LivaNova PLC 2019 Form 10-K Summary
Business Context and Reporting Period
LivaNova is a global medical-device company headquartered in London, organized into Cardiovascular and Neuromodulation reportable segments. Cardiovascular includes cardiopulmonary products, heart valves and advanced circulatory support. Neuromodulation includes VNS Therapy for epilepsy and depression, as well as products under development for obstructive sleep apnea and heart failure.
The filing reports the fiscal year ended December 31, 2019, with comparisons to fiscal 2018 and 2017. The filing is an annual report, not a standalone quarterly filing; fourth-quarter 2019 data is provided in unaudited supplementary information.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $1,084.2 million | $1,107.0 million | Down 2.1% |
| Operating loss from continuing operations | $168.9 million | $248.1 million | Improved by $79.2 million |
| Net loss | $155.2 million | $189.4 million | Improved by $34.2 million |
| Diluted loss per share | $3.21 | $3.91 | Improved by $0.70 |
| Cash flow from operating activities | $(91.1) million | $120.5 million | Declined by $211.6 million |
| Cash and cash equivalents | $61.1 million | $47.2 million | Increased by $13.9 million |
| Total debt | $337.7 million | $168.3 million | Increased by $169.4 million |
| Stockholders’ equity | $1,383.7 million | $1,503.7 million | Down $120.0 million |
Cost of sales declined to 29.9% of sales from 32.7%, while SG&A increased to 46.7% from 42.0% and research and development increased to 13.8% from 13.2%. The filing does not present a conventional consolidated gross margin including all amortization and other operating charges; reported gross profit before developed-technology amortization was $744.8 million, or approximately 68.7% of sales.
Segment sales were $656.6 million for Cardiovascular, down 3.7%, and $424.5 million for Neuromodulation, up 0.4%. Segment income was $28.5 million for Cardiovascular and $83.5 million for Neuromodulation, before specified corporate and other items.
Material Changes Versus the Prior Comparable Period
- Sales declined primarily because Cardiopulmonary sales fell 5.9%, including the loss of a Canadian distribution agreement that contributed $32.9 million of 2018 sales, and Heart Valves sales fell 4.7%. Advanced Circulatory Support sales increased 64.0% to $31.9 million.
- Neuromodulation sales were broadly flat. SenTiva adoption and international growth offset lower U.S. sales caused principally by competitive dynamics and sales-force turnover.
- Operating results benefited from the absence of the $294.1 million 3T Heater-Cooler litigation provision recorded in 2018. In 2019, the company recorded an additional $33.2 million litigation provision and recognized a $33.8 million insurance recovery.
- 2019 included $139.3 million of intangible-asset impairments and $42.4 million of goodwill impairment. These included a $50.3 million ImThera obstructive-sleep-apnea impairment and $89.0 million of Caisson IPR&D impairment plus $42.4 million of Caisson goodwill impairment.
- The company ended the Caisson transcatheter mitral-valve replacement program effective December 31, 2019 and incurred $12.3 million of restructuring expense, including $3.5 million associated with Caisson.
- Operating cash flow turned negative primarily because of $156.9 million of 3T litigation settlement payments and unfavorable changes in operating assets and liabilities. Financing activities provided $146.6 million, largely reflecting increased borrowings.
- The company adopted the new lease standard in 2019, recognizing approximately $60 million of right-of-use assets and lease liabilities at adoption. Year-end operating lease liabilities totaled $57.1 million.
Guidance, Outlook, Commentary and Risks
Management stated that existing cash, expected operating cash flow and available credit facilities were sufficient to fund operating needs, working capital, research and development, capital expenditures, 3T litigation obligations and debt service for the 12 months following issuance of the financial statements. No specific revenue or earnings guidance was provided in the filing.
- LifeSPARC received FDA approval in July 2019, had a limited U.S. commercial release in the fourth quarter, and was expected to launch fully in the second half of 2020.
- The company received FDA 510(k) clearance for updated 3T devices on February 25, 2020. Devices manufactured under the clearance were no longer subject to the applicable import alert, although remediation and regulatory work continued.
- At December 31, 2019, the 3T litigation provision was $170.4 million. A settlement framework provided for payments of up to $225 million; $135 million was paid in July 2019 and $90 million in January 2020. Approximately 95 filed and unfiled claims were known as of March 2, 2020, including matters that had settled but were not yet dismissed.
- Debt agreements contain financial covenants, including leverage, interest coverage and net-worth requirements. The company reported compliance at December 31, 2019. Principal payments on long-term debt were scheduled to be approximately $73.5 million in 2020, $111.4 million in 2021 and $91.9 million in 2022.
- Other material risks include medical-device regulation and recalls, product liability, reimbursement and pricing pressure, supply-chain interruptions, cybersecurity and privacy, foreign exchange, Brexit, acquisitions and integration, goodwill and intangible-asset impairment, tax audits, and international anti-corruption requirements.
- An Italian environmental-liability proceeding could potentially impose liability related to historical SNIA activities; no loss was accrued because it was not considered probable or reasonably estimable. Patent and Caisson contract litigation likewise had no recorded provision because potential losses were not probable or reasonably estimable.
- European operations represented approximately 21% of full-year sales, making Brexit-related regulatory, trade, tax and currency uncertainty relevant to the outlook. The filing also identified the emerging coronavirus outbreak as a potential operational and demand risk after year-end.
Most Important Facts for Investors to Verify
- Reconcile reported improvement in operating loss with the substantial 2019 impairments, litigation activity and other unusual items.
- Assess the sustainability of cash generation after the $156.9 million of 3T settlement payments and the increase in debt.
- Review the remaining 3T claims, settlement payments, insurance recoveries and adequacy of the $170.4 million litigation provision.
- Evaluate future impairment risk for the $915.8 million goodwill balance and remaining IPR&D, particularly ImThera’s $112.0 million carrying value after the 2019 impairment.
- Monitor Cardiovascular revenue recovery, the effect of the terminated Canadian distribution agreement, supplier issues and LifeSPARC commercialization.
- Monitor U.S. Neuromodulation competitiveness, RECOVER enrollment and reimbursement developments for depression therapy.
- Review debt maturities, covenant headroom, contingent consideration of $137.3 million and total contractual obligations of $678.3 million.
- Confirm the potential impact of Brexit, COVID-19-related procedure deferrals and supply disruptions, regulatory compliance, and unresolved tax and environmental matters.