CryoLife, Inc. (NYSE: CRY) — Q1 2019 Form 10-Q
Issuer note: The filing is for CryoLife, Inc., not Artivion, Inc. It covers the three months ended March 31, 2019; figures below are in U.S. dollars.
Business context and reporting period
CryoLife develops and sells medical devices and preserved human tissues used in cardiac and vascular surgery. Its reportable segments are Medical Devices and Preservation Services. The unaudited quarter is compared with the three months ended March 31, 2018.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $67.5 million | $61.9 million; up 9% reported, 11% excluding foreign exchange |
| Gross profit / margin | $44.3 million / 65.6% | $39.2 million / 63.3% |
| Operating income (loss) | $2.2 million | $(3.5) million |
| Net income (loss) | $(0.3) million | $(3.9) million |
| Diluted loss per share | $(0.01) | $(0.11) |
| Operating cash flow | $1.2 million provided | $9.7 million used |
| Cash and cash equivalents | $40.3 million at March 31 | $41.5 million at December 31, 2018 |
| Debt | $225.1 million gross loan balance; $216.4 million net of unamortized fees | $30.0 million revolving facility remained undrawn |
| Working capital / current ratio | $142.3 million / 5.0 | $144.7 million / 5.0 at December 31, 2018 |
Medical-device revenue rose 11% to $48.4 million; preservation-services revenue increased 4% to $19.1 million. Product growth was led by JOTEC, On-X and BioGlue. Gross-margin improvement primarily reflected the prior-year JOTEC inventory purchase-accounting step-up expense. General, administrative and marketing expense fell 2%, mainly as JOTEC-related integration and business-development costs declined; R&D expense increased 3% to $5.5 million. Interest expense was $3.9 million.
Cash declined by $1.1 million during the quarter, including restricted securities. Operating cash generation improved year over year, while investing activities used $1.4 million and financing activities used $1.2 million. At March 31, total liabilities were $314.3 million. Adoption of lease accounting added operating lease right-of-use assets and liabilities; operating lease liabilities were $24.9 million at quarter end.
Material changes versus the prior period
- Revenue increased 9%; product revenue grew 11%, while preservation-services revenue grew 4%.
- Gross margin increased by about 2.3 percentage points. Operating results moved from a loss to income; net loss narrowed to $0.3 million from $3.9 million.
- Operating cash flow improved from $9.7 million used to $1.2 million provided. The filing attributes much of the prior-year use to higher acquisition integration and business-development costs and associated liability-payment timing.
- Foreign-currency translation produced a $3.8 million comprehensive loss, compared with $7.1 million of translation income in Q1 2018.
Outlook, commentary and risks
- No full-year revenue or earnings guidance is provided. Management expects cash from operations and existing cash and cash equivalents to cover current operational liquidity needs for at least the next 12 months, while noting that future clinical, R&D, debt-service, capital and business-development needs could affect cash flows and may require additional financing.
- PerClot pivotal-trial enrollment was completed in January 2019; management anticipated submitting a U.S. FDA premarket approval application in early 2020. Approval and successful commercialization are uncertain; failure to obtain approval could impair related assets. Potential PerClot contingent payments are up to $1.0 million, and purchase commitments may continue if the distribution agreement is not terminated.
- Key risks include substantial debt and variable-rate exposure, credit-agreement covenants and collateral, dependence on major products and tissue supply, competition and pricing pressure, regulatory and clinical-trial outcomes, foreign exchange, and integration of JOTEC. The filing also highlights uncertainty around European regulatory requirements, including the On-X ascending aortic prosthesis CE Mark and the EU Medical Device Regulation taking effect in 2020.
- Estimated unreported product and tissue-processing liability was $1.8 million; actuarial analysis indicated it could be as high as $3.6 million including a statistical margin. Management reported no pending legal matter it believed would have a material adverse effect, while cautioning that legal outcomes remain uncertain.
- ASC 842 lease adoption on January 1, 2019 recognized $22.7 million of operating lease assets and liabilities at adoption. Management said the change had no significant impact on loan covenants or other credit-facility provisions.
Important facts for investors to verify
- Confirm the filing matches the intended issuer: this 10-Q identifies CryoLife, Inc. (ticker CRY), not Artivion, Inc.
- Track whether reported revenue growth converts into sustained operating income and positive operating cash flow.
- Review debt-service requirements, variable interest exposure, covenant compliance and the availability of the undrawn $30.0 million revolver.
- Monitor PerClot’s regulatory timeline, approval prospects, related commitments and potential impairment exposure.
- Assess product and tissue-processing liability estimates, foreign-exchange effects, and the regulatory status of On-X products in Europe.