CryoLife, Inc. (Artivion predecessor) — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Figures are unaudited and in U.S. dollars; financial amounts below are in millions unless otherwise noted. The company develops and sells medical devices and preserves human cardiac and vascular tissues.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $64.6 | $44.0 | $195.0 | $136.9 |
| Gross profit | $42.7 | $29.9 | $127.8 | $92.3 |
| Gross margin | 66% | 68% | 66% | 67% |
| Operating income | $4.6 | $0.8 | $6.5 | $8.2 |
| Net income (loss) | $1.6 | $1.3 | $(2.1) | $6.7 |
| Diluted earnings (loss) per share | $0.04 | $0.04 | $(0.06) | $0.19 |
- Q3 revenue grew 47%; nine-month revenue grew 42%. Growth primarily reflected JOTEC, acquired in December 2017, plus higher On-X and tissue-preservation revenue.
- Q3 product revenue was $45.2 million, including $15.0 million from JOTEC and $11.3 million from On-X. Nine-month JOTEC revenue was $46.7 million. Q3 preservation-services revenue rose 15% to $19.4 million.
- Despite higher gross profit, gross margin fell as JOTEC’s margins were lower, including the effects of purchase-accounting adjustments. Nine-month operating income declined despite revenue growth, reflecting higher operating costs.
- Q3 net income included a $2.7 million cash-settlement gain tied to claims against the representative of On-X’s former shareholders. Nine-month results also reflected acquisition-related and integration costs and JOTEC inventory fair-value step-up expense.
- Interest expense rose to $4.1 million in Q3 and $11.9 million for nine months, primarily due to the $225 million term loan used partly to finance JOTEC.
Cash, liquidity and debt
- Cash and cash equivalents were $34.6 million at September 30, 2018, down from $40.0 million at December 31, 2017; cash, cash equivalents and restricted securities totaled $35.3 million.
- Net cash used in operating activities was $0.6 million for the first nine months, versus $4.8 million provided in 2017. Investing activities used $5.0 million and financing activities used $1.3 million. Cash declined by $5.4 million, including restricted securities.
- Net working capital was $143.3 million and the current ratio was 6:1 at September 30, 2018. Management said existing cash and operating cash flow were expected to cover operational liquidity needs for at least 12 months.
- Net borrowings were $217.8 million, including $223.3 million outstanding on the term loan before unamortized issuance costs; the $30 million revolving facility was undrawn. The term loan’s stated aggregate rate was 6.39% at quarter-end. In October 2018, the company amended the facility, reducing the LIBOR margin to 3.25% from 4.00%.
Outlook, risks and notable items
- No formal company-wide revenue or earnings guidance is provided in the supplied filing text. Management expected JOTEC products to achieve double-digit growth over the next five years, dependent on sales-force integration, market expansion and execution.
- The company was conducting a pivotal PerClot trial; assuming enrollment proceeded as anticipated, it could receive U.S. FDA premarket approval around mid-2020. Approval and commercialization are uncertain. Failure to obtain approval could impair related prepaid royalties, intangible assets and equipment.
- Key risks include realizing JOTEC acquisition benefits while managing substantial variable-rate debt; integration and purchase-accounting costs; product and tissue regulatory approvals and quality requirements; competition and pricing pressure; foreign-exchange exposure; and variability in tissue supply, processing yields and demand. The On-X ascending aortic prosthesis CE Mark issue in Europe and possible FDA reclassification of certain preserved heart valves remain regulatory risks.
- Management reported effective disclosure controls at the reasonable-assurance level and said JOTEC’s operations and controls were still being integrated and evaluated. ASC 606 adoption had an immaterial effect; the company was still evaluating the impact of the upcoming lease-accounting standard.
Important facts for investors to verify
- Whether JOTEC growth, integration and expected margin improvement materialize, and how much reported growth is attributable to the acquisition.
- Debt service capacity, covenant compliance, variable-rate exposure and the realized benefit of the October 2018 repricing.
- Underlying operating performance excluding the $2.7 million settlement gain, acquisition/integration costs and purchase-accounting inventory charges.
- PerClot trial enrollment and FDA timing, and the status of the PerClot CE Mark and related asset impairment risk.
- Cash conversion and the causes of the operating cash outflow, particularly the $12.5 million use from changes in payables, accrued expenses and other liabilities.