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: JUNE 30, 2004
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 JULY 30, 2004
----- ----------------------------
Common 13,728,789
ICU MEDICAL, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
- ------------------------------ -----------
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets, June 30, 2004 and December 31, 2003 3
Condensed Consolidated Statements of Income for the three and six
months ended June 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2004 and 2003 5
Condensed Consolidated Statements of Comprehensive Income for the
six months ended June 30, 2004 and 2003 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 24
ITEM 4.
Controls and Procedures 24
PART II - OTHER INFORMATION 25
- ---------------------------
SIGNATURES 27
2
ICU MEDICAL, INC.
Condensed Consolidated Balance Sheets
June 30, 2004 and December 31, 2003
(all dollar amounts in thousands except per share data)
(unaudited)
ASSETS
6/30/04 12/31/03
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 3,260 $ 1,787
Liquid investments 88,650 71,350
---------- ----------
Cash, cash equivalents and liquid investments 91,910 73,137
---------- ----------
Accounts receivable, net of allowance for doubtful accounts of $687
and $742 as of June 30, 2004 and December 31, 2003, respectively 16,217 24,943
Finance loans receivable - current portion 2,848 4,142
Inventories 9,404 3,398
Prepaid income taxes 2,132 1,662
Prepaid expenses and other current assets 1,139 1,927
Deferred income taxes - current portion 2,002 2,008
---------- ----------
Total current assets 125,652 111,217
---------- ----------
PROPERTY AND EQUIPMENT, at cost: 73,964 71,615
Less--Accumulated depreciation (34,150) (30,574)
---------- ----------
39,814 41,041
---------- ----------
FINANCE LOANS RECEIVABLE - non-current portion 4,101 4,765
DEFERRED INCOME TAXES - non-current portion 2,738 2,680
INTANGIBLE ASSETS - net 4,011 4,166
OTHER ASSETS 405 419
---------- ----------
$ 176,721 $ 164,288
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,727 $ 3,051
Accrued liabilities 5,769 5,234
---------- ----------
Total current liabilities 8,496 8,285
---------- ----------
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 -- 14,158,612 shares
at June 30, 2004 and December 31, 2003 1,416 1,416
Additional paid-in capital 61,847 63,535
Treasury stock, at cost -- 235,275 and 471,390 shares at
June 30, 2004 and December 31, 2003, respectively (5,655) (12,116)
Retained earnings 110,541 102,991
Accumulated other comprehensive income 76 177
---------- ----------
Total stockholders' equity 168,225 156,003
---------- ----------
$ 176,721 $ 164,288
========== ==========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
ICU MEDICAL, INC.
Condensed Consolidated Statements of Income
For the Three Months and Six Months Ended
June 30, 2004 and June 30, 2003
(all dollar amounts in thousands except per share data)
(unaudited)
For the Three Months Ended For the Six Months Ended
---------------------------- ----------------------------
6/30/04 6/30/03 6/30/04 6/30/03
----------- ----------- ----------- -----------
REVENUES:
Net sales $ 21,001 $ 19,864 $ 42,272 $ 48,600
Other 663 1,419 1,626 3,459
----------- ----------- ----------- -----------
TOTAL REVENUE 21,664 21,283 43,898 52,059
COST OF GOODS SOLD 9,600 9,148 19,414 22,172
----------- ----------- ----------- -----------
Gross profit 12,064 12,135 24,484 29,887
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Selling, general and administrative 6,603 5,543 12,258 11,630
Research and development 403 537 854 1,008
----------- ----------- ----------- -----------
Total operating expenses 7,006 6,080 13,112 12,638
----------- ----------- ----------- -----------
Income from operations 5,058 6,055 11,372 17,249
INVESTMENT INCOME 398 274 708 570
----------- ----------- ----------- -----------
Income before income taxes 5,456 6,329 12,080 17,819
PROVISION FOR INCOME TAXES 2,046 2,430 4,530 6,850
----------- ----------- ----------- -----------
NET INCOME $ 3,410 $ 3,899 $ 7,550 $ 10,969
=========== =========== =========== ===========
NET INCOME PER SHARE
Basic $ 0.25 $ 0.28 $ 0.55 $ 0.79
Diluted $ 0.23 $ 0.26 $ 0.50 $ 0.72
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 13,808,661 13,763,120 13,754,326 13,885,425
Diluted 15,140,606 15,081,815 15,107,214 15,209,580
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
ICU MEDICAL, INC.
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended
June 30, 2004 and June 30, 2003
(all dollar amounts in thousands)
(unaudited)
For the Six Months Ended
------------------------
6/30/04 6/30/03
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 7,550 $ 10,969
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization 3,742 3,416
Net change in current operating assets and liabilities,
net of effects of acquisitions 3,022 (4,383)
--------- ---------
14,314 10,002
Tax benefits from exercise of stock options 1,913 186
--------- ---------
Net cash provided by operating activities 16,227 10,188
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,272) (7,071)
Cash paid for acquisitions -- (5,346)
Advances under finance loans (1,010) (8,172)
Proceeds from finance loan repayments 2,968 1,058
Purchases of investments (17,300) (5,107)
Proceeds from sale of investments -- 24,357
--------- ---------
Net cash used in investing activities (17,614) (281)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 2,581 473
Proceeds from employee stock purchase plan 279 271
Purchase of treasury stock -- (10,313)
--------- ---------
Net cash provided by (used in) financing activities 2,860 (9,569)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,473 338
CASH AND CASH EQUIVALENTS, beginning of the period 1,787 4,165
--------- ---------
CASH AND CASH EQUIVALENTS, end of the period $ 3,260 $ 4,503
========= =========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
ICU MEDICAL, INC.
Condensed Consolidated Statements of Comprehensive Income
For the Three Months and Six Months Ended
June 30, 2004 and June 30, 2003
(all dollar amounts in thousands)
(unaudited)
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
6/30/04 6/30/03 6/30/04 6/30/03
-------- -------- -------- --------
Net income $ 3,410 $ 3,899 $ 7,550 $10,969
Other comprehensive loss net of tax:
Foreign currency translation adjustment (38) -- (101) --
-------- -------- -------- --------
Comprehensive income $ 3,372 $ 3,899 $ 7,449 $10,969
======== ======== ======== ========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
6
ICU MEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(All dollar amounts in tables in thousands except per share data)
(unaudited)
NOTE 1: BASIS OF PRESENTATION: 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 2003
Annual Report to Stockholders.
