ICU Medical, Inc. Stock

Great. Good morning. This is Peter Harrison from Morgan Stanley's Investment Banking division. Today with me, I'd like to introduce Vivek Jain from ICU Medical, Chairman and CEO. Welcome, Vivek, and thanks for joining us.

Thanks, Peter, for having us at this great event. I appreciate people showing up at 7:00 a.m. New York time.

Perfect. Let's get started. Maybe let's start with the macro environment. On your Q2 call, you reiterated continued stable demand and utilization environment and status quo capital equipment market. It's different from some people we heard about ACA subsidy expirations affecting surgical volumes. That does not seem to have an effect on you guys. Do you agree that consensus continues to be healthy?

Sure. I mean, there was obviously some news last week with some of the large companies having their own specific commentary around procedure volumes. For us, our business is tied to hospital admissions. And from what we've seen, our customers are busy, census appears pretty good. We haven't seen any slowdown. It's, to use the words we said in our call script, it's in line with the assumptions underlying our guidance, which was okay growth underlying, not spectacular in terms of markets, but still positive.

And the rest of this year feels better, worse, the same?

Rest of the year feels very consistent with those comments. We haven't seen any big swings in either direction.

Okay. You've obviously spent a lot of work reshaping the portfolio in recent years. You did the IV Solutions JV with Otsuka, SKU rationalization in Vital Care. Obviously, you did the Smiths acquisition. What is your ultimate goal in portfolio management transition? Is it to improve the WAMGR, drive faster sales growth and/or better profitability? And if you had to say what inning you are in, in this transformation, what inning do you feel you're in?

I don't know that it was so much transformation. I mean, we -- for all the challenges, we look back on the last 7 or 8 years and said we took a $200 million direct sales parts supplier and turned it into a comprehensive integrated infusion company. That's the largest set producer in the world. Our goal wasn't necessarily about improving the underlying growth rates.

We -- the first transaction had -- the first big transaction had to happen out of defense. It's been really about trying to build a coherent portfolio, things that make sense together and trying to have the best pumps, the best consumables, the best IV solutions we can have, products that make sense together to the customer in the way the customer buys them.

Great. Maybe dive a little bit into the businesses. Let's start with IV Systems. That business grew a robust 12% organic in Q2, nearly plus 10% in the first half. Some of that was due to installations being pulled forward from later in the year and some was from competitive wins. What are the sustainable growth drivers into the second half of this year?

I think on our calls, we've been trying to be very transparent about the value, the drivers in the IV Systems business. And there's really 3, 3.5 of them. The biggest 2 opportunities are on our LVP pumps where we create value by either winning competitively or rolling over, upgrading our existing installed base. Most of the growth to date over the last 4 quarters, 5 quarters, and the business has grown nicely for 2.5 years in a row, has been from competitive wins. Next year, it will be a mix of both competitive and rollovers.

The third way we grow value in the pump business is by refreshing our own syringe pumps. Those are the pumps that came in the last acquisition. We have a strong market share position there. And maybe the half or half-plus is how do we go deeper with the installed base, reprofitize it by adding value around software, services, et cetera.

All right. I mean, obviously, the competitive environment for LVPs has been changing of late with Alaris remediation essentially completed, Novum IQ still off the market. How is the Plum family positioned competitively? And who do you think you're taking share from?

I think we've been very -- everybody in these calls is the math doesn't make sense. Obviously, everybody says they're winning and taking share. We have stayed away from those comments, and we have simply said it will show up on our P&L, which we believe it's starting to. And if you read our scripts prior to the latest acquisition, our pump is not that big. Our LVP business reported independently, and so you could make a judgment of the size of it. So small wins make a huge difference on our income statement.

I think the competitive environment is active as ever. There's plenty of opportunities out there, and there's a reasonable amount -- our installed base included -- old equipment in America that needs refresh and old equipment globally, that's a good opportunity.

All right. And thinking about your pump business a little bit more granularly, when do you expect the upgrade cycle to really start? And what is that opportunity for investors, units, timeline?

Normally, these devices have a 7- to 10-year life. And if we think about our own U.S. installed base, which is 20-ish percent of the market, we are in the very early days of refreshing that. That process is just starting. It will start in earnest next year. You have to be sensitive. It's a little bit like going to a customer, just like a software vendor and saying, even though this product is still functional and we built these things like tanks, they can pump a long time. We no longer support the software. We no longer offer spare parts, et cetera, and sort of encourage a refresh to a modern architecture.

And how do you think about with that upgrade cycle, the timing of the pull-through of consumables?

Our consumables business, for the most part, where we have the pumps today already, so when you talk about the upgrade cycle to the installed base, more often than not, we already have those consumables. So I wouldn't want you to think that it's incremental consumables to a large degree from rollovers. We probably have those already.

The opportunity to drive more consumables related to LVPs is more about the competitive wins where we have a reasonable chance of getting the consumable. I mean, our consumable market share was higher than our pump share anyway, right, historically. And consumables growth for lots of other reasons outside of the LVPs, but specific to LVPs, it's more on the competitive side.

Okay. One aspect of this business is hospital profitability headwinds from both payer mix and 340B. How could that influence the infusion pump spend? Or would those pressures have to be greater to drive hospitals to alter their replacement schedules?

I mean, hospitals have obviously been under economic pressure since certainly as long as I've been doing this, and they've been trained to behave in a certain way. I think I would say whether it's 340B or whatever, we -- we don't -- we focus on you need these products to deliver medications. You can't deliver care without them. Nobody buys a pump voluntarily. My joke is it's like teaching your mom to use a new cell phone, right? You only upgrade when you have to.

And at a certain point, these devices hit their age, they time out, the support isn't there, the parts aren't there and refresh needs to occur like your desktop PC or whatever it may be. That's the pump business. It's not a revenue-generating item for them. And if you look at just what's happened in the U.S. market where the market share leaders had to remediate, et cetera, people obviously had capital available for those remediations. You need the pump.

For the syringe pump, obviously, you've been in discussions with the FDA. You're making progress on the additional verification testing. You expected to refile the 510(k) in the second half. What is your confidence level that this new filing will fully address their concerns?

I think the questions were real time of things happening in the industry real time. We adapted quickly. We built the testing capability that was required. We reengineered 1 or 2 things to meet their requests. I think we believe we've had 6 first-pass approvals or something in our systems business over the last 2 years. This was the first one we didn't have, which is the danger of talking about them out loud because historically, we only talked about when you had them in hand.

And so it's the same team that's gotten 6 in the last 2 years and a bunch historically through the regulator. And we think we have the right data in hand and the right submission strategy, et cetera. And we feel confident that we'll -- the submission at least for the syringe pump will go in this year.

So if it goes in this year, what's the timeline for FDA clearance in your mind?

Typically, it's a 6- to 9-month review cycle. It really comes down to are the items reviewed only what was the test information required or other changes that may have happened in the industry. It's -- I think we'd be scared to handicap it one way or the other.

Do you see the FDA being slower, quicker than historical standards?

It's -- I'm not sure folks necessarily believe this, but everything from a review has been exactly on timeline, as responsive as they've ever.

That's great. It's good to hear. We talked a little bit about the LVP competitive environment. Maybe talk -- spend a little bit of time on the syringe pump competitive environment. And what is the benefits of having a syringe pump with your LVP? And how do you think about the share over time?

If you just kind of unwind history a little bit, right, the advantage that the market share-leading pump platform, where Dan Woolson here, Dan, our President in the front row, and I worked for a long time was when it came on market, there was real innovation around multiplexing and convenience of having all the pumping modalities in sort of a single software solution.

The remainder of the market that was using our system or the other competitor system, so players 2 and 3, typically we were using their LVP and either a Smiths syringe and CADD pump, which required the customer to have 2 separate software packages, run 2 separate drug libraries, have different training, et cetera.

The advantage of having syringe, which is 1 of the 2 or 3 core reasons why we took on the headache of the Smiths acquisition was to have what we believe was the best motor, the best pump, the most accurate syringe and make it simpler for customers by integrating with the same user interface, same feel and same software package as the LVP. And the multiplexed Plum combined with an integrated software syringe eliminated some of the historical challenges that we had on our LVP platform, deficiencies, you might say that we have in our LVP platform.

You did mention in passing the CADD program. When do you think you'll restart development of that?

CADD hasn't stopped. It just is lower priority. There's a finite amount of testing resources we had to address some of these questions. Medfusion in the NICU in the hospital is a more acute issue, is an older product. We had to get that done first. CADD is happening as we speak, but it's only getting a fraction of the lab capacity, not all of it. So it will be a couple of months behind Medfusion.

And do you have a sense of the work that's needed to get it from here to clearance and the timeline?

In a strange way, the request on CADD was almost less than the request on Medfusion. There just aren't as many sets you use on CADD as there are with syringes, and therefore, the testing volume isn't quite as dramatic on CADD as it is on Medfusion. So I think we have a good sense of what needs to get done.

And is that timeline for Medfusion a good proxy precedent for where you think CADD will land?

I think we'd probably pause on answering that right now until we see the response to Medfusion.

Let's wrap up on this part of the business with the software platform, LifeShield. How does this stack up versus the competition? How do you drive utilization?

Yes. I mean, the software offering is intended to be an enterprise-wide offering. We were limited in scale a little bit with our historical offerings at the size of IDN and the simplicity that it could run with an IDN, you could do it, but it required extra work.

Having a full kind of enterprise cloud-based system, the ability for customers to immediately update their drug libraries across a huge multistate IDN across all different pumping modalities in a matter of minutes is a real advantage versus running 2 separate pump platforms, 2 separate software systems. There's lots of other features and analytics and things people will pay for, but the safety aspect of Medfusion and interoperability, which has really become table stakes, is what we focus on making sure both pumps have and look and feel the exact same way.

And are you charging for that today?

We've always charged for software. I think the $64,000 question is, is there enough value in the LifeShield offering that we can illustrate and demonstrate that to our existing installed base and try to reprofitize that a bit? Because at some level, while the period-to-period revenues are great for the next few years on the rollover of existing installed base, we're already getting those dedicated sets. So that's not necessarily so NPV creating, right? The 10 years you get to get that. So we'd love to reprofitize the software if we can prove there's enough value to customers there.

Okay. Before we move on to consumables, I think the Otsuka JV you did was a very interesting transaction. It has led to some investor questions about what it means for future and how does it look? Maybe talk a little bit and describe that JV and the benefits that ICU gets from it.

I mean, again, back to a coherent portfolio. IV solutions, IV consumables and IV systems are a coherent portfolio, but we believe we had a better right to win where we could innovate in IV pumps and IV consumables. We didn't have the same drug expertise in IV solutions. We were very lucky to find a partner who is one of the 2 largest producers of these items on the planet. Otsuka dominates Asia in these products and was looking for a way into the U.S. market. They have all the innovation in what I would call for the U.S. market, next-gen IV solution bags and the rest of the market globe is already the standard, which is DEHP PVC-free IV bags, which is the elimination of certain plasticizers, which are becoming laws in states here.

Otsuka to us brought 3 things. They brought that technology, the know-how. They brought -- they are bringing their skills in automation, and they're ultimately bringing their capital. And I think that was something we didn't have the capital to invest at that scale. We didn't have the tech on the production side, and we didn't have the experience in the product categories. And so for us, it's coherent that we need to still sell it and price it to our customers, and we will do that, but we found a better partner to help us make.

And on the capital side, wasn't there just a big investment in Texas of late?

There was -- we broke ground 3 weeks ago in Texas on the first new IV solutions factory in this country and maybe from scratch for 30 or 40 years, $500 million and more to come. The shovels are already in the ground competing against data center people, et cetera, and contractors, people like concrete, put up for Shell, et cetera.

That's great. Why don't we pivot to your second business, the consumables business. It did return to mid-single-digit growth, organic growth. How sustainable is that growth momentum in second half '26 and onwards?

I mean if you look at our financial statements, you would see that the consumables business has grown 5%, 6%, 7% a year for 6 years in a row, since 2020, towards -- since maybe towards the end COVID in '21. We believe that growth is sustainable. There are 3 or 4 important drivers to that growth. One is one you already mentioned, which is if we win a competitive pump, gives us a chance of getting those consumables.

I would argue the more valuable one historically has been we've created these niche new markets, where we find new clinical applications that are high value and sort of in the trenches, and that's whether it's around oncology or dialysis or subcutaneous where we haven't -- we're not necessarily the first player there, but we need to prove our worth. There are new categories we're creating in the consumables business. The third is we get price a little bit. This year was a year of price and price will start to come back. And fourth, that business still is globalizing to the extent pumps are not used in certain geographies. You don't use really a needle-free connector until you're running a pump. And so places that are moving more to pumps we need to participate.

Maybe let's dive into price a little bit. How does that factor into the growth outlook and are you -- do you think you'll continue to be able to take prices going forward or at least offset inflation headwinds? What do you need to wait for GPO contract renewals?

I think the new wildcard in this -- the word tariffs is in this equation somewhere too, right? We took a lot of inflation on our P&L in the 2 years after the acquisition in early '20. So '22 and '23, maybe a little bit '24, we had a ton of inflation come our way. We had a set of new GPO contracts going in '25. They did -- they had price increases. They did not recoup the inflation we took historically. We still have not gotten that back. We do now have some escalators in our contracts going forward. I would have thought maybe they cover inflation, which you read the newspaper changes every single day. The bigger issue is whether you call tariffs inflation or price or whatever, that makes recouping all of it very difficult.

Right. Maybe moving on to Vital Care. That business, it was negative in the first half, but you expect it to be stable in the second half. Does that mean flat in second half or similar decline as in first half? How do you think about the relationship?

I think we meant a little bit the way we just talked about IV Solutions. We said plus or minus $70 million a quarter or so, might imply a little bit down year-over-year. We've gotten out of some via divestitures, some nonprofitable lines that maybe improves the organic reported number. But I think the more important item for us is we're making the best cash returns we've made on Vital Care, even if it's a little less strategic that the rest of [indiscernible] running it for cash, and I think we've done a good job.

Great. So from the SKU rationalization you've done, how do you think about the right underlying growth cadence longer term for this business? Does it remain a drag on your business? Or do you think it helps drive the way [indiscernible] and the growth of the company?

I do think Vital Care will be dilutive to overall corporate growth if the other businesses continue to put up the numbers that they put up, which we believe they will, right? And there's no way Vital Care is going to grow at the mid-single digit range. So over time, it's a strategic question we need to address. But if we're maximizing cash returns, the rest of the businesses are doing sort of better than our guidance was for this year. It's not a pressing problem on this right now.

So one theme we continue to see in MedTech is obviously, and you've been a player in this is portfolio rationalization. You've been pursuing both operational and strategic opportunities in Vital Care. On the last call, you talked about improvement in cash flow in the business. So the other question, I guess, is do you need to do something with that business? How do you think about that business going forward in the overall portfolio for ICU Medical?

I mean, again, I think it is -- if you believe in the circle of kind of what we do and where we think we have portfolio coherence. Vital Care is a little bit on the outside of that, right? There's no mystery around that. So if the opportunity came to monetize those in the right way we would do it. We've tried. It takes two to tango. We haven't had that opportunity. And I think we're not willing to sacrifice cash earnings in the name of a little bit of growth rate improvement, right? We don't want to be up here talking about dilution or stranded costs or things like that. So it has to make economic sense. The thing we've learned, whether it was Hospira, Smiths, Otsuka, all of it, the right things happen, sometimes just takes some time, we got to wait and we're in that moment.

Helpful. One theme we've seen in this conference continues to be a transition from hospitals to ASCs. How do you think about your role in ASCs? Do you have a higher or lower share ASCs and where you're best positioned your mind?

It's a great question and one we are focused on. We don't necessarily see for a hospital where they may send our products out to. Intuitively, we feel like our share is lower in ASCs, certainly because we measure it by some of the freestanding ones and some of the public operators, we are where we should be. So it is absolutely an area of commercial focus and desire to grow. I don't think -- even if care is accelerating there, it hasn't been -- our growth has been better in the hospital for what we can see at least. And so it completely makes sense that we need to be focused on that.

And is that -- get the portfolio to one of the ASC today or 100%?

Yes.

Maybe talk about a little bit of your 2026 guidance. It assumes stable macroeconomic environment with inflation at current levels. Oil price is kind of the same current...

What date was that?

Yes, moving daily. We have not seen gross margins, it's really affected by the higher oil prices in the first half. How do we think about that going forward?

The guidance, we had the opportunity to -- we've finally been consistent again for the last 2 or 3 years, the way we were from 2014 to 2019. And we took a 2- or 3-year time out from that. And we said we can do better than our original guidance this year based on fuel remaining where it was, 80-ish or something, no incremental tariffs and kind of currency in line. The currency -- and tariffs have been a big headwind for the most part since I called currency appears to have remained in line.

Our sensitivity to oil is not nearly as much as it used to be. Our IV Solutions business, which you had a lot of transportation was much heavier tied to that and there's a lag time. So even though there's been a swing that's not so much on our minds. The wildcard is a little bit something change in the tariff front. And we don't know any more than you do. The tariff favorability relative to what we thought earlier in the year to date helped offset some of the fuel increases if there's a major change there that would be different than our expectations. So that's not to throw a bucket of cold water on it. We still feel very good about it, but it's the crazy part is going and talk about the macro items, not talking about the underlying.

Right. So if I think about -- I think I know the answer, but if you think about tariffs, FX, oil, what of those 3, what keeps you up most at night?

Tariffs.

Tariffs. I was right in kind of -- all right. What are the key puts and takes that investors should consider for revenue growth and margin improvement moving into 2027? How do things like price, pump replacement cycle and obviously, new product approvals factor into that outlook?

Yes. I mean, I think we've demonstrated over the last 2.5 years in the spring of 2024, we said, okay, we're under-earning profitability needs to get in line. And from that day, I think there's been -- we have 1 slide supplement to the quarterly earnings. We've seen quarterly revenue growth, 5%, 6%, 7% in the big 2 businesses. We don't believe there's any reason for that to stop because we haven't even started the rollover of the pump platform. We haven't started the syringe rollovers. It may not be perfect for [indiscernible] but those things will happen. They have to happen because those devices are old. As long as census in the U.S. is stable, and we continue to create these in niche markets. There's no reason consumables should vary from the course it's been on.

And so then it's really a question, okay, do we maximize profitability? We squeeze out 20 points of EBITDA -- 20 points of EBITDA on 41 in change of gross margin, right? We run a lean company. Our SG&A hasn't really changed for many years, and it won't change going forward. So it's all about the gross margin line for us which is a function of price, delivering the manufacturing savings, integrations that we've been working on. Those come with bumps. We're dealing with a little bit of those now, but the -- if places go away, costs go down, and that has happened. And so for me, we've said publicly, our target gross margin pre-tariff was 45%, going to 43% without, and we should be exiting there at the end of next year. And so that shows we have some confidence in the gross margin ramp between now and then.

What is the ongoing leverage opportunity? You've talked about capturing 2 more points. Where can you go from there? Any more upside after that? Or how do you think about the puts and takes?

