LivaNova PLC — Q1 2018 Form 10-Q Summary
Business context and reporting period
LivaNova is a global medical-device company headquartered in London, with continuing operations in Cardiac Surgery and Neuromodulation. This unaudited report covers the three months ended March 31, 2018, compared with the same period in 2017. The Cardiac Rhythm Management business was classified as discontinued operations following the announced sale to MicroPort, which closed on April 30, 2018.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $250.4 million | $226.8 million | +10.4% |
| Gross profit | $162.1 million | $147.6 million | +9.8% |
| Gross margin | 64.7% | 65.1% | -0.4 percentage points |
| Operating income from continuing operations | $12.5 million | $19.7 million | -36.5% |
| Operating margin | 5.0% | 8.7% | -3.7 percentage points |
| Net income from continuing operations | $17.8 million | $13.2 million | +34.7% |
| Net income | $13.3 million | $11.3 million | +17.8% |
| Diluted earnings per share | $0.27 | $0.23 | +17.4% |
| Cash flow from operations | $20.4 million | $33.2 million | -38.6% |
| Capital expenditures | $5.8 million | $8.1 million | Decrease |
Cardiac Surgery sales increased 12.2% to $156.2 million, led by cardiopulmonary products. Neuromodulation sales increased 7.7% to $93.8 million, supported by demand for the SenTiva VNS Therapy System. Segment operating income declined to $10.3 million for Cardiac Surgery and $38.7 million for Neuromodulation.
Cash and cash equivalents were $65.0 million at March 31, 2018, down from $93.6 million at December 31, 2017. Total debt obligations were $183.4 million, comprising $119.7 million of current debt and $63.7 million of long-term debt. The company reported total assets of $2.70 billion and total liabilities of $885.9 million.
Material changes versus the prior comparable period
- Revenue growth was driven by Cardiac Surgery, particularly cardiopulmonary products, and by Neuromodulation product mix and SenTiva demand.
- Operating profitability weakened despite higher revenue. SG&A increased to $104.2 million from $87.3 million, and R&D increased to $31.8 million from $20.4 million.
- Restructuring expense fell to $1.9 million from $10.0 million, partly because Q1 2017 included significant costs related to the Suzhou facility exit.
- Continuing-operations earnings benefited from an $11.5 million gain on the acquisition of ImThera and a lower effective tax rate of 17.6%, compared with 27.1% in Q1 2017.
- Operating cash flow declined by $12.8 million, while investing cash use increased to $83.4 million, primarily because of the $77.6 million cash payment for ImThera.
- The company adopted revenue-recognition guidance under ASC 606 and other accounting updates; management reported no material cumulative impact from the revenue standard.
Outlook, commentary, risks, and unusual items
- Management stated that existing cash, expected operating cash flow, and available borrowing capacity should fund operating needs, working capital, research and development, capital expenditures, and debt service for the next 12 months.
- On January 16, 2018, LivaNova acquired the remaining 86% of ImThera for consideration of up to approximately $225 million. The transaction added $0.1 million of revenue and $1.0 million of operating losses in Q1.
- On April 4, 2018, LivaNova acquired TandemLife for cash consideration of up to $250 million, funded initially in part through a $190 million bridge facility. The company intended to use proceeds from the CRM sale to repay the bridge borrowing.
- The CRM sale generated a purchase price of $190 million plus customary adjustments. LivaNova provided a limited indemnity, generally up to €16.5 million, related to a French antitrust investigation.
- The 3T Heater-Cooler remediation liability was $25.6 million at March 31, 2018. Remediation includes vacuum and sealing upgrades, deep disinfection, and a continuing loaner-device program.
- LivaNova faced approximately 115 worldwide 3T-related claims as of May 1, 2018. No liability for damages was recorded because potential losses were not considered probable or reasonably estimable.
- Other unresolved matters include an FDA Warning Letter, a U.S. Attorney’s Civil Investigative Demand concerning VNS sales and marketing, legacy Italian litigation and tax matters, and uncertainty surrounding Brexit and the European Union state-aid investigation.
- No specific full-year financial guidance is provided in the filing text. Management cautioned that quarterly results are not necessarily indicative of full-year performance.
Important facts for investors to verify
- Whether revenue growth can translate into improved operating margins as SG&A and R&D investments continue.
- The timing and amount of contingent ImThera payments, including up to $113.3 million of recorded contingent consideration and additional regulatory or sales-based obligations.
- The effect of the TandemLife acquisition, the $190 million bridge borrowing, and repayment using CRM-sale proceeds.
- Final purchase-accounting effects for TandemLife and the ultimate proceeds and adjustments from the CRM divestiture.
- Potential additional costs from 3T remediation, FDA actions, product-related litigation, and the French antitrust investigation indemnity.
- Progress toward regulatory approvals and commercialization for ImThera, heart-failure therapies, transcatheter mitral valve replacement, and other pipeline programs.
- Foreign-exchange exposure, floating-rate debt, liquidity after the acquisitions, and compliance with bridge-facility leverage and interest-coverage covenants.