LivaNova plc — FY2023 Form 10-K Summary
Business context and reporting period
LivaNova is a global medical technology company headquartered in London and listed on Nasdaq under “LIVN.” The filing covers the fiscal year ended December 31, 2023, with comparisons to 2022 and 2021. The company operated through Cardiopulmonary, Neuromodulation and Advanced Circulatory Support (ACS) reportable segments during 2023.
Key products include heart-lung machines, oxygenators, perfusion systems, Vagus Nerve Stimulation therapy and temporary circulatory-support systems. In March 2023, the company launched the Essenz Perfusion System in the U.S. and broadly in Europe following FDA clearance and European approval.
Financial performance and liquidity
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net revenue | $1,153.5 million | $1,021.8 million | +12.9% |
| Gross profit | $771.3 million | $707.2 million | +9.1% |
| Gross margin | 66.9% | 69.2% | -2.3 points |
| Operating income (loss) | $(68.5) million | $(76.8) million | Improved by $8.3 million |
| Operating margin | (5.9%) | (7.5%) | Improved by 1.6 points |
| Net income (loss) | $17.5 million | $(86.2) million | Returned to profitability |
| Diluted earnings (loss) per share | $0.32 | $(1.61) | Improved |
| Operating cash flow | $74.9 million | $69.9 million | +$5.0 million |
| Capital expenditures | Approximately $35.0 million | Approximately $26.5 million | Increased |
Revenue growth was led by Cardiopulmonary, which increased 17.7% to $589.0 million, and Neuromodulation, which increased 9.0% to $519.7 million. ACS revenue increased 2.6% to $40.3 million but remained loss-making. Segment income was $20.0 million for Cardiopulmonary, $153.4 million for Neuromodulation and a $(117.4) million loss for ACS.
Cost of sales increased to 33.1% of revenue from 30.8%, primarily due to $12.6 million of ACS inventory obsolescence and the net effect of contingent-consideration remeasurement. R&D increased to 16.8% of revenue from 15.2%, reflecting higher RECOVER and OSPREY clinical-program spending and contingent-consideration expense.
The 2023 tax benefit was $98.9 million, largely reflecting the release of a $110.8 million U.K. deferred-tax valuation allowance. Accordingly, reported net income benefited materially from a tax item despite a pretax loss of $81.2 million. Foreign exchange and other income was $46.1 million, including fair-value gains on the embedded exchange feature of the notes and interest income.
Cash and cash equivalents were $266.5 million at year-end, while restricted cash was $311.4 million and was pledged as collateral for the SNIA litigation guarantee. Working capital was $653.2 million. Total debt obligations were $586.7 million, including $328.5 million of term facilities and $255.5 million of cash-exchangeable senior notes. The company had $125.0 million available under its revolving credit facility and no borrowings under that facility. Management stated that available liquidity, operating cash flow and borrowing capacity are expected to fund operations and obligations over the twelve months following the filing date.
Material changes versus the prior comparable period
- Revenue increased 12.9%, with growth across all geographic regions and both core segments.
- Net results improved from an $86.2 million loss to $17.5 million of net income, primarily because 2023 included a large tax benefit and 2022 included a $129.4 million ACS goodwill impairment.
- 2023 included $89.97 million of ACS long-lived-asset impairments, principally $78.1 million for developed technology and $7.1 million for trade names.
- ACS inventory obsolescence charges totaled $12.6 million, and the company recorded $0.1 million of 2024-plan restructuring expense in 2023.
- Interest expense rose to $58.9 million from $48.3 million because of higher interest rates and average borrowings.
- Operating cash flow improved modestly, while financing cash inflow declined substantially because 2023 had fewer debt proceeds than 2022.
- Cardiopulmonary segment income increased despite higher Essenz launch costs and a $12.7 million increase in the 3T Heater-Cooler litigation provision.
- Neuromodulation segment income declined 11.2% despite revenue growth, reflecting higher selling and marketing expense, clinical-program spending and a $29.0 million unfavorable change in ImThera contingent consideration.
Guidance, outlook, risks and unusual items
On January 5, 2024, the board approved a restructuring plan to focus on Cardiopulmonary and Neuromodulation and wind down substantially all ACS operations by the end of 2024. LifeSPARC and Hemolung operations are expected to be discontinued, while ACS standalone cannulae and accessories were transferred to Cardiopulmonary. Management expects approximately $15 million to $20 million of pretax restructuring charges, primarily in 2024, with most severance costs expected in the first half.
The November 2023 cybersecurity incident disrupted portions of the company’s information systems. Manufacturing sites were operating at normal levels at the filing date, but the investigation and remediation remained ongoing. Direct costs were approximately $2.6 million in both the fourth quarter and full year, excluding potential business interruption and other indirect costs. Insurance recovery is uncertain.
Material contingencies include 3T Heater-Cooler product-liability litigation, the SNIA environmental-liability litigation, the Italian medical-device payback measure and Saluggia site remediation. The SNIA damages judgment was approximately €453.6 million, but payment remains suspended pending Italian Supreme Court proceedings; the company posted a €270.0 million bank guarantee backed by restricted cash. The company also carried a $13.9 million 3T litigation provision and an $8.2 million Italian payback reserve at year-end.
The $287.5 million principal amount of 3.00% cash-exchangeable senior notes matures in December 2025. The notes and related term facilities create refinancing and liquidity risk, particularly because exchanges are settled in cash. The company’s capped-call transactions expire concurrently with the notes and may not fully offset cash obligations if the share price exceeds the cap price.
Other principal risks include medical-device regulatory and reimbursement changes, clinical-trial outcomes, product recalls and liability, supply-chain interruptions, foreign-exchange and interest-rate volatility, cybersecurity and privacy compliance, tax-law changes including Pillar Two, intellectual-property disputes, environmental obligations and the execution risk associated with the ACS wind-down.
Most important facts an investor should verify
- Whether the 2024 ACS wind-down achieves the projected cost savings, cash-burn reduction and timing.
- The final cash cost and insurance recovery associated with the November 2023 cybersecurity incident.
- The outcome and timing of the SNIA litigation and the potential release or continued requirement of the $311.4 million restricted-cash collateral.
- Progress, reimbursement implications and clinical results for the RECOVER depression study and OSPREY sleep-apnea trial.
- Whether Cardiopulmonary growth and Essenz adoption offset weaker ACS activity and increased manufacturing, clinical and regulatory costs.
- The company’s ability to refinance or repay the December 2025 senior notes and satisfy related cash-exchange obligations.
- Whether the 2023 tax benefit is nonrecurring and how future effective tax rates will be affected by deferred-tax-asset realizability and Pillar Two rules.
- Potential changes to the 3T Heater-Cooler litigation provision, Italian payback reserve and Saluggia environmental liability.