I mean, again, we certainly did not look like a normal medical device companies in the mid-30s. Solutions played a big role in that, that change, the operational stuff change. I think the next wave of margin improvements, which is a multiyear journey is again about 2 things. It's about also there's still more opportunities on the -- we've changed the manufacturing dramatically. There's more opportunities if we were willing to do that. But ultimately, it's about mix and price, what we're carrying on the new hardware and the overall consumables mix in the company.

All right. Think a little bit about cap allocation. You're expected to reach your 2 turns leverage by the end of the year. How does that impact? You've obviously been an acquirer of assets over time, moving the portfolio, how does your capital allocation strategy change once you hit that long sought after 2x leverage target?

I think we say it on the call script. I think for the difficulties we had in '22 and '23 and early in the first quarter '24 at least, we didn't skimp on R&D at all. And yes, the pumps, I think a little bit longer to get the syringe done. But the -- all the other products got out there, and there's a bunch more to come, including on the consumables side. So we think we have enough R&D innovation in-house, we don't need to do a lot of external. We had to do a lot of. It's a crazy story where we started to where we are today, but we have a lot of organic innovation.

And so finally, a discussion for us shifts to capital return. I think -- I don't know what the Fed is going to do. We kind of thought, hey, if stock price was lower and rates were lower, you would buy back as many shares as you could. If rates are high and stock price is high, there's some -- Brian's created, I'm sure I've had some AI grid that tells them what to do. It should go back whatever is kind of the most EPS efficient. Obviously, it depends on what your time horizon is, et cetera. But that's why we say in the script, it's a thinly traded stock. We know the power of buyback. We just need to -- getting it 2x the old-fashioned way has been a tough slog, right, over there.

So if you think about priorities, it's organic number one, buybacks return on capital number two, depending on where the stock price is and then M&A? Or how do you think about.

It's 100%, right.

On FX, going back to 1 of those 3 concerns we talked about, how big is that headwind to earnings versus your prior guidance given the moves in the Colon and peso?

I think in the call script, we just trying to reference it to put it in some context relative to what we thought we would earn when we did the transaction. Year-over-year, FX is okay. It's minor, right? But it's a quarterly impact right now and going forward. I think what's been very challenging for us is we went all in. CAFTA, the Central American Free Trade Agreement was resigned in the fall of '24. We went all in on that, moved our pumps that we acquired into Costa Rica. Two things happen that have kind of undermined some of our synergy case in that the Costa Rican Colon has gone over the last 4 years from 650 to 450, which is because of all the foreign direct investment, that's a pretty big swing if you have $100-ish million dominated cost, and Costa Rica has a 12.5% tariff.

And so if we add up tariffs plus the change of just the cost to Costa Rican Colon and the Japanese yen, where we had a $100 million commercial business, it's $100 million of earnings value to us over a 4-year period, which -- because every night, we go to bed, say, where did our margin go? Trying to piece it together. You could see a lot went to those places.

Going back to the organic investment, as you start seeing improved gross margin and SG&A leverage, how do you think about the right R&D as a percent of sales? You're currently at 4%. Is that the right level as investors think about modeling you lower, higher?

I mean I don't think we've ever been believers that there was some magic percentage, right? Capital equipment businesses typically require a bigger percentage, disposables business is usually need a little bit less. I think we're spending $85 million, $90-ish million right now. We think that's sort of $80 million to $90 million. I think that's sort of the right range, a lot of value from that.

On buyback, how do you and Brian, think about your preference for just kind of standard consistent buybacks versus something more opportunistic with an ASR, for example.

I mean I think in the buyback discussion, we are no different than the audience in this room, right? We want to maximize. And I don't know situationally, I don't think it's like we're coming into a bubbles of cash. It's just going to be normal operations. So I don't think there's some ASR triggering event. And obviously, you have less price flexibility if that happens. Let's cross that bridge once we get to 2x, we still have to do the first hurdle before we have such deep thoughts.

Taking a little bit of time you're getting there though. So these questions will become more prevalent as you get there. On getting there, you did not increase the 2026 free cash flow guidance even with $20 million of tariff refunds coming in 2Q. Why did you not? Is there something else that we should be thinking about to offset that benefit?

No, I just don't think we were focused on that level of precision.

Okay. From an M&A perspective, if you think about that second or third allocation -- are there areas in your business that you think you have holes? Or are you very happy with the portfolio you've created with the recent transactions?

I think we are happy with the portfolio we've created. There may be some -- we pride ourselves on being the innovator in some of these little spots and consumables. Occasionally, they're like the Pursuit Vascular. There are some spots we had to go external form. There might be 1 or 2 of those. We haven't spent a lot of time thinking about it. There are big staircase adjacencies to the product categories that we're in, but we've been 0 time thinking about any of those.

We talked a lot about the, I guess, the cost aspect, FX, tariffs, et cetera, oil. On the revenue side, what kind of keeps you up at night?

I think products offer a great value proposition to hospitals around the world. The only thing I think we are concerned about there is if there is some change in census. We haven't seen any. There's no reason employment is in a terrific spot, et cetera. I think it's again a macro item that concerns just more than anything about our own business.

Yes. And you can't control that, whether it's good or bad.

I got to keep winning.

Great. We have about a minute left. Any questions from the audience? Any closing remarks Vivek?

Thanks again for having us. Thanks for the interest in the early hours of the day here for ICU Medical, and we look forward to meeting on the 1 on 1 schedule. Thanks very much.

Thanks very much.

Good afternoon, everyone, and welcome to today's ICU Medical's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Also, please note that today's event is being recorded.

I'd now like to turn the conference over to John Mills, ICR Managing Partner. Please go ahead.

Good afternoon, everyone. Thank you for joining us to discuss ICU Medical financial results for the second quarter of 2026. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Brian Bonnell, Chief Financial Officer.

We wanted to let everyone know that we have a presentation accompanying today's prepared remarks. To view the presentation, please go to our Investor page and click on Events Calendar and will be under the Second Quarter 2026 Events.

Before we start our prepared remarks, we 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 all of 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 provide 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.

Thanks, John, and good afternoon, everyone. And we know it's again a busy earnings day, so I'll try to be brief. I'll walk through our Q2 revenue and earnings performance and provide some color on the businesses and then turn it over to Brian, who will recap the full Q2 results and detail our revised guidance for the year. After that, I'll come back with a few comments on our assessment of progress against our near and midterm financial goals that we've outlined for a while now, our mission of creating a comprehensive infusion therapy company and our capital allocation strategy.

Revenue for Q2 was $548 million for total company growth, 6% on an organic basis or 1% reported. And as a reminder, the reported results for the last time are impacted by the mid-2025 creation of the Otsuka ICU Medical JV and the resulting deconsolidation of IV Solutions from our income statement. Adjusted gross margins were 41%, adjusted EBITDA improved to $110 million and adjusted EPS was $2.37.

Organic free cash flow was strong. And when combined with tariff refunds, which are excluded from our P&L commentary today, we were able to repay $50 million of debt in the quarter and believe we're on track to hit our target of approximately 2x leverage by the end of the year.

The broader demand and utilization environment in Q2 continued to be stable with volume in line with our guidance assumptions for the year. The capital environment is status quo, and it does appear investments that customers need to get done do get done. Certain currencies for us continue to be painful, particularly the Costa Rican Colon and Mexican peso, where we have large production environments as is the Japanese Yen, where we still have a meaningful commercial business selling products made in North America.

In terms of geographic mix in Q2, North America drove the growth as the previously mentioned OEM wind down was recognized in international geographies. Getting into our businesses more specifically, our Consumables business grew 6% in Q1 reported and 5% organic and was a record in absolute sales. Growth was balanced across all 4 product families in Consumables and improved -- and all improved year-over-year.

For the remainder of the year, we continue to believe the business will attain mid-single-digit growth. And please remember, Q3 of 2025 was a healthy growth quarter for consumables last year. Our IV Systems business grew 13% reported and 12% organic, and it was again a record quarter in pumps. Dedicated sets generally follow the same trend as consumables and capital sales and were strong through the quarter, offset by declines in the OEM revenues that will continue to impact growth rates for the remainder of the year.

We did have some earlier-than-expected installations, which will come out later in the year. For Q3 in the near term, we would hold to our comments from the last call and expect organic growth to continue at or above the 6% rate.

Just wrapping up the businesses, Vital Care decreased 4% on an organic basis and reduced 32% reported due to the deconsolidation of IV Solutions. But as expected, we did have sequential improvement, and we expect stability for the balance of the year with the business down slightly for the year given the Q1 results.

We wanted to jump right into the financials today. So I'll turn it over to Brian and then come back with some commentary to assess our financial performance and how it aligns with our strategic goals. Brian, over to you.

Thanks, Vivek, and good afternoon, everyone. Since Vivek covered the Q2 revenue for each of the businesses, I'll focus my remarks on recapping the Q2 performance for the remainder of the P&L, along with the Q2 balance sheet and cash flow and then provide commentary on updates to our full year guidance.

As you can see from the GAAP to non-GAAP reconciliation in the press release, adjusted gross margin for the second quarter was 41%, which was in line with our expectations. Relative to the assumptions underlying our original full year guidance, we did experience higher logistics expense from elevated diesel costs, which was offset by lower tariff expense as the Section 122 tariffs in effect during the second quarter carried a lower average rate compared to the IEEPA tariffs incorporated into our original guidance.

During the quarter, we recognized $8 million of tariff expense, which represents approximately 1.5% of adjusted revenue. We also received $20 million of tariff refunds. We have excluded the full amount of the tariff refunds from our non-GAAP income statement, and they, therefore, had no impact on the 41% adjusted gross margin rate. The tariff refunds are, however, included in our free cash flow results for the quarter.

Adjusted SG&A expense was $112 million in Q2, and adjusted R&D was $22 million, representing 20.4% and 4.0% of adjusted revenue, respectively. The adjusted SG&A rate of 20.4% declined by 1 percentage point compared to both the second quarter of last year as well as Q1 of this year. The improvement was driven by operational efficiencies from our IT systems integration, along with favorable expense timing in the quarter.

Restructuring, integration and strategic transaction expenses were $21 million in the second quarter, which was higher than previous quarters as a result of $10 million of non-cash asset write-offs and other charges related to the exit of several manufacturing and distribution center facilities as we near completion of the consolidation of those facilities. The remaining $11 million of spend related primarily to manufacturing transfer activities and IT systems integration.

Actual cash spend in Q2 was down sequentially compared to Q1, and we continue to anticipate reductions in both the level of activity and the amount of spend in the second half of this year as we closed out several of these longer-term projects.

Adjusted EBITDA for Q2 was $110 million, reflecting a 20% margin rate and 10% growth compared to last year. However, similar to the past several quarters, the year-over-year comparability is impacted by 2 discrete items. The first is the deconsolidation of the IV Solutions business, which contributed $2 million of earnings in Q2 2025 when it was included in our consolidated results for 1 month.

And the second item is the increase in tariff expense of approximately $6 million year-over-year. The combined $8 million year-over-year drag from these 2 items was essentially offset by higher earnings from the core business of $19 million. We have now lapped the impact of the JV deconsolidation and tariffs.

And going forward, these items are expected to have little or no impact on year-over-year earnings growth. It's also worth noting the earnings from our 40% equity investment in the joint venture contributed $3 million of EBITDA in the second quarter, a similar level of profitability as last year, reflecting typical seasonality for the business and a few onetime favorable items. And similar to last year, we expect the full year earnings contribution from the JV to be breakeven or a small loss, which implies offsetting losses in the back half of this year.

And finally, adjusted diluted earnings per share for the quarter was $2.37 compared to $2.10 last year, an increase of 13%. The current quarter results reflect net interest expense of $16 million and adjusted effective tax rate of 23%. Diluted shares outstanding for the quarter were 25.0 million.

Now moving on to cash flow and the balance sheet. For the quarter, free cash flow was $62 million, and it was another solid free cash flow quarter, reflecting strong quality of earnings, along with the $20 million from tariff refunds.

During the quarter, we invested $11 million of cash spend for quality system and product-related remediation activities, $11 million on restructuring and integration and $19 million on CapEx for general maintenance and capacity expansion at our facilities as well as placement of revenue-generating infusion pumps with customers outside the U.S.

And just to wrap up on the balance sheet, we finished the quarter with $1.24 billion of debt and $298 million of cash. The strong free cash flow allowed us to pay down $50 million of debt, bringing our net leverage ratio down to 2.3x.

Turning now to our 2026 guidance. As we reach the midpoint of the fiscal year and in consideration of the factors I've mentioned, we are updating our full year guidance for adjusted EBITDA and adjusted EPS.

For full year adjusted EBITDA, we are raising and narrowing our previous guidance range of $400 million to $430 million to a range of $415 million to $435 million. And for full year adjusted EPS, we are raising and narrowing our previous guidance range of $7.75 to $8.45 per share to $8.60 to $9 per share.

For gross margin, we now expect full year adjusted gross margins to be higher at around 41.5%, reflecting the benefits from lower tariffs and accelerated synergy capture more than offsetting the negative impacts of higher oil prices.

Our guidance assumes a stable macroeconomic environment with inflation, currency and interest rates in line with today's levels, and it assumes the latest forecast for oil and diesel prices and no changes to the tariff policy and rates that are currently in place.

We continue to expect adjusted operating expenses to be approximately 25% of revenue for the full year. Net interest expense should be approximately $65 million. And for modeling purposes, you can assume an adjusted tax rate of 25% and diluted shares outstanding of 25.2 million. And as previously noted, the full year earnings contribution from the JV should be breakeven or a small loss.

To wrap up, we're pleased with the business performance through the first half of this year, including record revenues for both Infusion Systems and Consumables and the continued gross margin expansion as the benefits from some of the long-term integration projects are realized.

The goals we've previously laid out for 2026 have not changed, deliver at or above our long-term revenue targets for our core businesses, expand our margins by capturing some of the remaining 2 percentage points of opportunity and improve free cash flow generation.

Although, recent volatility in the macroeconomic environment can make forecasting more challenging, we believe the momentum we have in the business positions us to exceed the goals we've established at the beginning of the year.

And with that, I'll hand the call back over to Vivek for some comments on how these results fit in with our commentary over the last 2 years.

Okay. Thanks, Brian. I hope that was straightforward for investors on the current financial performance, and I wanted to put these Q2 results and our view of the full year into context with our comments over the last 2 years.

In early 2024, we said we have to prove that we could deliver consistent revenue growth in our differentiated businesses, and that was a combination of commercial execution and innovation. When we schedule our quarterly revenue growth, as shown on Slide 3 of the attached presentation, we feel that at least for the last 9 quarters and going forward for the balance of this year, we've had an acceptable revenue growth in our differentiated businesses.

Underlying these revenue trends, we remain committed to innovation and did not skimp on R&D investments or capital investments even through some difficult times. We believe in all of our differentiated product lines, we're at the beginning of new product cycles, which fulfill our mission of creating a comprehensive infusion therapy company.

Of course, there may be quarter-to-quarter variances, but it's obvious that new products should support our delivery of long-term predictable revenue growth and ensure our businesses are bigger every year.

In Infusion, Consumables, we continue to drive incremental innovation and have scale underpinned by leading brands with great clinical data. Our innovation in the core and adjacencies of this business adapt to the different methods by which medications may be prepared, conserved and delivered both in the hospital and the home.

In Infusion Systems, the LifeShield, Plum Duo and Solo family of products are being well received in the marketplace. The biggest update since the last call is that we made substantial progress on the additional verification testing required by FDA for the Medfusion 5000 syringe pump and believe an amended package will go back into the FDA this year. Both the Plum Duo and Solo Plum and new Medfusion 5000 pumps offer the opportunity for value creation through competitive wins and upgrades of our existing installed base.

The core tenet of the Smiths Medical acquisition was to have the most modern infusion devices connected to a single software solution across hospital LVP, syringe and ambulatory pumps with platforms that anchor the business for the next 10-plus years as the product life cycles are incredibly long. We want customers to have the right tool for the right job, all connected with a common user interface and software solution that minimizes training, speeds onboarding, supports interoperability and enables standardization for our enterprise customers. We're close to delivering this vision.

For the longer term, we've spent more time and energy over the last year and have a clear development plan for the final frontier, connecting the home care CADD environment back into the same common software framework.

There was some news during the quarter from our IV Solutions joint venture, and this is important even if the revenues do not flow through our income statement as it's part of creating the most comprehensive infusion therapy company and IV Solutions are still commercially co-mingled with our differentiated lines in the U.S. market.

Our joint venture partner announced funding of a $0.5 billion investment into IV Solutions production to bring their PVC-free products and production technologies to the U.S. market. On August 24, we'll have a groundbreaking ceremony for the first and largest greenfield IV Solutions production site in the U.S. in this century on adjacent land to the current facility.

We had mentioned their technologies previously, and we're so fortunate to have found Otsuka as a partner. Their financial commitment, novel technologies, availability of additional resources and long-term cultural philosophy make this the win-win for U.S. customers we described at inception. So we'll eventually have new offerings here too for customers alongside our new pumps and consumables.

The other comment we made in early 2024 was that it was clear we were under earning. And while we are pleased with our improved earnings power, we believe we still have room to go. But before that, I'll try to put the current year EBITDA levels into some context. While we will have record EBITDA this year, we're still burdened by 2 painful headwinds.

First, we're still bearing incremental tariffs, which are in the $30 million to $40 million annual range. Second, a specific basket of currencies, the ones I mentioned in the introduction, the Costa Rican colon, Japanese yen and Mexican peso have made a negative impact of plus or minus $60 million over the last 4 years with the colon the strongest and the yen weak -- with the Cologne in the strongest and the yen in the weakest position against the U.S. dollar in 20 years. But these are reality, so we have to focus on the items we control, and these are specifically the 2 points of additional gross margin to hit our targets that Brian referenced. These gains will come from the realization of synergies from our various plant and logistics consolidations, some incremental pricing and overall product mix.

These opportunities will still take a number of quarters for full achievement. While improved EBITDA is great, it must show up in free cash flow to create value. And the key point we've been stating and Brian just reiterated, was a reduction in cash consumption for all the restructuring and remediation work. This point dovetails with the capital allocation discussion as we believe the reduced cash needs will allow us to be at or near our 2x leverage target by the end of the year. We've been pursuing both operational and strategic choices in Vital Care. But as we've made all these lines cash flow positive, we don't feel the need to do something value destructive to chase a small improvement in the growth rate given the performance of the differentiated businesses.

Again, our team has shown the ability to be creative in finding the most logical strategic outcomes. Even independent of the portfolio discussion, our goal has always been to be 2x or less leverage, which felt appropriate for a mid-single-digit growing manufacturing company. We are now just slightly over a quarter turn from that, and we got there the old-fashioned way.

Since our time here, we've tried to protect the share base with the only meaningful equity dilution resulting from the shares used in the Hospira and Smiths transactions. We know returning capital can be attractive on a thin share base and our external M&A needs are minimal as we enough organic innovation in-house and with the only wildcard being a changing interest rate environment.

