ICU Medical - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 revenue was $537.0M, down 8.8% YoY due to IV Solutions deconsolidation, but beat S&P Global consensus by ~$25.5M; adjusted EPS was $2.03, materially above consensus, while GAAP diluted EPS was -$0.14, reflecting non-GAAP adjustments and tariff headwinds. Values retrieved from S&P Global.*
• Adjusted gross margin rose to 41% (from 37% YoY and 40% in Q2), driven by IV Solutions deconsolidation, synergies, FX, and a one-time Italy payback accrual reversal; tariffs reduced gross margin by ~200 bps in Q3.
• FY 2025 guidance was raised: adjusted EBITDA to $395–$405M (from $380–$390M) and adjusted EPS to $7.35–$7.65 (from $6.85–$7.15); GAAP net loss narrowed to $(8)–$0 and GAAP loss per share to $(0.30)–$0.00.
• Segment performance: Consumables and Infusion Systems grew YoY (record levels), while Vital Care fell with IV Solutions deconsolidation; free cash flow improved to $27.6M despite higher tariffs.
• Potential stock reaction catalysts: broad beats vs consensus, raised FY guidance, record Consumables/Systems scale; watch Q4 tariff step-up and FDA warning letter resolution timeline.

What Went Well and What Went Wrong

What Went Well

• Record Consumables quarter: +8% reported, +7% organic, driven by new implementations, niche markets (oncology/dialysis), and strong census; “It was a record quarter in absolute sales levels”.
• Infusion Systems +9% reported, +8% organic, with double-digit growth in LVP pumps and dedicated sets; active RFPs and start of Plum 360 refresh with Solo approval.
• Adjusted gross margin improved to 41%, aided by IV Solutions deconsolidation (~+500 bps), FX, and Italy payback settlement (~$4M revenue/GP).
• Refinancing shifted $190M from higher-cost Term Loan B to A, saving ~$2M annually in interest; $273M debt principal repaid YTD, ending Q3 with $1.3B debt and $300M cash.

What Went Wrong

• Reported revenue declined YoY (to $537.0M from $589.1M), primarily from IV Solutions deconsolidation, and Vital Care fell 52% reported YoY.
• Tariffs stepped up: ~$11M incurred; ~$9M expensed reduced Q3 gross margin ~200 bps; CFO guided Q4 tariff expense to $12–$14M (~$25M FY total).
• Sequential operating expenses expected to rise in Q4 as incentive comp and discretionary spend deferrals normalize; Q4 OpEx modeled at ~25.5% of revenue vs 24.3% in Q3.

Transcript

Operator (participant)

To all sites on hold, we do appreciate your patience and ask that you please continue to stand by. Your program should begin within the next two minutes. Please stand by. Your program is about to begin. Should you need audio assistance, you may press star then zero on your telephone keypad to speak with an operator.

Good afternoon, everyone, and welcome to ICU Medical's third quarter 2025 earnings conference call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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.

Deirdre Thomson (SVP of Investor Relations)

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 risk 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 have also included a reconciliation of these non-GAAP measures in today's release and provided as much detail as possible on any addendums that are added back. With that, it's my pleasure to turn the call over to Vivek.

Vivek Jain (CEO and Chairman)

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 -8% reported year-over-year. Gross margins increased, operating expenses declined, leading to more EBITDA on EPS.

As a reminder, the reported results are impacted by the mid-year 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, and 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 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 in 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 three 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 multi-year refresh of our Plum 360 install base with Plum Solo now that it's been cleared.

As we've discussed, since the new Plum Duo and 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 a 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 the FDA about the submitted 510(k)s for both the Medfusion 5000 syringe pump and the CADD ambulatory pumps and related life-sealed 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've characterized the Medfusion 5000 as a groundbreaking new innovative product, but like what we did with Plum Duo and Plum Solo, we conserved 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 a curling file. 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 LVPs, 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 three 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 install base of not only the LVP pumps, but also the install base of the syringe and ambulatory pumps, as that is a very significant install base.

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. With that, over to you, Brian.

Brian Bonnell (CFO)

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 meaningful improvement on both a year-over-year and sequential basis. There were three discrete items that impacted our gross margin rate for the quarter that are worth calling out.

The first was the one-time 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 one-time increase to both revenue and gross profit of approximately $4 million, improving the gross margin rate by just under a half 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 five 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. 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 two 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.

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. Therefore, if you exclude the two 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. We continue to believe sufficient operational improvement opportunities exist to allow us to close this remaining two percentage point GAAP 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 two quarters as a result of lower incentive compensation expense and the timing benefits 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. Finally, adjusted EBITDA for Q3 increased by 12% to $106 million compared to $95 million last year. Now, moving on to cash flow in 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 zero. 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. 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 31st, we completed the refinancing of the pro-rata portion of our credit facility that reset the five-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-$390 million to a range of $395 million-$405 million. For the full-year adjusted EPS, we are updating our previous guidance range of $6.85-$7.15 per share to $7.35-$7.65 per share. This guidance assumes fourth-quarter revenues and underlying profitability are generally consistent with the third quarter, plus the impact of three 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 7th.

