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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: _______ TO _________
COMMISSION FILE NO.: 0-19974
ICU MEDICAL, INC.
(Exact name of Registrant as provided in charter)
------------------------------------------------
Delaware 33-0022692
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
951 Calle Amanecer, San Clemente, California 92673
- -------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(949) 366-2183
--------------
(Registrant's Telephone No. Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days:
Yes XXX No____
Indicate the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at August 8, 2003
----- -----------------------------
Common 13,537,531
ICU MEDICAL, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
- ------------------------------ -----------
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
- -----------------------------------------
Condensed Consolidated Balance Sheets, June 30, 2003 and
December 31, 2002 3
Condensed Consolidated Statements of Income for the three
months ended June 30, 2003 and 2002 4
Condensed Consolidated Statements of Income for the six
months ended June 30, 2003 and 2002 5
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2003 and 2002 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk 21
PART II - OTHER INFORMATION 22
- ---------------------------
SIGNATURES 24
2
ICU MEDICAL, INC.
Condensed Consolidated Balance Sheets
June 30, 2003 and December 31, 2002
(all dollar amounts in thousands except share data)
(unaudited)
ASSETS
6/30/03 12/31/02
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 4,503 $ 4,165
Liquid investments 65,050 84,300
---------- ----------
Cash, cash equivalents and liquid investments 69,553 88,465
Accounts receivable, net of allowance for doubtful accounts of $641
and $665 as of June 30, 2003 and December 31, 2002, respectively 17,890 16,633
Finance loans receivable - current portion 1,703 --
Inventories 7,267 5,749
Prepaid income taxes 2,377 --
Prepaid expenses and other 1,096 1,652
Deferred income taxes - current portion 1,716 1,710
---------- ----------
Total current assets 101,602 114,209
---------- ----------
PROPERTY AND EQUIPMENT, at cost: 68,023 58,958
Less--Accumulated depreciation (27,151) (24,350)
---------- ----------
Property and equipment, net 40,872 34,608
---------- ----------
FINANCE LOANS RECEIVABLE 5,411 --
DEFERRED INCOME TAXES 4,313 4,313
INTANGIBLE ASSETS - net 4,322 3,352
OTHER ASSETS 463 550
---------- ----------
$ 156,983 $ 157,032
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,870 $ 5,046
Accrued liabilities 6,140 6,599
---------- ----------
Total current liabilities 10,010 11,645
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $1.00 par value
Authorized -- 500,000 shares, issued and outstanding -- none -- --
Common stock, $0.10 par value-
Authorized -- 80,000,000 shares, issued -- 14,098,807 and 14,087,026
shares at June 30, 2003 and December 31, 2002, respectively 1,410 1,409
Additional paid-in capital 63,434 63,284
Treasury stock, at cost -- 348,776 shares at June 30, 2003 (9,534) --
Retained earnings 91,663 80,694
---------- ----------
Total stockholders' equity 146,973 145,387
---------- ----------
$ 156,983 $ 157,032
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
3
ICU MEDICAL, INC.
Condensed Consolidated Statements of Income
For the Three Months Ended
June 30, 2003 and June 30, 2002 (all
dollar amounts in thousands except per share data)
(unaudited)
For the Three Months Ended
------------------------------
6/30/03 6/30/02
------------ ------------
REVENUES
Net Sales $ 19,864 $ 22,668
Other 1,419 --
------------ ------------
TOTAL REVENUE 21,283 22,668
------------ ------------
COST OF GOODS SOLD 9,148 9,332
------------ ------------
Gross profit 12,135 13,336
------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 5,543 5,416
Research and development 537 346
------------ ------------
Total operating expenses 6,080 5,762
------------ ------------
Income from operations 6,055 7,574
INVESTMENT INCOME 274 364
------------ ------------
Income before income taxes 6,329 7,938
PROVISION FOR INCOME TAXES 2,430 2,940
------------ ------------
NET INCOME $ 3,899 $ 4,998
============ ============
NET INCOME PER SHARE
Basic $ 0.28 $ 0.36
Diluted $ 0.26 $ 0.32
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 13,763,120 13,854,070
Diluted 15,081,815 15,403,283
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
ICU MEDICAL, INC.
Condensed Consolidated Statements of Income
For the Six Months Ended
June 30, 2003 and June 30, 2002 (all
dollar amounts in thousands except per share data)
(unaudited)
For the Six Months Ended
------------------------------
6/30/03 6/30/02
------------ ------------
REVENUES
Net Sales $ 48,600 $ 43,573
Other 3,459 --
------------ ------------
TOTAL REVENUE 52,059 43,573
COST OF GOODS SOLD 22,172 17,888
------------ ------------
Gross profit 29,887 25,685
------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 11,630 10,655
Research and development 1,008 649
------------ ------------
Total operating expenses 12,638 11,304
------------ ------------
Income from operations 17,249 14,381
INVESTMENT INCOME 570 740
------------ ------------
Income before income taxes 17,819 15,121
PROVISION FOR INCOME TAXES 6,850 5,600
------------ ------------
NET INCOME $ 10,969 $ 9,521
============ ============
NET INCOME PER SHARE
Basic $ 0.79 $ 0.70
Diluted $ 0.72 $ 0.62
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 13,885,425 13,616,595
Diluted 15,209,580 15,234,070
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
5
ICU MEDICAL, INC.
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended
June 30, 2003 and June 30, 2002
(all dollar amounts in thousands)
(unaudited)
For the Six Months Ended
------------------------
06/30/03 06/30/02
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 10,969 $ 9,521
Adjustments to reconcile net income to net cash
Provided by operating activities
Depreciation and amortization 3,416 2,703
Net change in current assets and current liabilities, and other,
net of acquisitions (4,383) (7,342)
--------- ---------
10,002 4,882
--------- ---------
Tax benefits from exercise of stock options 186 7,446
--------- ---------
Net cash provided by operating activities 10,188 12,328
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (7,071) (4,664)
Net change in liquid investments 19,250 (17,000)
Cash payments in connection with acquisitions (5,346) --
Advances under finance loans (7,114) --
--------- ---------
Net cash (used in) investing activities (281) (21,664)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 473 7,025
Proceeds from employee stock purchase program 271 --
Purchase of treasury stock (10,313) --
--------- ---------
Net cash provided by (used in) financing activities (9,569) 7,025
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 338 (2,311)
CASH AND CASH EQUIVALENTS, beginning of the period 4,165 3,901
--------- ---------
CASH AND CASH EQUIVALENTS, end of the period $ 4,503 $ 1,590
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
6
ICU MEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(All dollar amounts in thousands)
(unaudited)
NOTE 1: The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America and pursuant to the rules and
regulations of the Securities and Exchange Commission and reflect all
adjustments, which consist of only normal recurring adjustments, which are, in
the opinion of Management, necessary to a fair statement of the consolidated
results for the interim periods presented. Results for the interim period are
not necessarily indicative of results for the full year. Certain information and
footnote disclosures normally included in consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in our 2002 Annual
Report to Stockholders.
