ICU Medical, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. ICU Medical develops, manufactures and sells medical products for infusion therapy, IV solutions and critical care.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $312.3 million | $360.5 million | $643.2 million | $732.5 million |
| Gross profit / margin | $103.9 million / 33.3% | $151.8 million / 42.1% | $239.2 million / 37.2% | $300.8 million / 41.1% |
| Operating income | $26.3 million | $31.7 million | $56.6 million | $36.6 million |
| Net income | $22.8 million | $31.1 million | $53.8 million | $35.9 million |
| Diluted EPS | $1.06 | $1.44 | $2.50 | $1.67 |
| Operating cash flow | Not separately reported for the quarter | $2.3 million | $59.0 million |
- Q2 revenue fell 13.4%; first-half revenue fell 12.2%. Each product line declined year over year. IV Solutions had the largest dollar decline: $32.8 million in Q2 and $64.0 million for the first half.
- Q2 gross margin fell 8.8 percentage points. Management cited a $16.3 million one-time IV Solutions inventory-optimization charge, lost overhead absorption during production ramp-down, higher supply-chain costs and elevated inventory.
- Q2 operating income included a $39.5 million noncash gain from reducing the estimated HIS earn-out liability. The first-half gain was $47.2 million. The liability fell from $47.4 million at year-end 2018 to $0.2 million at June 30, 2019. This valuation change materially affects period comparisons.
- Restructuring, strategic transaction and integration costs were $37.0 million in Q2 and $61.4 million for the first half. The first-half amount included a $22.1 million supply-chain restructuring charge and a $12.7 million noncash asset write-off.
Liquidity, debt and cash flow
- At June 30, cash and cash equivalents were $291.9 million; short- and long-term investment securities totaled $23.9 million. Combined cash and investments were $315.7 million, down $68.4 million from year-end 2018.
- Current assets were $929.6 million and current liabilities $260.0 million. The company reported no borrowings under its $150 million revolving credit facility, with the full amount available; the facility matures in November 2022. ICU Medical was in compliance with financial covenants.
- First-half operating cash flow was $2.3 million, versus $59.0 million a year earlier. Working-capital changes used $93.2 million, including increases in receivables and inventory and a decrease in accrued liabilities.
- First-half capital expenditures were $48.7 million. Management estimated 2019 capital expenditures of approximately $95 million to $105 million and said existing cash and expected operating cash flows should fund operations for the next 12 months.
- Operating lease liabilities totaled $37.5 million following adoption of the new lease standard. The adoption added $40.4 million of lease assets and liabilities at January 1, 2019 and did not materially affect earnings or cash flows.
Management commentary, outlook and risks
- Management attributed lower IV Solutions sales mainly to normalization after competitors’ supply constraints had prompted temporary customer stock-up in 2018. Infusion Systems declines reflected historical U.S. pump installed-base losses and foreign exchange; consumables were affected by exchange rates, temporary oncology supply constraints and order timing.
- Management said there were no further significant plans to ramp down IV Solutions production for the remainder of 2019. Unpaid restructuring charges were expected to be paid by year-end. No specific revenue or earnings guidance was provided.
- Management cited customer concentration and contract retention, product competition and pricing, supply availability and manufacturing execution, foreign exchange, and successful product development and integration as risks. A 10% exchange-rate movement would change reported net Euro-denominated balance-sheet exposure by approximately $8.3 million and Canadian-dollar exposure by approximately $2.4 million; those exposures were not hedged.
- Pending matters include an antitrust class action involving IV saline products, in which ICU Medical is a defendant and awaits a ruling on a motion to dismiss, and a Department of Justice subpoena concerning Sapphire infusion pumps and related products. The company reported that the DOJ antitrust investigation into IV solutions was closed in December 2018. Management did not expect unsettled legal matters to materially affect financial position or results, but outcomes remain uncertain.
- In August 2019, after quarter-end, the board approved a new $100 million share-repurchase plan, replacing the prior plan. No shares were repurchased under the prior plan during Q2.
Key facts for investors to verify
- Whether revenue and gross margin stabilize as IV Solutions demand normalizes and the production adjustment takes effect.
- Whether inventory, receivables and other working-capital needs convert into improved operating cash flow.
- How much of reported earnings depends on the noncash earn-out revaluation and other discrete tax or restructuring items.
- Progress in Infusion Systems, including U.S. pump placements, and resolution of temporary supply constraints in other product lines.
- Any developments in the saline antitrust litigation, the Sapphire subpoena, and obligations under the Pfizer supply agreements and HIS earn-out.
- Actual capital spending versus the $95 million to $105 million estimate, and any use of the newly approved repurchase authorization.