LivaNova(LIVN) - 2020 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Note About Forward Looking Statements The report contains forward-looking statements subject to risks like COVID-19, regulatory changes, and market acceptance, which may cause actual results to differ materially - Forward-looking statements are not guarantees and are subject to risks including regulatory changes, market acceptance failures, competition, cyber-attacks, and COVID-19 impact[9][10][15] Condensed Consolidated Financial Statements Q1 2020 saw a 3.4% sales decrease but a net income of $37.6 million driven by a $44.7 million tax benefit, with a solid balance sheet despite COVID-19 liquidity impacts Condensed Consolidated Statements of Income (Loss) Q1 2020 net sales decreased to $242.4 million, but operating income improved to $0.6 million, resulting in $38.6 million net income from a $44.7 million tax benefit Condensed Consolidated Statements of Income (Loss) (in thousands) | Financial Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Net sales | $242,397 | $250,801 | | Operating income (loss) from continuing operations | $608 | $(20,779) | | Net income (loss) from continuing operations | $38,578 | $(14,849) | | Net income (loss) | $37,583 | $(14,849) | | Diluted income (loss) per share | $0.77 | $(0.31) | - Profitability significantly boosted by a $44.7 million income tax benefit in Q1 2020, compared to a $6.6 million benefit in the prior year period[17] Condensed Consolidated Balance Sheets As of March 31, 2020, total assets were $2.45 billion, with cash doubling to $125.8 million, total liabilities at $1.06 billion, and stockholders' equity at $1.39 billion Condensed Consolidated Balance Sheets (in thousands) | Balance Sheet Item | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $125,823 | $61,137 | | Total Current Assets | $616,922 | $549,443 | | Total Assets | $2,454,436 | $2,411,797 | | Total Current Liabilities | $529,724 | $512,553 | | Total Liabilities | $1,061,728 | $1,028,080 | | Total Stockholders' Equity | $1,392,708 | $1,383,717 | - Current litigation provision liability decreased substantially from $146.0 million at year-end 2019 to $43.0 million, reflecting 3T device litigation settlement payments[21] Condensed Consolidated Statements of Cash Flows Q1 2020 net cash used in operations was $106.0 million due to litigation payments, offset by $183.1 million from financing, resulting in a $64.7 million net increase in cash Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(106,045) | $1,974 | | Net cash used in investing activities | $(11,085) | $(5,641) | | Net cash provided by financing activities | $183,093 | $7,589 | | Net increase in cash and cash equivalents | $64,686 | $3,572 | - Significant cash outflow from operations driven by a $115.6 million payment for litigation provision liability[24] - Company raised significant capital through financing activities, with $162.9 million in proceeds from long-term debt obligations[24] Notes to the Condensed Consolidated Financial Statements Notes detail COVID-19 impact, debt covenant amendments, FDA clearance for 3T Heater-Cooler devices, a $225 million 3T litigation settlement framework, and a $41.3 million CARES Act tax benefit - Significant decline in product demand in late Q1 2020 due to COVID-19 and postponement of elective surgeries[27] - Anticipated debt covenant breach due to COVID-19 sales reductions was alleviated by April 2020 amendments, mitigating going concern doubt[28][60][174] - Received FDA 510(k) clearance for 3T Heater-Cooler devices in February 2020, resolving 2015 Warning Letter issues and lifting an import alert[44][72][139] - 3T device litigation settlement framework provides for up to $225 million in payments, with $90 million paid in January 2020, leaving a $54.6 million provision as of March 31, 2020[78][81][143] - Recorded a discrete tax benefit of $41.3 million in Q1 2020 from the U.S. CARES Act, allowing a 5-year net operating loss carryback[103][173] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses COVID-19's adverse impact on sales, a 3.4% decrease, but improved operating income due to contingent consideration and reduced legal costs, with debt covenant amendments strengthening liquidity Results of Operations Q1 2020 net sales decreased 3.4% to $242.4 million, with Cardiovascular down 2.2% and Neuromodulation down 5.3%, while cost of sales improved due to a $14.8 million fair value adjustment Net Sales by Segment (in millions) | Segment | Q1 2020 Net Sales ($M) | Q1 2019 Net Sales ($M) | % Change | | :--- | :--- | :--- | :--- | | Cardiovascular | 152.1 | 155.5 | (2.2)% | | - Cardiopulmonary | 116.4 | 121.6 | (4.3)% | | - Heart Valves | 25.2 | 25.7 | (1.8)% | | - Advanced Circulatory Support | 10.5 | 8.2 | 27.2% | | Neuromodulation | 89.7 | 94.6 | (5.3)% | | Total | 242.4 | 250.8 | (3.4)% | - Neuromodulation sales decreased primarily due to declines in new patient implants globally as procedures were delayed by COVID-19[164] - Cost of sales and R&D expenses as a percentage of sales decreased due to favorable net changes in contingent consideration fair value, totaling $14.8 million and $11.9 million respectively[167][168] Liquidity and Capital Resources COVID-19's anticipated impact raised substantial doubt about debt covenant compliance, but April 2020 amendments and cost-cutting alleviated going concern risk, despite $106.0 million cash use from operations - Projected sales reduction from COVID-19 would lead to debt covenant non-compliance, raising substantial doubt about going concern ability[174] - April 2020 debt agreement amendments modified financial covenants, alleviating substantial doubt about the company's going concern ability for the next twelve months[174] Cash Flow Summary (in thousands) | Cash Flow Activity (in thousands) | Three Months Ended March 31, 2020 | | :--- | :--- | | Operating activities | $ (106,045) | | Investing activities | $ (11,085) | | Financing activities | $ 183,093 | | Net increase in cash | $ 64,686 | Quantitative and Qualitative Disclosures About Market Risk Company manages market risks from foreign currency and interest rates through operations and derivatives, with no material changes since the 2019 Form 10-K - Primary market risks stem from foreign currency exchange rates and interest rates, managed through business activities and derivatives[184] - No material changes in the company's market risk profile from the 2019 Form 10-K information[184] Controls and Procedures Management, including CEO and CFO, deemed disclosure controls and procedures effective as of March 31, 2020, with no material changes to internal control over financial reporting - CEO and CFO concluded disclosure controls and procedures were effective as of March 31, 2020[185] - No material changes occurred during the quarter affecting internal control over financial reporting[186] PART II. OTHER INFORMATION Legal Proceedings This section refers to Note 10 for detailed descriptions of material pending legal proceedings, including product liability, environmental, patent, and tax disputes - Report refers to "Note 10. Commitments and Contingencies" for descriptions of material pending legal and regulatory proceedings[188] Risk Factors Primary risk factor update is the ongoing adverse effect of the COVID-19 pandemic on business, financial position, and liquidity, through deferred surgeries and supply chain disruptions - COVID-19 outbreak identified as a significant risk factor adversely affecting business, financial position, and liquidity[190] - Company expects Q2 2020 sales and operating results to be materially adversely impacted by the pandemic[192] - Pandemic could disrupt product distribution, cause temporary facility closures, and interrupt component and raw material supply[193] Other Information Company discloses two non-U.S. subsidiaries sell medical devices to distributors in Iran, generating $0.5 million gross revenue and $0.2 million net profit for Q1 2020 - Pursuant to Section 13(r) of the Exchange Act, company disclosed two non-U.S. subsidiaries sell medical devices to private distributors in Iran[199] Iran-Related Business Metrics (Q1 2020) | Metric | Amount (Q1 2020) | | :--- | :--- | | Gross Revenues from Iran | $0.5 million | | Net Profits from Iran | $0.2 million |