Business context and reporting period
ICU Medical, Inc. filed this Form 10-K for the fiscal year ended December 31, 2010. The company develops and manufactures disposable medical devices for I.V. therapy, oncology and critical care. Its principal product lines include CLAVE needleless connectors, custom infusion systems and critical care products. The filing also provides unaudited fourth-quarter results.
Financial results and key metrics
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Total revenue | $284.6 million | $231.5 million |
| Gross profit / margin | $130.6 million / 45.9% | $108.8 million / 47.0% |
| Operating income | $49.3 million | $38.0 million |
| Net income | $30.9 million | $26.6 million |
| Diluted earnings per share | $2.23 | $1.77 |
| Cash from operations | $33.1 million | $51.1 million |
| Cash, cash equivalents and investments | $93.4 million | $108.1 million |
| Working capital | $182.1 million | $174.2 million |
| Total assets / stockholders’ equity | $312.2 million / $274.3 million | $309.2 million / $265.0 million |
Revenue increased 23% year over year; operating income rose 30% and net income rose 16%. Gross margin declined about 1.1 percentage points, primarily due to critical-care integration and higher freight costs, partly offset by favorable product mix. Operating cash flow fell 35%, reflecting working-capital movements, including higher receivables and lower payables. The balance sheet reports no borrowings or debt balance.
In fourth-quarter 2010, revenue was $75.6 million, gross profit $37.5 million and net income $10.0 million, compared with $69.8 million, $31.4 million and $7.4 million, respectively, in fourth-quarter 2009.
Material changes versus the prior period
- Sales growth came from custom products, up 28% to $100.6 million; CLAVE, up 15% to $98.4 million; and standard critical care, up 21% to $50.4 million.
- Domestic distributor and direct sales increased 54%, while international sales increased 32%. These gains partly reflect a full year of direct critical-care sales after the 2009 acquisition of Hospira’s critical-care product line.
- Hospira remained the largest customer, representing 44% of FY 2010 revenue, down from 53% in 2009 and 69% in 2008. Its receivables were 43% of total accounts receivable at year-end.
- SG&A increased to $76.6 million from $68.2 million; R&D increased to $4.7 million from $2.6 million. The effective tax rate rose to 37.4% from 32.2%.
- The company spent $28.6 million repurchasing shares in 2010 and had $40.1 million remaining under a newly authorized $40 million repurchase plan at year-end.
Outlook, risks, contingencies and unusual items
- Management expected modest 2011 growth in several product lines, including CLAVE, custom products and critical care, while noting that 2010 included additional Hospira orders and other nonrecurring timing effects. These expectations are not assurances.
- Management estimated 2011 capital expenditures of $16–19 million, SG&A at 27.0%–27.5% of revenue, R&D at about 2% of revenue and an effective tax rate near 36%. It stated existing cash, investments and anticipated operating cash flow should fund operations for the next 12 months.
- Key risks include customer concentration and reliance on Hospira; competition and potential price pressure; upcoming expirations of certain CLAVE and Click Lock patents beginning in 2011; dependence on the Salt Lake City CLAVE manufacturing facility and limited-source suppliers; and manufacturing, labor, political and cross-border risks in Mexico and Slovakia.
- International growth exposes the company to currency movements and slower customer payments. The company did not hedge foreign-currency exposures; management reported longer European collection periods and higher days sales outstanding.
- A Slovakia plant flood led to $3.0 million of restoration capital expenditures; $0.6 million was reimbursed by insurance in 2010, with the remaining $2.4 million expected in 2011. Critical-care inventory acquired from Hospira included a repurchase right of up to $6.0 million if specified finished goods could not be sold by August 31, 2011.
- In patent litigation against RyMed, a jury returned a verdict for ICU Medical on two patents in December 2010; post-trial motions and possible retrial requests remained pending. Management said other routine legal matters were not expected to materially affect results.
- The company identified a potential 2.3% U.S. medical-device excise tax on certain sales beginning after December 31, 2012. Auditors issued an unqualified opinion and concluded internal control over financial reporting was effective as of year-end.
Important facts for investors to verify
- Whether Hospira’s purchasing, distribution arrangements and customer concentration changed after the reporting date, and how much 2010 growth depended on temporary orders or acquisition-related comparisons.
- Whether operating cash flow, receivable collections and international days sales outstanding improved after year-end.
- Progress and costs of the Slovakia and Mexico expansions, including receipt of the outstanding flood-insurance reimbursement.
- Developments in the RyMed patent case and the commercial impact of patent expirations and competing needleless connectors.
- Actual 2011 results against management’s stated growth, expense, tax-rate and capital-spending expectations.