In summary, it's a good place to be with our best business growing. Both again, will reach record revenues in 2026, and we could see a vast number of projects nearing completion. We expect our consumables and systems businesses to be reliable growers with an industry acceptable profit margin, the tightest and most optimized manufacturing network and each with a multiyear innovation portfolio. And ultimately, we want to transfer value from debt to equity. There's no confusion within the company in the pursuit of these goals, and we don't really have any frivolous activities here.

We produce essential items that require significant clinical training, hold manufacturing barriers and in general, items that customers do not want to switch unless they must. The market needs ICU Medical to be an innovative, reliable supplier and our company is stronger from all the events of the last few years. Thank you to all team members and customers.

And with that, we'll open it up to questions.

[Operator Instructions] And we will take our first question from Jayson Bedford with Raymond James.

Congrats on the progress. I wanted to ask on the system strength, which at 12%, obviously stood out. Is any of the strength here reflective of an uptick in the replacement cycle? Or is that still on the come?

Jason, thanks for the question. Yes, it was a good quarter in pumps. Some stuff came in early. Some installs came in early, as we mentioned. I think it's very much consistent with our commentary to date, which is we haven't really started our upgrade cycle in earnest. So this was insulation of competitive wins from last year or earlier in the year.

Okay. And just on LVP pricing dynamics with Duo and Solo, is it fair to assume that price is sticking?

Again, I think we've tried -- as we brought innovation to the market, we believe in any of these categories, price should be in line with value, and we think the value of the device merits what we're charging and offers a unique value proposition to the customer. So we feel good about where we've been able to hold that in the marketplace.

Okay. Maybe Brian or Vivek, on the first quarter call, you had talked about a $10 million impact from an increase in crude. Is that still part of the guidance framework? Or is that excluded now?

I would say we have incorporated kind of the latest oil and diesel prices that we're seeing in the market into our guidance. And the economics as to what the impact is on an increase in either oil or diesel has on our financials is still the same. And I would say now it is reflected in the updated guidance.

And we will take our next question from Jason Bednar with Piper Sandler.

I'll add my congrats here on a nice quarter. Vivek, I'll start at the same place that Jayson Bedford did on Infusion Systems, any ability to size those earlier-than-expected installations in Infusion Systems just as we try to think about maybe the cadence of demand here in growth, third quarter and fourth quarter?

Jason, thank you for the question. I don't know that it's that precise. I think we would say we feel pretty confident in the words we said in the last call and this call, which was at or above 6% for the next bit of time. So if you kind of just reverse engineer the math, that would give you some direction, a couple of million bucks. I'm not sure we'd say a lot more than that right now.

Okay. All right. Still really good performance. The competitive dynamics that you referenced as driving that infusion system strength, benefiting from wins earlier this year. Can you talk about real-time dynamics you're seeing out there in the market as you go into bids? I don't know if you're willing to talk about like order inflows, backlog where you sit today and just as we start thinking about the back half of this year and the jumping off point into '27.

I think our -- we've been in this infusion industry for a long time. Despite the headlines, nothing really goes that fast. So I think it's obviously very valuable. That's why many participants are talking about the situation. We felt pretty good at the end of last year, what we had signed and had installed. We continue to feel pretty good about it. I don't think the dynamics -- I wouldn't want to mislead you that there's some uber acceleration of the market. It feels pretty normal, and it's just about delivering good technology. So I don't think it's some out-of-sync acceleration or something like that, that's going. We feel good about our own book and what we're holding.

And I heard you on the Medfusion resubmission. Good to hear that's going well or the package is coming together. Any thoughts on submission timing just so we can approximate potential approval timing knowing that we're still having the deal or be at the limit of the FDA?

It's a great question. We tried to at least directionally say this year, we felt like we got a little burned on the Duo or the Solo -- excuse me, on the Duo, we never even talked about its filing until it was approved. That's what we've always done in consumables. Given we were in tougher times, we have to be more transparent. And then this one, of course, didn't happen on the first pass.

So I think we'd rather just leave it as this year. The testing was not hard, as we said on the last call, and we're just plowing through it. And for today, I'd like to leave it that it's just sometime this year. It is valuable to get it done because there's a large upgrade base available on Medfusion pumps out there also. So we have every incentive of the world to get it done as fast as we can.

And we will move next to Brett Fishbin with KeyBanc Capital Markets.

This is Will on for Brett. Last quarter, you mentioned that you were mostly done with the undergoing the SKU rationalization and those efforts. Could you just talk about how much more there is to squeeze on that? And if you could just comment on any contribution you saw as a result of those prior actions?

Will, thanks for participating. I think those comments were also really at the end of the year call, the February Q4 call, where we said Vital Care would be impacted by some product choices we were making there. We did most of that, as we said in the pre -- and we reaffirmed that on the Q1 call. We did most of that earlier in the year. That's why Q1 was so negative in Vital Care. It's still negative, but the point is that the -- for what it's worth, the comps get a little bit easier and starts to stabilize from here.

So it was only specific to the Vital Care line, and that work is largely done. We highlighted a small product line exit on the strategic side, and I think it's in the queue in an international geography, that will kind of get lapped out from an organic basis, too. So most of that work is done.

Got it. And then it's good to hear about the Medfusion update. Any update on CADD timing?

I think as we said in the last call, we really want to prioritize Medfusion, and we put all the resources. There's a finite amount of testing resources and we tilted them all to Medfusion to start. So it will follow it. I don't think we want to give specific timing.

And we will take our next question from Larry Solow with CJS Securities.

I echo the congrats on the quarter. Just another question on the strong systems growth. Can you just help us give us an idea -- you mentioned 12% growth, obviously, and you still had in the face of this OEM decline on the ambulatory side. Could you give us an idea, I guess, is that completely now wound down? And what was that number? What was that headwind approximately year-over-year?

Thanks, Larry. I mean I think we talked about the OEM business in rough numbers. It was meaningful to us. Obviously, the rest of the pump segment did quite well this quarter. We wouldn't want to mislead you or anyone else to say that is the baseline, right? It was unnaturally high to the question that was just asked this quarter, which helped offset that. That OEM, I think we've talked about it, Brian, as being a point or 2 drag on the segment over the balance of the year. And so we overcame that by obviously more in the LVP and other lines. But I don't want that spread for you to think that that's permanent. It was a bit of timing this quarter.

No, that's fair. And you mentioned all the sales up until today are competitive wins, nothing on the replacement yet, which I think is more -- supposed to be more beginning in '27. But just curious, have you had any discussions with customers? Is there any feedback? Just anecdotally on that?

To be clear, some of it is upgrades to existing customers. The majority is competitive. I certainly, we don't want to. There is some -- always some upgrading going on. We have been in contact with customers, and it's -- each one is a unique situation. It's a little bit like the car analogy I always use, right? The thing depends how many more miles you got available to you.

Some of these devices have been in the market more recently. There's less of an urgency to upgrade. Some are older and they're on their natural time horizon. And so I think people who -- there's not a nice way to say who stuck with the original Plum platform, obviously believed in it, and we continue to give them the reliability and safety of that platform with a whole bunch of upgrades. And so we feel good about it. We don't want to squeeze our customers into having to upgrade or get an off capital cycle earlier than they need to. So we're trying to be cautious about that.

And a couple for Brian. On the free cash flow, really nice quarter even without the $20 million, it would still have been a pretty good quarter there, $44 million. Year-to-date, I think you're up to over $90 million. What's the outlook for the back half of the year? And also just on the remediation and other expenses that is impacting you guys. And I think it sounds like this quarter was still some more in there. What's the outlook for that as we go out to next year and beyond?

Yes. Thanks, Larry. I think, yes, year-to-date free cash flow has been $89 million, which does include $20 million of tariffs. So if you were to even exclude that, we still feel okay about that. We did say that, our goal for this year was $150 million. And so I would say kind of given we're not really officially updating our guidance there, but we would say we feel good about where we are year-to-date relative to hitting that target.

And the items that you mentioned, that being spending on the restructuring and remediation activities, we did say that would come down in the back half of the year. We believe that -- we continue to believe that to be true. And so I think we have pretty good line of sight to hitting our goals on free cash flow for this year as a result of that.

I that's why we can make the comments on the leverage ratio.

Yes. No, absolutely. If I could squeeze one more, just the 200 bps kind of gross margin longer-term target. Is that -- or just kind of from -- is that on actions mostly you've already completed facility consolidations and stuff like that and should start coming through over the next few quarters? Is that kind of what you're referencing?

Yes, sure. I wouldn't say the majority of it is, but not all. We still have to get some price, and we still have to continue to make sure the mix of the most valuable products are growing faster than the rest of the portfolio. So in flight, we were very clear on the targets, obviously got knocked down a little bit because of tariffs. The goal is to look like a normal medical device company.

Got you. So it's a little more than blocking and tackling, but you kind of have a pretty good line of sight, hopefully, maybe not so much on timing, and there's always things that could interfere with that, but feel.

Well, that's a little bit we wanted this extended discussion on currencies, right? Obviously, the money went somewhere and the impact of the change in the production currencies and 1 or 2 key selling currencies made a big difference.

And we will move next to Mike Matson with Needham & Company.

So just on the tariff refunds, hearing from some of the other companies that we follow this quarter, it sounds like there's been some refunds in some cases, but there's potentially more coming later this year, even next year. I mean, is this kind of a one-and-done thing? Or do you think you could see additional refunds?

Yes. Thanks, Mike. On the tariff refunds, the $20 million that we received at the end of the quarter, that represents the majority of what we paid in IEEPA tariffs, but it's not all of it. So there is the potential for some further refunds. We don't know if that's going to happen in the back half of this year or sometime next year. I think that's -- the process is still very uncertain here. But there is some additional amounts that we could potentially receive, but it would not approach the $20 million that we've received so far.

Okay. Got it. The other thing that I've heard from some other companies today is that in some cases, the inflation that they're seeing and kind of the impact of oil prices has been a bit worse than they anticipated. I guess from what I'm hearing from you guys, it doesn't sound like that's the case, but I just wanted to get your take on that.

I think that the impact from oil prices is I would say, largely kind of -- for the second quarter, largely in line with what we had expected after our first quarter call. It's still obviously a negative relative to our original expectations for this year. And I guess it is hard to say exactly what the outlook is going to be, just given the volatility that we've seen just on a day-to-day basis. And so our guidance, we think, takes into consideration kind of where oil prices are today and where they're expected to go this year. But obviously, no one really knows.

Yes, understand. And then finally, this -- you called out this IT systems efficiency improvement that helped lower the SG&A to some degree. So is that something that will continue to help on a go-forward basis? Or is that kind of a temporary thing?

I wouldn't say it's temporary. I think we'll continue to see the benefits. I think though, most of the benefits are probably incorporated into the results in the second quarter. That -- and then the other thing I would point out is that the reduction in SG&A spend as a percent of revenue in part was driven by some of these efficiencies, but we also had, I would say, just a few kind of onetime items or let's call it, expense timing benefits that probably contributed this quarter, but won't --

I mean, just to be more direct, the current Q2 run rate is not the right run rate for SG&A. If we had the chance to invest more, we would do it, too, right through all those things.

And we will take our next question from Sam Eiber with U.S. Bancorp BTIG.

Nice to be on the call here. I want to come to Consumables. I don't think it's been asked about yet, but back to sort of that mid-single-digit organic growth rate. Vivek, I think I heard in your prepared remarks that each of the end markets you participate grew in the quarter. So curious if there's any more detail in terms of maybe what's driving end market performance, census, new customer wins and then the durability of growth there?

Sam, welcome to the call. Thank you for following us. I don't think there's any unique commentary there. I think just like many of the reports and companies over the last week, census was solid and stable, that's the biggest and most important thing. Admissions were solid. And then a little bit of incremental wins, et cetera, not a lot of price this year. I would say, it was less price this year than last year as we talked about earlier in the year, more on wins and a little bit sort of better performance in North America maybe than some of the international regions. Those will be the main drivers.

Vital Care, I think I heard the prepared remarks that -- and maybe I'm reading between the lines here, you're not going to rush into any sort of deal of that business. It looks like it's stabilizing a bit. But I guess, any catalyst that we should be looking out for in terms of when might be the right time, if you need to get through more remediation efforts, the warning letter. Just curious the state of Vital Care.

I mean, I think we'd answer it more directly, which is it takes two to tango, and we haven't sort of found the right intersection of fit and value and circumstance and ease of doing something. And the line, I'd say where we found the most strategic alternatives just or most logical things just means we're trying. And we still think there's logical things to do. It just sort of has to line up right, hasn't yet. I wouldn't -- I don't think there's any secrets beyond that.

This concludes the Q&A portion of today's call. I will now turn the program over to Vivek Jain for closing remarks.

Thanks, folks, for making the time and a busy day to hear about ICU's Q2 results. We look forward to updating you on Q3, and everyone, have a great rest of summer. Thanks very much.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.

Good afternoon, everyone, and welcome to today's ICU Medical, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] Also, please note that today's event is being recorded.

I would now like to turn the conference over to Deirdre Thomson with ICR. Please go ahead.

Good afternoon, everyone. Thank you for joining us to discuss ICU Medical's financial results for the first quarter of 2026. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Brian Bonnell, Chief Financial Officer.

We wanted to let everyone know that we have a presentation accompanying today's prepared remarks. To view the presentation, please go to our Investor page and click on Events Calendar, and it will be under the First Quarter 2026 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 all of 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 press release and provide as much detail as possible on any addendums that are added back.

And with that, it's my pleasure to turn the call over to Vivek.

Thanks, Deirdre. Good afternoon, everyone, and we know it's a busy earnings day, so we'll try to be as brief as possible. I'll walk through our Q1 revenue and earnings performance and provide some commentary on the businesses and then turn it over to Brian, who will recap the full Q1 results and explain our current view of how we can manage this year's new macro events. After that, I'll come back with a few comments on where we are on our near-term goals, our mission of creating a comprehensive infusion therapy company and our capital allocation strategy.

Revenue for Q1 was $526 million for total company growth of 1% on an organic basis or minus 12% reported. And as a reminder, the reported results are impacted by the mid-2025 creation of the Otsuka ICU Medical joint venture and resulting deconsolidation of IV Solutions from our income statement. Gross margins increased sequentially and were above 41%, driven by overall mix in our infusion businesses.

Adjusted EBITDA was $99 million and adjusted EPS was $1.97. Free cash flow was strong, and there was no real change in net leverage. The broader demand and utilization environment in Q1 was previewed on the last call. The sharp flu spike in late 2025 did soften January, but volumes returned to expected levels from February onwards and feels fine through today. The capital environment is status quo, and it does appear investments that customers need to get done are getting done.

Currency continues to move around a bit with the Mexican peso at elevated levels this year. Getting to our businesses more specifically. Our consumables business grew 5% in Q1 reported and 2% organic. As previewed on the February call, like prior years, Q1 revenues were down sequentially and in line with our expectations as we knew the changing environment from December to January.

For Q2, we would expect growth rates to return to our historical levels. Our IV Systems business grew 8% reported and 6% organic, and it was again a record quarter in pumps. Dedicated sets generally follow the same trend as consumables and capital sales were strong through the quarter. For Q2 and the near term, we would expect organic growth to continue at this rate or above while absorbing the previously mentioned OEM wind down.

Just wrapping up the businesses, Vital Care decreased 14% on an organic basis and decreased 59% reported due to the deconsolidation of IV Solutions. We've mostly wrapped up the work described on the last call of discontinuing certain SKUs as we had more contractual or operational flexibility with the largest impact of this felt now in Q1. I'll come back with an example of this shortly.

We believe we should see sequential stability to improvement organically here and continue to believe the right revenue assumption for the near term is flat to slightly down in the face of our decisions to improve profitability. I wanted to close the business unit commentary with some updates on the different product development initiatives within the company.

As we've mentioned more recently, we've been increasing the volume of new 510(k) submissions for our consumables offerings where the innovation is more incremental and intended to create new adjacent niches. Last year, we received a new 510(k) for our core microclve and Neutron needle-free connectors, which updated our label with recent favorable published evidence in infection control.

In Q1, we received 2 additional 510(k) clearances, which were some of the images that have been highlighted in our investor deck. First, we received approval for an adjacent product in our oncology line that bonds our market-leading Clave needle-free connectors to access ports and empty non-PVC, non-DEHP IV bags.

The second is a 510(k) for a revised disinfection cap, which complements our existing SwabCap portfolio and provides customers with another product to assist in infection control and accessing needle-free connectors. Both thematically aligned with our effort to add safety to each step in the infusion delivery workflow and are examples of the singles and doubles we need to consistently hit for continued long-term growth in consumables.

On Infusion Systems, in Q1, we received FDA approval on the latest version of our LifeShield safety software. This version includes new enhancements for improved analytics and reporting plus features to improve the experience for our large enterprise customers and to add safety in each step in the infusion delivery workflow. However, it's going to take a little bit more time to get the clearances on the new hardware platforms as the FDA is appropriately elevating testing requirements for new infusion pump submissions.

Specifically, regarding the new Medfusion and CADD hardware submissions, the FDA is seeking additional testing data, which in plain English for us means a larger sample size across a larger number of set configurations. We believe the increased testing is a result of the FDA continuing to raise the bar to ensure improved safety in the infusion pump landscape. Nothing about the additional testing relates to the core product technology around its mechanism, usability, human factors, et cetera.

The testing the FDA is asking us to do is standard. It's just a larger volume that takes some time to complete. Our current strategy is to prioritize finishing the testing first on Medfusion and then on to CADD. As context over the last 2.5 years in the pump business, we have successfully received 6 510(k) clearances with a first pass clearance each time, so we have the expertise to deliver on this. All in all, a lot of right things are happening in the product development process.

I'll come back after Brian with how these items align with our progress against our near-term goals and to help us -- that help us create a comprehensive infusion therapy company. So with that, over to you, Brian.

Thanks, Vivek, and good afternoon, everyone. Since Vivek covered the Q1 revenue for each of the businesses, I'll focus my remarks on recapping the Q1 performance for the remainder of the P&L, along with the Q1 balance sheet and cash flow and then provide commentary on a few puts and takes for the remainder of the year relative to the full year guidance we provided on our last call.

As you can see from the GAAP to non-GAAP reconciliation in the press release, adjusted gross margin for the first quarter was 41%, which was slightly ahead of our expectations due primarily to favorable product mix with our 2 higher-margin core business units of consumables and Infusion Systems growing faster than Vital Care. And the Q1 gross margin rate continued to benefit from the deconsolidation of the IV Solutions business, along with the ongoing capture of integration synergies.

In the first quarter, we recognized $10 million of tariff expense, which represents approximately 2% of adjusted revenue. The impact from higher oil and diesel prices was not meaningful on the Q1 gross margin rate as we only experienced those increases in the last month of the quarter.

Adjusted SG&A expense was $112 million in Q1 and adjusted R&D was $21 million, representing approximately 21% and 4% of adjusted revenue, respectively, which is consistent with our previously provided full year guidance for each of these areas of spend.

