Back to GetFilings.com
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: SEPTEMBER 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 by check mark whether the registrant is an accelerated filer (as
defined in the Exchange Act).
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 October 31, 2003
----- -------------------------------
Common 13,650,003
ICU MEDICAL, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
- ------------------------------ -----------
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
- -----------------------------------------
Condensed Consolidated Balance Sheets, September 30, 2003 and
December 31, 2002 3
Condensed Consolidated Statements of Income for the three months ended
September 30, 2003 and 2002 4
Condensed Consolidated Statements of Income for the nine months ended
September 30, 2003 and 2002 5
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 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 9
ITEM 3.
- -------
Quantitative and Qualitative Disclosures About Market Risk 20
ITEM 4.
- -------
Controls and Procedures 21
PART II - OTHER INFORMATION 22
- ---------------------------
SIGNATURES 23
2
ICU MEDICAL, INC.
Condensed Consolidated Balance Sheets
September 30, 2003 and December 31, 2002
(all dollar amounts in thousands except share data)
(unaudited)
ASSETS
9/30/03 12/31/02
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 5,639 $ 4,165
Liquid investments 65,475 84,300
---------- ----------
Cash and liquid investments 71,114 88,465
Accounts receivable, net of allowance for doubtful accounts of $639 and
$665 as of September 30, 2003 and December 31, 2002, respectively 15,828 16,633
Finance loans receivable - current portion 1,533 --
Inventories 4,680 5,749
Prepaid income taxes 3,851 --
Prepaid expenses and other 2,438 1,652
Deferred income taxes - current portion 1,599 1,710
---------- ----------
Total current assets 101,043 114,209
---------- ----------
PROPERTY AND EQUIPMENT, at cost: 70,686 58,958
Less--Accumulated depreciation (28,850) (24,350)
---------- ----------
Property and equipment, net 41,836 34,608
---------- ----------
FINANCE LOANS RECEIVABLE 4,976 --
DEFERRED INCOME TAXES 3,282 4,313
INTANGIBLE ASSETS, net 4,410 3,352
OTHER ASSETS 508 550
---------- ----------
$ 156,055 $ 157,032
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,301 $ 5,046
Accrued liabilities 5,991 6,599
---------- ----------
Total current liabilities 9,292 11,645
---------- ----------
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 -- 14,114,759 and 14,087,026
shares at September 30, 2003 and December 31, 2002, respectively 1,411 1,409
Additional paid-in capital 63,750 63,284
Treasury stock, at cost -- 549,218 shares at September 30, 2003 (14,236) --
Retained earnings 95,838 80,694
---------- ----------
Total stockholders' equity 146,763 145,387
---------- ----------
$ 156,055 $ 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
September 30, 2003 and September 30, 2002
(all dollar amounts in thousands except share and per share data)
(unaudited)
For the Three Months Ended
-----------------------------
9/30/03 9/30/02
------------ ------------
REVENUES
Net Sales $ 25,016 $ 20,105
Other 508 --
------------ ------------
TOTAL REVENUE 25,524 20,105
------------ ------------
COST OF GOODS SOLD 13,246 8,541
------------ ------------
Gross profit 12,278 11,564
------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 5,387 4,743
Research and development 419 384
------------ ------------
Total operating expenses 5,806 5,127
------------ ------------
Income from operations 6,472 6,437
INVESTMENT INCOME 313 339
------------ ------------
Income before income taxes 6,785 6,776
PROVISION FOR INCOME TAXES 2,610 2,500
------------ ------------
NET INCOME $ 4,175 $ 4,276
============ ============
NET INCOME PER SHARE
Basic $ 0.31 $ 0.31
Diluted $ 0.28 $ 0.28
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 13,603,733 13,895,280
Diluted 14,805,056 15,375,757
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
ICU MEDICAL, INC.
