Business context and reporting period
The filing is CryoLife, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The request metadata names Artivion, Inc., but the filing identifies the registrant as CryoLife, Inc. CryoLife preserves human tissue and develops and sells medical devices. It acquired Cardiogenesis on May 17, 2011, adding its surgical revascularization technology business.
Unless otherwise indicated, financial amounts below are in millions of dollars. Quarterly and six-month comparisons are against the respective 2010 periods.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $29.4 | $29.3 | $59.6 | $59.0 |
| Gross margin | $19.1 | $17.8 | $37.6 | $35.6 |
| Gross margin % | 64.8% | 60.7% | 63.0% | 60.3% |
| Operating income | $3.8 | $4.9 | $6.2 | $7.5 |
| Operating margin | 12.8% | 16.6% | 10.4% | 12.8% |
| Net income | $1.8 | $2.9 | $3.5 | $4.9 |
| Diluted EPS | $0.07 | $0.10 | $0.13 | $0.17 |
| Operating cash flow | Not separately presented | $7.9 | $10.0 |
At June 30, cash and cash equivalents were $19.8 million, down from $35.5 million at year-end 2010; restricted securities were $5.3 million. Working capital was $67.7 million, with a 4:1 current ratio, versus $82.2 million and 5:1 at year-end. Total liabilities were $24.5 million. There were no borrowings under the GE Capital revolver, with $14.8 million available; its term had been extended to August 31, 2011. The company reported compliance with its credit covenants.
Six-month investing cash outflow was $22.4 million, mainly the $21.1 million net cash cost of the Cardiogenesis acquisition. Financing cash outflow was $1.2 million, including $1.6 million of share repurchases. Capital expenditures were $1.2 million. The filing reports no off-balance-sheet arrangements.
Material changes versus prior period
- Revenue rose 0.4% in Q2 and 1.0% for the first half, but operating income fell 23% and 18%, respectively; net income declined 38% and 28%.
- Gross margin improved as preservation processing costs per unit declined and product costs fell. Operating expenses increased, including Cardiogenesis transaction, integration, personnel, and other business-development costs; research and development spending also rose.
- Revenue mix shifted: BioGlue and BioFoam grew, while preservation services were slightly lower. PerClot and Cardiogenesis revascularization revenue were new contributors; HemoStase sales were being discontinued. Cardiogenesis contributed $1.2 million of revenue after acquisition.
- The effective tax rate increased to approximately 52% for Q2 and 45% for the first half, versus 42% in both 2010 periods, largely due to unfavorable tax treatment of certain acquisition expenses.
- Cash and cash equivalents decreased primarily because of the acquisition. Goodwill of $4.4 million and acquired intangible assets of $11.9 million were recorded for Cardiogenesis; purchase-price allocation was preliminary.
Outlook, management commentary, risks and unusual items
- Management reported record second-quarter and first-half revenue. It expected Cardiogenesis revenue to benefit the remainder of 2011 and did not anticipate significant additional Cardiogenesis acquisition costs for the rest of the year.
- Management believed cash, cash equivalents, and operating cash flow would cover operational liquidity needs for at least 12 months, while also evaluating a new or extended credit facility. The existing facility was due to expire August 31, 2011. The company cautioned that future clinical trials, litigation, business development, and other spending would affect cash flows.
- In July 2011 CryoLife paid $3.5 million for an approximately 19% interest in ValveXchange and received specified acquisition and distribution rights; up to $2.0 million of additional revolving credit financing may be made available.
- PerClot’s U.S. regulatory path remains uncertain: the FDA disapproved the company’s IDE filing in April 2011; CryoLife was addressing FDA comments and anticipated refiling in Q3 2011. U.S. sales require FDA approval. The company expected international PerClot sales to grow, but anticipated lower total hemostat sales in 2011 as HemoStase was discontinued.
- BioGlue faces competitive pressure, hospital cost controls, and lower domestic use in some off-label applications. CryoLife cited price and volume opportunities internationally, including Japan, where Q2 BioGlue shipments were $518,000.
- Medafor litigation continued, including counterclaims and a separate Minnesota action; Medafor asserted that approximately $1.3 million plus prejudgment interest was owed. CryoLife said the outcome was not predictable and expected the Georgia case to proceed toward trial no earlier than 2012 or 2013.
- Other risks include a Cardiogenesis-related patent dispute, regulatory and reimbursement uncertainty, product-liability exposure, tissue supply, supplier concentration, acquisition integration, competition, and dependence on BioGlue. Estimated unreported loss liability was $2.2 million gross and $1.5 million net of recoverables; the gross estimate could be as high as $4.2 million using an actuarial margin for statistical fluctuations.
- Contractual obligations totaled $45.9 million, including $27.5 million in operating leases, $10.1 million in purchase commitments, and $4.3 million in research obligations. Certain PerClot contingent payments and legal and tax exposures remain uncertain.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for CryoLife, Inc., notwithstanding the Artivion metadata.
- Track the replacement or extension of the GE Capital credit facility and any resulting borrowing capacity or covenant changes.
- Monitor cash use after the Cardiogenesis acquisition and ValveXchange investment, including any additional ValveXchange financing.
- Verify PerClot IDE resubmission, FDA review progress, and the consequences for U.S. launch timing and contractual purchase requirements.
- Assess whether Cardiogenesis delivers expected revenue and integration benefits, and follow the acquired business’s regulatory, reimbursement, supplier, and patent risks.
- Follow Medafor and CardioFocus litigation, product-liability claims, and changes in recorded or potential loss exposures.
- Compare future earnings with the 2011 results while accounting for acquisition expenses, elevated taxes, share repurchases, and the absence of a specific numerical earnings or revenue forecast in this filing.