ICU Medical, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited. ICU Medical develops and sells medical devices for infusion therapy, critical care and oncology. It operates as one business segment.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $82.8 million | $81.4 million | $235.8 million | $234.2 million |
| Gross profit / margin | $41.0 million / 49% | $40.7 million / 50% | $115.8 million / 49% | $114.7 million / 49% |
| Operating income | $15.4 million | $17.5 million | $38.4 million | $42.5 million |
| Net income | $11.0 million | $12.2 million | $27.1 million | $28.9 million |
| Diluted EPS | $0.72 | $0.82 | $1.79 | $1.98 |
| Operating cash flow | — | $42.2 million | $40.9 million |
Revenue increased about 2% in Q3 and 1% year to date, while net income declined about 9% and 6%, respectively. Q3 operating income fell about 12%; higher SG&A was a key pressure. The quarter’s gross margin declined one percentage point year over year; the nine-month margin was unchanged.
Liquidity and capital resources
At September 30, cash and cash equivalents were $188.0 million and investment securities were $72.8 million, totaling $260.8 million, up $34.7 million from year-end 2012. Current assets were $363.8 million and current liabilities $27.1 million. The balance sheet lists no borrowings or debt. Nine-month investing cash use was $11.3 million, including $15.2 million of property and equipment purchases; financing provided $9.0 million.
Management said existing cash, investments and expected operating cash generation should fund operations for at least the next 12 months. Estimated 2013 capital expenditures were $20–$24 million, including manufacturing capacity and facility improvements.
Material changes, outlook and risks
- Customer concentration: Hospira represented 40% of revenue in both the third quarter and first nine months of 2013. It accounted for 39% of accounts receivable at quarter-end. Lower Hospira infusion shipments, including planned Clave reductions and inventory management, weighed on domestic sales.
- Product and regional trends: Nine-month oncology revenue rose 31% to $27.4 million and international sales increased 12% to $66.5 million. Critical care revenue fell 8% to $38.9 million, primarily due to competition. Infusion therapy revenue was approximately flat at $159.8 million.
- Costs and guidance: Nine-month SG&A increased to $68.4 million, or 29% of revenue, from $63.9 million, or 27%. The increase included $1.3 million of medical device excise tax, $1.3 million in charges for a strategic transaction that did not proceed, and higher IT and sales-related costs. Management expected 2013 SG&A of about 28% of revenue, R&D of about 3%, and an effective tax rate of about 31%; these are estimates, not guarantees. It anticipated modest increases in non-Hospira domestic sales and international sales, and oncology growth, while expecting critical care sales to decline.
- Legal contingency: In the RyMed patent case, the court ruled on September 30, 2013 that ICU Medical could not overcome RyMed’s prosecution-history-estoppel defense for verdicts based on the doctrine of equivalents. ICU Medical was evaluating appeal or proceeding to damages. Management did not expect other routine proceedings to materially affect results.
- Other exposures: The filing identifies risks from reliance on Hospira and other large customers, competition, product development and market adoption, international operations and foreign exchange, raw-material costs, regulation and litigation. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether Hospira shipment patterns and inventory levels stabilize, and how customer concentration affects sales and receivables.
- Whether oncology and international growth can offset critical care competition and uneven infusion product demand.
- Whether higher SG&A and one-time transaction costs abate, and whether the stated 2013 expense, tax and capital-spending expectations are met.
- Developments in the RyMed case, including any appeal and potential damages exposure.
- Investment portfolio liquidity and interest-rate and foreign-exchange sensitivity; the filing estimates a 10% euro exchange-rate move could change specified balance-sheet amounts by about $7.4 million.