As a result, we
incurred restructuring expenses of $4.4 million during the year ended December 31, 2019, primarily associated with severance
costs for approximately 35 impacted employees.
Additionally, we ended our Caisson TMVR program effective December 31, 2019 after determining that it was no longer
viable to continue to invest in the program. As a result, we recognized restructuring expenses of $3.5 million during the year
ended December 31, 2019, primarily associated with severance costs for approximately 50 impacted employees.
We expect our restructuring actions will result in an incremental benefit to operating (loss) income from continuing
operations, primarily through reductions to cost of sales - exclusive of amortization, selling, general and administrative and
research and development from the 2019 Plan and to research and development from the Caisson TMVR restructuring plan.
The following table presents the accruals, inventory obsolescence and other reserves, recorded in connection with our
reorganization plans including the balances and activity related to the CRM business franchise (in thousands):
Employee
Severance and
Other
Termination Costs
Other
Total
Balance at December 31, 2016
$
21,092
$
3,056
$
Charges
Cash payments / write-downs
Balance at December 31, 2017
Charges
Cash payments
Balance at December 31, 2018
Charges
Cash payments
Balance at December 31, 2019 (1)
10,076
(27,279)
3,889
15,641
(9,335)
10,195
11,472
(17,570)
4,097
$
$
5,363
(5,794)
2,625
925
(481)
3,069
782
(2,451)
1,400
$
24,148
15,439
(33,073)
6,514
16,566
(9,816)
13,264
12,254
(20,021)
5,497
(1) Cumulatively, we have recognized a total of $111.5 million in restructuring expense, inclusive of discontinued operations.
F-25
The following table presents restructuring expense by reportable segment (in thousands):
Cardiovascular (1)
Neuromodulation
Other (2)
Restructuring expense from continuing operations
Discontinued operations
Total
$
$
2019
Year Ended December 31,
2018
2017
3,592
$
11,497
$
1,082
7,580
12,254
—
1,595
2,823
15,915
651
12,254
$
16,566
$
8,819
561
7,676
17,056
(1,617)
15,439
(1) Cardiovascular restructuring expense for the year ended December 31, 2018 included $6.5 million of 2018 Plan expenses.
Cardiovascular 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) Other restructuring expense for the year ended December 31, 2019 included $3.5 million of Caisson restructuring expenses.
Note 7. Product Remediation Liability
On December 29, 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 CDC and FDA separately released safety notifications regarding 3T Heater-Cooler devices in response to which
we issued a Field Safety Notice Update for U.S. users of our 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 canister and internal sealing upgrade on a customer-owned device. We are currently implementing the vacuum
canister and internal sealing upgrade program in as many countries as possible until all devices are upgraded. In October 2018,
after review of information provided by us, the FDA concluded that we could commence the vacuum canister and internal
sealing upgrade program in the U.S., and on February 25, 2020, LivaNova received clearance for K191402, a 510(k) for the 3T
devices that addressed issues contained in the 2015 Warning Letter along with design changes that further mitigate the potential
risk of aerosolization. Concurrent with this clearance, (1) 3T devices manufactured in accordance with K191402 will not be
subjected to the import alert and (2) LivaNova initiated a correction to distribute the updated Operating Instructions cleared
under K191402.
As a second part of the remediation plan, we continue to offer a no-charge deep disinfection service (deep cleaning service)
for 3T device users as we receive the required regulatory approvals. The deep disinfection service was rolled out in Europe in
the second half of 2015, and in April 2018, the FDA agreed to allow us to move forward with the deep cleaning service in the
U.S., thereby 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, which began in the U.S., was rolled out in Europe shortly thereafter, and
is being made available progressively on a global basis, prioritizing and allocating devices to 3T device users based on pre-
established criteria.
F-26
Changes in the carrying amount of the product remediation liability are as follows (in thousands):
Balance at December 31, 2016
Adjustments
Remediation activity
Effect of changes in foreign currency exchange rates
Balance at December 31, 2017
Adjustments
Remediation activity
Effect of changes in foreign currency exchange rates
Balance at December 31, 2018
Adjustments
Remediation activity
Effect of changes in foreign currency exchange rates
Balance at December 31, 2019
$
$
33,487
2,452
(11,283)
2,890
27,546
(200)
(12,212)
(389)
14,745
3,663
(14,909)
(248)
3,251
We recognized product remediation expenses during the years ended December 31, 2019, 2018 and 2017 of $15.8 million,
$10.7 million and $7.3 million, respectively. Product remediation expenses include internal labor costs, costs to remediate
certain inspectional observations made by the FDA at our Munich facility and costs associated with the incorporation of the
modification of the 3T device design into the next generation 3T device. These costs and related legal costs are expensed as
incurred and are not included within the product remediation liability presented above. During the fourth quarter of 2018, we
recognized a $294.1 million liability related to the litigation involving the 3T device. As of December 31, 2019, the liability
was $170.4 million. Our related legal costs are expensed as incurred. For further information, please refer to “Note 14.
Commitments and Contingencies.”
Note 8. Goodwill and Intangible Assets
Our finite-lived and indefinite-lived intangible assets as of December 31, 2019 and 2018 consisted of the following (in
thousands):
Finite-lived intangible assets:
Customer relationships
Developed technology
Trade names
Other intangible assets
Total gross finite-lived intangible assets
Accumulated amortization - Customer relationships
Accumulated amortization - Developed technology
Accumulated amortization - Trade names
Accumulated amortization - Other intangible assets
Total accumulated amortization
Net finite-lived intangible assets
Indefinite-lived intangible assets:
IPR&D
Goodwill
Total indefinite-lived intangible assets
2019
2018
$
320,023
$
293,785
25,004
975
639,787
75,156
57,362
14,811
712
148,041
491,746
115,800
915,794
1,031,594
$
$
$
$
$
$
317,292
176,476
25,260
897
519,925
57,350
39,144
11,440
337
108,271
411,654
358,785
956,815
1,315,600
During the year ended December 31, 2019, we recognized $14.7 million of developed technology and in-process R&D and
$1.5 million in goodwill related to the acquisition of Miami Instruments.
F-27
The amortization periods for our finite-lived intangible assets as of December 31, 2019, are as follows:
Customer relationships
Developed technology
Trade names
Other intangible assets
Minimum Life
in years
Maximum Life
in years
15
2
15
5
18
19
15
10
The estimated future amortization expense based on our finite-lived intangible assets at December 31, 2019, is as follows (in
thousands):
2020
2021
2022
2023
2024
Thereafter
Total
$
$
39,901
39,102
39,102
39,102
39,102
295,437
491,746
Intangible Asset Impairments
In November 2019, we announced that we would be ending our Caisson TMVR program. The announcement triggered an
evaluation of finite and indefinite lived assets for impairment. As a result, we fully impaired the IPR&D asset and goodwill of
$89.0 million and $42.4 million, respectively.
During the second quarter of 2019, we determined that there would be a delay in the estimated commercialization date of our
obstructive sleep apnea product currently under development, which was acquired in the ImThera acquisition. This delay
constituted a triggering event that required an evaluation of the IPR&D asset arising from the ImThera acquisition for
impairment. Based on the assessment performed, we determined that the IPR&D asset was impaired and as a result, recorded
an impairment of $50.3 million, which is included in our Neuromodulation segment. The carrying value of the IPR&D asset as
of December 31, 2019 is $112.0 million. The estimated fair value of IPR&D was determined using the income approach.
Estimating the fair value of the IPR&D asset requires various assumptions, including revenue growth rates, timing and
probability of commercialization and the discount rate. Future delays in commercialization or changes in management
estimates could result in further impairment. Refer to “Note 4. Business Combinations.”
Intangible Asset Reclassification
During the third quarter of 2019, upon receiving FDA approval of the LifeSPARC system, we reclassified the IPR&D asset
of $107.5 million from the acquisition of TandemLife to finite-lived developed technology intangible assets and began
amortizing the intangible asset over a useful life of 15 years.
F-28
Goodwill
The changes in the carrying amount of goodwill by reportable segment are as follows (in thousands):
December 31, 2017
Goodwill as a result of acquisitions (1)
Foreign currency adjustments
December 31, 2018
Goodwill as a result of acquisitions (1)
Measurement period adjustments (2)
Impairment
Foreign currency adjustments
December 31, 2019
Cardiovascular Neuromodulation
Other
Total
$
425,882
$
315,943
$
42,417
$
784,242
121,446
(31,469)
515,859
1,550
(3,326)
—
2,957
82,596
—
398,539
—
—
—
215
—
—
42,417
—
—
(42,417)
—
204,042
(31,469)
956,815
1,550
(3,326)
(42,417)
3,172
$
517,040
$
398,754
$
— $
915,794
(1) Goodwill recognized during the year ended December 31, 2019 was the result of the Miami Instruments acquisition.
Goodwill recognized during the year ended December 31, 2018 was the result of the ImThera and TandemLife acquisitions.
Refer to “Note 4. Business Combinations.”
(2) Refer to “Note 4. Business Combinations.”
We performed a quantitative assessment for our Cardiovascular and Neuromodulation reporting units as of October 1, 2019.
The quantitative impairment assessment was performed using management’s current estimate of future cash flows. We
concluded that the fair value of our Cardiovascular and Neuromodulation segments exceeded the carrying value of the
respective reporting units by 24% and 584%, respectively, as evidenced by the estimated fair value of our Cardiovascular and
Neuromodulation reporting units calculated for the purpose of reconciling the fair value of our reporting units to our market
capitalization. Therefore, we concluded that our Cardiovascular and Neuromodulation reporting units’ goodwill was not
impaired.
Note 9. Investments
The following table details the carrying value of our investments in equity securities of non-consolidated affiliates without
readily determinable fair values for which we do not exert significant influence over the investee. These equity investments 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 of the same issuer. These below equity investments are included in
investments on the consolidated balance sheets as of December 31, 2019 and 2018 (in thousands):
Respicardia Inc. (1)
Ceribell, Inc. (2)
ShiraTronics, Inc. (3)
Rainbow Medical Ltd. (4)
MD Start II (5)
Highlife S.A.S. (6)
Other
Equity method investments (7)
2019
2018
$
17,706
$
3,000
2,045
1,099
1,121
1,064
770
26,805
451
$
27,256
$
17,706
3,000
—
1,119
1,144
1,084
770
24,823
—
24,823
(1) Respicardia Inc. (“Respicardia”) is a privately funded U.S. company developing an implantable device designed to restore a
more natural breathing pattern during sleep in patients with central sleep apnea by transvenously stimulating the phrenic
nerve. We have a loan outstanding to Respicardia with a carrying amount of $0.6 million and $0.6 million as of
December 31, 2019 and December 31, 2018, respectively, which is included in prepaid expenses and other current assets on
the consolidated balance sheet. Refer to the paragraph below for further details regarding this investment.
(2) On September 7, 2018, we acquired 1,007,319 shares of Series B Preferred Stock of Ceribell, Inc. (“Ceribell”). Ceribell is
focused on utilizing electroencephalography to improve the diagnosis and treatment of patients at risk for seizures.
(3) ShiraTronics, Inc. (“ShiraTronics”) is a privately held early-stage medical device company located in the U.S. and Ireland
and is focused on developing neuromodulation technologies for the treatment of debilitating migraine headaches. We are
required to invest up to a total of $5 million dependent upon ShiraTronics achieving certain milestones.
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(4) Rainbow Medical Ltd. (“Rainbow Medical”) is a private Israeli venture capital company that seeds and grows companies
developing medical devices in a diverse range of medical fields. Refer to the paragraph below for further details.
