Morningstar | ICU Medical Reports Volatile 3Q, but We Think Long-Term Outlook Is Intact
ICU Medical reported a mixed third quarter, with disappointing top-line performance offset by surprisingly resilient expense management. Management bumped its 2018 EBITDA outlook by roughly $10 million and set initial 2019 expectations near $330 million, which fell in line with our forecast. As we make some tweaks to our model, we don't foresee meaningfully changing our $251 fair value estimate for the narrow-moat company.While the headline figure of revenue down 10% versus last year represents a striking divergence from our and consensus expectations, we think the firm's ability to maintain gross and EBITDA margin levels is encouraging. Additionally, after considering the $10 million-$12 million in lost sales attributable to management's planned transition off legacy Hospira/Pfizer systems onto the company's internal platform, results look meaningfully better. Excluding the effect of this transition and the poor performance of the IV solutions segment, we think the firm would have actually grown 100-200 basis points. IV solutions saw worse-than-expected declines, however, falling over 25% versus last year. This number improves a bit after incorporating the systems transition but was still bad enough to drag firmwide growth into negative territory. While we anticipated a decline as the yearlong shortage in the U.S. solutions market moves closer to sufficient capacity, the magnitude of the reversal in the business caught us off guard. That said, we think it's likely the firm will see sequential growth in the coming quarters.
Ultimately, we think meaningful synergies will begin to materialize in 2019 as ICU Medical sees the cost benefits of fully transitioning off Pfizer's systems by year-end. Top-line performance remains somewhat uncertain, but we're more confident in our expectations around cash flow as we think the company has enough levers to pull to defend its margin structure in the near term.
ICU Medical is an infusion therapy company with a range of product portfolio that includes intravenous (IV) solutions, IV smart pumps, dedicated and nondedicated IV sets and needle free connectors, along with pain management and safety software technology. In addition, the company manufactures automated pharmacy IV compounding systems. The company's product lines include: Infusion Consumables; Infusion Systems, which include infusion pump hardware, IV mediation safety software, and rofessional pservices; IV Solutions, which include IV therapy and diluents and irrigation; and Critical Care, which help clinicians get real-time access to patients' hemodynamic and cardiac status.
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