Condensed Consolidated Statements of Income
For the Nine Months Ended
September 30, 2003 and September 30, 2002
(all dollar amounts in thousands except share and per share data)
(unaudited)
For the Nine Months Ended
-----------------------------
9/30/03 9/30/02
------------ ------------
REVENUES
Net Sales $ 73,616 $ 63,678
Other 3,967 --
------------ ------------
TOTAL REVENUE 77,583 63,678
------------ ------------
COST OF GOODS SOLD 35,418 26,429
------------ ------------
Gross profit 42,165 37,249
------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 17,017 15,398
Research and development 1,427 1,033
------------ ------------
Total operating expenses 18,444 16,431
------------ ------------
Income from operations 23,721 20,818
INVESTMENT INCOME 883 1,079
------------ ------------
Income before income taxes 24,604 21,897
PROVISION FOR INCOME TAXES 9,460 8,100
------------ ------------
NET INCOME $ 15,144 $ 13,797
============ ============
NET INCOME PER SHARE
Basic $ 1.10 $ 1.01
Diluted $ 1.00 $ 0.90
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 13,790,843 13,710,168
Diluted 15,073,761 15,281,644
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
5
ICU MEDICAL, INC.
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended
September 30, 2003 and September 30, 2002
(all dollar amounts in thousands)
(unaudited)
For the Nine Months Ended
-------------------------------
9/30/03 9/30/02
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 15,144 $ 13,797
Adjustments to reconcile net income to net cash
Provided by operating activities --
Depreciation and amortization 5,105 3,748
Net change in current assets and liabilities, and other,
net of acquisitions (2,120) (7,711)
------------- -------------
18,129 9,834
Tax benefits from exercise of stock options 275 8,141
------------- -------------
Net cash provided by operating activities 18,404 17,975
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (9,631) (8,446)
Net change in liquid investments 18,825 (15,824)
Cash payments in connection with acquisitions (5,572) --
Advances under finance loans, net (6,509) --
------------- -------------
Net cash used in investing activities (2,887) (24,270)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 719 7,663
Proceeds from employee stock purchase plan 561 --
Purchase of treasury stock (15,323) --
------------- -------------
Net cash provided by (used in) financing activities (14,043) 7,663
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,474 1,368
CASH AND CASH EQUIVALENTS, beginning of the period 4,165 3,901
------------- -------------
CASH AND CASH EQUIVALENTS, end of the period $ 5,639 $ 5,269
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
6
ICU MEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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:
9/30/03 12/31/02
----------- -----------
Raw material $ 3,202 $ 3,302
Work in process 733 534
Finished goods 745 1,913
----------- -----------
Total $ 4,680 $ 5,749
=========== ===========
NOTE 3: Property and equipment, at cost, consisted of the following:
9/30/03 12/31/02
----------- -----------
Land, building and building
improvements $ 21,233 $ 15,197
Machinery and equipment 24,314 19,142
Furniture and fixtures 5,579 5,343
Molds 13,740 9,534
Construction in process 5,820 9,742
----------- -----------
Total $ 70,686 $ 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 charge offs 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
$406,000; 2004 $1,362,000; 2005 $1,336,000; 2006 $1,306,000; 2007 $1,289,000 and
2008 $810,000. Weighted average maturity (principal and interest) at September
30, 2003 is 2.2 years and the weighted average interest rate is 4.7%. In October
2003, we decided to discontinue new lending activities; we will honor existing
lending commitments; unfunded commitments were approximately $6.1 million at
September 30, 2003.
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
7
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 the average market value during this period), 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 1,201,323 and 1,480,477 for
the three months ended September 30, 2003 and 2002, respectively and 1,282,918
and 1,571,476 for the nine months ended September 30, 2003 and 2002,
respectively. Options that are anti-dilutive because their average exercise
price exceeded the average market price of our common stock for the period
approximated 810,000 and 210,000 for the three months ended September 30, 2003
and 2002, respectively, and approximately 555,000 and 145,000 for the nine
months ended September 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 September
30, 2003 are: 1993 Stock Incentive Plan 197,759; 2003 Stock Option Plan
1,500,000; 2001 Directors' Stock Option Plan 581,250; 2002 Employee Stock
Purchase Plan 727,507.
