Business context and reporting period
Registrant: The filing is for CryoLife, Inc. (NYSE: CRY), although the request metadata identifies Artivion, Inc. It is a Form 10-K for the fiscal year ended December 31, 2016; fourth-quarter figures are also provided. CryoLife develops and sells cardiac-surgery medical devices and preserves and distributes human cardiac and vascular tissues.
The year included the January acquisition of On-X, a mechanical heart-valve business, for approximately $128.2 million. CryoLife also acquired PhotoFix technology and sold its HeRO Graft and ProCol product lines.
Financial results and position
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $180.4 million | $145.9 million |
| Gross margin | $118.9 million; 66% of revenue | $90.7 million; 62% |
| Operating income | $21.8 million | $5.4 million |
| Net income | $10.8 million | $4.0 million |
| Diluted earnings per share | $0.32 | $0.14 |
| Cash from operations | $19.7 million | $11.4 million |
- Fourth-quarter 2016 revenue was $45.0 million, up 13% from $39.8 million. Gross margin was $31.2 million (69%); net income was $2.9 million and diluted EPS was $0.09, unchanged from Q4 2015 EPS.
- FY 2016 revenue comprised $114.0 million of product sales and $66.4 million of preservation services. On-X contributed $34.2 million after its acquisition; BioGlue and BioFoam contributed $63.5 million.
- At year-end, cash and cash equivalents were $56.6 million, working capital $117.1 million, and the current ratio 5:1. Total assets were $316.1 million and shareholders’ equity $209.0 million.
- Term-loan principal was $73.6 million at year-end (including $4.6 million current and $67.0 million long-term debt net of unamortized issuance costs on the balance sheet). The $75 million term loan matures in 2021; the company also had a $20 million revolving facility. It reported compliance with debt covenants and no revolver balance was specified in the text.
- Cash used in investing was $73.9 million, mainly reflecting the On-X acquisition; financing provided $73.4 million, primarily from the term loan. Capital expenditures were $6.2 million.
Material changes versus the prior comparable period
- Revenue rose 24%, primarily because On-X was consolidated for most of 2016. Product revenue increased 37%; preservation-services revenue increased 6%.
- Gross margin increased from 62% to 66%, aided by lower tissue-processing costs and On-X contribution. Product costs also included $3.0 million of On-X acquisition inventory fair-value step-up expense.
- Operating income benefited from the net $7.9 million gain on business-component sales, including an $8.8 million HeRO Graft gain partly offset by a $0.8 million ProCol loss. General, administrative, and marketing expense increased to $91.5 million, including $7.9 million of business-development costs, primarily acquisition-related.
- Interest expense increased to $3.0 million following acquisition financing. The effective tax rate rose to approximately 41% from 32%, in part because of On-X acquisition-related tax treatment and tax-basis differences on the HeRO sale.
- On-X revenues represented 19% of 2016 revenue. BioGlue’s share declined to 35% from 41%, while preservation services’ share fell to 37% from 43%, reflecting the enlarged product base.
Outlook, risks, contingencies, and unusual items
- Management stated that cash, cash equivalents, and operating cash flow should meet operational liquidity needs for at least the next 12 months. It gave no specific revenue or earnings guidance; significant business-development activity could require additional borrowing or equity financing.
- Management expected On-X growth to benefit from sales-force integration and training. It planned to continue improving tissue-processing throughput and pursue additional vascular-tissue customers. PhotoFix manufacturing transfer to CryoLife’s Georgia facility was expected by mid-2017.
- PerClot U.S. commercialization remains contingent on FDA approval. Enrollment in the pivotal trial resumed in Q4 2016, with a target of FDA approval in the first half of 2019; a court injunction prevents U.S. marketing, sales, or distribution until February 8, 2019. SMI could seek termination of CryoLife’s exclusive PMA rights under specified circumstances if approval is not secured by October 2017.
- The On-X AAP’s CE Mark in the EEA was temporarily suspended in November 2016 pending completion of a remediation plan, creating potential European revenue impact. The FDA had not issued a proposed reclassification rule for CryoValve SGPV, but a future Class III classification could require a PMA and make continued distribution uneconomic.
- Key business risks include reliance on BioGlue and donated tissue, competition and pricing pressure, single-source suppliers, regulatory and product-liability exposure, foreign-exchange movements, and integration and debt-related risks from the On-X acquisition. BioGlue represented 35% of revenue and preservation services 37%.
- CryoLife reported no material legal proceedings requiring disclosure. It had $1.5 million of estimated unreported product/tissue claims liability and $626,000 of related insurance recoverables; the estimated liability could be as high as $2.8 million under the company’s stated actuarial range. The filing also reported $3.6 million of uncertain tax liabilities including interest and penalties.
- The company stopped paying dividends in 2016; its credit agreement restricts dividends and share repurchases. The 2016 financial-control assessment excluded On-X, which represented $140.4 million of year-end assets and $34.2 million of revenue.
Most important facts an investor should verify
- How much of revenue and earnings growth is attributable to acquired On-X versus underlying growth, and whether integration and sales-force changes deliver the expected benefits.
- Progress on On-X AAP’s European CE-Mark remediation and any effect on sales; also monitor the company’s broader regulatory and quality status.
- PerClot trial enrollment, FDA approval timing, contractual rights with SMI, and the February 2019 U.S. injunction expiry.
- Whether improved tissue-processing costs and yields persist, and whether tissue supply supports growth without material write-downs.
- Debt amortization, interest-rate exposure, covenant headroom, liquidity needs, and the potential financing required for acquisitions or development programs.
- Revenue concentration in BioGlue and preservation services, competitive pressure, and the effects of currency movements and divested product lines.