ICU Medical, Inc. — Q3 2009 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2009. ICU Medical develops, manufactures and sells disposable medical devices, including needleless connectors, custom infusion sets and critical-care products. Results are unaudited; dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Total revenue | $54.0 | $54.7 | $161.7 | $148.0 |
| Gross profit / margin | $25.0 / 46% | $24.9 / 46% | $77.4 / 48% | $63.5 / 43% |
| Operating income / margin | $7.6 / 14% | $10.5 / 19% | $27.0 / 17% | $18.8 / 13% |
| Net income | $6.3 | $7.6 | $19.1 | $15.3 |
| Diluted EPS | $0.42 | $0.52 | $1.27 | $1.06 |
- Q3 revenue declined about 1%; net income declined about 17%. SG&A rose to $16.8 million, or 31% of revenue, from $13.6 million, or 25%; cited drivers included legal expense, compensation and sales-force additions.
- Nine-month revenue increased about 9%, gross profit about 22%, operating income about 43%, and net income about 25%. Gross-margin improvement reflected favorable exchange rates, product mix and Mexico manufacturing efficiencies.
- Operating cash flow was $38.5 million for the nine months, versus $21.3 million in 2008. Investing cash use was $43.5 million, including the Hospira asset purchase and $10.2 million of capital spending; financing provided $2.2 million.
- At September 30, cash and equivalents were $53.3 million and investment securities were $70.1 million, for combined cash, equivalents and investments of $123.4 million, versus $111.8 million at year-end 2008. Current assets were $210.7 million and current liabilities $23.5 million. The filing reports no borrowings or interest-bearing debt on the balance sheet.
- Inventory rose to $44.9 million from $17.9 million, including $18.9 million of Hospira critical-care finished goods. Accounts receivable was $32.4 million, down from $38.4 million.
Material changes and unusual items
- On August 31, ICU Medical completed a $30.5 million cash purchase of Hospira’s critical-care product-line commercial rights and physical assets. ICU assumed sales, marketing, contracting and distribution; Hospira provides transitional distribution and light manufacturing for up to 18 months. Certain ICU research-funding and sales-support obligations under the prior agreement ended.
- Critical-care sales to Hospira between signing the agreement on July 8 and closing were not recognized as revenue. The related $1.9 million gross profit was deferred until the inventory is sold to end customers.
- Hospira represented 45% of Q3 revenue and 60% of nine-month revenue, down from 71% and 68%, respectively, in the comparable 2008 periods. It accounted for 47% of receivables at quarter-end.
- Alaris litigation resulted in a $5.5 million payment, including fees, costs and interest, during Q2 2009. The Medegen case was dismissed by agreement in Q3. ICU’s patent suit against RyMed remained pending, with trial scheduled for January 2010; a separate RyMed trademark and unfair-competition judgment was entered for ICU in October.
- October subsequent events: the board increased the share-repurchase authorization from $40 million to $55 million; $6.4 million had been purchased through September. The company stated it could repurchase approximately $43.5 million more, subject to market and business conditions.
Outlook, commentary and risks
- Management estimated 2009 gross margin of 46%–47%, SG&A of approximately 29%–30% of revenue, R&D of 1%–2% of revenue and an effective tax rate of approximately 34% before discrete items. These are estimates, not guarantees.
- Management expected modest 2009 growth in CLAVE, increased domestic and international distributor sales following the critical-care acquisition, and continued growth in custom infusion and oncology products. It expected the critical-care transition to be completed before the full 18-month service period, but warned delays or disruptions could diminish expected benefits.
- Management said the economic environment had not meaningfully affected reported results through Q3, though some customers sought lower inventory levels. It believed available cash, investments and expected operating cash flow would fund operations for at least 12 months.
- Key risks include Hospira dependence and customer concentration; successfully transitioning and selling the acquired critical-care line; competition, pricing pressure and patent litigation; execution and cost risks for the Slovakia plant, expected to operate in the second half of 2010; Mexico labor, security and cross-border risks; and investment-security liquidity and foreign-exchange exposure.
- Of the $70.1 million investment portfolio, $0.9 million was an auction-rate security classified as Level 3 due to limited market liquidity. ICU disclosed an agreement allowing it to require UBS to purchase that security at par plus accrued interest. No material change in disclosure controls was reported.
Important facts for investors to verify
- Whether ICU can successfully transition, market and sell the Hospira critical-care line, and realize the forecast sales and margin benefits.
- Whether Hospira concentration and inventory decisions continue to affect sales, receivables and ordering patterns.
- Whether inventory levels, including acquired critical-care stock and the related repurchase provision of up to $6 million, convert to sales as expected.
- Progress, total cost, permits and timing for the Slovakia plant and the associated capital-spending plan; estimated 2009 capital expenditures were $19 million.
- Developments in the RyMed patent case, other litigation costs and the company’s patent position.
- Liquidity and valuation of investments, particularly the auction-rate security, and execution of any further repurchases under the expanded authorization.