ICU Medical, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Results include Pfizer’s Hospira Infusion Systems (HIS) business from its February 3, 2017 acquisition; year-to-date HIS revenue reflects approximately five months. Comparisons with 2016 are therefore not like-for-like.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $331.5 million | $96.7 million | $579.3 million | $186.6 million |
| Gross profit / margin | $88.1 million / 26.6% | $50.1 million / 51.8% | $177.0 million / 30.6% | $99.4 million / 53.3% |
| Operating income (loss) | $(35.9) million | $22.8 million | $(52.9) million | $46.7 million |
| Net income (loss) | $(37.1) million | $16.6 million | $18.8 million | $34.8 million |
| Diluted EPS | $(1.87) | $0.98 | $0.93 | $2.05 |
| Operating cash flow | Six-month amount: $(28.9) million | Prior-year six-month amount: $41.8 million |
Q2 gross margin was pressured by HIS’s historically lower margins, an approximately 10-percentage-point purchase-accounting inventory step-up impact, and temporary under-absorption during planned inventory reduction. Six-month results also included a preliminary $63.2 million HIS bargain-purchase gain, which helped keep net income positive despite the operating loss.
Acquisition, costs and balance sheet
- HIS expanded ICU Medical’s portfolio into infusion pumps, IV solutions and related products. The transaction included cash consideration, a $75 million Pfizer seller note and issuance of 3.2 million common shares. Purchase accounting remains preliminary.
- Q2 restructuring and strategic transaction/integration costs totaled $19.9 million; the six-month amount was $49.3 million. This included $15.8 million of six-month restructuring charges and $33.5 million of transaction and integration costs. Management expected restructuring activities to be completed by year-end 2017 and said material charges had been incurred by June 30.
- Six-month SG&A was $150.0 million, versus $44.5 million; R&D was $24.6 million, versus $6.7 million. Management attributed increases primarily to HIS, including added personnel and transition-service costs.
- Cash and cash equivalents were $240.9 million at June 30, down from $445.1 million at year-end. Operating cash flow was negative $28.9 million and investing cash flow was negative $186.3 million, including $157.1 million of net acquisition cash outflow and $27.2 million of capital expenditures.
- Total assets were $1.487 billion and stockholders’ equity was $1.121 billion. Current liabilities were $189.1 million. Inventory was $401.3 million and accounts receivable was $124.9 million.
- Debt was $75 million under a three-year interest-only note due February 2020, bearing LIBOR plus 2.25% for the first year and 2.50% thereafter. A 1% LIBOR change would change annual interest expense by approximately $0.8 million.
- Pfizer may receive up to $225 million in contingent earn-out payments through 2019, tied to combined-company adjusted EBITDA targets. The liability was remeasured to $25.0 million at June 30, including a $6.0 million Q2 expense.
Outlook, risks and unusual items
- Management said existing cash and expected operating cash generation should fund operations for the next 12 months. It estimated 2017 capital expenditures at approximately $80 million, while cautioning actual spending could differ.
- Management cited integration and organizational growth, customer relationships, manufacturing transfers, product quality and regulatory compliance as execution challenges. The company had approximately 7,100 employees at June 30, including about 4,400 added with HIS.
- Risks include strong competition in pumps and IV solutions, reliance on major customers and distributors, pricing pressure, regulatory requirements, foreign-exchange exposure and integration costs. The company reported approximately €46.4 million of net Euro assets and did not hedge that Euro exposure.
- Saline-solution antitrust class actions and a U.S. Department of Justice investigation are ongoing; the company and Pfizer have reciprocal indemnification claims under the purchase agreement. The filing does not quantify a potential loss.
- The six-month effective tax rate was reported as negative 182%, affected by the bargain-purchase gain, geographic income mix and a $9.9 million tax benefit from equity-award exercises and vesting.
Key facts for investors to verify
- How final HIS purchase-price valuations, including the bargain-purchase gain and acquired inventory step-up, affect subsequent earnings.
- Whether integration, inventory normalization and manufacturing transfers improve margins as planned, and whether restructuring is completed by year-end.
- Cash conversion and working-capital needs, particularly receivables, inventory and transition-service-related costs.
- Progress toward earn-out performance targets and the resulting contingent consideration exposure.
- Developments in the saline antitrust litigation and DOJ investigation, including any indemnification or financial consequences.