LivaNova plc: Q1 2023 Form 10-Q Summary
Business context and reporting period
LivaNova designs, manufactures and sells medical technologies through three reportable segments: Cardiopulmonary, Neuromodulation and Advanced Circulatory Support (ACS). The filing covers the three months ended March 31, 2023, with comparative results for the three months ended March 31, 2022. Financial statements are unaudited, prepared under U.S. GAAP, and reported in U.S. dollars.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $263.4 million | $240.2 million | +9.7% |
| Gross profit | $174.1 million | $168.4 million | +3.3% |
| Gross margin | 66.1% | 70.1% | Down 4.0 percentage points |
| Operating income/(loss) | $(2.3) million | $9.5 million | Declined $11.8 million |
| Operating margin | (0.9%) | 4.0% | Down 4.9 percentage points |
| Net income | $7.4 million | $3.0 million | +146.3% |
| Diluted EPS | $0.14 | $0.06 | + $0.08 |
| Operating cash flow | $20.8 million | $25.8 million | Down $5.1 million |
Gross margin pressure reflected higher supply-chain, labor, freight and inflation-related costs, as well as a $5.0 million unfavorable change in the fair value of sales-based contingent consideration. SG&A was $124.1 million, or 47.1% of revenue, versus 49.3% in the prior-year quarter. R&D was $50.0 million, or 19.0% of revenue, versus 17.0%.
Foreign exchange and other income was $25.5 million, including a $44.4 million gain from the exchangeable notes fair-value adjustment, partly offset by a $23.4 million capped-call fair-value loss. Interest expense increased to $13.4 million from $7.8 million. The effective tax rate was 24.3%, compared with 45.6% in Q1 2022.
Revenue by segment was $132.1 million for Cardiopulmonary, up 12.8%; $120.7 million for Neuromodulation, up 9.5%; and $9.8 million for ACS, down 15.8%. Segment income was $7.6 million, $27.0 million and $(6.4) million, respectively.
Liquidity, cash flow and debt
- Cash and cash equivalents were $214.3 million at March 31, 2023. Including $308.6 million of restricted cash pledged for the SNIA litigation guarantee, cash, cash equivalents and restricted cash totaled $523.0 million.
- Working capital was $586.9 million, compared with $588.7 million at December 31, 2022.
- Total debt obligations were $542.5 million, including $520.2 million of long-term debt and $22.3 million of current debt obligations.
- The principal debt components included $288.0 million under the Term Facilities and $243.3 million of 3.00% cash exchangeable senior notes due December 2025. The Term Facilities mature in 2027 or earlier under specified conditions and carried an applicable SOFR margin of 3.50% at quarter-end.
- No borrowings were outstanding under the $125 million revolving credit facility at March 31, 2023. The company reported compliance with applicable financial covenants.
- Available short-term liquidity was reported at $389.3 million, consisting of cash plus availability under the revolving credit facility and the delayed draw term facility.
- On April 6, 2023, LivaNova drew the remaining $50 million under the Delayed Draw Term Facility, making the Term Facilities fully drawn. The proceeds were designated for general corporate purposes.
Material changes versus the prior comparable period
- Revenue growth was led by Cardiopulmonary and Neuromodulation, while ACS revenue declined as ECMO demand normalized with fewer severe COVID-19 cases.
- Operating results deteriorated despite higher revenue because of lower gross margin, increased R&D spending, contingent consideration remeasurement and higher other operating expense.
- Neuromodulation segment income fell 27.9%, primarily due to higher RECOVER and OSPREY clinical-development costs and a $7.2 million unfavorable change in ImThera contingent consideration.
- Operating cash flow declined by $5.1 million, partly due to increased 3T litigation settlement payments and lower income adjusted for non-cash items.
- Financing cash flow changed from $214.9 million provided in Q1 2022 to $5.2 million used in Q1 2023, primarily because the prior year included significant debt borrowings.
- The company began winding down its former heart-failure program during Q1 2023.
Guidance, outlook, risks and unusual items
The filing does not provide a clear numerical full-year revenue or earnings guidance. Management stated that existing cash, operating cash generation and available debt capacity are expected to fund operating needs, capital expenditures, acquisition earn-outs and debt service for the twelve months following issuance of the financial statements.
- Cardiopulmonary launched the Essenz heart-lung machine in the United States after FDA 510(k) clearance and reported approvals in Canada and Japan, with a broader European commercial release underway.
- Neuromodulation randomized the 500th unipolar depression patient in the RECOVER study and expects final analysis after 12-month follow-up data are available.
- Supply-chain delays, labor shortages, inflation, freight costs, foreign-exchange volatility and geopolitical instability remain significant operating risks.
- Restricted cash of $308.6 million supports a €270.0 million first-demand bank guarantee related to SNIA environmental litigation. A final decision is not expected before at least 2024, pending European Court of Justice and Italian Supreme Court proceedings. The Court of Appeal decision involved potential damages of approximately €453.6 million, while the asserted liability limit referenced by the company was approximately €572.1 million.
- The company had approximately 85 filed and unfiled worldwide claims related to 3T device product liability matters as of May 3, 2023. The recorded provision was $22.4 million at March 31, 2023.
- The Saluggia environmental liability was estimated at €34.1 million, with an estimated loss range up to €43.5 million.
- The Italian medical-device payback reserve was $7.0 million. The company has appealed related assessments and stated that payment obligations were suspended until June 30, 2023.
- Market values of the exchangeable-note embedded derivative and capped-call asset were $41.3 million and $31.0 million, respectively. These valuations materially affected reported income and are sensitive to LivaNova’s share price and volatility.
- LivaNova disclosed exposure to potential bank failures affecting deposits, including cash collateral for the SNIA guarantee, although it reported no deposits or business relationship with Silicon Valley Bank.
- Iran-related activities generated $2.2 million of revenue and $0.9 million of net profit in Q1 2023. The company stated that these activities are intended to comply with applicable sanctions laws.
Important facts for investors to verify
- Whether gross-margin pressure from inflation, supply-chain costs and contingent consideration persists in subsequent quarters.
- The timing and terms for refinancing or repaying the $243.3 million of exchangeable notes due December 2025.
- The effect of the April 2023 $50 million term-loan draw on interest expense, leverage and covenant compliance.
- Developments in the SNIA environmental litigation, including the ECJ referral, Italian Supreme Court proceedings and related restricted cash requirements.
- Actual exposure from 3T product-liability claims, the Italian payback measure and other contingent liabilities relative to recorded provisions.
- Commercial adoption and profitability of Essenz, recovery prospects for ACS, and clinical and regulatory progress for RECOVER and OSPREY.
- The extent to which reported net income continues to depend on volatile fair-value gains from exchangeable-note and derivative remeasurements.