CryoLife, Inc. (identified as Artivion in the request) — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The filing identifies the registrant as CryoLife, Inc. Financial amounts below are in U.S. dollars; income-statement and cash-flow figures are in millions unless otherwise noted.
Business context
CryoLife makes and distributes medical devices and preserves cardiac and vascular tissues used in surgery. Its reportable segments are Medical Devices and Preservation Services. The December 2017 acquisition of JOTEC added endovascular stent grafts and surgical grafts and was a major driver of 2018 growth.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $68.5 | $47.8 | $130.4 | $92.9 |
| Gross margin | $45.9 (67%) | $32.9 (69%) | $85.1 (65%) | $62.4 (67%) |
| Operating income | $5.4 | $4.8 | $1.9 | $7.3 |
| Net income (loss) | $0.2 | $3.2 | $(3.6) | $5.4 |
| Diluted EPS | $0.01 | $0.09 | $(0.10) | $0.16 |
- Revenue rose 43% in Q2 and 40% for the first half, primarily from JOTEC, alongside growth in On-X, BioGlue, and preservation services. JOTEC contributed $17.2 million in Q2 and $31.7 million year to date.
- Q2 gross margin dollars increased, but gross margin as a percentage of revenue fell to 67%, mainly reflecting lower JOTEC margins and purchase-accounting inventory step-up costs. Q2 product cost included $1.2 million of inventory step-up expense; the six-month amount was $2.7 million.
- Operating expenses rose substantially: Q2 general, administrative, and marketing expense was $34.7 million versus $23.4 million; six-month expense was $72.1 million versus $46.3 million. The first-half amount included $5.1 million of business-development and integration costs, primarily related to JOTEC.
- Interest expense increased to $4.1 million in Q2 and $7.8 million for the first half, largely due to acquisition-related borrowing. The six-month net loss also reflects higher operating expenses and financing costs; a tax benefit partly offset the pretax loss.
Cash flow, liquidity, and debt
- First-half operating cash flow was a use of $9.0 million, compared with $2.0 million provided in 2017. Investing cash use was $3.6 million, including $3.4 million of capital expenditures; financing cash use was $3.0 million, including $1.4 million of debt repayments and $1.8 million of share withholding-related repurchases.
- Cash and cash equivalents were $25.0 million at June 30, 2018, down from $40.0 million at year-end 2017; restricted securities were $0.8 million. The company reported that approximately 43% of cash and cash equivalents were held outside the U.S.
- Working capital was $135.6 million and the current ratio was 5:1. Gross loan balances were $227.4 million, with net borrowings of $218.2 million after unamortized loan costs. The $30 million revolving facility was undrawn and fully available. The term loan’s aggregate interest rate was 6.33% at quarter-end.
- The secured credit agreement is collateralized by substantially all U.S. assets, includes operating restrictions and limits cash dividends. Management said existing cash and expected operating cash flows should cover operational liquidity needs for at least the next 12 months, while noting that additional financing could be needed for significant business-development activity.
Material changes, outlook, and risks
- Acquisition and growth: Management attributed much of the revenue increase to JOTEC and expected its products to achieve double-digit growth over the next five years, based on sales-force integration, market expansion, and cross-selling. This is management’s expectation, not a guarantee.
- Product and market developments: On-X revenue excluding OEM rose 20% in Q2, mainly on higher unit volume. Preservation-services revenue increased 8% in Q2. CardioGenesis revenue declined 23% in Q2. Foreign-exchange movements benefited reported revenue; management warned that currency changes or distributor responses to dollar-denominated pricing could adversely affect sales.
- Regulatory milestones: The PerClot U.S. pivotal trial was underway; the company said FDA approval could occur in the first half of 2020 if enrollment proceeded as anticipated. It also targeted a return of the On-X ascending aortic prosthesis to the European market in Q4 2018, subject to a CE Mark pathway.
- Key risks: Realizing JOTEC’s expected benefits and managing integration and substantial variable-rate debt; competition and pricing pressure; reliance on major products and tissue supply; regulatory approvals and compliance; foreign-exchange exposure; and clinical-trial and reimbursement uncertainty. Failure to obtain U.S. PerClot approval could materially impair related assets. The filing also cites potential liability claims and uncertainty in accounting for the Tax Act.
- Unusual items: Foreign-currency translation reduced other comprehensive income by $11.8 million in Q2 and $4.6 million for the first half. The company adopted ASC 606 in 2018; it reported an immaterial transition adjustment and did not restate prior periods. On July 16, 2018, it settled disclosed indemnification claims and related litigation involving former On-X shareholders.
- No broad numerical revenue or earnings guidance is provided in the supplied filing text. The company described seasonal demand patterns for several product lines and tissue services.
Most important facts for investors to verify
- Whether JOTEC’s revenue growth, integration, and margin performance progress as management expects, and how much growth is acquisition-driven versus organic.
- Cash generation and working-capital trends, given first-half operating cash outflow and the decline in cash balances.
- Debt service capacity, exposure to variable interest rates, covenant compliance, and the availability and conditions of the revolver.
- PerClot trial enrollment and FDA timing, and the status of the On-X European CE Mark pathway.
- Future gross margins as JOTEC purchase-accounting inventory costs and integration expenses change, and the sensitivity of results to currency movements.
- Any material changes in Tax Act estimates, product or tissue liability exposures, or other contingencies.