(5) MD Start II is a private venture capital collaboration for the development of medical device technology in Europe.
(6) Highlife S.A.S. (“Highlife”) is a privately held clinical-stage medical device company located in France and is focused on
the development of a unique TMRV replacement system to treat patients with MR. Refer to the paragraph below for further
details. Due to an additional investment by a third party during the year ended December 31, 2018, our equity interest in
Highlife decreased to 7.8% from 24.6%. We determined that we no longer had significant influence over Highlife and, as a
result, we no longer accounted for Highlife under the equity method.
(7) During 2019 we invested $0.5 million in equity securities that we account for under the equity method of accounting. We
are required to fund up to a total of approximately €5.0 million (approximately $5.6 million as of December 31, 2019) based
on cash calls.
Respicardia Impairment
We recognized an impairment of our investment in Respicardia during the year ended December 31, 2017 based on the terms
of an additional round of financing with a new strategic investor that indicated 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. The estimated
fair value using the income approach was below the carrying value by $5.5 million. The impairment was included in
impairment of investments on our consolidated statement of income (loss).
Rainbow Medical Impairment
We recognized an impairment of our 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 investment might not be
recoverable and that the decrease in value of our 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 $3.0
million. This impairment was included in impairment of investments on our consolidated statement of income (loss).
Highlife Impairment
We recognized an impairment of our investment in, and notes receivable from, 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 on our consolidated statement of income (loss).
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 (losses) gains on our consolidated statement of income (loss).
Note 10. Fair Value Measurements
We review the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may
result in a reclassification of levels for certain securities within the fair value hierarchy. There were no transfers between Level
1, Level 2, or Level 3 during the years ended December 31, 2019, 2018 or 2017.
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Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis
(in thousands):
Assets:
Fair Value as of
December 31,
2019
Fair Value Measurements Using Inputs
Considered as:
Level 2
Level 1
Level 3
Derivative assets - designated as cash flow hedges (foreign
currency exchange rate "FX")
Derivative assets - freestanding instruments (FX)
Total assets
Liabilities:
$
$
535
26
561
$
$
— $
—
— $
535
26
561
$
$
Derivative liabilities - designated as cash flow hedges (FX)
$
169
$
— $
169
$
Derivative liabilities - designated as cash flow hedges
(interest rate swaps)
Derivative liabilities - freestanding instruments (FX)
Contingent consideration (1)
374
3,137
137,349
—
—
—
374
3,137
—
—
—
—
—
—
—
137,349
Total liabilities
$
141,029
$
— $
3,680
$
137,349
Fair Value as of
December 31,
2018
Fair Value Measurements Using Inputs
Considered as:
Level 2
Level 1
Level 3
Assets:
Derivative assets - freestanding instruments (foreign
currency exchange rate "FX")
Total assets
Liabilities:
$
$
236
236
$
$
— $
— $
236
236
$
$
Derivative liabilities - designated as cash flow hedges (FX)
$
1,354
$
— $
1,354
$
Derivative liabilities - designated as cash flow hedges
(interest rate swaps)
Derivative liabilities - freestanding instruments (FX)
Contingent consideration
Total liabilities
865
3,173
179,911
—
—
—
865
3,173
—
$
185,303
$
— $
5,392
$
179,911
—
—
—
—
—
179,911
(1) The contingent consideration liability at December 31, 2019 represents contingent payments related to four completed
acquisitions, including: Inversiones Drilltex SAS (“Drilltex”), ImThera, TandemLife and Miami Instruments. See the table
below for additional information.
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Our recurring fair value measurements, using significant unobservable inputs (Level 3), relate solely to our contingent
consideration liability. The following table provides a reconciliation of the beginning and ending balance of the contingent
consideration liability (in thousands):
Balance at December 31, 2017
Purchase price - ImThera contingent consideration (1)
Purchase price - TandemLife contingent consideration (1)
Payments (2)
Changes in fair value (3)
Effect of changes in foreign currency exchange rates
Balance at December 31, 2018
Additions (1)
Payments (2)
Changes in fair value (3) (4) (5)
Effect of changes in foreign currency exchange rates
Balance at December 31, 2019
Less current portion of contingent consideration liability at December 31, 2019
Long-term portion of contingent consideration liability at December 31, 2019
$
$
33,973
112,744
40,190
(2,661)
(4,311)
(24)
179,911
7,184
(20,204)
(29,406)
(136)
137,349
22,953
114,396
(1) See “Note 4. Business Combinations” for additional discussion.
(2) Payments during the year ended December 31, 2018 are for sales-based earnouts for Cellplex and for Drilltex. In July 2019,
we achieved a regulatory milestone upon receiving FDA approval of the LifeSPARC system, triggering the payment of
$19.0 million during the third quarter of 2019 to settle the related contingent consideration liability in connection with our
TandemLife acquisition.
(3) During the year ended December 31, 2019, the change in fair value resulted in a decrease of $13.2 million and $16.2 million
recorded to cost of sales - exclusive of amortization and research and development, respectively. During the year ended
December 31, 2018, the change in fair value resulted in a decrease of $3.6 million and $0.7 million recorded to cost of sales
- exclusive of amortization and research and development, respectively.
(4) In November 2019, we announced that we would be ending our Caisson TMVR program effective December 31, 2019. As
such, we released the contingent consideration provision associated with the acquisition of Caisson. At December 31, 2018,
the fair value of the Caisson contingent consideration provision was $27.9 million.
(5) The change in fair value during the year 2019 reflects a delay in the timing of anticipated regulatory approval and
commercialization for ImThera. While the probability of payment remains unchanged from the time of acquisition, the
projected years of payment for the regulatory milestone-based payment and the sales-based earnout have been updated to
occur between 2023-2024 and 2024-2028, respectively. See “Note 8. Goodwill and Intangible Assets” for additional
discussion.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Our 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 of the same issuer. Our investments in non-financial assets such 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 classify the measurement input for these assets as Level 3 inputs within the fair value hierarchy.
Other
The carrying values of our cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities
approximate their fair values due to the short-term nature of these items.
The carrying value of our long-term debt including the current portion, as of December 31, 2019, was $333.5 million, which
we believe approximates fair value.
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Note 11. Financing Arrangements
The outstanding principal amount of our long-term debt as of December 31, 2019 and 2018, was as follows (in thousands,
except interest rates):
2019 Debt Facility (1)
2017 European Investment Bank (2)
2014 European Investment Bank (3)
Mediocredito Italiano
Bank of America Merrill Lynch Banco
Múltiplo S.A.
Bank of America, U.S.
Banca del Mezzogiorno
Other
Total long-term facilities
Less current portion of long-term debt
2019
2018
$
184,275
$
103,570
28,053
6,222
8,422
2,004
—
965
333,511
73,181
—
103,570
47,606
Maturity
March 2022
June 2026
June 2021
Interest Rate
1.40% - 3.56%
3.31% - 3.37%
1.01%
7,623 December 2023
0.50% - 2.93%
—
July 2021
— January 2021
—
—
2,718
1,324
162,841
23,303
139,538
8.08%
3.76%
—
—
Total long-term debt
$
260,330
$
(1) The facility agreement with Bank of America Merrill Lynch International DAC, Barclays Bank PLC, BNP Paribas (London
Branch) and Intesa Sanpaolo S.P.A. provides a multi-currency term loan facility in an aggregate amount of $350 million and
terminates on March 26, 2022 (the “2019 Debt Facility”). Principal repayments of 20% of the outstanding borrowings under
the 2019 Debt Facility are due in September 2020, March 2021 and September 2021, with the remainder of the outstanding
borrowings due in March 2022.
(2) The 2017 European Investment Bank (“2017 EIB”) loan was obtained to support certain product development projects. The
interest rate for the 2017 EIB loan is reset by the lender each quarter based on LIBOR. Interest payments are paid quarterly
and principal payments are paid semi-annually.
(3) The 2014 European Investment Bank (“2014 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.
Contractual annual principal maturities of our long-term debt facilities as of December 31, 2019, are as follows (in
thousands):
2020
2021
2022
2023
2024
Thereafter
Total payments
Less: Debt issuance costs
Total long-term facilities
$
$
73,497
111,370
91,930
17,614
15,996
24,261
334,668
1,157
333,511
In connection with the CRM sale, on May 1, 2018, the borrowing capacity of the 2017 EIB loan decreased from €100.0
million (approximately $114.3 million as of December 31, 2018) to €90.0 million (approximately $103 million as of
December 31, 2018).
On March 26, 2019, we entered into the 2019 Debt Facility. Borrowings under the facility bear interest at a rate of LIBOR
plus 1.6% for borrowings in U.S. dollars and EURIBOR plus 1.4% for Euro-denominated borrowings. Proceeds from the
facility are used for general corporate and working capital purposes, excluding acquisitions, dividends and share buybacks.
Available borrowings under the 2019 Debt Facility commenced on March 26, 2019 and extend through March 26, 2020.
Principal repayments of 20% of the outstanding borrowings under the 2019 Debt Facility are due in September 2020, March
2021 and September 2021, with the remainder of the outstanding borrowings due in March 2022. The 2019 Debt Facility
contains financial covenants that require LivaNova to maintain a maximum consolidated net debt to EBITDA ratio, a minimum
interest coverage ratio and a maximum consolidated net debt to net worth ratio. LivaNova must also maintain a minimum
F-33
amount of consolidated net worth. The 2019 Debt Facility also contains customary representations and warranties, covenants,
and events of default. At December 31, 2019, LivaNova was in compliance with all covenants.
Revolving Credit
The outstanding principal amount of our short-term unsecured revolving credit agreements and other agreements with various
banks was $4.2 million and $5.5 million at December 31, 2019 and December 31, 2018, respectively, with interest rates ranging
from 2.72% to 8.29% and loan terms ranging from 10 days to 220 days.
On April 10, 2018, we entered into an amendment and restatement agreement with Barclays Bank PLC amending the revolving
facility agreement originally dated October 21, 2016 (the “Amendment”). The Amendment increased our borrowing capacity
under the facility from $40.0 million to $70.0 million and extended the term of the facility one year. The facility terminated on
October 20, 2019.
On July 25, 2019, we entered into a €40.0 million (approximately $44.9 million as of December 31, 2019) credit facility
agreement with Banca Nazionale del Lavoro SpA (“2019 Revolving Credit Facility”) for working capital needs. The 2019
Revolving Credit Facility has a term of 2 years and borrowings bear interest at Euribor plus 0.8%. There were no borrowings
under the 2019 Revolving Credit Facility during 2019.
Bridge Facility Agreement
In connection with the April 2018 acquisition of TandemLife, we entered into a bridge facility agreement (the “Bridge
Facility Agreement”) providing a term loan facility with the aggregate principal amount of $190.0 million. On April 3, 2018,
we borrowed $190.0 million under the Bridge Facility Agreement to facilitate the initial payment for our acquisition of
TandemLife. We used the proceeds from the sale of the CRM business franchise to repay the borrowings under the Bridge
Facility Agreement in full during 2018.
Note 12. Derivatives and Risk Management
Due to the global nature of our operations, we are exposed to foreign currency exchange rate fluctuations. In addition, due to
certain loans with floating interest rates, we are also subject to the impact of changes in interest rates on our interest payments.
We enter into foreign currency exchange rate (“FX”) derivative contracts and interest rate swap contracts to reduce the impact
of foreign currency exchange 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 on the consolidated
balance sheets. We do not enter into derivative contracts for speculative purposes. At inception of the contract, the derivative is
designated as either a freestanding derivative or a hedge. Derivatives that are not designated as hedging instruments are referred
to as freestanding derivatives with changes in fair value included in earnings.
