LivaNova PLC — Q1 2019 Form 10-Q Summary
Business context and reporting period
LivaNova is a global medical device company operating through two reportable segments: Cardiovascular and Neuromodulation. The unaudited results cover the three months ended March 31, 2019, compared with the three months ended March 31, 2018, and are presented in U.S. dollars under U.S. GAAP.
The former Cardiac Rhythm Management business is reported as discontinued operations following its April 2018 sale. Current operations include cardiopulmonary products, heart valves, advanced circulatory support and neuromodulation therapies.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $250.8 million | $250.4 million | 0.2% increase |
| Operating income (loss), continuing operations | $(20.8) million | $12.5 million | Decline of $33.3 million |
| Net income (loss), continuing operations | $(14.8) million | $17.8 million | Decline of $32.7 million |
| Net income (loss) | $(14.8) million | $13.3 million | Decline of $28.1 million |
| Basic diluted EPS | $(0.31) | $0.27 | Turned to loss |
| Operating cash flow | $2.0 million | $20.4 million | Decrease of $18.4 million |
| Cash and cash equivalents | $50.8 million | $65.0 million at March 31, 2018 | Period-end comparison |
Approximate Q1 2019 operating margin was negative 8.3%, versus approximately 5.0% in Q1 2018. Net margin was approximately negative 5.9%, versus approximately 5.3% in the prior-year quarter.
- Cardiovascular sales were $155.5 million, down 0.4%. Cardiopulmonary sales declined 2.8% and heart valve sales declined 17.3%, partly offset by $8.2 million of advanced circulatory support sales from TandemLife, acquired in April 2018.
- Neuromodulation sales were $94.6 million, up 0.9%; international growth was largely offset by U.S. weakness attributed principally to competitive dynamics and sales-force turnover.
- Cardiovascular segment income fell to $1.0 million from $10.3 million. Neuromodulation segment income fell to $21.6 million from $38.7 million.
- SG&A increased to $125.7 million from $104.2 million, and R&D increased to $43.6 million from $31.8 million. The filing attributes the increases to litigation, commercial investments and product-development programs.
- Product remediation expense was $2.9 million, restructuring expense was $2.5 million, merger and integration expense was $3.3 million, and amortization of intangibles was $9.3 million.
Balance sheet, debt and liquidity
- Total assets were $2.60 billion and total liabilities were $1.11 billion at March 31, 2019.
- Current debt obligations were $39.4 million and long-term debt was $141.9 million. Short-term revolving borrowings totaled approximately $16.6 million.
- On March 26, 2019, LivaNova entered into a $350 million multicurrency term loan facility maturing March 26, 2022. No borrowings had been drawn at March 31, 2019. The facility carries interest at LIBOR plus 1.6% for U.S. dollar borrowings and EURIBOR plus 1.4% for euro borrowings, and includes financial covenants.
- Cash increased by $3.6 million during the quarter to $50.8 million. Operating cash flow was largely offset by $5.6 million of investing cash outflows and supported by $7.6 million of financing cash inflows.
- Management stated that existing cash, expected operating cash flow and available borrowings should fund operations, working capital, R&D, capital expenditures, litigation obligations and debt service for the following 12 months. The filing states that the new facility alleviated previously identified substantial doubt about going-concern status.
Material changes versus the prior comparable period
- Revenue was essentially flat, but profitability deteriorated materially as segment income declined, corporate costs increased and the prior-year period included an $11.5 million noncash gain on the ImThera acquisition.
- Q1 2018 included a $4.5 million net loss from discontinued CRM operations; Q1 2019 had no discontinued-operations loss.
- Operating cash generation declined substantially, primarily because of lower earnings and working-capital changes. The prior-year investing outflow included $77.6 million for the ImThera acquisition; no comparable acquisition outflow occurred in Q1 2019.
- The company adopted ASC 842 lease accounting on January 1, 2019, recognizing approximately $60 million of right-of-use assets and lease liabilities at adoption. Lease liabilities totaled $58.0 million at March 31, 2019.
- The 3T device litigation provision remained $294.1 million. Current litigation provision liability was $252.1 million and long-term litigation provision liability was $42.0 million at quarter-end.
Guidance, outlook, management commentary, risks and unusual items
- The filing does not provide clear quantitative revenue, earnings or cash-flow guidance. Management cautions that quarterly results are not necessarily indicative of full-year results.
- Management expects the 2018 restructuring plan, affecting facilities in Italy and Colorado and expected to reduce personnel by approximately 75, to be completed by the end of 2019.
- Management cited growth opportunities from advanced circulatory support, the Perceval valve’s national reimbursement in Japan and Medicare coverage for VNS Therapy for treatment-resistant depression under Coverage with Evidence Development.
- 3T litigation remains a principal financial and operational risk. A March 2019 settlement framework provides for payments of up to $225 million for covered claims, with up to $135 million payable no earlier than July 2019 and the remainder in January 2020. Other state and international cases continue. Insurance coverage totals $32.9 million after an $11.0 million self-retention, but no insurance receivable was recorded.
- The company reported approximately 210 filed and unfiled 3T-related claims worldwide as of April 30, 2019. Product remediation liability was $11.5 million at March 31, 2019.
- Other risks include FDA regulatory matters, product approvals and reimbursement, competition, foreign exchange, Brexit, supplier dependence, cybersecurity, intellectual-property and tax litigation, and potential changes in healthcare regulation.
- Disclosure controls and procedures were not effective at March 31, 2019 because of material weaknesses in internal control over financial reporting previously reported in the 2018 Form 10-K. Management expected remediation before the end of fiscal 2019, but the weaknesses were not yet considered remediated.
- The filing reports no material off-balance-sheet arrangements and no material changes to previously disclosed contractual obligations.
Most important facts for an investor to verify
- Whether the $350 million term facility is fully available, whether covenant requirements can be maintained and when borrowings will be drawn.
- The timing and ultimate cash cost of the 3T litigation settlement, remaining claims and potential insurance recoveries relative to the $294.1 million provision.
- Progress in remediating the FDA Warning Letter and 3T device remediation obligations.
- Whether U.S. Neuromodulation demand recovers from competitive pressure and sales-force turnover.
- Whether Cardiovascular and Neuromodulation R&D and commercial investments generate sufficient revenue and margin improvement.
- Management’s completion and independent evaluation of remediation of the material weaknesses in internal controls.
- The outcome and potential exposure from the SNIA environmental litigation, Italian tax litigation and pending patent litigation, for which the filing states that losses are not currently probable or reasonably estimable.