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 Statement of
Financial Accounting Standards ("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 or, as to the 2002 Employee Stock Purchase Plan, the plan is
non-compensatory under the provisions of APB Opinion No. 25. 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 September 30, Nine months ended September 30,
----------------------------- -------------------------------
2003 2002 2003 2002
----------- ----------- ------------ ------------
Net Income, as reported.......... $4,175,000 $4,276,000 $15,144,000 $13,797,000
Pro forma adjustment............. $1,224,000 $1,873,000 $ 3,863,000 $ 4,550,000
----------- ----------- ------------ ------------
Net Income, pro forma............ $2,951,000 $2,403,000 $11,281,000 $ 9,247,000
=========== =========== ============ ============
Net Income per share.............
Basic, as reported $0.31 $0.31 $1.10 $1.01
Diluted, as reported $0.28 $0.28 $1.00 $0.90
Basic, pro forma $0.22 $0.18 $0.84 $0.69
Diluted, pro forma $0.20 $0.16 $0.76 $0.62
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 had revenues equal to ten percent or greater of total net revenues
from two customers, as follows:
Quarter ended September 30, Nine Months ended September 30,
---------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Abbott Laboratories 65% 61% 67% 64%
B. Braun Medical Inc. 1% 11% 1% 10%
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 (before expenses), 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(R) name, that are designed to eliminate exposure to
sharp, contaminated needles.
Bio-Plexus's revenues in the third quarter of 2003 and the first nine
months of 2003 were $1.9 million and $5.7 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 third quarter and nine months of
2002, assuming the acquisition occurred on January 1, 2002, were $22,348,000 and
$69,871,000, 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
intravenous therapy 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 and amortizable intangible assets of
approximately $1.3 million. The acquired assets and related operating results
are included in our consolidated financial statements since June 30, 2003. Their
effect on our financial statements is immaterial.
ITEM 2: 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
connection devices for use in intravenous ("I.V.") therapy applications and
custom I.V. systems that incorporate our proprietary products and, since October
31, 2002, blood collection needles.
9
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.
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,
10
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 revenues by product as a
percentage of total net sales for the periods indicated:
================================================== ========== ========== ========= ========== ========== ========== ==========
YTD YTD
PRODUCT LINE 2000 2001 2002 Q3-02 Q3-03 Q3-02 Q3-03
- -------------------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------
CLAVE(R) 71% 74% 67% 69% 55% 72% 58%
- -------------------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Custom and Generic I.V. Systems 12% 13% 17% 20% 26% 17% 21%
- -------------------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Punctur-Guard(R) - - 1% - 6% - 6%
- -------------------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------
CLC2000(R) 4% 3% 4% 4% 4% 4% 4%
- -------------------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Other Products 13% 10% 7% 7% 7% 7% 6%
- -------------------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------
License, royalty and revenue share - - 4% - 2% - 5%
- -------------------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Total 100% 100% 100% 100% 100% 100% 100%
================================================== ========== ========== ========= ========== ========== ========== ==========
Most custom I.V. systems include one or more CLAVEs. Total CLAVE sales
including custom I.V. systems were 77% of net revenue in 2002, and 81% and 73%
of net revenue in the third quarters of 2002 and 2003, respectively, and 82% and
73% for the first nine months of 2002 and 2003, respectively.
We sell our products to independent distributors and through agreements
with Abbott Laboratories ("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 custom I.V. sets, the CLC2000, and
the Rhino, a low-priced connector specifically designed for Abbott. The Abbott
Agreements extend to December 2009 and have extension provisions beyond 2009. We
also sell certain other products to a number of other medical product
manufacturers.
In August 2003, Abbott announced that it plans to spin-off its core
Hospital Products Business to its stockholders in a new, independent entity. The
Hospital Products Business accounts for virtually all of our sales to Abbott. We
believe the spin-off is a positive development for us and will result in new
business opportunities with the new Hospital Products Company.