If the derivative qualifies for hedge accounting, changes in the fair value of the derivative will be recorded in accumulated
other comprehensive income (“AOCI”) until the hedged item is recognized in earnings upon settlement/termination. FX
derivative gains and losses in AOCI are reclassified to our consolidated statements of income (loss) as shown in the tables
below and interest rate swap gains and losses in AOCI are reclassified to interest expense on our consolidated statements of
income (loss). We evaluate hedge effectiveness at inception. Cash flows from derivative contracts are reported as operating
activities on our consolidated statements of cash flows.
Freestanding FX Derivative Contracts
The gross notional amount of FX derivative contracts, not designated as hedging instruments, outstanding at December 31,
2019 and December 31, 2018 was $338.0 million and $320.2 million, respectively. These derivative contracts are designed to
offset the FX effects in earnings of various intercompany loans, our 2014 EIB loan, the Euro-denominated borrowings under
the 2019 Debt Facility and trade receivables. We recorded net gains (losses) for these freestanding derivatives of $3.1 million,
$(11.2) million and $(11.7) million for the years ended December 31, 2019, 2018 and 2017, respectively. These gains and
(losses) are included in foreign exchange and other gains (losses) on our consolidated statements of income (loss).
Cash Flow Hedges
Foreign Currency Risk
We utilize FX derivative contracts, designed as cash flow hedges, to hedge the variability of cash flows associated with our
12 months U.S. dollar forecasts of revenues and costs denominated in British Pound, Japanese Yen, Canadian Dollars and the
Euro. We transfer to earnings from AOCI, the gain or loss realized on the FX derivative contracts at the time of invoicing.
F-34
Interest Rate Risk
The 2014 EIB loan agreement matures in June 2021. The variable interest rate for the 2014 EIB loan is reset by the lender
each quarter based on the Euribor. To minimize the impact of changes in interest rates we entered into interest rate swap
agreement programs to swap the 2014 EIB loan’s floating-rate interest payments for fixed-rate interest payments. The interest
rate swap contracts qualify for, and are designated as, cash flow hedges.
The notional amounts of open derivative contracts designated as cash flow hedges as of December 31, 2019 and 2018, were
as follows (in thousands):
Description of Derivative Contract
2019
2018
FX derivative contracts to be exchanged for British Pounds
$
10,128
$
FX derivative contracts to be exchanged for Japanese Yen
FX derivative contracts to be exchanged for Canadian Dollars
FX derivative contracts to be exchanged for Euros
Interest rate swap contracts
25,342
—
48,838
22,442
9,629
23,985
7,637
29,768
38,115
$
106,750
$
109,134
After-tax net gain (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 are as follows (in thousands):
Description of Derivative Contract
FX derivative contracts
Interest rate swap contracts
After-tax net gain (loss) in
AOCI as of December 31,
2019
Amount Expected to be
Reclassified to Earnings
in Next 12 Months
$
$
600
(86)
514
$
$
600
(57)
543
Pre-tax gains (losses) for derivative contracts designated as cash flow hedges recognized in other comprehensive income
(loss) (“OCI”) and the amount reclassified to earnings from AOCI were as follows (in thousands):
Description of Derivative Contract
FX derivative contracts
FX derivative contracts
Location in Earnings of
Reclassified Gain or Loss
Foreign exchange and other
(losses) gains
SG&A
Interest rate swap contracts
Interest expense
Year Ended December 31, 2019
Gains Recognized in
OCI
Gains (Losses)
Reclassified from AOCI
to Earnings:
$
$
2,757
$
—
—
2,757
$
3,003
(2,071)
(92)
840
Year Ended December 31, 2018
Description of Derivative Contract
Location in Earnings of
Reclassified Gain or Loss
Gains Recognized in
OCI
Gains (Losses)
Reclassified from AOCI
to Earnings:
FX derivative contracts
FX derivative contracts
Foreign exchange and other
(losses) gains
SG&A
Interest rate swap contracts
Interest expense
$
$
44
—
—
44
$
$
2,697
(2,554)
(66)
77
F-35
Year Ended December 31, 2017
Description of Derivative Contract
Location in Earnings of
Reclassified Gain or Loss
Losses Recognized in
OCI
(Losses) Gains
Reclassified from AOCI
to Earnings:
FX derivative contracts
FX derivative contracts
Interest rate swap contracts
Foreign exchange and other
(losses) gains
SG&A
Interest expense
$
$
(9,861) $
—
—
(9,861) $
(6,471)
2,084
939
(3,448)
We offset fair value amounts associated with our derivative instruments on our consolidated balance sheets that are executed
with the same counterparty under master netting arrangements. Our 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 on the consolidated balance
sheets (in thousands):
December 31, 2019
Asset Derivatives
Liability Derivatives
Fair Value (1)
313
$
Derivatives Designated as Hedging
Instruments
Balance Sheet
Location
Fair Value (1)
Balance Sheet Location
Interest rate swap contracts
Interest rate swap contracts
FX derivative contracts
FX derivative contracts
Total derivatives designated as
hedging instruments
Derivatives Not Designated as
Hedging Instruments
Prepaid expenses and
other current assets
Accrued liabilities
Accrued liabilities
Other long-term liabilities
$
148 Accrued liabilities
387
535
FX derivative contracts
Accrued liabilities
26 Accrued liabilities
FX derivative contracts
Total derivatives not designated as
hedging instruments
Total derivatives
Prepaid expenses and
other current assets
26
561
$
$
December 31, 2018
Asset Derivatives
Liability Derivatives
Derivatives Designated as Hedging
Instruments
Balance Sheet
Location
Fair Value (1)
Balance Sheet Location
Fair Value (1)
536
$
Accrued liabilities
Other long-term liabilities
Accrued liabilities
Interest rate swap contracts
Interest rate swap contracts
FX derivative contracts
Total derivatives designated as
hedging instruments
Derivatives Not Designated as
Hedging Instruments
FX derivative contracts
Total derivatives not designated as
hedging instruments
Total derivatives
Prepaid expenses and
other current assets
$
$
236 Accrued liabilities
236
236
$
(1) For the classification of inputs used to evaluate the fair value of our derivatives, refer to “Note 10. Fair Value
Measurements.”
F-36
61
169
543
3,104
33
3,137
3,680
329
1,354
2,219
3,173
3,173
5,392
Note 13. Leases
We have operating leases primarily for (i) office space, (ii) manufacturing, warehouse and research and development
facilities and (iii) vehicles. Our leases have remaining lease terms up to 12 years, some of which include options to extend the
leases, and some of which include options to terminate the leases at our sole discretion. The components of operating lease
assets, liabilities and costs are as follows (in thousands):
Operating Lease Assets and Liabilities
Assets
Operating lease right-of-use assets
Liabilities
Accrued liabilities and other
Long-term operating lease liabilities
Total lease liabilities
Operating Lease Cost
Operating lease cost
Variable lease cost
Short-term lease cost
Total lease cost
Contractual maturities of our lease liabilities as of December 31, 2019, are as follows (in thousands):
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less: Amount representing interest
Present value of lease liabilities
Lease Term and Discount Rate
Weighted Average Remaining Lease Term
Weighted Average Discount Rate
Other information
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases
Operating lease assets obtained in exchange for lease liabilities
F-37
December 31, 2019
54,372
11,110
46,027
57,137
Year Ended
December 31, 2019
14,002
873
788
15,663
12,399
10,402
9,224
7,524
5,975
16,907
62,431
5,294
57,137
December 31, 2019
7.0 years
2.4%
Year Ended
December 31, 2019
13,522
8,712
$
$
$
$
$
$
$
$
$
Disclosures Related to Periods Prior to Adoption of Topic 842
On January 1, 2019, we adopted Topic 842 using the modified retrospective adoption approach, as noted in “Note 2. Basis of
Presentation, Use of Accounting Estimates and Significant Accounting Policies.” As required and as previously disclosed in our
2018 Form 10-K, the following table summarizes our future minimum operating lease payments as of December 31, 2018 (in
thousands):
Less than one year
One to three years
Three to five years
Thereafter
Total
Note 14. Commitments and Contingencies
FDA Warning Letter
$
$
11,986
21,031
14,998
20,943
68,958
On December 29, 2015, the FDA issued a Warning Letter alleging certain violations of FDA regulations applicable to
medical device manufacturers at our Munich, Germany and Arvada, Colorado facilities.
The FDA inspected the Munich facility from August 24, 2015 to August 27, 2015 and the Arvada facility from August 24,
2015 to September 1, 2015. On August 27, 2015, the FDA issued a Form 483 identifying two observed non-conformities with
certain regulatory requirements at the Munich facility. We did not receive a Form 483 in connection with the FDA’s inspection
of the Arvada facility. Following the receipt of the Form 483, we provided written responses to the FDA describing corrective
and preventive actions that were underway or to be taken to address the FDA’s observations at the Munich facility. The
Warning Letter responded in part to our responses and identified other alleged violations 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 were 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 had
informed us that the import alert was limited to the 3T devices, but that the agency reserved the right to expand the scope of the
import alert if future circumstances warranted 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 were 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 were reasonably related would not be approved until the violations had
been corrected; however, this restriction applied only to the Munich and Arvada facilities, which do not manufacture or design
devices subject to Class III premarket approval.
On February 25, 2020, LivaNova received clearance for K191402, a 510(k) for the 3T devices that addressed issues
contained in the 2015 Warning Letter along with design changes that further mitigate the potential risk of aerosolization.
Concurrent with this clearance, (1) 3T devices manufactured in accordance with K191402 will not be subjected to the import
alert and (2) LivaNova initiated a correction to distribute the updated Operating Instructions cleared under K191402.
We continue to work diligently to remediate the FDA’s inspectional observations for the Munich facility, as well as the
additional issues identified in the Warning Letter. We take these matters seriously and intend to respond timely and fully to the
FDA’s requests.
CDC and FDA Safety Communications and Company Field Safety Notice
On October 13, 2016, the CDC and the FDA separately released safety notifications regarding the 3T devices. The CDC’s
Morbidity and Mortality Weekly Report (“MMWR”) and Health Advisory Notice (“HAN”) reported that tests conducted by
CDC and its affiliates indicate that there appears to be genetic similarity between both patient and 3T device strains of the non-
tuberculous mycobacterium (“NTM”) bacteria M. chimaera isolated in hospitals in Iowa and Pennsylvania. Citing the
geographic separation between the two hospitals referenced in the investigation, the report asserts that 3T devices manufactured
prior to August 18, 2014 could have been contaminated during the manufacturing process. The CDC’s HAN and FDA’s Safety
Communication, issued contemporaneously with the MMWR report, each assess certain risks associated with 3T devices and
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provide guidance for providers and patients. The CDC notification states that the decision to use the 3T device during a surgical
operation is to be taken by the surgeon based on a risk approach and on patient need. Both the CDC’s and FDA’s
communications confirm that 3T devices are critical medical devices and enable doctors to perform life-saving cardiac surgery
procedures.
