ICU Medical, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless otherwise stated. ICU Medical develops, manufactures and sells medical technologies for vascular therapy, oncology and critical care. The company reports one business segment.
Financial highlights
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $71.5 million | $64.4 million | +11% |
| Gross profit | $34.6 million | $26.9 million | +29% |
| Gross margin | 48% | 42% | +6 percentage points |
| Operating income | $12.2 million | $6.4 million | +92% |
| Net income | $8.1 million | $4.3 million | +90% |
| Diluted EPS | $0.57 | $0.30 | +$0.27 |
| Operating cash flow | $15.2 million | $10.2 million | +$5.0 million |
- Cash and cash equivalents were $71.1 million at quarter-end, down from $78.9 million at December 31, 2010. Cash, cash equivalents and investment securities totaled $106.8 million, up from $93.4 million.
- Investing activities used $26.2 million, including $21.3 million net purchases of investment securities and $4.9 million of capital expenditures. Financing activities provided $2.2 million. No interest-bearing debt is reported on the balance sheet.
- Current assets were $223.0 million and current liabilities $27.6 million at March 31, 2011. Inventories increased to $51.2 million from $44.1 million at year-end.
Material changes and unusual items
- Revenue growth came from custom products (+18% to $24.1 million), CLAVE (+7% to $25.0 million), standard oncology (+60% to $2.2 million) and TEGO renal dialysis products (+152% to $2.0 million). Standard critical care sales rose 3% to $12.7 million.
- Gross margin improved primarily due to favorable product mix and manufacturing efficiencies. Operating results also included a $2.5 million legal-settlement credit, received in a dispute with a former law firm over patent-litigation fees.
- Q1 included $0.6 million of one-time Italy facility termination costs related to moving product assembly to Slovakia, and $2.3 million of Long Term Retention Plan expenses across SG&A and R&D. Management said the 2005 plan grants would be paid and 2006–2007 awards would not receive future payments.
- Foreign currency translation contributed $3.9 million to other comprehensive income; comprehensive income was $11.9 million versus $2.7 million a year earlier.
Outlook, risks and contingencies
- Management estimated 2011 gross margin of 47%–47.5%, SG&A at 28%–28.5% of revenue, R&D at approximately 2% of revenue, and an effective tax rate of approximately 36%. Planned 2011 capital expenditures were $16–$19 million. These are estimates, not guarantees.
- Management expected moderate growth in sales to Hospira and domestic distributors, modest international sales growth, and significant TEGO growth tied to a new agreement with a major U.S. dialysis provider. Custom-product growth expectations were tempered by nonrecurring Hospira orders in 2010.
- Hospira accounted for 41% of Q1 revenue and 37% of quarter-end accounts receivable. The company identified dependence on Hospira and other large customers, competition (including in CLAVE), product-development and manufacturing execution, and international, currency, input-cost and regulatory risks.
- The company stated existing cash, investments and expected operating cash generation should fund operations for the next 12 months, while warning that adverse business conditions or illiquidity in investments could require alternative financing. Investment securities totaled $35.7 million and were investment grade; the company did not hedge foreign-currency exposures.
- Management said routine legal proceedings were not expected to materially harm results. In the RyMed patent case, ICU had won a jury verdict on two patents, but post-trial motions and requests for retrial remained pending. No material risk-factor changes from the 2010 Form 10-K were reported.
Most important facts to verify
- Whether the $2.5 million settlement credit and one-time retention-plan and Italy-exit costs distort the earnings run rate.
- Hospira’s continued contribution to revenue and receivables, and the status and terms of its distribution agreements.
- Whether forecast margins, expense ratios, TEGO growth and $16–$19 million capital spending are achieved.
- Inventory growth, conversion of working capital into cash, and liquidity and valuation of investment securities.
- Developments in the RyMed litigation and any related patent or indemnification exposure.