LivaNova plc — Form 10-Q Summary
Business context and reporting period
LivaNova is a global medical-device company operating in two reportable segments: Cardiovascular and Neuromodulation. The filing covers the three and nine months ended September 30, 2021, with comparative periods ended September 30, 2020. Financial statements are unaudited, prepared under U.S. GAAP, and reported in U.S. dollars.
The Heart Valve business was sold on June 1, 2021. Cardiopulmonary and Advanced Circulatory Support activities remain in the Cardiovascular segment; Neuromodulation includes VNS therapy and related development programs.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $253.2 million | $240.1 million | $765.3 million | $664.7 million |
| Gross profit | $170.1 million | $147.6 million | $508.5 million | $430.6 million |
| Gross margin | 67.2% | 61.5% | 66.4% | 64.8% |
| Operating income (loss) | $17.9 million | $(7.5) million | $(21.4) million | $(22.1) million |
| Operating margin | 7.1% | (3.1)% | (2.8)% | (3.3)% |
| Net loss | $(42.2) million | $(14.8) million | $(127.3) million | $(65.2) million |
| Loss per diluted share | $(0.82) | $(0.30) | $(2.56) | $(1.34) |
- Q3 sales increased 5.5%; nine-month sales increased 15.1%.
- Neuromodulation sales rose 15.1% in Q3 and 36.4% for the nine months, reaching $113.3 million and $334.6 million, respectively.
- Cardiovascular sales decreased 1.6% in Q3 and increased 2.4% for the nine months. Cardiopulmonary sales increased 15.0% in Q3 and 7.8% year to date; Advanced Circulatory Support sales increased 22.8% and 43.4%, respectively.
- Q3 operating income improved primarily from higher Cardiopulmonary and Advanced Circulatory Support sales, the Heart Valve divestiture, and contingent-consideration fair-value effects. Nine-month operating results continued to reflect $32.3 million of additional 3T litigation provision expense.
- Interest expense was $11.4 million in Q3 and $43.8 million for the nine months. A $60.2 million debt-extinguishment loss materially increased the 2021 net loss.
Cash flow, debt and liquidity
- Cash provided by operating activities was $69.1 million for the nine months ended September 30, 2021, compared with cash used of $116.4 million in the prior-year period.
- Cash provided by investing activities was $40.5 million, including $40.2 million from the Heart Valve sale and $23.1 million from the sale of the Respicardia investment and loan. Capital expenditures were $17.9 million.
- Cash used in financing activities was $178.2 million, primarily reflecting $451.4 million of debt repayments and a $35.6 million make-whole premium, partially offset by $324.2 million of net ordinary-share issuance proceeds.
- Cash and cash equivalents declined from $252.8 million at December 31, 2020 to $181.8 million at September 30, 2021.
- Total principal long-term debt was $234.4 million, consisting primarily of $221.7 million of 3.00% cash exchangeable senior notes due December 2025. The former $450 million senior secured term loan was repaid and terminated in August 2021.
- Because the exchange condition was satisfied, the exchangeable notes were classified as current at September 30, 2021. No holders had elected to exchange as of the filing date. A $125 million senior secured revolving facility was established in August 2021 and was undrawn at quarter-end.
- Management stated that existing cash, operating cash flow and available borrowing capacity are expected to fund operating needs, working capital, research and development, capital expenditures and debt service for the twelve months following issuance of the financial statements.
Material changes versus the prior comparable period
- Revenue growth was led by Neuromodulation and Cardiopulmonary products, while reported Cardiovascular results were affected by the June 2021 Heart Valve divestiture.
- Gross margin improved because of product mix, the divestiture of Heart Valves and lower 3T product-remediation expense.
- Operating expenses increased year to date, including higher research and development expense and $43.1 million of other operating expenses versus $12.6 million in the prior-year period.
- The company issued 4.18 million ordinary shares at $82.50 per share, generating approximately $322.6 million of net proceeds used primarily to repay the term loan.
- Litigation provisions related to the 3T Heater-Cooler device increased by $32.3 million during the nine months; the provision was $40.2 million at September 30, 2021.
- Assets declined to $2.20 billion from $2.41 billion at year-end 2020, while total liabilities declined to $890.9 million from $1.29 billion, principally reflecting debt repayment and changes in derivative balances.
Outlook, risks, contingencies and unusual items
The filing does not provide specific revenue or earnings guidance. Management reported improving demand during 2021 but continued COVID-19 headwinds, including delayed elective procedures, staffing shortages and Delta-variant-related delays in clinical-trial implants. Supply, production and distribution remained operational without material COVID-19-related constraints at the filing date.
- The cash exchangeable notes may require significant cash settlement if holders elect to exchange, which could adversely affect liquidity. The related capped-call assets had a fair value of $94.5 million, while the embedded exchange-feature liability was $150.7 million.
- The company had approximately 85 filed and unfiled worldwide 3T-related claims as of November 2, 2021. The accrued liability was $40.2 million, but actual resolution costs may differ materially.
- LivaNova faces potentially significant environmental exposure related to SNIA’s historical liabilities in Italy. The Court of Appeal declared Sorin/LivaNova jointly liable up to an estimated €572.1 million net-worth amount, although the final damages amount had not been determined and the company had appealed.
- The Saluggia hazardous-substances liability was $40.2 million at September 30, 2021, compared with an estimated loss range of $43.0 million to $55.0 million at December 31, 2020.
- Regulatory, reimbursement, product-liability, intellectual-property, cybersecurity, supply-chain, foreign-exchange, tax and clinical-development risks remain material. The FDA had not yet completed its close-out inspection related to the 3T Warning Letter.
- Iran-related activities generated reported gross revenue of $2.7 million and net profit of $1.1 million in Q3, and $7.3 million and $3.1 million, respectively, for the nine months.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2021. A new financial consolidation system was implemented during the quarter.
Investor verification points
- Verify the timing and cash impact of any exchange of the $221.7 million principal amount of exchangeable notes classified as current.
- Reconcile reported operating improvement with the $60.2 million debt-extinguishment charge, fair-value movements and litigation provisions.
- Assess whether Neuromodulation growth and Cardiopulmonary growth can offset the loss of Heart Valve revenue.
- Review developments in the 3T product-liability claims and the unresolved Italian environmental litigation, including potential liquidity requirements.
- Monitor COVID-19 effects on hospital access, elective procedures, staffing, supply chains and the RECOVER and ANTHEM-HFrEF clinical programs.
- Confirm the company’s ability to maintain adequate liquidity if exchangeable-note holders demand cash settlement or if major contingencies require payment.