Also on October 13, 2016, concurrent with the CDC’s HAN and FDA’s Safety Communication, we issued a Field Safety
Notice Update for U.S. users of 3T devices to proactively and voluntarily contact facilities to aid in implementation of the CDC
and FDA recommendations. In the fourth quarter of 2016, we initiated a program to provide existing 3T device users with a
new loaner 3T device at no charge pending regulatory approval and implementation of additional risk mitigation strategies
worldwide, including a vacuum canister and internal sealing upgrade program and a deep disinfection service. This loaner
program began in the U.S. and was rolled out in Europe shortly thereafter. It 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 the risk
mitigation strategies described above. We are currently implementing the vacuum and sealing upgrade program in as many
countries as possible until all devices are upgraded. On October 11, 2018, after review of information provided by us, the FDA
concluded that we could commence the vacuum and scaling upgrade program in the U.S., and on February 25, 2020, LivaNova
received clearance for K191402, a 510(k) for the 3T devices that addressed issues contained in the 2015 Warning Letter along
with design changes that further mitigate the potential risk of aerosolization. Furthermore, we continue to offer a no-charge
deep disinfection service (deep cleaning service) for 3T device users as we receive the required regulatory approvals. The deep
disinfection service was rolled out in Europe in the second half of 2015, and on April 12, 2018, the FDA agreed to allow us to
move forward with the deep cleaning service in the U.S., thereby adding to the growing list of countries around the world in
which we offer this service.
On December 31, 2016, we recognized a liability for our product remediation plan related to our 3T device. We concluded
that it was probable that a liability had been incurred upon management’s approval of the plan and the commitments made by
management to various regulatory authorities globally in November and December 2016, and furthermore, the cost associated
with the plan was reasonably estimable. At December 31, 2019, the product remediation liability was $3.3 million. Refer to
“Note 7. Product Remediation Liability” for additional information.
Litigation
Product Liability
The Company is currently involved in litigation involving our 3T device. The litigation includes 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, various U.S. state court cases and cases in jurisdictions outside the U.S. The class action, filed
in February 2016, consists of all Pennsylvania residents who underwent open heart surgery at WellSpan York Hospital and
Penn State Milton S. Hershey Medical Center between 2011 and 2015 and who currently are asymptomatic for NTM
infection. Members of the class seek declaratory relief that the 3T devices are defective and unsafe for intended uses, medical
monitoring, damages, and attorneys’ fees.
On March 29, 2019, we announced a settlement framework that provides for a comprehensive resolution of the personal
injury cases pending in the multi-district litigation in U.S. federal court, the related class action pending in federal court, as well
as certain cases in state courts across the United States. The agreement, which makes no admission of liability, is subject to
certain conditions, including acceptance of the settlement by individual claimants and provides for a total payment of up to
$225 million to resolve the claims covered by the settlement. Per the agreed-upon terms, the first payment of $135 million was
paid into a qualified settlement fund in July 2019 and the second payment of $90 million was paid in January 2020. Cases
covered by the settlement are being dismissed as amounts are disbursed to individual plaintiffs from the qualified settlement
fund.
Cases in state courts in the U.S. and in jurisdictions outside the U.S. continue to progress. As of March 2, 2020, including the
cases encompassed in the settlement framework described above that have not yet been dismissed, we are aware of
approximately 95 filed and unfiled claims worldwide, with the majority of the claims in various federal or state courts
throughout the United States. This number includes cases that have settled but have not yet been dismissed. 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 or concealment, unjust
enrichment, and violations of various state consumer protection statutes.
In the fourth quarter of 2018, we recognized a $294.1 million provision for these matters. In the fourth quarter of 2019, we
recorded an additional liability of $33.2 million due to additional information obtained, including but not limited to: the nature
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and quantity of filed and unfiled claims; certain settlement discussions with plaintiffs’ counsel; and the current stage of
litigation in our remaining filed and unfiled claims. At December 31, 2019, the provision was $170.4 million. While the amount
accrued represents our best estimate, the actual liability for resolution of these matters may vary from our estimate.
The changes in the litigation provision liability for the year ended December 31, 2019, are as follows (in thousands):
Total litigation provision liability at December 31, 2018
Payments
Adjustments
FX and other
Total litigation provision liability at December 31, 2019
Less current portion of litigation provision liability at December 31, 2019
Long-term portion of litigation provision liability at December 31, 2019
$
$
294,061
(156,928)
33,233
38
170,404
146,026
24,378
In July 2019, we entered into agreements with our insurance carriers to recover $33.8 million under our product liability
insurance policies related to the litigation involving our 3T device. The insurance recovery was received and recorded in
litigation provision, net on the consolidated statements of income (loss) during the third quarter of the current fiscal year.
Environmental Liability
Our subsidiary, Sorin S.p.A. (“Sorin”) 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 Ministry of the Environment and the Protection of Land
and Sea (the “Italian Ministry of the Environment”), sought compensation from SNIA in an aggregate amount of 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 in connection with their claims in the Italian insolvency
proceedings. The Public Administrations appealed and in January 2016, the Court of Udine rejected the appeal. The Public
Administrations have also appealed that decision to the Supreme Court. In addition, the Bankruptcy Court of Milan’s decision
has been appealed.
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 €292,000 (approximately $328,000 as of December 31,
2019) for legal fees. The Public Administrations appealed the 2016 Decision to the Court of Appeal of Milan. 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.
Additionally the Court issued a separate order, staying the proceeding until a Panel of three experts can assess the
environmental damages, the costs of clean-up, and the costs that the Public Administrations has already borne for the clean-up
of the sites to allow the Court to decide on the second claim of the Public Administrations against LivaNova, (i.e., to refund the
Public Administration for the SNIA environmental liabilities). In the interim, we are appealing the decision to the Italian
Supreme Court (Corte di Cassazione).
We have not recognized an expense in connection with this matter because any potential loss is not currently probable or
reasonably estimable. In addition, we cannot reasonably estimate a range of potential loss, if any, that may result from this
matter.
Opposition to Merger Proceedings
On July 28, 2015, the Public Administrations filed an opposition proceeding before the Commercial Division of the Court of
Milan to the merger of Sorin and Cyberonics, Inc., the predecessor companies to LivaNova. The Court authorized the merger,
and the Public Administrations did not appeal that decision. The proceeding then continued as a civil case, with the Public
Administrations seeking damages. The Commercial Court of Milan delivered a decision in October 2016, fully rejecting the
Public Administrations’ request and awarding us approximately €400,000 (approximately $449,000 as of December 31, 2019)
in damages for frivolous litigation and legal fees. The Public Administrations appealed to the Court of Appeal of Milan. On
May 15, 2018, the Court of Appeal of Milan confirmed the decision authorizing the merger but annulled the penalty for
frivolous litigation and reduced the overall contribution of legal fees to €84,000 (approximately $94,000 as of December 31,
2019). On February 28, 2020, the Supreme Court confirmed the decision, authorizing the merger and increasing the overall
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contribution of legal fees to LivaNova to €98,000 (approximately $110,000 as of December 31, 2019). There is no further
avenue of appeal in this matter, and the matter is now concluded.
Patent Litigation
On May 11, 2018, Neuro and Cardiac Technologies LLC (“NCT”), a non-practicing entity, filed a complaint in the United
States District Court for the Southern District of Texas asserting that the VNS Therapy System, when used with the SenTiva
Model 1000 generator, infringes the claims of U.S. Patent No. 7,076,307 owned by NCT. The complaint requests damages that
include a royalty, costs, interest, and attorneys’ fees. On September 13, 2018, we petitioned the Patent Trial and Appeal Board
of the U. S. Patent and Trademark Office (the “Patent Office”) for an inter partes review (“IPR”) of the validity of the ‘307
patent. The Patent Office instituted an IPR of all the challenged claims. The Court has stayed the litigation pending the outcome
of the IPR proceeding. 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.
Contract Litigation
On November 25, 2019, LivaNova received notice of a lawsuit initiated by former members of Caisson Interventional, LLC
(“Caisson”), a subsidiary of the Company acquired in 2017. The lawsuit, Todd J. Mortier, as Member Representative of the
former Members of Caisson Interventional, LLC v. LivaNova USA, Inc., is currently pending in the United States District
Court for the District of Minnesota. The complaint alleges (i) breach of contract, (ii) breach of the covenant of good faith and
fair dealing and (iii) unjust enrichment in connection with the Company’s operation of Caisson’s Transcatheter Mitral Valve
Replacement (“TMVR”) program and the Company’s November 20, 2019 announcement that it was ending the TMVR
program at the end of 2019. The lawsuit seeks damages arising out of the 2017 acquisition agreement, including various
regulatory milestone payments. We intend to vigorously defend this claim. The Company has 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.
Tax Litigation
In a tax audit report received on October 30, 2009, the Regional Internal Revenue Office of Lombardy (the “Internal
Revenue Office”) informed Sorin Group Italia S.r.l. that, among several issues, it was disallowing in part (for a total of €102.6
million (approximately $115.1 million as of December 31, 2019), 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 2004. 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. On November 16, 2018, the Supreme Court returned the decisions for years 2005 and 2006 to the
previous-level Court (Regional Tax Court) due to lack of substance of the motivation given in the 2nd level judgments that were
appealed.
In November 2012, the Internal Revenue Office served a notice of assessment for 2007, and in July 2013, served a notice of
assessment for 2008. In these matters the Internal Revenue Office claims an increase in taxable income due to a reduction
(similar to the previous notices of assessment for 2004, 2005 and 2006) of the losses reported by Sorin Group Italia S.r.l. for the
2002, 2003 and 2004 tax periods, and subsequently utilized in 2007 and 2008. We challenged both notices of assessment. The
Provincial Tax Court of Milan has stayed its decision for years 2007 and 2008 pending resolution of the litigation regarding
years 2004, 2005, and 2006.
The total amount of losses in dispute is €62.6 million (approximately $70.2 million as of December 31, 2019). We have
continuously reassessed our potential exposure in these matters, taking into account the recent, and generally adverse, trend to
Italian taxpayers in this type of litigation. Although we believe that our defensive arguments are strong, noting the adverse
trend in some of the court decisions, we have recognized a reserve for an uncertain tax position for the full amount of the
potential liability. On May 31, 2019, we filed an application to settle the litigation according to law N. 136/2018 and paid the
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required settlement balance of €1.9 million. As per law N. 136/2018, the Italian Revenue Agency will review the settlement and
decide to accept or reject the application by July 31, 2020. Until the settlement is accepted by the Italian Revenue Agency, we
will continue to reserve for the full amount of the potential liability, by recognizing a €15.5 million reserve for uncertain tax
position (approximately $17.4 million, as of December 31, 2019), net of the settlement payment.
Other Matters
Additionally, we are the subject of various pending or threatened legal actions and proceedings that arise in the ordinary
course of our business. These matters are subject to many uncertainties and outcomes that are not predictable and that may not
be known for extended periods of time. Since the outcome of these matters cannot be predicted with certainty, the costs
associated with them could have a material adverse effect on our consolidated net income, financial position or liquidity.
Note 15. Stockholders’ Equity
Share repurchase plans
On August 1, 2016, the Board of Directors of LivaNova approved the authorization of a share repurchase plan (the "Share
Repurchase Program") pursuant to an authority granted by shareholders at the 2016 annual general meeting held on June 15,
2016. The authority granted by the shareholders has a five-year expiration. The Share Repurchase Program was structured to
enable us to buy back up to $150.0 million of our shares on NASDAQ between September 1, 2016 through December 31,
2016. On November 15, 2016, the Board of Directors approved an amendment (the "Amended Share Repurchase Program") to
the Share Repurchase Program authorizing the Company to repurchase up to $150.0 million of our shares between September
1, 2016 and December 31, 2018.
For the year ended December 31, 2018, we repurchased and canceled 500,333 shares under this plan at a cost of $50.0
million and an average price per share of $99.91. We did not purchase any shares during the years ended December 31, 2017
and December 31, 2019.