NOTE 2: Inventories consisted of the following:
6/30/03 12/31/02
------- --------
Raw material $ 4,957 $ 3,302
Work in process 1,035 534
Finished goods 1,275 1,913
--------------- ---------------
Total $ 7,267 $ 5,749
=============== ===============
NOTE 3: Property and equipment, at cost, consisted of the following:
6/30/03 12/31/02
------- --------
Land, building and building
improvements $ 18,915 $ 15,197
Machinery and equipment 23,343 19,142
Furniture and fixtures 5,527 5,343
Molds 11,226 9,534
Construction in process 9,012 9,742
--------------- ---------------
Total $ 68,023 $ 58,958
=============== ===============
NOTE 4: Finance loans receivable are commercial loans by ICU Finance, Inc., a
wholly-owned consolidated subsidiary. We plan to hold the loans to maturity or
payoff. They are carried at their outstanding principal amount, and will be
reduced for an allowance for credit losses and chargeoffs if any such reductions
are determined to be necessary in the future. Interest is accrued as earned
based on the stated interest rate and amounts outstanding. Loan fees and costs
have not been material. Scheduled maturities are: remainder of 2003 $716,000;
2004 $1,583,000; 2005 $1,234,000; 2006 $1,151,000; 2007 $1,157,000 and 2008
$1,273,000. Weighted average maturity (principal and interest) at June 30, 2003
is 2.3 years and the weighted average interest rate is 4.8%.
7
NOTE 5: Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding. Diluted net income per
share is computed by dividing net income by the weighted average number of
common shares outstanding plus dilutive securities. Our dilutive securities are
outstanding common stock options (excluding stock options with an exercise price
in excess of market value), less the number of shares that could have been
purchased with the proceeds from the exercise of the options, using the treasury
stock method, and were 1,318,695 and 1,549,213 for the three months ended June
30, 2003 and June 30, 2002, respectively and 1,324,155 and 1,617,475 for the six
months ended June 30, 2003 and June 30, 2002, respectively. Options that are
antidilutive because their average exercise price exceeded the average market
price of our common stock for the period approximated 500,000 and 100,000 for
the three months ended June 30, 2003 and 2002, respectively, and approximately
400,000 and 200,000 for the six months ended June 30, 2003 and 2002,
respectively.
At the 2003 Annual Meeting of Stockholders, the 2003 Stock Option Plan,
under which 1,500,000 common shares were reserved for issuance to employees, was
approved. Shares reserved for issuance under all of our stock plans at June 30,
2003 are: 1993 Stock Incentive Plan 338,756; 2003 Stock Option Plan 1,500,000;
2001 Directors' Stock Option Plan 603,750; 2002 Employee Stock Purchase Plan
739,392.
We account for our stock options granted to employees and directors
under Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock
Issued to Employees" and related interpretations as permitted by SFAS No. 123
"Accounting for Stock-Based Compensation," and do not recognize compensation
expense because the exercise price of the options equals the fair market value
of the underlying shares at the date of grant. Under SFAS No. 123, the Company
is required to present certain pro forma earnings information determined as if
employee stock options were accounted for under the fair value method of that
Statement. The fair value for options granted in 2003 and 2002 was estimated as
of the date of grant using a Black-Scholes option pricing model. The
Black-Scholes option valuation model was developed for use in estimating fair
value of fully transferable traded options with no vesting restrictions, and,
similar to other option valuation models, requires use of highly subjective
assumptions, including expected stock price volatility. The characteristics of
our stock options differ substantially from those of traded stock options, and
changes in the subjective assumptions can materially affect estimated fair
values; therefore, in Management's opinion, existing option valuation models do
not necessarily provide a reliable single measure of the fair value of our stock
options. The following information is provided pursuant to SFAS No. 123, as
amended. The pro forma adjustment reflects stock-based compensation cost
calculated under the fair value method, net of related tax effects, calculated
pursuant to SFAS No. 123.
Quarter ended June 30, Six months ended June 30,
----------------------------- ------------------------------
2003 2002 2003 2002
----------- ----------- ------------ -----------
Net Income, as reported.......... $3,899,000 $4,998,000 $10,969,000 $9,521,000
Pro forma adjustment............. 1,317,000 1,547,000 2,659,000 2,676,000
----------- ----------- ------------ -----------
Net Income, pro forma............ $2,582,000 $3,451,000 $8,310,000 $6,845,000
=========== =========== =========== ===========
Net Income per share.............
Basic, as reported $0.28 $0.36 $0.79 $0.70
Diluted, as reported $0.26 $0.32 $0.72 $0.62
Basic, pro forma $0.19 $0.26 $0.61 $0.52
Diluted, pro forma $0.18 $0.23 $0.56 $0.46
8
NOTE 6: The effective tax rate differs from that computed at the federal
statutory rate of 35% principally because of the effect of state income taxes
partially offset by the effect of tax-exempt investment income and state tax
credits.
NOTE 7: We have revenues equal to ten percent or greater of total net revenues
from two customers, as follows:
Quarter ended June 30, Six months ended June 30,
---------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Abbott Laboratories 67% 65% 68% 66%
B. Braun Medical Inc. 1% 10% 1% 9%
NOTE 8: We are from time to time involved in various legal proceedings, either
as a defendant or plaintiff, most of which are routine litigation in the normal
course of business. We believe that the resolution of the legal proceedings in
which we are involved will not have a material effect on our financial position
or results of operations.
In the normal course of business, we have made certain indemnities,
including indemnities to our officers and directors, to the maximum extent
permitted under Delaware law and intellectual property indemnities to customers
in connection with sales of its products. These indemnities do not provide a
maximum amount. We have not recorded any liability for these in our financial
statements and do not expect to incur any.
NOTE 9: In the fourth quarter of 2002, we acquired Bio-Plexus. Inc. for
approximately $8.8 million, net of cash acquired, and Bio-Plexus has been
included in our consolidated financial statements since October 31, 2002.
Bio-Plexus's principal products are blood collection needles, under the
Punctur-Guard name, that are designed to eliminate exposure to sharp,
contaminated needles. Bio-Plexus's revenues in the first quarter of 2003 were
$1.8 million, and its effect on net income was immaterial. Unaudited pro forma
combined revenues of the Company and Bio-Plexus for the first quarter of 2002,
assuming the acquisition occurred on January 1, 2002, were $22,813,000; the pro
forma effect on net income was immaterial.
Bio-Plexus's revenues in the second quarter of 2003 and the first half
of 2003 were $2.0 million and $3.8 million, respectively, and its effect on net
income was immaterial for both periods. Unaudited pro forma combined revenues of
the Company and Bio-Plexus for the second quarter and first half of 2002,
assuming the acquisition occurred on January 1, 2002, were $24,711,000 and
$47,524,000, respectively; the pro forma effect on net income was immaterial for
both periods.