We expect fourth-quarter tariff expense to be in the range of $12 million-$14 million, which would bring the full-year tariff expense to around $25 million. 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%-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.

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.

Vivek Jain (CEO and Chairman)

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. 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 EBITDA last year. That does not 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 under-earning, and these pro forma results show that we're closing the gap.

We fully understand we don't live in a pro forma universe, and tariffs are actual costs. 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. The data on slide three lays out our revenue growth for the last six 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. 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+ years as the product life cycles are incredibly long.

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. 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. Our previous comments still apply. Our ideal place is to be around two times 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 to 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. If that is available to us, it'd be a positive for the overall company revenue growth rate and likely gross margins. With the balance sheet in the safe position it is now and an improving interest rate for the 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 three. 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 two percentage points of gross margin Brian just referenced. 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 multi-year innovation portfolio.

Ultimately, to transfer value from debt to equity for the company. There is no confusion within the company in the pursuit of these goals, and we do not 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. With that, we will open it up to questions.

Operator (participant)

At this time, if you would like to ask a question, please press the star then one on your telephone keypad. You may withdraw your question at any time by pressing star then two. Again, it is star then one to ask a question. We will go first to Jayson Bedford with Raymond James.

Jayson Bedford (Managing Director of Equity Research)

Good afternoon and 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 strengths here. I have a tough time believing that. It's all the expanded label, nor is this business really a lumpy business. If you can go into a bit more detail on the source of the strength here.

Vivek Jain (CEO and Chairman)

Sure. Thank you for the question, Jayson, and thanks for the kind words. I think there's probably two, three, four drivers of this. I think the marketing points we made on the last call are certainly helpful. I think the drivers could be in, and it's not necessarily in the order of priority, but where we have one, more often than not, we'd win the consumables. 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. 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 had anything else. I think those are the top three reasons. And then maybe fourth, just to talk more, is a little bit of the international markets, particularly Western Europe, some pretty good.

Brian Bonnell (CFO)

Nothing else to add.

Jayson Bedford (Managing Director of Equity Research)

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. Can we assume the expectation is consumables grow sequentially?

Vivek Jain (CEO and Chairman)

I mean, I think, Jayson, I don't know that we'd want to be so precise on everything. We hit a really good plateau here. You can look at the track record, and that slide lays out exactly what's happening. 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 it next year. I don't want to be in a place where we say something we're not 100% able to commit to. I don't want to be so precise.

Jayson Bedford (Managing Director of Equity Research)

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 percentage of installs, orders, anything like that, that would be great. And then just, are you taking orders for Solo now?

Vivek Jain (CEO and Chairman)

We are taking orders for Solo now. 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.

Jayson Bedford (Managing Director of Equity Research)

Okay. Thanks.

Operator (participant)

We can move next to Brett Fishman with KeyBanc Capital Markets.

Brett Fishman (VP and Senior Equity Research Analyst)

Hey, guys. Thank you very much for taking the questions. 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 tariffs. I'm just curious how you're thinking about maybe the full year picture for 2026 in regards to tariff exposure, given we've had some additional updates 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. Thank you very much.

Vivek Jain (CEO and Chairman)

Sure. Obviously, an important topic, Brett, and we do not want to make it all about that. Thank you for the question. I think we would stand by exactly the same things we have said when we have been out on the road in the fall, which was. It is the actual number that we said here. This year, please do not annualize it. We are working on all the things that one does in terms of supply chain, manufacturing, etc., 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, not make this whole conversation about tariffs.

Operator (participant)

We will move next to Mike Matson with Needham.

Vivek Jain (CEO and Chairman)

Hey, Mike.

Mike Matson (Senior Equity Research Analyst)

Yeah. Thanks. You talked about the 45% gross margin target. I understand the tariffs have affected that. 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 to buybacks and things like that to drive more earnings growth?

Vivek Jain (CEO and Chairman)

I mean, Mike, we appreciate the question. We're chuckling here. You're talking to people who were at 36 not that long ago. 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 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 and the overall mix of the company? Consumables, obviously, before we did all the things over the last few years, you can look up the 10-K and see the margins of consumables are very attractive. They have to have the right mix to make a difference on the whole. We continue to work that to get there.

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. I think there's a couple of shots on goal. There's value of the technology. There's a mix of the overall portfolio. There's pieces of the portfolio. And then the financial leverage 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's talking about returning capital and doing all the things you're supposed to do with what the industry has gone through. We're no different.

