LivaNova(LIVN) - 2020 Q4 - Annual Report

Part I Business LivaNova PLC is a global medical device company with Cardiovascular and Neuromodulation segments, divesting Heart Valve business, and subject to extensive regulations - LivaNova is a global medical device company with two reportable segments: Cardiovascular and Neuromodulation[19][20] - On December 2, 2020, the company agreed to divest its Heart Valve business to Gyrus Capital, expected to close in the first half of 2021[26][27] - The company's largest markets are the U.S., Europe, and Japan, utilizing direct sales and independent distributors[54] - Primary competitors include Terumo Medical, Medtronic, Edwards Lifesciences, and Abbott Laboratories[59] Cardiovascular Segment The Cardiovascular segment offers cardiopulmonary, advanced circulatory support, and heart valve products, with the Heart Valve business slated for divestiture - The Cardiovascular segment includes cardiopulmonary products, heart valves, and advanced circulatory support products[22] - Cardiopulmonary products, like heart-lung machines and oxygenators, are used during procedures such as coronary artery bypass grafts[23] - Advanced Circulatory Support products, such as the LifeSPARC system, provide temporary extracorporeal life support for critically ill patients[25] - An agreement was made on December 2, 2020, to sell the Heart Valve business to Gyrus Capital, with the deal expected to close in the first half of 2021[26][27] Neuromodulation Segment The Neuromodulation segment develops VNS Therapy for epilepsy and difficult-to-treat depression, and an implantable neurostimulation device for obstructive sleep apnea - The VNS Therapy System is approved for drug-resistant epilepsy in patients aged four and older[32] - For difficult-to-treat depression (DTD), CMS provides coverage for Medicare beneficiaries via a Coverage with Evidence Development (CED) trial[37] - The RECOVER clinical study was initiated for DTD to meet CMS requirements, enrolling up to 1,000 patients in a randomized trial and up to 5,800 in a registry[38] - The company acquired ImThera Medical in January 2018 to enter the obstructive sleep apnea market with an implantable neurostimulation device[42][48] R&D, Acquisitions, and Intellectual Property LivaNova invests in R&D for new therapies, pursues growth through strategic acquisitions, and protects innovations with over 1,100 patents worldwide - R&D efforts focus on technological leadership, product design, clinical studies, and regulatory activities, including for DTD and heart failure[44][45] - The company relies on acquisitions and investments for new technologies, including TandemLife and Miami Instruments[46][49][50] - As of December 31, 2020, LivaNova held over 1,100 issued patents worldwide and approximately 280 pending patent applications[51] Government Regulation LivaNova operates under extensive global regulations, including FDA clearance, EU MDR compliance, patient privacy laws, and anti-corruption statutes - Medical devices require 510(k) clearance or Pre-Market Approval (PMA) from the FDA for U.S. market entry[64] - The company is updating products to comply with the new EU Medical Device Regulation (Reg MDR), imposing stricter requirements with a May 2024 deadline[66] - The company is subject to patient privacy laws like HIPAA in the U.S. and GDPR in the EU, with significant non-compliance fines[76] - Operations are subject to anti-corruption laws like the U.S. FCPA and UK Bribery Act, and healthcare fraud and abuse laws like the Anti-Kickback Statute and False Claims Act[81][83] Human Capital Management LivaNova employs nearly 4,000 people, focusing on talent retention, core values, diversity, and COVID-19 response measures like remote work and safety protocols - The company employs almost 4,000 people worldwide, focusing on recruitment, competitive compensation, and professional training for talent retention[93] - An ESG Task Force was created in 2020 to optimize environmental, social, and governance efforts, reporting quarterly to the Nominating and Corporate Governance Committee[96] - As of December 31, 2020, women comprised 27% of the Board, 27% of the Executive Team, and 56% of the total workforce[101] - In response to COVID-19, the company enabled remote work for most staff and implemented additional safety measures for on-site employees[103] Risk Factors The company faces significant risks including intense competition, supply chain issues, complex regulations, product liability, COVID-19 impacts, and financial risks related to debt and asset impairment - The company faces high competition, potential supply chain interruptions, and complex, costly government regulations[109][111][113] - Significant product liability risk exists, highlighted by ongoing litigation for the 3T Heater-Cooler product, with a $294.1 million provision recognized in 2018[123][125] - The COVID-19 pandemic materially impacted sales and operating results due to suspended elective medical procedures and remains a risk[145][146] - The company may incur impairments of intangible assets and goodwill, totaling $1.4 billion (56.4% of total assets) at year-end 2020, with significant impairments in 2020 and 2019[158] - Risks related to debt include ability to make payments on the Term Loan and Notes, potential repurchase obligations, and restrictive covenants[168][169][172] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None Properties LivaNova's principal executive office is leased in the UK, operating approximately 1.4 million square feet of global manufacturing and research facilities, 65% of which are owned - The company has manufacturing and research facilities totaling approximately 1.4 million square feet in six countries, with about 65% owned[192] - The principal executive office is leased in the UK, with segment headquarters in the U.S. (Neuromodulation) and Italy (Cardiovascular)[192] Legal Proceedings The company is involved in material legal proceedings, including product liability for the 3T Heater-Cooler, environmental liabilities, and VNS Therapy System patent litigation - Information on material legal proceedings is incorporated by reference from Note 15 of the consolidated