Icu Medical Inc/De Q3 FY2022 Earnings Call

Good afternoon, everyone. Thank you for joining us to discuss ICU Medical's financial results for the third quarter of 2022. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Brian Bonnell, Chief Financial Officer. We have a presentation accompanying today's prepared remarks. To view the presentation, please go to the Investor page and click on the Events Calendar, and it will be under the third quarter 2022 events. Before we start our prepared remarks, I want to touch upon any forward-looking statements made during the call, including beliefs and expectations about the company's future results. Please be aware, they are based on the best available information to management and assumptions that are reasonable. Such statements are not intended to be a representation of future results and are subject to risks and uncertainties. Future results may differ materially from management's current expectations. We refer you to the company's SEC filings for more detailed information on the risks and uncertainties that have a direct bearing on operating results and financial position. Please note that during today's call, we will also discuss non-GAAP financial measures, including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency into ICU Medical's ongoing results of operations, particularly when comparing underlying results from period to period. We've also included a reconciliation of these non-GAAP measures in today's release and provided as much detail as possible on any addendums that are added back. And with that, it is my pleasure to turn the call over to Vivek.

Thank you, John. Good afternoon, everyone, and I hope you are all doing well. It’s been a quick 90 days since our last call, and our legacy ICU business unit revenues were again very predictable in Q3, with operational performance improvements for the businesses that came with Smiths Medical. The external economic volatility in the supply chain, particularly around freight and fuel, has surpassed even the levels we saw in Q2 2022, which is surprising. As we previously mentioned, Q2 marked the highest peak for our team in the industry. However, the issues concerning raw material availability are starting to narrow. From a customer perspective, U.S. hospital census remained stable, and international underlying demand was strong across all regions in Q3. We also want to express our gratitude to all our customers and their frontline workers for trusting us during these challenging times. While Q3 revenues for legacy ICU Medical aligned with our earlier comments, Smiths Medical revenues exceeded our expectations shared during the last call. As many are now discussing topics previously unimaginable in our earnings calls, we will join that group by addressing year-over-year drivers for the three main legacy ICU businesses, explaining the Smiths Medical revenues achieved in Q3 and their connection to our earlier commentary, providing a status update on the two ongoing challenges we have highlighted this year, detailing the specific factors that have impacted gross margins significantly, and discussing the implications of a strong U.S. dollar. Lastly, we will touch on several important strategic initiatives we have completed, which will affect our baseline for 2022 moving forward. Q3 2022 marks our third quarter of joint reporting, and I will summarize the whole company results before diving into each segment. We recorded $582 million in adjusted revenue, with adjusted EBITDA of $93 million and an adjusted EPS of $1.75. Our investment in the business was softer this quarter, primarily due to inventory builds, as Brian will explain. The cost of goods was less clean this quarter, as we spent heavily to enhance service levels at Smiths Medical, while also incurring restructuring and integration costs that we are focused on reducing next year due to their impact on cash flow. The strong dollar and current foreign exchange effects are proving to be worse than they were in Q2. Now, turning to legacy ICU Medical, which has a straightforward story. In Q2, legacy ICU revenue stood at $320 million, remaining flat on a constant currency basis but showing a 2% decrease when reported. We saw slight year-over-year growth in our most differentiated businesses, with minimal COVID impact, as Q3 2021 had experienced a strong COVID surge. While underlying demand in Q3 was consistent, we did experience a brief slowdown during the quarter before rebounding in September. Public hospital companies have confirmed that surgeries were up, but long-stay high acuity admissions were down. Our U.S. sales were flat to down year-over-year due to a strong COVID comparison from Q3 2021, with all growth coming from international markets. Let’s quickly review the business segments before we discuss the current environment. Starting with Infusion Consumables, which is our largest business, revenues reached $141 million, representing a 1% year-over-year increase in constant currency but a 3% decrease when