Business context and reporting period
Filing identity: The supplied filing is CryoLife, Inc.’s Form 10-Q for the quarter ended June 30, 2017; it does not identify Artivion, Inc. as the registrant. The company makes and distributes medical devices and provides cardiac and vascular tissue preservation services. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $47.8 | $47.1 | $92.9 | $90.1 |
| Gross margin | $32.9; 69% | $30.3; 64% | $62.4; 67% | $57.9; 64% |
| Operating income | $4.8 | $4.6 | $7.3 | $11.2 |
| Net income | $3.2 | $2.3 | $5.4 | $4.9 |
| Diluted earnings per share | $0.09 | $0.07 | $0.16 | $0.15 |
| Operating cash flow | Not separately stated | Not separately stated | $2.0 | $5.8 |
- Q2 revenue grew about 2%; first-half revenue grew about 3%. Preservation services and On-X and BioGlue supported growth. Product revenue was nearly flat in Q2.
- First-half gross margin improved as tissue margins benefited from lower per-unit processing costs; Q2 also benefited from lower On-X inventory step-up expense.
- First-half operating income fell from 2016 because the prior-year period included a $7.9 million net gain from business-component sales. First-half 2017 also included $2.1 million of inventory basis step-up expense.
- Cash and cash equivalents were $52.5 million at June 30, 2017, down from $56.6 million at year-end 2016. Working-capital uses included higher receivables, inventory and deferred preservation costs, and prepaid expenses.
- Net working capital was $126.4 million and the current ratio was 6:1. Term-loan principal was $70.6 million ($68.9 million net of unamortized issuance costs); the $20 million revolving facility was undrawn and fully available. The term loan matures January 2021, bears variable interest, and was at an approximately 4.00% aggregate rate. The company reported covenant compliance as of July 25, 2017.
Changes, outlook, risks and unusual items
- Management said cash from operations and existing cash should cover operational liquidity needs for at least 12 months. Future uses include debt service, clinical trials, R&D, capital spending and possible business development; additional financing may be needed for significant acquisitions.
- Management expected 2017 cardiac laser therapy revenue to decline versus 2016, mainly due to fewer handpiece sales, and expected lower full-year per-unit preservation processing costs. No consolidated revenue or earnings guidance is stated in the supplied filing text.
- PerClot U.S. trial enrollment had resumed; management said FDA approval could occur in 2019 if enrollment proceeded as anticipated. The filing also says CryoLife could not market PerClot in the U.S. before February 8, 2019 under an injunction, and the SMI agreement’s exclusive-license provision could be at issue if approval was not secured by October 2017. Failure to obtain approval could impair related assets.
- The On-X ascending aortic prosthesis CE Mark suspension in the European Economic Area remained in effect pending review by the notified body, posing a risk to regional sales.
- CryoLife was litigating with the On-X shareholder representative over indemnification claims and approximately $10 million held in escrow. Management believed it was entitled to recover the funds and additional damages, but stated recovery was uncertain.
- BioGlue represented approximately 35% of Q2 revenue and tissue preservation services 37%; the filing highlights product competition, tissue supply and processing variability, regulatory and quality requirements, and foreign-exchange exposure. The estimated unreported product and tissue-processing liability was $1.5 million, with a possible estimate as high as $2.9 million after a statistical fluctuation margin.
- Q2 2017 tax expense benefited from $0.5 million of excess tax benefits on share-based awards; the first-half benefit was approximately $1.6 million. This contributed to lower effective tax rates and higher reported net income.
- The company adopted ASU 2016-09 in 2017, including a $0.238 million cumulative decrease to retained earnings. It was evaluating the effects of upcoming lease and revenue-recognition standards.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for CryoLife, Inc., despite the request metadata naming Artivion, Inc.
- Track whether revenue growth and margin gains persist, particularly in preservation services, On-X and BioGlue, and monitor the expected cardiac laser decline.
- Assess operating cash conversion and working-capital needs against management’s 12-month liquidity statement and scheduled debt service.
- Follow the On-X CE Mark matter, escrow litigation, and PerClot trial, regulatory timing, contractual milestones and impairment exposure.
- Separate recurring earnings from the 2016 divestiture gain and 2017 share-based-payment tax benefits when evaluating period comparisons.