LivaNova PLC 10-Q Summary: Second Quarter 2018
Business Context and Reporting Period
LivaNova is a global medical-device company operating through its Cardiac Surgery and Neuromodulation franchises. The filing covers the three and six months ended June 30, 2018, with comparative periods ended June 30, 2017. Results are reported in U.S. dollars under U.S. GAAP.
The Cardiac Rhythm Management business was sold to MicroPort on April 30, 2018 for total cash proceeds of $195.9 million, less $9.2 million of cash transferred. CRM results are classified as discontinued operations for all periods presented.
Financial Performance and Liquidity
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net sales | $287.5 million, up 12.4% | $537.9 million, up 11.4% |
| Gross profit | $194.0 million; 67.5% margin | $356.0 million; 66.2% margin |
| Operating income from continuing operations | $21.6 million; 7.5% margin | $34.1 million; 6.3% margin |
| Net income from continuing operations | $19.5 million | $37.4 million |
| Net income | $15.1 million; $0.31 diluted EPS | $28.3 million; $0.58 diluted EPS |
| Operating cash flow | Not separately provided | $48.5 million |
- Cardiac Surgery revenue increased 11.3% in the quarter and 11.7% year to date, led by cardiopulmonary products and the newly acquired TandemLife business. Segment income declined 31.3% in the quarter and 33.2% year to date.
- Neuromodulation revenue increased 14.1% in the quarter and 11.0% year to date. Segment income increased 19.8% and 8.8%, respectively, supported by SenTiva adoption and international growth.
- Cash and cash equivalents were $47.4 million at June 30, 2018, down from $93.6 million at December 31, 2017. Current assets were $554.7 million versus current liabilities of $368.0 million.
- Total current and long-term debt obligations were approximately $161.0 million at June 30, 2018, compared with $146.0 million at December 31, 2017. The $70.0 million Barclays revolving facility was fully utilized at quarter-end.
- Net cash used in investing activities was $93.2 million, primarily reflecting $279.9 million of acquisition payments, partly offset by $186.7 million of CRM-sale proceeds.
Material Changes Versus the Prior Comparable Period
- Revenue grew, but continuing-operations operating income declined 22.2% in the quarter and 28.2% year to date. SG&A increased to 42.9% of sales from 36.8% in the quarter, reflecting growth investments, acquisitions, legal costs, foreign exchange effects and organizational expansion.
- Net income declined substantially from $47.5 million to $15.1 million in the quarter and from $58.8 million to $28.3 million year to date. The prior-year periods benefited from a $39.4 million gain on acquisitions; 2018 included an $11.5 million gain related to the ImThera acquisition.
- Discontinued operations generated losses of $4.5 million in the quarter and $9.0 million year to date, compared with income of $1.8 million and a loss of $0.1 million, respectively, in the prior-year periods.
- LivaNova acquired the remaining interest in ImThera for consideration of up to $225 million and acquired TandemLife for consideration of up to $250 million. These transactions increased goodwill by $201.5 million and contingent consideration liabilities by approximately $147.2 million.
- The company completed the sale of its Suzhou facility in April 2018 and received approximately $13.3 million of proceeds.
Guidance, Outlook, Risks and Unusual Items
- No quantitative financial guidance is provided in the filing. Management states that existing cash, operating cash flow and available borrowing capacity are expected to fund operating needs, working capital, research and development, capital expenditures and debt service for at least the next 12 months.
- ImThera clinical-trial developments are expected to delay regulatory approval by at least 12 months. The related in-process research and development asset was not impaired, but further delays or revised estimates could result in impairment.
- The 3T Heater-Cooler remediation program remains active. The product-remediation liability was $19.7 million at June 30, 2018, and remediation expenses were $5.3 million year to date. The FDA permitted the company to proceed with a U.S. deep-cleaning service in April 2018.
- The company reported approximately 135 worldwide 3T-device claims as of July 31, 2018. No liability was recognized for damages because potential losses were not considered probable or reasonably estimable.
- Other contingencies include FDA regulatory matters, a U.S. Attorney civil investigative demand concerning VNS sales and marketing, patent litigation, Italian environmental proceedings and Italian tax litigation. The company has recognized a €17.0 million reserve for the Italian uncertain tax position.
- Brexit, foreign-exchange volatility, reimbursement changes, regulatory approvals, product liability, litigation, acquisition integration and healthcare-market adoption remain significant risks.
- CMS began reconsideration of coverage for VNS therapy for treatment-resistant depression; the filing states that a final decision was expected by the end of February 2019.
Important Facts for Investors to Verify
- Assess ongoing operating profitability excluding discontinued CRM operations and nonrecurring acquisition gains.
- Monitor whether Cardiac Surgery margins recover after TandemLife losses, international expansion spending and 3T-related legal costs.
- Track cash utilization, revolving-credit availability, acquisition-related contingent consideration and the July 2018 $60.0 million EIB borrowing.
- Verify the timing and regulatory progress of ImThera, Caisson, heart-failure, treatment-resistant-depression and other development programs.
- Evaluate potential exposure from 3T litigation, FDA remediation, the VNS investigation, patent claims, tax proceedings and environmental matters.
- Confirm the effect of the CRM divestiture and transition-services arrangements on future revenue, expenses and cash flow comparability.