Treasury Stock
For the year ended December 31, 2018, we issued 1.4 million shares to our Employee Benefit Trust (“EBT”). Shares held by
the EBT are issued to employees and directors at exercise of stock-based compensation grants. The balance of shares in the
EBT are reported as treasury shares. We did not issue any additional shares to our EBT during the year ended December 31,
2019.
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Accumulated other comprehensive (loss) income
The table below presents the change in each component of AOCI, net of tax and the reclassifications out of AOCI into net
income for the years ended December 31, 2019, 2018 and 2017 (in thousands):
As of December 31, 2016
$
3,619
$
(72,106) $
(68,487)
Change in
Unrealized Gain
(Loss) on Cash
Flow Hedges
Foreign Currency
Translation
Adjustments (1)
Total
Other comprehensive (loss) income before reclassifications,
before tax
Tax benefit
Other comprehensive (loss) income before reclassifications, net
of tax
Reclassification of loss from accumulated other comprehensive
income (loss), before tax
Reclassification of tax benefit
Reclassification of gain from accumulated other comprehensive
income (loss), after tax
Net current-period other comprehensive (loss) income, net of tax
As of December 31, 2017
Other comprehensive income (loss) before reclassifications,
before tax
Tax expense
Other comprehensive income (loss) before reclassifications, net
of tax
Reclassification of gain from accumulated other comprehensive
income (loss), before tax
Reclassification of tax expense
Reclassification of gain from accumulated other comprehensive
income (loss), after tax
Net current-period other comprehensive loss, net of tax
As of December 31, 2018
Other comprehensive income (loss) before reclassifications,
before tax
Tax expense
Other comprehensive income (loss) before reclassifications, net
of tax
Reclassification of gain from accumulated other comprehensive
income (loss), before tax
Reclassification of tax expense
Reclassification of gain from accumulated other comprehensive
income (loss), after tax
Net current-period other comprehensive loss, net of tax
As of December 31, 2019
$
(9,861)
2,653
(7,208)
3,448
(778)
2,670
(4,538)
(919)
44
(11)
33
(77)
19
(58)
(25)
(944)
2,757
(661)
2,096
(840)
201
(639)
1,457
513
118,338
—
108,477
2,653
118,338
111,130
—
—
—
118,338
46,232
(69,764)
—
3,448
(778)
2,670
113,800
45,313
(69,720)
(11)
(69,764)
(69,731)
—
—
—
(69,764)
(23,532)
3,627
—
3,627
—
—
(77)
19
(58)
(69,789)
(24,476)
6,384
(661)
5,723
(840)
201
—
3,627
(19,905) $
(639)
5,084
(19,392)
$
(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 16. Stock-Based Incentive Plans
Stock-Based Incentive Plans
Stock-based awards may be granted under the 2015 Incentive Award Plan (the “2015 Plan”) in the form of stock options,
SARs, RSUs and other stock-based and cash-based awards. As of December 31, 2019, there were approximately 4,904,000
shares available for future grants under the 2015 Plan. During the year ended December 31, 2019, we awarded SARs and RSUs
with service conditions that generally vest ratably over 4 years, subject to forfeiture unless service conditions are met. In
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addition, during the year ended December 31, 2019, we awarded market performance-based awards that cliff vest after three
years, subject to the rank of our total shareholder return for the three-year period ending December 31, 2021, relative to the
total shareholder returns for a peer group of companies, and we issued operating performance-based awards that cliff vest after
three years subject to the achievement of certain thresholds of cumulative adjusted free cash flow for the three-year period
ending December 31, 2021.
On January 1, 2019, we initiated the LivaNova Global Employee Share Purchase Plan (“ESPP”). Compensation expense
related to the ESPP for the year ended December 31, 2019 was $1.3 million.
The stock-based compensation tables below include expense and share activity related to discontinued operations.
Stock-Based Compensation
Amounts of stock-based compensation recognized on our consolidated statements of income (loss), by expense category, are
as follows (in thousands):
Year Ended December 31,
2018
2017
2019
Cost of goods sold
Selling, general and administrative
Research and development
Stock-based compensation from continuing operations
Stock-based compensation from discontinued operations
Total stock-based compensation expense
Income tax benefit
$
1,343
$
1,060
$
25,588
5,622
32,553
—
32,553
6,590
19,393
4,510
24,963
1,960
26,923
6,443
Total expense, net of income tax benefit
$
25,963
$
20,480
$
450
16,118
1,119
17,687
1,375
19,062
4,236
14,826
Amounts of stock-based compensation expense recognized on our consolidated statements of income (loss), by type of
arrangement, are as follows (in thousands):
Service-based stock appreciation rights
Service-based restricted stock units
Market performance-based restricted stock units
Operating performance-based restricted stock units
Employee stock purchase plan
Total stock-based compensation expense from continuing
operations
Unrecognized Stock-Based Compensation
Year Ended December 31,
2018
2017
2019
$
10,349
$
8,282
$
14,113
2,900
3,918
1,273
10,622
2,357
3,702
—
6,916
8,223
732
1,816
—
$
32,553
$
24,963
$
17,687
Amounts of stock-based compensation cost not yet recognized related to non-vested awards, including awards assumed or
issued, as of December 31, 2019, are as follows (in thousands):
Service-based stock appreciation rights
Service-based restricted stock unit awards
Performance-based restricted stock unit awards
Total stock-based compensation cost unrecognized
Unrecognized
Compensation
Cost
Weighted Average
Remaining Vesting
Period (in years)
$
$
25,508
33,456
10,587
69,551
2.67
2.73
1.65
2.35
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Stock Appreciation Rights and Stock Options
We use the Black-Scholes option pricing methodology to calculate the grant date fair market value of SARs. The following
table lists the assumptions we utilized as inputs to the Black-Scholes model:
Dividend yield (1)
Risk-free interest rate (2)
Expected option term - in years (3)
Expected volatility at grant date (4)
Year Ended December 31,
2019
—
2018
—
2017
—
1.4% - 2.2%
2.5% - 2.9%
1.7% - 2.2%
5.0 - 5.1
5.0 - 5.1
4.6 - 5.2
32.2% - 35.7%
29.2% - 29.9%
29.6% - 30.4%
(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 approximates the expected term of the awards granted 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.
(4) We determine the expected volatility of the awards based on historical volatility.
The following tables detail the activity for service-based SARs and stock option awards:
SARs and Stock Options
Outstanding — at December 31, 2018
Granted
Exercised
Forfeited
Expired
Outstanding — at December 31, 2019
Fully vested and exercisable — end of year
Fully vested and expected to vest — end of year (2)
Number of
Optioned
Shares
1,941,587
$
591,845
(121,534)
(171,282)
(25,560)
2,215,056
951,797
2,173,525
$
Wtd. Avg.
Exercise
Price per
Share
Wtd. Avg.
Remaining
Contractual
Term (years)
Aggregate
Intrinsic Value
(in thousands) (1)
67.33
96.60
61.50
83.44
72.60
74.41
61.45
74.08
7.0
5.2
7.0
$
$
$
22,195
15,495
22,117
(1) The aggregate intrinsic value of SARs and options is based on the difference between the fair market value of the
underlying stock at December 31, 2019, using the market closing stock price, and exercise price for in-the-money awards.
Includes the impact of expected future forfeitures.
(2)
Weighted average grant date fair value of SARs granted during
the year (per share)
Aggregate intrinsic value of SARs and stock options exercised
during the year (in thousands)
$
$
31.22
2,064
$
$
28.13
27,281
$
$
17.19
5,462
Year Ended December 31,
2018
2017
2019
Restricted Stock Units Awards
The following tables detail the activity for service-based RSU awards:
RSUs
Non-vested shares at December 31, 2018
Granted
Vested
Forfeited
Non-vested shares at December 31, 2019
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Number of
Shares
Wtd. Avg.
Grant Date Fair
Value
450,297
$
294,460
$
(147,969) $
(72,955) $
$
523,833
78.70
92.54
74.53
92.62
84.98
Year Ended December 31,
2018
2017
2019
Weighted average grant date fair value of service-based RSUs
issued during the year (per share)
Aggregate fair value of RSUs that vested during the year (in
thousands)
$
$
92.54
12,710
$
$
95.63
11,505
$
$
61.37
9,966
The following tables detail the activity for performance-based and market-based RSU awards:
Performance-based and market-based RSUs
Non-vested shares at December 31, 2018
Granted
Vested
Forfeited
Non-vested shares at December 31, 2019
Number of Shares
Wtd. Avg. Grant
Date Fair Value
295,364
$
88,453
$
(69,646) $
(28,502) $
$
285,669
56.48
98.50
41.52
75.97
71.02
Year Ended December 31,
2018
2017
2019
Weighted average grant date fair value of performance and
market-based restricted share units granted during the year (per
share)
Aggregate fair value of performance and market-based restricted
share units that vested during the year (in thousands)
$
$
98.50
6,697
$
$
95.62
9,409
$
$
42.11
110
Note 17. Employee Retirement Plans
Defined Benefit Plans
We sponsor several defined benefit pension plans, which include plans in the U.S., Italy, Germany, Japan and France. We
maintain a frozen cash balance retirement plan in the U.S. that is a contributory, defined benefit plan designed to provide the
benefit in terms of a stated account balance dependent on the employer's promised interest-crediting rate. In Italy and France,
we maintain 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 sponsor non-contributory, defined benefit plans designated to provide a
guaranteed minimum retirement benefits to eligible employees.
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The change in benefit obligations and funded status of our U.S. pension benefits is as follows (in thousands):
U.S. Pension Benefits
Year Ended December 31,
2018
2017
2019
Accumulated benefit obligations at year end
Change in projected benefit obligation:
Projected benefit obligation at beginning of year
Interest cost
Plan settlement
Actuarial loss
Benefits paid
Projected benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Plan settlement
Benefits paid
Fair value of plan assets at end of year
Funded status at end of year:
Fair value of plan assets
Projected Benefit obligations
Underfunded status of the plans
Recognized liability
Amounts recognized on the consolidated balance sheets
consist of:
Non-current liabilities
Recognized liability
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
11,232
10,591
382
(366)
871
(246)
11,232
6,767
628
546
(366)
(1)
7,574
7,574
11,232
3,658
$
$
$
$
$
$
10,591
11,001
336
(340)
8
(414)
10,591
6,879
(405)
1,047
(340)
(414)
6,767
6,767
10,591
3,824
3,658
$
3,824
$
3,658
3,658
$
$
3,824
3,824
$
$
11,191
10,425
361
—
770
(555)
11,001
5,925
444
870
—
(360)
6,879
6,879
11,001
4,122
4,122
4,122
4,122
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The change in benefit obligations and funded status of our non-U.S. pension benefits is as follows (in thousands):
Non-U.S. Pension Benefits
Year Ended December 31,
2018
2019
2017
Accumulated benefit obligations at year end
Change in projected benefit obligation:
Projected benefit obligation at beginning of year
Service cost
Interest cost
Actuarial loss (gain)
Benefits paid
Foreign currency exchange rate changes and other
Projected benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Foreign currency exchange rate changes
Fair value of plan assets at end of year
Funded status at end of year:
Fair value of plan assets
Projected Benefit obligations
Underfunded status of the plans (1)
Recognized liability
Amounts recognized on the consolidated balance sheets
consist of:
Non-current liabilities
Recognized liability
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
17,744
18,975
478
232
1,071
(2,380)
(289)
18,087
3,341
(34)
383
(332)
65
3,423
3,423
18,087
14,664
$
$
$
$
$
$
18,676
21,548
478
289
(818)
(1,631)
(891)
18,975
3,075
51
361
(156)
10
3,341
3,341
18,975
15,634
14,664
$
15,634
$
14,664
14,664
$
$
15,634
15,634
$
$
(1)
In certain non-U.S. countries, fully funding pension plans is not a common practice. Consequently, certain pension plans
have been partially funded.
