Filing summary
Entity and period: The filing is CryoLife, Inc.’s Form 10-K for the fiscal year ended December 31, 2015, filed February 16, 2016. The request identifies Artivion, Inc.; the supplied filing names CryoLife, Inc., and does not explain the difference. Financial figures below are for CryoLife.
Business context
CryoLife manufactures and distributes medical devices and preserves human cardiac and vascular tissue. Its principal products included BioGlue, CardioGenesis cardiac laser therapy, HeRO Graft, PerClot, ProCol and PhotoFix; preservation services covered cardiac and vascular tissue. BioGlue remained its largest product, contributing 41% of 2015 revenue.
Financial performance
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $145.9 million | $144.6 million | +1% |
| Gross margin | $90.7 million; 62% of revenue | $91.3 million; 63% | Down $0.6 million; 1 percentage point |
| Operating income | $5.4 million | $8.8 million | Down 39% |
| Net income | $4.0 million | $7.3 million | Down 45% |
| Diluted EPS | $0.14 | $0.25 | Down $0.11 |
| Operating cash flow | $11.4 million | $8.1 million | Up $3.3 million |
Fourth-quarter 2015 revenue was $39.8 million, up 7% year over year; gross margin was $26.5 million, or 67% of revenue, versus $22.6 million, or 61%. Quarterly net income was $2.6 million versus $1.8 million, and diluted EPS was $0.09 versus $0.06. The filing reports first- and second-quarter 2015 net losses, followed by profits in the third and fourth quarters.
At December 31, 2015, cash and cash equivalents were $37.6 million; working capital was $90.1 million and the current ratio was 6:1. Total liabilities were $25.9 million, and the 2015 balance sheet reported no outstanding borrowings. Cash flow from investing activities was negative $4.5 million and from financing activities negative $2.8 million. Capital expenditures were $3.5 million. The filing states management expected cash and operating cash flow to cover operational liquidity needs for at least 12 months, while noting potentially significant 2016 cash requirements.
After year-end, the On-X acquisition closed on January 20, 2016. Its financing included a $75 million term loan and a $20 million revolving facility under a $95 million senior secured credit facility; substantially all company and domestic subsidiary assets, subject to exceptions, secure the facility. Thus, the year-end debt position does not reflect this subsequent borrowing.
Changes versus prior periods
- Annual revenue edged higher, but operating income, net income and EPS declined. The main pressures included higher operating expenses, increased R&D spending, tissue-processing costs and a PerClot inventory write-down.
- BioGlue and BioFoam revenue fell 4% for the year, reflecting lower volume and unfavorable foreign exchange, partly offset by price increases. CardioGenesis revenue rose 15%; vascular preservation revenue rose 4%, while cardiac preservation revenue fell 5%.
- Products revenue rose 1% and preservation-services revenue was nearly flat. Within preservation services, reduced cardiac tissue shipments were partly offset by higher vascular tissue revenue.
- R&D expense increased 20% to $10.4 million. General, administrative and marketing expense increased 2% to $74.9 million, including approximately $3.0 million in severance and termination benefits and $3.0 million in On-X-related business development expenses.
- Operating cash flow improved year over year, although receivables and inventory/deferred preservation costs absorbed cash. The board discontinued dividends in December 2015; the subsequent credit agreement prohibits cash dividends.
Outlook, risks and unusual items
- Strategy and outlook: Management’s growth priorities were new products, expanded indications, international growth and business development focused on cardiac surgery. It gave no specific 2016 revenue or earnings guidance. It expected significant 2016 spending for On-X integration, PerClot clinical work, R&D, working capital and capital expenditures.
- On-X and HeRO: The On-X purchase price was approximately $128 million based on preliminary closing accounting, with final adjustments and purchase-price allocation still pending. CryoLife sold HeRO Graft on February 3, 2016 for $18.5 million cash and anticipated a gain, with final accounting incomplete.
- PerClot: U.S. sales and distribution were barred by an injunction through February 8, 2019. Enrollment in the U.S. pivotal clinical trial was suspended pending discussions with the FDA on protocol changes; approval, if achieved, was expected no earlier than early 2019. Management estimated another $6–$7 million in approval-related spending over several years, mostly in 2016 and 2017.
- Regulatory and operating risks: The FDA closed out the 2013 warning letter in April 2015 after reinspection, but the company remained subject to oversight. Potential FDA reclassification of CryoValve SGPV as a Class III device could require a PMA and make continued processing uneconomic. Tissue availability, processing yields, single-source suppliers, competition and foreign-exchange movements were also identified risks.
- Other contingencies: CryoLife had approximately $2.0 million in ProCol prepayments for inventory not received and disclosed Hancock Jaffe’s breach of the distribution agreement; the prepayment could be impaired if recovery or repayment is not secured. Reported unreported product and tissue liability reserves were $1.4 million, with related insurance recoverables of $0.6 million; management’s analysis indicated the liability could be as high as $2.6 million.
- Unusual comparability: 2013 earnings included a $12.7 million pre-tax gain on the Medafor investment sale and a $3.2 million investment impairment. The 2015 annual comparison also reflects tax-rate differences and one-time personnel and legal costs.
Most important facts to verify
- Confirm the issuer and reporting entity: the supplied filing is for CryoLife, Inc., not an entity identified in the filing as Artivion, Inc.
- Review final On-X purchase accounting, the actual debt balance and covenant headroom after closing, and integration results.
- Track PerClot trial resumption, FDA protocol decisions, expected approval timing, remaining costs and the injunction expiration.
- Check the final HeRO sale gain and goodwill allocation, and whether the expected proceeds and strategic shift affect ongoing results.
- Monitor recovery of the ProCol advance, tissue-processing throughput and margins, and any FDA action concerning CryoValve SGPV.
- Assess whether operating cash flow and liquidity meet the stated 2016 needs after acquisition financing, integration spending and discontinued dividends.