ICU Medical, Inc. (the "Company," a Delaware corporation) operates
principally in one business segment engaged in the development, manufacturing
and marketing of disposable medical devices designed to protect healthcare
workers and patients from the spread of infectious diseases. The Company's
devices are sold principally to distributors and medical product manufacturers
throughout the United States and a small portion internationally. All
subsidiaries are wholly owned and are included in the consolidated financial
statements. All intercompany balances and transactions have been eliminated.
NOTE 2: INVENTORIES consisted of the following:
6/30/04 12/31/03
-------- --------
Raw material $ 4,356 $ 2,699
Work in process 729 340
Finished goods 4,319 359
--------- ---------
Total $ 9,404 $ 3,398
========= =========
NOTE 3: PROPERTY AND EQUIPMENT, at cost, consisted of the following:
6/30/04 12/31/03
-------- --------
Land, building and building
improvements $ 21,577 $ 16,887
Machinery and equipment 29,938 26,429
Furniture and fixtures 7,262 6,572
Molds 12,111 11,480
Construction in process 3,076 10,247
--------- ---------
Total $ 73,964 $ 71,615
========= =========
NOTE 4: FINANCE LOANS RECEIVABLE are commercial loans by ICU Finance, Inc., a
wholly-owned consolidated subsidiary. Loans are made only to credit-worthy
healthcare entities and are fully secured by real and personal property. The
Company plans 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 2004 $2,122,000; 2005 $1,235,000; 2006 $1,165,000;
7
2007 $1,157,000 and 2008 $1,270,000. Weighted average maturity (principal and
interest) at June 30, 2004 was 1.5 years and the weighted average interest rate
was 5.3%. In October 2003, the Company discontinued new lending activities; the
Company will honor existing lending commitments. The maximum that can be
borrowed under all commitments, including amounts outstanding, was approximately
$ 7,052,000 at June 30, 2004.
NOTE 5: NET INCOME PER SHARE is computed by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share is
computed by dividing net income by the weighted average number of common shares
outstanding plus dilutive securities. Dilutive securities are outstanding common
stock options (excluding stock options with an exercise price in excess of the
average market value for the 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 1,331,945 and 1,318,695 for the three months
ended June 30, 2004 and June 30, 2003, respectively and 1,352,888 and 1,324,155
for the six months ended June 30, 2004 and 2003, respectively. Options that are
antidilutive because their average exercise price exceeded the average market
price of its common stock for the period approximated 600,000 and 500,000 for
the three months ended June 30, 2004 and 2003 respectively and 570,000 and
400,000 for the six months ended June 30, 2004 and 2003, respectively.
NOTE 6: STOCK OPTIONS: The Company accounts for 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 does
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 the second quarter of 2004 and 2003 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 its 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 its 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,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net Income, as reported............ $3,410 $3,899 $7,550 $10,969
Pro forma adjustment............... 1,653 1,317 2,673 2,659
----------- ----------- ----------- -----------
Net Income, pro forma.............. $1,757 $2,582 $4,877 $ 8,310
=========== =========== =========== ===========
Net Income per share
Basic, as reported $0.25 $0.28 $0.55 $0.79
Diluted, as reported $0.23 $0.26 $0.50 $0.72
Basic, pro forma $0.13 $0.19 $0.36 $0.61
Diluted, pro forma $0.12 $0.18 $0.33 $0.56
8
NOTE 7: INCOME TAXES: 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 8: MAJOR CUSTOMERS: The Company had revenues equal to ten percent or
greater of total net revenues from one customer, Hospira, Inc. (formerly a part
of Abbott Laboratories), of 52% and 67% in the second quarters of 2004 and 2003,
respectively, and of 56% and 68% in the first six months of 2004 and 2003,
respectively.
NOTE 9: COMMITMENTS AND CONTINGENCIES: The Company is from time to time involved
in various routine non-material legal proceedings, either as a defendant or
plaintiff, most of which are routine litigation in the normal course of
business. The Company believes that the resolution of the legal proceedings in
which it is involved will not have a material effect on its financial position
or results of operations.
In the normal course of business, the Company has made certain
indemnities, including indemnities to its 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. The Company has not recorded any liability for these
in its financial statements and does not expect to incur any.
NOTE 10: ACQUISITIONS: In June 2003, the Company acquired the assets of two
affiliated manufacturers of intravenous therapy systems located in northern
Italy for a cash payment of approximately $4.6 million. Principal assets
acquired are assembly facilities and related equipment of $2,443,000 and
inventories of $1,110,000 and an agreement not to compete valued at
approximately $818,000. The acquired assets and related operating results are
included in its consolidated financial statements since June 30, 2003. The
effect of this acquisition on its financial statements is immaterial.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We are a leader in the development, manufacture and sale of
proprietary, disposable medical connection systems for use in intravenous
("I.V.") therapy applications. Our devices are designed to protect healthcare
workers and their patients from exposure to infectious diseases such as
Hepatitis B and C and Human Immunodeficiency Virus ("HIV") through accidental
needlesticks. We are also a leader in the production of custom I.V. systems and
low cost generic I.V. systems and we incorporate our proprietary products on
many of those custom I.V. systems.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are summarized in Note 1 to the
Consolidated Financial Statements included in our 2003 Annual Report to
Shareholders. In preparing our financial statements, we make estimates and
assumptions that affect the expected 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 Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Under our current investment policies, the securities in which we invest have 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.
We record sales and related costs when ownership of the product
transfers to the customer. Under the terms of most purchase orders, ownership
transfers on shipment, but in some cases it transfers on delivery. If there are
significant doubts at the time of shipment as to the collectibility of the
receivable, we defer recognition of the sale in revenue until the receivable is
collected. Most of our customers are medical product manufacturers or
distributors, although some are end-users. Our only post-sale obligations are
warranty and certain rebates. We warrant products against defects and have a
policy permitting the return of defective products. We record warranty returns
as an expense and amounts have been insignificant. Customers, with certain
exceptions, do not retain any right of return and there is no price protection
with respect to unsold products; returns from customers with return rights have
not been significant. We accrue rebates as a reduction in revenue based on
contractual commitments and historical experience. 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 determined.
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 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 except for certain standard (non-custom) products which we will
carry in inventory in expectation of future orders. For finished products in
inventory, we need to estimate what may not be saleable. We regularly review
10
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 the 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 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.
BUSINESS OVERVIEW
Until the late 1990s, our primary emphasis in product development,
sales and marketing was disposable medical connectors for use in I.V. therapy,
and our principal product was the CLAVE. In the late 1990s, we commenced a
transition from a product-centered company to an innovative, fast, efficient,
low-cost manufacturer of custom I.V. systems, using processes that we believe
can be readily applied to a variety of disposable medical devices. This strategy
enables us to capture revenue on the entire I.V. system, and not just a
component of the system.
