LivaNova PLC Form 10-Q Summary
Business Context and Reporting Period
LivaNova PLC is a global medical-device company with reportable Cardiovascular and Neuromodulation segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, with comparisons to the corresponding 2020 periods. Financial statements are presented in U.S. dollars under U.S. GAAP.
Neuromodulation includes VNS Therapy and investigational therapies for depression, obstructive sleep apnea and heart failure. Cardiovascular includes cardiopulmonary and advanced circulatory support products. The Company completed the initial closing of its Heart Valve business divestiture on June 1, 2021.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Net sales | $264.5 million | $182.2 million | $512.1 million | $424.6 million |
| Year-over-year change | 45.2% | — | 20.6% | — |
| Gross profit | $173.7 million | $116.5 million | $338.4 million | $283.0 million |
| Gross margin | 65.7% | 63.9% | 66.1% | 66.7% |
| Operating loss | $(34.9) million | $(15.2) million | $(39.3) million | $(14.6) million |
| Operating margin | (13.2)% | (8.4)% | (7.7)% | (3.4)% |
| Net loss | $(55.3) million | $(88.0) million | $(85.0) million | $(50.4) million |
| Loss per share | $(1.13) | $(1.81) | $(1.74) | $(1.04) |
| Cash flow from operations | Not separately provided | Not separately provided | $45.1 million | $(125.1) million |
Q2 sales growth was led by Neuromodulation, which increased 105.6% to $117.6 million. Cardiovascular sales increased 17.1% to $145.9 million, including 120.8% growth in Advanced Circulatory Support and a 15.7% decline in Heart Valve sales. For the six-month period, Neuromodulation sales increased 50.7% to $221.3 million and Cardiovascular sales increased 4.5% to $289.0 million.
Q2 selling, general and administrative expense was $122.7 million, research and development expense was $52.6 million and other operating expense was $33.2 million. Interest expense increased to $16.5 million from $5.7 million. Foreign exchange and other gains were $0.1 million in Q2, compared with losses of $1.0 million in the prior-year quarter.
At June 30, 2021, cash and cash equivalents were $329.4 million, compared with $252.8 million at December 31, 2020. Total current assets were $809.1 million and total current liabilities were $702.2 million. Total debt obligations were approximately $663.0 million, consisting principally of the senior secured term loan and cash exchangeable senior notes. The Company had $5.0 million outstanding under short-term revolving credit agreements and no borrowings under its $50.0 million revolving credit facility.
Net cash increased by $76.6 million during the first six months. Operating cash flow was $45.1 million, investing cash flow was $46.7 million and financing cash flow was $(14.1) million. Investing cash flow included $41.8 million from the Heart Valve divestiture and $23.1 million from the sale of the Respicardia investment and loan.
Material Changes Versus the Prior Comparable Period
- Sales increased substantially, primarily from recovery in procedure volumes and improved Neuromodulation demand across all regions.
- Neuromodulation segment income increased 39.6% in Q2 and 18.0% for the first six months, while Cardiovascular reported larger losses.
- Operating losses widened despite higher sales, primarily because of a $29.4 million Q2 provision for 3T Heater-Cooler product-liability claims, higher contingent-consideration fair-value adjustments and increased research and development spending.
- Net loss improved in Q2 because the prior-year period included a $70.0 million U.K. deferred-tax valuation allowance; the six-month net loss worsened because of higher operating losses and financing costs.
- Interest expense increased materially due to debt raised in June 2020 and the related effective-interest amortization.
- Operating cash flow improved by $170.2 million year over year, principally because of lower 3T litigation settlement payments, a $24.6 million CARES Act tax refund and favorable non-cash adjustments.
- The Heart Valve business was partially divested on June 1, 2021. Additional consideration of approximately $3.0 million was expected in the fourth quarter of 2021 and approximately $11.9 million on December 30, 2022, subject to the transaction terms.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific numerical revenue or earnings guidance. Management stated that existing cash, expected operating cash generation and available borrowing capacity should fund operating needs, working capital, research and development, capital expenditures and debt service for the twelve months following issuance of the financial statements. Management also noted that additional debt or equity financing may be required, including if the Company faces an adverse SNIA environmental-litigation outcome.
- COVID-19 continues to create unpredictable procedure-volume, hospital-resource, employee-productivity and supply-chain risks. Neuromodulation volumes were recovering, but certain European and Rest-of-World markets remained challenged.
- The 3T Heater-Cooler litigation provision was $60.2 million at June 30, 2021 after a $29.4 million second-quarter increase. Approximately 85 filed and unfiled claims were identified as of July 28, 2021, and actual resolution costs may differ from the recorded estimate.
- The Company faces potential SNIA environmental liabilities in Italy. The Italian Court of Appeal determined potential joint liability up to an estimated €572.1 million fair value of assets received in the historical spin-off; damages had not yet been determined and the Company had not recorded a liability for this matter.
- The cash exchangeable senior notes became exchangeable for cash during July through September 2021 after the exchange condition was satisfied. Approximately $218.4 million of principal was outstanding at June 30, 2021 and was classified as current, although no holders had elected to exchange as of the filing date. The related capped-call asset had a fair value of $104.3 million.
- Current debt obligations increased to $232.0 million from $13.3 million at year-end, principally because of the note reclassification. The Company stated it was in compliance with applicable debt covenants at June 30, 2021.
- Restructuring expense was $9.7 million for the first six months, with a remaining restructuring accrual of $6.4 million at June 30, 2021.
- Management highlighted regulatory approvals, reimbursement, product liability, intellectual property, cybersecurity, supply dependence, foreign currency, interest-rate and competitive risks. No material changes to previously disclosed risk factors were reported.
- The Company reported Iran-related gross revenue of $3.3 million and net profit of $1.4 million in Q2, and gross revenue of $4.6 million and net profit of $2.0 million for the first six months. It stated that these activities were intended to comply with applicable sanctions laws.
- Alex Shvartsburg was appointed CFO effective August 1, 2021, after serving as interim CFO.
Most Important Facts for Investors to Verify
- Whether Neuromodulation growth and COVID-19-related procedure recovery continue through the remainder of 2021.
- The ultimate cash cost and timing of 3T product-liability claims and related settlement activity.
- The potential magnitude and timing of damages in the SNIA environmental litigation.
- Whether holders exchange the cash exchangeable notes and the resulting effect on liquidity, debt maturities and capped-call recoveries.
- Whether Cardiovascular profitability improves after the Heart Valve divestiture and as litigation-related charges decline.
- The sustainability of positive operating cash flow after excluding the Heart Valve and Respicardia proceeds, CARES Act refund and litigation-payment timing effects.
- Progress and regulatory outcomes for B-Capta, RECOVER/UNCOVER, OSPREY and other clinical programs.