reported. Growth occurred in international markets, while the U.S. market experienced a slight decline in core IV, supported by specialty categories, reflecting the strong COVID comparison from the summer of 2021. In oncology, we've faced some raw material constraints, but we expect these to improve by the end of the year. We're pleased that international markets are stabilizing, although the U.S. situation remains somewhat uncertain at this time. Next, in Infusion Systems, which includes our large-volume pumps and associated dedicated sets, we generated $88 million in adjusted revenues, a 1% constant currency increase but a 3% decrease when reported. We had a reasonable level of installations in Q3, though we faced declines in dedicated set volumes year-over-year in the U.S. due to COVID impacts from 2021. Improved international performance contributed to growth in this segment. We previously noted that customer engagement was returning as pandemic fatigue wanes, and while the current environment introduces some challenges to decision-making, we believe our competitive opportunities remain unchanged. We are concentrating on commercial execution and have no updates contrary to our prior commentary on this segment. In terms of Infusion Systems, we reported $81 million in adjusted revenue, roughly comparable to last year. We have no further comments on revenue here. The significant issue for us is that this segment has absorbed a disproportionate share of inflation in legacy ICU, adversely affecting profits. The unexpected inflation and earnings pressure we experienced this year stem mainly from fuel and shipping costs, along with currency fluctuations, and to a lesser extent, pricing surges of electronic components. Labor challenges were more manageable this year, and we adjusted our budget accordingly, albeit we've experienced some raw material price spikes. However, as we've indicated in past calls, these price spikes don’t indicate an intrinsic increase in value over the long term. We maintain confidence in the market growth, which suggests that as capacity increases, pricing will come back into balance. Our focus remains on operating a stable and predictable environment, seeking price improvements where feasible, and emphasizing to our customers the need for indexing certain costs while believing that supply and demand dynamics will stabilize over time. Moving on to the Smiths businesses, we will begin by discussing aggregate revenues against our last comments, along with updates on the ongoing issues we've been addressing all year. The Smiths Medical revenues reached $262 million, with breakdowns of Infusion Systems generating $97 million, Vascular Access at $95 million, and Vital Care at $70 million. This exceeded our expectations, largely due to additional billing days, which we anticipated, coupled with more stable operational processes in IT and labor that led to better performance in fulfilling back orders, albeit we incurred significant expenditures to achieve this. The performance of our domestic business has improved considerably, although international performance still requires attention. On our previous call, we noted an increase in confidence and predictability in the Smiths Infusion Systems, and we outperformed our Q3 expectations by clearing all U.S. backorders on CAD disposables, which enhances our competitive position for new wins. We hadn't expected recovery until Q4, however, the entire unit is demonstrating better reliability in production and fulfillment for the Smiths dedicated pump sets and other items. Regarding Vascular Access, while we anticipated some improvements, it is still a work in progress. We benefitted from a $5 million boost from our last COVID syringe order, and while our production and U.S. distribution for major sub-product lines are strong, our commercial execution needs further development since Smiths has lagged behind here. Lastly, Vital Care continues to face supply challenges and back orders that are being addressed, as it was the most neglected area. We've extensively discussed the two buckets of challenges in our preceding calls. Today, I will address them in reverse order compared to earlier presentations. Regarding quality-related interruptions, we are making meaningful execution progress aligned with our prior communications to both customers and regulators, having made significant decisions. By halting sales of certain older products and committing to a clear and thoughtful remediation plan, we began supporting existing Med Fusion syringe pump customers in early Q3. We also tackled the root causes of the warning letter we received in late 2021. Our current experience mirrors that of Hospira, with the right team embedded in operations. The key distinction since our last call is our execution of various field actions in Q3, following our earlier commitments. Although a warning letter is certainly undesirable, it signals that the regulatory agency is facilitating progress, and we aim to demonstrate more advancements