ICU Medical Earnings: Smiths Integration Challenges Results and Near-Term Outlook

No-moat ICU Medical’s ICUI third-quarter results were largely in line with our expectations. Adjusted total sales declined by 6% year over year in constant currency, but gross margin expanded 100 basis points on an adjusted basis. Management attributed the top-line decline to the weak performance of acquired products from Smiths, and we believe the operational glitches related to the Smiths acquisition are mostly short-term.

We are maintaining our $177 fair value estimate, as we continue to expect efficiency improvement and cross-selling opportunities upon the completion of the Smiths integration. Shares look significantly undervalued to us.

In this quarter, many legacy ICU products, including the IV consumables and the LVP pump business, had healthy mid-single-digit annual revenue growth rates, but the Smiths products remained a drag. Positively, issues with the legacy Smiths’ back order fulfillment gradually wound down, and in the long run, we continue to expect low-single-digit organic revenue growth for ICU Medical. For the first time after the Smiths acquisition (not including the positive cash flow due to one-time benefits in the first quarter), ICU recorded a positive non-GAAP free cash flow of $14 million. We are encouraged to see the favorable outcomes from the inventory reduction program, which releases resources for infrastructure improvement and other efficiency-oriented commitments.

Management cited many priorities in the next stage of the Smiths’ integration, including the enterprise resource planning system and logistics. Although the consolidation activities are slated for an acceleration in 2024, management doesn’t expect positive effects until 2025. Overall, we believe ICU is currently on the right track to stabilize its revenue growth and margin levels after initial chaos around lost revenue and impaired margins with the Smiths acquisition.