CryoLife, Inc. (now Artivion, Inc.) — FY2017 Form 10-K
Business context and reporting period
The filing covers the fiscal year ended December 31, 2017, including the fourth quarter. CryoLife develops and sells medical devices and preserves human cardiac and vascular tissues for surgery. It reports Medical Devices and Preservation Services segments. On December 1, 2017, it acquired German endovascular and surgical products company JOTEC; 2017 results include only one month of JOTEC operations.
Financial performance and condition
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $189.7 million | $180.4 million |
| Gross margin | $128.6 million; 68% | $118.9 million; 66% |
| Operating income | $8.0 million | $21.8 million |
| Net income | $3.7 million | $10.8 million |
| Diluted EPS | $0.11 | $0.32 |
| Operating cash flow | $10.8 million | $19.7 million |
Revenue rose 5%. Product revenue was $119.6 million (up 5%), while preservation services revenue was $70.1 million (up 6%). Key product revenues included BioGlue/BioFoam of $65.9 million, On-X of $37.0 million, and JOTEC of $4.1 million. Fourth-quarter revenue increased 17% to $52.8 million, but the quarter posted a $3.0 million net loss versus $2.9 million net income a year earlier. Full-year operating income and earnings were affected by higher operating and interest expenses; FY2016 also included a $7.9 million net gain from divestitures. FY2017 interest expense was $4.9 million, compared with $3.0 million.
At year-end, cash and cash equivalents were $40.0 million, working capital was $136.3 million, and the current ratio was 4:1. Gross debt was approximately $229.0 million, before $10.0 million of unamortized loan costs; the balance-sheet debt carrying amount was $219.0 million. The company had a $225 million secured term loan and an undrawn $30 million revolving facility. The term loan’s stated rate was 5.36% at year-end and it matures in 2024. Total assets were $589.7 million and shareholders’ equity was $277.1 million.
Material changes versus the prior comparable period
- Revenue growth reflected higher BioGlue, On-X, and preservation services sales, foreign exchange benefits, and the December JOTEC contribution. JOTEC reported $4.1 million revenue and a $1.5 million net loss from acquisition through year-end.
- Gross margin improved to 68% from 66%, supported by lower unit tissue-processing costs and product mix; acquisition inventory step-up costs partly offset the improvement.
- Operating income fell to $8.0 million from $21.8 million, and net income fell to $3.7 million from $10.8 million. General, administrative, and marketing expense rose 11% to $101.2 million, while R&D increased 45% to $19.5 million.
- Operating cash flow declined to $10.8 million, with increases in receivables, inventories, and deferred preservation costs weighing on cash conversion.
- Cash debt and leverage increased substantially to fund JOTEC. The acquisition was financed with cash, 2.68 million newly issued shares valued at $53.1 million, and term debt.
Outlook, commentary, risks, contingencies, and unusual items
- Management said cash, operating cash flow, and available resources were expected to meet operational liquidity needs for at least 12 months. It warned that debt service, trials, R&D, working capital, capital spending, and potential acquisitions could materially affect cash needs; additional financing may be sought.
- Management anticipated JOTEC could achieve double-digit product growth over the next five years as the enlarged sales force gains experience. This is a qualitative expectation, not formal financial guidance, and depends on integration, market growth, cross-selling, and regulatory progress.
- The PerClot U.S. pivotal trial was ongoing. Assuming enrollment proceeded as expected, the company said FDA premarket approval might be received in the second half of 2019. Approval and commercialization were not assured. A third party’s PerClot CE Mark was due to expire in the second quarter of 2018, creating a distribution risk if not renewed.
- The On-X ascending aortic prosthesis CE Mark remained suspended in Europe; the company was pursuing another certification pathway and targeted a possible return to that market in Q3 2018. It recorded inventory write-downs, primarily related to the product, amid the certification delay.
- The FDA had not proposed reclassifying CryoValve SGPV, but a future Class III classification could require a PMA and make continued processing commercially infeasible.
- BioGlue accounted for 35% of revenue and tissue preservation services for 37%, leaving results exposed to product competition, tissue supply and yields, regulatory change, and procedure demand. PerClot, BioGlue, On-X, and JOTEC each also face product-specific regulatory or competitive risks.
- The JOTEC acquisition’s preliminary allocation included $110.1 million of goodwill; total goodwill reached $188.3 million. The purchase accounting remained subject to refinement, with potential future amortization, impairment, or other adjustments.
- The company reported an ongoing dispute with the former On-X shareholders concerning indemnification claims and approximately $10 million held in escrow. The outcome is uncertain. Tax Act accounting was provisional; management noted possible material effects on future effective tax rates.
- No dividends were paid in 2017; the credit agreement restricts dividends and includes operating and financial covenants. Substantially all U.S. assets secure the debt. The company reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether JOTEC integration delivers sustained growth, margin improvement, and cross-selling sufficient to justify the acquisition price and debt burden.
- Debt balances, variable interest costs, covenant headroom, required repayments, and cash generation relative to scheduled obligations.
- Progress and outcomes for the PerClot U.S. trial and CE Mark renewal, On-X AAP European certification, and any FDA action on CryoValve SGPV.
- Organic growth by product and segment, distinguishing acquisition, currency, pricing, and volume effects.
- Final JOTEC purchase-price allocation, acquired intangible amortization, goodwill recoverability, and integration costs.
- Status and potential recovery of the On-X escrow and indemnification litigation, and final accounting for tax reform and uncertain tax positions.