Mike Matson (Senior Equity Research Analyst)

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

Vivek Jain (CEO and Chairman)

I mean, I think you're asking the question that's been at the heart of part of this industry's challenge, right? The industry sold under fixed-price contracts for a number of these categories for a long period of time. Absorbing inflation was hard. All of us, I think, have been very focused on making sure we're getting fair value for our products. We try at every opportunity. It doesn't mean it's an easy conversation. The system is under pressure in a few spots. Where the market structure is right and where the clinical value is right and where our competitiveness is right, yeah, we think we have eked out. Brian can go through kind of the macro numbers each year. It's a bit of a high-level number we give to say, "What's the annual impact of price?" Right?

If you want to make a few comments on that.

Brian Bonnell (CFO)

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

Mike Matson (Senior Equity Research Analyst)

Okay. That's great. Thank you.

Vivek Jain (CEO and Chairman)

Thanks, Mike.

Operator (participant)

Once again, as a reminder, it is star then one to register for a question. We will go next to Larry Solow with CJS Securities.

Larry Solow (Partner)

Great. Thanks very much. Hey, Vivek, just a couple of follow-ups on the systems in particular. Can 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 timeline where it's up for a refresh. Could you just maybe discuss sort of that opportunity over the next few years? Anything a little bit more? I know you mentioned a refresh cycle for ambulatory and syringe. I imagine assuming those are all you get newer 510(k) approvals, could that be something that also begins next year?

Vivek Jain (CEO and Chairman)

Yeah. Sure. Yeah, Larry, I think we tried to articulate in the pump business. I think there's three 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 install base. We really had to focus on competitive share gains. We are still absolutely the number one way to create value is to focus on competitive share gains. If we can offer more tech in the current device of the Duo and Solo existing install base, and that existing install base buys multiple of these products from us across each of our pillars, that's an opportunity to create value and kind of.

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 on the market in 2016, 2017. 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 till the end of next year. It's just starting.

Larry Solow (Partner)

Gotcha. Just a question on free cash flow.

Vivek Jain (CEO and Chairman)

Sorry. I'm sorry. Let me answer. The CADD and Medfusion are the same on SMIS. Those are very large install bases too. We've been so focused on the LVP discussion. There are some opportunities there too that we're focused on. That is why Medfusion 5000 is really important.

Larry Solow (Partner)

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

Brian Bonnell (CFO)

Yeah, 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 in another. 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. Yeah, I think that's, I think you've identified kind of the next value driver for us. 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.

Vivek Jain (CEO and Chairman)

It's about time.

Larry Solow (Partner)

The remediation.

Vivek Jain (CEO and Chairman)

We've been pumping. We've been pumping capital in, right? Get the consolidation done and get logistics done, etc.

Larry Solow (Partner)

I think the.

Vivek Jain (CEO and Chairman)

Go ahead.

Larry Solow (Partner)

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

Vivek Jain (CEO and Chairman)

Yeah. 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 it.

Larry Solow (Partner)

Yeah, yeah. We'll note it on your net income. You're already taking that on your operating. Yeah, above that. Yeah, that's fair. Okay, great. I appreciate all the calls. Thanks, guys.

Vivek Jain (CEO and Chairman)

All right.

Operator (participant)

We will move next to Jason Bednar with Piper Sandler.

Jason Bednar (Managing Director)

Hey, good afternoon. Thanks for taking the questions. Congrats on a really good quarter here, guys. I'm sorry I've been bouncing around a couple of calls, so apologies if these have been asked. I would assume if there was an update to be shared on the FDA and the warning letters, we'd have heard it today. You'd have proactively addressed that. 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?

Vivek Jain (CEO and Chairman)

We tried to. Thanks for the question, Jason. It's good we didn't talk about it in the Q&A. I think there are 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's gone on, they're being responsive. It feels like the other things we went through on the Duo Solo. There's been good dialogue. We're focused on getting the products approved first and foremost. No change in our view. No change in the feel of that with what's going on there.

Jason Bednar (Managing Director)

Okay. Perfect. Yeah, kind of 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 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 thinking about what that segment looks like going forward.

Vivek Jain (CEO and Chairman)

Yeah. I mean, it's dangerous to commit when people say we're adamantly going down this path and then that path 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 seven 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. We continue to explore all available avenues. If there was something to get done, it would have got done already, right? I think we were trying to be a little bit introspective about it, saying we don't want to do things that are value destructive. The balance sheets, 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? I think we're pretty transparent in the script, and the slide speaks for itself. It shows a varying difference in growth rates across the businesses. We're 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.

Jason Bednar (Managing Director)

All right. Perfect. Thanks so much, guys.

Vivek Jain (CEO and Chairman)

Thank you for the questions.

Operator (participant)

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

Vivek Jain (CEO and Chairman)

Thanks, everyone, for the interest. We've got more Q&A on the call, more people covering us. It's great. We appreciate everybody's time and attention. We wish everyone a good end to the year, and we look forward to talking to you in early 2025. Thanks very much.

Operator (participant)

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