soon. Regardless of the financial statement implications, our significant expenditures emphasize how critical our progress is. On the operational challenges related to production, it can be generally said that the entire Smiths production network is functioning well, with only minor interruptions. The silicone availability issues we mentioned previously have been sorted out, and we are now fully producing those items. We continue to focus on securing our supply chain and bringing in key high-margin disposable components while ensuring proper staffing levels in our factories. From an expense standpoint, we invested significantly to enhance customer service levels with an ICU-focused mindset, but these efforts have negatively impacted gross margins. It's critical for us to identify and detail the largest discrepancies from expectations regarding gross margins, as these are significant areas where we can address challenges. Brian will elaborate further. We have already demonstrated our ability to manage operational costs, and while revenue growth is paramount, enhancing gross margin performance is equally important. One area I'd particularly like to highlight is our freight and logistics expenses, which are projected to reach around $250 million this fiscal year, substantially higher than any historical figure. This increase derives from elevated diesel costs, ocean freight rates, and expedited shipping expenses, which are essential not just for customer deliveries but also to secure an adequate supply of raw materials for our network. We won't discuss this frequently, but it's difficult to comprehend the profit shortfall without considering these substantial factors, especially when the average selling price is not declining. Alongside these challenges, improving the quality system and reducing remediation costs are crucial areas for enhancing our cash flow. Regarding next year, we wanted to preliminarily suggest some changes to how we might report as we realign our business units. We are likely to consolidate revenues into three segments: a consumables segment consisting of legacy ICU IV consumables, most of legacy Smiths Medical, Vascular Access, and a few other consumable lines; a systems segment including all legacy ICU IV pumps along with most legacy Smiths Medical IV systems and their associated dedicated disposables; and a Vital Care segment that combines legacy ICU IV solutions, critical care, and much of the legacy Smiths Medical Vital Care. We anticipate improvements in production and operations for most of these segments in 2023, though the Vascular Access commercial execution will require further attention, as mentioned earlier. Additionally, some strategic initiatives we recently completed will adjust the 2022 baseline. This includes agreements to exit India as a direct selling organization and remove other negative margin situations where pricing or costs cannot be justified. While these may result in slight revenue reductions for the base year, they are necessary to shift from negative profit situations to neutral or positive ones. From an earnings perspective for the remainder of this year, the main difference from our last call is currency fluctuations. Although the euro has stabilized somewhat in recent months, key markets such as Canada, Japan, and Australia have all experienced further currency weakness. Notably, we inherited legacy currency hedges from Smiths this year, whereas ICU historically operated unhedged. Consequently, we've had to accept the repercussions today, which have significantly impacted the year. From a revenue standpoint, we believe Q3 demonstrated our potential when our fulfillment operations stabilize, even if they come at a higher cost. We expedited the resolution of some back orders more quickly than expected, which could influence Q4, depending on how the underlying market evolves. Regarding long-term performance, I will refrain from reiterating our previous comments, as we believe we have been transparent about the size and scale of the self-help opportunities. Our aim is to return to focusing on the aggregate positioning of our combined portfolio and its significance for customers. Although this situation has proven more challenging than anticipated, the logic for our customers remains clear. Similar to our experience with the Hospira transaction, we need to shift perceptions from historical views to highlight our value through innovation and service. These portfolios are logical together, and we are actively exploring how to integrate them effectively, whether literally or economically. We firmly believe that having a broader range of essential care items increases our opportunities. Our company is emerging stronger following recent events, and though we've faced challenges, we are optimistic about our path forward with our new colleagues to create value from this combination. We extend our gratitude to all customers, suppliers, and frontline healthcare workers for their contributions. With that, I'll pass it over to Brian.