In June 2003, we acquired the assets of two affiliated manufacturers of
I.V. systems located in northern Italy for a cash payment of approximately $4.3
million. Principal assets acquired are assembly facilities and related equipment
and inventories. It is included in our consolidated financial statements at June
30, 2003. Its effect on our financial statements is immaterial.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We develop, manufacture, sell and distribute disposable medical
connection products. Our principal products are proprietary safe medical
connector devices for use in intravenous ("I.V.") therapy applications. We also
produce custom I.V. systems that incorporate our proprietary products, and since
October 31, 2002, blood collection needles.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
Our significant accounting policies are summarized in Note 1 to the
Consolidated Financial Statements included in our 2002 Annual Report to
Shareholders. In preparing our financial statements, we make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities. We apply our accounting
policies on a consistent basis. As circumstances change, they are considered in
our estimates and judgments, and future changes in circumstances could result in
changes in amounts at which assets and liabilities are recorded.
Investment securities are all marketable and considered "available for
sale". See "Quantitative and Qualitative Disclosures about Market Risk" below.
Under our current investment policies, there is no significant difference
between cost and fair value. If our investment policies were to change, and
there were differences between cost and fair value, that difference, net of tax
effect, would be reflected as a separate component of stockholders' equity.
Most of our product sales are FOB shipping point and ownership of the
product transfers to the customer when we ship it. Certain other product sales
are FOB destination and ownership of the product transfers to the customer at
destination. We record sales and related costs when ownership of the product
transfers to the customer. Most of our customers are distributors or medical
product manufacturers, although there are some sales to end-users. Our only
post-sale obligations are warranty and certain rebates. Customers, with certain
rare exceptions, do not retain any right of return and there is no price
protection with respect to unsold products. We warrant products against defects
and have a policy permitting the return of defective products. We provide a
reserve for warranty returns as an expense; amounts have been insignificant. We
accrue rebates as a reduction in revenue based on contractual commitments and
historical experience; amounts have not been significant. Adjustments of
estimates of warranty claims, rebates or returns, which have not been and are
not expected to be material, affect current operating results when they are
made.
Accounts receivable are stated at net realizable value. An allowance is
provided for estimated collection losses based on specific past due accounts for
which we consider collection to be doubtful. Loss exposure is principally with
international distributors for whom normal payment terms are long in comparison
to those of our other customers and, to a lesser extent, domestic distributors.
Many of these distributors are relatively small and we are vulnerable to adverse
developments in their businesses that can hinder our collection of amounts due.
If there are significant doubts as to the collectibility of receivables at the
time of shipment, we do not recognize the sale until the receivable is
collected. If actual collection losses exceed expectations, we could be required
to accrue additional bad debt expense, which could have an adverse effect on our
operating results in the period in which the accrual occurs.
10
Inventories are stated at the lower of cost or market. We need to carry
many components to accommodate our rapid product delivery, and if we misestimate
demand or if customer requirements change, we may have components in inventory
that we may not be able to use. Most finished products are made only after we
receive orders, but for those that are not, we need to estimate what may not be
saleable. We regularly review inventory for slow moving items and write off all
items we do not expect to use in manufacturing, or finished products we do not
expect to sell. If actual usage of components or sales of finished goods
inventory is less than our estimates, we would be required to write off
additional inventory, which could have an adverse effect on our operating
results in the period in which the write-off occurs.
Property and equipment is carried at cost and depreciated on the
straight-line method over their estimated useful lives. The estimates of useful
lives are significant judgments in accounting for property and equipment,
particularly for molds and automated assembly machines that are custom made for
us. We may retire them on an accelerated basis if we replace them with larger or
more technologically advanced tooling. The remaining useful lives of all
property and equipment are reviewed regularly and lives are adjusted or assets
written off based on current estimates of future use. As part of that review,
property and equipment is reviewed for other indicators of impairment, but to
date we have not encountered circumstances indicating the carrying amount of an
asset, or group of assets, may not be recoverable. An unexpected shortening of
useful lives of property and equipment that significantly increases depreciation
provisions, or other circumstances causing us to record an impairment loss on
such assets, could have an adverse effect on our operating results in the period
in which the related charges are recorded.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
We have implemented all new accounting pronouncements that are in
effect and that may impact our consolidated financial statements and the effect
of such adoption was not material. We do not believe that there are any other
new accounting pronouncements that have been issued that might have a material
impact on our consolidated financial statements.
GENERAL
- -------
The following table sets forth the net sales by product as a percentage
of total net sales for the periods indicated:
=============================================== ========== ========== ========== ========== ========== ========== ==========
YTD YTD
PRODUCT LINE 2000 2001 2002 Q2-02 Q2-03 Q2-02 Q2-03
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
CLAVE(R) 71% 74% 67% 71% 54% 74% 60%
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Custom I.V. Systems 12% 13% 17% 17% 22% 15% 17%
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Punctur-Guard - - 1% - 8% - 6%
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
CLC2000(R) 4% 3% 4% 5% 3% 4% 4%
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Lopez Valve(R) 3% 2% 2% 2% 1% 2% 2%
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
RF100-RF150 ("Rhino") 5% 3% 2% 2% 3% 2% 2%
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Protected Needle Products and Other 5% 5% 3% 3% 2% 3% 2%
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
License, royalty and revenue share - - 4% - 7% - 7%
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total 100% 100% 100% 100% 100% 100% 100%
=============================================== ========== ========== ========== ========== ========== ========== ==========
11
We sell our products to independent distributors and through agreements
with Abbott (the "Abbott Agreements") and certain other medical product
manufacturers. Most independent distributors handle the full line of our
products. Abbott purchases CLAVE products, principally bulk, non-sterile
connectors. Abbott also purchases the Rhino, a low-priced connector specifically
designed for Abbott, the CLC2000, and custom I.V. sets. The Abbott Agreements
extend to December 2009 and have extension provisions beyond that date. We also
sell certain other products to a number of other medical product manufacturers.
We believe that as the healthcare provider market continues to
consolidate, our success in marketing and distributing CLAVE products will
depend, in part, on our ability, either independently or through strategic
supply and distribution arrangements, to secure long-term CLAVE contracts with
major buying organizations. Further, our marketing and distribution strategy may
result in a significant share of our revenues being concentrated among a small
number of distributors and manufacturers. The loss of a strategic supply and
distribution agreement with a customer or the loss of a large contract by such a
customer could have a material adverse effect on our operating results.
We believe the success of the CLAVE has motivated, and will continue to
motivate others to develop one piece, swabbable, needleless connectors that may
incorporate many of the same functional and physical characteristics as the
CLAVE. We are aware of a number of such products. In response to competitive
pressure, we have been reducing prices to protect and expand our market. The
price reductions to date have been more than offset by increased volume in the
aggregate. We expect that the average price of our CLAVE products may continue
to decline. There is no assurance that our current or future products will be
able to successfully compete with products developed by others.
