LivaNova PLC 2018 Q3 Form 10-Q Summary
Business context and reporting period
LivaNova is a global medical-device company operating through Cardiovascular and Neuromodulation segments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Results are presented in U.S. dollars under U.S. GAAP.
The Cardiac Rhythm Management business was sold on April 30, 2018 for $195.9 million of gross cash proceeds, less $9.2 million of cash transferred. Its results are classified as discontinued operations.
Financial performance and key metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $272.1 million | $251.3 million | $810.0 million | $733.9 million |
| Gross profit | $174.3 million | $161.9 million | $530.4 million | $479.6 million |
| Gross margin | 64.1% | 64.4% | 65.5% | 65.3% |
| Operating income from continuing operations | $(5.8) million | $30.0 million | $28.4 million | $77.5 million |
| Net income | $(7.2) million | $27.8 million | $21.2 million | $86.6 million |
| Diluted EPS | $(0.15) | $0.57 | $0.43 | $1.79 |
| Operating cash flow | Not separately provided | Not separately provided | $99.6 million | $73.7 million |
Q3 sales increased 8.3%, while nine-month sales increased 10.4%. Cardiovascular sales increased 4.2% in Q3 and 9.1% for the nine months; Neuromodulation sales increased 15.3% and 12.4%, respectively. The United States generated $405.8 million, or approximately half of nine-month sales.
Q3 operating results were pressured by higher SG&A, R&D, merger and integration expenses, and product-remediation costs. Q3 SG&A was $115.1 million, R&D was $42.4 million, merger and integration expenses were $12.7 million, and product-remediation expense was $3.4 million. Nine-month R&D increased to $108.4 million from $77.1 million, reflecting investment in next-generation products and clinical programs.
At September 30, 2018, cash and cash equivalents were $79.9 million versus $93.6 million at December 31, 2017. Current assets were $573.2 million and current liabilities were $347.1 million. Current debt obligations were $49.0 million and long-term debt was $108.1 million. The company also reported $183.0 million of contingent consideration liabilities, primarily related to ImThera and TandemLife acquisitions.
Net cash used in investing activities was $107.4 million, including $279.9 million for acquisitions, $25.1 million of capital expenditures, and $186.7 million of proceeds from the CRM sale. Net cash used in financing activities was $2.9 million. Cash declined by $13.7 million during the nine months.
Material changes versus the prior comparable period
- Revenue grew, led by SenTiva VNS adoption, international Neuromodulation growth, stronger heart-lung machine demand, and TandemLife revenue.
- Profitability declined materially: Q3 continuing-operations operating income fell from $30.0 million to a $5.8 million loss; nine-month operating income fell 63% to $28.4 million.
- Segment income declined 58.9% for Cardiovascular and 21.7% for Neuromodulation in Q3. Management attributed the declines to growth investments, higher R&D, litigation costs, and losses from acquired businesses.
- LivaNova acquired the remaining interest in ImThera for consideration of up to $225 million and acquired TandemLife for consideration of up to $254 million. The acquisitions increased goodwill and intangible assets and added substantial contingent consideration liabilities.
- ImThera’s clinical developments resulted in a minimum 12-month delay to expected regulatory approval. Management reported no impairment at September 30, 2018, but identified further delays or changes in estimates as potential impairment triggers.
- Discontinued operations generated a $9.9 million net loss for the nine months, compared with $0.7 million of income in the prior-year period, primarily reflecting CRM activities through the sale date and related effects.
- The product-remediation liability for 3T Heater-Cooler devices declined to $17.9 million from $27.5 million at year-end, although remediation expense increased to $8.7 million for the nine months.
Guidance, outlook, management commentary, risks and unusual items
Management stated that existing cash, expected operating cash flow, and available borrowing capacity should be sufficient for operating needs, working capital, research and development, capital expenditures, and debt service over the next 12 months. The filing does not provide a clear quantitative revenue or earnings guidance figure.
Key growth initiatives include SenTiva, next-generation heart-lung machines, TandemLife, treatment-resistant depression, obstructive sleep apnea, transcatheter mitral valve replacement, and heart-failure programs. CMS was reconsidering coverage for VNS therapy in treatment-resistant depression, with a final decision expected by the end of February 2019.
- 3T device remediation remains subject to regulatory approvals, customer response, remediation costs, and product-liability litigation. On October 11, 2018, the FDA allowed the U.S. vacuum and sealing upgrade program to commence.
- Approximately 150 worldwide claims related to 3T devices were reported as of October 31, 2018. The company had not accrued damages because potential losses were not probable or reasonably estimable.
- The company recognized approximately $1.9 million of SG&A expense for a settlement with the U.S. Department of Justice, the State of Georgia, and a former employee related to VNS sales and marketing.
- A patent-infringement case concerning the SenTiva Model 1000 was stayed pending an inter partes review. Potential losses were not considered probable or reasonably estimable.
- Brexit could increase regulatory, trade, tax, and operating uncertainty. The company also disclosed unresolved Italian tax litigation and an approximately $19.6 million reserve for an uncertain tax position.
- Foreign-currency and interest-rate exposure is managed through derivatives. The filing identifies no material change in market-risk exposures from the 2017 Form 10-K.
Important facts for investors to verify
- Whether revenue growth converts into improved operating margins as acquisition losses, litigation costs, and strategic investments moderate.
- The timing and cost of 3T device remediation, the progression of related litigation, and any future changes to the $17.9 million remediation liability.
- Regulatory and clinical milestones for ImThera, Caisson, TandemLife, VITARIA, and VNS treatment-resistant depression programs.
- The valuation and payment timing of the $183.0 million contingent consideration liability.
- Cash generation after acquisition spending, capital expenditures, debt service, and potential regulatory or litigation payments.
- The impact of Brexit, tax proceedings, foreign exchange, and changing reimbursement policies on future results.