LivaNova PLC — Form 10-Q Summary
Business context and reporting period
LivaNova is a global medical-device company operating in Cardiac Surgery, Cardiac Rhythm Management and Neuromodulation. The filing covers the three months ended March 31, 2016, following the October 19, 2015 merger of Cyberonics and Sorin. The prior comparable period is Cyberonics’ standalone thirteen weeks ended April 24, 2015; therefore, year-over-year comparisons are not directly comparable because 2016 includes Sorin’s businesses.
Financial performance and position
| Metric | Q1 2016 | Comparable prior period |
|---|---|---|
| Net sales | $287.0 million | $74.1 million |
| Gross profit / margin | $163.4 million / 56.9% | $66.5 million / 89.8% |
| Operating income (loss) / margin | $(36.1) million / (12.6)% | $16.7 million / 22.6% |
| Net income (loss) | $(40.4) million | $10.5 million |
| Diluted earnings (loss) per share | $(0.83) | $0.40 |
| Cash flow from operations | $9.6 million | $16.2 million |
| Capital expenditures and intangible purchases | $9.0 million | $1.2 million |
Revenue consisted of Cardiac Surgery of $143.4 million, Cardiac Rhythm Management of $61.7 million, Neuromodulation of $81.4 million and Other of $0.4 million. Neuromodulation revenue increased 9.8% versus the prior Cyberonics period, despite a 6.8% decline in generator unit volume, primarily because of higher U.S. pricing and adoption of the higher-priced AspireSR generator.
Operating results were affected by $28.6 million of restructuring expense, $15.9 million of intangible amortization, $6.8 million of merger and integration costs, $1.0 million of litigation-related expenses and approximately $21.3 million of merger-related inventory step-up amortization included in cost of sales. Excluding the combined businesses and these acquisition-related effects, the filing does not present a directly comparable consolidated margin.
At March 31, 2016, cash and cash equivalents were $87.5 million, short-term investments were $7.0 million and total assets were $2.62 billion. Total debt was $171.6 million, including $75.5 million of current debt and $96.1 million of long-term debt. Total stockholders’ equity was $1.83 billion. Management stated that existing cash, investments and expected operating cash flow should fund operating needs, working capital, research and development, capital expenditures and debt service for the next 12 months.
Material changes versus the prior comparable period
- Net sales increased by $212.9 million, primarily because the 2016 period includes the acquired Sorin Cardiac Surgery and Cardiac Rhythm Management operations.
- The company moved from $10.5 million of prior-period net income to a $40.4 million net loss, primarily reflecting merger-related amortization, restructuring, inventory step-up amortization and other integration costs.
- Gross margin declined to 56.9% from 89.8%, principally because Sorin’s businesses were included and $21.3 million of inventory step-up amortization was recorded in cost of sales.
- Cash from operations declined to $9.6 million from $16.2 million, while cash used in financing increased to $27.1 million, including short-term debt repayments and repayment of trade-receivable advances.
- Cash declined by $25.1 million during the quarter to $87.5 million, partly offset by a $1.27 million favorable foreign-exchange effect.
- Restructuring plans initiated in 2015 and 2016 are expected to reduce the workforce by approximately 131 personnel and include closure of the Meylan, France research and development facility.
Outlook, commentary, risks and unusual items
- Management expected cost of sales as a percentage of sales to improve after completion of the merger-related inventory step-up effect. SG&A was expected to remain approximately unchanged, and R&D spending as a percentage of sales was expected to remain similar to the first quarter.
- Management expected additional merger and integration expenses similar to the first-quarter $6.8 million and further restructuring expenses during the remainder of 2016, although most planned restructuring expense was recorded in the first quarter.
- The FDA issued a Warning Letter concerning the Munich, Germany and Arvada, Colorado facilities. Importation of 3T Heater Cooler devices into the United States was restricted, although existing customers could be supplied under a medical-necessity process. Management estimated that less than 1% of fiscal 2016 consolidated sales would be affected and that the matter would be resolved without a material financial impact.
- A putative class action alleges that 3T Heater Cooler devices exposed surgical patients to nontuberculous mycobacterium. The class had not been certified, and the filing states that additional related proceedings could materially affect the company’s business, results, financial condition or liquidity.
- The company continued to face SNIA environmental litigation and related potential successor liabilities concerning contamination at Italian Caffaro chemical sites. A Milan court dismissed the principal claims on April 1, 2016, but appeals remained possible. No accrual was recorded because a material loss was not considered probable and the potential loss was not estimable.
- LivaNova recorded a $19.2 million provision related to disputed Italian tax assessments; the total tax losses in dispute were reported as €62.6 million, or approximately $71.3 million.
- An Italian tax audit of Sorin Group Italia commenced in April 2016. New U.S. anti-inversion and intercompany-debt tax rules could affect future acquisitions, restructurings and LivaNova’s treatment as a foreign corporation for U.S. tax purposes.
- Foreign-exchange exposure remained significant. The company reported a $1.8 million foreign-exchange and other loss, including $3.8 million of losses on freestanding foreign-exchange forwards.
- The filing identified the June 23, 2016 U.K. referendum on European Union membership as a potential source of regulatory, trade, personnel, currency and operating uncertainty.
Most important facts for investors to verify
- Assess post-merger revenue growth and profitability using a comparable combined-company baseline rather than the Cyberonics-only prior period.
- Verify the timing and remaining amount of merger-related inventory step-up amortization, restructuring charges, integration costs and intangible amortization.
- Monitor cash conversion, debt maturities, short-term borrowings and the company’s ability to sustain liquidity while reporting losses.
- Track remediation of the FDA Warning Letter and any expansion of restrictions involving 3T Heater Cooler devices.
- Follow the 3T Heater Cooler class action, SNIA environmental litigation, Italian tax litigation and related contingent liabilities.
- Evaluate the potential effect of U.S. tax-rule changes on LivaNova’s foreign-corporation status, future acquisitions and intercompany financing.
- Confirm management’s restructuring savings, workforce reductions and facility-consolidation milestones.