CryoLife, Inc. — Q1 2013 Form 10-Q
Period: Three months ended March 31, 2013. The filing identifies the registrant as CryoLife, Inc. (Florida); the supplied company metadata names Artivion, Inc. Financial amounts below are in U.S. dollars unless stated otherwise.
Business context and financial performance
CryoLife develops and sells medical devices for cardiac and vascular applications and preserves and distributes human tissues for transplantation. It reports Medical Devices and Preservation Services segments. Q1 revenue reached a company record, led by BioGlue and the addition of HeRO Graft sales following the 2012 Hemosphere acquisition.
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $35.536 million | $32.301 million | +10% |
| Gross margin | $23.276 million; 65% | $21.292 million; 66% | +9% in dollars |
| Operating income | $3.311 million | $1.629 million | More than doubled |
| Net income | $2.192 million | $0.991 million | +121% |
| Diluted EPS | $0.08 | $0.04 | +$0.04 |
| Operating cash flow | $(1.169) million | $1.805 million | Turned negative |
Product revenue rose 20% to $19.796 million, including BioGlue and BioFoam of $15.464 million, PerClot of $0.864 million, revascularization technologies of $2.191 million, and HeRO Graft of $1.277 million. Preservation-services revenue was nearly flat at $15.677 million: vascular tissue revenue increased while cardiac tissue revenue declined. Medical-device gross margin increased to $16.331 million from $13.941 million; preservation-services gross margin declined to $6.882 million from $7.163 million.
Liquidity, debt and cash flow
- Cash and cash equivalents were $8.632 million at March 31, down from $13.009 million at year-end 2012 and $21.146 million at March 31, 2012. A further $5.0 million was restricted under the credit agreement; $0.303 million of restricted securities was also reported.
- Working capital was $57.2 million and the current ratio was 4:1. Total liabilities were $24.734 million; the filing reports no borrowing outstanding under the GE Capital facility.
- The GE facility provided $20.0 million of availability and expires October 28, 2014. The company reported covenant compliance. The $5.0 million restricted cash requirement and a minimum-liquidity covenant after share repurchases constrain liquidity.
- Operating cash use reflected a $3.321 million increase in receivables and $4.386 million of cash outflows from accounts payable, accrued expenses, and other liabilities. Investing cash use was $1.072 million, including $0.988 million in capital expenditures. Financing cash use was $2.135 million, including $1.203 million of share repurchases and $0.687 million in dividends.
Material changes versus the prior period
- Product growth, including acquired HeRO Graft sales and higher BioGlue revenue, drove total revenue up 10%; preservation-services revenue was essentially unchanged.
- Gross margin dollars rose, but gross margin as a share of revenue eased to 65% from 66%. Product costs increased 38%, partly reflecting HeRO sales and greater BioGlue volume.
- Net income improved, aided by higher operating income and a lower effective tax rate (about 28% versus 37%). The 2013 rate benefited from enactment of the 2012 research and development tax credit; management expected a higher rate for the remainder of 2013.
- Operating cash flow shifted from positive to negative, and cash declined. The company initiated quarterly dividends in 2012 and authorized a new $15 million repurchase program in February 2013.
Outlook, risks and unusual items
- Management expected 2013 preservation-services revenue to increase over 2012, but warned that the HTA’s temporary suspension of CryoLife Europa’s tissue-import license could reduce European shipments. The HTA directed a recall of unimplanted tissue and later allowed imports in certain circumstances for critically ill patients. The suspension could be extended or ended earlier.
- The FDA issued a Warning Letter following an inspection and Form 483 relating to tissue processing, preservation and distribution, and medical-device manufacturing. CryoLife said it had responded and was implementing corrective actions, but satisfactory resolution is not assured; additional requirements could affect product availability, costs, revenue and cash flows.
- The company anticipated launching a next-generation HeRO device in Q4 2013, following manufacturing scale-up and validation. It planned to resubmit a revised PerClot investigational-device exemption application in Q2 2013; U.S. sales require FDA approval. Management expected PerClot revenue to increase during 2013 but cited competition and weak European hospital budgets.
- Management expected general, administrative and marketing expenses to rise for full-year 2013, including from Hemosphere-related staffing and the 2.3% U.S. medical-device excise tax. Research and development spending was also expected to increase materially, mainly for PerClot clinical studies.
- BioGlue was a mature product facing competition and declining domestic-market volumes; Q1 growth was supported by international sales, particularly Japan. Foreign-currency movements could affect international revenues. The company also cited seasonality and variability in tissue availability, yields, releases and procedure timing.
- Unusual or notable items included a $39,000 loss from remeasurement of Hemosphere contingent consideration, a write-down of certain cardiac tissues, and ongoing Hemosphere integration costs. The CardioFocus litigation settlement and Medafor settlement occurred in 2012, not Q1 2013. CryoLife disputed Medafor’s assertion that U.S. PerClot use would infringe its patent.
- The company stated it expected existing cash and operating cash flows to meet operational liquidity needs for at least 12 months. Significant business development could require borrowing, additional debt or equity financing. It reported no off-balance-sheet arrangements and no material change in risk factors from its 2012 Form 10-K.
Important facts for investors to verify
- Whether FDA corrective actions and HTA requirements are resolved, and the duration and financial effect of the European tissue-import suspension.
- Whether BioGlue’s international growth can offset mature-market competition, and whether PerClot and HeRO meet the company’s stated commercialization expectations.
- Cash conversion and working-capital trends, particularly receivables and accrued-payable outflows; assess liquidity after restricted cash and repurchases.
- Progress on the PerClot FDA pathway, related clinical spending, minimum purchase commitments, and the potential Medafor patent dispute.
- Hemosphere revenue milestones and contingent payments, as well as the performance of the $2.0 million ValveXchange loan and related investment.
- The effect of the medical-device excise tax, higher planned operating and R&D spending, and the expected increase in the tax rate after the Q1 credit benefit.