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
11
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,
although overall pricing has been stable recently. The price reductions to date
have been more than offset by increased volume. 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 safety I.V. systems where appropriate
to reduce risk of injury to employees from needlesticks. We believe this law has
had and will continue to have a positive effect on sales of our needleless
systems, although we are unable to quantify the current or anticipated effect of
the law on our 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. Under one of our Abbott agreements, we manufacture all custom I.V.
sets for sale by Abbott and 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 contract with group purchasing
organizations and independent dealer networks for inclusion of our custom I.V.
system products among those available to members of those entities. Custom I.V.
systems accounted for approximately $15.2 million of net sales in the first nine
months of 2003, including net sales under the Abbott SetSource program of
approximately $7.5 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 (before expenses), 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 nine months of 2003
were $5.7 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 the
Punctur-Guard manual and automated manufacturing in Connecticut. Manual assembly
is performed at our facility in Ensenada, Baja California, Mexico and our new
manufacturing facility in Roncanova de Gazzo, Italy. Molding and automated
assembly, except for that done in Connecticut, takes place in our San Clemente,
California facility. 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 and
through mid 2003 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 by the end 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
12
results. Further, our Connecticut and, more recently, our Italian facilities are
transitioning to our manufacturing methods, but there is no assurance as to the
completion or success of those transitions.
We distribute our products through three distribution channels. Net
sales for each distribution channel were as follows:
================================================== ========== ========== ========= ========== ========== ========== ==========
YTD YTD
CHANNEL 2000 2001 2002 Q3-02 Q3-03 Q3-02 Q3-03
- -------------------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Medical product manufacturers 74% 72% 73% 71% 68% 74% 72%
- -------------------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Independent domestic distributors 21% 20% 19% 21% 25% 19% 23%
- -------------------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------
International 5% 8% 8% 8% 7% 7% 5%
- -------------------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Total 100% 100% 100% 100% 100% 100% 100%
================================================== ========== ========== ========= ========== ========== ========== ==========
QUARTER ENDED SEPTEMBER 30, 2003 COMPARED TO THE QUARTER ENDED SEPTEMBER 30,
- ----------------------------------------------------------------------------
2002
- ----
NET REVENUES increased $5,419,000, or approximately 27%, to $25,524,000
in the third quarter of 2003, compared to $20,105,000 during the same period
last year. The increase was principally attributable to a 62% increase in sales
of custom and generic I.V. systems and Punctur-Guard sales, which were not
included until the acquisition of Bio-Plexus in the fourth quarter of 2002.
Net sales to Abbott in the third quarter of 2003 were $16,370,000, as
compared with net sales of $12,051,000 in the third quarter of 2002. (Abbott
sales discussed in this paragraph do not include export sales.) Net sales of
CLAVE Products to Abbott, excluding custom I.V. systems, increased to
$11,911,000 in the third quarter of 2003 from $9,619,000 in the third quarter of
2002 due to an increase in unit volume partially offset by slightly lower
average selling prices. Most custom I.V. systems include a CLAVE. Net sales of
CLAVE Products to Abbott, including custom I.V. systems with CLAVE, increased to
$14,162,000 in the third quarter of 2003 from $10,796,000 in the third quarter
of 2002. Sales to Abbott under the SetSource program, which included custom I.V.
sets both with a CLAVE and without a CLAVE, approximated $3,096,000 in the third
quarter of 2003 as compared with approximately $1,580,000 in the third quarter
of 2002. 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 increased substantially
over those in the third quarter of 2002 on increased unit volume. We expect a
moderate increase in sales of the CLC2000 to Abbott in the fourth quarter of
2003 over levels of the fourth quarter of 2002. Sales of the Rhino were the same
in both years; we expect sales of the Rhino 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 decreased from $1,810,000 in the third quarter of 2002 to zero in
the third quarter of 2003, and total net revenue from B. Braun declined from
$2,218,000 in the third quarter of 2002 to $266,000 in the third quarter of
2003. 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 believe any adverse effect will be short-term and we do not believe there
will be any adverse long-term effects. The short-term effect is because B. Braun
is selling orders from inventory of CLAVE products, and we will not receive
orders to replenish that inventory until such time as customers order from
alternative CLAVE distribution channels. 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 our independent
distributors when they are no longer available from B. Braun. We estimate, based
13
on market information received from the distribution channels, that we have
secured as customers for future sales approximately 47% of the unit volume of
CLAVE products formerly sold by B. Braun through the end of August 2003. B.