The federal Needlestick Safety and Prevention Act, enacted in November
2000, modified standards promulgated by the Occupational Safety and Health
Administration to require employers to use needleless systems where appropriate
to reduce risk of injury to employees from needlesticks. We believe the effect
of this law has helped to accelerate sales of our needleless systems, although
we are unable to estimate the amount or timing of such sales.
We are taking steps to reduce our dependence on our current proprietary
products. We are seeking to substantially expand our custom I.V. systems
business with products sold to medical product manufacturers and independent
distributors. On February 27, 2001, we signed an agreement with Abbott under
which we manufacture all new custom I.V. sets for sale by Abbott, and we jointly
promote the products under the name SetSource(TM). We expect continuing
significant increases in sales of custom I.V. systems under this agreement. We
also launched efforts to contract with group purchasing organizations and
independent dealer networks for inclusion of our products among those available
to members of those entities. Custom I.V. systems accounted for approximately
$9.5 million of net sales in the first six months of 2003, including net sales
under the Abbott SetSource program of approximately $4.4 million. There is no
assurance that either one of these initiatives will continue to succeed.
In the fourth quarter of 2002 we acquired Bio-Plexus. Inc. for
approximately $8.8 million, net of cash acquired, and Bio-Plexus has been
included in our consolidated financial statements since October 31, 2002.
Bio-Plexus's principal products are blood collection needles, under the
Punctur-Guard name, that are designed to eliminate exposure to sharp,
contaminated needles. Bio-Plexus's revenues in the first half of 2003 were $3.8
million, and its effect on net income was immaterial.
We have an ongoing program to increase systems capabilities, improve
manufacturing efficiency, reduce labor costs, reduce time needed to produce an
order, and minimize investment in inventory. The original focus on
labor-intensive production of custom I.V. systems was expanded to include all
automated manufacturing operations in San Clemente, California and has most
recently been expanded to include the Punctur-Guard manual and automated
manufacturing in Connecticut. Manual assembly, except for that done in
12
Connecticut, is performed at our facility in Ensenada, Baja California, Mexico.
Molding and automated assembly, except for that done in Connecticut, takes place
in our San Clemente, California facility. We continue to make investments in
automated molding and assembly equipment. In the third quarter of 2002 we
commenced use of automated assembly equipment for the 1o2 Valve(R) and commenced
use of automated assembly equipment for the CLC2000 in the fourth quarter of
2002. Throughout 2002, we added molding and automated assembly capacity for
CLAVE production. In the third quarter of 2002 we commenced a significant
expansion of our manual assembly capacity in Mexico; clean room and warehouse
space was completed in June 2003, and we expect to complete construction and
installation of an electron beam sterilizer in the third quarter of 2003. All
these steps have reduced and will continue to reduce unit production costs.
Ongoing steps also include automation of the production of new products and
other products for which volume is growing. We have been considering
establishment of production facilities outside North America for some time, and
in June 2003 we acquired a manufacturer of I.V. sets in Italy. We continue to
consider establishment of production facilities in other areas. Because
significant innovation is required to achieve these goals, there is no assurance
that these steps will achieve the desired results.
We distribute our products through three distribution channels. Net
sales for each distribution channel were as follows:
=============================================== ========== ========== ========== ========== ========== ========== ==========
CHANNEL 2000 2001 2002 Q2-02 Q2-03 YTD YTD
Q2-02 Q2-03
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Medical product manufacturers 74% 72% 73% 75% 73% 75% 75%
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Independent domestic distributors 21% 20% 19% 19% 24% 18% 22%
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
International 5% 8% 8% 6% 3% 7% 3%
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total 100% 100% 100% 100% 100% 100% 100%
=============================================== ========== ========== ========== ========== ========== ========== ==========
The healthcare business in the United States is subject to seasonal
fluctuations, and activity tends to diminish somewhat in the summer months of
June, July and August, when illness is less frequent than in winter months and
patients tend to postpone elective procedures. This typically causes seasonal
fluctuations in our business. In addition, we can experience fluctuations as a
result of variations in the ordering patterns of our largest customers, which
may be driven more by production scheduling and their inventory levels, and less
by seasonality.
QUARTER ENDED JUNE 30, 2003 COMPARED TO THE QUARTER ENDED JUNE 30, 2002
- -----------------------------------------------------------------------
NET REVENUES decreased $1,385,000, or approximately 6%, to $21,283,000
in the second quarter of 2003, compared to $22,668,000 during the same period
last year.
As explained below, the principal reason for the decrease in net
revenues was a $4,573,000 decrease in CLAVE product sales across all
distribution channels partially offset by the addition of the Punctur-Guard
product line purchased in October 2002 ($1,682,000), increases in licenses and
other non-product revenue ($1,419,000) and increases in custom I.V. system sales
to Abbott ($1,120,000). Our quarterly results can fluctuate on a
quarter-to-quarter basis as well as a year-to-year basis because of fluctuations
in orders from our medical product manufacturer customers that may not reflect
their current sales volumes and normal seasonal fluctuations due to lower
censuses in healthcare facilities in summer months. For these reasons, it is
13
particularly useful to consider our results for the first six months of 2003 as
part of considering our results for the second quarter of 2003. We believe part
of the decrease in CLAVE product sales in the second quarter of 2003 resulted in
part from seasonal fluctuations, in part from the timing of sales to Abbott, and
in part from the termination of CLAVE sales to B. Braun Medical Inc. ("B.
Braun"). B. Braun is filling orders from inventory of CLAVE products, and we
will not receive orders to replenish that inventory until such time as the
customer orders from alternative CLAVE distribution channels.
Net sales to Abbott in the second quarter of 2003 were $14,046,000, as
compared with net sales of $14,591,000 in the second quarter of 2002. (Abbott
sales discussed in this paragraph do not include export sales.) Net sales of
CLAVE Products to Abbott, excluding custom CLAVE I.V. systems, decreased to
$10,355,000 in the second quarter of 2003 from $12,135,000 in the second quarter
of 2002 due principally to a decrease in unit volume because of the timing of
orders. Sales to Abbott under the SetSource program approximated $2,369,000 in
the second quarter of 2003 as compared with approximately $1,249,000 in the
second quarter of 2002, a 90% increase almost entirely because of increased unit
volume. We expect a substantial increase in CLAVE unit and dollar sales volume
with Abbott through the balance of 2003, as well as a significant increase in
SetSource unit and sales volume. Net sales of CLC2000 were $455,000 in the
second quarter of 2003, a 25% decrease as compared with the second quarter of
2002 principally because of lower pricing. We expect sales of the CLC2000 to
Abbott will increase in the future. Sales of the Rhino were virtually unchanged
at approximately $500,000; sales of Rhino started to decline in early 2001, and
while they have leveled off recently, we expect them to decline in the future as
the market shifts to one piece, swabbable, needleless technology. There is no
assurance as to the amount of any future sales to Abbott.
