LivaNova PLC — Form 10-K Summary
Business context and reporting period
LivaNova is a global medical device company operating in Cardiac Surgery, Neuromodulation and Cardiac Rhythm Management. The filing covers the year ended December 31, 2016. Because the company changed from Cyberonics’ April fiscal year to a calendar year after the October 19, 2015 Cyberonics-Sorin merger, the prior-period comparisons are not fully comparable. Management provides an unaudited equivalent prior period for January 24, 2015 through December 31, 2015.
The fourth quarter of 2016 generated net sales of $310.6 million and a net loss of $29.8 million, or $0.61 diluted loss per share.
Financial performance and key metrics
| Metric | Year ended December 31, 2016 | Equivalent prior period |
|---|---|---|
| Net sales | $1,213.9 million | $489.8 million |
| Gross profit | $704.4 million | $338.3 million |
| Gross margin | 58.0% | 69.1% |
| Operating loss | $27.6 million | $8.9 million |
| Net loss | $62.8 million | $19.4 million |
| Diluted loss per share | $1.29 | $0.90 |
| Operating cash flow | $90.2 million | $(9.3) million |
| Capital expenditures | $36.5 million | $16.1 million |
The equivalent prior period included only Sorin results from the acquisition date through December 31, 2015, while 2016 included Sorin for the full year. Accordingly, the large increase in consolidated sales primarily reflects the merger’s full-year contribution rather than organic growth alone.
- Segment sales were $611.7 million for Cardiac Surgery, $351.4 million for Neuromodulation, $249.1 million for Cardiac Rhythm Management and $1.7 million for Corporate and New Ventures.
- Neuromodulation sales increased 21.7% versus the equivalent prior period, driven primarily by U.S. pricing and the inclusion of a full year of activity.
- Cost of sales was 38.9% of revenue, including $35.2 million of amortization related to the merger inventory fair-value step-up.
- Product remediation expense was $37.5 million, or 3.1% of sales, related to 3T Heater Cooler devices.
- Research and development expense was $122.5 million, or 10.1% of sales.
- Merger and integration expenses were $20.5 million; restructuring expenses were $55.9 million; amortization of acquired intangibles was $45.5 million; and goodwill impairment was $18.3 million.
- Losses from equity-method investments were $22.6 million, including a $9.2 million impairment of the Respicardia investment and losses from other investees.
Liquidity, cash flow and debt
- Cash and cash equivalents were $39.8 million at December 31, 2016, compared with $112.6 million at December 31, 2015. Cash, cash equivalents and short-term investments totaled $39.8 million because short-term investments were zero at year-end.
- Working capital was $303.3 million and total assets were $2.34 billion.
- Total debt was $122.9 million, consisting of $47.7 million of current debt and $75.2 million of long-term debt, compared with $174.3 million at December 31, 2015.
- Financing activities used $124.3 million, including $54.5 million for share repurchases, $33.7 million of revolving-facility repayments, $23.8 million to repay advances on customer receivables and $21.1 million of long-term debt repayment.
- Management stated that existing cash, operating cash flow and available financing are expected to fund operating needs, working capital, research and development, capital expenditures and debt service for the next 12 months.
- Contractual obligations totaled $227.5 million, including $96.5 million of principal payments on long-term debt and $96.6 million of operating lease obligations. Guarantees totaled $48.9 million.
Material changes versus the prior comparable period
- Consolidated sales increased because the 2016 results included the Sorin businesses for a full year. The filing does not provide a fully comparable audited prior-year consolidated period.
- Gross margin declined from 69.1% to 58.0%, principally due to the full-year inclusion of Sorin, merger-related inventory step-up amortization and product remediation costs.
- Operating results remained negative, although merger and integration expense declined from $64.5 million to $20.5 million on the equivalent-period comparison.
- Restructuring expense increased to $55.9 million from $11.3 million. The plans are expected to reduce approximately 317 positions; 205 reductions had occurred by year-end.
- The company recorded an $18.3 million non-cash impairment of Cardiac Rhythm Management goodwill. CRM goodwill was reduced to zero, while total goodwill was $691.7 million at year-end.
- Cash flow from operations improved to $90.2 million from a use of $9.3 million in the transitional period, but cash declined substantially after debt repayments, investments and share repurchases.
- Total debt declined by $51.4 million from December 31, 2015, and the company eliminated advances on customer receivables as a financing source.
Guidance, outlook, risks and unusual items
- No specific numerical revenue, earnings or margin guidance is provided in the filing.
- Management’s strategy emphasizes margin expansion, profitable growth, product development, commercialization and geographic expansion under a redesigned regional operating structure.
- The 3T Heater Cooler remediation plan includes design modifications, deep-disinfection services and no-charge loaner devices. The company recognized a total remediation liability of $33.5 million at December 31, 2016, in addition to $4.0 million of 2016 costs. The estimate may materially change based on customer behavior, market reaction and regulatory approvals.
- The company faced an FDA Warning Letter and import-related restrictions concerning 3T Heater Cooler devices. Multiple product-related lawsuits had been filed, and no liability had been accrued for those lawsuits at year-end because the matters were at an early stage.
- The Costa Rica manufacturing operation is being exited and transferred to Houston, with completion expected in the first half of 2017. The company recorded $5.7 million of related building and equipment impairment and classified $4.5 million of land and building as held for sale.
- Material risks include medical-device regulatory compliance, product recalls and liability, reimbursement and pricing pressure, healthcare fraud and abuse laws, intellectual-property litigation, foreign exchange, cybersecurity, supply interruptions, international operations, tax audits and merger integration.
- Italian tax litigation remains unresolved. The company maintained a provision of approximately $16.9 million, while the total amount of losses in dispute was approximately €62.6 million.
- The company has not paid cash dividends and does not anticipate paying dividends in the foreseeable future.
- On February 23, 2017, LivaNova announced that it would cancel its London Stock Exchange listing effective after trading close on April 4, 2017; its NASDAQ listing will continue.
Important facts for investors to verify
- Reconcile reported 2016 growth using a comparable full-year pro forma view that includes Sorin for both periods.
- Assess the cash-cost and timing of the 3T Heater Cooler remediation program, related regulatory approvals and potential litigation exposure.
- Monitor whether CRM and Cardiac Surgery performance supports the goodwill valuations and avoids additional impairment charges.
- Review debt maturities, financial covenants, available revolving capacity and liquidity after the significant 2016 cash decline.
- Evaluate the execution and expected savings from the restructuring plans, including the Costa Rica exit and planned personnel reductions.
- Review tax audits, unrecognized tax benefits of $22.4 million, Italian tax litigation and the potential impact of changes in U.S. tax-residency or inversion rules.
- Confirm the company’s future regulatory, reimbursement and product-launch requirements for Perceval, CROWN PRT, PLATINIUM and other key products.