Braun is still supplying CLAVE product to at least some of their customers. We
believe that the percentage of unit volume secured will increase when CLAVE
products 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
54% from $4,214,000 in the third quarter of 2002 to $6,491,000 in the third
quarter of 2003. This increase in sales to independent distributors is
attributed to the inclusion of $1,612,000 of Punctur-Guard product sales and
increased sales to independent distributors of CLAVE products and custom I.V.
systems with CLAVEs. We believe this increase in sales of CLAVE and custom I.V.
systems with CLAVEs 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 and custom I.V. systems with CLAVEs to independent domestic distributors.
There is no assurance as to the amount of any future sales increases to the
independent domestic distributors.
Total net sales to international distributors (excluding Canada) were
$1,649,000 in the third quarter of 2003, as compared with $1,527,000 in the
third quarter of 2002. The increase in the third quarter of 2003 was principally
because of an increase in custom set product sales, offset by a decrease in
CLAVE product sales. Many of our distributors are meeting demand for CLAVE
products from existing inventories, and we now expect continuing weakness in
CLAVE product sales to international distributors through the balance of 2003,
with a resumption of growth in the first half of 2004. We have distribution
arrangements in the principal countries in Western Europe, the Pacific Rim,
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)
increased slightly from $13,820,000 in the third quarter of 2002 to $13,991,000
in the third quarter of 2003, or 1%. Total net sales of CLAVE Products including
custom I.V. systems with CLAVE increased from $16,243,000 in the third quarter
of 2002 to $18,715,000, or 12%, in the third quarter of 2003. This was due to an
increase in unit shipments to Abbott and domestic distributors, partially offset
by decreased unit shipments to international distributors and the absence of
shipments to B. Braun. We expect continued growth in CLAVE unit and dollar sales
volume in the fourth quarter of 2003, notwithstanding the termination of
distribution to B. Braun because of the large growth that we expect in our other
distribution channels. However, we give no assurance that the 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 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 and generic I.V. systems, which included custom
I.V. sets, both with a CLAVE and without a CLAVE, were $6,681,000 in the third
quarter of 2003 compared to $3,962,000 in the third quarter of 2002, a
$2,719,000, or 69% increase on increased unit volume. Slightly over half of the
increase was in the Abbott SetSource program.
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 of 2003
making improvements on the Punctur-Guard products and manufacturing processes.
Pending completion of those efforts, we did not actively promote sales of those
14
products. Improvements were completed on the Winged Set products and they were
re-launched on March 1, 2003. Improvements on the blood collection needles were
completed and we started selling the improved product in late September 2003.
Sales of Punctur-Guard products (excluding royalties) were $1,652,000 in the
third quarter of 2003 as compared to $1,618,000 in the first quarter of 2003 and
$1,734,000 in the second 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.
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 to better meet the demand for the 1o2 Valve. Most 1o2 Valve sales are
part of our custom I.V. systems, and sales, which are included in that category,
were approximately $1,000,000 in the third quarter of 2003, as compared with
approximately $680,000 in the third quarter of 2002.
Net sales of the CLC2000 were $1,054,000 in the third quarter of 2003,
a $199,000, or 23%, increase from the third quarter of 2002, principally because
of increased sales to Abbott. We expect sales of the CLC2000 to continue to
increase in the fourth quarter and in later years, but there is no assurance as
to the amount or timing of future CLC2000 sales.
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 third quarter of 2003 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.
Our sales can fluctuate on a quarter-to-quarter 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.
GROSS MARGIN for the third quarter of 2003, calculated on net sales and
excluding other revenue, was 47% as compared to 58% in third quarter of 2002. We
believe approximately two-thirds of this difference is due to several temporary
factors, the principal one relating to our automated production in San Clemente.
During the third quarter we completed a number of production improvements,
principally replacing lower capacity molds with higher capacity molds. The
additional capacity, which resulted in unabsorbed overhead in the short term,
allowed us to reduce the number of production employees and, over the long term,
will improve efficiencies and margins as production begins to match capacity.
