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# CryoLife Inc. Message Board

• dlhild@ymail.com dlhild Nov 5, 2012 1:48 PM Flag

## Does the TISSUE COST CENTER Operate at a Loss?

Suggested Conference Call Question #1: Does the combined cardiac and vascular tissue cost center, which composes roughly 50% of total sales, operate at an operating loss?

During CY2011, tissue sales were \$59,793,000. COGS was \$34,340,000. This resulted in a gross profit of \$25,453,000. If operating expenses are then allocated to each cost center, using a pro-rata based upon total revenue allocation calculation, \$32,089,766 in operating expenses gets allocated to the tissue cost center. Subtract \$32,089,766 from \$25,453,000 and you get a tissue cost center operating loss of negative \$6,636,766. If you credit back taxes using a 40% tax rate, the after tax tissue cost center operating loss drops to negative \$3,982,060. The math certainly makes it appear that the tissue cost center does operate at an operating loss.

The question again: “Does the combined cardiac and vascular tissue cost center operate at an operating loss”? Yes/No. Explain. Do your own due diligence.

In answer to the above question, CRY's response was a resounding non response. Not a peep.

SA (a/k/a "THE KING" for purposes of this post) is CRY's Chairman of the Board, CEO, and President. So you would think THE KING would know whether the tissue cost center had an operating loss last year. But what happened? Not a peep from THE KING. So one has to conclude that THE KING may not know anything about profitability in this 49% of sales cost center. That’s OK, because THE KING can’t know everything. Also, he’s 73 and just signed a new 3 year employment contract.

Let's check the numbers for Q3 2012, just to see what might have happened at this cost center during Q3 2012. After all, we want to determine whether anything may have changed. So here we go. Q3 2012 tissue sales were \$16,399,000 (\$8,239,000 cardiac tissue plus \$8,160,000 vascular tissue). Hence, the tissue cost center represented 49% of total sales (total tissue sales of \$16,399,000 divided by total sales \$33,429,000). So total tissue sales were \$16,399,000 less tissue COGS of \$9,005,000 resulting in a gross margin for the tissue cost center (a/k/a/ preservation services) of \$7,394,000. Total operating expenses were \$18,362,000. If we allocate 49% of total operating expenses (prorate allocation method) to the tissue cost center, we end up subtracting \$8,997,000 in operating expenses from the \$7,394,000 in tissue gross margin, which results in a net operating loss of . It’s possible I suppose that this is THE KING'S logic. THE KING intends this cost center to lose money on every dollar of sales, and they he intends to make it up in volume. Not the way I was taught accounting, but THE KING is from an earlier era, and he may have been taught differently. Another possible problem with tissue products is that it might have a massive liability tail (witness Bryan Lykin’s death, Google “Cryolife Lykins” and you will get hits).

So KING, KING, KING, OH MASTER, SIR, please explain to your concerned loyal common shareholder subjects the error of our accounting error ways. Please provide us with reassurance, so that we do not have to worry about the welfare of the CRYOLIFE KINGDOM.

Do your own analysis to make sure the numbers presented above were correctly calculated.

This is just this poster's point of view. Do your own due diligence.

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• "In answer to the above question, CRY's response was a resounding non response."

Why are you writing that. I'm not aware of the question about possible tissue processing losses ever being asked.

Sentiment: Hold

• dlhild@ymail.com dlhild Nov 7, 2012 10:16 PM Flag

rroach76, I have discussed the poor margins and likely unprofitability of the Preservation Services (Cardiac and Tissue) cost center several times in the past. You must have me on ignore! Don't you find it quite amazing though that almost half of the sales are in a cost center that appears to operate at an operating loss, not operating income mind you, but at an actual operating loss? I have put forth specific number on this from CRY’s financial statements several times. I did this because if my analysis was somehow flawed, then someone could explain to me the error of my accounting ways. So far nobody has challenged my analysis though. IMO, if the analysts here were any good, instead of being in cahoots with SA, they would ask this question. SA so far doesn't want to touch this subject, because it shows how bad he is at managing the profitability of the company. My own guess as to why SA keeps running the Preservation Services cost center is because it is his baby going back to the beginning of the company, and he just can’t give up on it. IMO this is a typical flaw of an entrepreneur. IMO SA was just never able to make the jump from a privately run corporation to a publicly traded one. Also, IMO I suspect he still has the mentality of someone that owns the entire company, and still thinks he can run it that way. IMO this type of environment may lend itself to pettiness, and may not lend itself to an efficiently run entity. This is all guess work on my part. I know of no way to test my premise.

One of my recent posts on this subject is set forth below.

Conference Call Question #1 - TISSUE:
By dlhild.Oct 23, 2012 11:39 AM.Permalink

Does the combined cardiac and vascular tissue cost center, which composes roughly 50% of total sales, operate at an operating loss?

During CY2011, tissue sales were \$59,793,000. COGS was \$34,340,000. This resulted in a gross profit of \$25,453,000. If operating expenses are then allocated to each cost center, using a pro-rata based upon total revenue allocation calculation, \$32,089,766 in operating expenses gets allocated to the tissue cost center. Subtract \$32,089,766 from \$25,453,000 and you get a tissue cost center operating loss of negative \$6,636,766. If you credit back taxes using a 40% tax rate, the after tax tissue cost center operating loss drops to negative \$3,982,060. The math certainly makes it appear that the tissue cost center does operate at an operating loss.

The question again: “Does the combined cardiac and vascular tissue cost center operate at an operating loss”? Yes/No. Explain. Do your own due diligence.

• dlhild@ymail.com dlhild Nov 5, 2012 1:52 PM Flag

Let's check the numbers for Q3 2012, just to see what might have happened at this cost center during Q3 2012. After all, we want to determine whether anything may have changed. So here we go. Q3 2012 tissue sales were \$16,399,000 (\$8,239,000 cardiac tissue plus \$8,160,000 vascular tissue). Hence, the tissue cost center represented 49% of total sales (total tissue sales of \$16,399,000 divided by total sales \$33,429,000). So total tissue sales were \$16,399,000 less tissue COGS of \$9,005,000 resulting in a gross margin for the tissue cost center (a/k/a/ preservation services) of \$7,394,000. Total operating expenses were \$18,362,000. If we allocate 49% of total operating expenses (prorate allocation method) to the tissue cost center, we end up subtracting \$8,997,000 in operating expenses from the \$7,394,000 in tissue gross margin, which results in a net operating loss of -\$1,603,000.

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