Thanks, Vivek, and good afternoon, everyone. To begin, I'll first walk down the P&L and discuss our results for the third quarter and then move on to cash flow and the balance sheet. Along the way, I'll provide our updated outlook for the full year for each of these areas. So starting with the revenue line. Our third quarter 2022 GAAP revenue was $598 million compared to $336 million last year, which is up 78% on a reported basis, reflecting the impact of the Smiths Medical acquisition. For your reference, the 2021 and 2022 adjusted revenue figures by business unit can be found on Slide #3 of the presentation. For the legacy ICU business, adjusted revenue for the quarter was $320 million compared to $328 million last year, flat on a constant currency basis and down 2% on a reported basis. Infusion Consumables was up 1% constant currency and down 3% reported. Infusion Systems was also up 1% constant currency and down 3% reported, and IV Solutions was down 1% on both a constant currency and reported basis. Overall, we were pleased with the results for the legacy ICU businesses as compared to a very strong Q3 last year. For the third quarter, Smiths Medical contributed $262 million in revenue. Compared to the second quarter, this represents a sequential quarter increase of $39 million. It is worth noting that Smiths Medical's historical financial reporting calendar resulted in five additional business days during the quarter as compared to legacy ICU. We estimate that these five additional business days accounted for approximately half of the $39 million sequential increase in revenue, with the remaining increase due primarily to improvement in customer order fulfillment and reductions in back order levels, most notably within the legacy Smiths Medical, Infusion Systems and Vascular Access businesses. During the quarter, we completed the IT systems work to align the Smiths Medical financial reporting calendar to that of ICU. And going forward, the number of business days will be the same across the combined company. As you can see from the GAAP to non-GAAP reconciliation in the press release, for the third quarter, our adjusted gross margin for the combined company was 35%. During the quarter, we continued to experience the impact from the same items as the second quarter and largely to the same degree with the exception of foreign exchange, which worsened during the third quarter as a result of the continued strengthening of the U.S. dollar. For the full year, we expect adjusted gross margin to be around 36%. Coming into 2022, we originally expected adjusted gross margins to be 40% or 4 percentage points higher than our current forecast. So let's recap the drivers of this difference, which fall into a few distinct categories. The first category is operational inefficiencies being driven by the current supply chain environment. Here, we're seeing a 2 percentage point impact to gross margin from a combination of the continued effect of lower manufacturing absorption from reduced volumes, plus additional expenses related to air freight and other forms of expedited shipping to customers, which has been incurred to address the legacy Smiths Medical operational challenges. The second category is higher market prices for fuel and diesel, as well as certain categories of raw materials. The higher freight rates are disproportionately driven by the legacy ICU Solutions business, while the higher raw material prices are spread more broadly. These higher freight and raw material costs reduced adjusted gross margin by approximately 2 percentage points. And the final category is foreign exchange, which will have a 1 percentage point negative impact to adjusted gross margin for the year as a result of the strength in the U.S. dollar. Recently, we have seen some improvement related to manufacturing absorption as we continue to increase manufacturing output and improve customer fulfillment. But this benefit has been largely offset by the impact of foreign exchange from the continued strengthening of the U.S. dollar. Additionally, our willingness to expedite shipments to ensure product availability for customers, along with the lag between manufacturing improvements and the cost recognition in the P&L, we don't expect to see a meaningful improvement to adjusted gross margin during the fourth quarter. Adjusted SG&A expense was $107 million in Q3, and adjusted R&D was $23 million. Total operating expenses in Q3 declined compared to Q2 by approximately $6 million from a combination of continued realization of synergies, lower personnel costs and timing. Restructuring, integration and strategic transaction expenses were $14 million in the third quarter and related primarily to the integration of the Smiths Medical acquisition. This was the same level of spend as the second quarter, and we anticipate we will maintain a similar level of spending in Q4. Adjusted diluted earnings per share for the third quarter was $1.75 compared to $2.07 last year. The current quarter results reflect an adjusted effective tax rate of 18.5%, and basic and diluted shares outstanding for the quarter were $23.9 million. And finally, adjusted EBITDA for Q3 increased 29% to $93 million compared to $72 million last year. Now moving on to cash flow and the balance sheet. For the quarter, free cash flow was a net outflow of $18 million. Sequentially, this was a meaningful improvement compared to a net outflow of $86 million in the second quarter due to a combination of improved earnings and lower working capital. We saw this improvement in cash flow while at the same time continuing to invest heavily into the three key areas of the business that we've highlighted for the past several calls. The first is higher levels of inventory to bolster safety stock and allow for onboarding of new customers. Here, we invested $52 million in additional raw materials and finished goods inventory during the quarter, most of which was related to the Smiths Medical product lines in order to protect our manufacturing operations from supply disruptions and to replenish our distribution channels to better serve customers. The second area was the integration of the Smiths Medical business, and as previously mentioned, we spent $14 million on restructuring and integration. And the third was quality improvement initiatives for Smiths Medical. During the quarter, we spent $19 million on quality system and product-related remediation work. Additionally, we spent $21 million on Capital Expenditures for general maintenance and capacity expansion at our facilities as well as the placement of revenue-generating infusion pumps with customers outside of the U.S. We continue to expect total Capital Expenditures spending in 2022 of approximately $100 million. For the fourth quarter, we will continue to invest in the Smiths Medical integration and quality system improvements along with higher levels of inventory across the combined company. However, inventory has been the area of greatest investment with $152 million spent through the first three quarters this year, and we believe we are nearing the point of stabilization and expect inventory levels to peak by Q1 2023. Just to wrap up on the balance sheet, we finished the quarter with $1.7 billion of debt and $249 million of cash and investments. Since our last call, the macroeconomic factors that impact our near-term earnings outlook remained mostly stable, with the exception of foreign exchange, where the U.S. dollar has continued to strengthen relative to foreign currencies in markets where we have a meaningful presence. As a result of the foreign exchange impact on our P&L for the second half of this year, we expect to end the year at the lower end of our previously provided guidance ranges for adjusted EBITDA of $350 million to $370 million and adjusted EPS of $6.20 to $6.80 per share. For modeling purposes, the Q4 adjusted EPS guidance assumes interest expense of $21 million, a non-GAAP tax rate of approximately 23%, and diluted shares outstanding of $24.1 million. In summary, we're pleased with the meaningful progress we made during the third quarter to address the operational challenges of the Smiths Medical business. While profitability will remain constrained as we invest to repair the legacy Smiths Medical business and deal with the current macroeconomic pressures, we remain convinced of the longer-term opportunity to improve the financial performance of the combined organization with the list of items under our control. Strategically, we have broadened our available markets, and we're working to get all portions of the business on the same trajectory as legacy ICU. We look forward to providing updates on our progress along with our 2023 outlook during our call early next year. And with that, I'd like to turn the call over for any questions.