Restructuring, integration and strategic transaction expenses were $17 million in the first quarter and related primarily to our IT systems integration and manufacturing plant consolidation projects. This represents a sequential decline relative to the fourth quarter, and we anticipate continued reductions in both the level of activity and the amount of spend in the second half of this year as we move towards completion of several of these longer-term projects.

Adjusted EBITDA for Q1 was $99 million, which is the same as last year. However, similar to the past several quarters, the year-over-year comparability is impacted by 2 discrete items. The first is the deconsolidation of the IV Solutions business, which contributed $6 million of earnings in Q1 2025 when it was included in our consolidated results.

And the second item is the increase in tariff expense of approximately $8 million year-over-year. The impact of these 2 items was essentially offset by higher earnings from the core business of $14 million. And finally, adjusted diluted earnings per share for the quarter was $1.97 compared to $1.72 last year, an increase of 15%. The current quarter results reflect net interest expense of $16 million and an adjusted effective tax rate of 24%. Diluted shares outstanding for the quarter were 25.2 million.

Now moving on to cash flow and the balance sheet. For the quarter, free cash flow was $28 million, and it was another solid free cash flow quarter, which reflects strong quality of earnings and our typical lower CapEx spending in the first quarter of the year. During the quarter, we invested $9 million of cash spend for quality system and product-related remediation activities, $17 million on restructuring and integration and $11 million on CapEx for general maintenance and capacity expansion at our facilities as well as placement of revenue-generating infusion pumps with customers outside the U.S.

And just to wrap up on the balance sheet, we finished the quarter with $1.3 billion of debt and $288 million of cash. Overall, the first quarter results were very much in line with our expectations. And based on our outlook for the remainder of the year, we believe our previously provided full year guidance is still applicable. But there are a few risks and opportunities that have emerged since our last call that could impact our full year results.

Based on current projections, we believe the financial impacts for these risks and opportunities largely offset. But because they relate mostly to macroeconomic factors and trade policies that are still evolving, the eventual impact will depend on their ultimate degree and duration.

In terms of risks, the most relevant is the price of oil and the resulting impacts on diesel costs that get passed along by our freight carriers. We estimate that a $10 increase in the price of a barrel of oil results in a total of $3 million of annualized incremental expense on our P&L, of which $2 million is related to our core operations and $1 million of which relates to our 40% ownership in the joint venture.

Applying this math to the latest market forecast for oil and diesel results in approximately $10 million of additional logistics expense in 2026. On the opportunity side, we do expect tariffs to be slightly lower than our initial estimates for the second and third quarters of this year as the current Section 122 tariff rate of 10% is less than the average rate we paid under IEEPA. And it was the IEEPA tariffs that served as the basis for our original full year guidance range of $40 million to $50 million of tariff expense.

However, given the current Section 122 tariffs are temporary by nature, and it is not yet known what new framework may ultimately replace them, we are not assuming this benefit will continue beyond the expiration of the 122 tariffs. The benefit from the lower Section 122 tariffs, when combined with a little earnings upside from accelerated operational efficiencies that we now expect to realize this year should together largely offset the impact of higher diesel costs.

And just to be clear, the upside from lower tariff expense that I just mentioned is before consideration of any potential IEEPA refunds that could be received this year. We are not considering potential IEEPA refunds in any of our guidance commentary.

To wrap up, we're pleased with the business performance for the first quarter, including the highest ever revenue quarter for Infusion Systems and the continued gross margin expansion as the benefits from some of the long-term integration projects are realized. The goals we've set out for 2026 have not changed, deliver at or above our long-term revenue targets for our core businesses, expand our margins by capturing some of the remaining 2 percentage points of opportunity and improve free cash flow generation.

Although recent events have created some macroeconomic headwinds, we believe the momentum we have in the business should allow us to still deliver on our original goals for this year.

And with that, I'll hand the call back over to Vivek to discuss some of the initiatives to get us there.

Okay. Thanks, Brian. And we hope it's clear that at this moment, we believe we can handle the new volatility alongside tariffs and rates, and we continue to believe on building off the last 2 years of more predictable revenues with attractive growth in our core. All of this is obviously part of our near-term goals or part of our near-term goals in addition to showing that we're improving our earnings power.

To provide an update to some of our near-term goals from the previous call, we had stated that most of our IV systems growth this year will be back half weighted. We've been working hard to increase our ability to install customers early in the year and now believe growth in IV systems will be more balanced throughout the year, which helps manage the near-term volatility.

Another key near-term objective of ours was to lower cash consumed in integration and remediation activities. And as Brian also mentioned, that will materially decrease later in the year, but will again be down sequentially in Q2. Previous calls have discussed all the various projects, so we won't go through them again, but investors can assume that peak spending is behind us.

Strategically, our goal has been to build the most comprehensive and innovative infusion therapy focused company. Throughout the last few years, we've not skimped on R&D and innovation nor capital investments into the manufacturing assets of our consumables and systems businesses, and we found a win-win with Otsuka in the JV that will modernize the IV Solutions business.

As a result, we believe in IV systems. We have a complete platform solution that will anchor this segment for the next 10-plus years as the product life cycles are incredibly long. In infusion consumables, we have scale underpinned by leading brands with great clinical data that will be supported with more innovation in the core and in the adjacencies of this business.

Financially, we believe these investments alongside good commercial execution will allow us to continue the attractive revenue trends in our core businesses longer term. And when combined with the annualization of operations and logistics cost savings previously described into 2027 and more time to mitigate tariffs via pricing and operational decisions, we can get the company's earnings power closer to where we think it should be.

The ideal portfolio also matters in creating the most comprehensive infusion therapy company and in optimizing margin and EPS. We have been pursuing both operational and strategic choices in Vital Care. And as I mentioned in the introductory remarks, we've tried to exit certain SKUs or lines that have not made sense.

One smaller example of note, in our 10-Q, we will disclose that we're exiting certain Japanese surgical commodities, a product line that was more than $20 million in revenues a few years ago, but down over 50% cumulatively, including currency and has nothing to do with our core infusion business. Given the removal of the broad 2021 warning letter earlier in the year, we've been spending more time exploring different outcomes for the pieces of the Vital Care portfolio with several different work streams.

While nothing is certain, our team has shown the ability to be creative in finding the most logical strategic outcomes. Even independent of the portfolio discussion, our goal has always been to be 2x or less leverage, which felt appropriate for a mid-single-digit growing manufacturing company. We're now within the half turn of that and we can get there the old-fashioned way via organic cash flow generation over this year or via any of the moves just discussed.

Since our time here, we've tried to protect the share base with the only meaningful equity dilution resulting from the shares used in the Hospira and Smiths transactions. We know returning capital can be attractive on a thin share base and our external M&A needs are minimal as we have enough organic innovation in-house. So it's pretty obvious what we should be doing. In summary, it's a good place to be with our best businesses growing. Both will again reach record revenues in 2026, and we can see a vast number of projects nearing completion.

We expect our consumables and systems businesses to be reliable growers with an industry acceptable profit margin, the tightest and most optimized manufacturing network and each with a multiyear innovation portfolio. And ultimately, we want to transfer value from debt to equity. There's no confusion about that within the company in the pursuit of these goals. we don't really have any frivolous activities here.

We produce essential items that require significant clinical training, hold manufacturing barriers and in general, items that customers do not want to switch unless they must. The market needs ICU Medical being an innovative, reliable supplier and our company is stronger from all the events of the last few years.

Thanks to all of our team members and customers as we improve each day. And with that, we'll open it up to questions.

[Operator Instructions] We'll take our first question from Jayson Bedford with Raymond James.

Maybe just a few questions. First, on Infusion Systems, the growth kind of stood out off a tough comp. Wondering if you can -- and I apologize if I missed it, but LVP growth, did you comment on LVP growth in the quarter? And if not, can you do so now?

Jayson, I think we prefer towards the end of the year to kind of reflect on each business line rather than do it each quarter. But I would say, given the results that were pretty transparent towards the end of last year, the strongest growth driver was LVP by far and away in the segment.

Okay. Okay. Fair enough. In terms of the timing on the new hardware, how long -- I guess, is there a way to kind of frame the push out, if you will? I realize you don't have full control of this, but what is the extension here?

It wasn't that long ago, Jason, where we used to say in these scripts, we would only talk about new products when we had the approvals in hand, right? And when things got harder, we had to -- in the warning letter, we had to give more color on the resolution. We certainly would like to get back to that. I think we would say the part we control a couple of months to get the testing done, a little bit of time to get the analysis together.

And then it's about how long the dialogue takes. So certainly, our goal is as fast as possible. We didn't really plan for anything meaningful from a financial perspective for a while anyway. I mean it took us 18 months even with Duo and solo to really get going. So we -- things go slow in infusion, as we've said over and over again, and we take our time on the releases, et cetera. So a little bit of time, still trying to move as fast as we can.

Is the expectation that you get Medfusion cleared first?

I think we would say right now, that's where we're going to do our testing first, which tells you where we think the priority is. Again, both parties would have to agree on everything there, but that's certainly our prioritization.

Okay. Fair enough. On Vital Care, I think it was down about $10 million year-over-year apples-to-apples. How much of this is related to the exit of the Japanese product line here?

Some of the -- we haven't -- we've announced the exit. We've made a very small transaction to do that, but it's still on the income statement today. A little bit of the $10 million is related to that product line continuing to shrink. It's literally nickels and dimes in the other areas. It's $1 million here, $2 million. There's not one spot you can point to across any of the 4 or 5 businesses there.

Okay. Okay. And then maybe I'll ask one last one, a quick one, and then I'll get back in queue. Brian, $28 million in free cash flow, remind me what is the expectation for the full year?

Our full year guidance for that was to do improve upon last year and be close to $150 million.

Our next question will come from Brett Fishbin with KeyBanc Capital Markets.

I'm going to ask just a follow-up on the systems business. And I think you mentioned previously that you were gearing up for more of a back half weighted dynamic this year. And today, you changed the message a little bit. So I was curious what changed and what's allowing you to see more balanced performance through the year rather than kind of the inflection into 2H?

I think it -- as you roll out new products, it's important to be cautious of what can get installed when. And over the last 6 months to a year, we've been trying to make sure we have the available installation resources on hand and that those the scheduling of the installs meets the customers' needs and aligns with their own schedules. And I think we just got better at synchronizing that and had a little bit of caution in there for ourselves because it's always a little choppy when you put new products into the market.

All right. Great. And just one more from me. I think this would be more on the consumables business. Just wanted to parse out some of the commentary on hospital volume trends. It seems kind of obvious that January was softer and you saw a pickup into February and March and indicated that things are fine. Maybe if you could just comment on how material you think the January weakness is to the quarter, thinking about like the normal 5%, 6% consumables growth as a baseline. How much of the delta do you think was driven by January?

Thanks, Brett. I think I don't know that we actually have that exact level of precision, Brett. I think if you just looked at kind of the previous years and said, okay, the business has been down sequentially Q1 over Q4 of the last couple of years, average it out, this was more the difference is probably that number. I don't think we have a more high-tech answer than that. And we tried to make sure everybody is aware of that when we were talking in February.

We'll take our next question from Mike Matson with Needham.

It's Joseph on for Mike today. Maybe just a broader question on the quarter. I was curious if the Smiths warning letter resolving that, did that have any effect on -- in the quarter just in terms of -- was this an overhang with any hospital administrators and now that's passed, it's not affecting the company anymore. I imagine it's maybe not that short term, but just curious how you guys are thinking about that.

Nice to meet you, Joe. Thank you for the question. I would say the original warning letter that was received by the business we bought between signing and closing is resolved. That's the 2021 warning letter. We still have a subset of products that are covered under a warning letter that came in 2025. I think I would say, I don't believe that's necessarily an overhang or correlated to commercial activities of the company.

And if you kind of dig what's going on there, it's been a very hot topic for many, many manufacturers certainly over the last 18 months. So I think our answer would be not correlated to commercial activities. And of course, the agency is doing what they should do and try to ensure safety and quality, and we need to be the most compliant company we can be.

Okay. Yes, makes sense. And then just one more. Just on Plum Duo and Solo. In terms of active conversations with health systems or valuations on contracts, I'm just wondering if you could maybe quantify or give some more color on the customer pipeline here in 2026 or over the next 12 months? And then maybe just to nail down on one of your prior comments for Infusion Systems rather than as maybe you talked about in the past of being a second half acceleration. Just trying to understand this a little bit more. Is the framing now more of a steady acceleration or more of stable to lower growing over the year, if that makes sense?

I'll let Brian do the second half of that. On the first half, I think we went into a lot of detail on the last call or the call prior, I can't remember about the 2 different ways we create value in the infusion pump business. We create value either by winning competitive share or by rolling our own and reprofitizing our own installed base. And on the last call, we said we felt pretty good about what we were holding for signed competitive situations.

Most of this year's business is still that. We haven't really focused on the rollover situations very much. And the pipeline for the competitors is still active and robust as all vendors are saying, and we're out there competing. After we feel like that has reached its point and the aging of devices, and we'll shift our energy to our own installed base. But I don't think anything is different than our previous comments on the competitive opportunity for pumps.

Yes. And I think the question on just kind of the calendarization of the installs and what does that mean? I think it's -- I think we're saying that the full year for Infusion Systems looks the same as it did when we gave our original guidance. We just think that it's going to be a little less back-end weighted because we have been able to accelerate a few of those installations. So the growth rate, I think, would be a little bit more steady across the Qs 2 through 3 or 2 through 4 as opposed to just being in the back half.

We'll take our next question from Jason Bednar with Piper Sandler.

On the guidance commentary, Brian, I appreciate all the moving parts you highlighted from the prior update to today. Just so we have those dialed in, I heard the assumption of the higher $10 million in logistics costs that you're baking in. I maybe confirm that you're assuming oil is where it is for the rest of the year, if that's the assumption. But then -- sorry, if I missed it, what were the numbers on the lower tariff assumptions? And then how much are you pulling forward on efficiencies to net against that $10 million?

Yes. I think just on the forecast for oil prices, I do think if you look at kind of the '26 forecast, it does have some reduction in oil prices kind of as we continue throughout the year. So I wouldn't say it's necessarily exactly at today's spot price. But nonetheless, if you look at the offsets, I would say of the $10 million that we need to offset, roughly 2/3 of that is probably to come from lower tariffs, the remaining 1/3 from accelerating some of our operational efficiencies.

Okay. All right. Helpful. One on price points here. I know part of the conversation with the new pump cycle is that we are going to have higher -- are going to be selling at higher price points with better margins. Given where we are in the cycle, you booked a lot of orders, you're out there developing the funnel further. Are you seeing those price points stick? Are you having pushback on those higher price points? Anything there would be helpful.

Sure. Jason, it's Vivek. I would say we believe that technology offering is in line with its value. And so I would also say when we took over and got into the pump business 7 or 8 years ago, in the dark days when we had acquired Hospira had come off of just a decade of share losses. There were moments we discounted heavily and it didn't change anything. And so I think our experience in the pump business is to ensure that the technology in the device is commensurate with its value.

We believe that to be the case. These devices have more and more technology in them, and it's important that, that value is recognized. So we're certainly trying to hold firm on that. And the answer to your question will ultimately flow through the P&L or not. And you can see the strength we've had in the systems business.

Okay. Perfect. One more quick one just from a modeling standpoint. I think and I'm not always quick on math on the uptake, but I think you were implying that this Japanese product line, maybe roughly $10 million or maybe sub-$10 million today in annual revenue. So are you counseling us to be taking out $2 million to $2.5 million per quarter out of Vital Care or -- and starting that in beginning in 2Q? Or help me out.

Yes. I think you're overthinking that so that wasn't the intent. I would just say we had examples of dumb things we were doing in there, and we were trying to clean them up. And it's not that there was some catastrophic issue with some of the product lines. There are some unique circumstances that we've been trying to take action on those when we have the contractual flexibility. That's still in our P&L. It's drifted down $10 million.

That's been part of the things going on over the years in Vital Care, there's a couple of items like that. So I don't know, Brian, please add to that, if I to provide any deep guidance on that. It's just -- it's hard to explain what's been going on. I felt like since it's going to be in the Q, we should give an example of it.

Okay. We can follow up offline. I got a couple of other follow-ups related to that, but I won't bog things down here.

We'll take our next question from Larry Solow with CJS Securities.

It's Pete Lucas for Larry. In your prepared remarks, you mentioned gross margin of 41% ahead of estimates due to favorable mix. Do you see this as sustainable? And can you kind of give us an idea of cadence through the year and the overall OpEx on this and the overall OpEx, I should say?

Pete, nice to meet you. Good question. I think Brian said in his script that we believe we still had 2 points of opportunity to hit our target gross margins even from where we are today. We haven't been very specific other than saying we thought we would be exiting around that rate at the end of next year. We don't really provide quarterly gross margin guidance. So I think we're happy with where we are.

We think we continue to have areas to improve it. I don't think we necessarily give out gross margin by quarter guidance. But if you look at the chart in our investor deck, you've seen the last 7 or 8 quarters, we've continued to improve pretty consistent there. So it's obviously a very hot topic for it. And with all the capital we've been pouring into manufacturing and logistics consolidation is to improve that line, very important. disappeared from the screen.

We'll take our next question from Michael Toomey with Jefferies.

I just want to check on the messaging to be clear. Are you reiterating the EBITDA and EPS guide or stepping away because of visibility on the cost? I just want to be clear on that.

No, I think we're still -- we still have a high degree of confidence in our original guidance there. And we just wanted to make sure folks understood kind of the puts and takes that we could potentially have given some of these emerging items. That's all.

Sorry, Mike. We took a lot of work. Let's be clear.

I saw the 1Q guide as the previous guide, sorry, you're just highlighting a lot of moving parts.

No change. No change.

Sorry. We're just trying to explain the real things that we're dealing with. No change.

No, that's helpful. And then on the replacement cycle we've talked about. I appreciate you said that's more of a 2027 opportunity. Just wondering if you've seen any earlier evidence coming through in the orders or pipeline of that replacement cycle?

Yes. Great question. Yes, you need to line those things up. They don't happen overnight. So we're starting those conversations today, right? But the real energy, I think, again, will be towards the end of this year. But the same inertia or incumbent benefit that accrues in the infusion industry also accrues to us where we have a full-line customer, a lot of experience with the device. And so we think we're well positioned there.

The devices operate well for a long time, and so you don't like to force those changes on people until really the life cycle is used up with the device. The timing sort of lines up more with next year and the competitive opportunities are what we should spend our time on if they're here. And we think the results will show our success in that over the balance of the year. So opportunity there, starting cautiously, important part of next year's story.

Okay. Yes, that's great. Just one more as well. Becton this morning talked about 50 bps share gain in the quarter. Do you have any commentary on the share trends for ICU?

Not really. I mean everybody -- it's not necessarily everybody compares these things apples-to-apples. We've always tried to stay away from that, as you know, like the results in the P&L should speak for themselves because I'm not sure everybody counts exactly the same tongue in cheek, everybody has been taking share and the market is kind of what it is. So I think we would prefer not to comment other than say we're materially off the lows in this business where we were a few years ago.

