Goodwill and Intangible Assets

12 Months Ended

Dec. 31, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

Detail of finite-lived and indefinite-lived intangible assets (in thousands):



	December 31, 2016			December 31, 2015			April 24, 2015
Finite-lived intangible assets:
Developed technology	$	206,048		$	213,873		$	13,204
Customer relationships	441,088			444,472			—
Trademarks and trade names	12,649			13,030			—
Other intangible assets	2,106			11			1,023
Total	661,891			671,386			14,227
Accumulated amortization	(52,694		)	(12,444		)	(4,059		)
Net	$	609,197		$	658,942		$	10,168
Indefinite-lived intangible assets:
Goodwill	$	691,712		$	745,356		$	—

During the year ended December 31, 2016, we purchased $1.9 million of developed technology.

In connection with the Mergers and based upon the preliminary acquisition valuation, we acquired certain finite-lived intangible assets: $464.0 million of customer relationships, $211.1 million of developed technology and $13.6 million of trade names.

The amortization periods for our finite-lived intangible assets as of December 31, 2016:



	Minimum Life in years	Maximum Life in years
Developed technology	9	15
Customer relationships	16	18
Trademarks and trade names	4	4
Other intangible assets	5	5

The estimated future amortization expense based on our finite-lived intangible assets at December 31, 2016 (in thousands):



2017	$	45,408
2018	45,407
2019	45,407
2020	45,407
2021	45,397
Thereafter	382,171

Goodwill and Goodwill Impairment

Our business consists of three operating Segments (which are our reporting units for goodwill testing): our historical Cyberonics segment, Neuromodulation (“NM”) and the two historical Sorin segments, Cardiac Surgery (“CS”) and Cardiac Rhythm Management (“CRM”).

The carrying amount of goodwill by Segment (in thousands):



	Neuromodulation		Cardiac Surgery			Cardiac Rhythm Management			Total
April 24, 2015
Goodwill from acquisition	$	315,943	$	429,627		$	17,575		$	763,145
Currency adjustments	—		(17,086		)	(703		)	(17,789		)
December 31, 2015	315,943		412,541			16,872			745,356
Measurement period adjustments, net	—		(25,728		)	1,757			(23,971		)
Impairments	—		—			(18,348		)	(18,348		)
Currency adjustments	—		(11,044		)	(281		)	(11,325		)
December 31, 2016	$	315,943	$	375,769		$	—		$	691,712

As a result of the Mergers, the newly formed LivaNova entity recognized $763.1 million of goodwill on its balance sheet as the excess of the fair value of consideration over the fair value of the net assets acquired and liabilities assumed from Sorin. We finalized the measurement of assets and liabilities recognized in the Mergers in the nine months ended September 30, 2016, and as a result we recorded a net decrease in goodwill of $24.0 million.

We test goodwill for impairment on an annual basis or when events or changes in circumstances indicate that a potential impairment exists. As part of our annual goodwill impairment test as of October 1, 2016, we considered that certain sales targets were not achieved during the third quarter of 2016 and the reduction to our fourth quarter 2016 sales projections.

Our stock price also declined significantly during the fourth quarter, reaching a low following the Mergers of $40.84 on November 15, 2016. Our stock price traded between $40.84 and $60.99 during the fourth quarter of 2016 and averaged $49.31 during this period.

Management considered the reduction in third quarter sales and fourth quarter sales projections, in addition to a decline in our stock price, and based on a qualitative assessment concluded that the goodwill of the CRM and CS reporting units may be impaired. As a result, we performed the first step of the impairment test process by estimating the fair value of the reporting units using an income approach.

Based on the valuation performed as of October 1, 2016, the CRM reporting unit estimated fair value was less than its carrying value; therefore, we concluded that the CRM goodwill balance was impaired. For the second step of the impairment test, we compared the estimated fair value of the reporting unit to the fair value of all assets and liabilities of the reporting unit to calculate the implied fair value of goodwill. As a result, we recorded a non-cash loss on impairment totaling $18.3 million which was included in Goodwill Impairment in our consolidated statement of net loss for the year ended December 31, 2016.

Based on the valuation performed as of October 1, 2016, the CS reporting unit estimated fair value exceeded the carrying value by approximately 6%, therefore we concluded that the goodwill balance was not impaired.

The income approach was based on a discounted cash flow model, which utilized present values of cash flows to estimate fair value. The future cash flows were projected based on our estimates of future sales, operating costs, capital requirements, growth rates and terminal values. Forecasted sales and growth rates take into account current market conditions and our anticipated business outlook, both of which have been impacted by the reduction in sales projections during 2016.

Operating costs were forecasted using a combination of our historical average operating costs and expected future costs, adjusted for an estimated inflation factor. Capital requirements in the discounted cash flow model were based on management's estimates of future capital costs, taking into consideration our historical trends. The estimated capital requirements included cash outflows to maintain manufacturing and R&D facilities.

A terminal period was used to reflect our estimate of stable, perpetual growth. The terminal period reflects a terminal growth rate of 3% for both reporting units, which includes an estimated inflation factor. The future cash flows were discounted using a market participant risk-adjusted weighted average cost of capital ("WACC") for CRM and CS of 9.5% and 8.5%, respectively.

These assumptions were derived from unobservable inputs and reflect management's judgments and assumptions. A decline in the CS reporting unit cash flow projections or adverse changes in other key assumptions such as a 50 basis point increase in the WACC or a 0.5% reduction in the terminal growth rate could result in a goodwill impairment charge in the future. However, management does not believe that an impairment charge is likely.

We evaluated the estimated fair value of our reporting units as compared to our market capitalization as of October 1, 2016. The aggregate fair values of our reporting units exceeded our market capitalization, and we believe the resulting implied control premium was reasonable based on recent market transactions within our industry or other relevant benchmark data.

We performed a qualitative assessment for our NM reporting unit as of October 1, 2016. Despite the reduction to sales projections for CRM and CS, we concluded that the fair value of NM remains substantially in excess of the carrying value of the reporting unit, as evidenced by the estimated fair value of the NM reporting unit calculated for the purpose of reconciling the fair value of our reporting units to our market capitalization. Therefore, we concluded that it remains more-likely than not that the NM reporting unit goodwill was not impaired.

The estimates used to determine the fair value of the CS reporting unit reflect management's best estimates of inputs and assumptions that a market participant would use. We believe our estimates are reasonable given the Company’s advantageous position in the global market for oxygenators, heart-lung machines, and auto-transfusion systems, despite the issues experienced in the 3T Heater Cooler market. Future declines in the CS reporting unit's operating performance or our anticipated business outlook may reduce the estimated fair value of our CS reporting unit and result in an impairment of goodwill. As indicated in the Risk Factors, various factors that could impact the reporting unit’s operating performance include, but are not limited to, the timing of regulatory approvals, market acceptance of products, non-coverage determinations for reimbursement by third-party payors, temporary manufacturing disruptions, or product recalls or safety alerts.

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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