LivaNova plc — 2022 Second-Quarter Form 10-Q Summary
Business context and reporting period
LivaNova is a global medical-device company with reportable segments in Cardiopulmonary, Neuromodulation and Advanced Circulatory Support (ACS). This unaudited Form 10-Q covers the three and six months ended June 30, 2022, prepared under U.S. GAAP in U.S. dollars. Comparative 2021 amounts were revised for previously identified foreign-currency inventory and cost-of-sales errors.
Financial performance and liquidity
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Six months ended June 30, 2022 | Six months ended June 30, 2021 |
|---|---|---|---|---|
| Net sales | $254.2 million | $264.5 million | $494.3 million | $512.1 million |
| Gross profit | $184.4 million | $172.3 million | $352.8 million | $335.7 million |
| Gross margin | 72.5% | 65.1% | 71.4% | 65.6% |
| Operating income (loss) | $31.8 million | $(36.3) million | $41.3 million | $(42.0) million |
| Operating margin | 12.5% | (13.7)% | 8.3% | (8.2)% |
| Net income (loss) | $16.4 million | $(56.5) million | $19.4 million | $(87.2) million |
| Diluted earnings (loss) per share | $0.30 | $(1.15) | $0.36 | $(1.79) |
- Six-month operating cash flow was $15.6 million, down from $45.1 million. The decline primarily reflected higher inventory, lower tax refunds and incentive-plan payments.
- Six-month investing cash flow was $(21.6) million, compared with $46.7 million of inflow in the prior year, which benefited from Heart Valve and Respicardia-related proceeds.
- Six-month financing cash flow was $208.6 million, primarily reflecting $218.3 million of net Bridge Loan Facility proceeds.
- Cash, cash equivalents and restricted cash totaled $406.8 million at June 30, 2022, including $297.7 million restricted as collateral for the SNIA litigation guarantee. Unrestricted cash and equivalents were $109.0 million.
- Total debt obligations were $466.0 million, consisting principally of $232.1 million of 3.00% exchangeable senior notes and a $220.0 million Bridge Loan Facility. The Bridge Loan was repaid on July 6, 2022 with proceeds from new term facilities.
- The Company reported $125.0 million of availability under its revolving credit facility and stated that expected operating, capital, acquisition and debt-service needs could be funded over the following twelve months.
Material changes versus the prior comparable period
- Revenue declined 3.9% in the second quarter and 3.5% year to date. The decline largely reflected the divestiture of the Heart Valve business in 2021, unfavorable foreign exchange and lower ACS demand; Cardiopulmonary and Neuromodulation underlying sales increased.
- Cardiopulmonary sales increased 6.7% in the quarter and 7.2% year to date, supported by higher cardiac-procedure volumes and oxygenator and heart-lung machine sales.
- Neuromodulation sales increased 0.1% in the quarter and 3.0% year to date, while segment income increased to $51.4 million and $88.8 million, respectively.
- ACS sales decreased 29.6% in the quarter and 19.9% year to date, primarily due to fewer COVID-related ECMO patients and hospital staffing challenges. LivaNova acquired the remaining 97% of ALung on May 2, 2022 for consideration of up to $110.0 million, including contingent consideration.
- Profitability improved substantially due to favorable product mix, lower litigation and restructuring costs, contingent-consideration fair-value changes and the absence of certain 2021 Heart Valve-related expenses. Reported results also benefited from significant non-cash fair-value adjustments.
- Research and development expense decreased, although spending increased for the RECOVER, ANTHEM-HFrEF and OSPREY clinical programs. SG&A included approximately $4.4 million of ALung acquisition-related expenses.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a clear quantitative full-year revenue or earnings guidance figure. Management stated that the interim results are not necessarily indicative of full-year results.
- COVID-19 continues to affect elective procedures, Neuromodulation demand, ACS ECMO volumes, clinical-study timing, labor availability and supply chains. Inflation, freight costs, labor costs and longer component lead times remain material concerns.
- Foreign-exchange movements, particularly the stronger U.S. dollar, negatively affected reported sales and profitability. The filing identifies ongoing exposure to foreign-currency, interest-rate and equity-price risks.
- The Company faces significant SNIA environmental litigation in Italy. A Court of Appeal judgment ordered approximately €453.6 million of damages, while the Company appealed to the Italian Supreme Court. Payment was suspended subject to a €270.0 million bank guarantee, collateralized by $297.7 million of restricted cash. The Supreme Court hearing was scheduled for October 5, 2022.
- At June 30, 2022, the Company had a $36.9 million provision for 3T Heater-Cooler product-liability matters and a $35.9 million Saluggia hazardous-substances liability, representing the low end of an estimated $35.9 million to $45.6 million range.
- The FDA completed a close-out inspection of the Munich facility in April 2022 and issued a Form 483 with three observations. The Company submitted corrective and preventive-action responses, but FDA acceptance and closure of the 2015 Warning Letter remain uncertain.
- A July 2022 demand letter from Mitral sought approximately €20.8 million related to the Heart Valve divestiture. No liability was recorded because a loss was not considered probable; the filing states that applicable warranty claims are generally capped at €8.0 million, subject to exceptions.
- Reported earnings were affected by exchangeable-note and capped-call fair-value adjustments. For the six months, these produced a net favorable impact within foreign exchange and other income, but the amounts are sensitive to LivaNova’s share price and volatility.
- Iran-related sales were $1.3 million in the quarter and $3.0 million year to date; the filing states that the Company intends to continue this business while monitoring sanctions compliance.
Important facts for investors to verify
- Whether the Italian Supreme Court ultimately upholds, modifies or reverses the SNIA liability and the resulting effect on restricted cash, debt and liquidity.
- The terms, interest expense and covenant compliance associated with the $350 million term facilities issued after quarter-end, including repayment of the Bridge Loan.
- Whether the FDA accepts the Munich Form 483 remediation and closes the longstanding 2015 Warning Letter.
- The sustainability of reported margin expansion after excluding litigation, restructuring, contingent-consideration and derivative fair-value effects.
- The integration, commercialization progress and future contingent payments associated with the ALung acquisition and Hemolung RAS.
- Trends in Neuromodulation implant volumes, ACS demand, supply-chain costs, foreign exchange and COVID-19-related procedure volumes.