Can you hear me okay?

Perfectly.

I always feel like they need more time to digest all of the information given in these calls, but let me take a stab at it here. On the legacy Infusion Systems business, a good set of installations. You did mention you're seeing a benefit from the Smiths combination. Are you seeing some selling synergies as a result of the combination?

I would say, Jayson, if you look at the historical market trends, anywhere that used a Smiths product was utilizing either our LVP pumps or alternatives. We had a clear understanding of our presence in those areas. I think in places where our products were used by others, we now have a reason to enter those markets where we previously didn't. This is prompting us to engage in discussions that we may not have had the opportunity for prior.

And the environment for capital is conducive to those discussions?

I believe that issue was addressed in the script. It felt solid 120 days ago and continues to feel good. However, it's taking a bit longer due to the week-to-week uncertainties in the world, which might slow down some decision-making. We haven't observed any significant changes. Additionally, regarding the information we've published, the capital for the combined company stands at 15%. If you examine it more closely, much of this consists of software licenses, service contracts, and spare parts. Actual capital is not a significant portion of the company. While it's important for driving future dedicated disposable share, the majority of the company is made up of single-use disposables.

Okay. And on the legacy consumables business, growth slowed. I realize you had a tough comp here. I think you alluded to some supply chain constraints, and I think in the past, you've called out oncology. Is there any way to either kind of quantify the impact of the supply chain constraints or at least just kind of frame the current situation and when it will be resolved?