In connection with the settlement in November 2002 of our contract
litigation against B. Braun, we terminated the manufacture and supply agreement
under which we sold CLAVE products to B. Braun effective December 31, 2002. We
continue to vigorously pursue patent litigation that we brought against B. Braun
in 2001. See Part II, Item 1. Legal Proceedings. As a result of the termination
of the manufacture and supply agreement for CLAVE products, CLAVE product sales
to B. Braun declined from $1,755,000 in the second quarter of 2002 to zero in
the second quarter of 2003, and total net revenue from B. Braun was $274,000 in
the second quarter of 2003, as compared to $2,291,000 in the second quarter of
2002. There will be no CLAVE product sales to B. Braun in the future. While the
termination of the B. Braun CLAVE agreement could have an adverse effect on us,
we do not believe that it will. We do expect to lose some sales unit volume to
B. Braun products that compete with CLAVE, but we believe many of B. Braun's
customers prefer the CLAVE to B. Braun's products and that many of them will
continue to buy CLAVE products through either Abbott or independent distributors
when they are no longer available from B. Braun. To the extent that customers'
needs are filled through independent distributors, we generate higher revenue
and profit per CLAVE connector, because independent distributors purchase
packaged sterilized products, often complete I.V. sets, from us at higher prices
than the bulk nonsterile CLAVE sites which accounted for most of the CLAVEs that
we sold to B. Braun. We have contracts to supply B. Braun a protected needle
product, and B. Braun pays us under the Safeline revenue sharing agreement. We
expect both of these revenue streams to continue to decrease as the market
shifts to one piece, swabbable, needleless technology.
Net sales to independent domestic distributors increased approximately
19% from $4,235,000 in the second quarter of 2002 to $5,040,000 in the second
quarter of 2003. This increase in sales to independent distributors is
attributed to the inclusion of $1,590,000 of Punctur-Guard sales, partially
offset by reduced sales to independent distributors in all other product lines.
Although the dollar amount of CLAVE product sales decreased, unit sales
increased, which we believe is because of acquisition by our independent
distributors of market share from B. Braun, and we expect a continued increase
in unit sales of CLAVE products to independent domestic distributors. There is
no assurance as to the amount of any future sales increases to the independent
domestic distributors.
14
Total sales to international distributors (excluding Canada) were
$611,000 in the second quarter of 2003, as compared with $1,389,000 in the
second quarter of 2002. The decrease was principally because of a decrease in
CLAVE product sales as our distributors sold existing inventories. We expect
continued weakness through the third quarter, but expect to resume growth in
international sales in the fourth quarter of 2003 or the first quarter of 2004.
We have distribution arrangements in the principal countries in Western Europe,
the Pacific Rim and Latin America and in South Africa. Furthermore, we have been
increasing the number of our international business development managers. We
expect increases in sales to foreign distributors in the future, although there
is no assurance that those expectations will be realized.
Total net sales of CLAVE Products (excluding custom CLAVE I.V. systems)
decreased to $11,527,000 in the second quarter of 2003 from $16,100,000 in the
second quarter of 2002. Substantially all of the decrease was because of a
decrease in unit shipments in all of our medical product manufacturer and
International distribution channels, as described above: Abbott decreased
$1,800,000, B. Braun decreased $1,755,000 and International decreased $898,000.
Independent domestic distributors' sales decreased $143,000, notwithstanding an
increase in unit volume, and was the only distribution channel experiencing any
significant price decreases. We expect continued significant growth in CLAVE
unit and dollar sales volume in the second half of 2003, notwithstanding the
termination of distribution to B. Braun because of the growth that we expect in
our other distribution channels. However, we give no assurance that the
expectations will be realized.
We believe that sales of CLAVE products to B. Braun, which were
terminated as of December 31, 2002, will ultimately be replaced in part as
independent distributors and Abbott commence sales to customers who will no
longer be able to obtain CLAVE products from B. Braun. We do not know how much
CLAVE product inventory B. Braun had at the end of 2002 or how much of it they
had sold by June 30, 2003. We believe that they were still filling customer
orders for CLAVE product at June 30, 2003. Further, we believe that because B.
Braun continued to supply customers from inventory, customers were not forced to
switch to other distribution sources, and the decline in sales to B. Braun has
not yet been replaced. As B. Braun exhausts its inventory of CLAVE products, we
may experience an increase in sales of CLAVE products as Abbott and the
independent distributors build inventory of CLAVE products to service their new
customers. While we anticipate that it may occur in the second half of 2003, we
give no assurance that our expectations will be realized.
In October 2001, we commenced production of the "MicroCLAVE(R)." It is
smaller than the existing CLAVE but is functionally similar. We will initially
market it as an extension of the CLAVE product line for use where its smaller
size is advantageous, such as pediatric care. Sales are included in CLAVE
product sales.
Net sales of custom I.V. systems were $4,619,000 in the second quarter
of 2003 compared to $3,880,000 in the second quarter of 2002, a $739,000, or
19%, increase. The SetSource program with Abbott accounted for about $1,120,000
of the increase, partially offset by a decrease in sales by independent
distributors because of a change in the sales mix to less expensive I.V. sets.
We acquired the Punctur-Guard product line and technology with the
purchase of Bio-Plexus on October 31, 2002. We now produce the Punctur-Guard
line of products and also license the technology to two medical device
manufacturers for use in catheters. We spent most of the first half making
improvements on the Punctur-Guard products and manufacturing processes. Pending
completion of those efforts, we did not actively promote sales of those
products. Improvements were completed on the Winged Set products and they were
re-launched on March 1, 2003. Improvements on the blood collection needles are
ongoing. Sales of Punctur-Guard products (excluding royalties) were $1,682,000
in the second quarter of 2003 as compared to $1,618,000 in the first quarter of
2003. We expect sales of those products to increase in the future, but we give
no assurance that such increases will be achieved.
15
The 1o2 Valve is the first one-way or two-way drug delivery system in
the marketplace. In the third quarter of 2002, we began using automated assembly
equipment that will enable us to better meet demand for the 1o2 Valve. We are
selling the 1o2 Valve only as a part of our custom I.V. systems, and sales,
which are included in that category, were approximately $740,000 in the second
quarter of 2003, as compared with approximately $740,000 in the first quarter of
2003.
Net sales of the CLC2000 were $723,000 in the second quarter of 2003, a
$383,000, or 35%, decrease from the second quarter of 2002, principally because
of lower pricing on sales to Abbott and lower unit volumes in other distribution
channels. We expect sales of the CLC2000 to increase moderately in the second
half 2003 and later years, but there is no assurance as to the amount or timing
of future CLC2000 sales.