Most of the remaining one-third of the difference in gross margins was due to
the Punctur-Guard products, which currently have a lower gross margin than most
of our other products. We expect margins on the Punctur-Guard products to
improve over the next year as we continue to improve sales and fully convert
this product line to our manufacturing techniques. We give no assurance as to
the amount or timing of future improvements to our gross margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") for the third
quarter of 2003, excluding research and development expenses, increased 14% to
$5,387,000, and was approximately 21% of revenue in 2003 as compared with 24% of
revenue in 2002. The increase was because of the inclusion of Bio-Plexus and a
small increase in sales and marketing costs related to increased sales levels.
Administrative costs were higher because of personnel additions and increased
information technology expenses, but those higher costs were offset by decreased
litigation expenses. We do not expect any significant net increases in SG&A
costs for the balance of 2003. However, actual costs may differ from our
expectations.
15
RESEARCH AND DEVELOPMENT EXPENSES ("R&D") increased in the third
quarter of 2003 by $35,000 to $419,000, and were approximately 1.6% of revenues
in the third quarter of 2003 as compared with 1.9% in the third quarter of 2002.
Spending was principally on new product development, product improvements to
Punctur-Guard, and software development to support manufacturing and
distribution of custom and generic I.V. systems. We estimate that R&D costs will
continue for the balance of 2003 at approximately the same level as the first
three quarters of 2003. However R&D costs could differ from those estimates and
the R&D projects may not be completed as expected.
We plan to launch, in limited markets, a new I.V. connector currently
under development. We expect to apply late 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 increased $35,000 or 1% and was 25% of net
revenues in the third quarter of 2003, as compared with 32% in the third quarter
of 2002. The decline in income from operations as a percentage of revenue was
because of the decrease in the gross profit as a percentage of sales. The effect
of that decrease was partially offset by the level of operating expenses, which
increased only 13% while net revenue increased 27%.
INVESTMENT INCOME decreased in the third quarter of 2003 as compared
with the third 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 38.5% in the
third quarter of 2003, as compared with 37% in the third 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 2% to $4,175,000 in the third quarter of 2003 as
compared with $4,276,000 in the comparable period last year. NET INCOME PER
SHARE - DILUTED was $0.28 in both years. The effect of the decrease in net
income was offset by a decrease in average shares outstanding.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
- --------------------------------------------------------------------------------
30, 2002
- --------
NET REVENUES increased $13,905,000, or approximately 22%, to
$77,583,000 in the first nine months of 2003 compared to $63,678,000 during the
same period last year. The increase was primarily attributable to a $5,053,000,
or 47%, increase in sales of custom I.V. systems, many of which include CLAVEs,
the inclusion of $5,004,000 of Punctur-Guard product sales from the company
bought last year, and $3,967,000 of license, royalty and revenue share income.
Net sales to Abbott in the first three quarters of 2003 were
$51,121,000, as compared with net sales of $40,611,000 in the first three
quarters of 2002. Net sales of CLAVE Products to Abbott, excluding custom CLAVE
I.V. systems, increased to $39,609,000 in the first three quarters of 2003 from
$34,094,000 in the first three quarters of 2002 due to an increase in unit
volume. Most custom I.V. systems include a CLAVE. Net sales of CLAVE Products to
Abbott, including custom I.V. systems with CLAVE, increased to $45,227,000 in
the first nine months of 2003 from $36,682,000 in the first nine months of 2002.
Sales to Abbott under the SetSource program approximated $7,544,000 in the first
three quarters of 2003 as compared with approximately $3,683,000 in the first
three quarters of 2002, with the increase from higher unit volumes.
Net sales from B. Braun were $952,000 in the first three quarters of
2003, as compared with $6,170,000 in the first three quarters of 2002. CLAVE
Products sales in the first three quarters of 2002 were $4,931,000, with no
CLAVE sales in the first three quarters of 2003. As discussed above, there will
be no CLAVE product sales to B. Braun in the future.
16
Net sales to independent domestic distributors increased approximately
$5,989,000, or 50%, from $11,920,000 in the first three quarters of 2002 to
$17,909,000. This is attributed to the inclusion of Punctur-Guard sales of
$4,749,000 during the first nine months of 2003, and a 25% increase in sales of
CLAVE products and a 20% increase in sales of custom I.V. systems. We believe
the increased CLAVE product sales reflect acquisition of market share from B.
