ICU Medical, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. ICU Medical develops, manufactures and sells infusion therapy, IV solutions, infusion systems and critical-care products. Amounts below are in U.S. dollars; financial statement figures are in millions except per-share data.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $307.5 | $327.2 | $950.7 | $1,059.7 |
| Gross profit / margin | $118.6 / 38.6% | $134.6 / 41.1% | $357.7 / 37.6% | $435.4 / 41.1% |
| Operating income | $32.9 | $2.3 | $89.5 | $38.9 |
| Net income | $26.6 | $0.2 | $80.4 | $36.1 |
| Diluted EPS | $1.24 | $0.01 | $3.73 | $1.67 |
| Operating cash flow | Nine-month period: $53.1, versus $110.3 in 2018 |
Revenue fell 6.0% year over year in Q3 and 10.3% for the nine-month period. Lower IV Solutions revenue was the largest product-line contributor to the nine-month decline; Critical Care and Infusion Systems also declined. Nine-month Infusion Consumables revenue was nearly flat on a reported basis and up 1.0% at constant currency. In Q3, Infusion Consumables increased 1.7% reported and 3.1% at constant currency.
Q3 SG&A declined 14.0% year over year to $65.9 million, principally as Pfizer transition-service consulting costs ended, partly offset by higher depreciation and bad-debt expense. Nine-month SG&A declined 15.3% to $206.3 million. Gross margin contracted in both periods, which management attributed to slower IV Solutions manufacturing and added supply-chain costs associated with elevated inventory.
Liquidity, balance sheet and cash flow
- At September 30, cash and cash equivalents were $315.9 million and short-term investments were $20.8 million, totaling $336.8 million, down from $382.1 million in cash and investments at December 31, 2018.
- Operating cash flow was $53.1 million; capital expenditures were $73.3 million. Cash and cash equivalents decreased $28.8 million during the nine months to $315.9 million.
- Working capital was $689.1 million; the approximate current ratio was 3.7x. Accounts receivable was $210.4 million and inventory was $343.7 million.
- No borrowings were outstanding under the $150 million revolving credit facility; the full amount was available and the company was in compliance with its financial covenants. The facility matures in November 2022.
- Total assets were $1.64 billion and stockholders’ equity was $1.34 billion. Operating lease liabilities totaled $36.9 million following adoption of the new lease standard.
Material changes and unusual items
- Operating income and net income were affected by a $47.4 million reduction in the fair value of the HIS acquisition earn-out liability, recorded as an operating benefit. The liability was reduced from $47.4 million at year-end 2018 to zero because management assessed the probability of meeting the payout targets by year-end 2019 as remote. Pfizer’s potential earn-out was up to $225 million.
- Nine-month restructuring, strategic transaction and integration expenses were $69.4 million. These included $22.1 million for a supply-chain restructuring that reduced third-party manufacturing commitments, $16.3 million for initial IV Solutions inventory optimization, and a $12.7 million noncash write-off of assets related to Pfizer separation and clean-up.
- Nine-month contract settlement expense was $3.8 million, compared with $28.9 million in 2018. The company also cited temporary 2018 customer stock-up purchases during competitors’ IV Solutions shortages, which subsequently reversed as customers returned to original suppliers.
- Management reported no further significant IV Solutions production ramp-down plans for the remainder of 2019. It estimated 2019 capital expenditures of $95–$105 million.
- On November 8, 2019, after the reporting date, ICU Medical acquired Pursuit Vascular for approximately $75 million in cash, with a potential earn-out of up to $50 million.
Outlook, risks and contingencies
Management stated that cash and expected operating cash generation should fund operations for the next 12 months, while noting that a deeper or prolonged downturn, missed revenue or expense expectations, or weaker customer or supplier solvency could require alternative financing. The filing provides no specific revenue or earnings guidance.
Risks discussed include customer and distributor concentration, healthcare purchasing-group contracting, price and competitive pressures, product development and regulatory approvals, manufacturing and supply constraints, inventory and working-capital needs, foreign-exchange exposure, and integration and execution of growth initiatives. A saline antitrust class action naming ICU Medical remains pending; defendants’ motion to dismiss was awaiting a court ruling. The related DOJ antitrust investigation was closed in December 2018. A separate DOJ subpoena concerning Sapphire infusion pump products was disclosed. Management said it did not expect unsettled proceedings to materially adversely affect financial position or results, but outcomes remain uncertain.
Important facts for investors to verify
- How much of reported earnings growth reflects the noncash $47.4 million earn-out fair-value benefit, and what operating performance is expected without it?
- Whether IV Solutions demand, production levels and elevated inventory normalize, and how supply-chain costs affect future gross margins.
- Why operating cash flow fell to $53.1 million, including the effects of higher inventory, receivables and other assets, and whether cash conversion improves.
- Progress on the $95–$105 million 2019 capital-spending plan and the expected cash and integration impact of the Pursuit Vascular acquisition.
- Developments in the pending saline antitrust litigation and the potential exposure, including any indemnification rights or claims involving Pfizer.