ICU Medical, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. Financial statements are unaudited. ICU Medical develops, manufactures and sells medical devices for infusion therapy, critical care and oncology.
Financial highlights
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Total revenue | $78.7 million | $77.3 million | $153.0 million | $152.8 million |
| Gross profit / margin | $38.0 million / 48% | $39.1 million / 51% | $74.8 million / 49% | $74.0 million / 48% |
| Operating income | $11.0 million | $13.5 million | $23.0 million | $24.9 million |
| Net income | $7.4 million | $9.1 million | $16.1 million | $16.8 million |
| Diluted EPS | $0.48 | $0.63 | $1.06 | $1.16 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $26.0 million | $31.5 million |
- Q2 revenue rose about 2%, while net income declined about 19%. First-half revenue was essentially flat and net income declined about 4%.
- Q2 gross margin fell three percentage points, which management attributed primarily to manufacturing inefficiencies and unfavorable Mexican peso exchange-rate effects, partly offset by favorable product mix. First-half margin improved one point, primarily from product mix.
- At June 30, cash and cash equivalents were $170.6 million and investment securities were $73.4 million, for combined cash and investments of $244.0 million, up from $226.2 million at year-end 2012. Total assets were $451.6 million; current liabilities were $28.0 million. The balance sheet reports no debt.
- First-half investing cash use was $8.1 million, including $11.8 million in property and equipment purchases. Financing activities provided $6.5 million. The filing reports no borrowing facility or debt balance.
Business trends and material changes
- Product mix was uneven: first-half oncology revenue increased 30% to $17.5 million; critical care fell 14% to $25.4 million amid competition; infusion therapy increased 1% to $103.6 million. In Q2, oncology rose 32%, critical care declined 19%, and infusion therapy rose 3% year over year.
- Hospira accounted for 40% of first-half revenue in both 2013 and 2012, and 39% of accounts receivable at June 30, 2013. Q2 Hospira revenue was 42% of total, versus 38% a year earlier. Hospira’s planned first-quarter inventory reduction contributed to lower first-half Clave shipments.
- First-half domestic sales declined 3%, while international sales increased 8%. Critical care competition weighed on both domestic and international sales.
- SG&A increased to $46.0 million from $43.7 million for the first half; the 2013 medical device excise tax contributed $0.9 million to the increase. R&D rose to $5.8 million from $5.4 million.
Outlook, risks and contingencies
- Management estimated 2013 capital expenditures of $23–$28 million, including planned Salt Lake City manufacturing-space and clean-room improvements, equipment and mold purchases, and IT investment. It expected to fund spending from cash and investments.
- Management expected modest 2013 growth in infusion therapy and oncology, lower critical care sales due to competition, SG&A of approximately 28% of revenue, R&D of approximately 3% of revenue, and an effective tax rate near 33%. These are estimates and not guarantees.
- The company said existing cash, investments and expected operating cash generation should fund operations for the next 12 months. It held $15.0 million of cash at foreign subsidiaries. Management noted that prolonged business weakness or investment-security illiquidity could require alternative financing.
- Customer concentration, especially dependence on Hospira and its distribution arrangements, is a significant risk. Other stated risks include competitive pressure, new-product execution, manufacturing problems, foreign exchange exposure, raw-material costs and healthcare regulation. A 10% euro exchange-rate change was estimated to affect relevant net balance-sheet assets by about $6.9 million; the company did not hedge foreign-currency exposure.
- ICU Medical continued patent litigation against RyMed Technologies. A jury had found infringement and patent validity in 2010; a court ruling on RyMed’s prosecution-history-estoppel defense remained pending, after which damages, if any, would be determined. Management did not expect other routine legal matters to materially harm results.
- No material changes to the risk factors from the 2012 Form 10-K were reported. Management stated disclosure controls were effective and there was no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Hospira’s share of revenue and receivables, the terms and duration of its distribution agreements, and the effect of customer inventory changes.
- Whether gross-margin pressure from manufacturing inefficiencies and currency effects persists, and whether critical care competition continues to reduce sales.
- Actual capital expenditures versus the $23–$28 million estimate and the expected capacity benefits of facility investments.
- Progress and potential financial outcomes of the RyMed litigation, including any damages or appeals.
- Investment portfolio liquidity and interest-rate exposure, along with the effect of unhedged euro and Mexican peso movements.