Business context and reporting period
CryoLife, Inc. (the registrant in this filing; the request metadata identifies Artivion, Inc.) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. The company develops and sells medical devices and provides human-tissue preservation services. Its reportable businesses are Medical Devices and Preservation Services.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages. Comparisons are with the corresponding 2012 period.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $36.25 | $33.43 | $105.31 | $98.92 |
| Gross profit / margin | $23.35 / 64% | $21.31 / 64% | $68.10 / 65% | $63.97 / 65% |
| Operating income | $4.57 | $2.95 | $10.69 | $10.41 |
| Net income | $3.17 | $1.54 | $7.15 | $5.86 |
| Diluted EPS | $0.11 | $0.06 | $0.25 | $0.21 |
| Operating cash flow | $7.3 reported for the quarter | Not stated here | $11.31 | $11.01 |
- Quarterly revenue rose 8%; nine-month revenue rose 6%. Medical-device revenue increased 11% for the quarter and 14% year to date, while preservation-services revenue increased 6% for the quarter and was essentially flat year to date.
- Quarterly net income more than doubled, while nine-month net income rose 22%. Management attributed improved earnings chiefly to product revenue and margin growth; lower effective tax rates also helped. The nine-month 2013 rate was 31%, compared with 40% in 2012, partly reflecting enactment of the 2012 R&D tax credit.
- Cash and cash equivalents were $17.68 at September 30, up from $13.01 at December 31, 2012. Net working capital was $64.7 and the current ratio was 4:1. A further $5.0 of cash was restricted under the credit agreement.
- No borrowings were outstanding under the $20.0 revolving credit facility; the full amount was available. Total liabilities were $28.65 and shareholders’ equity was $134.54. The filing reports no off-balance-sheet arrangements.
- Nine-month investing cash use was $3.40, mainly capital expenditures of $3.24. Financing cash use was $3.28, including $2.20 of dividends and $1.52 of repurchases. Receivables used $4.14 of operating cash, largely due to timing of collections.
Material changes and unusual items
- BioGlue and BioFoam revenue increased 12% in Q3; management cited higher volume, pricing and favorable foreign exchange. HeRO Graft revenue was down 1% in Q3 year over year, though nine-month revenue increased substantially versus the reported prior-year period because CryoLife acquired Hemosphere in May 2012.
- Product costs included $0.49 of nine-month expense for obsolete revascularization handpieces after the company moved to a newly approved design. R&D expense increased 15% in the first nine months, with higher spending on PerClot clinical work.
- On October 1, 2013, C.R. Bard completed its acquisition of Medafor. CryoLife received approximately $15.4 for its shares and expected to recognize an approximately $12.7 gain in Q4. Up to a further $8.4 could be received, subject to escrow, sales milestones and possible offsets; these amounts are uncertain.
- Q3 2012 comparisons included no Medafor sale gain, while the 2012 nine-month results included a $4.7 Medafor litigation-settlement gain and a $4.1 CardioFocus settlement loss. These prior-period items affect expense comparisons.
- The company declared dividends of $0.0275 per share in Q2 and Q3 2013, up from $0.0250 in 2012. It repurchased approximately 253,000 shares for $1.5 in the first nine months.
Outlook, risks and contingencies
- Management expected preservation-services revenue for Q4 and full-year 2013 to be comparable with 2012, subject to European regulatory restrictions. It expected PerClot revenue to be flat or slightly lower in Q4 year over year, but higher for full-year 2013. It anticipated FDA approval to begin PerClot pivotal-trial enrollment in late Q4 2013 or Q1 2014; this was not a guarantee.
- Management expected higher R&D spending for 2013 and a significant increase in 2014, and expected Q4 and full-year 2013 net income and diluted EPS to rise significantly, principally because of the anticipated Medafor gain.
- The FDA had issued a Warning Letter concerning tissue processing and device manufacturing. The company reported corrective actions and favorable verbal feedback, but awaited FDA reinspection. The U.K. Human Tissue Authority reinstated CryoLife Europa’s import license with processing conditions under appeal; European tissue shipments and related revenue could be affected. A separate FDA Form 483 involved Cardiogenesis; the company had responded and implemented changes.
- ValveXchange had defaulted on certain loan covenants; the $2.0 loan and $3.2 preferred-stock investment could be impaired. The company said it was working to resolve the default and considered collateral adequate, but repayment and investment recovery were not assured.
- Other risks include BioGlue competition and domestic hospital cost pressures, tissue supply and shipment variability, foreign-exchange exposure, possible PerClot patent litigation if launched in the U.S., and contractual commitments. The filing listed $41.34 of scheduled contractual obligations, including $25.95 of operating leases and $6.88 of purchase commitments. Management believed available cash and operating cash flow would cover operational liquidity needs for at least 12 months.
Most important facts for investors to verify
- Whether the company completed FDA reinspection and resolved the Warning Letter, Cardiogenesis observations and HTA processing conditions, and the resulting effect on product and tissue availability.
- Whether PerClot received trial authorization on the stated timetable, and the eventual clinical, regulatory, commercial and patent-litigation outcomes.
- Actual Medafor escrow and milestone receipts, including offsets, compared with the potential additional $8.4.
- Whether ValveXchange cured its covenant default and whether the loan and preferred-stock investment remain recoverable.
- Cash conversion and receivables collection, the ability to meet credit-agreement covenants, and the sustainability of dividends and repurchases amid higher R&D and contractual spending.