LivaNova(LIVN) - 2019 Q4 - Annual Report

PART I Item 1. Business LivaNova is a global medical device company operating through Cardiovascular and Neuromodulation business franchises - LivaNova operates through two principal business franchises, which are also its reportable segments: Cardiovascular and Neuromodulation[18] - The Cardiovascular business develops, produces, and sells cardiopulmonary products, heart valves, and advanced circulatory support systems[20][21][23] - The Neuromodulation business markets devices for treating epilepsy, depression, and obstructive sleep apnea, with its core product being the VNS Therapy System[24][25] - The company protects its intellectual property with over 1,000 issued patents worldwide as of December 31, 2019[45] - In November 2019, the company announced the termination of its Caisson transcatheter mitral valve replacement (TMVR) program[41] - The company's business is subject to extensive government regulation by agencies like the FDA and is preparing for compliance with the new EU Medical Device Regulation (Reg MDR)[55][60] Item 1A. Risk Factors The company faces significant risks from competition, supply chain issues, regulations, and product liability claims - The company operates in highly competitive markets and faces pricing pressure from managed care and provider consolidation[93][94] - Extensive government regulations (FDA, EU's Reg MDR) present significant compliance costs and risks of product approval delays[97][104] - The company is exposed to significant product liability risks, particularly from its 3T Heater-Cooler litigation, with provisions of $294.1 million in 2018 and $33.2 million in 2019[108][111] - Cybersecurity threats pose a risk to IT systems and products, with potential for data breaches and regulatory fines[119][121] - International operations are subject to risks including foreign currency fluctuations, political instability, health epidemics, and uncertainties related to Brexit[131][134][151] - The company recorded significant impairment charges in 2019 related to the ImThera IPR&D asset ($50.3 million) and the discontinuation of the Caisson business (goodwill of $42.4 million and IPR&D of $89.0 million)[141] Item 2. Properties The company operates 11 global facilities totaling 1.3 million square feet, with 66% of this space being owned - The company's principal executive office is leased and located in the UK[156] - Manufacturing and research facilities are located globally, totaling approximately 1.3 million square feet[156] - Approximately 66% of the manufacturing and research facility space is owned by the company[156] Item 3. Legal Proceedings Material legal proceedings are incorporated by reference from Note 14 of the consolidated financial statements - Details on material legal proceedings are provided in Note 14 of the consolidated financial statements[158] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's shares trade on NASDAQ under "LIVN" with no current dividend plans or active share repurchase programs - The company's ordinary shares are traded on the NASDAQ Global Market under the symbol "LIVN"[162] - LivaNova has no current intention to declare and pay dividends[165] - A share repurchase program authorizing up to $150.0 million in buybacks expired on December 31, 2018[166] Item 6. Selected Financial Data The company reported net sales of $1.084 billion and a net loss of $155.2 million for fiscal year 2019 Selected Financial Data | Metric (In thousands, except per share data) | Year Ended Dec 31, 2019 | Year Ended Dec 31, 2018 | Year Ended Dec 31, 2017 | | :--- | :--- | :--- | :--- | | Net sales | $1,084,170 | $1,106,961 | $1,012,277 | | Operating (loss) income from continuing operations | $(168,870) | $(248,072) | $96,487 | | Net (loss) income from continuing operations | $(155,541) | $(178,462) | $54,465 | | Net (loss) income | $(155,176) | $(189,399) | $(25,089) | | Diluted (loss) per share | $(3.21) | $(3.91) | $(0.52) | | Total assets | $2,411,797 | $2,549,701 | $2,503,891 | | Stockholders' equity | $1,383,717 | $1,503,738 | $1,815,314 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net sales decreased 2.1% in 2019, resulting in an operating loss impacted by asset impairments and negative cash flow Results of Operations Net sales fell 2.1% in 2019, with a net loss of $155.5 million driven by asset impairments of $181.7 million Net Sales by Segment (in thousands) | Net Sales by Segment (in thousands) | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | Cardiovascular | $656,646 | $681,825 | (3.7)% | | Neuromodulation | $424,547 | $422,990 | 0.4% | | Total Net Sales | $1,084,170 | $1,106,961 | (2.1)% | - Cardiovascular sales declined 5.9% in Cardiopulmonary products, partly due to exiting a Canadian distribution agreement, and 4.7% in Heart Valves[222] - Neuromodulation sales growth was driven by Europe and Rest of World, offset by a decline in U.S. sales due to competitive dynamics[226] - In 2019, the company recorded impairments of goodwill ($42.4M) and intangible assets ($139.3M) related to the Caisson and ImThera programs[248][249] - The 2018 results included a $294.1 million litigation provision for the 3T device, while 2019 saw an additional $33.2 million provision offset by an insurance recovery[253] Liquidity and Capital Resources Operating cash flow turned negative to ($91.1 million) due to $156.9 million in litigation payments, increasing total debt Cash Flow Summary (in thousands) | Cash Flow Summary (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(91,142) | $120,489 | | Net cash used in investing activities | $(41,290) | $(120,556) | | Net cash provided by (used in) financing activities | $146,581 | $(42,348) | - The negative shift in operating cash flow was primarily due to $156.9 million in 3T litigation settlement payments made during 2019[300] - Total debt increased to $337.7 million as of Dec 31, 2019, compared to $168.3 million as of Dec 31, 2018[305] - As of December 31, 2019, the company had significant contractual obligations totaling $678.3 million, including $90.0 million for 3T litigation settlements due in less than one year[309] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to foreign currency, interest rate, and credit risks, which it manages using derivatives - The company is exposed to market risks from foreign currency exchange rates, interest rates, and credit concentration[313] - A foreign currency exchange rate risk management strategy utilizing derivatives is in place to reduce exposure[314] - Interest rate risk on debt is managed in part through interest rate swap contracts[316] Item 9A. Controls and Procedures Management concluded that disclosure controls and procedures were effective following the remediation of prior material weaknesses - Management concluded that disclosure controls and procedures were effective as of December 31, 2019[322] - Management's assessment concluded that internal control over financial reporting was effective as of December 31, 2019[324] - The company remediated previously disclosed material weaknesses concerning IT access controls and billing processes[327][328] PART III Item 10. Directors, Executive Officers and Corporate Governance Required information on directors, officers, and governance is incorporated by reference from the 2020 Definitive Proxy Statement - Information is incorporated by reference from the 2020 Definitive Proxy Statement[331] Item 11. Executive Compensation Required information regarding executive compensation is incorporated by reference from the 2020 Definitive Proxy Statement - Information is incorporated by reference from the 2020 Definitive Proxy Statement[333] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Required information concerning security ownership is incorporated by reference from the 2020 Definitive Proxy Statement - Information is incorporated by reference from the 2020 Definitive Proxy Statement[334] Item 13. Certain Relationships and Related Transactions, and Director Independence Required information on related party transactions is incorporated by reference from the 2020 Definitive Proxy Statement - Information is incorporated by reference from the 2020 Definitive Proxy Statement[335] Item 14. Principal Accounting Fees and Services Required information on accounting fees is incorporated by reference from the 2020 Definitive Proxy Statement - Information is incorporated by reference from the 2020 Definitive Proxy Statement[336] PART IV Item 15. Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the annual report - This item contains the Consolidated Financial Statements and the Report of Independent Registered Public Accounting Firms[339] - An index to all exhibits filed with the Form 10-K is provided[341]