ICU Medical, Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. ICU Medical develops, manufactures, and sells disposable medical devices, custom infusion sets, and critical-care products. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $68.9 | $53.4 | $133.2 | $107.7 |
| Gross profit | $32.1 | $25.8 | $59.1 | $52.4 |
| Gross margin | 47% | 48% | 44% | 49% |
| Operating income | $11.8 | $8.7 | $18.2 | $19.4 |
| Net income | $7.7 | $5.7 | $12.0 | $12.8 |
| Diluted EPS | $0.56 | $0.38 | $0.86 | $0.85 |
Q2 revenue rose 29% year over year; first-half revenue increased 24%. First-half gross margin fell five percentage points, while operating income declined 6% and net income fell 7%. Q2 earnings increased despite slightly lower gross margin. First-half SG&A was $39.0 million (29% of revenue), compared with $31.6 million (30%); R&D was $1.9 million versus $1.4 million.
Cash, liquidity, and capital
- Operating cash flow for the first half was $17.5 million, down from $27.8 million. Capital expenditures were $11.3 million.
- Cash and cash equivalents were $57.6 million at June 30; investment securities were $25.5 million, for combined cash and securities of $83.1 million, versus $108.1 million at December 31, 2009.
- Total current assets were $184.3 million and current liabilities $31.3 million. No borrowings are presented on the balance sheet.
- First-half treasury-stock purchases used $28.6 million. The prior $55 million repurchase authorization was completed in Q2; the board approved a new $40 million plan in July 2010.
- Management said available cash, securities, and expected operating cash flow should fund operations for the next 12 months. Estimated 2010 capital expenditures are $18–22 million.
Business changes, outlook, and risks
- The 2009 purchase of Hospira’s critical-care product line shifted sales from Hospira to domestic and international distributors and direct customers. This helped drive growth in distributor/direct sales, but reduced sales to Hospira. Standard critical-care sales increased 54% in the first half.
- Hospira remains the largest customer: 40% of first-half 2010 revenue, down from 67% a year earlier; it represented 35% of accounts receivable at June 30. This concentration creates material customer-dependence risk.
- First-half custom-product revenue rose 18% to $43.7 million; CLAVE sales rose 11% to $47.1 million. Management expects continued growth in custom products, CLAVE, and critical care, but gives no assurance these expectations will be achieved.
- Management estimates 2010 gross margin of 44–45%, SG&A of 28.0–28.5% of revenue, R&D of about 1.5% of revenue, and an effective tax rate of about 35%. Planned investment includes a Slovakia plant and expansion of the Mexico facility.
- Margin pressures included higher freight, unfavorable Mexican peso exchange rates, and temporary manufacturing-transition costs on critical-care products; factory efficiencies partially offset these effects. Q2 SG&A also included increased sales staffing, marketing and dealer fees, and Slovakia start-up costs.
- Risks include Hospira dependence, competition and price pressure, execution of the critical-care transition and new facilities, customer ordering variability, foreign exchange and raw-material costs, and development or commercialization of new products. The filing reports no material change to previously disclosed risk factors.
- The company is pursuing patent litigation against RyMed; trial was scheduled for December 13, 2010. Management said routine legal matters were not expected to materially affect results. Certain indemnification arrangements have no stated maximum, though management did not expect material liabilities.
Most important facts to verify
- Whether Hospira concentration continues to decline and distributor/direct critical-care sales can offset lower Hospira sales.
- Whether gross margins recover from the first-half 44% level and meet management’s 44–45% full-year estimate.
- Whether operating cash generation supports planned $18–22 million capital spending and the new $40 million repurchase plan.
- Progress, costs, and timing of the Slovakia plant and Mexico expansion, including any continuing transition costs.
- Outcome and potential exposure from the RyMed patent case and any other contingencies.