We are also increasing our efforts to acquire new products. We acquired
the Punctur-Guard line of blood collection needles in 2002 and are continuing to
seek other opportunities. However, there can be no assurance that we will be
successful in finding acquisition opportunities, or in acquiring companies or
products.
Custom I.V. systems and new products will be of increasing importance
to us in future years. We expect CLAVE products to continue to grow in the U.S.,
but at a slower percentage growth rate than in the past because of our large
market penetration and potentially substantial increases in competition if we
are unsuccessful in enforcing our intellectual property rights. Growth for all
of our products outside the U.S. could be substantial, although to date it has
been modest. Therefore, we will be directing increasing product development,
acquisition, sales and marketing efforts to custom I.V. systems and new products
in the U.S. and increasing our emphasis on the markets outside the U.S.
Our largest customer has been Abbott Laboratories ("Abbott"). On April
30, 2004, Abbott spun off its core Hospital Products Division to its
stockholders as an independent company named Hospira, Inc. The Hospital Products
Division historically accounted for virtually all of our sales to Abbott. Abbott
has assigned our agreements with Abbott to Hospira. We believe the spin-off is a
positive development for us and will result in new business opportunities with
Hospira. For clarity, all historical references to Abbott and its Hospital
Products Division have been changed to Hospira.
11
Our relationship with Hospira has been and will continue to be of
singular importance to our growth. In 2003, approximately 67% of our revenue was
from sales to Hospira, and we expect this percentage to increase on a yearly
basis in the future. Hospira has a significant share of the I.V. set market in
the U.S., and provides us access to that market. We expect that Hospira will be
important to our growth for CLAVE, custom I.V. systems, and our other products
in the U.S. and also outside the U.S.
We believe that achievement of our growth objectives, both within the
U.S., and outside the U.S., will require increased efforts by us in sales and
marketing and product development, and we expect to increase expenditures for
those during 2004.
There is no assurance that we will be successful in implementing our
growth strategy. The custom I.V. systems market is still small and we could
encounter customer resistance to custom products. Further, we could encounter
increased competition as other companies see opportunity. Product development or
acquisition efforts may not succeed, and even if we do develop or acquire
products, there is no assurance that we will achieve profitable sales of such
products. An adverse change in our relationship with Hospira, or a deterioration
of Hospira's position in the market, could have an adverse effect on us.
Increased expenditures for sales and marketing and product acquisition and
development may not yield desired results when expected, or at all. While we
have taken steps to control all these risks, there are certain of those risks
which may be outside of our control, and there is no assurance that steps we
have taken will succeed.
OVERVIEW OF OPERATIONS
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 2001 2002 2003 Q2-03 Q2-04 Q2-03 Q2-04
- ---------------------------------------------------------------------------------------------------------------------------
CLAVE 74% 67% 59% 54% 50% 60% 50%
- ---------------------------------------------------------------------------------------------------------------------------
Custom and Generic I.V. Systems 13% 17% 22% 22% 32% 17% 31%
- ---------------------------------------------------------------------------------------------------------------------------
Punctur-Guard(R) - 1% 7% 8% 6% 6% 6%
- ---------------------------------------------------------------------------------------------------------------------------
CLC2000(R) 3% 4% 4% 3% 4% 4% 4%
- ---------------------------------------------------------------------------------------------------------------------------
Other Products 10% 7% 4% 6% 5% 6% 6%
- ---------------------------------------------------------------------------------------------------------------------------
License, royalty and revenue share - 4% 4% 7% 3% 7% 3%
- ---------------------------------------------------------------------------------------------------------------------------
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 with at least one CLAVE were 70% of net revenue in
the second quarter of 2003 and 72% of net revenue in the second quarter of 2004,
and 72% and 70% year-to-date June 30, 2003 and 2004, respectively.
We sell our products to independent distributors and through agreements
with Hospira (the "Hospira Agreements") and certain other medical product
manufacturers. Most independent distributors handle the full line of our
products. Hospira purchases CLAVE products, principally bulk, non-sterile
connectors, and the CLC2000. In addition, we sell custom I.V. systems to Hospira
12
under a program referred to as SetSource. In January 2004, we announced the
execution of amendments to our existing agreements with Hospira. The amendments
extend the terms of our agreements to 2014 and provide Hospira with rights to
distribute all existing ICU Medical products worldwide. We signed another
contract amendment with Hospira in January 2004 to distribute our Punctur-Guard
line of blood collection needles in the U.S. and the rest of the world. We also
sell certain other products to a number of other medical product manufacturers.
We believe that as healthcare providers continue to either consolidate
or join major buying organizations, our success in marketing and distributing
CLAVE products will depend, in part, on our ability, either independently or
through strategic relationships such as our Hospira relationship, to secure
long-term CLAVE contracts with large healthcare providers and major buying
organizations. As a result of this marketing and distribution strategy we derive
most of our revenues from a relatively small number of distributors and
manufacturers. The loss of a strategic relationship with a customer or a decline
in demand for a manufacturing customer's products could have a material adverse
effect on our operating results.
In June 2004, Cardinal Health, Inc. ("Cardinal") acquired Alaris
Medical Systems, Inc. ("Alaris"). Alaris manufactures a connector that competes
with the CLAVE. Cardinal is the largest distributor of healthcare products in
the United States, and the companies have announced their intent to increase
market share growth beyond what Alaris might be able to achieve on its own. We
believe the ownership of Alaris by Cardinal could adversely affect our market
share and the prices for our CLAVE products.
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. We have patents covering the
technology embodied in the CLAVE and intend to enforce those patents as
appropriate. If we are not successful in enforcing our patents, competition from
such products could adversely affect our market share and prices for our CLAVE
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 and blood collection needles, 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 through increased sales to medical product manufacturers and
independent distributors. Under one of our Hospira Agreements, we manufacture
all new custom I.V. sets for sale by Hospira and jointly promote the products
under the name SetSource. 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 products
among those available to members of those entities. Custom I.V. systems
accounted for approximately $13.3 million of net sales in the first six months
of 2004, including net sales under the Hospira SetSource program of
approximately $5.8 million. Also, in the fourth quarter of 2002 we acquired
Bio-Plexus. Inc., whose principal products are blood collection needles, under
the Punctur-Guard name, that are designed to eliminate exposure to sharp,
contaminated needles. Punctur-Guard product revenues in the first six months of
2004 were $2.7 million. There is no assurance that either one of these
initiatives will continue to succeed.
