Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. CYBERONICS INC (864683) 10-Q published on Aug 20, 2015 at 3:31 pm
Reporting Period: Jul 23, 2015
Our effective tax rates were 35.4% and 39.1% for the thirteen weeks ended July 24, 2015 and July 25, 2014, respectively. The effective tax rate, for the thirteen weeks ended July 24, 2015, was primarily comprised of our federal income tax rate of 35%, state and foreign income taxes, permanent differences and discrete items. Permanent differences relate to transactions that are reported for U.S. GAAP purposes but are not reported for income tax purposes in accordance with the Internal Revenue Code. A discrete item is an unusual or infrequently occurring tax credit or expense item recorded in the quarter incurred rather than over the balance of the fiscal year. 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” standard, we establish a valuation allowance. During the quarter ended July 24, 2015, we recorded a deferred tax asset for the Cerbomed impairment. The impairment, once realized for income tax purposes, would be a capital loss, which can only be offset by capital gains. We recorded a valuation allowance against the deferred tax asset because we are not anticipating generating capital gains to offset this loss. The valuation allowance increased our effective tax rate by approximately 4.0%. This effect was offset by the favorable tax effect from our Costa Rica manufacturing facility of 2.5% and the 2.1% favorable tax effects of treating the financial statement impact of the merger expenses and the Cerbomed impairment as discrete items. The effective tax rate for the thirteen weeks ended July 25, 2014 was 39.1% and was primarily comprised of our federal income tax rate of 35%, plus state and foreign income taxes, permanent differences and discrete items. We recorded a 2.6% unfavorable discrete item related to a change in our international ownership structure.
Completion of the Mergers is subject to certain conditions, some of which are outside of the parties' control. On July 24, 2015, Sorin received a claim from the Italian State's Attorney seeking to enjoin the Sorin Merger. The claim was filed with the Civil Court of Milan on behalf of the Italian Ministry of the Environment and other Italian government agencies pursuant to provisions of the Italian Civil Code permitting creditors to challenge a merger if the merger will result in harm to the position of creditors with respect to the merged entity. In its claim, the Italian State's Attorney alleges that the Sorin Merger is intended to insulate Sorin from potential liability related to certain environmental litigation against Sorin's previous parent company, SNIA S.p.A., and thus harms the position of the relevant Italian government agencies, which the claim alleges are creditors of Sorin. Sorin believes that the claim is without merit and is contesting it vigorously. Sorin sought an expedited resolution of the Italian State's Attorney's claim in the Civil Court of Milan, which held a hearing on the matter on August 17, 2015. On August 20, 2015, the Civil Court of Milan issued a ruling rejecting the objection of the Italian State's Attorney, thus allowing the Mergers to move forward. Closing of the transaction is expected to occur in the fourth calendar quarter of 2015.
The VNS Therapy System delivers stimulation to the left vagus nerve by means of an implantable pulse generator. The pulse generator is an implantable, programmable signal generator designed to be coupled with a lead to deliver mild electrical pulses to the vagus nerve. The pulse generator is a battery-powered device. The Model 102 (Pulse™), Model 102R (Pulse Duo™), Model 103 (Demipulse®), Model 104 (Demipulse Duo®), Model 105 (AspireHC®) and the Model 106 (AspireSR®) generators are the VNS Therapy pulse generators we currently offer in the U.S. and most markets worldwide. The AspireSR generator is the first and only VNS Therapy System that provides responsive stimulation to heart-rate increases that may be associated with seizures. The AspireSR generator is capable of delivering programmable stimulation comparable to our other VNS Therapy generators and also enables additional stimulation automatically when a patient’s relative heart-rate changes exceed certain variable thresholds. Heart-rate changes may accompany seizure activity in certain patients. The thresholds are programmed by the patient’s physician and can be adjusted to suit individual patient needs.
In connection with the mergers, Cyberonics common stock (CYBX) will be delisted from the NASDAQ stock market and Sorin ordinary shares will be delisted from the Italian Stock Exchange (i.e., Mercato Telematico Azionario, organized and managed by Borsa Italiana S.p.A.). The parties intend to list LivaNova PLC ordinary shares under the symbol "LIVN" on the NASDAQ stock market and the London Stock Exchange. The transactions contemplated by the Transaction Agreement, which remain subject to approval by Cyberonics shareholders, were overwhelmingly approved by Sorin shareholders on May 26, 2015. Based on the number of Sorin ordinary shares and securities convertible into Sorin ordinary shares and the number of shares of Cyberonics common stock and securities convertible into Cyberonics common stock, in each case outstanding as of August 17, 2015 (the latest practicable date for which such numbers are known), and taking into consideration the purchase by holders of other Sorin ordinary shares pursuant to Article 2437-quater of the Italian Civil Code of all Sorin shares held by any holder who properly exercised and perfected his or her rescission rights under Italian law with respect to Sorin ordinary shares in connection with the Sorin Merger, it is anticipated that existing Cyberonics security holders would own approximately 54% of LivaNova PLC on a fully-diluted basis and existing Sorin security holders would own approximately 46% of LivaNova PLC on a fully-diluted basis, as of immediately after completion of the Mergers.
Cash provided by operating activities increased by $0.6 million to $18.7 million during the thirteen weeks ended July 24, 2015 as compared to the thirteen weeks ended July 25, 2014. The comparative change was primarily due to deferred taxes, the impairment of our investment in Cerbomed, trade accounts receivables, and accounts payable and accrued liabilities. Trade accounts receivable increased during the quarter ended July 24, 2015 by $4.5 million, primarily due to increased sales; in the prior fiscal period, trade accounts receivables fell by $2.2 million primarily due to significant remittances from a single international customer. Total current liabilities increased during the quarter ended July 24, 2015 by $5.5 million, due primarily to the financial, legal and professional fees related to the pending merger, as compared to a decrease in accounts payable and accrued expenses during the quarter ended July 25, 2014, by $5.0 million, primarily due to the settlement of prior year-end incentive compensation accruals.
Cash received from investing activities increased by $20.2 million to $18.4 million during the thirteen weeks ended July 24, 2015, as compared to the thirteen weeks ended July 25, 2014, primarily due to the transfer of our $20.0 million certificate of deposit to cash equivalents from short-term investments, which resulted from a change in the maturity period to three months from six months. In addition, we purchased PP&E of $1.7 million and $1.8 million during the quarter ended July 24, 2015 and July 25, 2014, respectively, primarily for manufacturing equipment and infrastructure improvements.