LivaNova(LIVN) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Note About Forward-Looking Statements The report includes forward-looking statements subject to risks like supply chain disruptions and economic volatility - The report identifies several key risks that could cause actual results to differ from forward-looking statements[9][10][15] - Key risks include supply chain interruptions, global market volatility, foreign exchange fluctuations, and regulatory compliance failures[10][15] Item 1. Condensed Consolidated Financial Statements The unaudited financial statements show results for the three and nine months ended September 30, 2022 Condensed Consolidated Statements of Income (Loss) The company reported a Q3 2022 net loss of $107.3 million, driven by a significant goodwill impairment charge Condensed Consolidated Statements of Income (Loss) (in thousands) | Metric | Q3 2022 | Q3 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Revenue | $252,605 | $253,215 | $746,931 | $765,301 | | Gross Profit | $170,918 | $168,664 | $523,711 | $504,351 | | Impairment of goodwill | $129,396 | $— | $129,396 | $— | | Operating (Loss) Income | $(131,973) | $16,422 | $(90,712) | $(25,538) | | Net Loss | $(107,344) | $(43,443) | $(87,907) | $(130,691) | | Diluted Loss Per Share | $(2.01) | $(0.84) | $(1.64) | $(2.63) | Condensed Consolidated Balance Sheets Total assets remained flat at $2.21 billion, with a notable goodwill decrease and liability increase Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $231,114 | $207,992 | | Restricted cash | $275,165 | $— | | Goodwill | $742,370 | $899,525 | | Total Assets | $2,212,878 | $2,200,951 | | Current debt obligations | $21,695 | $229,673 | | Long-term debt obligations | $518,249 | $9,849 | | Total Liabilities | $1,065,915 | $906,306 | | Total Stockholders' Equity | $1,146,963 | $1,294,645 | Condensed Consolidated Statements of Cash Flows Operating cash flow decreased while financing cash flow increased due to new debt proceeds Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $51,218 | $69,064 | | Net cash (used in) provided by investing activities | $(27,461) | $40,535 | | Net cash provided by (used in) financing activities | $281,787 | $(178,183) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $298,287 | $(70,986) | Notes to the Condensed Consolidated Financial Statements Key notes cover the ALung acquisition, a $129.4 million goodwill impairment, new financing, and major litigation updates - The company acquired the remaining 97% of ALung Technologies for up to $110.0 million, including contingent consideration[39] - A goodwill impairment charge of $129.4 million was recognized for the Advanced Circulatory Support (ACS) reporting unit[54] - The company entered into new term loan facilities for an aggregate principal amount of $350 million[75][76] - In the SNIA environmental litigation, the company has appealed a decision ordering it to pay approximately €453.6 million[121][122] - An additional liability of $18.6 million was recorded in Q3 2022 for the 3T device product liability litigation[116][117] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses segment performance amidst global disruptions, a goodwill impairment, and new debt financing Results of Operations Q3 2022 revenue was flat as Neuromodulation growth was offset by declines in other segments and a large impairment Net Revenue by Segment (in thousands) | Segment | Q3 2022 | Q3 2021 | % Change | | :--- | :--- | :--- | :--- | | Cardiopulmonary | $120,959 | $123,235 | (1.8)% | | Neuromodulation | $121,835 | $113,287 | 7.5% | | Advanced Circulatory Support | $8,636 | $15,399 | (43.9)% | | Total | $252,605 | $253,215 | (0.2)% | - The ACS segment recorded a goodwill impairment of $129.4 million in Q3 2022, driven by a 29% year-to-date revenue decline[199] - Neuromodulation segment income increased due to higher revenue and a favorable change in contingent consideration fair value[188] - Cardiopulmonary segment income decreased due to a $20.1 million increase in litigation provisions and legal costs[185] Liquidity and Capital Resources Liquidity was impacted by securing a €270.0 million bank guarantee for litigation, funded by new term loans - To suspend payment of damages in the SNIA litigation, the company provided a €270.0 million bank guarantee, collateralized by $275.2 million in restricted cash[216][218] - A $220.0 million Bridge Loan Facility was used to post collateral and was later repaid using proceeds from a new $350 million Term Facility[217][221] Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Operating activities | $51,218 | $69,064 | | Investing activities | $(27,461) | $40,535 | | Financing activities | $281,787 | $(178,183) | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from foreign currency, equity prices, and interest rates - The company's primary market risks stem from foreign currency exchange rates, equity price fluctuations, and interest rate changes[227] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the quarter[228] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2022[229] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 10 for details on material pending legal and regulatory proceedings - For information on material legal proceedings, the report refers to "Note 10. Commitments and Contingencies" in the financial statements[231] Item 1A. Risk Factors Updated risks include heightened supply chain disruptions, ongoing FDA regulatory issues, and international business uncertainties - Supply chain risks are exacerbated by COVID-19, leading to delays, labor shortages, and inflationary pressures[235] - The company faces ongoing FDA regulatory risk, highlighted by a 2015 Warning Letter and a recent Form 483[236][237] - Increased EPA scrutiny on ethylene oxide (EtO) emissions presents a potential risk to product sterilization processes[242] - International operations carry significant risks, including impacts from the Russia-Ukraine conflict and currency fluctuations[243][246] Item 5. Other Information Disclosures include business dealings in Iran and the planned retirement of the General Counsel - The company disclosed sales to distributors in Iran, generating net revenue of $1.5 million for the three months ended September 30, 2022[251][253] - Keyna Skeffington, General Counsel and Company Secretary, will retire from the company on June 30, 2023[254] Item 6. Exhibits This section lists filed exhibits, including CEO/CFO certifications and Interactive Data Files - The exhibits filed with this report include CEO and CFO certifications (Exhibits 31.1, 31.2, 32.1) and Interactive Data Files (Exhibit 101)[256]