Business context and reporting period
This Form 10-Q is for CryoLife, Inc. and subsidiaries, for the quarter and nine months ended September 30, 2011. The filing does not identify the registrant as Artivion; investors should verify the company/issuer mapping. CryoLife preserves and distributes human tissue and sells medical devices, including BioGlue, PerClot and, following its May 2011 acquisition, Cardiogenesis revascularization products.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data. Interim results are unaudited.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $29.7 | $28.4 | $89.2 | $87.4 |
| Gross margin | $18.9 (63.8%) | $15.2 (53.5%) | $56.5 (63.3%) | $50.8 (58.1%) |
| Operating income (loss) | $2.5 | $(1.3) | $8.7 | $6.3 |
| Net income (loss) | $2.0 | $(3.0) | $5.5 | $1.8 |
| Diluted EPS | $0.07 | $(0.11) | $0.20 | $0.06 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $13.7 | $13.8 |
- Q3 revenue rose 4%; nine-month revenue rose 2%. Products increased 13% in Q3 and 6% year to date, while preservation-services revenue declined 3% and 1%, respectively.
- Q3 BioGlue and BioFoam revenue increased 10% to $12.2 million. Nine-month revenue increased 5% to $36.9 million, including $1.2 million of BioGlue sales to Japan.
- Cash and cash equivalents were $21.1 million at September 30, down from $35.5 million at December 31, 2010. Restricted securities were $5.3 million. Net working capital was $66.6 million and the current ratio was 4:1, versus $82.2 million and 5:1 at year-end.
- Nine-month investing cash outflow was $27.1 million, mainly reflecting $21.1 million net cash for Cardiogenesis, $3.6 million for the ValveXchange investment, and $2.0 million of capital expenditures. Financing cash outflow was $1.0 million, including $1.6 million of stock repurchases.
- No borrowings were outstanding under the GE Capital facility; $14.8 million was available at September 30. Total liabilities were $27.2 million. The facility was scheduled to expire October 31, 2011.
Material changes and unusual items
- Cardiogenesis was acquired in May for approximately $21.7 million in cash. Its revascularization products contributed $2.1 million of Q3 and $3.3 million of nine-month revenue. The company recorded $3.0 million of acquisition and integration costs during the first nine months; the preliminary purchase allocation included $4.6 million of goodwill and $11.9 million of intangible assets.
- General, administrative and marketing expense increased 29% in Q3 and 16% year to date, to $14.7 million and $42.7 million. Management attributed the increase to Cardiogenesis operations and business development costs, including $4.1 million of business development costs year to date.
- Gross margin improved partly because 2010 product costs included a $1.6 million HemoStase inventory write-down. The 2010 comparison also included a $3.5 million PerClot acquired in-process R&D charge and a $3.6 million Medafor investment impairment; neither charge recurred in 2011.
- PerClot revenue was $0.6 million in Q3 and $1.9 million year to date. HemoStase sales were discontinued in March 2011; PerClot is not approved for U.S. commercial distribution.
Outlook, risks and contingencies
- Management expected cardiac valve shipment pressure to continue into Q4, citing lower-cost competition and hospital cost containment. It also expected domestic BioGlue sales to remain pressured, while Cardiogenesis revascularization revenue was expected to benefit Q4 results. No specific full-year revenue or earnings guidance is provided.
- The FDA disapproved CryoLife’s PerClot IDE filing in April 2011. Management was addressing FDA comments and anticipated refiling in Q4. U.S. sales depend on regulatory approval; the filing describes contingent PerClot milestone payments and minimum purchase commitments.
- Management anticipated a new GE Capital credit agreement in Q4 but cautioned that renewal or replacement was not assured. It believed operating cash and existing cash would cover operational liquidity needs for at least 12 months, while identifying clinical trials, litigation, business development and possible ValveXchange lending as future cash needs.
- CryoLife reported ongoing Medafor litigation, including a denied motion for partial summary judgment and a separate Minnesota case whose outcome it could not predict. It expected the Georgia case to continue through discovery, with trial not expected before 2013. The acquired Cardiogenesis business was also involved in a patent lawsuit; trial was scheduled for May 2012, and the company could not predict the outcome.
- Estimated net unreported loss liability was $1.5 million; the gross liability could be as high as $4.3 million under actuarial estimates. The filing also lists $46.2 million in scheduled contractual obligations, primarily operating leases and purchase commitments.
- Other significant risks include BioGlue dependence and competition, tissue/product liability and regulatory exposure, reliance on donor tissue and suppliers, acquisition integration, and the ability to obtain PerClot approvals and future credit.
Important facts for investors to verify
- Confirm that this CryoLife filing is the intended filing for the Artivion request.
- Check whether the GE Capital facility was renewed or replaced after its October 31, 2011 expiration, and on what terms.
- Track PerClot IDE refiling, FDA progress, U.S. approval timing, and related purchase or milestone obligations.
- Review subsequent developments, potential liabilities and legal costs in the Medafor and CardioFocus cases.
- Assess the sustainability of gross-margin improvement given the prior-year inventory write-down, and monitor preservation-service trends, BioGlue competition and Cardiogenesis integration costs.