Net sales of the Lopez Valve decreased 23% in the second quarter
compared to the same period last year principally because of lower unit volume
sold to independent domestic distributors. We believe that the focus of the
sales and marketing efforts of our personnel and those of our distributors on
other products has and may continue to dilute sales of the Lopez Valve and may
contribute to quarterly fluctuations, but we do expect modest sales increases
throughout the balance of 2003.
Net sales of protected needle products are no longer significant. We
discontinued the Click Lock and Piggy Lock products in the first quarter of
2003. The remaining protected needle product is the McGaw Protected Needle, and
we expect its sales will continue to decline as the market shifts to one piece,
swabbable, needleless technology.
Other revenue consists of license, royalty and revenue share income,
and has been presented separately in our financial statements since the fourth
quarter of 2002. The principal component in the second quarter of 2003 was an
initial payment on a license to use certain of our patents of $988,000. The
remainder of the $1,419,000 was ongoing royalties for use of Punctur-Guard
technology and Safeline revenue share payments from B. Braun. We expect to
receive ongoing royalties for the use of Punctur-Guard technology and SafeLine
revenue share payments from B. Braun, which have been aggregating approximately
$450,000 per quarter, as well as additional payments under another license of
approximately $240,000 per quarter for four years starting in the first quarter
of 2004. We may receive other license fees or royalties in the future for the
use of our technology. We give no assurance as to amounts or timing of any
future payments, or whether such payments will be received.
GROSS MARGIN for the second quarter of 2003, calculated on net sales
and excluding other revenue, was 54% as compared to 59% for the second quarter
of 2002. The following factors caused a decline in the gross margin in the
second quarter: (i) inclusion of Bio-Plexus which has a lower gross margin than
the average for our other products, (ii) lower gross margin on international
sales because of price reductions, (iii) a shift in the product mix to a greater
proportion of bulk non-sterile product which has a lower margin than the average
for our other products, and (iv) exclusion of Safeline revenue share payments
from net sales (now included in other revenue). We expect gross margins for the
entire year 2003 to be somewhat lower than the 57% recorded in 2002. If
Bio-Plexus has a significant increase in sales before production improvements
are made, there could be a near-term adverse effect on overall gross margins.
16
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"), excluding
research and development expenses, increased $127,000, or 2%, to $5,543,000, and
was approximately 26% of revenue in 2003 as compared with 24% of revenue in
2002. The increase was because of the inclusion of Bio-Plexus and increased
administrative costs, partially offset by savings in sales and marketing costs
principally from internal organizational changes and other reductions in
expenses. We expect to add sales and administrative personnel as 2003
progresses, and those personnel and related costs will cause a modest increase
in total SG&A costs, which we expect to be 22% to 24% of total revenue for the
entire year 2003. However, actual costs may differ from our expectations.
RESEARCH AND DEVELOPMENT EXPENSES ("R&D") increased in the second
quarter of 2003 by $191,000 to $537,000, and were approximately 2.5% of revenues
in the second quarter of 2003 as compared with 1.5% in the second quarter of
2002. The principal increase was on product development for the Punctur-Guard
product line to make improvements that we felt were necessary to successfully
market and sell the products. We estimate that R&D costs for the remainder of
2003 will be at approximately the same percentage of total revenue as in 2002.
However R&D costs could differ from those estimates and the R&D may not be
completed as expected.
We launched an infusion device using Punctur-Guard technology in the
second quarter of 2003. These devices will be used for short-term intravenous
administration therapy.
We plan to launch, in limited markets, a new I.V. connector currently
under development. We expect to apply later in 2003 to the FDA under Section
510(k) of the FDC Act for approval to market this new connector. There is no
assurance that the FDA will grant marketing clearance, that we will launch this
new product, or that it will achieve sales if and when we commence marketing it.
INCOME FROM OPERATIONS decreased $1,519,000 or 20% and was 28% of net
revenues in the second quarter of 2003, as compared with 33% in the second
quarter of 2002. Gross profit, including license, royalty and revenue share
income, decreased 9% over that in 2002, while operating expenses increased 6%,
causing a decrease in the operating margin that was disproportionately high in
relation to the six percent decrease in net revenues.
INVESTMENT INCOME decreased in the second quarter of 2003 as compared
with the second quarter of 2002, because of a decrease in the investment
portfolio and declines in interest rates.
INCOME TAXES were accrued at an effective tax rate of 38.4% in the
second quarter of 2003, as compared with 37% in the second quarter of 2002. The
increase is principally because of a one percentage point increase in the
estimated federal tax rate applicable to the Company and a decline in tax exempt
income as a percentage of taxable income. We expect our effective tax rate to be
approximately 38.4% for the entire year 2003.
NET INCOME decreased 22% to $3,899,000 in the second quarter of 2003 as
compared with $4,998,000 in the comparable period last year, principally because
of the decrease in income from operations. NET INCOME PER SHARE - DILUTED
decreased $0.06, or 19%, in the second quarter of 2003 from the second quarter
of 2002.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2002
- -----------------------------------------------------------------------------
NET REVENUES increased $8,486,000, or approximately 19%, to $52,059,000
in the first six months of 2003 compared to $43,573,000 during the same period
last year. The increase was primarily attributable to a $2,616,000, or 38%,
increase in sales of custom I.V. systems, the inclusion of $3,323,000 of
Punctur-Guard product sales from the company bought last year, and $3,459,000 of
non-product income related to use by others of our technology.
17
Net sales to Abbott in the first half of 2003 were $34,751,000, as
compared with net sales of $28,560,000 in the first half of 2002. Net sales of
CLAVE Products to Abbott, excluding custom CLAVE I.V. systems increased to
$27,697,000 in the first half of 2003 from $24,476,000 in the first half of 2002
principally due to an increase in unit volume. Sales to Abbott under the
SetSource program approximated $4,448,000 in the first half of 2003 as compared
with $2,104,000 in the first half of 2002.
Net revenue from B. Braun was $686,000 in the first half of 2003, as
compared with $3,951,000 in the first half of 2002. CLAVE product sales to B.
Braun in the first half of 2002 were $3,122,000, but less than $100,000 in the
first half of 2003. As discussed above, there will be no CLAVE product sales to
B. Braun in the future.
Net sales to independent domestic distributors increased approximately
$3,712,000, or 48%, from $7,706,000 in the first half of 2002 to $11,418,200.
This is attributed to the inclusion of Punctur-Guard sales of $3,138,000 during
the first half of 2003, and increases in sales of all the other principal
product lines. Independent domestic distributors had a 26% increase in CLAVE
product sales on an increase in unit volume of approximately 50%, partially
offset by a reduction in average sales prices. We believe the increased CLAVE
product sales reflects acquisition of market share from B. Braun.