Braun.
Total net sales to foreign distributors (excluding Canada) were
$3,470,000 in the first three quarters of 2003, as compared with $4,598,000 in
the first three quarters of 2002. The decrease is almost entirely due to a
decrease in CLAVE product sales as distributors have slowed their orders to
reduce their inventory levels.
Total net sales of CLAVE Products (excluding custom CLAVE I.V. systems)
decreased from $45,961,000 in the first three quarters of 2002 to $45,044,000 in
the first three quarters of 2003, or 2%. Net sales of CLAVE Products including
custom I.V. systems with CLAVE increased from $52,397,000 in the first nine
months of 2002 to $56,484,000 in the first nine months of 2003, or 8%. CLAVE
product sales to Abbott increased 16%, principally due to increased unit volume.
Independent domestic distributors had a 25% increase in CLAVE product sales.
These were partially offset by the absence of CLAVE product sales to B. Braun of
approximately $4,931,000 and the decline in International CLAVE product sales.
Net sales of custom and generic I.V. systems increased approximately
49% to $16,195,000 in the first three quarters of 2003 as compared with
$10,533,000 in the first three quarters of 2002. Approximately 70% of the
increase was in the Abbott SetSource program. Net sales of custom I.V. sets
containing a 1o2 Valve were approximately $2,500,000 for the first three
quarters of 2003, as compared with approximately $1,850,000 for the first three
quarters of 2002. Unit volume accounted for virtually all of the increases.
Net sales of the CLC2000 increased from $2,456,000 in the first three
quarters of 2002 to $2,943,000 in the first three quarters of 2003. Abbott
accounted for approximately 60% of the increase, with most of the balance from
independent domestic distributors.
Other revenues for the first nine months of 2003 consisted principally
of a fully paid up license fee of $1,666,000 in the first quarter of 2003 and an
initial payment under a license of $988,000, in both cases for licenses to use
certain of our patents. The remainder of the $3,967,000 was ongoing royalties
for the use of Punctur-Guard technology and SafeLine revenue share payments from
B. Braun.
GROSS MARGIN, calculated on net sales and excluding other revenue, was
52% for the first nine months of 2003 as compared to 59% during the first nine
months of 2002. The principal reasons for the decrease in gross margin for the
first nine months of 2003 are essentially the same as for the third quarter.
While we believe that the improved efficiencies and added capacity completed
this quarter will improve margins in the future, we give no assurance that our
expectations will be met.
SG&A excluding research and development expenses, increased by
$1,619,000 (11%) to $17,017,000, and were 22% of revenues in the first three
quarters of 2003, as compared with 24% for the first three quarters of 2002. The
net increase was primarily due to the inclusion of Bio-Plexus and increased
administrative costs because of personnel additions and increased information
technology expenses. Those higher costs were partially offset by decreased
litigation expenses and savings in sales and marketing costs stemming
principally from internal organizational changes and other reductions in
expenses.
R&D increased for the first three quarters of 2003 by approximately
38%, principally because of product improvement expenditures for the
Punctur-Guard line.
INCOME FROM OPERATIONS increased $2,903,000, or 14%, principally
because of the increase in net revenues and a low rate of growth in operating
expenses in relation to growth in total revenue, offset by the decrease in gross
17
margin as a percentage of net sales. The operating margin was 31% of total sales
in the first three quarters of 2003, as compared with 33% of sales in the first
three quarters of 2002.
INVESTMENT INCOME decreased $196,000, or 18%, as compared with the
first three quarters 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 three quarters of 2003 as compared to 37% in the first three quarters of
2002.