Yes. I think there's probably two issues that happened. One, that's why we were trying to say there was a little bit of intra-quarter volatility. It was a little bit soft out there in U.S. hospitals kind of mid-July, early August. Maybe, I don't know, if it was holiday travel or what, but it was a little bit less than we had expected. And that's part of what happened in Q3. And the other part is being short some of these items on oncology in one or two other areas. I would say, I don't want to give a precise number around that, but it's certainly more than $1 million over the balance of the year.

Over the balance of the year or the quarter? Sorry.

Well, saying a lot of it happened in Q3. So $1 million in the quarter is probably better.

Okay. Just on gross margin, you kind of called out the $250 million impact. I think you cited diesel, ocean freight, expedited freight. But you also mentioned that there are areas of self-help within that. Is there any way to kind of walk us through where you see the opportunity? And when will we see an impact on gross margin?

Yes. Just to be clear, we were just saying $250 million is the absolute spend, right? And by any historical measure, spending 10% of your revenues on moving stuff around is not a normal level. So it's not saying that's all incremental pain. There are lots of pieces that you can pick at. I mean one piece that we've been very focused on, we knew we were going to have some expedited freight when we did the transaction, and we were behind even some of our own production, which had more expedites. So I don't know I'd say that the number of expedited freight costs this year was somewhere north of $20 million, $25 million. That's a very tangible thing that we need to go after. It's not all going to get solved in one quarter. It takes time to get it, but it's fully under our control, and we need to do that. And that's a big chunk of variance relative to our original plan for the year.

And seems to kind of clarify the spend, I realize we're not in a normal environment, but what is normal? Meaning if $250 million is what it was this year in a normalized environment for a business this size, what would be the normal level?

Yes. I think we want to separate IV Solutions. I don't want to get too granular, but we want to separate IV Solutions from everything else. Historically, those costs were in the 4% to 5% range for outside of solutions, and we're obviously a much higher percentage right now.

Vivek, I don't want to get too granular around a single quarter, but I know a lot of people are focused on like the exit rate for this year and running that out to next year. So as I think about like low end on guidance, I'm thinking 350 to 360, and the range that takes you down to 350 is a step back from some of the progress you've made this quarter in getting closer to 360. Is there another step forward? And moving towards 2023, how should we think about like that range of outcomes for the fourth quarter?

I understand your point, Matt. It's been a challenging year, and we want to avoid making any errors. Your question is completely valid. We were quite open during our last call and may have been a bit optimistic regarding revenue. There's definitely potential for margin improvement. I feel more comfortable saying that we should stay within our current parameters and address next year when we arrive at it. If revenues do not meet expectations and currency fluctuations worsen, there is a possibility that your concerns could materialize. However, there's also a strong chance that if we execute our plans effectively, we will achieve our intended results. I appreciate your question, but I prefer not to focus too heavily on a specific quarter given the challenges we've faced this year.

Okay. I think that's fair. And then you talked about a few strategic efforts you were making. How are you thinking about the timing of portfolio rationalization at this point?

There are a few countries where our lines of business are truly unprofitable, and we should prioritize addressing those if possible. We have been making adjustments in certain areas by changing pricing strategies or adopting different market approaches. Our focus has been on dealing with these negative impacts. Regarding portfolio rationalization, I don’t believe the market conditions are particularly favorable, which is not surprising. Currently, we are concentrating on ensuring our assets are operating effectively and seeing where that leads us. If there are contributions to positive cash flow for the overall enterprise, we are not feeling pressured to act quickly and will instead focus on maximizing value.

Okay. I'm not sure if Jayson asked this or not. How much was oncology affected this quarter? Can you provide some quantification on that?

I think the answer we gave there was about the quarter, which you could say, it was $1 million or something. I don't think it would be an unrealistic assumption to say if you annualize that number, that was the impact of oncology constraints this year.

