CryoLife, Inc. — Q2 2016 Form 10-Q
Entity and period: The filing is for CryoLife, Inc. and subsidiaries, for the quarter and six months ended June 30, 2016. The supplied company label, Artivion, Inc., does not match the registrant name shown in this filing.
Business context
CryoLife develops and sells medical devices used in cardiac surgery and provides preservation services for human cardiac and vascular tissues. Its January 2016 acquisition of On-X expanded its heart-valve product portfolio; the company also acquired PhotoFix technology in April. CryoLife sold its HeRO Graft and ProCol product lines as part of a shift toward cardiac-surgery products.
Financial performance
Amounts below are in millions of dollars, except per-share data. Q2 is the three months ended June 30; H1 is the six months ended June 30.
| Metric | Q2 2016 | Q2 2015 | H1 2016 | H1 2015 |
|---|---|---|---|---|
| Revenue | $47.1 | $35.5 | $90.1 | $69.4 |
| Gross profit / margin | $30.3 / 64% | $21.6 / 61% | $57.9 / 64% | $41.2 / 59% |
| Operating income (loss) | $4.6 | ($0.5) | $11.2 | ($2.0) |
| Net income (loss) | $2.3 | ($0.5) | $4.9 | ($0.8) |
| Diluted EPS | $0.07 | ($0.02) | $0.15 | ($0.03) |
| Operating cash flow | Not separately provided | Not separately provided | $5.8 | $5.2 |
- Q2 revenue rose 33%; H1 revenue rose 30%. On-X contributed $9.6 million in Q2 and $16.3 million in H1, with no comparable 2015 revenue in CryoLife’s results.
- Q2 product revenue was $30.0 million and preservation-services revenue was $17.0 million. BioGlue and BioFoam revenue increased 11% in Q2; preservation-services revenue increased 9%.
- H1 results included a net $7.9 million gain from business-component sales: an $8.8 million HeRO Graft gain less an approximately $0.8 million ProCol loss. The gain is included in H1 operating income.
- At June 30, cash and cash equivalents were $46.9 million; working capital was $111.1 million and the current ratio was 5:1. H1 cash from investing was a use of $69.2 million, primarily reflecting the On-X acquisition; financing provided $73.1 million.
- Debt included $74.5 million principal under a $75 million term loan, with $72.2 million reported after unamortized issuance costs and current maturities. The company also had a $20 million revolving facility. The term loan’s stated aggregate interest rate was approximately 3.5%; the company reported covenant compliance at quarter-end.
Material changes and unusual items
- On-X was acquired for approximately $128.2 million: $93.6 million cash and $34.6 million in CryoLife shares. Purchase-price allocation remained preliminary. The acquisition was funded in part with the new $75 million term loan and increased share count.
- On-X inventory purchase-accounting step-up charges were $0.9 million in Q2 and $1.5 million in H1. H1 acquisition transaction and integration costs were $6.6 million, including costs associated with ending certain distribution agreements.
- HeRO Graft and ProCol sales produced $19.8 million of H1 cash proceeds. HeRO transition-supply sales were at lower prices than prior hospital sales; the transfer to the buyer was completed in Q2, and further HeRO sales were not anticipated.
- Operating expenses increased: H1 general, administrative and marketing costs rose 27% to $48.7 million; research and development rose 19% to $5.9 million. Interest expense increased to $1.5 million in H1, primarily due to acquisition-related borrowing.
- The board discontinued cash dividends in December 2015; no dividends were declared or paid in H1 2016.
Outlook, commentary and risks
- Management said existing cash and operating cash flow were expected to cover operational liquidity needs for at least 12 months, while noting future needs for debt service, PerClot clinical work, R&D, working capital and capital expenditures. Additional financing could be sought for significant business development.
- Management expected full-year On-X revenue to exceed On-X’s 2015 revenue, but cautioned that sales-channel disruption during integration could affect individual quarters; it anticipated stronger growth after integration and salesforce training.
- The company expected cardiac laser therapy revenue to decline in 2016, partly because of fewer anticipated console sales. It expected lower per-unit tissue-processing costs for full-year 2016 after process improvements.
- PerClot trial enrollment had been suspended pending FDA protocol discussions. The revised protocol was approved in July 2016; management anticipated resuming enrollment in H2 2016 and FDA premarket approval in H1 2019. A court injunction barred U.S. marketing, sales and distribution through February 8, 2019. Failure to obtain approval could impair PerClot-related assets; the filing also notes potential SMI minimum-purchase obligations.
- Key risks include execution and integration of On-X, competition and dependence on BioGlue and tissue-preservation revenue, donor-tissue supply and processing quality, regulatory action, foreign-exchange effects, and debt covenants and variable-rate borrowing. The filing reports estimated unreported product and tissue claims of $1.4 million, with related insurance recoverables of $0.6 million; its actuarial analysis indicated the liability could be as high as $3.1 million including a statistical margin.
Important facts for investors to verify
- Confirm the registrant identity: this filing names CryoLife, Inc., despite the request metadata naming Artivion, Inc.
- Track On-X integration, direct-sales transitions, revenue growth and profitability excluding acquisition-related costs and purchase-accounting charges.
- Monitor final On-X purchase accounting and any resulting changes to goodwill, intangible assets, taxes or reported earnings.
- Review term-loan amortization, variable interest exposure, revolver availability and ongoing compliance with leverage and interest-coverage covenants.
- Follow PerClot trial timing, regulatory progress, the injunction expiration date and any related impairment or contractual purchase obligations.
- Assess whether tissue availability and processing-cost improvements are sustainable, and monitor the company’s exposure to product-liability and quality risks.