ICU Medical, Inc. — Q2 2009 Form 10-Q
Reporting period: Three and six months ended June 30, 2009. ICU Medical develops, manufactures and sells disposable medical devices, custom infusion sets and critical-care products. Unless noted otherwise, amounts are in U.S. dollars.
Financial performance and position
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Total revenue | $53.4 million | $48.6 million | $107.7 million | $93.2 million |
| Gross profit / margin | $25.8 million / 48% | $20.8 million / 43% | $52.4 million / 49% | $38.6 million / 41% |
| Operating income / margin | $8.7 million / 16% | $5.7 million / 12% | $19.4 million / 18% | $8.3 million / 9% |
| Net income | $5.7 million | $4.8 million | $12.8 million | $7.7 million |
| Diluted EPS | $0.38 | $0.33 | $0.85 | $0.53 |
| Net cash from operations | Not provided for quarter | $26.6 million | $11.0 million |
- Q2 revenue rose 10%; first-half revenue rose 16%. First-half diluted EPS increased 60% year over year.
- First-half operating cash flow benefited from a $11.2 million decrease in receivables; inventory increased $4.7 million. Investing activities used $21.2 million, including $6.9 million of capital expenditures and $5.7 million for the German acquisition. Financing activities provided $1.4 million.
- At June 30, cash and cash equivalents were $62.6 million; investment securities were $82.1 million; combined cash, cash equivalents and securities totaled $144.7 million. Current assets were $206.2 million versus current liabilities of $20.8 million. The balance sheet reports no debt.
- Total assets were $299.1 million and stockholders’ equity was $268.4 million. Accounts receivable was $27.5 million and inventory was $24.8 million.
Material changes and operating drivers
- Gross margin improved by 5 percentage points in Q2 and 8 points in the first half. Management attributed the gains to favorable product mix, manufacturing efficiencies in Mexico, favorable exchange rates and lower transportation costs.
- CLAVE sales increased 16% in both Q2 and the first half. Custom product sales increased 6% in Q2 and 16% in the first half, led by custom infusion and oncology products. Critical-care sales decreased 8% in Q2 but increased 9% in the first half.
- SG&A increased to $16.5 million in Q2 and $31.6 million in the first half, primarily due to higher patent-litigation costs and sales-related compensation. R&D decreased to $0.6 million in Q2 and $1.4 million in the first half, reflecting focus on core projects and the cessation of MedScanSonics operations.
- Other income declined year over year, partly because prior-year periods included settlement payments and interest income was lower. The first-half 2009 effective tax rate was 36%, versus 30.3% in 2008.
Outlook, risks and unusual items
- Management estimated 2009 gross margin of 46–47%, SG&A of 29–30% of revenue, R&D of 1–2% of revenue and an effective tax rate of approximately 36%. It expected 2009 capital expenditures of about $17 million, including approximately $4 million for land and initial construction in Slovakia. These are estimates, not guarantees.
- On July 8, 2009, ICU Medical agreed to acquire Hospira’s critical-care product-line commercial rights and physical assets, primarily inventory, for an estimated $35 million, payable in cash. Closing was expected in Q3, subject to customary conditions. ICU Medical expected to defer recognition of critical-care shipments to Hospira beginning July 8 until the acquired inventory is sold to end customers after closing; management expected the largest revenue impact in Q3.
- Hospira represented 63% of Q2 revenue and 67% of first-half revenue. It also accounted for 59% of accounts receivable at June 30. The company remains exposed to changes in Hospira’s purchasing, market position and commercial relationship; taking over critical-care sales also creates execution and transition risks.
- ICU Medical paid $5.5 million in Q2 to satisfy an attorneys’ fees and costs award in its Alaris patent case after the Federal Circuit affirmed the district court decision. A separate Medegen patent case was remanded to the district court; the company intends to defend itself, and no accrual was recorded because the outcome was uncertain.
- Of $82.1 million in investment securities, $2.4 million were illiquid auction-rate securities measured using significant unobservable inputs. The company reported put agreements allowing it to require Morgan Stanley and UBS to purchase these securities at par plus accrued interest. It also disclosed currency, resin-price, seasonal, customer-ordering, competition, Mexico operations and litigation risks.
- Management said the challenging economy had not materially affected reported results through Q2, although some customers were taking a more conservative approach to inventory. It believed existing liquidity and expected operating cash generation would fund operations for at least the next twelve months.
Important facts for investors to verify
- Whether the Hospira critical-care acquisition closed as expected, its final purchase price, and the effect of deferred revenue and the transition to direct distribution.
- Whether ICU Medical can reduce customer concentration and maintain Hospira-related sales, receivables collections and commercial relationships.
- Whether improved gross margins and management’s full-year expense and capital-spending estimates were achieved.
- The eventual outcome and potential cost of the Medegen litigation, and any further patent-litigation expenses.
- The liquidity and realizable value of auction-rate securities, including the enforceability and timing of the disclosed put agreements.