Business context and reporting period
CryoLife, Inc. filed this Form 10-K for the fiscal year ended December 31, 2012. The company preserves human cardiac and vascular tissue and sells surgical sealants, hemostats, revascularization devices, and the HeRO dialysis graft. This summary reflects the filing’s identification of the registrant as CryoLife, Inc.; the supplied filing does not identify it as Artivion.
2012 included the May acquisition of Hemosphere, which added the HeRO Graft business. Cardiogenesis, acquired in 2011, contributed a full year of revascularization technology revenue.
Financial performance and position
Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Revenue | $131.7 | $119.6 | +10% |
| Gross margin | $85.0; 65% of revenue | $75.8; 63% | +12% |
| Operating income | $12.6 | $11.6 | +8% |
| Income before tax | $12.1 | $11.5 | +5% |
| Net income | $7.9 | $7.4 | +8% |
| Diluted earnings per share | $0.28 | $0.26 | +$0.02 |
| Cash from operations | $19.0 | $16.8 | +$2.2 |
- Product revenue rose 14% to $67.5 million; preservation services revenue increased 6% to $63.6 million. BioGlue and BioFoam generated $53.2 million, about 41% of total revenue. Cardiac preservation revenue grew 12%; vascular preservation revenue grew 2%.
- At year-end, cash and cash equivalents were $13.0 million, restricted cash and securities totaled $5.3 million, working capital was $56.1 million, and the current ratio was 4:1. Working capital declined from $62.4 million a year earlier.
- No borrowings were outstanding under the $20 million revolving credit facility at year-end; the full $20 million was available, subject to agreement terms. The facility expires October 2014 and requires $5 million of restricted cash and compliance with financial covenants.
- Total assets were $157.2 million, total liabilities $29.0 million, and shareholders’ equity $128.1 million. The filing reports long-term liabilities of $7.6 million.
- Operating cash funded, among other items, the $17.0 million net cash acquisition of Hemosphere, $3.1 million of capital expenditures, $2.0 million advanced to ValveXchange, $3.5 million of stock repurchases, and $1.4 million of dividends. Cash and cash equivalents fell from $21.7 million to $13.0 million.
Fourth-quarter performance
Fourth-quarter revenue was $32.8 million, up 8% from $30.4 million in 2011. Gross margin was $21.0 million, or 64% of revenue, versus $19.4 million and 64%. Net income was $2.1 million versus $1.9 million; diluted EPS was $0.07 in both periods. Fourth-quarter operating expenses rose, while lower tax expense supported net income growth.
Material changes and unusual items
- Revenue growth included $3.1 million of HeRO Graft sales following the May 2012 acquisition of Hemosphere. BioGlue revenue increased 8% for the year, aided by international sales, including $4.1 million to Japan; domestic BioGlue volume declined.
- Medical-device mix helped lift the annual gross margin rate to 65% from 63%. General, administrative, and marketing expense rose 14% to $65.1 million, reflecting acquisition-related costs, expanded sales and marketing, and legal expenses.
- 2012 results included a $4.7 million gain from the Medafor settlement and $4.1 million of CardioFocus settlement expense. CryoLife received $3.5 million from Medafor and paid $4.5 million to CardioFocus; both disputes were settled.
- The company recorded a $340,000 impairment of its ValveXchange preferred-stock investment. At year-end it carried that investment at $3.2 million and had a separate $2.0 million loan receivable; management noted both could be impaired or uncollectible.
- Research and development expense was $7.3 million, up 5%. Management expected R&D spending to increase materially in 2013, primarily for PerClot clinical studies. No consolidated revenue or earnings guidance was provided in the supplied filing text.
Outlook, risks, and contingencies
- FDA quality matter: In January 2013, after a routine inspection, the FDA issued a warning letter concerning tissue processing, preservation, distribution, and medical-device manufacturing. FDA concerns included complaint investigations, management review, staff training, disinfectant controls, and environmental monitoring. Management intended to respond and did not expect a material effect, but acknowledged possible impacts on product availability, costs, and financial results, as well as potential regulatory enforcement.
- PerClot: U.S. commercialization depends on FDA approval. The FDA had raised questions about the revised IDE filing, and the company expected to respond in Q1 2013. Management estimated U.S. approval could be targeted for 2015 and anticipated spending $5–$6 million over several years, largely in 2013–2014. Medafor asserted that U.S. use of PerClot would infringe its patent; CryoLife disputed the assertion and anticipated possible litigation.
- Other development plans: Management anticipated launching the FDA-cleared PEARL 8.0 handpiece in 2013, pursuing a European HeRO Graft launch after expected CE Mark approval, and conducting a European BioFoam post-market study. The U.S. BioFoam IDE study was discontinued after enrollment proved difficult; unspent DOD funds were to be returned. FDA comments on the CryoValve SGAV humanitarian-device application remained unresolved.
- Costs and commercial pressures: The 2.3% U.S. medical-device excise tax took effect January 1, 2013; management expected it to affect most domestic medical-device sales and SynerGraft-processed tissues and did not expect to pass it on to customers. The filing also cites hospital budget constraints, competition, foreign-exchange exposure, and reliance on donated tissue and single-source suppliers.
- Capital allocation and commitments: The company initiated a quarterly dividend of $0.025 per share in 2012 and anticipated continuing it, subject to cash needs and credit-agreement restrictions. A February 2013 authorization allowed up to $15 million of share repurchases through October 2014. Contractual obligations totaled $40.8 million, including $26.6 million in operating leases, $5.8 million in purchase commitments, and $4.5 million in contingent payments; some additional contingent amounts were not included because timing could not be estimated.
Important facts for investors to verify
- Whether the FDA warning-letter observations were satisfactorily resolved, and whether any follow-up action affected tissue or device production, availability, or costs.
- PerClot IDE progress, likely approval timing and costs, commercial prospects, and the outcome or exposure from the Medafor patent dispute.
- Underlying growth and margins by product, particularly domestic BioGlue trends, HeRO Graft performance, and the effect of acquisition-related revenue and costs.
- Liquidity after acquisition spending, dividends, repurchases, and planned R&D; covenant compliance and the October 2014 credit-facility expiry.
- Recoverability of the ValveXchange investment and loan, and the assumptions supporting deferred preservation costs, acquired intangible assets, and contingent-payment estimates.