Business context and reporting period
Filing identity: The supplied filing is CryoLife, Inc.’s Form 10-K for the fiscal year ended December 31, 2011, not a filing under the name Artivion, Inc. (the company’s later name). It was signed February 17, 2012. CryoLife preserves human cardiac and vascular tissue and sells surgical sealants, hemostats, and revascularization devices. In May 2011 it acquired Cardiogenesis, adding transmyocardial revascularization products.
Financial performance and liquidity
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $119.6 million | $116.6 million |
| Gross profit / margin | $75.8 million / 63.4% | $68.4 million / 58.6% |
| Operating income / margin | $11.6 million / 9.7% | $9.9 million / 8.5% |
| Net income | $7.4 million | $3.9 million |
| Diluted earnings per share | $0.26 | $0.14 |
| Cash from operations | $16.8 million | $20.8 million |
Revenue rose 3%. Product revenue increased 5% to $59.4 million, while preservation-services revenue was essentially flat at $59.8 million. BioGlue and BioFoam generated $49.5 million, about 41% of revenue. Cardiogenesis contributed $5.7 million from its acquisition date. The gross-margin improvement reflected lower unit preservation costs and lower product costs; operating expenses rose, including acquisition and business-development costs.
Fourth-quarter revenue was a record $30.4 million, up 4% year over year, and gross profit was $19.4 million versus $17.6 million. Fourth-quarter net income was $1.9 million, down from $2.1 million.
At year-end, cash and cash equivalents were $21.7 million, with $5.3 million in restricted securities; working capital was $62.4 million and the current ratio 4:1. The $20 million GE Capital revolving facility had no borrowings and $19.8 million available. Total liabilities were $26.3 million; the filing does not identify a material drawn term-debt balance. Operating cash flow declined to $16.8 million. Investing used $27.7 million, principally for the $21.1 million net Cardiogenesis acquisition payment, $3.6 million ValveXchange investment, and $2.5 million capital spending.
Material changes, outlook, and risks
- Cardiac preservation revenue fell 5% for the year, largely from fewer valve shipments amid lower-cost competition and hospital cost controls. Vascular preservation revenue increased 5%, led by demand for saphenous-vein tissues.
- BioGlue and BioFoam revenue rose 4%; Japanese BioGlue sales contributed $2.0 million after approval for aortic-dissection repair. Management cited competitive pressure and constrained hospital budgets in the U.S. and weak European conditions.
- HemoStase sales ended in March 2011 after Medafor terminated its distribution agreement. PerClot, distributed internationally, generated $2.5 million but lacked U.S. approval; the FDA rejected its initial IDE submission. Management planned to refile in early 2012 and estimated U.S. approval no earlier than 2013–14, with $5–6 million of approval spending expected over several years, mostly in 2012.
- Management expected significantly higher 2012 general, administrative, and marketing expenses, particularly from Medafor litigation. Litigation costs were $2.3 million in 2011; the company expected 2012 and 2013 costs to be significantly higher. No formal consolidated revenue or earnings guidance is provided.
- Unusual operating item: $674,000 of 2011 processing costs were expensed after tissue-processing solution failed quality requirements. The 2010 comparison included $3.5 million of acquired PerClot in-process R&D expense, a $3.6 million Medafor investment impairment, and a $1.6 million HemoStase inventory write-down.
- Key exposures include Medafor litigation and counterclaims; a CardioFocus patent case against Cardiogenesis, with trial scheduled for June 2012; German BioGlue patent challenges; BioGlue patent expirations in mid-2012 in the U.S. and mid-2013 elsewhere; product-liability exposure; reliance on donor tissue and single-source suppliers; and regulatory, competitive, foreign-exchange, and hospital-spending risks. The 2.3% U.S. medical-device excise tax was scheduled to begin after 2012; management estimated a hypothetical 2011 impact of about $1.1 million.
Management said cash from operations and existing cash were expected to cover operational liquidity needs for at least 12 months. A $5 million minimum cash covenant, a $20 million liquidity requirement after stock repurchases, and other credit covenants constrain available capital. The company also committed up to $2 million of revolving financing to ValveXchange.
Most important facts for investors to verify
- Whether the legal disputes, particularly Medafor and CardioFocus, result in significant expense, damages, or other obligations.
- PerClot IDE resubmission, U.S. clinical and approval timing, required investment, and ability to replace lost HemoStase sales.
- Whether core BioGlue sales and cardiac tissue shipments stabilize despite competition, patent expiry, and hospital cost controls.
- Cash conversion and liquidity after acquisition spending, repurchases, litigation costs, and planned development investment; confirm restricted cash and covenant headroom.
- Impact of the processing-solution quality issue and any further tissue-quality, product-liability, or regulatory developments.