Filing summary
Entity note: The supplied filing is CryoLife, Inc.’s Form 10-Q for the quarter ended September 30, 2016. This does not match the request metadata naming Artivion, Inc.; verify the intended issuer before relying on this summary. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context and reporting period
CryoLife develops, manufactures, processes, and distributes medical devices and preserved human tissues, primarily for cardiac surgery. It reports Medical Devices and Preservation Services segments. The filing covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. On-X, acquired January 20, 2016, materially expanded the medical-device business.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $45.3 | $36.7 | $135.4 | $106.1 |
| Gross margin | $29.8; 66% | $23.0; 63% | $87.7; 65% | $64.2; 61% |
| Operating income | $5.5 | $2.5 | $16.7 | $0.5 |
| Net income | $3.0 | $2.1 | $7.9 | $1.4 |
| Diluted EPS | $0.09 | $0.07 | $0.24 | $0.05 |
| Operating cash flow | $8.8, per management | Not separately stated here | $14.7 | $10.0 |
- Revenue mix: Q3 medical-device revenue was $28.0 million, including $8.9 million from On-X; preservation-services revenue was $17.2 million. Q3 revenue rose 23%, primarily reflecting On-X. Nine-month revenue rose 28%.
- Cash and liquidity: September 30 cash and cash equivalents were $54.1 million, versus $37.6 million at year-end 2015. Working capital was $117.3 million and the current ratio was 6:1. Nine-month cash increased by $16.5 million.
- Debt: The company had a $75 million term loan issued to help finance On-X and a $20 million revolving facility under its amended secured credit agreement. Term-loan principal was $73.6 million; debt carrying value was $71.4 million after unamortized issuance costs. The reported term-loan rate was approximately 3.28%. The company said it was in covenant compliance at September 30.
- Cash flows and investment: Nine-month investing cash use was $71.1 million, led by $91.2 million for On-X net of acquired cash, partly offset by $19.8 million of business-sale proceeds and $5.0 million released from restricted cash. Financing provided $73.4 million, principally from the $75 million term loan. Capital expenditures were $3.5 million.
Material changes versus the prior comparable period
- Q3 revenue increased 23%; nine-month revenue increased 28%. The acquisition added $25.2 million of reported On-X revenue in the first nine months of 2016. On-X’s combined pre- and post-acquisition revenue was reported as up 6% for Q3 and 7% for the nine-month period versus On-X’s prior-year revenue.
- Gross margin expanded to 66% in Q3 and 65% year to date, from 63% and 61%, respectively. Management cited On-X contribution, higher tissue margins, lower tissue-processing costs, and stronger BioGlue margins; On-X inventory purchase-accounting step-up costs partly offset the improvement.
- Operating expenses increased, including higher sales and integration costs. Nine-month general, administrative, and marketing expenses included $7.0 million of business-development costs, primarily associated with On-X. Interest expense rose due to acquisition-related borrowing.
- Nine-month results included a net $7.9 million gain from business-component sales: an approximately $8.8 million gain on HeRO Graft, partly offset by an approximately $0.8 million loss on ProCol. These sales were not classified as discontinued operations.
- The company issued 3.7 million shares as part of the On-X purchase consideration. It discontinued cash dividends in December 2015; no dividends were declared or paid in the 2016 periods shown.
Outlook, commentary, risks, and unusual items
- Management said existing cash and operating cash flows should meet operational liquidity needs for at least the next 12 months. Potential cash needs include debt service, the PerClot clinical trial, research and development, working capital, capital expenditures, and possible business development. No general numerical revenue or earnings guidance is provided in the supplied text.
- Management expected On-X revenue for full-year 2016 to exceed On-X’s 2015 revenue, while warning that channel disruption during integration could affect individual quarters. It expected On-X growth to accelerate as the combined sales force gains experience.
- Management expected cardiac laser therapy revenue to decline in 2016 versus 2015. It also expected lower per-unit tissue-processing costs for full-year 2016 following process improvements.
- PerClot’s pivotal U.S. trial enrollment had been suspended for FDA protocol discussions; the revised protocol was approved in July 2016. The company anticipated resuming enrollment in Q4 2016 and targeted FDA approval in the first half of 2019. Separately, a court injunction bars U.S. marketing, sales, and distribution until February 8, 2019. Failure or delay in approval could impair PerClot-related assets; the filing reported $1.5 million of prepaid royalties, $3.0 million of net intangible assets, and $1.2 million of net property and equipment associated with the product.
- On-X purchase-price allocation remained preliminary and subject to adjustment. The acquisition added substantial goodwill and intangibles; goodwill was reported at $76.5 million at September 30. Acquisition and integration costs were expensed as incurred.
- Other material risks include dependence on BioGlue and tissue-preservation revenue, product competition, donor-tissue supply and processing risks, medical-device regulation and quality oversight, foreign-exchange exposure, and debt covenants and variable-rate borrowing. The filing also describes potential liabilities from product and tissue claims; estimated unreported loss liability was $1.7 million, with a reasonably possible high estimate of $3.1 million before related insurance recovery.
Important facts for investors to verify
- Confirm issuer identity: the filing is for CryoLife, Inc., not Artivion, Inc.
- Check subsequent On-X integration and sales-channel performance against management’s growth expectations, including whether reported growth reflects comparable-period and acquisition timing effects.
- Review final On-X purchase accounting, goodwill and intangible-asset valuations, and the effect of amortization and inventory step-up costs on margins and earnings.
- Track operating cash conversion, inventory and deferred preservation-cost growth, cash balances, term-loan repayment, revolver availability, interest rates, and covenant headroom.
- Monitor PerClot trial enrollment, regulatory timing, the February 2019 U.S. injunction expiration, and potential impairment or further contractual purchase obligations.
- Assess sustainability of tissue-processing cost reductions and tissue availability, alongside BioGlue competition, On-X channel transitions, and currency impacts.