LivaNova PLC 2017 Form 10-K Summary
Business context and reporting period
LivaNova is a global medical device company operating primarily through Cardiac Surgery and Neuromodulation. Products include cardiopulmonary equipment, oxygenators, heart valves, repair products and VNS Therapy systems for drug-resistant epilepsy and treatment-resistant depression.
The filing covers the year ended December 31, 2017, with December 31, 2016 as the primary comparable period. The company changed from Cyberonics’ prior April fiscal year to a calendar year after the 2015 Cyberonics-Sorin merger, which affects comparisons with earlier periods. Cardiac Rhythm Management (CRM) is presented as discontinued operations following a planned sale.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $1,012.3 million | $964.9 million | 4.9% increase |
| Gross profit | $651.6 million | $559.5 million | 16.5% increase |
| Gross margin | 64.4% | 58.0% | +6.4 percentage points |
| Operating income from continuing operations | $95.7 million | $31.4 million | Increase of $64.2 million |
| Operating margin | 9.5% | 3.3% | +6.2 percentage points |
| Net income from continuing operations | $54.5 million | $1.9 million | Significant increase |
| Net loss | $(25.1) million | $(62.8) million | Improved by $37.7 million |
| Diluted loss per share | $(0.52) | $(1.28) | Improved |
| Cash flow from operations | $91.3 million | $90.2 million | Increase of $1.2 million |
| Capital expenditures | $34.1 million | $38.4 million | Decrease |
Cost of sales declined to 34.9% of revenue from 38.1%, primarily because 2016 included $25.2 million of acquisition-related inventory fair-value step-up amortization. R&D expense increased to $109.7 million from $82.5 million, or 10.8% of sales versus 8.5%.
At December 31, 2017, cash and cash equivalents were $93.6 million, working capital was $463.8 million and total assets were $2.50 billion. Total debt was approximately $146 million, consisting of $84.0 million of current debt obligations and $62.0 million of long-term debt. Management stated that existing cash and expected operating cash flow should fund operating needs, working capital, R&D, capital expenditures and debt service for the next 12 months.
Fourth-quarter information
| Metric | Fourth quarter 2017 | Fourth quarter 2016 |
|---|---|---|
| Net sales | $278.4 million | $249.6 million |
| Gross profit | $172.1 million | $125.4 million |
| Operating income from continuing operations | $18.3 million | $(14.9) million |
| Net income from continuing operations | $(31.5) million | $(6.3) million |
| Net loss | $(111.7) million | $(29.8) million |
The fourth-quarter 2017 net loss included the $78.3 million after-tax impairment of CRM assets held for sale and a $27.5 million non-cash tax charge related to U.S. tax reform.
Material changes versus the prior comparable period
- Cardiac Surgery revenue increased 3.9% to $635.5 million, driven primarily by cardiopulmonary products, Inspire oxygenators, heart-lung machine upgrades and favorable currency effects.
- Neuromodulation revenue increased 6.7% to $375.0 million, supported by demand for AspireSR and the October 2017 launch of SenTiva.
- Cardiac Surgery segment income increased to $81.0 million from $16.6 million, primarily because 2016 included acquisition-related inventory step-up amortization.
- Neuromodulation segment income increased 7.9% to $188.4 million, despite higher U.S. sales-force and marketing costs.
- Merger and integration expense declined to $15.5 million from $20.4 million, and restructuring expense declined to $17.1 million from $37.4 million.
- R&D investment increased by $27.2 million, including increased TMVR and heart-failure development activity and costs associated with the Caisson acquisition.
- Operating cash flow was broadly stable, while investing cash use increased to $52.9 million, including $14.2 million for the Caisson acquisition and $34.1 million of capital expenditures.
Guidance, outlook, commentary and unusual items
The filing does not provide a clear numerical revenue or earnings guidance range. Management expects cash and operating cash generation to support requirements over the next 12 months and continues to emphasize product development, clinical evidence, cost control and portfolio expansion.
- In May 2017, LivaNova acquired the remaining 51% of Caisson Interventional for consideration of up to $72.0 million. The transaction generated a $39.4 million pre-tax non-cash gain, while Caisson contributed no revenue and $20.1 million of expenses during the post-acquisition period.
- In November 2017, LivaNova entered into a letter of intent to sell CRM to MicroPort for $190 million in cash. Closing was expected in the second quarter of 2018, subject to definitive agreements, regulatory approvals and other conditions. CRM generated $245.2 million of 2017 revenue but a $79.6 million net loss, including the impairment.
- The company recorded $8.6 million of cost-method investment impairments and $16.7 million of losses from equity-method investments, including a $13.0 million impairment related to Highlife.
- The 3T heater-cooler remediation liability was $27.5 million at year-end. The company continued loaner-device, vacuum-and-sealing upgrade and disinfection programs.
- LivaNova was defending approximately 110 worldwide claims related to 3T devices as of February 27, 2017. It also received a U.S. Attorney’s Office Civil Investigative Demand concerning sales and marketing of VNS devices. The filing states that potential losses were not probable or reasonably estimable, and no related loss accrual was recorded.
- Other material exposures include medical-device regulation, product liability, recalls, reimbursement pressure, foreign currency, cybersecurity, supply-chain disruption, tax audits, Brexit-related uncertainty and an EU State Aid investigation concerning UK controlled foreign company rules.
- Subsequent to year-end, LivaNova acquired the remaining 86% of ImThera for up to approximately $225 million and agreed to acquire TandemLife for up to $250 million. It also entered into a $170 million bridge facility intended in part to fund the TandemLife transaction.
Most important facts for an investor to verify
- Whether the CRM sale closed on the expected terms and how the $190 million proceeds were used.
- The ultimate cost, timing and regulatory status of the 3T heater-cooler remediation program and related litigation.
- Whether the ImThera and TandemLife transactions increase leverage, cash requirements or integration risk beyond management’s expectations.
- The sustainability of the 2017 gross-margin improvement after the nonrecurring inventory step-up amortization benefit.
- The commercialization, regulatory and clinical milestones for SenTiva, Caisson TMVR, ImThera and other New Ventures programs.
- The resolution and potential financial impact of tax disputes, the EU State Aid investigation and the provisional U.S. tax-reform charge.
- Future cash conversion, accounts-receivable growth, debt maturities and compliance with financing covenants.