CryoLife, Inc. — Form 10-Q summary
Issuer note: The filing provided is for CryoLife, Inc., not Artivion, Inc. It covers the quarter and nine months ended September 30, 2012; financial statement amounts are in thousands except per-share data. Unaudited interim results are not necessarily indicative of full-year results.
Business context and results
CryoLife preserves and distributes human cardiac and vascular tissues and sells medical devices. In May 2012 it acquired Hemosphere, maker of the HeRO dialysis graft, adding that product to its portfolio.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $33.4 million | $29.7 million | $98.9 million | $89.2 million |
| Gross margin | $21.3 million (about 63.7%) | $18.9 million (about 63.8%) | $64.0 million (about 64.7%) | $56.5 million (about 63.3%) |
| Operating income | $2.9 million | $2.5 million | $10.4 million | $8.7 million |
| Net income | $1.5 million | $2.0 million | $5.9 million | $5.5 million |
| Diluted EPS | $0.06 | $0.07 | $0.21 | $0.19 |
| Cash from operations | Not separately presented for quarter | $11.0 million | $13.7 million |
Revenue increased 13% year over year in Q3 and 11% for the nine-month period. Q3 net income declined despite higher operating income, primarily as income tax expense rose to $1.1 million from $0.3 million; the effective tax rate was about 41% versus 12%. Nine-month net income increased modestly, with a 40% effective tax rate versus 36%.
For the nine months, preservation-services revenue was $48.4 million, up 7%; product revenue was $50.0 million, up 14%. Growth included cardiac tissue, BioGlue, and HeRO Graft sales. HeRO contributed $2.0 million after acquisition; revascularization revenue was $6.1 million. HemoStase sales had ceased, affecting the comparison.
Financial position, liquidity and capital allocation
- Cash and cash equivalents were $7.8 million at September 30, down from $21.7 million at year-end 2011. A further $5.0 million was restricted under the credit agreement. Current assets were $72.2 million and current liabilities $19.9 million; working capital was $52.3 million and the current ratio was 4:1.
- Operating cash flow was $11.0 million; investing used $21.0 million, principally the $17.0 million net cash purchase of Hemosphere; financing used $3.9 million, including $3.5 million of repurchases and $0.7 million of dividends. Cash decreased $13.9 million over the period.
- No borrowings were outstanding under the $20.0 million GE Capital revolving facility; reported availability was $19.8 million. The facility expires October 2014, is secured by substantially all company assets, and has financial covenants. CryoLife reported covenant compliance.
- The company began a quarterly dividend of $0.025 per share and said it anticipated quarterly payments, while noting future dividends could change or be discontinued. It had $10.3 million remaining under share-repurchase authorizations.
Material changes, outlook and risks
- Management reported record quarterly revenue for the fourth consecutive quarter and expected full-year 2012 preservation-services revenue to exceed 2011. It believed Q4 revascularization revenue could increase from Q3, but cautioned that this was not assured.
- The Hemosphere acquisition had an approximately $22.0 million purchase price, including $17.0 million cash paid net of acquired cash and estimated contingent consideration. The contingent liability was $1.9 million at quarter-end; up to $4.5 million may be payable through 2015 against milestones. Acquisition and integration costs were about $1.7 million for the nine months.
- Q3 included a $0.34 million other-than-temporary impairment of the ValveXchange investment. CryoLife had advanced $1.0 million to ValveXchange by quarter-end and advanced a further $1.0 million in October 2012.
- Legal settlements affected the nine-month comparison: CryoLife paid $4.5 million to settle CardioFocus litigation and recorded $4.1 million of settlement expense; it received $3.5 million from Medafor and recorded a $4.7 million gain, as well as eliminating a $1.2 million payable. The settlements were completed in Q2; the filing reports the Medafor cash receipt in Q3. Insurance reimbursements included $3.1 million received in the nine months and another $0.9 million in October.
- Management expected higher 2012 selling and administrative costs from the expanded sales force and Hemosphere operations, and higher 2013 costs including the U.S. medical-device excise tax. It also expected 2012 R&D spending to exceed 2011, partly due to planned PerClot clinical studies.
- PerClot was not approved for U.S. sale. After FDA feedback on its IDE, the company planned to submit a revised application in Q4 2012 and expected FDA approval in 2015; timing and approval are uncertain. Medafor asserted that U.S. PerClot use would infringe its patent; CryoLife disagreed and warned of possible litigation.
- On October 16, 2012, the FDA issued a Form 483 with observations concerning tissue processing and medical-device manufacturing. Management believed it could address them, but warned that required actions or further FDA enforcement could affect product availability, costs, demand, and results.
- Other risks include competition and declining domestic BioGlue demand, foreign-exchange exposure, economic pressure on hospital budgets, dependence on donor tissue and suppliers, acquisition integration, product liability, and regulatory approval risk. The company estimated net unreported tissue/product loss liability of $1.2 million, with a possible estimate as high as $3.5 million including a statistical margin.
Important facts for investors to verify
- Confirm the issuer and reporting entity: this supplied filing identifies CryoLife, Inc., despite the request metadata naming Artivion.
- Track whether revenue growth converts into cash: nine-month operating cash flow fell from $13.7 million to $11.0 million while cash declined to $7.8 million.
- Assess the sustainability of earnings apart from settlement gains and expenses, acquisition costs, tax-rate fluctuations, and the ValveXchange impairment.
- Monitor FDA follow-up to the Form 483, PerClot IDE progress and patent exposure, and HeRO Graft sales and milestone liabilities.
- Review credit-facility covenants and restricted cash, as well as the company’s capacity to fund dividends, repurchases, R&D, and further acquisitions.