ICU Medical, Inc. — Q2 2011 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2011. ICU Medical develops, manufactures and sells medical technologies for I.V. therapy, oncology and critical care. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless stated otherwise.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Total revenue | $77.8 million | $68.9 million | $149.3 million | $133.2 million |
| Gross profit / margin | $36.2 million / 47% | $32.1 million / 47% | $70.8 million / 47% | $59.1 million / 44% |
| Operating income | $14.0 million | $11.8 million | $26.2 million | $18.2 million |
| Net income | $9.5 million | $7.7 million | $17.6 million | $12.0 million |
| Diluted EPS | $0.67 | $0.56 | $1.24 | $0.86 |
- Q2 revenue rose about 13% and net income about 23% year over year. First-half revenue increased about 12% and net income about 47%; the first-half comparison includes a $2.5 million legal-settlement credit in 2011.
- First-half operating income also benefited from the $2.5 million credit. Expenses included a $2.0 million one-time Long Term Retention Plan charge in SG&A, higher sales and marketing costs, and increased R&D spending.
- Q2 gross margin was unchanged year over year. For the first half, improved product mix more than offset Slovakia plant start-up costs, higher freight and higher raw-material costs.
- Operating cash flow was $25.5 million in the first half, versus $17.5 million in the comparable 2010 period. Investing cash use was $26.3 million, including $9.8 million in property and equipment purchases and net investment-security purchases. Financing provided $8.2 million, primarily from employee stock transactions.
Balance sheet and liquidity
- At June 30, 2011, cash and cash equivalents were $87.4 million; investment securities were $33.4 million; combined cash, cash equivalents and securities were $120.8 million, up from $93.4 million at year-end 2010.
- Current assets were $238.9 million and current liabilities $26.8 million. Total stockholders’ equity was $307.1 million. The balance sheet presents no borrowings or other debt.
- Management said existing cash, investments and expected operating cash generation should fund current operations for at least the next 12 months. Estimated 2011 capital expenditures were $16–$19 million.
- Inventory increased to $49.4 million from $44.1 million at year-end; net accounts receivable declined to $51.8 million from $55.1 million.
Material changes and operating trends
- Q2 international sales excluding Canada increased 42%, while domestic distributor/direct sales rose 4% and U.S. sales to Hospira rose 5%. First-half increases were 25%, 7% and 10%, respectively.
- First-half product sales grew for CLAVE (9%), custom products (10%), standard oncology (130%) and TEGO (117%). Standard critical care sales declined 3% in the first half amid increased competition.
- Product mix shifted toward oncology: standard oncology represented 6% of first-half revenue versus 3% in 2010; critical care represented 22% versus 25%. I.V. therapy remained 64% of revenue.
- The assembly transition from the Italy facility to the Slovakia plant was completed in March 2011. The company recorded $0.6 million in termination costs in the first half, with $0.3 million accrued at June 30.
Outlook, risks and unusual items
- Management estimated 2011 gross margin of 47%–47.5%, SG&A of 27.5%–28% of revenue, R&D of about 3% of revenue, an effective tax rate of about 35%, and capital expenditures of $16–$19 million. These are estimates, not guarantees.
- Management expected modest growth in Hospira, CLAVE, custom-product and international sales; moderately lower standard critical care sales; higher standard oncology sales; and significant TEGO growth. Each outlook statement was qualified by uncertainty.
- Hospira accounted for 41% of first-half revenue and 32% of accounts receivable at June 30. The company cautioned that a deterioration in the relationship or Hospira’s market position could adversely affect results.
- Other risks include aggressive critical-care pricing and customer losses, potential increased competition in CLAVE, dependence on a small number of customers and purchasing relationships, product-development and market-acceptance uncertainty, manufacturing and raw-material costs, and unhedged foreign-currency exposure.
- The company received $2.5 million under a settlement with a former law firm, recorded as a credit to operating expenses. Patent litigation with RyMed remained subject to post-trial motions and requests for retrial; management said routine proceedings were not expected to have a material adverse effect.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its 2010 Form 10-K.
Key facts for investors to verify
- Whether revenue and product growth—especially oncology and TEGO—continues, and whether critical-care price competition worsens.
- Hospira’s continuing share of revenue and receivables, and any change in the commercial relationship or ordering patterns.
- Whether forecast gross margins and expense ratios are achieved as Slovakia operations mature and manufacturing costs change.
- Cash conversion, inventory growth, planned capital spending, and the liquidity and value of the investment-security portfolio.
- Developments in the RyMed litigation and any resulting financial or operating consequences.