The tables below present net periodic benefit cost of the defined benefit pension plans by component (in thousands):
U.S. Pension Benefits
Year Ended December 31,
2018
2017
2019
Interest cost
Expected return on plan assets
Settlement and curtailment loss
Amortization of net actuarial loss
Net periodic benefit cost
$
$
382
(298)
—
148
232
$
$
336
(318)
135
571
724
$
$
23,785
20,402
503
291
(27)
(2,222)
2,601
21,548
2,898
54
369
(393)
147
3,075
3,075
21,548
18,473
18,473
18,473
18,473
361
(282)
—
527
606
F-48
Non-U.S. Pension Benefits
Year Ended December 31,
2018
2019
2017
Service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial loss (gain)
Net periodic benefit cost
$
$
$
478
232
34
1,071
1,815
$
478
$
289
(51)
(818)
(102) $
503
291
(54)
(27)
713
To determine the discount rate for our U.S. benefit plan, we used the FTSE Above Median Pension Discount Curve. For the
discount rate used for the other non-U.S. benefit plans we consider local market expectations of long-term 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 assumption for our U.S. benefit plan was derived from a study conducted
by our investment managers. The study includes a review of anticipated future long-term performance of individual asset
classes and consideration of the appropriate asset allocation strategy given the anticipated requirements of the plan to determine
the average rate of earnings expected on the funds invested to provide for the pension plan benefits.
Major actuarial assumptions used in determining the benefit obligations and net periodic benefit cost for our significant U.S.
benefit plans as of December 31, 2019, 2018 and 2017, are presented in the following table:
2019
U.S. Pension Benefits
2018
2017
Weighted-average assumptions used to determine
benefit obligation:
Discount rate
2.88%
3.97%
3.28%
Weighted-average assumptions used to determine
net periodic benefit cost:
Discount rate
Expected return on plan assets
3.97%
5.00%
3.28%
5.00%
3.63%
5.00%
Major actuarial assumptions used in determining the benefit obligations and net periodic benefit cost for our significant non-
U.S. benefit plans as of December 31, 2019, 2018 and 2017, are presented in the following table:
Weighted-average assumptions used to determine
benefit obligation:
Discount rate
Rate of compensation increase
Weighted-average assumptions used to determine
net periodic benefit cost:
2019
Non-U.S. Pension Benefits
2018
2017
0.20% - 0.71%
2.50% - 3.00%
0.20% - 1.55%
2.50% - 3.00%
0.27% - 2.73%
2.50% - 3.00%
Discount rate
Rate of compensation increase
0.20% - 0.71%
2.50% - 3.00%
0.27% - 1.55%
2.50% - 3.00%
0.27% - 2.73%
2.50% - 3.00%
Retirement Benefit Plan Investment Strategy
In the U.S., we have 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. pension plans. The plan assets in the U.S. are invested
in accordance with sound investment practices that emphasize long-term fundamentals. The investment objectives for the plan
assets in the U.S. are to achieve a positive rate of return that would be expected to close the current funding deficit and so
enable us 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 contains a diversified
F-49
portfolio of fixed income and equity index funds. Securities are also diversified in terms of domestic and international
securities, short- and long-term securities, growth and value styles, large cap and small cap stocks.
Outside the U.S., pension plan assets are typically managed by decentralized fiduciary committees. There is a significant
variation in policy asset allocation from country to country. Local regulations, local funding rules, and local financial and tax
considerations are part of the funding and investment allocation process in each country.
The table below presents our U.S. pension plan target allocations by asset category as of December 31, 2019:
Equity securities
Debt securities
Other
Retirement Benefit Fair Values
30%
69%
1%
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 partnerships 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 partnerships 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 provide information by level for the retirement benefit plan assets that are measured at fair value, as
defined by U.S. GAAP (in thousands):
Equity mutual funds
Fixed income mutual funds
Money market funds
Equity mutual funds
Fixed income mutual funds
Money market funds
Fair Value as of
December 31, 2019
Fair Value Measurement Using Inputs Considered as:
Level 1
Level 2
Level 3
$
$
2,262
$
— $
2,262
$
5,225
74
7,561
$
—
74
74
5,225
—
$
7,487
$
—
—
—
—
Fair Value as of
December 31, 2018
Fair Value Measurement Using Inputs Considered as:
Level 1
Level 2
Level 3
$
$
1,961
$
— $
1,961
$
4,734
72
6,767
$
—
72
72
4,734
—
$
6,695
$
—
—
—
—
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 make the minimum required contribution to fund the U.S. pension plan as determined by MAP - 21 and the Highway and
Transportation Funding Act of 2014 (“HAFTA”). We contributed $0.9 million, $1.4 million and $1.2 million to the pension
plans (U.S. and non-U.S.) during the years ended December 31, 2019, 2018 and 2017, respectively. We anticipate that we will
make contributions to the U.S. pension plan of approximately $1.4 million during the year ended December 31, 2020.
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Benefit payments, including amounts to be paid from our assets, and reflecting expected future service as of December 31,
2019, are expected to be paid as follows (in thousands):
2020
2021
2022
2023
2024
2025 - 2029
Severance Indemnity
U.S. Plans
Non-U.S. Plans
3,026
812
994
612
707
3,262
894
723
966
1,066
889
5,327
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. 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 $1.0 million, $(0.2) million and $0.4 million for the years ended December 31, 2019, 2018 and 2017,
respectively.
Defined Contribution Plans
We sponsor defined contribution plans in the U.S. including the Cyberonics, Inc. Employee Retirement Savings Plan, which
qualifies under Section 401(k) of the IRC covering U.S. employees and the Cyberonics, Inc. Non-Qualified Deferred
Compensation Plan (the “Deferred Compensation”), covering certain U.S. middle and senior management. In addition, we
sponsor the Belgium Defined Contribution Pension Plan for Cyberonics’ Belgium employees. We incurred expenses for our
defined contribution plans of $12.4 million, $12.0 million and $13.9 million for the years ended December 31, 2019, 2018 and
2017, respectively.
Note 18. Income Taxes
Earnings Before Income Taxes and Components of Income Tax Provision
The U.S. and non-U.S. components of income (loss) from continuing operations before income taxes and our income tax
expense (benefit) from continuing operations (in thousands):
Income (loss) from continuing operations before income taxes:
UK and Non-U.S.
U.S.
Total income tax expense (benefit) from continuing operations
consisted of the following:
Current:
UK and Non-U.S.
U.S.
Deferred:
UK and Non-U.S.
U.S.
$
$
$
Total income tax (benefit) expense from continuing operations
$
F-51
Year Ended December 31,
2018
2017
2019
$
28,788
(214,482)
(185,694) $
$
59,528
(306,975)
(247,447) $
71,980
49,158
121,138
1,112
(4,988)
(3,876)
(7,407)
(18,870)
(26,277)
(30,153) $
$
9,645
$
1,291
10,936
533
(81,098)
(80,565)
(69,629) $
12,771
26,743
39,514
(4,140)
14,580
10,440
49,954
Effective Income Tax Rate Reconciliation
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
earnings mix in various jurisdictions and the changes in tax laws, our consolidated effective income tax rate may vary from one
reporting period to another.
The following table is a reconciliation of the statutory income tax rate to our effective income tax rate expressed as a
percentage of income from continuing operations before income taxes:
Statutory tax rate at UK Rate
Deferred tax valuation allowance
Foreign tax rate differential
U.S. state and local tax expense, net of federal benefit
Effect of changes in tax rate
Write-off/impairment of investments
Reserve for uncertain tax positions
Research and development tax credits
UK CFC tax
U.S. tax on non-U.S. operations
Base erosion anti-abuse tax
Exempt income
Transaction costs
Sale of intellectual property
Domestic manufacturing deduction
Other, net
Effective tax rate
U.S. Tax Reform
Year Ended December 31,
2018
2017
2019
19.0%
(17.6)
6.7
6.1
(3.1)
(2.8)
2.5
2.2
2.1
(1.6)
1.5
1.2
—
—
—
—
19.0%
(0.8)
3.0
4.3
0.6
(1.3)
(0.7)
1.1
(1.0)
(0.5)
(1.2)
6.1
(0.8)
—
—
0.3
19.0%
10.6
10.7
1.2
(19.9)
(14.8)
1.2
(1.6)
0.2
1.5
—
(13.5)
2.0
44.3
(1.8)
2.1
16.2%
28.1%
41.2%
On December 22, 2017, the U.S. enacted the Tax Act, which significantly changed U.S. corporate income tax laws by, among
other things, reducing the U.S. corporate income tax rate to 21%, which commenced in 2018. In addition, the Tax Act created a
mandatory deemed repatriation tax (“transition tax”) 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 transition tax 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. During the fourth quarter of 2018, we finalized our accounting under Staff
Accounting Bulletin No. 118 for the remeasurement of the deferred tax assets and liabilities and impairment of foreign tax
credits related to the Tax Act. Our accounting for the remeasurement is complete with a final non-cash net charge of $21.0
million.
F-52
Deferred Income Tax Assets and Liabilities
The significant components of our deferred tax assets and liabilities as of December 31, 2019 and 2018, are as follows (in
thousands):
Deferred tax assets:
Net operating loss carryforwards
Tax credit carryforwards
Accruals and reserves
Deferred compensation
Inventory
Other
Gross deferred tax assets
Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Property, equipment & intangible assets
Gain on sale of intellectual property
Investments
Other
Gross deferred tax liabilities:
Net deferred tax assets (liabilities)
Reported on the consolidated balance sheet as (after valuation allowance and
jurisdictional netting):
Net deferred tax assets
Deferred tax liabilities
Net deferred tax assets (liabilities)
Tax Attributes
2019
2018
$
125,883
$
28,272
69,562
9,692
9,436
12,135
254,980
(76,317)
178,663
(89,115)
(53,091)
—
—
(142,206)
36,457
68,676
(32,219)
36,457
$
$
$
$
$
$
87,406
26,152
96,483
5,757
3,956
6,043
225,797
(40,255)
185,542
(122,035)
(59,249)
(3,561)
(740)
(185,585)
(43)
68,146
(68,189)
(43)
Net operating loss (“NOL”) and tax credit carryforwards as of December 31, 2019, which can be used to reduce our income
tax payable in future years (in thousands):
Region
Europe NOL
U.S. Federal NOL
U.S. State NOL
South America NOL
Far East NOL
U.S. foreign tax credits
U.S. research & development tax credits
U.S. State research & development tax credits
Other non-U.S. tax credits
Other U.S. tax credits
Gross
Amount
Tax Benefit
Amount
with No
Expiration
Amount
with
Expiration
Carryforward
Period
$ 254,869
$
52,408
$
49,032
$
252,283
307,525
17,263
86
—
—
—
—
—
52,979
14,611
5,859
26
14,832
6,552
5,126
1,259
503
17,872
5,431
5,521
—
—
—
—
—
503
3,376
35,107
9,180
338
26
2022 - 2026
2021 - 2036
2020 - 2038
2028 - 2030
2029
14,832
2025 - 2029
2020 - 2039
2022 - 2039
2020 - 2032
6,552
5,126
1,259
—
$ 832,026
$
154,155
$
78,359
$
75,796
As of December 31, 2019 and 2018, we had a valuation allowance of $76.3 million and $40.3 million, respectively. These
valuation allowances were primarily related to continuing operations.
