LivaNova PLC 10-Q Summary
Business context and reporting period
LivaNova is a global medical-device company operating through Cardiovascular and Neuromodulation segments. The filing covers the three and six months ended June 30, 2020, prepared under U.S. GAAP in U.S. dollars. Results were materially affected by COVID-19-related delays in elective procedures, reduced hospital spending and delayed neuromodulation implants.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $182.2 million | $277.2 million | $424.6 million | $528.0 million |
| Operating loss | $(15.2) million | $(29.9) million | $(14.6) million | $(50.7) million |
| Net loss | $(88.0) million | $(29.2) million | $(50.4) million | $(44.1) million |
| Loss per share | $(1.81) | $(0.60) | $(1.04) | $(0.91) |
| Operating cash flow | Not separately provided | Not separately provided | $(125.1) million | $(17.4) million |
Q2 operating margin was approximately (8.4)%, compared with (10.8)% in the prior-year quarter. Six-month operating margin was approximately (3.4)%, compared with (9.6)%. Q2 net margin was approximately (48.3)%, and six-month net margin was approximately (11.9)%.
- Cardiovascular sales declined 27.7% in Q2 and 15.6% for the six-month period. Neuromodulation sales declined 45.1% and 26.2%, respectively.
- Q2 Cardiovascular segment loss was $9.4 million versus income of $10.1 million; Neuromodulation segment income increased to $27.3 million from $0.6 million, largely due to contingent-consideration fair-value changes and the absence of the $50.3 million 2019 intangible impairment.
- Cash and cash equivalents were $232.5 million at June 30, 2020, up from $61.1 million at December 31, 2019. Current assets were $672.4 million versus current liabilities of $268.4 million.
- Total debt, including current and long-term obligations, was approximately $646.6 million at June 30, 2020, compared with $337.7 million at year-end 2019.
- Net cash used in investing activities was $22.7 million, including $18.0 million of property, plant and equipment purchases. Net cash provided by financing activities was $319.7 million.
- Six-month cash flow was materially reduced by $122.2 million of 3T litigation settlement payments and a $16.4 million CRM sale closing-adjustment payment.
Material changes versus the prior comparable period
- Revenue fell $95.0 million, or 34.3%, in Q2 and $103.4 million, or 19.6%, for the first six months, primarily because COVID-19 reduced elective procedures and delayed implants.
- Q2 cost of sales increased to 31.2% of revenue from 27.0%, reflecting product mix and unfavorable manufacturing variances from lower demand. SG&A increased to 53.8% of revenue from 45.9%.
- The company recorded a $66.3 million Q2 income-tax expense, compared with a $6.2 million benefit in the prior-year quarter. This primarily reflected a $70.0 million valuation allowance against U.K. deferred tax assets. The six-month period includes a $42.9 million CARES Act tax benefit.
- In June 2020, LivaNova raised approximately $699.9 million of combined net proceeds through a $450.0 million senior secured term loan and $287.5 million of 3.00% cash exchangeable senior notes. It repaid approximately $528.0 million of existing indebtedness and related fees.
- The new term loan matures in June 2025 and bears interest at three-month LIBOR, subject to a 1% floor, plus 6.50%. The notes mature in December 2025 and are exchangeable only for cash.
- The company paid the second $90.0 million installment under its 3T litigation settlement in January 2020. The remaining 3T litigation provision was $49.0 million at June 30, 2020.
Guidance, outlook, commentary, and risks
The filing does not provide a clear quantitative full-year revenue or earnings guidance figure. Management reported stabilization in some geographies as elective surgeries resumed and expected recovery to continue globally during the second half of 2020, but emphasized that recovery would vary by country and depend on COVID-19 case volumes, hospital capacity, staffing, patient willingness to reschedule, travel restrictions, economic conditions and potential resurgence.
- Manufacturing plants remained operational, with no known or foreseen raw-material or distribution constraints at the filing date. The company implemented cost reductions, reduced discretionary spending and tightened personnel-cost management.
- RECOVER clinical-study sites were largely closed during Q2, resulting in few new implants. Management expected implants to recover gradually in Q3 and more fully in Q4, with increases continuing into 2021. The ANTHEM-HFrEF trial was temporarily paused and subsequently restarted at more than half of its sites.
- The FDA cleared the K191402 510(k) for the 3T devices in February 2020, allowing devices manufactured under the clearance to avoid the prior import alert. Remediation, disinfection and loaner programs continue.
- Key risks include continued COVID-19 disruption, elective-procedure delays, clinical-trial delays, regulatory compliance, product liability, reimbursement changes, foreign exchange, Brexit, supplier dependence and competition.
- The company faces cash-payment and covenant risks under the new term loan and cash exchangeable notes. The term loan includes net-revenue and secured-leverage covenants; failure to comply could result in default, acceleration or enforcement of security interests.
- An Italian environmental matter could involve liability of up to an estimated €572.1 million, approximately $641.3 million at June 30, 2020; no loss was accrued because it was not considered probable or reasonably estimable.
- The company reported Iran-related gross revenue of $3.5 million and net profit of $1.3 million in Q2, and $4.0 million and $1.5 million, respectively, for the six-month period.
Most important facts for investors to verify
- Whether elective-procedure volumes and neuromodulation implants recovered as projected during the second half of 2020.
- Compliance with the new term-loan revenue and secured-leverage covenants, including the effect of sustained COVID-19 revenue weakness.
- Available cash generation relative to interest, principal and potential cash settlement obligations under the notes.
- Future changes to the $49.0 million 3T litigation provision and the status of approximately 85 filed and unfiled worldwide claims reported as of July 29, 2020.
- The ultimate exposure from the Italian environmental and tax matters, which were not fully reflected as recognized losses in the filing.
- Whether deferred tax assets remain realizable after the $70.0 million U.K. valuation allowance and continuing operating losses.