Business Context and Reporting Period
LivaNova PLC is a London-headquartered global medical device company reporting under U.S. GAAP for the fiscal year ended December 31, 2022. Its reportable segments are Cardiopulmonary, Neuromodulation and Advanced Circulatory Support (ACS). Products include heart-lung machines and oxygenators, VNS Therapy systems, LifeSPARC temporary life-support products and the Hemolung respiratory assist system.
The filing is an annual Form 10-K rather than a standalone fourth-quarter filing; the supplied text does not provide a separate Q4 income statement.
Key Financial Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net revenue | $1,021.8 million | $1,035.4 million | (1.3%) |
| Gross profit | $707.2 million | $706.0 million | 0.2% |
| Gross margin | 69.2% | 68.2% | +1.0 percentage point |
| Operating loss | $76.8 million | $0.8 million | Material deterioration |
| Operating margin | (7.5%) | (0.1%) | Down 7.4 points |
| Net loss | $86.2 million | $135.8 million | Loss narrowed 36.5% |
| Net loss per share | $1.61 | $2.68 | Loss narrowed |
| Operating cash flow | $69.9 million | $102.5 million | (31.8%) |
| Capital expenditures | $26.6 million | $22.3 million | Increase |
Gross margin was approximately 69.2%, while the net loss margin was approximately 8.4%. Selling, general and administrative expense was $469.2 million, or 45.9% of revenue, and R&D expense was $155.8 million, or 15.2% of revenue.
- Cardiopulmonary revenue increased 3.6% to $500.3 million; segment income was $11.2 million versus a $6.4 million loss in 2021.
- Neuromodulation revenue increased 4.6% to $477.0 million; segment income increased 1.9% to $172.8 million.
- ACS revenue declined 29.1% to $39.3 million; segment loss was $142.6 million, primarily due to a $129.4 million goodwill impairment.
- Cash and cash equivalents were $214.2 million. Restricted cash was $301.4 million, pledged as collateral for the SNIA litigation guarantee.
- Working capital was $588.7 million versus negative working capital of $17.8 million in 2021, largely reflecting the reclassification of debt and restricted cash-related activity.
- Total debt obligations were $541.5 million, including $518.1 million of long-term debt, compared with $239.5 million at December 31, 2021.
- Available liquidity included $125.0 million under the revolving credit facility and $50.0 million under the delayed-draw term facility, in addition to cash and cash equivalents.
Material Changes Versus the Prior Comparable Period
- Revenue decreased modestly because Cardiopulmonary and Neuromodulation growth was more than offset by the ACS decline and unfavorable foreign exchange. Management estimated unfavorable currency effects of approximately $33.5 million for Cardiopulmonary and $9.7 million for Neuromodulation.
- Cost of sales declined to 30.8% of revenue from 31.8%, supported by product mix and the prior-year Heart Valve divestiture, partly offset by inflation, labor and supply-chain costs.
- Operating results were negatively affected by the $129.4 million ACS goodwill impairment. Excluding this noncash charge, the reported operating loss would have been materially lower, although the filing does not present a non-GAAP adjusted operating result in the supplied text.
- Foreign exchange and other income was $49.9 million, compared with a $13.3 million expense in 2021, primarily reflecting changes in the fair value of the exchange feature of the cash exchangeable notes and capped call derivatives.
- Interest expense decreased to $48.3 million from $50.2 million, while debt increased because the Company refinanced a $220.0 million bridge facility with a $300.0 million initial term facility and retained $50.0 million of delayed-draw availability.
- The Company acquired the remaining 97% of ALung in May 2022 for consideration of up to $110.0 million, including contingent consideration. The ACS goodwill recognized in the transaction was fully impaired during the third quarter.
- Operating cash flow declined as inventories increased by $25.7 million to mitigate supply-chain risk and payments under the short-term incentive plan increased.
Outlook, Commentary, Risks and Unusual Items
Management stated that cash, expected operating cash flow and available borrowings should be sufficient to fund operating, working-capital, capital-expenditure and debt-service needs for the twelve months following the filing date. The filing does not provide a specific 2023 revenue, earnings or margin guidance range.
- In November 2022, the FDA approved LifeSPARC for ECMO use beyond six hours. CMS also approved an NTAP designation for Hemolung RAS in August 2022.
- The Company completed initial European clinical cases for the Essenz Perfusion System in the fourth quarter of 2022.
- The Company stopped enrollment in the ANTHEM-HFrEF heart-failure trial on February 22, 2023, after concluding that the data did not demonstrate a sufficiently strong positive impact on functional or mortality endpoints. It is winding down the heart-failure program.
- The FDA closed the 2015 Warning Letter in December 2022 after the Company completed corrective actions related to its Munich facility and 3T Heater-Cooler device.
- The Company recorded $6.6 million of restructuring expense in 2022 and expects total costs of approximately $10.0 million for a cost-optimization program, including a workforce reduction expected to be completed by mid-2023.
- The SNIA environmental litigation involves an approximately €453.6 million damages order. Payment is stayed pending appeals, secured by a €270.0 million first-demand bank guarantee backed by $301.4 million of restricted cash. The filing expects further judicial developments no earlier than 2024.
- 3T Heater-Cooler product-liability matters resulted in a $32.5 million provision at December 31, 2022. Approximately 85 filed and unfiled claims were known as of February 27, 2023; ultimate liability may differ from the recorded provision.
- The Company had a $6.4 million reserve for the Italian medical-device payback measure, although the actual liability could vary.
- Principal operating risks include supply-chain interruptions, inflation, foreign-exchange volatility, reimbursement and regulatory changes, clinical-trial outcomes, product liability, cybersecurity, intellectual-property disputes and impairment of goodwill or intangible assets.
- Iran-related activities generated $4.9 million of 2022 gross revenue and $1.8 million of net profit, according to the Section 13(r) disclosure.
Important Facts for Investors to Verify
- Confirm the terms, amortization schedule and covenant compliance for the $300.0 million initial term facility and the $50.0 million delayed-draw facility.
- Assess refinancing and cash-settlement requirements for the $239.6 million principal amount of 3.00% cash exchangeable senior notes due December 2025.
- Monitor the SNIA litigation, the €270.0 million guarantee and the availability of the related $301.4 million restricted cash.
- Evaluate whether ACS revenue and profitability can recover after the 29.1% revenue decline and $129.4 million goodwill impairment.
- Track the financial and strategic effects of winding down the ANTHEM-HFrEF heart-failure program and completing the OSPREY and RECOVER studies.
- Verify the ultimate exposure from 3T Heater-Cooler litigation, the Italian MedTech payback measure and Saluggia hazardous-substance obligations.
- Reconcile reported earnings with noncash derivative fair-value gains and losses, goodwill impairment, contingent-consideration remeasurements and restructuring costs.