LivaNova PLC 2019 Q3 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 unaudited filing covers the three and nine months ended September 30, 2019, compared with the respective 2018 periods. Results are presented under U.S. GAAP in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $268.6 million | $272.1 million | $796.6 million | $810.0 million |
| Operating income (loss) | $25.8 million | $(5.8) million | $(24.9) million | $28.4 million |
| Net income (loss) | $32.1 million | $(7.2) million | $(11.9) million | $21.2 million |
| Diluted EPS | $0.66 | $(0.15) | $(0.25) | $0.43 |
| Operating cash flow | Not separately provided | Not separately provided | $(94.0) million | $99.6 million |
Q3 operating margin was approximately 9.6%, compared with negative 2.1% in the prior-year quarter. The nine-month operating margin was approximately negative 3.1%, compared with 3.5% in 2018. Cost of sales, excluding amortization, declined to 32.1% of sales in Q3 from 34.7%; however, SG&A increased to 45.8% from 42.3% and R&D increased to 17.1% from 15.6%.
At September 30, 2019, cash and cash equivalents were $75.3 million, versus $47.2 million at December 31, 2018. Total debt obligations were approximately $341.7 million, including $68.8 million current debt and $272.9 million long-term debt, compared with approximately $168.3 million at year-end 2018. The company reported compliance with all debt covenants and stated that cash, expected operating cash flow and available borrowing capacity should fund anticipated needs for the next 12 months.
Net cash used in operating activities was driven principally by the $140.8 million cash payment related to the 3T device litigation provision. Investing cash use was $30.5 million, including $10.8 million for the Miami Instruments acquisition and $16.8 million for capital expenditures. Financing activities provided $153.7 million, primarily from long-term borrowings.
Material changes versus the prior comparable periods
- Q3 sales declined 1.3% year over year; nine-month sales declined 1.7%.
- Cardiovascular sales declined 6.7% in Q3 and 3.2% for the nine months. Cardiopulmonary and Heart Valves weakness more than offset Advanced Circulatory Support growth.
- Neuromodulation sales increased 7.2% in Q3 and 0.7% for the nine months, supported by international growth and continued adoption of SenTiva, partly offset by earlier U.S. competitive pressure and sales-force turnover.
- Q3 profitability benefited from a $33.8 million insurance recovery related to 3T litigation. Nine-month results included a $50.3 million impairment of obstructive sleep apnea in-process research and development assets.
- Operating income improved in Q3 from a prior-year loss, but nine-month operating income declined sharply because of the impairment, higher SG&A and R&D, litigation-related expenses and the absence of the 2018 gain on acquisition.
- The company adopted ASC 842 lease accounting on January 1, 2019, recognizing approximately $60 million of right-of-use assets and lease liabilities at adoption.
- On June 12, 2019, LivaNova acquired the Miami Instruments minimally invasive cardiac surgery instruments business for cash consideration of up to $17.0 million.
Guidance, outlook, commentary and risks
The filing does not provide clear quantitative full-year revenue or earnings guidance. Management expected a limited U.S. commercial release of the FDA-approved LifeSPARC system by the end of 2019 and highlighted the launch of the Bi-Flow arterial femoral cannula. CMS accepted the RECOVER clinical-study protocol for VNS Therapy in treatment-resistant depression, and the first patient was enrolled in September 2019.
Material contingencies include the 3T Heater-Cooler product remediation program, FDA regulatory matters and related litigation. The 3T litigation provision was $153.0 million at September 30, 2019; a settlement framework provides for payments of up to $225.0 million, with $135.0 million paid in July 2019 and the remainder scheduled for January 2020. The product-remediation liability was $7.4 million. Approximately 100 filed and unfiled claims worldwide remained known as of October 29, 2019.
Other significant risks include regulatory approval and reimbursement, product liability, intellectual property litigation, foreign-exchange and interest-rate exposure, Brexit-related uncertainty, supplier dependence, cybersecurity, competition, clinical-study outcomes and potential additional impairment of the ImThera obstructive sleep apnea assets. LivaNova also disclosed that its disclosure controls were not effective because of material weaknesses in internal control over financial reporting; remediation efforts were ongoing and management expected completion before year-end 2019.
The company disclosed gross revenue of $3.2 million and net profit of $1.2 million from activities in Iran during Q3 2019, and $8.7 million and $3.1 million, respectively, for the nine-month period.
Most important facts for investors to verify
- Whether the 3T litigation settlement is fully accepted and whether remaining claims create liabilities beyond the $153.0 million provision.
- The timing and cash impact of the scheduled January 2020 settlement payment and other litigation-related obligations.
- Progress toward remediation of material weaknesses in internal controls.
- Commercial uptake and margins for LifeSPARC, Advanced Circulatory Support and other new products.
- Recovery of Cardiovascular sales, particularly Cardiopulmonary and Heart Valves, and sustainability of Neuromodulation growth.
- Commercialization timing and impairment risk for the obstructive sleep apnea program, whose carrying value was $112.0 million after the $50.3 million impairment.
- Debt repayment requirements under the 2019 Debt Facility, including scheduled principal repayments beginning in September 2020.
- Potential exposure from the Italian environmental, tax and patent proceedings, for which the filing states that losses are not currently probable or reasonably estimable.