And at this time, this concludes our question-and-answer session. I will now turn the meeting back to Vivek for closing remarks.

Thanks, everyone. I know it's been a very hectic earnings calendar the last day or 2. So we will end quickly here and say thank you very much. Look forward to discussing our results with you on our Q2 call, and have a good start to the summer, everyone. Thanks.

This concludes today's meeting. We appreciate your time and participation. You may now disconnect. Thank you.

Good day, and welcome to the ICU Medical, Inc. Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, today's event is being recorded. I'd like to now turn the conference over to John Mills. Please go ahead, sir.

Good afternoon, everyone. Thank you for joining us to discuss ICU Medical's financial results for the fourth quarter and full year of 2025. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Brian Bonnell, Chief Financial Officer. We want to let everyone know that we have a presentation accompanying today's prepared remarks. To view the presentation, please go to our Investor page and click on the event calendar and will be under the fourth quarter 2025 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. The Future results may differ materially from management's current expectations. We refer all of 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 our complete analysis and greater transparency in 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 under the addendums that are added back. And with that, it is my pleasure to turn the call over to Vivek.

Thanks, John, and good afternoon, everyone. We are glad the call is earlier after year-end as the systems and processes have become more integrated within the company. I'll walk through our high-level revenue and earnings performance, provide some important housekeeping and operational updates and comment a bit on our near-term outlook. Then I'll turn it over to Brian to recap the full Q4 results and provide our complete 2026 guidance. After that, I'll offer a few thoughts on our longer-term outlook, capital allocation strategy and where we are in our mission of creating a comprehensive infusion therapy company. Revenue for Q4 was $536 million for total company growth of 2% on an organic basis or minus 14% reported, and we finished with 5% organic growth for the company for full year 2025.

Gross margins were again 40% -- above 40% and we delivered EBITDA of $98 million and EPS of $1.91. As a reminder, the reported results are impacted by the mid-2025 creation of the Otsuka ICU Medical JV and resulting deconsolidation of IV solutions from our income statement. Both our consumables and systems businesses delivered record revenue orders operationally, and Brian will explain the year-over-year decrease in EBITDA due to the deconsolidation and tariffs. Cash generation was again strong as we repaid additional principal and net debt is currently just below $1 billion. The broader demand and utilization environment in Q4 and continue to be attractive across almost every geography would the U.S. having a sharper and faster flu spike towards the end of the year, which has normalized now.

The capital environment is status quo, and it does appear investments that customers need to get done are getting done. On currency, while the weaker dollar does help revenues in our selling geographies, we are monitoring the Mexican peso, which is at its strongest point in the last year. Getting into our businesses more specifically, our consumables business in Q4 grew 6% reported and 5% organic it was a record quarter operationally as Q3 had some revenue benefit from the Italian tax settlement. For the year, consumables grew 7% reported and 6% organic. Going into a bit more detail about how the business has performed over the year, Three of the product lines, infusion consumables, oncology and tracheostomy were all at high single-digit levels. And we believe going forward, we have both the operational stability and innovation to improve our performance in Vascular Access.

Reflecting on our performance in consumables over the last few years, we grew organically 7% in 2024, 6% in 2025 and and we continue to believe that mid-single digits is a good assumption for the medium term. Our IV systems business grew 3% reported and 1% organic and was again the best quarter in pumps even with some installations being pulled into Q3. As a reminder, Q4 2024 was a very large quarter for pumps Hence, why we foreshadowed the growth rate here a bit on the prior call. Going into more detail about how the product families performed over the year, LVPs were low double digits for the year syringe pumps were high single digits, and these were offset by negativity in the ambulatory line, which was 100% due to a single OEM customer that's been decreasing for the last few years and will finally fully exit in 2026.

Reflecting on our performance in this segment over the last few years, systems grew organically 7% in 2024, 5% in 2025 and and we continue to believe that mid-single digits is a good assumption for this segment for the near term, and I'll comment on the product road map shortly. Just wrapping up the businesses, Vital Care decreased 6% on an organic basis and decreased 35% reported due to the deconsolidation of IV solutions and was essentially flat both sequentially and for the year. As vital care now makes an impact on the overall company growth rates, we'll give a little bit of background on what we'll be doing with these businesses.

There are a limited number of low or negative profit SKUs within Vital Care and we've essentially been harvesting those as they have positive cash flow in a finite life or we've been discontinuing the loss-making SKUs in accordance with various customer contractual or regulatory requirements. Most of that work should wrap up over the next few months with the biggest year-over-year impact to be felt in Q1. Mathematically, we believe the right revenue assumption for the near term for these businesses is flat to slightly down in the face of our decisions to improve profitability. We do have some important housekeeping and operational updates that have transpired over the last 90 days. all of which dovetailed with our priorities from late 2024 and 2025. First, we've received official closure of the broad FDA warning letter received by Smiths Medical just prior to us closing the acquisition.

In addition to validating the work we've done, we believe when combined with the profit and growth improvements within Vital Care, we should have more strategic choices available to us. Second, we continue to make progress in the pursuit of our new 510(k) for Medfusion 5,000 syringe pumps and CADD ambulatory pumps and the related LifeShield safety software. This work is important as it underpins the core tenant of our systems business to have the most modern infusion hardware devices all connected on a single software solution for customers and this work is important also because we believe it addresses the primary concern of the warning letter we received in early 2025. Third, we've generally finished the manufacturing integration of 2 large legacy Smiths Medical manufacturing sites and will begin to reap the benefits as bridge inventory is depleted towards the end of this year.

And lastly, a bit in real time, we've gone live this quarter with a full order to cash conversion for Europe and it's proceeding smoothly, and the entire company, except for a limited amount of legacy Smiths Medical Asia Pacific regions are on a single instance of a modern ERP that will lead to future synergies in logistics and customer service. Over the last 6 quarters or so, we've been outlining our medium-term goals on these calls, which started with the overall commentary about a belief that we were under earning and describing the actions we needed to pursue to improve. In our view, the medium term we were describing has become the near term of the back half of this 2026 calendar year. I'll try to explain how the list of items I just went through, make their way into the financial statements in the back half of this year.

The first item for revenues is that we'll lap the creation of the solutions JV in May, which, while just optics does require significant explanation around the large reported negative revenue growth rates. Second, the vast majority of pump unit growth in the back half will be from Plum Duo and Solo products, which carry higher ASPs that are more meaningful to revenue growth. The gross margin line, which has been steadily improving, should benefit from manufacturing and logistics optimization.

Even though the manufacturing integrations are largely completed as of today, it still takes several months to sell out the existing pre-costed inventory. The work around the quality remediations, IT system integrations, plant closures and logistics consolidations have consumed significant cash, and that should materially change after the second quarter leading to improved free cash flow in the back half. We know it's taken time to get this work done and appreciate investors' patience but believe it is now within the near-term horizon. With that, I'll turn it over to Brian.

Thanks, Vivek, and good afternoon, everyone. Since Vivek covered the Q4 revenue for each of the businesses, I'll focus my remarks on recapping the Q4 performance for the remainder of the P&L, along with the Q4 balance sheet and cash flow and then provide guidance on our expectations for 2026. As you can see from the GAAP to non-GAAP reconciliation in the press release, adjusted gross margin for the fourth quarter was 40.5% and which was in line with the guidance we provided on the Q3 call of 40% to 41%. Unlike the third quarter, there were not any discrete items worth calling out in Q4 other than tariffs, where we recognized $11 million of expense, which represents a sequential increase of $2 million compared to Q3. And the Q4 gross margin rate continued to benefit from the deconsolidation of the IV Solutions business and the ongoing capture of integration synergies.

Adjusted SG&A expense was $113 million in Q4 and adjusted R&D was $21 million. Total adjusted operating expenses were $134 million and represented 25% of revenue, which is a 0.5 percentage point lower than the previously provided guidance of 25.5% and driven mostly by deferred spending and general cost controls. Similar to gross margin, Q4 was mostly a clean quarter for operating expenses, and we didn't have some of the unique items that we called out for Q3. Restructuring, integration and strategic transaction expenses were $20 million in the fourth quarter and related primarily to our IT systems integration and manufacturing plant consolidation projects were both the level of activity and the amount of spend peaked in Q4 as we approach completion of several of these projects in the early part of 2026. Adjusted EBITDA for Q4 was $98 million, a decrease of 7% from $106 million last year.

The year-over-year decline of $8 million was driven by 2 items, the first is the deconsolidation of the IV Solutions business, which contributed higher than normal earnings in Q4 2024 due to additional volumes from the U.S. market shortage. And the second item is the impact from current year tariffs. Combined, these 2 items had a year-over-year impact on adjusted EBITDA for the fourth quarter of approximately $25 million. And finally, adjusted diluted earnings per share for the quarter was $1.91 compared to $2.11 last year, which is a decline of 9% and the current quarter results reflect adjusted net interest expense of $18 million and adjusted effective tax rate of 23% and diluted shares outstanding of $25.2 million.

Now moving on to cash flow and the balance sheet. For the quarter, free cash flow was $44 million, and it was another solid free cash flow quarter, especially when taking into consideration the cash impact from higher tariffs. During the quarter, we invested $17 million of cash spend for quality system and product-related remediation activities, $20 million on restructuring and integration and $25 million on CapEx for general maintenance and capacity expansion at our facilities as well as placement of revenue generated -- generating infusion pumps with customers outside the U.S. And just to wrap up on the balance sheet, we finished the quarter with $1.3 billion of debt and $308 million of cash. During the quarter, we paid down $30 million of principal on our Term Loan B bringing total debt principal payments for the full year to $303 million.

Moving forward to the 2026 outlook and beginning with adjusted revenue, we expect full year 2026 consolidated organic revenue growth in the low to mid-single-digit range. And we expect the organic growth rates for each of the underlying business units to generally be in line with the longer-term outlook that we've provided the last several years, which is mid-single digits for both consumables and infusion systems and flat to down slightly for vinyl care. Consumables growth is expected to be driven mostly by volume increases from continued share gain in our core infusion lines and the benefit of higher growth markets for oncology and other niche categories.

Historically, the consumables business has experienced a sequential step down in absolute revenue dollars from Q4 to Q1 each year and given the higher demand we experienced in late December from the strong but short-lived flu season, we would not expect this year to be any different. The Infusion Systems guidance reflects accelerated growth in our LVP line, driven by implementations of Plum Duo and Solo from competitive wins, which will be more weighted towards the back half of the year. This will be somewhat offset by lower volumes in the ambulatory line from the wind down of an expiring OEM arrangement. Based on current foreign exchange rates, we expect currency to be favorable to reported revenue growth rate in the first quarter of 26% and closer to neutral for the remainder of the year. In terms of calendarization, we would expect the quarterly growth rates at a consolidated level to be higher in the back half of the year due to the IV systems implementation schedule.

Moving further down the P&L. We expect adjusted gross margin for the full year to be around 41%. The 41% gross margin reflects the benefit from continued synergy capture being partially offset by higher manufacturing costs from inflation and the recent strengthening of the Mexican peso. It also assumes tariff expense of approximately 2% of revenue based on tariff rates and available exemptions that are in place today. We expect the gross margin rate to improve throughout the year as we complete the manufacturing consolidation and supply chain integration projects and begin to realize the benefits with the gross margin rate as we exit the year higher than the 41% average. We are planning for adjusted operating expenses as a percentage of revenue to be approximately 25% for 2026, consisting of 21% for SG&A and 4% for R&D.

The SG&A rate of 21% is a slight decrease compared to Q4 of 2025 and reflects integration savings offsetting the negative impacts from inflation and currency. The R&D spend of 4% of revenue represents a modest increase to fund various initiatives expected to drive long-term revenue growth. Net interest expense is expected to be approximately $70 million based on current interest rates as well as the roll-off of a portion of our interest rate swaps. The adjusted tax rate should be around 25% and and diluted shares outstanding are estimated to average $25.3 million during the year. Bringing these components together results in a 2026 adjusted EBITDA range of $400 million to $430 million and adjusted EPS in the range of $7.75 to $8.45 per share.

It's worth noting that the 2026 EBITDA range reflects the impact from the annualization of 2 items, the first is the full year of tariff impact, and the second is the deconsolidation of the IV Solutions business and associated earnings, which combined are worth approximately $25 million. Now on to cash flow. We ended 2025 with $100 million of free cash flow for the year, which was slightly better than our original 2025 guidance after considering the unplanned cash flow impact from tariffs. For 2026, we expect free cash flow to improve relative to 2025, driven by the combination of higher earnings and reduced spending for restructuring and integration and product-related remediation.

In terms of calendarization, we expect free cash flow generation to be weighted towards the back half of the year, consistent with earnings and also reflecting the reduction in integration spending as we completed a number of the manufacturing and supply chain projects over the course of the year. In terms of capital allocation, after paying down over $300 million of debt over the course of 2025, we ended the year with $1 billion of net debt and a net leverage ratio of just under 2.5x. And any free cash flow generated during 2026 will continue to be prioritized towards debt paydown. And we stated previously that our long-term leverage target is 2x and once we reach that level, any free cash flow will then be available for share repurchases. Our expectation is that we should reach our targeted leverage by the beginning of 2027 based solely on organic cash flows with the possibility to accelerate this timing from proceeds of any potential transactions.

To wrap up, we're pleased with the business performance during 2025. The improvements we've made over the past several years brought us back to more predictable and consistent revenue growth and improved profitability, which are reflected in the 2025 results. For 2026 and beyond, we're focused on continuing to deliver at or above our long-term revenue targets, expanding our margins by capturing some of the remaining 2 percentage points of opportunity that we've discussed and improving free cash flow generation at the same -- at the time of the Smiths Medical acquisition 4 years ago, we anticipated the combined organization would generate $500 million in EBITDA and after the integration was completed. Certainly, the integration has been bumpier and taken longer than we expected.

And while our 2026 EBITDA guidance is still short of the $500 million target, the difference of $70 million when compared to the top end of the 2026 EBITDA guidance range can be attributed to the $25 million of earnings related to the IV Solutions divestiture and along with $40 million to $50 million in unanticipated tariffs. So we feel the underlying business performance is now within reach of our original goals at the time of the acquisition but tariffs do present another hurdle that we are focused on overcoming to achieve those original targets. And with that, I'll hand the call back over to Vivek to discuss some of the initiatives to get us there.

Okay. Thanks, Brian. That was straightforward. And we hope it's obvious that this year's revenue guidance is the same as the last few years with a better track record in our ability to deliver more predictable revenues and we hope the math on where we are relative to our original transaction targets is clear. While we have achieved healthy revenue growth in our differentiated core product lines for the last few years, sustained revenue growth is about consistent execution combined with consistent innovation to refresh the portfolio. Strategically, our goal has been to build the most comprehensive and innovative infusion therapy-focused company. Throughout the last few years, we did not skimp on R&D nor innovation nor capital investments into the manufacturing assets of our consumables and systems businesses.

And we found a win-win with Otsuka in the JV that will modernize the IV solutions business. As a result, we believe in IV systems, we have a complete platform solution that will anchor the segment for the next 10-plus years as the product life cycles are incredibly long. In infusion consumables, we have scale underpinned by leading brands with great clinical data that will be supported with more innovation in the core and adjacencies of this business. We believe these investments alongside good commercial execution will allow us to continue the revenue trends longer term. Specifically, over the long term, we expect our Infusion Systems business to have opportunities both in competitive situations and as we begin a long-term refresh of our own pump installed base in earnest in 2027.

We expect our offerings at some point this year to include each device, Plum Duo, Plum Solo, Medfusion 5000 syringe and CADD ambulatory to be the most recently FDA-cleared pumps and the most modernized from a design perspective, each with their own unique clinical advantages and all connected via a single software solution where we're working to add features every day. That portfolio has us on the best footing we've ever had, and we believe it offers incremental value to our existing installed base customers. In our consumables business, we'll continue to create the niche markets that have powered us along with expanded capacities in our core business, all supplemented by incremental innovation around the core that will be more visible over the next few quarters.

And for customers, this will be economically combined when commercially relevant with a more reliable and more innovative IV solutions business where our partner brings tremendous value. While it's nice now that we can pro forma bridge back clearly to our original transaction estimates, tariffs and higher interest rates are all real and therefore, we are not still quite at the targets we expected in real dollars. We're describing the long-term revenue sustainability to illustrate that there is more than enough opportunity to jump over the tariffs -- the tariff headwinds over time. And that will be supplemented by the annualization of the operations and logistics cost savings into 2027 and additional margin opportunities that Brian described and more time to mitigate the tariffs via pricing and operational decisions.

The balance sheet and the overall portfolio construction do play a role in maximizing revenue growth and EPS. As Brian said, our goal has always been to be 2x or less levered, which feels appropriate for a mid-single-digit growing manufacturing company. We're now within half a turn of that and we can get there the old-fashioned way via organic cash flow generation this year or via any strategic moves. It's obvious that vital care is less synergistic to our core lines of business, dilutive to our overall growth rate and our team has shown the ability to be creative in finding the most logical strategic outcomes. And independent of that, we're working to improve the organic profile of that business with the safest balance sheet we've had in recent history.

Since our time here, we've tried to protect the share base with the only meaningful equity dilution resulting from the shares used in the Hospira and Smiths transactions. We know returning capital can be attractive on a thin share base and our external M&A needs are minimal as we have enough organic innovation in-house. So it's pretty obvious to us what we should be doing. Of course, there are wildcards with tariffs and interest rates, but we feel like we've weathered those issues. All in all, it's a good place to be with our best businesses growing. Both will again reach record revenues in 2026, and we can see a vast number of projects nearing completion. We expect our consumables and systems businesses to be reliable growers with an industry acceptable profit margin, the tightest and most optimized manufacturing network and each with a multiyear innovation portfolio.

And ultimately, our goal is to transfer value from debt to equity. There's no confusion within the company in the pursuit of these goals, and we don't really have any frivolous activities here. We produce essential items that require significant clinical training, hold manufacturing barriers and in general items that customers do not -- are items that customers do not want to switch unless they must. The market needs ICU Medical to be an innovative, reliable supplier and our company is stronger from all the events over the last few years. thanks to all our team members and customers as we improve each day. And with that, we'll open it up to questions.

[Operator Instructions] And we'll take our first question from Jayson Bedford with Raymond James.

Maybe a few questions. Just start with systems. Double-digit LVP growth, very strong for the year. Are customers -- can you talk about the environment out there today? Are customers -- it sounds like it, but are customers actively making decisions today? Or is there any pausing in the environment at all?

I think from a capital perspective, Jason, the words have been the exact same, I think, the last 6 quarters, which is the capital environment has been very stable, nothing different than historical behavior. Deals are getting done. I think the industry challenges historically are well known, and there was some backup in refresh cycles, and I think it's coming to fruition. I'm not sure I'd call it accelerated - but again, we were starting from a place where our share base after Hospira had gone backwards a mere was very low. And so these improvements are very meaningful to our P&L.

Okay. And just the comment on second half, can we assume that the vast majority of pump business you're doing today on the LVP side is Duo and Solo?