F-53
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 related to continuing operations.
As a result of the business combination during the transitional period to December 31, 2015, the historic NOL’s of Sorin U.S.
are limited by IRC section 382. The annual limitation is approximately $18.3 million, which is sufficient to absorb the U.S. net
operating losses prior to their expiration. As a result of the April 2018 acquisition of TandemLife, there is an IRC section 382
annual limitation of approximately $17.2 million, which is sufficient to absorb the U.S. net operating losses prior to their
expiration.
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 amortized to current income tax expense on our consolidated statements of income (loss). With our adoption of Accounting
Standards Update 2016-16, Intra-Entity Transfers of Assets Other Than Inventory on January 1, 2018, we no longer record the
income tax on the deferred inter-company gain in prepaid expense and other assets on the consolidated balance sheets; rather,
the income tax expense on the gain of the asset sale is recognized in the corresponding jurisdictions for the seller and buyer,
refer to “Note 23. New Accounting Pronouncements” for further information.
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.
No provision has been made for income taxes on undistributed earnings of foreign subsidiaries as of December 31, 2019
because it is our intention to indefinitely reinvest undistributed earnings of our 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, we may be liable
for income taxes and withholding taxes. As of December 31, 2019, it was not practicable to determine the amount of the
deferred tax liability related to those investments.
Uncertain Income Tax Positions
The following is a roll-forward of our total gross unrecognized tax benefit (in thousands):
Balance at beginning of year
Increases:
Tax positions related to current year
Tax positions related to prior year
Decreases:
Year Ended December 31,
2018
2017
2019
$
22,883
$
26,137
$
22,374
176
—
671
3,309
324
1,153
—
—
2,286
26,137
Tax positions related to prior years for settlement with tax
authorities
Tax positions related to prior years for lapses of statute of
limitations
Impact of foreign currency exchange rates
Balance at end of year
(2,104)
(3,999)
(4,632)
(328)
15,995
$
(2,343)
(892)
22,883
$
$
Unrecognized tax benefits of $11.4 million, $11.6 million and $12.2 million at December 31, 2019, 2018 and 2017,
respectively, included in the table above are presented in the balance sheet as a reduction to the related deferred tax assets for
net operating loss carryforwards.
Accrued interest and penalties totaled $5.7 million, $6.3 million and $8.0 million as of December 31, 2019, 2018 and 2017,
respectively, and were included in other long-term liabilities on our consolidated balance sheets.
Tax authorities may disagree with certain positions we have taken and assess additional taxes. We regularly assess the likely
outcomes of our tax positions in order to determine the appropriateness of our reserves for uncertain tax positions. However,
there can be no assurance that we will accurately predict the outcome of these audits and the actual outcome of an audit could
have a material impact on our consolidated results of income, financial position or cash flows. If all of our unrecognized tax
benefits as of December 31, 2019 were recognized, $12.9 million would impact our effective tax rate. We believe it is
reasonably possible that the amount of gross unrecognized tax benefits could be reduced by up to $12.0 million in the next 12
months as a result of the resolution of tax matters in various global jurisdictions and the lapses of statutes of limitations. Refer
to “Note 14. Commitments and Contingencies” for additional information regarding the status of current tax litigation.
F-54
We record accrued interest and penalties related to unrecognized tax benefits in interest expense and foreign exchange and
other (losses) gains, respectively, on our consolidated statements of income (loss).
The major jurisdictions where we are subject to income tax examinations are as follows:
Jurisdiction
U.S. - federal and state
Italy
Germany
England and Wales
Canada
Brexit
Earliest Year Open
2001
2015
2014
2017
2015
On January 31, 2020, the UK departed from the EU (in a move commonly referred to as “Brexit”), and the UK will now
enter a transition period that is scheduled to end on December 31, 2020, unless requested to be extended before July 1, 2020.
During the transition period, the UK will cease to be an EU member, but the trading relationship will remain the same under the
EU's rules. Although the long-term effects of Brexit will depend on any agreements the UK makes to retain access to the EU
markets during the transition period, Brexit has created additional uncertainties that may ultimately result in new regulatory
costs and challenges for medical device companies and increased restrictions on imports and exports throughout Europe. This
could adversely affect our ability to conduct and expand our operations in Europe and may have an adverse effect on our
business, financial condition and results of operations.
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 transition period concludes. 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.
We and several of our wholly owned subsidiaries that are domiciled either in the UK, various EU Member States, or in the
U.S., 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. We
continue to 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 there are material changes in tax laws or
treaties between the UK and other countries.
European Union State Aid Challenge
On October 26, 2017, the European Commission (“EC”) announced that an investigation would be opened with respect to the
UK’s controlled foreign company (“CFC”) rules for the period January 1, 2013 through December 31, 2018. Under the CFC
rules, financing profits of entities controlled by UK parent companies are taxed when the funding originates in the UK, or
Significant People Functions relating to the financing are located in the UK. The provisions under investigation provide group
finance exemptions related to the profits of entities involved in financing of the non-UK group activities. On April 2, 2019, the
EC concluded that “when financing income from a foreign group company, channeled through an offshore subsidiary, is
financed with UK connected capital and there are no UK activities involved in generating the finance profits, the group finance
exemption is justified and does not constitute State aid under EU rules.” However, in relation to Significant People Functions,
“when financing income from a foreign group company, channeled through an offshore subsidiary, derives from UK activities,
the group finance exemption is not justified and constitutes State aid under EU rules.” Her Majesty’s Revenue and Customs
(“HMRC”) has stated that they do not consider the timing and form of the UK’s exit from the EU will have a practical impact
on the requirement to recover the alleged aid. On June 14, 2019, the UK filed an appeal to the Commission’s decision. On July
5, 2019, HMRC began the first step in the recovery process to identify beneficiaries and sent letters asking for information.
Based upon our assessment of the technical arguments as to whether the exemption is State aid, together with no UK activities
involved in our financing, no uncertain tax position reserve has been recognized related to this matter. Furthermore, in
F-55
December 2019, we amended our 2017 tax return filing to avail ourselves of different rules to determine UK taxation, which
are not subject to the EU decision. We filed our 2018 tax return similarly, and therefore, we do not believe that the EU state aid
decision will result in a material liability.
Note 19. Net Income Per Share
The following table sets forth the basic and diluted weighted-average shares outstanding used in the computation of basic and
diluted net income per share (in thousands of shares):
Basic weighted average shares outstanding
Add effects of stock-based compensation instruments (1)
Diluted weighted average shares outstanding
Year Ended December 31,
2018
2017
2019
48,349
—
48,349
48,497
—
48,497
48,157
344
48,501
(1) Excluded from the computation of diluted earnings per share for the years ended December 31, 2019, 2018 and 2017 were
stock options, SARs and RSUs totaling 2.9 million, 2.7 million and 1.2 million because to include them would have been
anti-dilutive under the treasury stock method.
Note 20. Geographic and Segment Information
Segment Information
We identify operating segments based on the way we manage, evaluate and internally report our business activities for
purposes of allocating resources, developing and executing our strategy, and assessing performance. We have two reportable
segments: Cardiovascular and Neuromodulation.
The Cardiovascular segment generates its revenue from the development, production and sale of cardiopulmonary products,
heart valves and related products and advanced circulatory support. Cardiopulmonary products include oxygenators, heart-lung
machines, autotransfusion systems, perfusion tubing systems, cannulae and other related accessories. Heart valves include
mechanical heart valves, tissue heart valves, related repair products and minimally invasive surgical instruments. Advanced
circulatory support includes temporary life support product kits that can include a combination of pumps, oxygenators, and
cannulae. On June 12, 2019, we acquired the minimally invasive cardiac surgery instruments business from Miami Instruments,
which are integrated into our Cardiovascular business franchise as part of our Heart Valves portfolio.
Our Neuromodulation segment generates its revenue from the design, development and marketing of neuromodulation
therapy systems for the treatment of drug-resistant epilepsy, DTD and obstructive sleep apnea. Neuromodulation products
include the VNS Therapy System, which consists of an implantable pulse generator, a lead that connects the generator to the
vagus nerve, and other accessories.
“Other” includes corporate shared service expenses for finance, legal, human resources and information technology and
corporate business development and New Ventures.
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 and amortization and
intangibles.
F-56
We operate under three geographic regions: U.S., Europe, and Rest of World. The table below presents net sales by operating
segment and geographic region (in thousands):
Year Ended December 31,
2018
2017
2019
Cardiopulmonary
United States
Europe
Rest of World
Heart Valves
United States
Europe
Rest of World
Advanced Circulatory Support
United States
Europe
Rest of World
Cardiovascular
United States
Europe
Rest of World
Neuromodulation
United States
Europe
Rest of World
Other
Totals
United States
Europe (1)
Rest of World
Total (2) (3)
$
161,471
$
161,134
$
135,632
207,613
504,716
18,900
40,548
60,559
120,007
30,781
741
401
31,923
211,152
176,921
268,573
656,646
335,332
46,262
42,953
424,547
141,720
233,554
536,408
24,709
44,258
56,989
125,956
18,588
580
293
19,461
204,431
186,558
290,836
681,825
348,980
42,443
31,567
422,990
152,828
133,585
210,911
497,324
24,977
42,120
71,096
138,193
—
—
—
—
177,805
175,705
282,007
635,517
316,916
34,765
23,295
374,976
2,977
2,146
1,784
546,484
223,183
314,503
553,411
229,001
324,549
494,721
210,470
307,086
$
1,084,170
$
1,106,961
$
1,012,277
(1) 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.
(2) Net sales to external customers includes $37.7 million, $34.8 million and $30.8 million in the United Kingdom, our country
of domicile, for the years ended December 31, 2019, 2018 and 2017, respectively.
(3) No single customer represented over 10% of our consolidated net sales. No country’s net sales exceeded 10% of our
consolidated sales except for the U.S.
F-57
The table below presents a reconciliation of segment (loss) income from continuing operations to consolidated
(loss) income from continuing operations before tax (in thousands):
Year Ended December 31,
2018
2017
2019
Cardiovascular (1)
Neuromodulation (2)
Other (3)
Total reportable segment (loss) income from continuing
operations
Merger and integration expenses
Restructuring expenses
Amortization of intangibles
Operating (loss) income from continuing operations
Interest income
Interest expense
Gain on acquisitions
Impairment of investments
Foreign exchange and other (losses) gains
(Loss) income from continuing operations before tax
$
$
28,460
$
83,483
(204,727)
(92,784)
23,457
12,254
40,375
(168,870)
803
(15,091)
—
(258,493) $
184,674
(96,724)
(170,543)
24,420
15,915
37,194
(248,072)
847
(9,825)
11,484
—
(2,536)
(185,694) $
—
(1,881)
(247,447) $
81,412
183,228
(102,425)
162,215
15,528
17,056
33,144
96,487
1,318
(7,797)
39,428
(8,565)
267
121,138
(1) Results for the years ended December 31, 2019 and 2018 include Litigation provision, net of $(0.6) million and $294.0
million, respectively. Refer to “Note 14. Commitments and Contingencies” for additional information.
(2) Results for the year ended December 31, 2019 include the ImThera impairment of the IPR&D asset of $50.3 million. Refer
to “Note 8. Goodwill and Intangible Assets” for additional information.
(3) Results for the year ended December 31, 2019 include the Caisson impairments of goodwill and the IPR&D asset of $42.4
million and $89.0 million, respectively. Refer to “Note 8. Goodwill and Intangible Assets” for additional information.
