LivaNova PLC 2020 Form 10-K Summary
Business context and reporting period
LivaNova is a global medical device company headquartered in London and listed on Nasdaq under LIVN. The annual report covers the fiscal year ended December 31, 2020, with comparisons to 2019 and 2018. Operations are reported through Cardiovascular and Neuromodulation segments.
- Cardiovascular: cardiopulmonary products, heart valves and advanced circulatory support systems, including LifeSPARC.
- Neuromodulation: VNS Therapy for drug-resistant epilepsy and difficult-to-treat depression, plus obstructive sleep apnea and heart-failure development programs.
- The former Cardiac Rhythm Management business remains classified as discontinued operations following its 2018 sale.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $934.2 million | $1,084.2 million | Down 13.8% |
| Operating loss from continuing operations | $269.9 million | $168.9 million | Loss increased |
| Net loss | $345.0 million | $155.2 million | Loss increased |
| Basic and diluted loss per share | $7.10 | $3.21 | Loss increased |
| Operating cash flow | $(79.4) million | $(91.1) million | Improved by $11.7 million |
| Capital expenditures | $35.9 million | $28.0 million | Increased |
| Cash and cash equivalents | $252.8 million | $61.1 million | Increased |
| Total debt | $655.6 million | $337.7 million | Increased |
| Total stockholders’ equity | $1.119 billion | $1.384 billion | Decreased |
Approximate consolidated margins were 67.0% gross margin, negative 28.9% operating margin and negative 36.9% net margin in 2020. Cost of sales rose to 33.0% of sales from 29.8%, reflecting product mix and $20.0 million of unfavorable manufacturing variances associated with lower COVID-19-related demand.
- Cardiovascular sales: $577.1 million, down 12.1%. Cardiopulmonary sales declined 11.5% and Heart Valves sales declined 26.6%; Advanced Circulatory Support increased 32.6% to $42.3 million, aided by the LifeSPARC launch.
- Neuromodulation sales: $354.4 million, down 16.5%, primarily because patients and physicians delayed implant procedures.
- Research and development expense increased to $152.9 million, or 16.4% of sales, from $146.8 million, or 13.5% of sales.
- Interest expense increased to $40.8 million from $15.1 million, and foreign exchange and other losses increased to $33.4 million from $2.5 million.
- The effective tax rate was 0.2%; the company recorded a $43.3 million CARES Act tax benefit, partly offset by increased valuation allowances.
Material changes versus the prior comparable period
- COVID-19 materially reduced elective and non-COVID medical procedures, hospital capital spending and demand for LivaNova products across geographies.
- The company recorded a $180.2 million impairment for the Heart Valves disposal group and a $21.3 million impairment of allocated Cardiovascular goodwill after entering into a sale agreement.
- A $42.2 million decommissioning provision was recorded for obligations relating to hazardous substances and contaminated facilities at the Saluggia, Italy campus. The related liability was $43.0 million at year-end, representing the low end of an estimated $43.0 million to $55.0 million range.
- Additional 3T Heater-Cooler litigation provisions of $3.9 million were recorded in 2020. The remaining litigation provision was $36.5 million at year-end.
- The company initiated a 2020 restructuring plan and incurred $7.6 million of restructuring expense, primarily relating to approximately 54 employees.
- In June 2020, LivaNova entered into a $450.0 million senior secured term loan and issued $287.5 million of 3.00% cash exchangeable senior notes. Proceeds were used primarily to refinance existing debt and for general corporate purposes.
Liquidity, debt and cash flow
Cash used in operating activities was $79.4 million, while financing activities provided $310.8 million, resulting in a $191.7 million increase in cash during the year. Management stated that existing cash, operating cash generation and available borrowing capacity were expected to fund operating needs, working capital, research and development, capital expenditures, litigation obligations and debt service for the 12-month period following issuance of the financial statements.
- Long-term debt obligations were $650.7 million at December 31, 2020, before debt issuance costs; reported total debt was $655.6 million.
- The senior secured term loan had a June 2025 maturity and an effective interest rate of approximately 9.0% at year-end.
- The cash exchangeable notes mature in December 2025 and had an effective interest rate of approximately 9.9%; the embedded exchange-feature liability was $121.8 million.
- The company had a $50.0 million revolving credit facility, with no borrowings under that facility during 2020.
- Contractual obligations totaled $1.280 billion, including $757.2 million of debt principal, $196.8 million of long-term debt interest and $130.2 million of derivative instruments.
- The company reported compliance with financial covenants as of December 31, 2020, as amended in February 2021.
Guidance, outlook, commentary and risks
- Management expected elective procedures to stabilize and recover globally during 2021, but emphasized that recovery rates would vary by country and depend on COVID-19 case volumes, hospital capacity, staffing, patient willingness to reschedule procedures, travel restrictions and potential resurgence.
- RECOVER depression-study activity and the ANTHEM-HFrEF heart-failure trial were delayed or paused by COVID-19 restrictions, although enrollment and site activity resumed at certain locations.
- The proposed Heart Valves divestiture was expected to have initial closings in the first half of 2021, potentially excluding LivaNova Site Management. Completion remained subject to amendments and other closing conditions.
- The company received FDA 510(k) clearance for updated 3T devices in February 2020 and stated that remediation of the 2015 Warning Letter observations was complete, pending FDA close-out inspection.
- Material risks include continued COVID-19 disruption, elective-procedure recovery uncertainty, regulatory compliance and product approvals, product liability and recalls, supply-chain concentration, reimbursement and pricing pressure, cybersecurity, foreign exchange, tax audits, Brexit-related changes, environmental liabilities and the ability to service or refinance debt.
- A significant unresolved environmental exposure relates to potential liability for SNIA-related contamination claims in Italy. The company also disputed a 2021 administrative order concerning maintenance of environmental measures at the Brescia site and had not accrued a loss because it was not considered probable or reasonably estimable.
- The company had approximately $1.4 billion of net intangible assets and goodwill, or 56.4% of total assets, making future impairment charges a material risk.
Most important facts for an investor to verify
- Whether elective medical procedures and hospital capital spending recovered sufficiently in 2021 to reverse the 2020 sales declines.
- The timing, final scope and proceeds of the Heart Valves divestiture, including whether LivaNova Site Management is transferred.
- Actual cash requirements and covenant headroom under the 2025 term loan and cash exchangeable notes.
- The ultimate cost and timing of 3T Heater-Cooler litigation and related product-remediation activities.
- The final amount and timing of Saluggia decommissioning obligations, including the potential range above the $43.0 million accrued liability.
- Potential exposure from Italian environmental litigation and the Brescia administrative order.
- Progress, enrollment and regulatory outcomes for RECOVER, ANTHEM-HFrEF and the obstructive sleep apnea program.
- The recoverability of goodwill, intangible assets and deferred tax assets given continuing losses and elevated valuation allowances.