Business context and reporting period
The filing is CryoLife, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. CryoLife reports Medical Devices and Preservation Services. The request identifies Artivion, Inc.; however, the filing itself names CryoLife, Inc. as the registrant, so confirm the issuer identity before relying on this summary.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $44.0 | $45.3 | $136.9 | $135.4 |
| Gross margin | $29.9 (68%) | $29.8 (66%) | $92.3 (67%) | $87.7 (65%) |
| Operating income | $0.8 | $5.5 | $8.2 | $16.7 |
| Net income | $1.3 | $3.0 | $6.7 | $7.9 |
| Diluted EPS | $0.04 | $0.09 | $0.19 | $0.24 |
| Operating cash flow | Not separately presented | Not separately presented | $4.8 | $14.7 |
Q3 revenue declined 3%, while nine-month revenue increased 1%. At September 30, cash and cash equivalents were $54.2 million; current assets were $155.6 million and current liabilities $26.1 million, for working capital of $129.5 million and a 6:1 current ratio. Term-loan principal was $69.7 million (net carrying amount $68.1 million); the $20 million revolving facility was undrawn. The reported term-loan rate was approximately 3.99%. Nine-month capital expenditures were $5.4 million.
Material changes versus comparable periods
- Q3 net income and operating income fell substantially year over year. Management attributed the pretax earnings decline primarily to higher operating expenses, including JOTEC-related business-development costs.
- Q3 general, administrative and marketing expense rose 20% to $24.8 million, including $3.0 million of business-development costs; nine-month expense included $4.4 million of such costs. Research and development expense rose 36% to $13.1 million for the nine months.
- Nine-month gross margin increased 5%, principally on improved tissue margins and lower per-unit preservation processing costs. Preservation Services revenue rose 4% for the nine months, while product revenue declined 1%.
- Q3 results included an estimated $1.0 million On-X distributor inventory buyback revenue reversal, within $1.1 million of total revenue reversals connected with anticipated distributor-market changes for JOTEC. Hurricanes delayed procedures in Florida and Texas; management estimated a roughly $1.0 million adverse revenue effect.
- The 2016 comparison included a $7.9 million net gain on sale of the HeRO and ProCol businesses, which did not recur. Nine-month operating cash flow fell to $4.8 million, with working-capital outflows including $6.9 million for inventory and deferred preservation costs and $4.3 million for receivables.
Outlook, commentary and risks
- On October 10, 2017, CryoLife announced a definitive agreement to acquire JOTEC for $225 million, subject to adjustments and customary closing conditions. The proposed funding included a new $255 million secured credit facility, $56.25 million of stock, and available cash; the facility was expected to refinance the existing term loan. Closing was expected later in 2017, not yet completed as of the filing.
- Management expected 2017 CardioGenesis revenue to decline versus 2016, mainly due to lower handpiece sales, and expected lower full-year per-unit preservation costs. It cautioned that tissue-preservation revenue can fluctuate with donor supply, processing yields, release timing, demand and seasonality. No consolidated revenue or earnings guidance is provided.
- PerClot U.S. pivotal-trial enrollment had resumed; management said FDA approval could occur in 2019 if enrollment progressed as anticipated. SMI had given notice seeking to terminate CryoLife’s exclusive license to pursue U.S. PMA approval, and negotiations were underway. A separate injunction bars U.S. PerClot marketing, sales or distribution until February 8, 2019. Failure to obtain approval could impair related assets.
- The On-X AAP CE Mark remained suspended. CryoLife had withdrawn its application with the prior notified body and was pursuing another certification path, targeting a return to the European market in Q1 2018; failure could adversely affect future European revenue.
- CryoLife was in litigation with the On-X shareholder representative over indemnification claims and approximately $10 million held in escrow. Recovery is uncertain. The filing also estimates unreported product and tissue-processing liability of $1.6 million, potentially as high as $3.0 million under an actuarial sensitivity analysis.
- Other material risks include dependence on BioGlue and tissue-preservation revenue, regulatory and quality requirements, competition and pricing pressure, foreign exchange, clinical-trial outcomes, supplier and facility concentration, and increased leverage and integration risks from the proposed JOTEC acquisition. Management stated that existing cash and operating cash flows were expected to meet operational liquidity needs for at least 12 months, while noting JOTEC and other planned spending could significantly affect cash flows.
Important facts for investors to verify
- Confirm the issuer and ticker: this source filing is for CryoLife, Inc., despite the request’s Artivion, Inc. label.
- Check subsequent JOTEC transaction filings for closing status, final consideration, financing terms, share issuance and resulting debt burden.
- Track progress and resolution of the On-X escrow litigation, AAP European certification, and the PerClot license dispute and clinical trial.
- Assess whether working-capital investment converts into cash and whether the improved gross margin persists as revenue, expenses and integration costs evolve.
- Review the complete filing and later disclosures for debt covenant headroom, contingencies, and updates to the stated outlook and risks.