13
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. These include use of automated
assembly equipment for new products and other products for which volume is
growing, use of larger molds and molding machines, centralization of all
proprietary molding in San Clemente, expansion of our production facility in
Mexico, and the establishment of other production facilities outside the U.S.
We distribute products through three distribution channels. Net product
revenues for each distribution channel were as follows:
=====================================================================================================================
CHANNEL 2001 2002 2003 Q2-03 Q2-04 YTD YTD
Q2-03 Q2-04
- ---------------------------------------------------------------------------------------------------------------------
Medical product manufacturers 72% 73% 71% 73% 56% 75% 60%
- ---------------------------------------------------------------------------------------------------------------------
Independent domestic distributors 20% 19% 23% 24% 31% 22% 32%
- ---------------------------------------------------------------------------------------------------------------------
International 8% 8% 6% 3% 13% 3% 8%
- ---------------------------------------------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100% 100% 100%
=====================================================================================================================
QUARTER-TO-QUARTER COMPARISONS: We present summarized income statement
data in Item 1. Financial Statements. The following table shows, for the year
2003 and the second quarter and first half of 2003 and 2004, the percentages of
each income statement caption in relation to revenues, and the percentage change
in each caption in each quarter. (We currently calculate our gross profit
percentage based on net sales, which includes only product sales and excludes
non-product revenue such as license fees. See below for information on
non-product revenue. We present the alternative calculation based on total
revenue for the convenience of readers who prefer to view it that way. )
Percentage of Revenues
-------------------------------------------------------------------------------
Year Quarter ended June 30, Six months ended June 30,
--------- ------------------------------ -------------------------------
2003 2003 2004 CHANGE 2003 2004 CHANGE
---- ---- ---- ------ ---- ---- ------
Revenue
Net sales 96% 93% 97% 6% 93% 96% -13%
Other 4% 7% 3% -53% 7% 4% -53%
--------- ------------------------------ -------------------------------
Total revenues 100% 100% 100% 2% 100% 100% -16%
Cost of sales 47% 43% 44% 5% 43% 44% -12%
Gross Profit
Percentage of net sales 53% 54% 54% 0% 54% 54% -11%
Percentage of all revenues 55% 57% 56% -1% 57% 56% -18%
Selling, general and administrative expenses 21% 26% 30% 19% 22% 28% 5%
Research and development expenses 2% 3% 2% -25% 2% 2% -15%
--------- ------------------------------ -------------------------------
Total operating expenses 23% 29% 32% 15% 24% 30% 4%
Income from operations 32% 28% 23% -17% 33% 26% -34%
--------- ------------------------------ -------------------------------
Investment income 1% 1% 2% 45% 1% 2% 24%
--------- ------------------------------ -------------------------------
Income before income taxes 33% 29% 25% -14% 34% 28% -32%
Income taxes 12% 11% 9% -16% 13% 11% -34%
--------- ------------------------------ -------------------------------
Net income 21% 18% 16% -13% 21% 17% -31%
========= ============================== ===============================
14
QUARTERLY RESULTS: 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 in net sales 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. Our expenses often do not
fluctuate in the same manner as net sales, which may cause fluctuations in
operating income that are disproportionate to fluctuations in our revenue.
QUARTER ENDED JUNE 30, 2004 COMPARED TO THE QUARTER ENDED JUNE 30, 2003
- -----------------------------------------------------------------------
Net revenues increased $381,000, or approximately 2%, to $21,664,000 in
the second quarter of 2004, compared to $21,283,000 during the same period last
year.
DISTRIBUTION CHANNELS: Net sales to Hospira in the second quarter of
2004 were $11,321,000, as compared with net sales of $14,046,000 in the second
quarter of 2003. (Hospira sales discussed in this paragraph do not include
export and foreign sales.) Net sales of CLAVE Products to Hospira, excluding
custom CLAVE I.V. systems, decreased by $2,969,000 in the second quarter of 2004
from $10,355,000 in the second quarter of 2003 because Hospira has been reducing
its inventory of CLAVE products. We believe Hospira's unit sales to their
customers have increased in this period. Sales to Hospira under the SetSource
program approximated $3,054,000 in the second quarter of 2004 as compared with
approximately $2,369,000 in the second quarter of 2003, a 29% increase almost
entirely because of increased unit volume. We expect a substantial decrease in
CLAVE unit and dollar sales volume with Hospira through the balance of 2004 as
compared to 2003 as Hospira continues to reduce its inventory. We expect a
significant increase in SetSource unit and sales volume through the remainder of
2004 as compared to 2003 as we continue to grow this market. Net sales of
CLC2000 decreased approximately 10% to $409,000 on decreased unit volume. We
expect sales of the CLC2000 to Hospira will increase in the future. Net sales of
the Rhino were down 60% to approximately $221,000; sales of Rhino started to
decline in early 2001, and 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 increases to Hospira.
Net sales to independent domestic distributors increased approximately
27% from $5,040,000 in the second quarter of 2003 to $6,411,000 in 2004. This
increase in sales to independent distributors is attributed principally to a
$773,000, or 95%, increase in CLAVE product sales to $1,586,000 and a $921,000,
or 43%, increase in our custom I.V. system sales from approximately $2,138,000
to approximately $3,059,000 (this includes all custom I.V. systems, including
custom I.V. systems that include CLAVE connectors). The increase in CLAVE
product sales was due to an increase in demand through this channel. The
increase in sales of custom I.V. systems was attributable to an increase in unit
volume, and we expect increased volume of custom I.V. systems in the future as
we continue to penetrate this market. These increases were partially offset by a
decrease in sales of Punctur-Guard products due to a small decrease in unit
sales and to pricing concessions on our Punctur-Guard line of products to
achieve wider distribution; we anticipate increased unit and dollar volumes in
the second half of 2004 through new outpatient provider contracts. As part of
our program to increase sales of custom I.V. systems, we have been encouraging
customers to purchase custom I.V. systems that include CLAVE connectors, rather
than purchasing only the CLAVE connectors. This continues to contribute to the
increase in sales of custom I.V. systems including one or more CLAVEs. Sales of
custom I.V. systems including one or more CLAVE connector and CLAVE products
combined were $2,348,000 in the second quarter of 2003 as compared with
$3,550,000 in the second quarter of 2004. There is no assurance as to the amount
of any future sales increases to the independent domestic distributors.