Domestically in the United States for the U.S. portion of our business, absolutely. Internationally, the 60 continues to be placed.

Okay. Just on the syringe and ambulatory side, are the pending clearances having an impact on infusion system sales, meaning is there a pause there as folks may wait for the newer approved products?

No. I mean range of the 4 years that we've owned the syringe business last year was pretty close to the top. And any customer who is serious about the platform is very interesting in what the future road map looks like and want to engage on it, and it hasn't been slung anything down.

Okay. and just timing on the clearances. Is it safe to assume a 2Q midyear?

I mean I think I would -- we would leave it as, one, we are incredibly pleased that we have seen no change in the regulatory response in this time. Responses are just as prompt as ever. And the quality of the dialogue is just as good as ever. We received a first pass review on the plum Duo, we felt these were high-quality filings. It's never over until it's over, and there's the normal back and forth going on. So we're doing our part, and I think they're doing their part the best they can.

Okay. Maybe just one last one for me, and then I'll let someone else jump in. But just congrats on closing out the warning letter. Just along that vein, you mentioned it would open up some strategic choices. I think the word you used. Can you just comment on the appetite for these type of products out there?

I mean I think we all read the same newspapers. I didn't see the same things happening from a transactional perspective I think there's capital we put to work in some situations. For us, some of the assets that we've beaten around the bushes that we'd love to figure out what to do with have been the exact assets that were either covered under the open warning letter or we're in the midst of being integrated via their manufacturing sites were moving or their IT systems that ran were moving in. And a lot of that work is behind us now. So we just feel like we're in a better place to explore some of those opportunities.

We'll now move on to Brett Fishbin with KeyBanc Capital Markets.

Maybe just one on consumables since systems was just touched on. So I think for this year, you're pointing to mid-single-digit growth, which is pretty in line with what you've seen in the last couple of years, maybe 100 bps or so lower. But I'm just curious kind of like what you're seeing from an underlying volume standpoint across hospitals and your other end markets 6 weeks into the year. I think we've picked up on some signs that maybe baseline hospital utilization volumes might be decelerating a little bit. So just curious if you've seen anything like that. And just like how you're thinking about that as it pertains to the guidance for '26.

It's a good question, Brett. I think just as the first point of clarification, our guidance for consumables, independent of the results that were put up is exactly the same as the last 2 years, right? So our mid-single-digit sentences the party line and what we certainly have been sticking to. In terms of what we are seeing out there, I think the comments we made in the back half of the year are the same as today, which is in the back half of the year, it was a very different -- it was a lower growth rate than we had seen the year before. I think that trends continue.

For us, it still feels like it's positive, may not be at the same rate. But when we look at our underlying demand, we haven't seen any impact along the line of utilization on anything right now. There's a little bit of a seasonality point, Brian was talking about in the script on the flu stuff and just the normal seasonality we've had in the consumables business, but I don't think there's anything related to our buying demand. We were talking about or I wouldn't have made the normal comments in the third para.

All right. Perfect. Perfect. And then just one follow-up. And I think I know we're all kind of ready to move past this tariff topic, but just to start the year, just thinking about the guidance, I think giving the 2% metric as a percent of sales makes a lot of sense. But just wanted to ask if there's any changes in how we should be thinking about exposures geographically? And then just what you can tell us about any mitigation efforts that you've undertaken since the last call in November.

Brian, do you want to that one?

Yes. I mean I don't know if there's really much in terms of changes in terms of exposure and things like that. We'll kind of see what happens here in the near future, if anything, and who knows what could result from that. But I think we have done some things structurally to try to mitigate the tariffs as much as we can. We saw a little bit of that favorability Brett, in Q4 coming in a little bit less than our previous guidance around some expense there. So I think that helps, and that kind of gets back to the point as to why Vivek was saying earlier earlier in '25 don't annualize what we were seeing at that point in time. So yes, I think there's still a little bit more work to be done on tariffs, but maybe those benefits won't come until a little bit later in the year because some of those are, let's say, heavier in terms of lift.

We'll take our next question from Mike Matson with Needham & Company.

Yes. So when I look at your slide and kind of the bar chart in there, for the Infusion Systems business. It looks like the syringe pumps are a pretty small slice of that business. So is that really just because the overall market is smaller or is it a sign that your shares may be lower in that category? And does that mean there's maybe more opportunity to take some share when you launch the new syringe pump?

Yes. Mike, we'll start with the market sizing. It's a much, much smaller market than the LVP in terms of actually units pumping maybe 10% to 15% of the size of the overall LVP market. Max 20, if we had a debate about it, depending on who system you're using. So first, the market size is much on. And it's the inverse of where we are in LVPs, our share is actually higher on syringe, certainly very high freestanding syringe. -- than we have in LVP. So I think for us, it goes back to the roots of why we took on the pain of the last transaction was it was a gap that is -- even though it's only 10%, 15%, 20% of the market, it's still important to customers to have that integrated view to drive more safety to have it in an integrated fashion, and we had to get a foothold there, which is why we did what we did. So there's -- syringe is a small portion of the segment, you're right, but it is important to customers.

Yes. Okay. That makes sense. And then just Vital Care, given the commentary around potential sale at some point of that business, -- and I can't remember if you disclosed this in your filings or not, but can you tell us what maybe the EBIT or EBITDA margins are in that business or kind of the portion of your corporate earnings that are coming from it, just so we can maybe start to do some math around like what the potential trade-off would be between lots of earnings versus share repurchases and things like that. I know it depends on the price, but -- and I know it may or may not actually happen.

Yes. I mean I think we're not quite -- if it was easy to do, all of this will be done are, right? We haven't -- that the infrastructure is deeply commingled in spots, which is why this is tricky to work your way through. And until you really get it on its own organized IT, its own organized manufacturing. It's been hard to assess that with super precision. I think what we would say as it relates to the general direction of the question you're asking, one, it is likely that most of vital care is probably below the corporate gross margin. I think that's a safe assumption.

And the second 1 is, I think if you look on our track record, of most of the situations, right, we've tried to thread the needle in the right way and the solutions, J.B., we found a way to improve our revenue growth rate, improve our gross margins and do something that was EPS breakeven, so to speak, right? That would still be the target. I'm not saying that's achievable, but it's easy to give things away, but it's value destructive. So you have to be patient, get them the right quarter and the right forum to make sure I've heard yourself doing it.

Okay. All right. Got it. So you'd be aiming ideally for something that's at least kind of neutral to earnings?

I don't think we want to be that firm that again, there's 1 not every business has created equal necessarily in there, but I think directionally, that would be the goal we'd aspire to, right?

We'll now move on to Jason Bednar with Piper Sandler.

Congrats on the quarter here and in the Smiths warning letter being lifted. Vivek, I wanted to go back to the systems business where the other Jason started, I'll ask a few here. So you did mid-singles for the full year of 25%. You're guiding to something similar for '26. I guess I wanted to ask, maybe it's just being prudent to start the year, but you do have a competitor deal with challenges with their pump system you have a new product cycle you can take advantage of, maybe some early contribution from the replacement cycle opportunity with those old Hospira pumps. But I know you're saying that's maybe more of a 2017 event. What's the good case scenario here for this year? If 25% was a normal year at mid-singles, couldn't 26 be a bit stronger just given some of those factors I mentioned. And then maybe just in the response, if you could help us quantify the impact of that OEM wind down that was referenced in the prepared remarks.

Sure. There was a lot in there. I guess I'd start by saying right now, starting this year, we feel good about what we think of almost as our backlog of our transactions that we've contracted for and a large portion of our revenue growth assumptions here is just making sure the installations happen. And so upside to that was if we actually could sign more and install more in the same year. So I think from a place of safety, I think we feel we're starting in a better spot. As it relates to competitive stuff, the second part of your question, as I've said before, we all live in a glass house. This whole industry has been right for challenges. We've essentially worked at 23 players.

I think we'd be cautious on making assumptions about how other people get their house in order. We've all been through it. And then on the OEM piece, that is a piece of business that has been declining for the last 2 years. So the good growth of 7 and 5 in LVPs has been jumping over that anyway, right? We never really wanted to speak about it so transparently because we didn't want anybody to feel that bump. I don't think they really felt it in '25, and we think we have the ability to grow through it again in 2016. I don't think we want to be precise in exactly how many points of headwind, but it was certainly a headwind to the business for the last 2 years, and the business still did well.

Okay. That's helpful. I appreciate that. And then I know you highlighted the stronger ASPs on Solo and Duo. I think that's helping the growth rates should help the growth rate here in systems, maybe more in the second half of the year. What kind of ASP contribution or uplift should we be thinking about from those? Is it material?

I think the challenge and the opportunity for this industry, and a lot of value is created if you can -- there's 3 components of value in the pump business, maybe there's 4 components of value, right? The first is obviously that the razor and razor blade the dedicated sets. The second is software and service. The third is if you can drag adjacencies like we do with regular consumables and the fourth is the hardware itself. And we thought we were pretty well positioned on the first, second and third, certainly, new products position us better in software than the historical products. But I think the challenge for our pump is historically is that we weren't generating enough margin on the hardware. We believe this piece of technology has enough the new pubs have enough technology embedded in enough features that we can begin to have a more interesting positive gross margin on the part makes a big difference for us. It will make a big difference for us over time.

Okay. So it's safe to assume that it's improving gross margin, then it's material enough on the revenue line, too.

Correct.

Okay. Perfect. Last one for me. Just I thought it was pretty clear just from a lot of comments even how you started the call that operations are for the business are just in a much better state today than where we've been in the last few years. lot of confidence around cash flow, seeing benefits from some of the common systems, facility consolidations et cetera, that you've been going down. Maybe if you could or Brian to jump in, if you can unpack that a bit more? And does that show up? Do we see that across gross margin and SG&A lines -- is that a dynamic that just builds throughout the year? Just any more color there would be helpful.

Yes. I mean I think I think we talked about kind of those areas of improvement, whether it's gross margin or free cash flow that those were opportunities that would probably take a few years to fully capture the full value of the opportunity where -- whether it's gross margin or free cash flow, those benefit from the projects that are underway, whether it's the IT system integration or the manufacturing plant and supply chain network consolidation. A lot of that work is wrapping up this year and projects are being completed, and we'll continue to realize benefits. And I think we're our goal is to really exit next year. So by the time we get to the end of 2017, we're kind of more at a steady run rate whether it's gross margin or free cash flow, it's kind of closer to those targets that we've been talking about.

So to be specific, Jason, there was a slide in the IR deck, which showed the target gross margin level and then the adjustment for tariffs, right? That's what we're talking about to where we get to. And this basically what happened, it was a spiral downwards in the first year or 2 as results were coming through and the business wasn't as healthy as we thought. We just get more value. We have to consolidate more integrate harder that consumed capital. And those projects became big projects. We're finally coming out of them, therefore, capitalize and consume that things get back to. It's kind of a spill down and the spiral back up and we're at least on the better side of it now.

Right. Very clear. Congrats again.

Once again, to Larry Solow with CJS Securities.

Great. So a couple of follow-ups, most of my question has been answered actually. So on the margin improvement question, so the consolidation initiatives themselves which I guess is just part of that 200 bps or so of opportunity and probably maybe the biggest part by itself, but it sounds like that activity is done and will at least get that benefit not the full year's worth, but maybe by the end of this year, that run rate will be in the numbers already on the consolidation piece for most of it. Is that fair to say?

I think -- Larry, thanks for the question. I think what you're trying to say, again, it can drift month-to-month. But in general, once the inventory that was made at the old factory, leaves, we get the benefit of the manufacturing synergization. And we have a number of logistics, consolidation is also rolling in. We expect a lot of that to be in the run rate by the end of this year. and then that will annualize into next year, which is another benefit. And the components of the 2 points of margin, the missing still 2 points relative to our new targets, are really those activities being fully implemented, the previous question, the benefit of better margin on hardware sales overall pricing, et cetera, those all go into components of margin. And as the consumer business grows, that helps margin stutters a lot of things in the mix for both this year and next year, they're all good.

And when does the cash outlay, right? So you've been -- I think it feels like you spent more than $100 million this year. But on the remediation and integration restructuring combined, it sounds like you spent 37 this quarter. So I think it was over 100 again for the full year, and it's averaged over 100 to 3 years. So -- and you've been averaging or at least run rate close to $100 million free cash flow. So Fair to say that in 18 months, the business just improves a little bit at the core by just getting rid of all these excess expenses, you should be doing well north of $200 million in free cash flow, right, unless -- my math is.

Thank you for the vivid recollection of our shared experience. Yes, it was painful. That is the exact amounts that we've been putting at it. I think we were trying to say in the call, it's this year, it needs to end and hopefully by the middle of this year. There will always be some tough on regular remediations that are happening, et cetera, but a materially different number in the back half. So that's the way free cash flow is around and then growth long term on top of that.

Got it. And if I could just sneak 1 more, just more just systems, a lot of questions on this one. But there's still, I guess, a lot of business up for grabs, right? I don't know if you can just kind of characterize where we stand and without mention the competitors may but I know there was a lot of business up for grabs there. How are you doing in that? And just your comfort level on the refresh cycle because to me, that feels like competitive new business wins are great, but when you have all these in-house install base that can just flip over to the new line, that should be a much greater opportunity for you. So just your confidence level that we could start seeing your customers will want to switch or would be anxious to switch as we look out? I know that's still a little bit of ways, but any color on that would be great.

Sure. I mean, first on the competitive piece, again, from a safety perspective, we feel like we have enough contracts in hand. As long as we can manage the installation schedule, we feel like what we see in the near term is pretty good. And there's plenty of competitive activity. just in normal course competitive activity that can keep us busy. In terms of the refresh of our installed base, I mean, our journey here we went through some dark days where people had left the infusion hardware category, Abbott Hospira what we became a very different market shares historically. -- we stabilized that classic. And truthfully, that many of the customers that stayed because they believed in the core technology.

And the pieces of that core technology have been conserved into this modern package of Plum Duo, Plum Solo and now enhanced with the syringe in CADD, all in the same software. And so I would argue that these customers went through some tough times, still we're committed to the technology, and we believe we have a better offering for them today, and that's independent from the economic wrapper around the other accessories and solutions and other things that may or may not be part of any given conversation. So we think we're well positioned for that conversation, too.

At this time, there are no further questions in queue. I will now turn the meeting back to our presenters for any additional or closing remarks.

Thanks again for your interest in ICU Medical. We're glad a number of our projects are reaching completion, and we look forward to updating everybody on our Q1 call later this year.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.

Good afternoon, everyone. We're excited to continue our 44th Annual JPMorgan Healthcare Conference.

My name is Rohin Patel. I'm associate on the healthcare team here at JPMorgan. And today, it's my pleasure to introduce ICU Bio -- ICU Medical, excuse me. And its CEO, Vivek Jain. We'll have time for Q&A at the end, where we'll be joined by Brian Bonnell, CFO.

And with that, we'll hand it over to Vivek.

Thanks, Rohin. And thanks to JPMorgan for having us at this great event. I think we know a number of folks in the room, so we'll try to be informal as usual. And in the next 20 minutes or so, I think we can give you a good feel for the investment rationale into ICU Medical, our team, a number of pharma colleagues are here in the front row, has been together a long time. And our investment into the company and our time at the company speaks to our commitment to get this right.

And I think we're excited today to be talking for the first time in the last number of years with many of the situational challenges that we went through with our last transaction behind us and a lot, not all, but a lot of the macro items that we face too in the market. We simplified our investor presentation. For those of you who are familiar with us, we did simplify our presentation a little bit. Hopefully, it cuts to the chase of the opportunity and illustrates our potential.

We would, of course, encourage you to read our safe harbor language at your leisure, which is available on our website. And so first, let me just do a quick snapshot on ICU Medical. We are a focused player primarily in IV therapy. We report in 3 segments, which are consumables, systems and Vital Care. Consumables and systems are our core businesses. 2/3 of our revenues come from North America. I would say more than 2/3 of our profits come from North America. And almost 90% of what we do are single-use disposables that are $10 or less.

So 90% -- 87% of our items are single-use disposables, the balance is capital equipment sales. In terms of financial metrics, we at the stock price a couple of days ago, we're about $3.8 billion of equity value, and there's about $1 billion of net debt, which implies trailing just over 2.5x levered. We'll talk a little bit at the end of the presentation what our goals are there and where we want to get to.

For those of you who've seen us before, this chart last year would have had $300 million more in revenues on it. We consummated a joint venture for our IV Solutions business last year. We still have commercial responsibility for that business, but it's no longer included in our publicly reported results.

Let me give a minute on the IV therapy industry. It's a structurally attractive industry with a lot of very, what we call, sticky demand drivers. And first and foremost, these are essential products, 90% of the folks who walk into a hospital today receive some sort of infusion therapy. There's a high -- if we spoke like consultants, we'd say there's a high incumbency or familiarity advantage where people don't want to switch products. And the products themselves have very long both life cycles in terms of the technology of the products but also have long contractual cycles where if you get a piece of business, it stays for many years in a row.

The underlying market structure is attractive, and that's a very consolidated industry. There's a limited number of players that do this around the world. The regulatory barriers are very high. And sometimes people's impression of that is you can only participate at a census level, but like many markets, there's lots and lots of niches and hidden spots in this market where growth is faster than census, and that's what we look to optimize and participate in.

I mean, ultimately, our role in this industry is to address the meaningful areas in infusion therapy, which are really at the confluence of safety patient -- or at the confluence of patient safety, clinical efficiency and workflow. And where those things don't go right, there's often bad outcomes for hospitals. And so if patients are safe. If care is delivered efficiently, good outcomes are happening, hospitals don't have problems. If those things aren't happening right, there's usually negative reimbursement effects, et cetera, for hospitals. We benefit -- we add value by making sure those things happen the right way for our customers.

How did we get here? So 9 years ago, 8 years ago, we were a $200 million direct sales company. And our team showed up and we got to work really focused on innovation around our original core consumables business. And that set us on our journey to grow that business, and we supplemented it over the next number of years with a variety of M&A activities.

We did some defensive M&A with Hospira, acquiring Hospira Infusion Systems, which was a very good transaction. We did some offensive M&A with Smiths Medical which was a strategically logical transaction, but a harder transaction execute. And we did some creative M&A in the creation of our joint venture with Otsuka Pharmaceuticals.

Those deals, while all strategically logical, we had to believe we could add value through innovation. And so lots of folks have rolled up industries consolidated things, but if you're not adding value with new products, new features, making things better, making things safer, it doesn't matter what you bought. And through all the difficulties you went through the last couple of years, we remain committed to innovation throughout that journey.

Okay. So kind of getting into our businesses a little bit now and then into the financials. We think each of the businesses and particularly consumables and systems are well positioned with a right to win. And so if you look at our results on our earnings calls, we published a slide that has the last 6, 7 quarters of revenue growth. Those numbers have averaged 5%, 6%, 7% in the big businesses. There's a handful of key products that you can look at under leisure in each of those sectors but we are 1 or 2 in the U.S. market.

