LivaNova PLC — Form 10-Q Summary
Business context and reporting period
LivaNova PLC is a U.K.-based global medical device company operating through Neuromodulation, Cardiac Surgery, and Cardiac Rhythm Management. The filing covers the unaudited three months ended March 31, 2017, compared with the three months ended March 31, 2016. The financial statements are presented in U.S. dollars under U.S. GAAP.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $285.1 million | $287.0 million | (0.6%) |
| Gross profit | $184.4 million | $162.7 million | 13.4% |
| Gross margin | 64.7% | 56.7% | +8.0 percentage points |
| Income (loss) from operations | $18.6 million | $(36.1) million | Improved by $54.7 million |
| Operating margin | 6.5% | (12.6%) | +19.1 percentage points |
| Net income (loss) | $11.3 million | $(40.4) million | Improved by $51.6 million |
| Diluted earnings (loss) per share | $0.23 | $(0.83) | Improved by $1.06 |
| Operating cash flow | $33.2 million | $9.6 million | +$23.6 million |
Segment sales were $139.2 million in Cardiac Surgery, $87.2 million in Neuromodulation, and $58.3 million in Cardiac Rhythm Management. Neuromodulation increased 7.1%, while Cardiac Surgery declined 3.0% and Cardiac Rhythm Management declined 5.6%.
Cash and cash equivalents were $62.7 million at March 31, 2017, compared with $39.8 million at December 31, 2016. Current assets were $660.7 million versus current liabilities of $323.8 million. Debt obligations totaled approximately $121.5 million, consisting of $45.5 million of current debt and $76.1 million of long-term debt. Management stated that existing cash 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
- Revenue was broadly stable, but profitability improved materially as the $21.3 million merger-related inventory step-up amortization recorded in Q1 2016 was fully amortized during 2016.
- Cost of sales fell to 35.6% of revenue from 43.1%, and gross margin increased to 64.7% from 56.7%.
- Restructuring expense declined to $10.2 million from $28.6 million, while merger and integration expense declined to $2.2 million from $6.8 million.
- Product remediation costs produced a $0.8 million reduction in expense in Q1 2017, compared with $0.7 million of expense in Q1 2016.
- Foreign exchange and other gains were $3.4 million, including a $3.2 million gain from selling a cost-method investment, compared with a $1.8 million loss in Q1 2016.
- Operating cash flow increased to $33.2 million, and the company generated a $22.9 million increase in cash during the quarter versus a $25.1 million decrease in Q1 2016.
Guidance, outlook, risks, contingencies, and unusual items
- No specific financial guidance was provided. Management expects available liquidity and future operating cash flow to support anticipated requirements for at least the next 12 months.
- The company is implementing remediation measures for its 3T Heater Cooler device, including design modifications, deep-disinfection services, and a loaner-device program. The product remediation liability was $31.7 million at March 31, 2017. Management stated that the estimate could materially change based on customer behavior, market reaction, and regulatory approval timing.
- The company received CE Mark approval in Europe in April 2017 for the redesigned 3T device. U.S. regulatory clearance remained necessary for broader deployment.
- Thirty-six lawsuits and one Canadian case related to 3T Heater Cooler devices were disclosed, including putative class actions. No liability had been accrued for these lawsuits as of March 31, 2017.
- LivaNova disclosed ongoing Italian litigation related to alleged environmental liabilities arising from the historical SNIA/Caffaro chemical operations. No accrual was recorded because management considered a material loss not probable and the potential amount not estimable.
- Restructuring included a plan to sell the Suzhou Industrial Park facility in China. The company recorded $4.6 million of impairment and $0.5 million of additional costs, and classified $13.1 million of related property, plant, and equipment as held for sale.
- Brexit may affect tax reliefs, treaties, trade, legal arrangements, and future financial results; the ultimate effects were not determinable at the filing date.
- The CFO, Vivid Sehgal, announced his resignation effective May 31, 2017, and the company was seeking a successor.
- On May 2, 2017, LivaNova acquired the remaining interest in Caisson Interventional for up to $72 million, net of $6 million of debt forgiveness. The company expected to recognize a pretax non-cash gain in Q2 2017 on revaluing its existing Caisson investment.
Most important facts for investors to verify
- Whether the improved gross margin and operating profitability are sustainable after restructuring benefits and the absence of the prior-year inventory step-up amortization.
- The ultimate cost, timing, regulatory status, and liability revisions associated with the 3T Heater Cooler remediation program.
- The progression and potential financial exposure of the 3T-related lawsuits and other litigation, including the SNIA environmental proceedings and Italian tax disputes.
- The effect of Brexit and potential U.K., European, and U.S. tax-law changes on the company’s effective tax rate and cash taxes.
- The financial impact, regulatory milestones, and contingent payments associated with the Caisson acquisition.
- Execution of the Suzhou facility sale and the remaining restructuring obligations.
- Future performance of the Neuromodulation franchise and whether it can offset continued pricing and volume pressure in Cardiac Surgery and Cardiac Rhythm Management.