I have just a couple of follow-up questions. Regarding the slowdown in the U.S. in July and August, could it be that the return to some seasonal patterns, as I have heard from a few other companies, might also influence the impact at the Hospira level?

Possibly. It looked more like the world did pre-COVID, even a bit less than that. So it's hard to say.

Okay. That's fair. Vivek, something mentioned...

It's still a little bump even in the fourth quarter, right? That's what I was trying to say. We need to hold our market share, gain market share, create new categories, that's what we're focused on, right? We're not going to change so much standing just to make sure the portfolio is in the right places with our customers.

And Vivek, you talked about some of the strategic efforts. You mentioned the exit from India as one example. I assume there are various small projects involved, but could you provide an overview of what some of these initiatives are and how they contribute to making any significant impact?

I mean, I think they're all onesies and twosies, but there's a number of them, right? So we'll take that the world we live in right now. So we have to grab them if we can. Even if it's a low single-digit type of help, we've got to do it. We have to do it.

Right. The gross margin pressure is nothing new. I believe you mentioned expecting it to continue in Q4 as well. Were there any improvements on prior expectations? I don't think so. I just wanted to clarify that point.

No. Brian?

No, we weren't, Larry. So I think that...

Some of the things really changed. FX has gotten a little worse, which has changed. But I feel like freight at least has gotten a little better. Are you guys seeing at least a little bit of an improvement there? Maybe not enough to really move the needle just yet, but maybe some light at the end of the tunnel.

We believe the long-term forecast, right, which is back half diesel price changing next year, you would believe that. But at the moment, we have not seen any, right? There's still a strong disconnect between diesel pricing and regular fuel pricing in the U.S. And ocean inbound to the U.S. from Asia, ocean is down. But we don't really use a lot of that, right? It's outbound to Europe and other spots for us, and air costs have not changed at all for expedited. So air expedite is still very big. And most of that stuff that drives that big, huge logistics number is variance on air and other expedites.

Okay. Just a couple more. You mentioned on the Med Line pump, it sounds like things are midline pumps certainly progressing. So are you basically back in the market with all? Can you just kind of give us a little more color there update?

I think you mean the Med Fusion.

Med Fusion pumps, excuse me, yes, yes.

I think I'd leave it at our comments in the script, which are we've informed customers, regulators of the actions that need to be taken to support the product. We are out in the field working on those actions, and we are supporting existing customers to have answers. And that's probably all I would say, right? They didn't have a lot of information a number of months ago, and they're getting real support in the field today.

Got you. All right. Just one last question for Brian regarding cash flow. I know that this year has seen a year-to-date usage of cash, although it seems like things are gradually improving. Looking ahead, I understand that inventory should hopefully provide a better guide for you next year in terms of positivity. Do you expect that, considering much of the integration work and costs will decrease, you might return to being free cash flow positive next year? Additionally, over the long term, can free cash flow approximate net income?

Yes, Larry. Yes, on inventory, that's been the largest area of investment for us this year. It's $150 million to date. We do see that peaking by Q1 of next year and then probably stable after that. I don't know if it goes down, but certainly stable. And that alone should allow us to see some positive free cash flow next year. And then I think while it will take a while since we are going to continue investing in the integration as well as the quality systems, yes, eventually, at some point, we do get to where free cash flow is in line with our GAAP net income.

Yes, I want to add two points. First, Larry, the type of inventory is significant because the supply chain has been disrupted all year. We have encountered a lot more raw materials. Despite the staggering numbers, we have finished goods in abundance, which is true for many companies. Second, it's important to note that during COVID, our net income and free cash flow were fairly tight, but at good levels, and we want to return to that. The reality is that we had to utilize our legacy cash flow to sustain ourselves this year, and that's what occurred. At the very least, the transaction needs to be self-sustaining, and that might be a modest goal in comparison to achieving our overall objectives. Thank you, everyone. We value your interest in ICU Medical and look forward to connecting at various conferences early next year and having another call soon. Thank you very much. Goodbye.

There conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.