And we win because there's some synergy between the businesses of consumables and systems. We win because we innovate, we win because we have global manufacturing scale and cost positions, we win because of brand and we win because we innovate consistently. I'll get into the more specific innovation in the systems business, but if you add up these players -- these various verticals, each one of them is one of the largest suppliers in the world in these categories.

To make it really simple about the company, what are our priorities, right? How should investors judge what we're spending our time on. There's 3 things we're trying to do. We're trying to make sure that we deliver consistent core revenue growth, right, keep our commercial momentum going. We're trying to ensure that we continue to deliver innovation. And for us, that innovation has been both incremental, which is sometimes [ pod ], but has really been what's been driving our consumables business for years, and we want to deliver step change innovation, which we're doing in our Infusion Systems business. And ultimately, at the end of the day, that needs to show up on our P&L, right? And we want to show that we have financial results that provide evidence that those things are happening.

So on the first one, what are we trying to do to deliver mid-single-digit growth? And how have we done that in these businesses? And first and foremost, for both consumables and systems about competitive share gains. And so I'll talk a little about in each vertical why we're getting competitive share gains. It's about creating the faster growth markets, and it is -- has been about pricing and some of the things coming over the last few years. So in consumables, we've won for really 4 or 5 clear reasons, brand, the way we deliver the product to the patient and the hospital the way we organize the product from a training perspective, by creating faster growth markets -- faster growth markets in biologics, in home infusion, et cetera, those niches are growing at attractive growth rates faster than the hospital markets.

And we took a lot of pain and price and inflation here over the last number of years, and we've been very focused on getting pricing back in line to recruit that inflation. So on consumables, we've won for all of those reasons. And then if we win in systems, and I'll talk about in a second, more often than not, we win in consumables, too. And so the pumps drag some of the plastic consumables that go behind it.

In the pump business in systems, we have a couple of unique things going on in the LVP pumps, which are the workhorse pumps that came from Hospira. If we win in those systems area. It helps also not only pull the consumables, the other types of pumps, which are the specialty pumps that came from Smiths, the CADD pump and the Medfusuion pump.

The CADD pump and the Medfusuion pump participate in some of those faster-growing markets in home care, offsite, et cetera. So it's not only having the right product, having it in the right place where they can participate. And an advantage we finally created for ourselves is on the hardware side of the pump business. We finally have some products that are capable of driving an attractive gross margin.

And so pricing matters there because we get -- we realize the value for the technology we're now offering, which wasn't necessarily the case with the historical pump platform. And so I think it's pretty clear there's a lot of drivers of our commercial momentum across our most important businesses in each of the subproduct families in those groups that were referenced on the previous page.

In terms of innovation, most of our innovation dollars for the last 5 years have been in the pump business. And so we did these -- we innovated on consumables. We did these transactions. We built a full line of infusion pump devices. But until very recently, they were all running on their own IT network under their own drug libraries with their own limited connectivity.

Over the last 2 or 3 years, we've got approval for a new LVP system and a new software system called LifeShield and LVP is called Plum Duo and Plum Solo, and we're currently pursuing approval for a new syringe pump and ambulatory pump that would connect to the same IT and same system. And so we've tried to deliver a simpler, more modernized format for customers, where each of these devices is the most accurate and most precise tool but try to conserve the things that make them really standard -- making them able easy to be standardized in terms of user interface, workflow, connectivity, et cetera, with a common look and feel.

And so that speeds up education, training, service, et cetera, and it's the first time we get to go to market with all of this in an integrated fashion. This investment cost more than $100 million over the last couple of years. And if we talk about why it was so important and to understand why we made it, in the pump business, you really create value in 2 ways.

You create value by refreshing our own installed base of existing pumps either with more valuable technology or with new software tools and other things that revalue the installed base itself or we take competitive share gains. Having the full line portfolio gives us the best opportunity to compete in the very situational things that have gone on in the pump business today with a bunch of decisions that finally were sort of in the fourth quarter of the game where customers have to make a decision on what they're going to do with infusion pumps.

Longer term and the bottom point, and I'll take one little slide on futures. This business is still kind of a razor and razor blade model, and we want to migrate that more to analytics and software and very few medical device companies have been able to make transition. But as we think about it, and this is future, this isn't here today, the infusion pump is the most prevalent wireless device in the hospital probably besides the mobile devices of the staff for the hospital themselves. And these pumps are delivering critical medication every day, and that real estate is important. And over time, we see an opportunity to deepen the clinical workload. So this will be a stepped approach. These pumps today do what used to be kind of higher end stuff is now table stakes basic bidirectional connectivity with data, populating an EMR, EHR, et cetera.

Over time, we want to add that more connectivity to home care with the CADD pumps at home. Over time, we want to see is there more decision support that can be offered with ventilators, anesthesia equipment, et cetera. How do we get more into the clinical workflows around that. And then the holy grail is these closed loops that people talk about that take a long time to materialize, but there will be a time and place for that. And so I think we have some very clear opportunities there. And fundamentally, they're back to the same drivers we've talked about on that slide, which is how do we add more safety to the system, right? These are all just different words for safety.

In the consumables area, we hint around on our earnings call, we have innovation going on there. We were trying to figure out how to just make it really clear what our consumables innovation is. And our consumables innovation is predicated on 2 things. And this business, again, has grown 5%, 6%, 7% a year for more than half a decade. Our innovation here is centered on improving patient or clinician safety and it's making clinical efficacy or workflows easier.

And so that's -- on the safety side, that's using up your medication. It's minimizing hazardous drug exposure, it's reducing infection risks, reducing ripping out catheters, et cetera. On the clinical side, it's driving standardization. And really, it's about closing the open holes in the infusion system.

And so it's taking the legacy parts and pieces of ICU Medical and attaching them everywhere it makes sense to system or make management of adverse events easier within that system. And that can be a dedicated pump set cartridge. That's the original genesis of the Abbott ICU Medical historical relationship 30 years ago, that bottom left picture to taking those parts and pieces and putting them on what was a Smiths ambulatory dedicated set, Hospira infusion bag, a closed system catheter everywhere we can add the value and drive standardization we're trying to do in infusion consumables, and this now is over a $1 billion business for us.

Okay. A little bit on financials, and then I'll wrap it up. In the darkest day -- so all these things need to make their way on to the P&L. In the darkest days post last acquisition, I think we hit 34% or 35% gross margins. We said we were underearning at that time probably 500 basis points, and we should be a 40% gross margin company.

We then created the joint venture with Otsuka Pharma that raised that 40% target to 45% in our mind. So that was a 500 basis point improvement with the solutions JV. With tariffs, there's a 200 basis point hit to that target, so that's kind of adjusted for tariffs to be at the 43% range. At our most recent quarter, it was 41%. And so we still think we have 200 basis or so to go of gross margin improvements.

The second point is we need to get back to our historical expectations of free cash flow versus net income. And there's lots of areas of improvement for free cash flow. Tariffs are a huge area of cash consumption at the moment. We have spent a lot of money on restructuring costs that should be decreasing. We have spent a lot of money on quality remediation. It should be decreasing. And all of that leads to gross margin expansion.

The bottom part of this middle slide basically is saying if we've made all of that innovation, we may have some assets we are interested in divesting. We didn't skimp on innovation or CapEx. We don't need to do a lot of external M&A we're close to achieving our target leverage, which is on the right-hand side of the slide. And if we achieve our target leverage, which is about half a turn away from where we are right now, the goal on a thinly traded security, where we protected the share base is to return to shareholders after the work of putting all of these assets together.

And so I think we have a very clear view in our mind what the capital allocation plan for the company should be. And I think we're very close to achieving it. And it's admittedly, it took us longer than we expected and wanted to get here, but we're here now with the products about to turn the corner on some of these items.

So in summary, why invest in ICU Medical. I think we're at an inflection point of new product cycles on the pump side, consistent innovation on consumables. Improving financials and then a couple of wildcards that may or may not happen, specifically the product cycles that I talked about really Plum Duo Plum Solo, the Medfusuion 5000 syringe loss launch software opportunity, consistent consumables growth. We're exiting this period of difficult merger integrations. We've improving gross and operating margins.

The synergies are being realized. And so that it's -- sometimes it's a scary word, but we absolutely are seeing situations where we walked into a customer that we picked up from the last acquisition, selling them ambulatory pumps or syringe pumps and then be able to convert that customer into an LVP full-line account and vice versa. That's very valuable. We're bringing those quality issues to resolution. Cash flow has been improving. If you've been seeing our results, EPS has been growing. Our costs don't really change that much. And so there's a lot of leverage on revenue growth. Debt levels are getting where they need to be, lower cash consumed below the line. I know a lot of people don't pay -- we pay a lot of attention to what gets thrown below the line because it's real cash, it can pay off real debt.

And then there's some optionality on what do we do on capital allocation and/or capital return if something is to be monetized. We're close on target leverage and tariffs, obviously, are a wild card with what's going on out there. So it's an interesting time for the company. We think we're at a very, very close moment to realize the potential of all the things we put together and happy to answer any questions, and thanks for your interest in ICU Medical.

Maybe I can start off with the first question. So big picture wise, do you feel the company is out of the woods with -- on the challenges, so to speak, from the Smiths Medical acquisition? And if so, what would be the proof of that?

I mean I think we've just spent the last 20 minutes trying to make a case for we're getting out of the woods. We're almost out the woods. It's not fully there. I think there are -- in terms of the things that are still behind us, while we believe we have satisfied all the requirements for the warning letters that were received by Smiths and then us subsequent to the acquisition. We don't have them lifted yet.

So that needs to get done. It's not a commercial impediment nor is it so much of an economic impediment anymore, but it is a bit of a black cloud we would like removed and maybe affect some things on the strategic side. I think that's one remaining item and we need to sort of fully finish the IT integrations for the rest of the world. That hasn't been done yet. But operationally, I think most items are out. And then I don't know what you call tariffs, tariffs are more macro item from this year, but that's something that's consuming us too, but it wasn't necessarily related to the transaction. The transaction-related things outside of what I mentioned, I think we're mostly clear.

Maybe I'll ask another one. What does ICU Medical believe it can grow market growth rates?

Yes. I think ICU Medical has demonstrated for at least the last 7 or 8 quarters that we've been growing above whatever people call normal hospital census. And in the presentation, we were trying to say in all markets, there's growth. You may have to create them, you have to find them, right, but there are pockets of every market that are moving faster. And to make sure our portfolio is adding value in those areas.

And so if we pick some spots in the consumables business, there are spots with dialysis or home care or oncology that are growing faster, and we have healthy portions of our portfolio there. In the pump business, there are ambulatory infusion in other areas of software that's going faster. We're either there or trying to get our portfolio [ there ]. And then we have some very -- that's what we're supposed to do every day.

And then our situation is unique because a lot of weird stuff happened the IV solutions and IV consumables business that has led to some changes, and there's a lot of things going on in the pump business on top of that. And so yes, there's baseline growth. We should do better because we're taking share. We should do better because we are trying to tilt our portfolio growth areas. And then there's these kind of unique macro things that happen in each one of those segments.

Okay. If we don't have any more questions from the audience, I think we can wrap up the session. Thank you very much for...

Thanks, Rohin for having us. I appreciate it. We'll hanging around. We've got time. Obviously, We'll hang around if anybody has anything you want ask privately, feel free to grab us. Thanks very much for the interest, folks.

Thank you.

Good afternoon, everyone, and welcome to ICU Medical's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that today's event is being recorded.

I would now like to turn the conference over to Deirdre Thomson of ICR. Please go ahead.

Good afternoon, everyone. Thank you for joining us to discuss ICU Medical's financial results for the third quarter of 2025. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Brian Bonnell, Chief Financial Officer.

We wanted to let everyone know that we have a presentation accompanying today's prepared remarks. To view the presentation, please go to our Investor page and click on Events Calendar, and it will be under the Third Quarter 2025 event.

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 all of 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 provide as much detail as possible on any addendums that are added back.

And with that, it's my pleasure to turn the call over to Vivek.

Thanks, Deirdre, and good afternoon, everyone. I'll walk through our Q3 revenue and earnings performance and provide some commentary on the businesses and then turn it over to Brian to recap the full Q3 results and balance sheet and provide an update to our latest outlook. After that, I'll come back with a few comments on how we evaluate our performance year-to-date, where we are in our mission of creating a comprehensive infusion therapy company, our goals around the balance sheet and optimizing our portfolio; and lastly, a couple of thoughts on the medium-term priorities of the company.

The short story for Q3 is revenue was $533 million for a total company growth of 5% on an organic basis or minus 8% reported year-over-year. Gross margins increased, operating expenses declined, leading to more EBITDA and EPS. As a reminder, the reported results are impacted by the midyear creation of the Otsuka ICU Medical JV and resulting deconsolidation of IV Solutions from our income statement.

Consumables and IV Systems had good year-over-year growth. Both revenues and gross margins were slightly positively impacted from a settlement of a portion of the Italian payback liability, which was an expense we absorbed towards the end of 2022, and Brian will provide more detail.

Adjusted EBITDA was $106 million and EPS was $2.03. Free cash flow generation improved. And as of today, we've repaid $273 million in principal year-to-date. The broader demand and utilization environment in Q3 continued to be attractive across almost every geography with the growth rates positive, but not at the levels we saw last year. The capital environment is status quo, that it does appear investments that customers need to get done are getting done.

Getting into our businesses more specifically, our Consumables business in Q3 grew 8% reported and 7% organic. It was a record quarter in absolute sales levels with growth driven by new customer -- new global customer implementations, rapid growth in some of our niche markets and solid census. We had the best sequential increase in absolute dollars since Q2 of 2024. For the balance of the year, we're very comfortable with our comments on mid-single-digit growth for the year, but don't expect Q4 to have the same growth rates as this quarter.

On the last few calls, we've made some high-level comments around new product filings and innovation in our Consumables business with a number of line extensions or adjacencies that are rapidly pushing the development process and/or have already submitted 510(k)s to further strengthen our market positions. These products at their core are around enhancing patient safety and workflow efficiencies in the infusion drug delivery process. A number of these programs combine the parts and pieces of legacy ICU and what we acquired from Smiths.

We believe these developments alongside our existing commercial opportunity can keep this segment growing at historical rates into the medium term. Our IV Systems business grew 9% reported and 8% organic. Unlike Q2, this was driven by all 3 main product families as we lapped the difficult comparison in the CADD ambulatory product line.

LVP pumps and dedicated sets were again the largest contributors with double-digit growth driven by new installations and strong census for dedicated set utilization. We continue to be engaged in many new RFP processes and are beginning customer discussions around the multiyear refresh of our Plum 360 installed base with Plum Solo, now that it's been cleared. As we've discussed, since the new Plum Duo Solo products have been approved, the installation schedule is not predictable enough to be perfectly smooth just yet. Hence, we knew Q3 would be a record quarter as some installs from Q2 pushed into Q3 and even a few Q4 installs came forward.

For the balance of the year, we're very comfortable with the previous comments on mid-single-digit growth for the year. We don't expect Q4 to have the same growth rates as this quarter given the comments we just made on installs and the very large sequential step-up in Q4 over Q3 in 2024. Since the last call, we've been in dialogue with FDA about the submitted 510(k)s for both the Medfusion 5000 syringe pump and the CADD ambulatory pumps and related LifeShield safety software.

These submissions are working their way through the process, and we would call the process fair and like prior experiences with no real change in responsiveness from the agency even with all the challenges they're dealing with. As a reminder, we characterized the Medfusion 5000 as a groundbreaking new innovative product. But like what we did with Plum Duo and Plum Solo, we conserve the guts of the product that made Medfusion a market leader based on accuracy and workflow.

We would describe the CADD submission as more like a catch-up 510(k), bringing a variety of product iterations up to date in [indiscernible] filing. When these products get cleared, all of our pump modalities will connect to a single software solution, bringing ease of use and tighter control of all types of infusions to a hospital customer.

This was the core tenet of the acquisition to have a single software solution across hospital LVP, syringe and ambulatory pumps. We want customers to have the right tool for the right job, all connected with a common user interface and software solution that minimizes training, speeds onboarding, supports interoperability and enables standardization for our enterprise customers.

We believe we're seeing the benefits of this vision in the marketplace today with 3 distinct value drivers, which can be summarized as: first, the opportunity to win competitive market share with a full suite of the newest and best-in-class products; second, the opportunity to refresh our installed base of not only the LVP pumps, but also the installed base of the syringe and ambulatory pumps as that is a very significant installed base. And lastly, to create new revenue streams via software and home care connectivity, which are still in the very early days.

We believe these drivers, again, which are frankly the main reasons for the acquisition, position us for sustained growth in the medium term. Just wrapping up the business segments, our Vital Care segment was down 52% reported and down 4% organically as IV Solutions revenues were deconsolidated from our income statement. Critical Care and Respiratory were slightly up year-over-year. That's a quick summary for me on the businesses. I'll come back shortly with a few more comments. And so with that, over to you, Brian.

Thanks, Vivek, and good afternoon, everyone.

Since Vivek covered the Q3 revenue for each of the businesses, I'll focus my remarks on recapping the Q3 performance for the remainder of the P&L, along with the Q3 balance sheet and cash flow and then provide commentary on the implications for our latest outlook.

As you can see from the GAAP to non-GAAP reconciliation in the press release, adjusted gross margin for the third quarter was 41%, which was slightly better than our expectations. Here, we saw a meaningful improvement on both a year-over-year and sequential basis. There were 3 discrete items that impacted our gross margin rate for the quarter that are worth calling out.

The first was the onetime benefit associated with settling the Italy medical device payback liability related to the years 2015 through 2018, whereby we paid $2.5 million to resolve those historical periods at less than assessed values and therefore reversed the excess accruals, which resulted in a onetime increase to both revenue and gross profit of approximately $4 million, improving the gross margin rate by just under 0.5 percentage point.

The second item was that consistent with our previous guidance, we saw the full benefit from deconsolidation of the IV Solutions business, which improved our gross margin rate in the third quarter by almost 5 percentage points, whereas in comparison, the second quarter of this year, we experienced approximately half of the same benefit given the timing of the joint venture transaction.

And the third item was the impact of tariffs. Here, we incurred and paid $11 million of tariffs during the quarter and recognized expense of $9 million in the P&L after capitalizing an incremental $2 million into inventory. The $9 million of expense in Q3, which reduced our gross margin rate by approximately 2 percentage points was a meaningful step-up relative to Q2 expense of $3 million, but a bit less than our prior guidance had assumed. Also contributing to the year-over-year improvement were continued benefits from integration synergies and favorable foreign exchange.

With the third quarter results, we continue to progress towards our previously stated gross margin goals. In prior years, when our gross margin rate was in the mid-30s, we established a target of 40% gross margins to be achieved from a combination of manufacturing and supply chain synergies, price increases and improved manufacturing absorption from volume growth. Then last year, we increased the target to 45% to reflect the expected benefit from the deconsolidation of the IV Solutions business.

