ICU Medical, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Amounts are in U.S. dollars; financial statement figures are in millions except per-share data. The company develops, manufactures, and sells medical devices for infusion therapy, critical care, and oncology.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $73.2 | $74.3 | Down 1.4% |
| Gross profit / margin | $36.0 / 49.2% | $36.8 / 49.5% | Margin down 0.3 percentage points |
| Operating income / margin | $9.9 / 13% | $12.0 / 17% | Down 17.9% |
| Net income | $6.7 | $8.7 | Down 23.3% |
| Diluted EPS | $0.43 | $0.58 | Down 25.9% |
| Cash provided by operations | $12.7 | $10.8 | Up $2.0 |
Cash, cash equivalents, and investment securities totaled $303.8 million at March 31, up from $296.9 million at year-end 2013. Cash and cash equivalents were $227.6 million; available-for-sale investment securities were $76.2 million. Current liabilities were $25.5 million. The balance sheet reports no debt. Stockholders’ equity was $474.2 million.
Investing activities used $12.0 million, including $5.9 million of property and equipment purchases. Financing activities provided $0.9 million, including $5.8 million spent on treasury stock. The company estimated 2014 capital expenditures of $18–24 million, including approximately $7 million for a Salt Lake City manufacturing-space and clean-room project. Management said existing liquidity and expected operating cash flow should fund operations for the next 12 months.
Changes versus the prior-year quarter
- Hospira sales fell 10% to $25.5 million, primarily because of lower Clave unit sales. Hospira represented 35% of revenue, compared with 38% a year earlier; receivables from Hospira were 46% of company receivables at quarter-end.
- Non-Hospira sales rose 4% to $47.7 million. Infusion therapy sales declined 5% to $50.8 million, chiefly due to lower Clave sales, partly offset by higher sales of other infusion products. Critical care sales increased 4% to $13.1 million, and oncology sales increased 10% to $9.0 million.
- Gross margin decreased slightly, primarily due to higher freight expense. SG&A declined modestly to $22.5 million; R&D rose to $3.6 million from $1.9 million, driven by additional R&D staff and project expense.
- The effective tax rate increased to 34% from 29%. Net income declined despite lower SG&A, reflecting lower revenue and higher R&D expense.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management cited new-product development, custom products, international sales, and expanded sales and marketing as growth priorities, while cautioning that product development, acquisitions, and market expansion may not succeed.
- Customer concentration is significant: Hospira’s distribution and purchasing agreements extend to 2018, and the company says its relationship with Hospira remains important. Changes in that relationship or Hospira’s market position could materially affect results.
- Risks include competition, customer ordering patterns, international and foreign-exchange exposure, raw-material costs, manufacturing disruptions, healthcare regulation and reimbursement, and the ability to develop and sell new products. The company did not hedge foreign-currency exposures; it estimated a 10% euro movement could affect specified balance-sheet amounts by about $8.6 million. A 10% resin-price increase was estimated to change material costs by about $1.2 million.
- In a patent action against RyMed, the court ruled in September 2013 that ICU Medical could not overcome RyMed’s prosecution-history-estoppel defense under the doctrine of equivalents. The company was considering appeal options and proceeding to the damages phase. Management said other legal matters were not expected to materially affect financial position or results.
- The company repurchased 88,792 shares for approximately $5.6 million during the quarter, leaving $22.5 million available under its $40 million repurchase authorization. It reported $26.9 million of cash and cash equivalents held outside the United States.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing identified no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether the decline in Hospira and Clave sales continues, and the resulting effect of customer concentration on revenue and receivables.
- Whether oncology, critical care, and other infusion products can sustain growth and offset weaker Clave sales.
- Actual 2014 capital spending and the timing and cost of the Salt Lake City expansion.
- Developments in the RyMed patent litigation and any material changes to legal or indemnification exposure.
- Foreign-exchange and input-cost exposure, investment-security liquidity, and the pace of share repurchases.