Assets by reportable segment as of December 31, 2019 and 2018, was as follows (in thousands):
Assets
Cardiovascular
Neuromodulation
Other
Total
Capital expenditures by segment were as follows (in thousands):
Capital Expenditures
Cardiovascular
Neuromodulation
Other
Discontinued operations
Total
2019
2018
1,546,520
$
1,532,825
749,069
116,208
731,840
285,036
2,411,797
$
2,549,701
$
$
Year Ended December 31,
2018
2017
2019
$
$
20,779
$
27,621
$
3,415
3,783
—
1,728
7,630
1,018
27,977
$
37,997
$
18,985
2,504
7,010
5,608
34,107
F-58
Geographic Information
Property, plant, and equipment, net by geographic region as of December 31, 2019 and 2018, was as follows (in thousands):
PP&E
United States
Europe
Rest of World
Total
2019
2018
$
$
61,410
$
110,270
9,674
181,354
$
68,862
112,376
10,162
191,400
Note 21. Supplemental Financial Information
Inventories, net as of December 31, 2019 and 2018, consisted of the following (in thousands):
Raw materials
Work-in-process
Finished goods
2019
2018
45,225
$
14,581
104,348
40,387
15,999
97,149
164,154
$
153,535
$
$
Inventories are reported net of the provision for obsolescence. The provision, which reflects normal obsolescence and
includes components that are phased out or expired, totaled $12.7 million and $11.6 million at December 31, 2019 and
December 31, 2018, respectively.
PP&E as of December 31, 2019 and 2018, consisted of the following (in thousands):
Land
Building and building improvements
Equipment, software, furniture and fixtures
Other
Capital investment in process
Total
Accumulated depreciation
Net
2019
2018
Lives in Years
$
15,165
$
86,814
205,711
9,431
18,220
335,341
(153,987)
181,354
$
$
15,866
82,035
195,008
8,298
20,228
321,435
(130,035)
191,400
3 to 39
2 to 16
1 to 10
F-59
Accrued liabilities as of December 31, 2019 and 2018, consisted of the following (in thousands):
2019
2018
Contingent consideration (1)
$
22,953
$
CRM purchase price adjustments payable to MicroPort Scientific Corporation
Operating lease liabilities (2)
Legal and other administrative costs
Contract liabilities
Research and development costs
Restructuring related liabilities (3)
Provisions for agents, returns and other
Product remediation (4)
Derivative contract liabilities (5)
Other amounts payable to MicroPort Scientific Corporation
Other accrued expenses
(1) Refer to “Note 10. Fair Value Measurements.”
(2) Refer to “Note 13. Leases.”
(3) Refer to “Note 6. Restructuring.”
(4) Refer to “Note 7. Product Remediation Liability.”
(5) Refer to “Note 12. Derivatives and Risk Management.”
Note 22. Quarterly Financial Information (unaudited)
14,891
11,110
11,066
6,728
5,160
4,315
3,922
3,251
3,173
1,340
32,191
$
120,100
$
18,530
14,891
—
9,189
3,304
1,841
9,393
4,934
13,945
5,063
9,319
33,876
124,285
The tables below present the quarterly results for the years ended December 31, 2019 and 2018 (in thousands except for
share data):
Year Ended December 31, 2019
Net sales
Gross profit (1)
Operating income (loss) from continuing operations (2)
Net (loss) income from continuing operations (2)
Net income from discontinued operations, net of tax
Net (loss) income (2)
Diluted (loss) earnings per share:
Continuing operations
Discontinued operations
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
250,801
$
277,169
$
268,610
$
287,590
163,600
(20,779)
(14,849)
—
(14,849) $
197,114
(29,876)
(29,393)
178
(29,215) $
179,406
25,761
32,118
—
32,118
(0.31) $
—
(0.31) $
(0.61) $
0.01
(0.60) $
0.66
—
0.66
204,638
(143,976)
(143,417)
187
(143,230)
(2.96)
—
(2.96)
$
$
$
$
$
$
F-60
Year Ended December 31, 2018
Net sales
Gross profit (1)
Operating income (loss) from continuing operations (3)
Net income (loss) from continuing operations (3)
Net loss from discontinued operations, net of tax
Net income (loss) (3)
Diluted earnings (loss) per share:
Continuing operations
Discontinued operations
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
250,398
$
287,498
$
272,082
$
296,983
162,085
193,963
12,530
17,822
(4,549)
13,273
0.36
(0.09)
0.27
$
$
$
21,607
19,528
(4,462)
15,066
0.40
(0.09)
0.31
$
$
$
$
$
$
174,348
(5,757)
(6,273)
(904)
(7,177) $
204,073
(276,452)
(209,539)
(1,022)
(210,561)
(0.13) $
(0.02)
(0.15) $
(4.32)
(0.02)
(4.34)
(1) Gross profit excludes amortization of developed technology intangible assets of approximately $3.7 million, $5.5 million and $3.6
million for the first and second quarters in 2019, the third and fourth quarters in 2019 and for each quarter in 2018, respectively.
(2) The second quarter of 2019 includes a $50.3 million impairment of the ImThera IPR&D asset arising from the ImThera acquisition.
The fourth quarter of 2019 includes a $42.4 million impairment of Caisson’s goodwill arising from the Caisson acquisition and a
$89.0 million impairment of Caisson’s IPR&D asset arising from the Caisson acquisition. For further information, please refer to
“Note 8. Goodwill and Intangible Assets.”
(3) The fourth quarter of 2018 includes a $294.1 million litigation provision associated with our 3T devices. For further information,
please refer to “Note 14. Commitments and Contingencies.”
Note 23. New Accounting Pronouncements
Adoption of New Accounting Pronouncements
The following table provides a description of our adoption of new Accounting Standards Updates (“ASUs”) issued by the
FASB and the impact of the adoption on our condensed financial statements:
Issue Date &
Standard
May 2014
ASU No. 2014-09,
Revenue from
Contracts with
Customers (Topic
606)
Description
This ASU requires an entity to recognize
the amount of revenue to which it expects
to be entitled for the transfer of promised
goods or services to customers and
replaces most existing revenue recognition
guidance.
Date of
Adoption
January 1,
2018
Effect on Financial Statements or Other
Significant Matters
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 Cardiovascular 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 did 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.
F-61
This update 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 an identical or a
similar investment of the same issuer.
The standard requires lessees to recognize
most leases on the balance sheet as lease
liabilities with corresponding right-of-use
(“ROU”) assets and to provide enhanced
disclosures. Furthermore, from a lessor
perspective, certain of our agreements that
allow the customer to use, rather than
purchase, our medical devices met the
criteria of being a lease in accordance with
the new standard.
This update provides guidance on the
presentation and classification of certain
cash receipts and cash payments in the
statement of cash flows.
January 1,
2018
There was no material impact to our
consolidated financial statements as a result
of adopting this ASU.
January 1,
2019
Adoption of the new standard resulted in the
recognition of ROU assets and lease
liabilities of approximately $60 million as of
January 1, 2019. Refer to “Note 13.
Leases.”
January 1,
2018
There was no material impact to our
consolidated financial statement of cash
flows as a result of adopting this ASU.
January 1,
2018
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.
This update clarifies when a set of assets
and activities is a business.
January 1,
2018
We recognized the following cumulative-
effect adjustments, including to retained
earnings, upon adoption at January 1, 2018:
Prepaid expenses and other current assets
decreased by $12.6 million, deferred tax
assets increased by $58.3 million, other
assets decreased by $68.1 million and the
accumulated deficit increased by $22.5
million.
The ImThera, TandemLife and Miami
Instruments acquisitions were considered
acquisitions of a business. Refer to “Note 4.
Business Combinations” for a discussion of
our acquisitions.
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.
January 1,
2018
Our adoption resulted in an immaterial
impact to our consolidated financial
statements. The consolidated statements of
income (loss) for the years ended
December 31, 2017 and December 31, 2016
have been recast for the adoption of this
update.
January 2016
ASU No. 2016-01,
Financial
Instruments -
Overall (Subtopic
825-10):
Recognition and
Measurement of
Financial Assets
and Financial
Liabilities
February 2016
ASU No. 2016-02,
Leases (Topic 842)
and subsequent
amendments
August 2016
ASU No. 2016-15,
Statement of Cash
Flows (Topic 230):
Classification of
Certain Cash
Receipts and Cash
Payments
October 2016
ASU No. 2016-16,
Income Taxes
(Topic 740): Intra-
Entity Transfers of
Assets Other Than
Inventory.
January 2017
ASU No. 2017-01,
Business
Combinations
(Topic 805):
Clarifying the
Definition of a
Business
March 2017
ASU No. 2017-07,
Compensation—
Retirement Benefits
(Topic 715):
Improving the
Presentation of Net
Periodic Pension
Cost and Net
Periodic Post
Retirement Benefit
Cost.
F-62
This update simplifies the accounting for
non-employee share-based payment
transactions.
January 1,
2019
There was no material impact to our
consolidated financial statements as a result
of adopting this ASU.
June 2018
ASU No. 2018-07,
Compensation—
Stock
Compensation
(Topic 718):
Improvements to
Nonemployee
Share-Based
Payment Accounting
Future Adoption of New Accounting Pronouncements
The following table provides a description of future adoptions of new accounting standards that may have an impact on our
financial statements when adopted:
Description
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 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. Early adoption is permitted.
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. Early adoption is
permitted.
This update removes, modifies and adds certain
disclosure requirements related to fair value
measurements. Early adoption is permitted.
Projected
Date of
Adoption
January 1,
2020
January 1,
2020
January 1,
2020
This update adds and removes certain disclosure
requirements related to defined benefit plans. This ASU
is to be implemented on a retrospective basis for all
periods presented with early adoption permitted.
January 1,
2021
This update clarifies and aligns the accounting for
implementation costs for hosting arrangements with the
requirements for capitalizing implementation costs
incurred to develop or obtain internal-use software. This
ASU is to be applied either retrospectively or
prospectively with early adoption permitted.
January 1,
2020
Effect on Financial
Statements or Other
Significant Matters
We are currently
evaluating the effect
this standard will
have on our
condensed
consolidated financial
statements and related
disclosures.
We are currently
evaluating the effect
this standard will
have on our
condensed
consolidated financial
statements and related
disclosures.
We do not expect the
adoption of this
update to have a
material effect on our
condensed
consolidated financial
statement disclosures.
We do not expect the
adoption of this
update to have a
material effect on our
condensed
consolidated financial
statement disclosures.
We do not expect the
adoption of this
update to have a
material effect on our
condensed
consolidated financial
statements.
Issue Date & Standard
June 2016
ASU No. 2016-13,
Financial Instruments—
Credit Losses (Topic 326)
January 2017
ASU No. 2017-04,
Intangibles-Goodwill and
Other (Topic 350):
Simplifying the Test for
Goodwill Impairment
August 2018
ASU No. 2018-13, Fair
Value Measurement (Topic
820): Changes to the
Disclosure Requirements for
Fair Value Measurement
August 2018
ASU No. 2018-14,
Compensation—Retirement
Benefits—Defined Benefit
Plans—General (Subtopic
715-20): Changes to the
Disclosure Requirements for
Defined Benefit Plans
August 2018
ASU No. 2018-15,
Intangibles—Goodwill and
Other—Internal-Use
Software (Subtopic 350-40):
Customer’s Accounting for
Implementation Costs
Incurred in a Cloud
Computing Arrangement
That Is a Service Contract
F-63
LivaNova PLC
20 Eastbourne Terrace
London, W2 6LG
United Kingdom
T +44 20 3325 0660
www.livanova.com