This target of 45% was prior to the imposition of tariffs beginning in early 2025. And therefore, if you exclude the 2 percentage point impact of tariffs from our Q3 results for comparison purposes, our gross margin would have been 43%, which is within 2 percentage points of our goal and we continue to believe sufficient operational improvement opportunities exist to allow us to close this remaining 2 percentage point gap over time.

Adjusted SG&A expense was $109 million in Q3 and adjusted R&D was $21 million. Total adjusted operating expenses were $130 million and represented 24.3% of revenue. The total dollar amount of spend was less than the past 2 quarters as a result of lower incentive compensation expense and the timing benefit from the deferral of discretionary spending as we've implemented cost controls across the company due to the uncertain and changing environment.

Restructuring, integration and strategic transaction expenses were $13 million in the third quarter and related primarily to continued efforts to integrate our IT systems and consolidate our manufacturing network. Adjusted diluted earnings per share for the quarter increased by 28% to $2.03 compared to $1.59 last year.

The current quarter results reflect net interest expense of $20 million, an adjusted effective tax rate of 27% and diluted shares outstanding of 24.8 million. And finally, adjusted EBITDA for Q3 increased by 12% to $106 million compared to $95 million last year.

Now moving on to cash flow and the balance sheet. For the quarter, free cash flow was $28 million and includes the impact of a $10 million outflow related to reducing our utilization of our accounts receivable purchase program to 0. It was another solid free cash flow quarter when taking into consideration the impact from lower usage of the receivable program, along with the cash flow impact from higher tariffs.

During the quarter, we invested $12 million of cash spend for quality system and product-related remediation activities, $13 million on restructuring and integration and $29 million on CapEx for general maintenance and capacity expansion at our facilities as well as placement of revenue-generating infusion pumps with customers outside the U.S.

And just to wrap up the balance sheet, we finished the quarter with $1.3 billion of debt and $300 million of cash. During the quarter, we paid down $25 million of principal on our Term Loan B, bringing total debt principal payments during 2025 to $273 million. Subsequent to quarter end, on October 31, we completed the refinancing of the pro rata portion of our credit facility that reset the 5-year term of the revolver and Term Loan A, which were scheduled to become current in January 2026.

As part of the refinancing, we increased the size of the Term Loan A by $190 million and used these additional proceeds to pay down our higher rate Term Loan B by $190 million. We expect the refinancing to save approximately $2 million annually in interest expense as a result of this reallocation of principal, along with other more favorable pricing terms.

Moving forward to the outlook for the remainder of the year. Given the strong performance in Q3, we are increasing our previously provided full year EBITDA guidance range of $380 million to $390 million to a range of $395 million to $405 million. And for the full year adjusted EPS, we are updating our previous guidance range of $6.85 to $7.15 per share to $7.35 to $7.65 per share. This guidance assumes fourth quarter revenues and underlying profitability are generally consistent with the third quarter plus the impact of 3 specific items.

The first is the absence of the discrete $4 million benefit from the Italy payback settlement that we experienced in Q3.

The second is higher tariff expense in the fourth quarter as we will incur a full quarter impact of the Costa Rica tariff rate that increased from 10% to 15% effective August 7. We expect fourth quarter tariff expense to be in the range of $12 million to $14 million, which would bring the full year tariff expense to around $25 million.

And the third item is sequentially higher operating expenses as the third quarter benefit from the lower incentive compensation and deferral of discretionary spend is not expected to be experienced to the same degree in Q4. As a result, for the fourth quarter, we're assuming operating expenses to be approximately 25.5% of revenue, which despite being higher than Q3, is lower than our previously provided guidance of 26% for the back half of this year.

After considering these items, Q4 gross margin should be in the range of 40% to 41%, consistent with our previous guidance and assumes the current tariff environment and foreign exchange rates remain in place through the end of this year. Net interest expense should be approximately $19 million in Q4. And for modeling purposes, you can assume fourth quarter adjusted tax rate of 25% and fourth quarter diluted shares outstanding of 25 million.

To wrap up, we're happy with the solid performance of the business during the third quarter as our Consumables and Infusion Systems businesses are as large as they've ever been. We continue to progress towards our gross margin goals, and we saw sequential EBITDA improvements despite the increasing headwinds from the tariffs and the deconsolidation of IV Solutions.

Now I'll hand the call back over to Vivek to close out with a few additional thoughts.

Thanks, Brian. I'll make a few remarks on how we're evaluating our performance, both financially and strategically, our goals around the balance sheet and optimizing our portfolio, and lastly, a couple of thoughts on the medium-term priorities of the company.

In terms of assessing our financial performance on the income statement, I'll use some of the numbers Brian just ran through. If we assume the full 2025 tariff impact is approximately $25 million and added that back to the midpoint of our current view of $400 million of EBITDA, we would be pleased with the result of $425 million as compared to the $370 million in EBITDA last year, and that doesn't even correct for the $15 million or $20 million of EBITDA that was deconsolidated with the JV creation.

Since early 2024, we've been talking about underearning, and these pro forma results show that we're closing the gap. But we fully understand we don't live in a pro forma universe and tariffs are actual costs. So as previously discussed, we continue to do everything possible to mitigate. Strategically, our goal has been to build the most comprehensive and innovative infusion-focused company. This shows first in our recent historical revenue. And the data on Slide 3 lays out our revenue growth for the last 6 quarters.

Throughout the difficulties of the last few years, we did not skimp on R&D and innovation nor capital investments into the manufacturing assets of our Consumables and Systems segment, and we found a win-win with Otsuka in the JV. As a result, we believe in IV Systems, we have a complete and clinically differentiated platform solution that will anchor the segment for the next 10-plus years as the product life cycles are incredibly long.

And in Infusion Consumables, we have the scale underpinned by leading brands with great clinical data that will be supported with more innovation in the core and adjacencies of this segment to support growth. We believe these investments alongside good commercial execution can continue the revenue trends seen on the chart I just referenced.

The balance sheet and overall portfolio also play a role in maximizing revenue growth and EPS. We assume over time, we'll have less leverage and be in a lower rate environment. So we would expect EPS would increase faster than EBITDA. At the end of 2025, we would expect to be 2.5x levered net debt to EBITDA, and our previous comments still apply. Our ideal place is to be around 2x levered and given the innovation we believe we have in-house to return any additional capital to shareholders in the most efficient fashion.

The most obvious and fully under our control way of getting there is organically by improving free cash flow. It's why in addition to offsets tariffs, we're focused on reductions to below-the-line cash outlays and restructuring, integration and quality as they've been material. The less in our control means is via any available portfolio optimizing like we did with IV Solutions. And if that is available to us, it would be a positive for the overall company revenue growth rate and likely gross margins. But with the balance sheet in the safe position is now and an improving interest rate environment, we're on better footing to evaluate and optimize each piece of the portfolio if the opportunity was to arise.

In terms of our medium-term execution priorities, they can be summarized at a high level as the following: First, to continue to commercially execute to sustain and supplement the revenue growth shown on Slide 3. Second, to work with our partners at FDA to gain approval for the new infusion systems hardware and software and bring resolution of the warning letters. Third, to complete the integration activities in the areas of consolidations in our production, logistics and real estate network that are important contributors to the 2 points of gross margin Brian just referenced. And lastly, make progress on the leverage ratio either way to allow for capital return.

All in all, it's a good place to be with our best businesses growing, reaching record sizes and projects nearing completion. We expect our Consumables and Systems businesses to be reliable growers with an industry acceptable profit margin, the tightest and most optimized manufacturing network and each with a multiyear innovation portfolio and ultimately, to transfer value from debt to equity for the company.

There's no confusion within the company in the pursuit of these goals, and we don't really have any frivolous activities here. We produce essential items that require significant clinical training, hold manufacturing barriers and in general, are items that customers do not want to switch unless they must. The market needs ICU Medical to be an innovative, reliable supplier and our company is stronger from all the events of the last few years.

Thanks to all the team members and customers as we improve each day. And with that, we'll open it up to questions.

[Operator Instructions] And we will go first to Jayson Bedford with Raymond James.

Congratulations on the progress here. I guess I wanted to start with Consumables. Last quarter, you talked about the expanded label for Clave. If you can just maybe talk to the sources of the strength here. I have a tough time believing that it's all the expanded label nor is this business really a lumpy business. So I'm just -- if you can go into a bit more detail on the source of the strength here.

Sure. Thank you for the question, Jayson, and thanks for the kind words. I think there's probably 2, 3, 4 drivers of this. I think the marketing points we made on the last call are certainly helpful. I think the drivers could be -- and it's not necessarily in the order of priority, but where we have one more often than not, we'd win the consumables. And so I think that's been in the background.

I think some of the market share gains late in the year last year and early this year around customer wins that had really IV Solutions and Consumables have come to fruition and are getting installed. That's probably the second reason. And the third is the niche markets. Embedded in there is still oncology, dialysis, some of the specialty markets that we've done a nice job of developing. I think those are going well. I don't know, Brian, if you'd add anything else. I think those are the top 3 reasons. And then maybe fourth, just to talk more is a little bit of the international markets, particularly Western Europe has been pretty good.

Nothing else to add.

Okay. And just on the growth, I appreciate the comment that it won't see the same -- Consumables won't see the same sequential lift as it did 2Q to 3Q. But can we assume the expectation is it -- Consumables grow sequentially?

I mean, I think, Jayson, I don't know that we'd want to be so precise in everything. We hit a really good plateau here. You can look at the track record and that slide lays out exactly what's happening in Consumables. We're standing by our mid-single digits comments for the year. We feel very good about it for the balance of the year. We feel very good about next year. I don't want to be in a place where we say something we're not 100% able to commit to. So I don't want to be so precise.

Okay. Okay. That's fair. Maybe just one more for me, and I'll let some others jump in. On Infusion Systems, can you comment on Duo and the traction you're seeing in the market, if there's any metrics you can provide in terms of percent of installs, orders, anything like that, that would be great. And then just are you taking orders for Solo now?

We are taking orders for Solo now. And so we are signing contracts, which is great. I think the installs are still in the relative early days. I'm not sure we'd say a lot more than that other than there's a lot of dialogue going on in the pump market in the U.S.

And we can move next to Brett Fishbin with KeyBanc Capital Markets.

I'm just going to stick to one and then I'll jump back in the queue. I wanted to just ask about 2026. I think you gave some maybe directional commentary on like tariffs. Just curious how you're thinking about maybe the full year picture for 2026 in regards to tariff exposure, given you've had some additional updates in the last few months and maybe a little more time to work on potential mitigation. I know in the past, you've said not to necessarily annualize the 2H impact, but just sounds like kind of a high 4Q exit rate.

Sure. Obviously, an important topic, Brett, and we don't want to make it all about that. Thank you for the question. I think we would stand by exactly the same things we've said when we've been out on the road in the fall, which was -- it is the actual number that we said here. This year, please don't annualize it. We're working on all the things that one does in terms of supply chain, manufacturing, et cetera, to do our best to offset as much as possible. A lot of that work is in flight. I would prefer to leave it at that right now and not make this whole conversation about tariffs.

And we will move next to Mike Matson with Needham.

You talked about the 45% gross margin target. And I understand the tariffs have affected that. But let's just say you get to that 45% on a tariff-adjusted basis. What happens then? I mean, is there still room to go higher? Will you be able to get leveraged earnings growth? Or are you going to be sort of more reliant on financial leverage where, as you said, with the leverage ratio coming down, you'll return maybe do buybacks and things like that to drive more earnings growth?

I mean Mike, we appreciate the question. We're chuckling here talking to people who are at 36, not that long ago. So it was very -- we're happy with what we've done. We still need to close the gap to get there. I appreciate you asking beyond that. It's two things. It's about the value of the technology and the hardware and how -- what's our ability to sustain and improve that over time? What's our ability to change the mix, add more software products to the market to grow Consumables, the overall mix of the company.

Consumables, obviously, when we were -- before we did all the things over the last few years, you can look at the 10-K and see the margins of Consumables are very attractive, but they have to have the right mix to make a difference on the whole, and we continue to work that to get there. And we do have some businesses that are obviously below the corporate margin average, right? In the right circumstance, we would probably figure out if we can do something with those. And so I think there's a couple of shots on goal. There's value of the technology, there's mix of the overall portfolio, there's pieces of the portfolio and then the financial run rate you talked about, too. Those are all arrows in the quiver about how we have to drive earnings.

I mean I listened to the industry calls over the last week, everybody is talking about returning capital and doing the things you're supposed to do with what the industry has gone through. And so we're no different.

Yes. Not taking anything away from the tremendous gross margin improvement we've already seen, which is great. And then I guess my other question would just be around pricing. What are you seeing? I know you had talked in the past about some of these contract renewals and things like that. And are you getting improved pricing anywhere?

I mean I think you're asking the question that's the heart -- that's been at the heart of part of this industry's challenge, right, that the industry is sold under fixed price contracts for a number of these categories for a long period of time and absorbing inflation was hard. So all of us, I think, have been very focused on making sure we're getting fair value for our products. We try it every opportunity. It doesn't mean it's an easy conversation.

The system is under pressure in a few spots. But where the market structure is right and where the clinical value is right and where our competitiveness is right, yes, we think we have [indiscernible] out and Brian can go through kind of the macro numbers each year. It's a bit of a high-level number we give and saying what's the annual impact of price, right? Do you want to make a few comments on that?

Yes. I mean I think earlier in the year, we said we were expecting to get around 1% overall price increase. And I think we're very much on track to see that in the P&L this year.

[Operator Instructions] We will go next to Larry Solow with CJS Securities.

Just a couple of follow-ups on the Systems in particular. Could you maybe just characterize your discussions on the replacement side, the opportunity there? I think you've mentioned that I think a large part of your base is actually eligible or that has come up on the time line where it's up for a refresh. So could you just maybe discuss sort of that opportunity over the next few years? And anything a little bit more? I know you mentioned a refresh cycle for ambulatory and syringe. I imagine assuming those are all -- you get those newer 510(k) approvals, could that be something that also begins next year?

Sure. Yes, Larry, I think we tried to articulate in the pump business, there are -- I think there's 3 ways to create value, right? Ultimately, for us for the last couple of years because post Hospira, the Plum 360 was a relatively new entrant into the U.S. pump market, new device into the pump market, we didn't have a lot of opportunity for refresh or replacement of our own installed base, and we really had to focus on competitive share gains.

We are still absolutely the #1 way to create value is to focus on competitive share gains. But if we can offer more tech in the current device of the Duo and Solo to our existing installed base and that existing installed base buys multiple of these products from us across each of our pillars, that's an opportunity to create value and kind of -- and add more value to that existing customer base. That process is in the very early days.

Most of those devices entered the U.S. market when Hospira brought the 360 back in the market in 2016, 2017. So that will start in earnest, I think, the middle of next year, end of next year from a contract perspective. If we see any benefit from it, it won't be really until the end of next year. It's just starting.

Got you. And just a question on free cash flow.

Sorry, let me answer the CADD and Medfusion are the same. Those are very large installed bases, too. We've been so focused on the LVP discussion. There's some opportunities there, too, that we're focused on. And that's why Medfusion 5000 is really important.

Right. And then on the free cash flow in the quarter, pretty solid and especially if we back out the AR impact and then the remediation and restructuring, you would actually have done $60 million. I know the remediation and restructuring probably are not stopping anytime soon, but maybe you can't just say you're going to do $250 million next year multiply by 4. But does this demonstrate the sort of ability for your business to generate significant free cash flow and as remediation and restructuring expenses start to hopefully wane over the next coming quarters, should we see a nice jump in free cash flow?

Yes, Larry, good question. I mean it's hard to take any individual quarter for free cash flow and annualize it just because you do tend to have a lot of things that show up in one quarter and not another. But I do -- we do absolutely believe that free cash flow is really an opportunity for us to drive value, especially as some of the improvements in gross margin begin to get to our goals on that.

So yes, I think that's -- I think you've identified kind of the next value driver for us. And you're right, it's not going to be seen in the very short term in terms of some of the spend coming down, but that's the opportunity that we have in front of us.

It's about time -- we've been pumping capital in, right, get the consolidation done, logistics done, et cetera.

Those remediation restructuring expenses have averaged close to $100 million a year, right, I think since you acquired Smiths, is that number directionally going to start dropping materially as you look out over the next few years?

Yes. I mean I hate to be a little bit of a downer on this one, Larry. Yes, that number is going to go down, but the tariffs do consume some cash on the front end, too. So we're trying to balance that.

[indiscernible] on your net income. You're already taken that on your operating above that. But yes, that's fair.

And we will move next to Jason Bednar with Piper Sandler.

Congrats on a really good quarter here, guys. Sorry, I've been bounce around a couple of calls, so apologies if these have been asked. But I would assume if there was an update to be shared on the FDA and the warning letters, we would have heard it today, you'd have proactively addressed that. But just checking in on that topic, is there anything new to share on those warning letters? Any updated dialogue or scheduled interactions with the agency?

We tried to -- thanks for the question, Jason. It's good we didn't talk about it in the Q&A. I think our -- there is some attempts by us to bring them to resolution. I think they really center around getting the new product approvals done. We're very focused on that. I tried to give an update in the script on -- the dialogue has been normal, even though with all the stuff the government has gone on, they're being responsive, and it feels like the other things we went through on the Duo Solo. So there's been good dialogue. We're focused on getting the products approved, first and foremost. No change in the feel of that with what's going on there.

Okay. Perfect. Status quo. Maybe just for a follow-up question, I got a similar thing here, but I'll ask it. Something that's come up in past calls, Vivek, you've been a little more open to the idea of some more portfolio management within that Vital Care segment. Obviously, nothing to announce here today. But maybe give us kind of your feelings or kind of a status update on where discussions are as far as like evaluating strategically what fits, what doesn't fit? Are there interested parties out there? Are those discussions happening? Just anything there that can help with kind of where -- thinking about what that segment looks like going forward?

Yes. I mean it's dangerous to commit when people say we're adamantly going down this path and then that doesn't happen. I think we've been trying to be transparent. If you look at the company, we were a $300 million parts supplier 7 years ago. And so we've had the ability to get things done with large multinationals across the globe. That is kind of one of the team's competencies over the years. And so we continue to explore all available avenues.

If there was something to get done, it would have got done already, right? And so I think we were trying to be a little bit introspective about it and saying we don't want to do things that are value destructive. The balance sheet and Brian did an amazing job, got the financing done, we got a little time to be patient, and we continue to explore what's available. I'm not sure I'd want to give more color than that or certainty because it's not 100% in our control. right?

And I think we're pretty transparent in the script and the slide speaks for itself. It shows a very -- a varying difference in growth rates across the businesses. And we are very transparent like in the case of IV Solutions, we didn't feel we had all the tech that you need to be competitive in hand. We went out and found a partner. The same logic could apply to some of the smaller businesses, too.

And this does conclude the Q&A session. I'd like to turn the program back over to Vivek Jain for any closing remarks.

Thanks, everyone, for the interest. We got more Q&A on the call, more people covering us. It's great. We appreciate everybody's time and attention. And we wish everyone a good end to the year, and we look forward to talking to you in early 2026. Thanks very much.

Thank you for your participation. This does conclude today's program. You may disconnect at any time.