ICU Medical, Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; balance-sheet figures are as of March 31, 2010. The company develops, manufactures and sells disposable medical devices, including IV connectors, custom infusion sets and critical-care products. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Total revenue | $64.4 million | $54.3 million | +18.4% |
| Gross profit / margin | $26.9 million / 41.8% | $26.6 million / 48.9% | Profit +1.4%; margin −7.1 percentage points |
| Operating income / margin | $6.4 million / 9.9% | $10.7 million / 19.7% | −40.7% |
| Net income | $4.3 million | $7.1 million | −39.8% |
| Diluted EPS | $0.30 | $0.47 | −36.2% |
| Operating cash flow | $9.6 million | $19.8 million | −51.4% |
- Cash, cash equivalents and investment securities totaled $84.9 million, down from $108.1 million at December 31, 2009. Cash and equivalents alone were $42.9 million.
- Current assets were $181.8 million and current liabilities $31.1 million, yielding working capital of $150.8 million and a current ratio of approximately 5.9.
- The balance sheet presents no interest-bearing debt. Total liabilities were $41.5 million; these include deferred-tax balances and an income-tax liability.
- Capital expenditures were $10.4 million. Financing cash outflow was $23.2 million, principally $24.0 million of share repurchases.
Material changes and business drivers
- Revenue growth reflected the August 2009 acquisition of Hospira’s critical-care product line and the subsequent shift to direct and distributor sales. Domestic distributor/direct sales rose 184% and international sales rose 53%; sales to Hospira fell 31%.
- Critical-care sales increased 38% to $12.4 million; CLAVE sales increased 10% to $23.4 million; custom-product sales increased 8% to $20.4 million. Custom products represented about 32% of revenue.
- Gross margin declined to 42% from 49%. Management attributed the decline to higher freight costs, unfavorable Mexican peso exchange rates, product mix weighted toward lower-margin critical-care products, and temporary manufacturing-transition costs.
- SG&A rose to $19.7 million from $15.1 million, driven principally by sales-force expansion, compensation, travel, and promotional and distribution fees. R&D was $0.9 million versus $0.7 million.
- Hospira remained the largest customer, contributing 41% of revenue versus 71% a year earlier. It represented 35% of accounts receivable at quarter-end. The reduced revenue concentration reflects the critical-care product-line transition, but Hospira remains strategically important.
Outlook, risks and unusual items
- Management estimated 2010 gross margin of approximately 43%, SG&A of 27–28% of revenue, R&D of 1–2% of revenue, and an effective tax rate near 35%. These are expectations, not guarantees.
- Management forecast 2010 capital expenditures of approximately $18–22 million, including construction and equipment for a Slovakia plant expected to begin operating in the second half of 2010. It expected to fund spending from existing cash and investments.
- The company expected sufficient liquidity for the next 12 months, while warning that more severe business downturns, investment-security illiquidity, or missed operating expectations could require alternative financing.
- Key risks include customer and channel concentration, dependence on Hospira, competitive pressure and pricing, execution of the critical-care transition and Slovakia facility, manufacturing costs and efficiency, foreign-exchange exposure, and success of new products and growth initiatives. Healthcare demand and customer ordering patterns can also cause quarterly fluctuations.
- The company held a $0.9 million auction-rate security classified as Level 3; it reported an agreement allowing it to require UBS to purchase the security at par plus accrued interest. Investment securities totaled $42.0 million.
- ICU Medical’s patent-infringement suit against RyMed remained pending; the court had denied RyMed’s interlocutory appeal and a new trial date was to be set. Management said other routine legal proceedings were not expected to materially affect results.
- The company repurchased 686,336 shares in Q1 at an average $34.93 per share. Approximately $4.7 million remained under the $55 million authorization at quarter-end.
Important facts for investors to verify
- Whether direct and distributor critical-care sales can sustain growth and margins after the Hospira acquisition and transition.
- How much of the gross-margin decline is temporary transition cost versus continuing product-mix, freight, or currency pressure.
- Hospira’s ongoing share of revenue and receivables, and the effect of any change in the relationship or its market position.
- Actual capital spending, Slovakia plant timing and costs, and the cash impact of continued share repurchases.
- The liquidity and enforceability of the UBS auction-rate-security purchase arrangement, and the status and potential outcome of the RyMed litigation.