LivaNova PLC 2020 Q3 Form 10-Q Summary
Business context and reporting period
LivaNova is a global medical-device company organized in England and Wales, with reportable segments in Cardiovascular and Neuromodulation. The filing covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. Results were materially affected by COVID-19-related delays and cancellations of elective medical procedures.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | YTD 2020 | YTD 2019 |
|---|---|---|---|---|
| Net sales | $240.1 million | $268.6 million | $664.7 million | $796.6 million |
| Net income (loss) | $(14.8) million | $32.1 million | $(65.2) million | $(11.9) million |
| Operating income (loss) | $(7.5) million | $25.8 million | $(22.1) million | $(24.9) million |
| Loss per diluted share | $(0.30) | $0.66 | $(1.34) | $(0.25) |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $(116.4) million | $(94.0) million |
- Q3 sales declined 10.6% year over year; nine-month sales declined 16.6%.
- Q3 net loss margin was approximately 6.2%, compared with net income margin of approximately 12.0% in Q3 2019. The nine-month net loss margin was approximately 9.8% versus approximately 1.5% in the prior-year period.
- Cost of sales excluding amortization increased to 36.0% of sales in Q3 from 32.1%, primarily due to product mix and unfavorable manufacturing variances associated with lower COVID-19-driven demand.
- Q3 Cardiovascular sales declined 9.4% to $140.9 million, while Neuromodulation sales declined 12.6% to $98.4 million. Advanced Circulatory Support sales increased 91.9% in Q3, primarily due to the full U.S. commercial release of LifeSPARC.
- At September 30, 2020, cash and cash equivalents were $227.8 million, versus $61.1 million at December 31, 2019.
- Total debt obligations were approximately $651.1 million, comprising $14.0 million of current debt and $637.1 million of long-term debt. Approximate debt less cash was $423.3 million, excluding leases and other obligations.
- June financing transactions generated approximately $699.7 million of combined net proceeds from a senior secured term loan and cash exchangeable senior notes. Approximately $525.4 million of outstanding principal was repaid.
- The company used $33.3 million in investing activities, including $28.4 million of capital expenditures, during the first nine months. Financing activities provided $315.9 million, resulting in a $166.7 million net increase in cash.
Material changes versus the prior comparable period
- COVID-19 caused significant declines in hospital capital spending, cardiac surgery procedures, and new-patient and end-of-service Neuromodulation implants.
- Cardiovascular segment income fell to a $7.3 million loss in Q3 from $36.2 million of income. The prior-year quarter benefited from a $33.8 million insurance recovery related to 3T Heater-Cooler litigation.
- Neuromodulation segment income declined 29.5% in Q3 to $21.2 million, although nine-month segment income increased 57.5% to $82.3 million, primarily reflecting favorable changes in contingent consideration and the absence of a $50.3 million prior-year intangible-asset impairment.
- SG&A declined 19.4% in Q3, reflecting sales and marketing reductions, lower 3T legal expenses, tax-litigation effects and cost-containment actions. R&D declined in dollars but increased to 19.7% of sales from 17.1%.
- Interest expense increased to $14.7 million in Q3 from $4.8 million, reflecting the new debt structure and related amortization of discounts and issuance costs.
- The company recorded a $42.4 million discrete tax benefit under the CARES Act during the first nine months, partly offset by a $74.5 million valuation allowance for the U.K. and other jurisdictions.
Guidance, outlook, risks and unusual items
- The filing does not provide specific quantitative revenue or earnings guidance. Management expects signs of elective-procedure stabilization in certain geographies to continue during the fourth quarter, but recovery rates remain dependent on COVID-19 case volumes, hospital capacity, staffing, patient willingness to reschedule, restrictions and potential resurgence.
- Management states that existing cash, expected operating cash generation and borrowing capacity should be sufficient for operating needs, working capital, research and development, capital expenditures and debt service for the twelve months following the filing date. However, the company generated negative operating cash flow year to date.
- The senior secured term loan contains financial covenants, including a minimum trailing twelve-month net revenue threshold and maximum secured leverage ratios. The term loan matures in June 2025; the cash exchangeable senior notes mature in December 2025.
- 3T Heater-Cooler remediation continues following FDA regulatory actions. The product-remediation liability was $1.7 million at September 30, 2020, while the provision for 3T-related litigation was $46.3 million. Approximately 85 filed and unfiled claims worldwide were identified as of October 29, 2020.
- The company has paid the full $225 million contemplated under the principal 3T litigation settlement framework, although certain cases remain pending or have not yet been dismissed. Actual liability may differ from the recorded provision.
- An Italian environmental matter could involve liability of up to the estimated fair value of net assets received in the Sorin spin-off, approximately $669.1 million, but no loss was accrued because the potential loss was not considered probable or reasonably estimable.
- Clinical studies, including RECOVER and ANTHEM-HFrEF, experienced pauses or delays due to COVID-19. Approximately 90% of RECOVER sites were open during the third quarter, but further disruptions remain possible.
- Other risks include regulatory compliance and product approvals, reimbursement and market adoption, foreign-exchange and interest-rate exposure, supplier dependence, litigation, intellectual-property claims, Brexit-related uncertainty, cybersecurity and shareholder activism.
- The company disclosed Iran-related sales of $2.3 million and net profits of $0.8 million for Q3 2020, and sales of $6.3 million and net profits of $2.3 million for the first nine months.
Important facts for investors to verify
- Whether elective-procedure volumes and Neuromodulation implants recover as expected during late 2020 and 2021.
- Compliance with the senior secured term-loan revenue and leverage covenants amid negative operating cash flow and elevated debt.
- The adequacy of the $46.3 million 3T litigation provision and the potential exposure from unresolved claims and other legal proceedings.
- The sustainability of cash liquidity after debt service, litigation payments, capital expenditures and continued operating cash usage.
- The effect of tax valuation allowances, CARES Act benefits and future tax settlements on reported earnings and cash taxes.
- Progress and commercial uptake for LifeSPARC, Perceval Plus, Symmetry and other development or clinical programs.