Total sales to foreign distributors (excluding Canada) were $1,820,000
in the first half of 2002, as compared with $3,071,000 in the first half of
2001. The decrease is almost entirely accounted for by a decrease in CLAVE
product sales as the timing of distributor orders was adversely impacted by
their reduction of inventory levels.
Total sales of CLAVE Products (excluding custom CLAVE I.V. systems)
decreased from $32,141,000 in the first half of 2002 to $31,054,000 in the first
half of 2003, or 3%. CLAVE product sales to Abbott increased 13%, principally
due to increased unit volume. Independent domestic distributors had a 26%
increase in CLAVE product sales. These were partially offset by the absence of
CLAVE product sales to B. Braun of approximately $3 million, before the effect
of sales to former B. Braun customers filled through other distribution
channels, and the decline in International CLAVE product sales.
Net sales of custom and generic I.V. systems increased approximately
38% to $9,513,000 in the first half of 2003 over those in the first half of
2002. Most of the increase was in the Abbott SetSource program. Unit volume
accounted for the majority of the increase.
Net sales of the CLC2000 increased from $1,601,000 in the first half of
2002 to $1,889,000 in the first half of 2003. Independent domestic distributors
accounted for most of the net increase on increased unit sales.
Net sales of the Lopez Valve increased 19% in the first half of 2003,
principally because of an increase in unit sales to Bard Medical, which has a
contract to distribute the Lopez Valve.
GROSS MARGIN, calculated on net sales and excluding other revenue, was
54% for the first six months of 2003 as compared to 59% during the first six
months of 2002. The reasons for the decrease in gross margin for the first half
of the year are essentially the same as for the second quarter, with the
additional factor of some non-recurring production expenses in the first quarter
of 2003.
SG&A excluding research and development expenses, increased by $975,000
to $11,630,000, and were 22% of revenues in the first half of 2003, as compared
with 24% in the first half of 2002. The net increase was because of the
inclusion of Bio-Plexus offset by savings in sales and marketing costs.
18
R&D increased for the first half of 2003 by approximately 55%
principally because of product development expenditures for the Punctur-Guard
product line.
INCOME FROM OPERATIONS increased $2,868,000, or 20%, principally
because of the increase in net revenue; the decrease in the gross margin as a
percentage of net sales was offset by other revenues and a low rate of growth in
operating expenses in relation to growth in total revenue. The operating margin
was 33% of revenues in the first half of both years.
INVESTMENT INCOME decreased $170,000, or 23%, as compared with the
first half of 2002, notwithstanding an increase in the average investment
portfolio in the first half of 2003 compared with the first half of 2002. This
was because of the effect of declines in interest rates since the beginning of
2001.
INCOME TAXES were accrued at an effective tax rate of 38.4% in the
first half of 2003 as compared to 37% in the first half of 2002.
NET INCOME increased $1,448,000, or 15%, to $10,969,000 as compared
with $9,521,000 for the first six months of 2002. NET INCOME PER SHARE - diluted
increased 16% to $0.72 per share in the first six months of 2003 as compared
with $0.62 for the first six months of 2002.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the first half of 2003, our working capital decreased
$10,972,000 to $91,592,000. The decrease was principally because purchases of
treasury stock, investment in property and equipment, acquisitions and new
finance loans exceeded working capital generated by operations. During the six
months ended June 30, 2003, our cash and cash equivalents and investment
securities position decreased $18,932,000 to $69,533,000 from $88,465,000 at
December 31, 2002. Cash provided by operating activities and the exercise of
stock options (including the stock purchase program) totaling $10.9 million was
more than offset by the $10.3 million spent on purchasing our stock, $7.1
million of capital expenditures, $7.1 million of finance loans and $5.3 million
on acquisitions.
We expect that sales of our products will continue to grow in 2003. If
sales continue to increase, accounts receivable and inventories are expected to
increase as well. As a result of these and other factors, including increased
capital expenditures, our working capital requirements may increase in the
foreseeable future.
Inventories increased from $5,749,000 at December 31, 2002 to
$7,267,000 at June 30, 2003. The increase of $1,518,000 is solely related to
inventory at Bio-Plexus acquired in October 2002 and the manufacturer in Italy
acquired in June 2003.
We currently estimate that capital expenditures for property and
equipment will be approximately $12 million in 2003 (excluding any
acquisitions). We expect that $4 million will be spent on completion of the $7.2
million expansion in Mexico, including an electron-beam sterilizer, $6.8 million
on molds, molding equipment and automated assembly equipment, and $1.2 million
on computers and software. Of those amounts, approximately $7 million has been
incurred, approximately $3 million was committed under contracts at June 30,
2003, and we expect to commit the balance later in 2003. Amounts of spending are
estimates and actual spending may substantially differ from those amounts.
19
We are currently evaluating the design and capacity of our
manufacturing facilities. We estimate that our current facilities and additions
in process will be adequate through 2003, but that production after 2003 will
require additional clean room facilities for molding and automated assembly. We
expect to decide later in the year how to meet the need for additional
facilities and the location of additional clean room facilities for molding and
automated assembly.
In the first half of 2003, we purchased 376,792 shares of our common
stock for $10.3 million. Since then, through August 5, 2003, we have purchased
an additional 212,500 shares for $5.0 million. Until those purchases, we had not
purchased treasury stock since October 1999, except for a small amount in March
2000. We may purchase additional shares in the future. However, future
purchases, if any, will depend on market conditions and other factors.
On April 15, 2003, we announced that we were considering payment of a
dividend. Since then, we have determined that we will not take any action to pay
a dividend, but will consider additional purchases of our stock on the market.
ICU Finance, Inc. is a wholly owned consolidated subsidiary that we
established in 2002 as a licensed commercial lender to provide financing to
companies involved in distribution of healthcare products and provision of
healthcare services. Loans are made only to credit-worthy customers on a fully
secured basis. It has $7,114,000 loans outstanding, most of which were made in
June 2003. Scheduled maturities are: remainder of 2003 $716,000; 2004
$1,583,000; 2005 $1,234,000; 2006 $1,151,000; 2007 $1,157,000 and 2008
$1,273,000. Weighted average maturity (principal and interest) at June 30, 2003
is 2.3 years and the weighted average interest rate is 4.8%.
We have a large cash and liquid investment position generated from
profitable operations and stock sales, principally from the exercise of employee
stock options. We maintain this position to fund our growth, meet increasing
working capital requirements, fund capital expenditures, and take advantage of
acquisition opportunities that may arise. Our primary investment goal is capital
preservation, so, as further described below in "Quantitative and Qualitative
Disclosures about Market Risk," our liquid investments have very little credit
risk or market risk.
We believe that our existing working capital, supplemented by income
from operations, will be sufficient to fund capital expenditures and increased
working capital requirements for the foreseeable future.
