ICU Medical, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; compared with the same quarter of 2018. ICU Medical develops, manufactures and sells infusion therapy, IV solutions, infusion systems and critical-care products. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $330.9 | $372.0; down 11.1% |
| Gross profit / margin | $135.3 / 40.9% | $149.0 / 40.1% |
| Income from operations | $30.4 | $4.9 |
| Net income | $31.0 | $4.9 |
| Diluted earnings per share | $1.44 | $0.23 |
| Operating cash flow | $(21.0) | $(20.7) |
| Capital expenditures | $28.7 | $26.5 |
| Cash, cash equivalents and investments | $315.3 | $384.1 at Dec. 31, 2018 |
| Revolving credit facility | No borrowings; $150.0 available | Facility matures in 2022 |
Revenue declined across IV Solutions, Infusion Systems and Critical Care, partly offset by modest growth in Infusion Consumables. IV Solutions revenue fell 21.6% to $113.2 million, reflecting prior-year customer stock-up amid competitor supply shortages. Infusion Systems fell 9.7% to $84.3 million, primarily due to historical losses in the U.S. installed pump base and foreign-exchange effects. Critical Care fell 9.8% to $12.9 million, mainly from order timing. Infusion Consumables rose 0.5% to $120.6 million; management cited temporary oncology-product supply constraints. On a constant-currency basis, Infusion Consumables grew 3.2% and Infusion Systems declined 5.9%.
Gross margin improved 0.8 percentage points, which management attributed primarily to a higher Infusion Consumables share of sales and improved factory efficiencies. SG&A declined 14.6% to $72.6 million, including lower consulting, legal and compensation costs. Net income improved substantially, but comparisons were affected by the prior-year $28.9 million contract-settlement expense; 2019 included a $2.8 million contract-settlement expense and a $7.7 million favorable change in the fair value of the HIS earn-out liability. The 2019 tax provision was $2.4 million, with a 7% effective tax rate that included a $5.6 million discrete tax benefit from equity-award tax benefits and a $1.8 million provision related to earn-out remeasurement.
Liquidity, debt and cash flow
Cash and investments totaled $315.3 million at quarter-end, down $68.9 million from year-end 2018. Operating cash use was $21.0 million despite positive net income, principally reflecting a $49.5 million increase in receivables, a $34.8 million decrease in accrued liabilities and a $12.0 million increase in inventory. Cash used in investing was $10.5 million; financing cash use was $17.2 million, including $18.2 million of employee tax-withholding payments related to net share settlement of equity awards. The company reported no revolver borrowings and compliance with its financial covenants.
Outlook, risks and unusual items
- Management said existing cash and expected future operating cash flows should fund operations for at least the next 12 months. It estimated 2019 capital expenditures of $95–$105 million, primarily for manufacturing capacity, customer-placed infusion products and IT. The filing gives no specific revenue or earnings guidance.
- ICU Medical recorded $24.4 million of restructuring, strategic transaction and integration expenses in Q1, including a $12.7 million non-cash write-off tied to final Pfizer separation costs and clean-up. The company said HIS integration remained the primary source of transaction and integration costs.
- The HIS acquisition earn-out may require up to $225 million in cash based on performance through 2019; the recorded fair-value liability was $39.7 million at March 31. The final amount remains contingent on performance targets.
- A putative saline-solution antitrust class action added ICU Medical as a defendant; a motion to dismiss was pending. Pfizer and ICU Medical have reciprocal indemnification claims relating to the litigation. The Department of Justice antitrust investigation was closed in December 2018. Separately, the company was coordinating with Pfizer to respond to a DOJ subpoena concerning Sapphire infusion pumps and related products.
- The company entered an agreement to acquire certain assets from a distributor for approximately $8 million, with closing anticipated in Q2 2019. The filing does not state that the acquisition had closed by quarter-end.
- Adoption of the new lease standard on January 1, 2019 resulted in recognition of $40.4 million of operating lease right-of-use assets and lease liabilities at adoption. Quarter-end operating lease liabilities were $38.6 million; adoption had no material earnings impact and no cash-flow impact for the quarter.
- Key operating risks discussed include supply constraints, customer and distributor concentration or relationship changes, competition and price pressure, regulatory and product-quality matters, foreign-exchange exposure, litigation, and execution of integration and growth plans.
Important facts for investors to verify
- Whether lower IV Solutions and Infusion Systems revenue persists beyond the quarter, and whether oncology-product supply constraints ease.
- How much of the earnings improvement reflects recurring operating performance versus prior-year contract-settlement costs, the current-period earn-out remeasurement and discrete tax items.
- Whether working-capital requirements—especially receivables, inventory and accrued liabilities—continue to weigh on operating cash flow.
- Actual 2019 capital expenditures and the company’s ability to maintain liquidity while funding investment and any acquisition.
- Performance against HIS earn-out targets, potential cash payment, and status and potential financial exposure of the pending litigation and DOJ subpoena matters.