financial statements[194] Mine Safety Disclosures This item is not applicable to the company - Not applicable Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities LivaNova's ordinary shares trade on NASDAQ under 'LIVN', with no current dividend intention and an expired $150.0 million share repurchase program - The company's ordinary shares are traded on the NASDAQ Global Market under the symbol 'LIVN'[198] - The company currently has no intention to declare and pay dividends[199] - A $150.0 million share repurchase program expired on December 31, 2018, with no shares repurchased since[200] Management's Discussion and Analysis of Financial Condition and Results of Operations LivaNova's 2020 financial performance was significantly impacted by COVID-19, leading to decreased sales, a net loss, and strategic financing actions to bolster liquidity - The COVID-19 pandemic materially impacted 2020 sales and operating results due to delayed or suspended elective procedures[208][209] Consolidated Results of Operations (in thousands) | | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | | Net sales | $934,241 | $1,084,170 | | Operating loss from continuing operations | $(269,864) | $(168,870) | | Net loss from continuing operations | $(343,515) | $(155,541) | | Net loss | $(345,008) | $(155,176) | - The company recorded a $180.2 million impairment of the Heart Valves disposal group and a $21.3 million impairment of associated goodwill in 2020[287] - To bolster liquidity, the company entered a $450.0 million senior secured term loan and issued $287.5 million in cash exchangeable senior notes in June 2020[336][337] Results of Operations In 2020, net sales decreased by 13.8% to $934.2 million due to COVID-19, leading to a widened operating loss from continuing operations of $269.9 million, exacerbated by impairments Net Sales by Segment (2020 vs. 2019, in thousands) | Segment | 2020 (in thousands) | 2019 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Cardiovascular | $577,083 | $656,646 | (12.1)% | | Neuromodulation | $354,444 | $424,547 | (16.5)% | | Total Net Sales | $934,241 | $1,084,170 | (13.8)% | - Cardiovascular sales declined due to reduced heart-lung machine and oxygenator sales from COVID-19, partially offset by a 32.6% increase in Advanced Circulatory Support sales[261] - Neuromodulation sales declined primarily due to fewer new patient and end-of-service implants caused by COVID-19 procedure delays[265] - Operating loss from continuing operations widened to $269.9 million in 2020 from $168.9 million in 2019, driven by impairments, a decommissioning provision, and lower sales[256] Liquidity and Capital Resources As of December 31, 2020, cash and equivalents increased to $252.8 million due to new financing, despite $79.4 million net cash used in operations, with total contractual obligations of $1.28 billion Cash Flow Summary (in thousands) | Activity | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | | Net cash (used in) operating activities | $(79,422) | $(91,142) | | Net cash used in investing activities | $(41,844) | $(41,290) | | Net cash provided by financing activities | $310,756 | $146,581 | - Total debt increased to $655.6 million at year-end 2020 from $337.7 million at year-end 2019, mainly due to new Term Loan and Exchangeable Notes[346] Contractual Obligations as of Dec 31, 2020 (in thousands) | Obligation | Total (in thousands) | | :--- | :--- | | Principal payments on debt | $757,177 | | Interest payments on long-term debt | $196,847 | | Operating leases | $59,667 | | Contingent consideration | $103,818 | | Total Contractual Obligations | $1,280,079 | Controls and Procedures Management and independent auditors concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2020 - The CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2020[362] - Management concluded that internal control over financial reporting was effective as of December 31, 2020, based on the COSO (2013) framework[364] - PricewaterhouseCoopers LLP confirmed the effectiveness of internal control over financial reporting as of December 31, 2020[365] Part III Directors, Executive Compensation, Security Ownership, and Principal Accountant Fees Information for Items 10-14 is incorporated by reference from the 2021 Proxy Statement, and the company has adopted a Code of Business Conduct and Ethics - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the 2021 Proxy Statement[370][372][373] - The company has adopted a Code of Business Conduct and Ethics applicable to all employees, officers, and directors[371] Part IV Exhibits, Financial Statement Schedules This section includes the consolidated financial statements, the independent auditor's report, and an index of exhibits, with financial statement schedules omitted as applicable - The Consolidated Financial Statements of LivaNova PLC and the Report of Independent Registered Public Accounting Firms are included, beginning on page F-1[378] - All financial statement schedules required by Regulation S-X have been omitted as not applicable or included in notes[379] Financial Statements The 2020 audited financial statements show a net loss of $345.0 million on $934.2 million net sales, with total assets of $2.41 billion, and an unqualified auditor's opinion on financials and internal controls Key Financial Statement Data for FY 2020 (in thousands) | Metric | Amount (in thousands) | | :--- | :--- | | Statement of Income: | | | Net Sales | $934,241 | | Operating Loss from Continuing Operations | $(269,864) | | Net Loss | $(345,008) | | Balance Sheet (End of Period): | | | Total Assets | $2,411,351 | | Total Liabilities | $1,292,522 | | Total Stockholders' Equity | $1,118,829 | | Cash Flow Statement: | | | Net Cash Used in Operating Activities | $(79,422) | | Net Cash Used in Investing Activities | $(41,844) | | Net Cash Provided by Financing Activities | $310,756 | - The auditor's report from PricewaterhouseCoopers LLP provides an unqualified opinion on the financial statements and internal controls[394] - The auditor identified goodwill impairment assessment for the Cardiovascular reporting unit as a Critical Audit Matter due to significant management judgment in fair value estimation[402][403]