Net sales to international distributors (excluding Canada) were
$2,766,000 in the second quarter of 2004, as compared with $611,000 in the
second quarter of 2003. The increase was principally due to a $1,493,000
increase in CLAVE product sales and $526,000 increase in sales of custom I.V.
systems. In 2003, we experienced a slowing of distributor orders while they
15
reduced inventory levels. Orders in most areas of the world have returned to
more normal levels, and this and expansion of our business accounted for the
increase in CLAVE sales. The increase in sales of custom I.V. systems was
attributable to an increase in unit volume, and we expect increased volume of
custom I.V. systems in the future as we continue to penetrate this market. We
expect increases in foreign sales in the future in response to increased sales
and marketing efforts including additional business development managers. Also,
we believe we will see a positive impact beginning late in 2004 or 2005 from our
recent amendments to the Hospira contracts. There is no assurance that those
expectations will be realized.
PRODUCT AND OTHER REVENUE: Net sales of CLAVE Products (excluding
custom CLAVE I.V. systems) decreased to $10,820,000 in the second quarter of
2004 from $11,527,000 in the second quarter of 2003. This decrease was due
primarily to a decrease in unit shipments of CLAVE products to Hospira,
partially offset by an increase in unit shipments to our domestic and
international distributors. The aggregate average net selling price of CLAVE
products in the second quarter of 2004 changed little from 2003 except for a
decrease in selling prices to domestic specialty distributors, and we do not
expect any more than minimal decreases for the balance of the year. Sales of
custom I.V. systems including one or more CLAVE connectors and CLAVE products
combined were $15,880,000 in the second quarter of 2004 as compared with
$14,976,000 in the second quarter of 2003. We expect a decrease in CLAVE (not
including custom sets with CLAVE) unit and dollar volume in the second half of
2004 as compared with the second half of 2003 because of the expected reduction
in inventory of CLAVE only products by Hospira, partially offset by increased
unit and dollar volume with our domestic and our international distributors.
However, there is no assurance that the expectations will be realized.
Net sales of custom I.V. systems were $7,040,000 in the second quarter
of 2004 compared to $4,620,000 in the second quarter of 2003, a $2,421,000, or a
52% increase. The SetSource program with Hospira accounted for about $685,000 of
the increase and domestic and international distributors accounted for about
$1,605,000. Unit volume accounted for the majority of the increase.
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 $1,283,000 in the second
quarter of 2004, as compared with approximately $740,000 in the second quarter
of 2003.
We acquired the Punctur-Guard product line and technology with the
purchase of Bio-Plexus on October 31, 2002. After our acquisition of Bio-Plexus
on October 31, 2002, we made significant improvements to the Punctur-Guard
products and manufacturing processes. We did not actively promote sales of those
products until completion of those product improvements. We completed
improvements on the Winged Set products and re-launched them on March 1, 2003.
We completed improvements on the BCN and started selling the improved product in
late September 2003. Sales of Punctur-Guard products (excluding royalties) were
$1,183,000 in the second quarter of 2004 as compared to $1,733,000 in the second
quarter of 2003 due to a 6% decrease in unit sales and to pricing concessions on
our Punctur-Guard line of products to achieve wider distribution; we anticipate
increased unit and dollar volumes in the second half of 2004 through new
outpatient provider contracts, but we give no assurance that such increases will
be achieved.
Net sales of the CLC2000 were $943,000 in the second quarter of 2004, a
$220,000, or 30%, increase from the second quarter of 2003 due to an expansion
of our business in this product both domestically and internationally. We expect
sales of the CLC2000 to increase moderately in the second half 2004 and later
years, but there is no assurance as to the amount or timing of future CLC2000
sales.
16
Other revenue consists of non-product revenue. The principal ongoing
components are royalties received for other companies' use of Punctur-Guard
technology, SafeLine revenue share payments from B. Braun and payments under
another license of approximately $235,000 per quarter for four years starting in
the first quarter of 2004. These ongoing components account for all of our other
revenue in 2004. In the second quarter of 2003, we did not receive the $235,000
payment, but did receive a $988,000 initial payment on a license to use certain
of our products. 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 2004, calculated on net sales
and excluding other revenue, was 54%, the same as for the second quarter of
2003. Gross margins were depressed by about 5 percentage points because of the
effect of our Punctur-Guard operations and the new facility in Italy; the
remaining operations in San Clemente and Ensenada achieved a gross margin of 59%
due to product mix and manufacturing efficiencies. We believe that production in
San Clemente in the second half of 2004 will be less than originally anticipated
because of the reduced purchases from Hospira as they reduce inventory levels.
This reduced production level may have an adverse impact on our gross margins.
We are working to improve gross margins on the Punctur-Guard products;
improvement will depend on increased sales and full conversion of 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") in the second
quarter of 2004 increased 1,060,000, or 19%, to $6,603,000, and was
approximately 30% of revenue in 2004 as compared with 26% of revenue in 2003.
The increase in costs was primarily due to increased corporate administrative
costs, integration and administrative costs of our operation in Italy, partially
offset by elimination of administrative costs related to Bio-Plexus and lower
patent litigation costs. Corporate administrative costs have increased
principally because of personnel additions, information technology costs and
costs related to Sarbanes-Oxley compliance. We expect patent litigation costs
will significantly increase in the second half of 2004 as we enforce our patents
against B. Braun and Alaris. Sales and marketing costs increased slightly
because of the addition of personnel. We expect increased administrative costs
as the year progresses and increased selling costs as we add more sales
personnel.
RESEARCH AND DEVELOPMENT EXPENSES ("R&D") decreased in the second
quarter of 2004 by $134,000 to $403,000, and were approximately 2% of revenues
in the second quarter of 2004 as compared with 2.5% in the second quarter of
2003. Spending was principally on new product development, with a smaller amount
being spent on product improvements to Punctur-Guard. Spending on software
development decreased as principal development projects neared completion. We
estimate that R&D costs will increase during 2004 to support on-going new
product development and various product and process improvements. However, R&D
costs could differ from these estimates and the R&D may not be completed as
expected.
We plan to launch, in limited markets, a new connector in 2004. We have
applied to the Food & Drug Administration ("FDA") under Section 510(k) of the
Federal Food, Drug and Cosmetics Act for approval to market this new connector.
We also expect to launch a new product for the diabetes market for which we have
already received marketing approval from the FDA under section 510(k) and which
we expect to introduce later in 2004. We are currently developing a new integral
check valve for use with all standard and custom I.V. administration sets, which
we expect to introduce within the third quarter of 2004. There is no assurance
that the FDA will grant any required marketing clearance, that we will launch
any of these new products, or that they will achieve sales if and when we
commence marketing them.
