LivaNova PLC 10-Q Summary: Transitional Period Ended October 18, 2015
Business context and reporting period
LivaNova PLC was formed to facilitate the combination of Cyberonics and Sorin. This transition report presents the results of Cyberonics and its subsidiaries for the twelve weeks from July 25, 2015 through October 18, 2015, and the year-to-date transitional period of twenty-five weeks. The periods are not fully comparable with the prior-year thirteen- and twenty-six-week periods.
The Sorin and Cyberonics mergers closed on October 19, 2015, one day after the reporting period. The financial statements therefore exclude Sorin and do not reflect the combined company. LivaNova issued approximately 48.8 million ordinary shares and began trading on Nasdaq and the London Stock Exchange under the symbol LIVN.
The business develops and sells implantable neuromodulation devices, principally the VNS Therapy System for drug-resistant epilepsy and treatment-resistant depression, and the VITARIA System for heart failure in certain international markets.
Key financial metrics
| Metric | 12 weeks ended October 18, 2015 | 13 weeks ended October 24, 2014 | 25 weeks ended October 18, 2015 | 26 weeks ended October 24, 2014 |
|---|---|---|---|---|
| Net sales | $67.5 million | $73.4 million | $148.5 million | $145.4 million |
| Gross profit | $58.0 million | $66.7 million | $129.6 million | $132.2 million |
| Gross margin | 85.9% | 90.8% | 87.2% | 90.9% |
| Operating income (loss) | $(26.4) million | $26.3 million | $(5.1) million | $48.3 million |
| Net income (loss) | $(25.1) million | $17.3 million | $(12.7) million | $30.8 million |
| Diluted EPS | $(0.96) | $0.64 | $(0.49) | $1.15 |
Operating expenses for the twelve-week period were $84.3 million, including $27.9 million of merger-related expenses. For the twenty-five-week period, operating expenses were $134.7 million, including $34.5 million of merger-related expenses. Stock-based compensation expense was $15.7 million for the quarter and $18.8 million year to date, substantially above the prior-year periods because of merger-triggered accelerated vesting.
Cash provided by operating activities was $49.5 million for the twenty-five weeks, compared with $42.6 million in the prior-year period. Net cash increased $65.6 million to $189.8 million, aided by the maturity or reclassification of approximately $20.0 million of short-term investments. Investing activities provided $16.0 million, while financing activities used less than $0.1 million.
At October 18, 2015, total assets were $357.6 million and total liabilities were $79.3 million. Cash and cash equivalents were $189.8 million, short-term investments were $7.0 million, and total current assets were $282.4 million against current liabilities of $71.0 million. The filing does not disclose conventional interest-bearing debt; reported long-term liabilities were $8.2 million, including $5.8 million for uncertain tax benefits.
Material changes versus the prior comparable periods
- Quarterly sales declined 8.0%, although year-to-date sales increased 2.1%. U.S. sales declined 2.6% for the quarter and increased 6.1% year to date; international sales declined 32.0% and 15.7%, respectively.
- Unit sales declined 16.1% for the quarter and 3.8% year to date. The higher average U.S. selling price, driven by the AspireSR generator, partially offset lower unit volume.
- Gross margin declined because of the higher cost of the AspireSR generator, higher patent royalties, the required programming tablet, and increased stock-based compensation.
- SG&A and R&D increased materially as percentages of sales, primarily because of merger-related stock compensation, merger-triggered cash bonuses, and an impairment charge for the ProGuardianREST system.
- The company recorded a $771,000 impairment of ProGuardian-related tangible and intangible assets after deciding not to commercially develop the system.
- A $2.1 million impairment of the Cerbomed investment was recorded during the first quarter of fiscal 2016 and was included in year-to-date results.
- The effective tax rate for the twenty-five-week period was negative 72.9%, reflecting tax expense despite a pretax loss. Non-deductible merger costs, executive compensation, and other permanent differences increased tax expense by approximately $6.3 million.
Outlook, commentary, risks, and unusual items
Management did not provide quantitative revenue, earnings, or margin guidance in the filing. Management stated that the merger was expected to provide revenue enhancements, cost savings, synergies, a more diversified business mix, and entry into opportunities involving heart failure, sleep apnea, and less invasive mitral valves. However, the initial purchase accounting was incomplete, and the company could not provide pro forma information for the combined entity or the major classes of acquired assets and assumed liabilities.
Management believed U.S. cash balances were adequate to fund anticipated U.S. business activities for the next twelve months, but noted that the combined company might obtain additional financing to fund future growth. The filing does not identify a specific financing commitment.
Key risks include integration costs and disruption following the mergers, retention of key employees, regulatory approval and product-development uncertainty, reimbursement changes, dependence on suppliers, product liability, intellectual-property challenges, foreign exchange exposure, tax-law changes, and litigation. The company does not hedge its foreign currency exposure.
A qui tam and employment-related lawsuit brought by a former employee remained subject to legal proceedings. The False Claims Act claims had been dismissed, while remaining retaliation and wrongful-termination claims were ordered into arbitration in November 2015. The company stated that it could not estimate potential loss or damages.
CMS reimbursement rates for VNS procedures declined in 2015 but increased for 2016. U.S. Medicare continued to exclude coverage for VNS therapy for treatment-resistant depression, limiting that market.
Most important facts for investors to verify
- Do not treat the reported results as LivaNova consolidated results; they represent pre-merger Cyberonics only and exclude Sorin.
- Review subsequent LivaNova filings for the completed acquisition accounting, goodwill, intangible assets, assumed liabilities, pro forma results, and integration costs.
- Assess whether the AspireSR launch can offset declining unit volumes and weakness in international sales.
- Separate recurring operating performance from merger-related expenses, accelerated stock compensation, investment impairments, and the ProGuardian asset impairment.
- Verify post-merger liquidity, financing needs, leverage, and cash deployment because the filing reports no conventional debt but anticipates possible future financing.
- Monitor regulatory, reimbursement, litigation, foreign-exchange, and product-development risks, including the status of the VITARIA and VNS programs.