CryoLife, Inc. — Q2 2013 Form 10-Q
Entity note: The filing is for CryoLife, Inc.; it does not identify the registrant as Artivion, Inc. The reporting period ended June 30, 2013. Financial amounts below are in millions of dollars unless noted.
Business context and financial performance
CryoLife develops and sells medical devices for cardiac and vascular applications and preserves and distributes human tissues for transplantation. Its reportable segments are Medical Devices and Preservation Services.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $33.5 | $33.2 | $69.1 | $65.5 |
| Gross profit / margin | $21.5 / 64% | $21.4 / 64% | $44.8 / 65% | $42.7 / 65% |
| Operating income | $2.8 | $5.8 | $6.1 | $7.5 |
| Net income | $1.8 | $3.3 | $4.0 | $4.3 |
| Diluted earnings per share | $0.06 | $0.12 | $0.14 | $0.15 |
- Q2 revenue rose about 1%; first-half revenue rose about 5%. Product revenue growth was offset in part by lower preservation-services revenue.
- Medical-device revenue was $18.2 million in Q2 (+9%) and $38.0 million for the first half (+15%). HeRO Graft revenue was $1.4 million in Q2, its strongest quarter since the May 2012 acquisition; PerClot and revascularization technologies also grew.
- Preservation-services revenue declined 6% in Q2 and 3% for the first half. Lower cardiac tissue shipments, including European shipments affected by the HTA suspension, were a key factor.
- Operating income fell about 52% in Q2 and 18% in the first half. Higher general, administrative and marketing costs were a principal cause; the 2012 comparison also included Medafor settlement gains and CardioFocus litigation costs.
- Q2 cost of products included $0.4 million of obsolete revascularization handpieces after the company shifted to a redesigned product. Management also cited a write-down of certain cardiac tissues unlikely to ship before packaging expiry.
Cash flow, liquidity and debt
- Six-month operating cash flow was $4.0 million, versus $4.9 million in the prior-year period. Management reported $5.2 million of operating cash generated during Q2.
- Six-month investing cash outflow was $2.4 million, mainly capital expenditures; financing cash outflow was $3.0 million, including $1.4 million of dividends and $1.4 million of share repurchases. Cash and cash equivalents declined to $11.7 million from $13.0 million at year-end.
- At June 30, current assets were $78.0 million and current liabilities $18.8 million; working capital was $59.1 million and the current ratio was 4:1. An additional $5.3 million was restricted: $5.0 million cash under the credit agreement and $0.3 million securities pledged for tax obligations.
- No borrowings were outstanding on the $20 million GE Capital revolving facility; the full $20 million was available. The facility expires October 2014, and the company reported covenant compliance. Total liabilities were $27.0 million.
- Management believed existing cash and expected operating cash flow would meet operational liquidity needs for at least 12 months. It noted future needs could include PerClot trials, dividends, repurchases, capital spending and business development; significant additional business development could require borrowing or equity financing.
Outlook, commentary and key risks
- Management expected 2013 preservation-services revenue to be comparable with 2012, but said it could decline slightly if HTA issues were not resolved. European tissue-import suspension was extended through September 22, 2013, subject to earlier change; a variance allowed certain imports for critically ill patients.
- The FDA conditionally approved the PerClot investigational-device exemption. CryoLife planned to refile its revised submission in Q3 2013 and, subject to FDA conditions, expected pivotal-trial enrollment in Q4 2013 or Q1 2014. U.S. sales require FDA approval. Management expected increased R&D spending in 2013 and 2014, driven partly by clinical studies.
- HeRO Graft received a CE Mark; the first European clinical case occurred in July 2013. Management planned a controlled European introduction in the second half of 2013 and a broader launch in 2014.
- The FDA had issued a Warning Letter concerning tissue processing and medical-device manufacturing. Management reported corrective actions and favorable verbal feedback, but an FDA inspection remained necessary to verify them. A separate Cardiogenesis Form 483 raised labeling, complaint-handling and field-action observations. Further regulatory action could affect product availability, costs and revenue.
- On July 22, 2013, CryoLife notified ValveXchange of loan-covenant defaults related in part to an unapproved convertible-note financing. ValveXchange had 15 days to cure. CryoLife held a $2.0 million secured loan and a $3.2 million preferred-stock investment; failure of ValveXchange financing or collateral recovery could lead to losses.
- BioGlue faced competitive and hospital-budget pressures, and management expected domestic sales-volume pressure to continue. Foreign-currency movements, tissue supply and variability in tissue releases, PerClot regulatory and patent risks, and product-liability exposure were also identified risks.
- The company increased its quarterly dividend 10%, to $0.0275 per share beginning in Q2 2013. It repurchased about 229,000 shares for $1.4 million in the first half and had $13.6 million of authorization remaining, subject to lender liquidity restrictions.
Important facts for investors to verify
- Progress and outcome of FDA inspections and corrective-action reviews, including the Warning Letter and Cardiogenesis Form 483; status of the HTA suspension and its effect on tissue shipments.
- PerClot’s revised IDE submission, clinical-trial timing and costs, U.S. approval prospects, and potential patent litigation.
- ValveXchange’s cure of the reported loan defaults, financing outlook, and recoverability of CryoLife’s loan and equity investment.
- Whether operating cash flow can support rising R&D and commercial costs while maintaining dividends and repurchases, and whether further financing is needed.
- Trends in BioGlue and preservation-services revenue, HeRO Graft adoption, and gross margins following the handpiece and tissue write-downs.