FORWARD LOOKING STATEMENTS
- --------------------------
Various portions of this Report, including this Management's Discussion
and Analysis, describe trends in our business and finances that we perceive and
state some of our expectations and beliefs about our future. These statements
about the future are "forward looking statements," and we identify them by using
words such as "believes," "expects," "estimates," "plans," "will," "continue,"
"could," and by similar expressions and statements about aims, goals and plans.
The forward looking statements are based on the best information currently
available to us and assumptions that we believe are reasonable, but we do not
intend the statements to be representations as to future results. They include,
among other things, statements about:
o future operating results and various elements of operating results,
including sales and unit volumes of products, future license, royalty and
revenue share income, production costs, gross margins, SG&A, and R&D
expense and income taxes;
o factors affecting operating results, such as shipments to specific
customers, product mix, selling prices, warranty claims, rebates, returns,
the market shift to needleless products, future increases or decreases in
sales of certain products, impact of safety legislation, achievement of
business expansion goals, development of innovative systems capabilities,
20
introduction and sales of new products, manufacturing efficiencies, labor
costs, unit production costs, acquisition and use of production equipment
and expansion of facilities and assembly capacity, expansion of markets and
the need for additional facilities, business seasonality, customer ordering
patterns, and the effect of accounting pronouncements;
o new or extended contracts with manufacturers and buying organizations, and
dependence on a small number of customers, effect of termination of B.
Braun CLAVE agreement;
o regulatory approval and outcome of litigation; competitive and market
factors, including continuing development of competing products by other
manufacturers, consolidation of the healthcare provider market and downward
pressure on selling prices; and working capital requirements, changes in
accounts receivable and inventories, capital expenditures, acquisitions of
other businesses or product lines, and common stock repurchases.
The kinds of statements described above and similar forward looking
statements about our future performance are subject to a number of risks and
uncertainties which one should consider in evaluating the statements. First, one
should consider the factors and risks described in the statements themselves.
Those factors are uncertain, and if one or more of them turn out differently
than we currently expect, our operating results may differ materially from our
current expectations.
Second, one should read the forward looking statements in conjunction
with the Risk Factors in our Current Report on Form 8-K to the Securities and
Exchange Commission dated February 15, 2002 which is incorporated by reference.
Third, our actual future operating results are subject to other
important factors that we cannot predict or control, including among others the
following:
o general economic and business conditions;
o the effect of price and safety considerations on the healthcare industry;
o competitive factors, such as product innovation, new technologies,
marketing and distribution strength and price erosion;
o unanticipated market shifts and trends;
o the impact of legislation affecting government reimbursement of healthcare
costs;
o changes by our major customers and independent distributors in their
strategies that might affect their efforts to market our products;
o unanticipated production problems; and
o the availability of patent protection and the cost of enforcing and of
defending patent claims.
We disclaim any obligation to update the statements or to announce
publicly the result of any revision to any of the statements contained herein to
reflect future events or developments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
We have a portfolio of corporate preferred stocks and
federal-tax-exempt state and municipal government debt securities. The
securities are all "investment grade" and we believe that we have virtually no
exposure to credit risk. Dividend and interest rates reset at auction for most
of the securities from between seven and forty-nine day intervals, with some
longer but none beyond twelve months, so we have very little market risk, that
is, risk that the fair value of the security will change because of changes in
market interest rates.
21
Our future earnings are subject to potential increase or decrease
because of changes in short-term interest rates. Generally, each one-percentage
point change in the discount rate will cause our overall yield to change by
two-thirds to three-quarters of a percentage point, depending upon the relative
mix of federal-tax-exempt securities and corporate preferred stocks in the
portfolio and market conditions specific to the securities in which we invest.
In June 2003, we made a number of commercial loans, which brought the
total outstanding to $7.1 million. Loans are made only to credit worthy parties
on a fully secured basis and we plan to hold the loans until maturity or payoff.
Maturities are five years or less and the weighted average maturity (principal
and interest payments) is 2.3 years. Because of the relatively small amount of
the commercial loans, market risk is not significant to our financial
statements.
ITEM 4. CONTROLS AND PROCEDURES
- ---------------------------------
Our principal executive officer and principal financial officer have
concluded, based on their evaluation of our disclosure controls and procedures
(as defined in Regulations 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934) within 90 days of filing this Report, that our disclosure controls
and procedures are effective to ensure that the information we are required to
disclose in the reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure and that such information is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities Exchange Commission. There were no
significant changes in our internal controls or in other factors that could
significantly affect our internal controls subsequent to the date of the
principal executive officer's and principal financial officer's evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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In an action filed August 21, 2001 entitled ICU MEDICAL, INC. V. B
BRAUN MEDICAL, INC. pending in the United States District Court for the Northern
District of California, we allege that B.Braun Medical, Inc. infringes two of
our patents by the manufacture and sale of its UltraSite medical connector. We
seek monetary damages and injunctive relief and intend to vigorously pursue this
matter. The outcome of this matter cannot be determined at this time.
We are from time to time involved in various other legal proceedings,
either as a defendant or plaintiff, most of which are routine litigation in the
normal course of business. We believe that the resolution of the legal
proceedings in which we are involved will not have a material adverse effect on
our financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES
- ------------------------------
Inapplicable
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ITEM 3. DEFAULT UPON SENIOR SECURITIES
- ---------------------------------------
Inapplicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The following is a description of matters submitted to a vote of our
stockholders at our annual Meeting of Stockholders held on June 13, 2003:
A. Jack W. Brown and Richard H. Sherman, M.D. were elected as
directors to hold office until the 2006 Annual Meeting. Votes
cast for and withheld with respect to the nominee were as
follows:
Votes For Votes Withheld
--------- --------------
Jack W. Brown 12,077,730 511,882
Richard H. Sherman, M.D. 12,096,506 493,462
The terms of the following directors were continued after the
Annual Meeting: John J. Connors, Michael T. Kovalchik, III,
M.D., George A. Lopez, M.D., Joseph R. Saucedo, and Robert S.
Swinney, M.D.
B. A proposal to approve the 2003 Stock Option Plan was approved.
Votes cast were as follows:
For Against Abstain Broker Non-Vote
--------- ---------- ------- ----------------
5,767,360 5,554,412 57,288 1,210,552
C. A proposal to ratify the selection of Deloitte & Touche LLP as
our auditors was approved. Votes cast were as follows:
For Against Abstain Broker Non-Vote
--------- ---------- ------- ----------------
12,514,711 26,287 48,614 -0-
ITEM 5. OTHER INFORMATION
- --------------------------
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits:
Exhibit 31: Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32: Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Reports on Form 8-K:
The Registrant filed the following Report on Form 8-K during the quarter for
which this Report is filed:
Item 5 - April 15, 2003
Item 5 - June 23, 2003
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ICU Medical, Inc.
(Registrant)
/s/ Francis J. O'Brien Date: August 8, 2003
- ----------------------
Francis J. O'Brien
Chief Financial Officer
(Principal Financial Officer and)
Chief Accounting Officer)
24