LivaNova PLC 2017 Third-Quarter Form 10-Q Summary
Business context and reporting period
LivaNova is a global medical-device company operating through Cardiac Surgery, Neuromodulation, and Cardiac Rhythm Management, with corporate activities and new ventures reported in “Other.” The filing covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. Financial statements are unaudited, prepared under U.S. GAAP, and reported in U.S. dollars.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $309.7 million | $295.3 million | $916.2 million | $903.3 million |
| Gross profit | $199.8 million | $188.1 million | $595.0 million | $540.4 million |
| Gross margin | 64.5% | 63.7% | 64.9% | 59.8% |
| Income from operations | $32.1 million | $23.0 million | $81.8 million | $8.8 million |
| Operating margin | 10.4% | 7.8% | 8.9% | 1.0% |
| Net income (loss) | $27.8 million | $(1.6) million | $86.6 million | $(33.0) million |
| Diluted EPS | $0.57 | $(0.03) | $1.79 | $(0.67) |
| Cash from operations | Not separately provided for the quarter | Not separately provided for the quarter | $73.7 million | $49.3 million |
Quarterly net margin was approximately 9.0%, compared with a loss margin of approximately 0.5% in the prior-year quarter. Nine-month net margin was approximately 9.5%, compared with a loss margin of approximately 3.7% in 2016.
- Q3 sales increased 4.9%; nine-month sales increased 1.4%.
- Q3 segment sales growth was 7.6% in Cardiac Surgery, 1.7% in Neuromodulation, and 2.9% in Cardiac Rhythm Management. Nine-month growth was 1.0%, 5.5%, and negative 3.1%, respectively.
- At September 30, 2017, cash and cash equivalents were $65.2 million, compared with $39.8 million at December 31, 2016.
- Current assets were $722.1 million versus current liabilities of $356.4 million. Reported current debt obligations were $52.1 million and long-term debt obligations were $71.9 million.
- The company reported $96.0 million of long-term debt principal, including the current portion, and $28.0 million outstanding under short-term revolving credit arrangements.
- Total assets were $2.60 billion and stockholders’ equity was $1.91 billion at September 30, 2017.
Material changes versus the prior comparable period
- Profitability improved materially, driven by higher sales, cost efficiencies, lower merger and restructuring expenses, and the absence of prior-year inventory fair-value step-up amortization. The prior-year nine-month cost of sales included $35.2 million of such amortization.
- Cardiac Surgery operating income increased to $63.5 million for nine months from $29.2 million, while Cardiac Rhythm Management improved to $13.5 million from a $14.4 million loss, largely due to restructuring and cost reductions.
- Corporate and new-venture operating losses increased to $79.4 million for nine months from $49.1 million, primarily because of Caisson-related expenses and higher corporate costs.
- SG&A increased to $353.9 million for nine months from $345.7 million. R&D increased to $104.1 million from $94.1 million, partly due to Caisson-related compensation and development costs.
- The company generated $25.4 million of net cash during the first nine months, compared with a $49.0 million decrease in the prior-year period. Financing cash outflows declined to $10.0 million from $63.0 million.
- On May 2, 2017, LivaNova acquired the remaining 51% of Caisson Interventional for consideration of up to $72.0 million. The transaction generated a $39.4 million pretax gain, including a $38.1 million noncash gain from remeasuring the existing investment. Caisson added no revenue and $16.9 million of expenses from acquisition through September 30.
- Goodwill increased to $781.1 million from $691.7 million, primarily reflecting $42.4 million of Caisson goodwill and $46.9 million of foreign-currency adjustments.
- LivaNova recorded a $13.0 million impairment related to its Highlife investment and notes receivable. Losses from equity-method investments totaled $20.1 million for nine months.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide a specific numerical revenue or earnings guidance target. Management stated that existing cash, operating cash generation, and available borrowing capacity are expected to fund operating needs, working capital, research and development, capital expenditures, and debt service for the next 12 months.
- 3T Heater-Cooler remediation: The product remediation liability was $30.2 million at September 30, 2017. LivaNova received European approval for design changes and continued implementing vacuum and sealing upgrades, deep-disinfection services, and a loaner-device program. The estimate could materially change based on customer behavior, market response, and regulatory approvals.
- 3T litigation: Multiple lawsuits have been filed concerning alleged infections associated with 3T devices. A Pennsylvania federal court certified a class concerning named plaintiffs on October 23, 2017. No damages liability was accrued because potential losses were not considered probable or reasonably estimable.
- Other legal and tax matters: The company continues to face SNIA environmental litigation and appeals, Italian tax litigation, and other proceedings. It has recognized a €17.0 million reserve for an uncertain tax position related to Italian tax matters.
- Cardiac Rhythm Management: Management began exploring strategic alternatives, including a possible divestiture, but had not committed to a sale plan as of September 30, 2017. The business was not classified as held for sale.
- Caisson: The acquired business is in early clinical development and remains subject to clinical, regulatory, integration, and commercialization risks. Contingent consideration liabilities totaled $34.2 million at quarter-end.
- Regulatory and market risks: Key risks include FDA and other regulatory actions, product liability, reimbursement changes, clinical outcomes, supplier dependence, foreign exchange and interest-rate volatility, Brexit-related tax and trade uncertainty, and the ability to commercialize new therapies.
- Accounting changes: LivaNova expects adoption of the intra-entity transfer tax standard to reduce retained earnings by approximately $65.2 million at January 1, 2018. The company was still assessing other forthcoming revenue recognition, financial instruments, lease, cash-flow, goodwill, business-combination, and compensation standards.
Most important facts for investors to verify
- Whether 3T remediation costs, regulatory actions, and related litigation ultimately exceed the recorded $30.2 million liability and whether additional claims become probable or estimable.
- Caisson’s clinical progress, regulatory approvals, commercial timing, integration costs, and potential contingent payments of up to approximately $39.6 million.
- The basis and sustainability of the $39.4 million Caisson acquisition gain and the effect of excluding unusual items when assessing recurring earnings.
- Whether Cardiac Rhythm Management sales weakness continues and whether a strategic transaction is pursued.
- The sustainability of improved gross margins and operating profitability after the favorable comparison created by the completion of prior-year inventory step-up amortization.
- Cash conversion, inventory and receivables growth, debt maturities, revolving-credit usage, and availability under the new EIB borrowing facility of up to €100 million.
- Potential effects of Brexit, U.S. and international tax changes, and the expected $65.2 million retained-earnings reduction from the new intra-entity transfer tax accounting standard.