INCOME FROM OPERATIONS decreased $997,000 or 17% and was 23% of net
revenues in the second quarter of 2004, as compared with 28% in the second
quarter of 2003. The decline in income from operations as a percentage of
revenue was because operating expenses increased at a faster rate than revenues
and gross margin.
INVESTMENT INCOME increased in the second quarter of 2004 as compared
with the second quarter of 2003 by $124,000, because of an increase in invested
funds (including finance loans) and slight increase in overall yield.
17
INCOME TAXES were accrued at an effective tax rate of 37.5% in the
second quarter of 2004, as compared with 38.4% in the second quarter of 2003.
The decrease is principally because of savings in state income taxes due to
organizational changes. We expect our effective tax rate will be approximately
37.5% for the entire year 2004.
NET INCOME decreased 13% to $3,410,000 in the second quarter of 2004 as
compared with $3,899,000 in the comparable period last year. While revenues
increased 2%, gross profit decreased 1%. Operating expenses increased 15%, which
caused income from operations to decrease 17%. The slight increase in investment
income and a decrease in the effective income tax rate resulted in an overall
decrease of 13%. NET INCOME PER SHARE - DILUTED decreased $0.03 or 13%, in the
second quarter of 2004 as compared with the second quarter of 2003 on a
comparable number of shares. There was approximately the same number of dilutive
shares during each quarter.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2003
- -----------------------------------------------------------------------------
Net revenues decreased $8,161,000, or approximately 16%, to $43,898,000
in the first six months of 2004 compared to $52,059,000 during the same period
last year. Approximately $5.7 million of the decrease is attributable to two
items that occurred in the first half of 2003 but did not recur in 2004: a
deferment of approximately $4.0 million of CLAVE product available for delivery
to Hospira on current orders in the fourth quarter of 2002, but for which
shipment was deferred until early 2003 by agreement with Hospira, and a one-time
license fee of approximately $2.7 million. The balance of the decrease is
principally attributable to reduced CLAVE purchases by Hospira, partially offset
by increased sales in our independent domestic and international distributors
and increases in recurring non-product revenue.
DISTRIBUTION CHANNELS: Net sales to Hospira in the first half of 2004
were $24,480,000, as compared with net sales of $34,751,000 in the first half of
2003. Net sales of CLAVE Products to Hospira, excluding custom CLAVE I.V.
systems decreased to $16,360,000 in the first half of 2004 from $27,697,000 in
the first half of 2003 principally due to a decrease in unit volume as Hospira
reduced its inventory of CLAVE products and in part because there was nothing
comparable in 2004 to the deferment of approximately $4,000,000 of CLAVE orders
to the first quarter of 2003. We believe Hospira's unit sales to their customers
have increased. Sales to Hospira under the SetSource program approximated
$5,798,000 in the first half of 2004 as compared with $4,448,000 in the first
half of 2003 on increased unit volume.
Net sales to independent domestic distributors increased approximately
$760,000, or 7%, from $11,418,200 in the first half of 2003 to $12,178,000.
Independent domestic distributors had a 7%, or $165,000, increase in CLAVE
product sales principally because of an increase in unit volume. Custom I.V.
system sales increased 31% from approximately $4,683,000 to approximately
$6,119,000 (this includes all custom I.V. systems, including custom I.V. systems
that include CLAVE connectors). The increase in sales of custom I.V. systems was
attributable to an increase in unit volume. These increases were partially
offset by a $668,000, or 21%, decrease in sales of Punctur-Guard products due to
a decrease in unit sales and to pricing concessions on our Punctur-Guard line of
products to achieve wider distribution; and, a decrease in sales of CLC2000 of
35% on lower unit volume. As part of our program to increase sales of custom
I.V. systems, we have been encouraging customers to purchase custom I.V. systems
that include CLAVE connectors, rather than purchasing only the CLAVE connectors.
This continues to contribute to the increase in sales in custom I.V. systems
including one or more CLAVEs. Sales of custom I.V. systems including one or more
CLAVE connectors and CLAVE products combined were $5,287,000 in the first half
of 2003 as compared with $6,462,000 in the first half of 2004.
Net sales to international distributors (excluding Canada) were
$4,827,000 in the first half of 2004, as compared with $1,820,000 in the first
half of 2003. The increase was principally due to a $2,120,000 increase in CLAVE
product sales and an $845,000 increase in custom I.V. set sales. In 2003, we
experienced a slowing of distributor orders while they reduced CLAVE inventory
levels. Orders in most areas of the world have returned to more normal levels,
18
and this and expansion of our business accounted for the increase in CLAVE
sales. The increase in sales of custom I.V. systems was attributable to an
increase in unit volume.
PRODUCT AND OTHER REVENUE: Net sales of CLAVE Products (excluding
custom CLAVE I.V. systems) decreased from $31,054,000 in the first half of 2003
to $21,956,000 in the first half of 2004, or 29%. CLAVE product sales to Hospira
decreased $11,337,000, as Hospira reduced its inventory of CLAVE products. That
decrease was partially offset by increases in CLAVE product sales to independent
domestic and international distributors.
Net sales of custom and generic I.V. systems increased approximately
$3,902,000, or 41%, to $13,415,000 in the first half of 2004 over the first half
of 2003. The SetSource program with Hospira accounted for about $1,350,000 of
the increase, and domestic distributors accounted for $1,436,000, and
international distributors accounted for the remaining increase. Unit volume
accounted for the majority of the increase. 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 $2,236,000 in the first half of 2004, as compared
with approximately $1,437,000 in the first half of 2003. Sales of custom I.V.
systems including one or more CLAVE connectors and CLAVE products combined were
$31,268,000,000 in the first half of 2004 as compared with $37,475,000 in the
first half of 2003. The decrease was attributable to a decrease in Hospira's
purchase of CLAVE products partially offset by increases in CLAVE product sales
in all other channels and increases in sales of custom I.V. systems including
one or more CLAVE in all channels.
Net sales of Punctur-Guard products (excluding royalties) were
$2,651,000 in the first half of 2004 as compared to $3,352,000 in the first half
of 2003 due to a decrease in unit sales and to pricing concessions on our
Punctur-Guard line of products to achieve wider distribution.
Net sales of CLC2000 in the first half of 2004 changed less than 1%
from the first half of 2003.
