Business context and reporting period
This is CryoLife, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The request metadata names Artivion, Inc., but the filing identifies the registrant as CryoLife, Inc. CryoLife develops and sells medical devices and preserved human tissues for cardiac and vascular surgery, including BioGlue, JOTEC and On-X products, and preservation services.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $71.1m | $68.5m | $138.6m | $130.4m |
| Gross margin | $47.0m (66%) | $45.9m (67%) | $91.2m (66%) | $85.1m (65%) |
| Operating income | $6.5m | $5.4m | $8.7m | $1.9m |
| Net income (loss) | $2.8m | $0.2m | $2.5m | $(3.6)m |
| Diluted earnings (loss) per share | $0.07 | $0.01 | $0.07 | $(0.10) |
Revenue grew 4% in Q2 and 6% in the first half; excluding foreign-exchange effects, growth was 7% and 9%, respectively. Q2 gross margin percentage declined, mainly because of product mix and inventory write-offs; the first-half percentage improved, partly because 2018 included JOTEC purchase-accounting inventory step-up costs. Operating income improved substantially year over year, with management citing lower JOTEC integration and business-development costs and lower inventory step-up costs. The six-month income tax benefit was $1.4m; stock-compensation tax benefits contributed approximately $1.9m.
For the six months, operating cash flow was $1.9m, compared with cash used of $9.0m in 2018. Investing activities used $3.6m, principally for capital expenditures; financing activities used $0.8m. Cash and cash equivalents were $39.7m at June 30, 2019, down from $41.5m at year-end 2018. Working capital was $151.1m and the current ratio was 5:1.
Long-term debt was $215.0m, with an additional $1.2m current portion; total loan balance before unamortized loan costs was $224.4m. The $30m revolving credit facility was undrawn and fully available. The term loan’s reported annual interest rate was 5.58% at quarter-end. Operating lease liabilities of $24.3m were recognized following adoption of ASC 842; finance lease liabilities were $6.3m.
Material changes, outlook and risks
- Product revenue rose 4% in Q2 and 7% in the first half. BioGlue and On-X grew; PhotoFix increased 55% and 45%, respectively, on greater unit sales and expanded product sizes. PerClot revenue declined 19% in Q2 and 5% in the first half, while JOTEC revenue was flat in Q2 and rose 5% in the first half.
- Preservation-services revenue increased 4% in both periods. Cardiac tissue revenue grew 16% in Q2 and 13% year to date; vascular tissue revenue declined 6% and 4%, respectively, amid lower shipments and service fees.
- Management said cash from operations and existing cash were expected to meet current operational liquidity needs for at least 12 months. Future cash needs include debt service, clinical trials, research and development, working capital and capital expenditures. No specific revenue or earnings guidance was provided.
- PerClot pivotal-trial enrollment was completed in January 2019; management anticipated submitting a U.S. FDA premarket approval application in early 2020. The filing warns that failure to obtain approval could impair PerClot-related assets and that additional minimum-purchase obligations may arise under the SMI agreement.
- Regulatory risks include the planned transfer of BioGlue’s European Notified Body services after the existing provider said it would cease service in September 2019, and continuing uncertainty around the On-X ascending aortic prosthesis CE Mark in Europe. The filing also identifies tissue supply, product liability, competition, foreign exchange, debt, and regulatory-compliance risks.
- Estimated unreported product and tissue-processing liability was $1.9m, with related insurance recoverables of $0.9m; actuarial analysis indicated the liability could be as high as $3.7m including a statistical margin. Management reported no pending legal matter it believed could have a material adverse effect, while noting litigation outcomes remain uncertain.
Important facts for investors to verify
- Confirm the registrant and security being analyzed: this supplied filing is for CryoLife, Inc. (NYSE: CRY), despite the Artivion metadata.
- Track revenue growth and margins by product and service, especially the divergent trends in cardiac versus vascular preservation and the effects of foreign exchange.
- Monitor operating cash generation against debt service, clinical spending and the $30m available revolver; assess the variable-rate debt exposure and covenant restrictions.
- Check progress and timing for PerClot’s anticipated FDA submission and the BioGlue and On-X European regulatory matters.
- Assess whether tissue-processing claims, supply variability, and contingent or contractual obligations change materially in subsequent filings.