LivaNova PLC — Q2 2017 Form 10-Q Summary
Business context and reporting period
LivaNova is a global medical-device company operating through Cardiac Surgery, Neuromodulation, and Cardiac Rhythm Management. The unaudited filing covers the three and six months ended June 30, 2017, with comparisons to the corresponding 2016 periods. Financial statements are prepared under U.S. GAAP in U.S. dollars.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $321.4 million | $321.0 million | $606.5 million | $608.0 million |
| Gross profit | $210.8 million | $189.5 million | $395.2 million | $352.2 million |
| Gross margin | 65.6% | 59.0% | 65.2% | 57.9% |
| Operating income (loss) | $31.1 million | $22.0 million | $49.7 million | $(14.2) million |
| Operating margin | 9.7% | 6.8% | 8.2% | (2.3)% |
| Net income (loss) | $47.5 million | $9.0 million | $58.8 million | $(31.4) million |
| Diluted EPS | $0.98 | $0.18 | $1.22 | $(0.64) |
| Cash flow from operations | Not separately provided | Not separately provided | $31.6 million | $12.6 million |
Q2 sales were essentially flat year over year, while six-month sales declined 0.3%. Segment sales for Q2 were $158.6 million in Cardiac Surgery, $97.0 million in Neuromodulation, and $65.5 million in Cardiac Rhythm Management. Neuromodulation increased 7.7%, while Cardiac Surgery declined 1.5% and Cardiac Rhythm Management declined 5.8%.
At June 30, 2017, cash and cash equivalents were $42.7 million, compared with $39.8 million at December 31, 2016. Total debt was approximately $125.5 million, consisting of current debt obligations of $55.8 million and long-term debt of $69.7 million. The company reported total assets of $2.53 billion and stockholders’ equity of $1.84 billion.
Material changes versus the prior comparable period
- Gross margin expanded materially, primarily because the merger-related inventory fair-value step-up had been fully amortized by the end of Q2 2016. Cost of sales declined to 33.9% of sales from 40.7%.
- Six-month operating results improved from a $14.2 million operating loss to $49.7 million of operating income. Restructuring expense declined to $11.3 million from $32.8 million.
- Cardiac Surgery operating income increased to $23.7 million in Q2 from $9.0 million, and Cardiac Rhythm Management improved to $5.6 million from an operating loss of $0.3 million, despite lower sales.
- Neuromodulation growth was driven primarily by U.S. demand, new-patient sales, price premiums, and AspireSR manufacturing efficiencies.
- Research and development expense increased to $43.0 million in Q2 from $30.2 million, partly reflecting Caisson-related compensation and retention costs.
- Cash from operations increased by $19.0 million for the first six months, while investing cash outflows increased because of the Caisson acquisition. Financing cash outflows decreased substantially from the prior year.
Guidance, outlook, commentary, and unusual items
- No formal quantitative revenue or earnings guidance is provided in the filing. Management stated that cash, operating cash generation, and available borrowing capacity are expected to fund operating needs, working capital, research and development, capital expenditures, and debt service for the next 12 months.
- On May 2, 2017, LivaNova acquired the remaining 51% of Caisson Interventional, a clinical-stage transcatheter mitral-valve replacement company. Consideration may total up to $72.0 million, including contingent payments. The acquisition produced a $39.4 million pretax gain, substantially reflecting the fair-value remeasurement of LivaNova’s existing Caisson investment, and added $2.0 million of expenses with no revenue during the post-acquisition period.
- The company recorded a $13.0 million impairment related to its Highlife investment and notes receivable. Losses from equity-method investments totaled $15.4 million in Q2 and $18.5 million for the first six months.
- The 3T Heater-Cooler remediation liability was $32.0 million at June 30, 2017. LivaNova obtained European CE Mark approval for the redesigned device in April and began its first customer-owned-device vacuum and sealing upgrade in May. U.S. regulatory clearance remained pending.
- The company recorded $4.6 million of impairment and $0.5 million of additional costs related to its plan to sell the Suzhou, China facility. Assets held for sale totaled $13.9 million at quarter-end.
- LivaNova entered into a European Investment Bank financing contract with a borrowing base of €100 million, or approximately $114 million, for research and development projects. No amounts had been drawn as of June 30, 2017.
- The FDA import limitation affecting 3T devices and related remediation activities remain material operational and regulatory matters. Approximately 50 additional U.S. lawsuits and three Canadian lawsuits related to 3T devices were disclosed; no damages liability was recorded because potential losses were not considered probable or reasonably estimable.
- LivaNova submitted its Sentiva VNS device application to the FDA and anticipated approval in the latter part of 2017. The FDA also expanded approval of VNS Therapy to patients at least four years old with drug-resistant partial-onset seizures.
- Brexit creates potential tax, trade, legal, currency, and economic uncertainty. The filing states that the financial impact could be material, but cannot yet be determined.
Most important facts for investors to verify
- Whether the substantial gross-margin improvement is sustainable after the nonrecurrence of merger-related inventory step-up amortization.
- Progress, regulatory approvals, costs, and potential liability changes associated with the 3T Heater-Cooler remediation and litigation.
- Caisson’s clinical, regulatory, commercial, and integration progress, including potential contingent consideration of up to $39.6 million.
- Future performance of Neuromodulation relative to continued weakness in Cardiac Surgery and Cardiac Rhythm Management.
- Cash conversion and working-capital trends, particularly increases in accounts receivable and inventory.
- The effect of the $13.0 million Highlife impairment and ongoing losses from equity-method and early-stage investments.
- Potential balance-sheet and retained-earnings effects from the expected January 2018 adoption of intra-entity transfer tax guidance, for which management estimated a cumulative retained-earnings reduction of approximately $65.2 million.
- Management’s statement that disclosure controls and procedures were effective as of June 30, 2017, and that no material change in internal control over financial reporting occurred during the quarter.