Other revenue consists of non-product revenue and was $1,436,000 in the
first half of 2004 compared to $3,056,000 in the first half of 2003. The
principal ongoing components are royalties received for other companies' use of
Punctur-Guard technology, SafeLine revenue share payments from B. Braun and
payments under another license of approximately $235,000 per quarter for four
years starting in the first quarter of 2004. These ongoing components account
for all of our other revenue in 2004. In the second quarter of 2003, we did not
receive the $235,000 payment, but did receive a $988,000 initial payment on a
license to use certain of our products.
GROSS MARGIN, calculated on net sales and excluding other revenue, was
54% for the first six months of 2004, the same as during the first six months of
2003. The factors impacting our gross margin for the first half of the year are
essentially the same as for the second quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") increased by
$628,000 to $12,258,000, and were 28% of revenues in the first half of 2004, as
compared with 22% in the first half of 2003 on higher revenue. The factors
impacting SG&A costs for the first half of the year are increased corporate
administrative costs, and integration and administrative costs related to our
operation in Italy, partially offset by the elimination of administrative costs
related to Bio-Plexus and lower patent litigation costs.
RESEARCH AND DEVELOPMENT EXPENSES ("R&D") decreased in the first half
of 2004 by $154,000 to $854,000, and were approximately 2% of revenues in the
first half of 2004 and higher revenue of 2003. The factors impacting R&D costs
for the first half of the year are essentially the same as for the second
quarter.
19
INCOME FROM OPERATIONS decreased $5,877,000, or 34%, principally
because of the decrease in net revenue; the resulting decrease in the gross
margin and the growth in operating expenses. The operating margin was 26% of
revenues in the first half of 2004 and 33% in the first half of 2003.
INVESTMENT INCOME increased $138,000, or 24%, as compared with the
first half of 2003, because of an increase in invested funds (including finance
loans) and a slight increase in overall yield.
INCOME TAXES were accrued at an effective tax rate of 37.5% in the
first half of 2004 as compared to 38.4% in the first half of 2003.
NET INCOME decreased $3,419,000, or 31%, to $7,550,000 as compared with
$10,969,000 for the first six months of 2003. NET INCOME PER SHARE - diluted
decreased 31% to $0.50 per share in the first six months of 2004 as compared
with $0.72 for the first six months of 2003 on a relatively same number of
shares.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the first half of 2004, our working capital increased
$14,224,000 to $117,156,000 from $102,932,000 at December 31, 2003. The increase
was principally due to cash generated by operations, cash received from employee
equity plans and a reduction in finance loans which was partially offset by
investment in property and equipment. Our cash and cash equivalents and
investment securities position increased during the six months ended June 30,
2004 by $18,773,000 to $91,910,000 from $73,137,000 at December 31, 2003. This
is because the aggregate of cash provided by operating activities (including tax
benefits from exercise of stock options) of $16,227,000, cash provided by the
company's employee equity plans of $2,860,000 and net receipts of $1,958,000
under finance loans exceeded the purchase of property and equipment of
$2,272,000.
OPERATING ACTIVITIES: Our cash provided by operating activities tends
to increase over time because of increases in our net income. However, it is
subject to fluctuations, principally from changes in accounts receivable,
inventories, current liabilities, investments in capital equipment and tax
benefits from exercise of stock options.
Normally the substantial majority of our accounts receivable are
current or no more than thirty days past due. In recent years, the majority of
each quarter's sales have been in that last half of the quarter with the result
that the amount of accounts receivable reported as of the end of each quarter
tends to be higher than the amounts at other times during a quarter.
Accounts receivable decreased from $24,943,000 at December 31, 2003 to
$16,217,000 at June 30, 2004, or 35%; the decrease was principally because
revenue in the second quarter of 2004 was 27% less than revenue in the fourth
quarter of 2003.
We generally try to maintain a minimal amount of inventory of finished
goods and work in process, but will maintain larger amounts of components
(classified as raw material) acquired from third parties to avoid production
delays if deliveries by our suppliers are late. However, in order to avoid
production inefficiencies caused by fluctuating production levels, we have begun
to level out our production volumes and build finished goods of our standard
(non-custom) products to meet anticipated future orders. Because of Hospira's
decision to reduce their inventory levels we expect to reduce production in the
second half of 2004.
Inventories increased $6,006,000 from $3,398,000 at December 31, 2003
to $9,404,000 at June 30, 2004 principally because of our decision to increase
our production volumes beyond current orders and increase our finished goods
inventories in anticipation of higher revenues for the second half of 2004 which
we now believe will be less than originally anticipated. This caused our
finished good inventory to increase in the first half of 2004, but we expect
finished good inventories to begin to return to levels in line with anticipated
sales.
20
Our current liabilities tend to fluctuate based on the timing of when
liabilities are incurred and paid. The largest single source of fluctuation has
been income tax liabilities, and those fluctuations are generally a function of
the timing and amount of estimated tax payments in relation to actual tax
liabilities.
The tax benefits from the exercise of stock options, which we believe
is more properly related to the sale of our stock which is a financing activity,
fluctuates based principally on when employees choose to exercise their vested
stock options. Tax benefits from the exercise of stock options in the first half
of 2004 were $1,913,000 on the exercise of options to acquire 224,811 shares as
compared to $186,000 in the first half of 2003 on the exercise of options to
acquire 32,064 shares.
We expect that sales of certain products will grow in the second half
of 2004. If sales increase, accounts receivable are expected to increase as
well. As a result of these and other factors, we expect the use of working
capital to fund our operations to continue to increase.
INVESTING ACTIVITIES: During the first half of 2004 we used cash of
$17,614,000 in investing activities, comprised primarily of the purchase of
liquid investments of $17,300,000 utilizing cash generated by operations in
excess of other investing needs and the net cash receipt of $1,958,000 in
finance loans.
Capital expenditures were at a relatively high rate in 2003,
principally because of our expansion in Mexico, including an electron-beam
sterilizer, and investment in molds, molding equipment, automated assembly
equipment, computers and software.
Upon completing an evaluation of the design and capacity of our
manufacturing facilities, we estimate that our current facilities will be
adequate for our business as it currently exists through 2004, but that
production after 2004 may require additional 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.
Capital expenditures in the first half of 2004 were $2,272,000
principally to maintain capacity. We currently estimate that capital
expenditures for the remainder 2004 will be approximately $3,700,000, bringing
the year total to approximately $6,000,000 and will be paid from cash we
generate from operations. We expect the $6 million will be spent on molds,
molding equipment and automated assembly equipment, computers and software to
maintain current capacity including targeted growth for 2004. Of those amounts,
approximately $750,000 was committed under contracts at June 30, 2004, and we
expect to commit the balance in 2004. Amounts of spending are estimates and
actual spending may substantially differ from those amounts.
