LivaNova PLC 2018 Form 10-K Summary
Business context and reporting period
LivaNova is a global medical-device company headquartered in London, with two reportable segments: Cardiovascular (CV) and Neuromodulation (NM). Products include cardiopulmonary systems, heart valves, temporary circulatory-support products, VNS Therapy systems, and emerging therapies for obstructive sleep apnea, treatment-resistant depression, heart failure, and mitral-valve disease.
The filing reports the fiscal year ended December 31, 2018. The requested “2018 Q4” information is available through the unaudited fourth-quarter data, but the filing itself is an annual Form 10-K.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $1,107.0 million | $1,012.3 million | Up 9.4% |
| Operating income (loss), continuing operations | $(248.1) million | $96.5 million | Declined $344.6 million |
| Net income (loss), continuing operations | $(178.5) million | $54.5 million | Declined $233.0 million |
| Net loss | $(189.4) million | $(25.1) million | Loss increased |
| Diluted loss per share | $(3.91) | $(0.52) | Less favorable |
| Operating cash flow | $120.5 million | $91.3 million | Up $29.2 million |
| Cash and cash equivalents | $47.2 million | $93.6 million | Down $46.4 million |
| Total debt | $168.3 million | $146.0 million | Up $22.3 million |
| Working capital | $36.6 million | $463.8 million | Down substantially |
Based on reported net sales, the 2018 operating margin was approximately negative 22.4% and the net margin was approximately negative 17.1%. Cost of sales improved to 32.7% of sales from 34.9%, but SG&A increased to 42.0% from 37.5% and R&D increased to 13.2% from 10.8%.
Fourth-quarter 2018 sales were $297.0 million, operating loss from continuing operations was $276.5 million, net loss was $210.6 million, and diluted loss per share was $4.34. The fourth quarter included the $294.0 million 3T litigation provision.
- CV sales rose 7.3% to $681.8 million, including $19.5 million from TandemLife; cardiopulmonary sales increased, while heart-valve sales declined 8.9%.
- NM sales rose 12.8% to $423.0 million, driven primarily by adoption of the SenTiva VNS Therapy System.
- Investing cash outflow was $120.6 million, including $279.7 million for acquisitions and $186.7 million of net proceeds from the CRM sale.
- Financing cash outflow was $42.3 million, including $50.0 million of share repurchases and $23.8 million of long-term debt repayments, partially offset by $103.6 million of new long-term borrowings.
Material changes versus the prior comparable period
- Revenue increased $94.7 million, or 9.4%, led by CV cardiopulmonary products and NM products.
- Reported profitability deteriorated sharply because of the $294.0 million 3T heater-cooler litigation provision, higher legal costs, increased growth investments, and acquisition-related operating losses.
- LivaNova acquired the remaining interest in ImThera for consideration of up to approximately $225 million and acquired TandemLife for consideration of up to approximately $254 million.
- The CRM business was sold on April 30, 2018 for $195.9 million of gross cash proceeds, less $9.2 million of cash transferred. CRM results are presented as discontinued operations.
- Cash declined despite higher operating cash flow, reflecting acquisitions, capital spending, share repurchases, debt activity, and foreign-exchange effects.
- The company adopted ASC 606 and certain other accounting standards in 2018; management reported no material opening retained-earnings impact from the new revenue standard.
Outlook, risks, contingencies, and unusual items
The filing does not provide a clear numerical 2019 revenue or earnings guidance range. Management expects to continue investing in SenTiva, TRD, heart failure, TMVR, obstructive sleep apnea, next-generation heart-lung machines, and other clinical and regulatory programs.
The most significant unusual item is the 3T heater-cooler litigation. The company recorded a litigation liability of approximately $294.1 million, with approximately $161.9 million expected to be paid during 2019 and most of the remainder expected in the first half of 2020. Approximately 210 filed and unfiled claims were identified as of March 18, 2019. Product-liability insurance coverage is $32.9 million after an $11.0 million self-retention limit, and the company had not recorded an insurance receivable at year-end.
The litigation and $23.3 million of current debt obligations raised substantial doubt about the company’s ability to continue as a going concern. Management concluded that the doubt was alleviated by a February 25, 2019 commitment letter for a $350 million multicurrency term-loan facility, subject to conditions and expected execution by April 26, 2019, together with expected operating cash flows.
- Two material weaknesses existed in internal control over financial reporting: inadequate user-access and segregation-of-duties controls over the primary financial system, and controls over price and quantity accuracy in billing and revenue processes. Management planned remediation by the end of 2019.
- The FDA Warning Letter and related remediation concerning the 3T device remain material regulatory and product risks. The year-end product-remediation liability was $14.7 million.
- The company faces additional environmental, tax, patent, product-liability, reimbursement, regulatory, cybersecurity, foreign-exchange, Brexit, supply-chain, and acquisition-integration risks.
- Caisson’s paused INTERLUDE CE Mark trial enrollment delayed commercialization and created impairment risk, although no impairment was recorded at year-end.
- The 2018 restructuring plan targets approximately 75 personnel reductions across selected CV facilities and was expected to be completed by the end of 2019.
- The company disclosed $10.3 million of gross revenue and $3.7 million of net profit attributable to activities in Iran during 2018 and stated that it intended to continue those activities.
Most important facts for investors to verify
- Whether the $350 million financing commitment closed on the stated terms and adequately supported litigation payments, debt maturities, and operating liquidity.
- Actual cash payments and settlement outcomes for the 3T litigation compared with the $294.1 million provision and available insurance coverage.
- Progress and effectiveness of remediation of the two material weaknesses, particularly revenue and billing controls.
- Organic growth and profitability excluding TandemLife, ImThera, discontinued CRM operations, and litigation-related items.
- Commercial and regulatory milestones for ImThera, TandemLife, Caisson, VITARIA, and the SenTiva product portfolio.
- Whether CV heart-valve declines, pricing pressure, regulatory requirements, and reimbursement changes offset growth in cardiopulmonary and NM products.
- Future impairment risk for the company’s $1.7 billion of goodwill and intangible assets, which represented approximately 67.7% of total assets at year-end.