NET INCOME increased $1,347,000, or 10%, to $15,144,000 as compared
with $13,797,000 for the first nine months of 2002. NET INCOME PER SHARE -
DILUTED increased 11% to $1.00 per share in the first nine months of 2003 as
compared with $0.90 for the first nine months of 2002. This was a slightly
higher percentage than the increase in net income because a slight increase in
the weighted average number of shares outstanding was more than offset by a
decrease in the dilutive effect of stock options.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the first nine months of 2003, our working capital decreased
$10,783,000 to $91,781,000. The decrease was because purchases of treasury
stock, investment in property and equipment, acquisitions and new finance loans
exceeded working capital generated by operations. During the nine months ended
September 30, 2003, our cash and cash equivalents and investment securities
position decreased $17,351,000 to $71,114,000 from $88,465,000 at December 31,
2002. This is because the purchase of $15,323,000 of treasury stock, purchases
of property and equipment of $9,632,000, net advances of $6,509,000 made under
finance loans and cash payments of $5,572,000 for acquisitions exceeded the
aggregate of cash provided by operating activities (including tax benefits from
exercise of stock options) of $18,404,000 and cash provided by the company's
employee equity plans of $1,280,000.
Cash provided by stock options, including tax benefits, was $994,000 in
the first three quarters of 2003 as compared with $15,804,000 in the first three
quarters of 2002; options were exercised on 61,939 shares in the first three
quarters of 2003 as compared with 812,544 shares in the first three quarters of
2002.
We expect that sales of our products will continue to grow through the
balance of 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 capital expenditures, our working capital requirements may
increase in the foreseeable future.
Inventories decreased from $5,749,000 at December 31, 2002 to
$4,680,000 at September 30, 2003 principally because of a decrease in finished
goods, which decreased $1,168,000 because of better scheduling and matching of
orders to production. Accounts receivable net decreased $805,000 from December
31, 2002 to September 30, 2003 even as sales increased because we were able to
improve collection times from our domestic distributors and because the
decreased level of international sales resulted in a reduction of receivables
from international customers.
We currently estimate that capital expenditures for property and
equipment will be approximately $11.5 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, $6.3 million
on molds, molding equipment and automated assembly equipment, and $1.2 million
on computers and software. Of those amounts, approximately $9.6 million has been
incurred, approximately $0.5 million was committed under contracts at September
30, 2003, and we expect to commit the balance by the end of 2003. Amounts of
spending are estimates and actual spending may substantially differ from those
amounts.
We recently completed an evaluation of the design and capacity of our
manufacturing facilities. We estimate that our current facilities will be
adequate through 2004, but that production after 2004 may require additional
18
clean room facilities for molding and automated assembly. We expect to decide in
the future how to meet the need for any additional facilities and the location
of additional clean room facilities for molding and automated assembly. We
currently expect that our capital expenditures in 2004 will be less than half of
the levels of 2003.
In the first nine months of 2003 we purchased 589,292 shares of our
common stock for $15,323,000. 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.
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 $6,509,000 in loans outstanding, most of which were made
in June 2003. Scheduled maturities are: remainder of 2003 $406,000; 2004
$1,362,000; 2005 $1,336,000; 2006 $1,306,000; 2007 $1,289,000 and 2008 $810,000.
Weighted average maturity (principal and interest) at September 30, 2003 is 2.2
years and the weighted average interest rate is 4.7%. In October 2003, we
decided to discontinue new lending activities; we will honor existing lending
commitments; unfunded commitments were approximately $6.1 million at September
30, 2003.
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 potentially to 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 technology, future increases or
decreases in sales of certain products and in certain markets, impact
of safety legislation, increases in systems capabilities, 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;
19
o new or extended contracts with manufacturers and buying organizations,
and dependence on a small number of customers, effect of Abbott's
spin-off of its Hospital Products Division, short-term and long-term
effects of termination of the 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.
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.
20
At September 2003, we had outstanding commercial loans of $6.5 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 2.2
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-14(c) and 15a-14(c) 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.
21
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
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 ICU's
patent 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
ITEM 3. DEFAULT UPON SENIOR SECURITIES
- ---------------------------------------
Inapplicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
Inapplicable
ITEM 5. OTHER INFORMATION
- --------------------------
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(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 Reports on Form 8-K during the quarter for
which this Report is filed:
Item 7 - July 16, 2003
Item 5 - September 19, 2003
22
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: November 12, 2003
------------------
Francis J. O'Brien
Chief Financial Officer
(Principal Financial Officer and)
Chief Accounting Officer)
23