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 healthcare entities
and are fully secured by real and personal property. At June 30, 2004, it had
$6,949,000 in loans outstanding. Scheduled maturities are: remainder of 2004
$2,122,000; 2005 $1,235,000; 2006 $1,165,000; 2007 $1,157,000 and 2008
$1,270,000. Weighted average maturity (principal and interest) at June 30, 2004
was 1.5 years and the weighted average interest rate was 5.3%. In October 2003,
we discontinued new lending activities. We will honor existing lending
commitments. The maximum that can be borrowed under all commitments, including
amounts outstanding, was approximately $7,052,000 at June 30, 2004. This is down
from almost $13,000,000 at the end of the fourth quarter 2003 primarily due to
the expiration or reduction of lending agreements.
21
FINANCING ACTIVITIES: Cash provided by stock options and the employee
stock purchase plan, including tax benefits, was $4,773,000 in the first half of
2004 as compared to $930,000 in the first half of 2003: options were exercised
on 224,811 shares in the first half of 2004 as compared with 32,064 in the first
half of 2003.
We spent $10,313,000 to acquire shares of our common stock in the first
half of 2003, but did not acquire any shares in the first half of 2004. We may
purchase our shares in the future. However, future purchases of our common
stock, if any, will depend on market conditions and other factors.
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, as further described in Item 3. Quantitative and
Qualitative Disclosures about Market Risk, our liquid investments have very
little credit risk or market risk. We currently believe that our existing cash
and liquid investments along with funds expected to be generated from future
operations will provide us with sufficient funds to finance our current
operations for the next twelve months.
OFF BALANCE SHEET ARRANGEMENTS
In the normal course of business, we have agreed to indemnify officers
and directors of the Company to the maximum extent permitted under Delaware law
and to indemnify customers as to certain intellectual property matters related
to sales of our products. There is no maximum limit on the indemnification that
may be required under these agreements. We have never incurred, nor do we expect
to incur, any liability for indemnification. Except for indemnification
agreements, we do not have any "off balance sheet arrangements".
CONTRACTUAL OBLIGATIONS
We have the following contractual obligations of approximately the
following amounts. These amounts exclude purchase orders for goods and services
for current delivery; we do not have any long-term purchase commitments for such
items.
Payments due: less than 1 year
Total from June 30, 2004
----- ------------------
Property and equipment $750,000 $750,000
======== ========
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 "believe," "expect," "estimate," "plan," "will," "continue,"
"could," may," 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 future expenditures on sales and marketing and product
development, sales and unit volumes of products, future license, royalty
and revenue share income, production costs, gross margins, SG&A, and R&D
expense, new product introductions, changes in working capital items such
as receivables and inventory, selling prices and income taxes;
22
o factors affecting operating results, such as shipments to specific
customers, expansion in international markets, selling prices, the market
shift to needleless technology, future increases or decreases in sales of
certain products and in certain markets and distribution channels, impact
of safety legislation, increases in systems capabilities, introduction and
sales of new products, manufacturing efficiencies, unit manufacturing
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 and fluctuations in quarterly
results, customer ordering patterns and warranty claims, rebates and
returns;
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, effect of contract amendments with Hospira,
ability to replace distributors, and the outcome of our strategic
initiatives;
o regulatory approval and outcome of litigation; competitive and market
factors, including continuing development of competing products by other
manufacturers, the impact of Cardinal's acquisition of Alaris,
consolidation of the healthcare provider market and downward pressure on
selling prices; and working capital requirements, changes in accounts
receivable and inventories, current liabilities, capital expenditures,
acquisitions of other businesses or product lines, indemnification
liabilities, contractual liabilities 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.
23
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; they are readily saleable at par at auction dates, and
can normally be sold at par between auction dates.
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.
At June 30, 2004 we had outstanding commercial loans of approximately
$6,949,000. Loans are made only to credit worthy parties and are fully secured
by real and personal property. 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 1.5 years. Because of the relatively small
amount of the commercial loans, market risk is not significant to our financial
statements.
We do not have any significant foreign currency exchange risk. Sales
from the U.S. to foreign distributors are all denominated in U.S. dollars. Cash
and receivables in entities outside the United States, principally in Mexico and
Italy, which are denominated in foreign currency are insignificant and are
generally offset by accounts payable in the same foreign currency. Translation
adjustments to date have not been significant.
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) as of the end of the period covered by 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.
24
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 infringes ICU's patent by the
manufacture and sale of its UltraSite medical connector. On December 30, 2003,
we were awarded an additional patent and on December 30, 2003 we filed an
additional action against B. Braun for patent infringement and moved to amend
the 2001 action to include that allegation. The 2001 action has since been
amended to include our claim of infringement of the additional patent. 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
In an action filed June 16, 2004 entitled ICU MEDICAL, INC. V. ALARIS
MEDICAL SYSTEMS, INC. pending in the United States District Court for the
Central District of California, we allege that Alaris Medical Systems, Inc.
infringes ICU's patent in the manufacture and sale of the SmartSite and
SmartSite Plus Needle-Free Valves and Systems. We seek monetary damages and
injunctive relief and intend to vigorously pursue this matter. On August 2, 2004
the Court denied our request for a preliminary injunction. 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
- ------------------------------------------------------------
The following is a description of matters submitted to a vote of our
stockholders at our annual Meeting of Stockholders held on May 28, 2004:
A. George A Lopez, M.D. and Robert S. Swinney, M.D. were elected
as directors to hold office until the 2007 Annual Meeting.
Votes cast for and withheld with respect to the nominee were
as follows:
VOTES FOR VOTES WITHHELD
--------- --------------
George A. Lopez, M.D. 11,881,743 243,030
Robert S. Swinney, M.D. 11,632,548 492,225
The terms of the following directors were continued after the
Annual Meeting: Jack W. Brown, John J. Connors, Michael T.
Kovalchik, III, M.D., Joseph R. Saucedo, and Richard H.
Sherman, M.D.
25
B. 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
---------- -------- ------- ---------------
12,106,237 10,698 7,838 -0-
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 Report on Form 8-K during the quarter for
which this Report is filed:
Items 9 and 7 - June 16, 2004
Items 9 and 7 - June 25, 2004
26
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 3, 2004
- ---------------------
Francis J. O'Brien
Chief Financial Officer
(Principal Financial Officer)
/s/Scott E. Lamb Date: August 3, 2004
- ----------------
Scott E. Lamb
Controller
(Principal Accounting Officer)
27