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ICUI > SEC Filings for ICUI > Form 10-Q on 19-Oct-2012All Recent SEC Filings

Show all filings for ICU MEDICAL INC/DE

Form 10-Q for ICU MEDICAL INC/DE


19-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

We are a leader in the development, manufacture and sale of innovative medical devices used in infusion therapy, oncology and critical care applications. Our products improve patient outcomes by helping to prevent bloodstream infections and protect healthcare workers from exposure to needlestick injuries and hazardous drugs. Our critical care devices are used for monitoring continuous cardiac output, oxygen saturation and other key parameters used to diagnose and treat critical care patients. Our product lines include custom infusion and monitoring systems, closed systems for the preparation and delivery of hazardous drugs, needlefree infusion connectors, catheters and cardiac monitoring systems.

Business Overview

In the early 1990's, we launched the CLAVE, an innovative one-piece, needlefree infusion connection device. The CLAVE is a worldwide leader in connector products. The CLAVE's unique design ensures compliance with needlefree policies because of its passive technology which cannot accept a needle. Our CLAVE products accounted for 36% of our revenues in 2011.

In the late 1990s, we commenced a transition from a product-centered company to an innovative, fast, efficient, low-cost manufacturer of custom infusion sets, using processes that we believe can be readily applied to a variety of disposable medical devices. This strategy has enabled us to capture revenue on the entire infusion delivery system, and not just a component of the system. We have furthered this effort to include all of our proprietary devices beyond the CLAVE.

One of our strategies has been to acquire new product lines. For example, in August 2009, we purchased the commercial rights and physical assets of Hospira's critical care product line, which resulted in our control over all aspects of the critical care product line, including production, sales, marketing, customer contracting and distribution. We had previously manufactured for sale, exclusively to Hospira, the critical care products. Pursuant to the prior arrangements, Hospira retained commercial responsibility for the products that we manufactured, including sales to end customers, marketing, pricing, distribution, customer contracts, customer service and billing, and we had little ability to directly influence Hospira's sales and marketing efforts, and our sales under this arrangement were subject to fluctuations over which we had little control. The purchase of Hospira's critical care line has resulted in an increase in direct sales and sales to independent distributors but a decrease in sales to Hospira. There is no assurance that we will be successful in finding future acquisition opportunities or integrating new product lines into our existing business.

Another strategy for reducing our dependence on our current proprietary products has been to introduce new products. In 2007 and 2008, we introduced a line of oncology products including the Spiros male lure connector device, the Genie vial access device and ancillary products specifically designed for chemotherapy. In 2011, we introduced Neutron, a needlefree catheter patency device and Diana, a hazardous drug compounding system. We can provide no assurance that we will be able to successfully manufacture, market and sell these new products.

We are also expanding our business through increased sales to medical product manufacturers, independent distributors and through direct sales to the end users of our product. These expansions include our 2008 agreement with


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Premier, the extension of the term of our agreement with MedAssets, our 2011 agreement with Novation covering all of our critical care products and the growth of our internal sales and marketing group. Each of these organizations is a U.S. healthcare purchasing network. We also potentially face substantial increases in competition in our CLAVE business. Therefore, we are focusing on increasing product development, acquisition, sales and marketing efforts to custom infusion systems, oncology products, critical care products and other products that lend themselves to customization and new products in the U.S. and international markets.

Our products are used in hospitals and alternate medical sites in more than 50 countries throughout the world. We categorize our products into three main product lines: Infusion Therapy, Critical Care and Oncology. Products outside of our main product lines are grouped under the heading titled "Other" below. Our primary products include:

Infusion Therapy
•Needlefree connector products ?CLAVE
?MicroCLAVE/ MicroCLAVE Clear
?Y-CLAVE
?Anti-Microbial CLAVE ?Anti-Microbial MicroCLAVE ?Neutron
•Custom infusion sets

Critical Care
•Hemodynamic monitoring systems ?Transpac disposable pressure transducers ?SAFESET closed needlefree blood conservation systems ?Custom monitoring systems
•Catheters ?Advanced sensor catheters ?Pulmonary artery thermodilution catheters ?Multi-lumen central venous catheters
•Custom angiography and interventional radiology kits Oncology
•Vial and bag access devices
•Genie closed vial access device
•Spiros closed male luer
•Custom preparation and administration sets and accessories
•Diana - hazardous drug compounding system Other
•TEGO needlefree hemodialysis connector
•Lopez enteral valve

Our largest customer is Hospira. Hospira accounted for 41%, 42% and 44% of our worldwide revenues in the first nine months of 2012 and the years ended 2011 and 2010, respectively. Our relationship with Hospira has been and will continue to be important for our growth. We currently manufacture custom I.V. sets for sale by Hospira and jointly promote the products under the name SetSource. Additionally, as discussed above, prior to our acquisition of its critical care line, we previously manufactured Hospira's critical care products. We expect revenues from sales of CLAVE products, custom infusion sets and new products to Hospira to remain a significant percentage of our revenues. Hospira has a significant share of the I.V. set market in the U.S. and provides us access to that market, and we expect that Hospira will continue to be important to our growth for CLAVE, custom infusion sets and our other products worldwide.

Revenues for the first nine months of 2012 and the years ended 2011 and 2010 were $234.2 million, $302.2 million and $283.0 million, respectively. We currently sell substantially all of our products to medical product manufacturers, independent distributors and through direct sales to the end user. Most of our independent distributors handle the full line of our infusion administration products. We sell our I.V. administration and oncology products under two agreements with Hospira. Under a 1995 agreement, Hospira purchases CLAVE products, principally bulk, non-sterile connectors, oncology products and the CLC2000. Pursuant to a 2001 agreement, we sell custom infusion sets to Hospira under a program referred to as SetSource. Our 1995 and 2001 agreements with Hospira provide Hospira with conditional exclusive and nonexclusive rights to distribute all existing ICU Medical products worldwide with terms that extend through 2018. We sell invasive monitoring


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and angiography products to independent distributors and through direct sales. 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, the success of our products will depend, in part, on our ability, either independently or through strategic relationships such as our Hospira relationship, to secure long-term 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.

We believe that achievement of our growth objectives worldwide will require increased efforts by us in sales and marketing and product development; however, there is no assurance that we will be successful in implementing our growth strategy. The custom products market is small, when compared to the larger market of standard products, and we could encounter customer resistance to custom products. Further, we could encounter increased competition as other companies see opportunity in this market. Product development or acquisition efforts may not succeed, and, even if we do develop or acquire additional 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 these risks, there are certain risks that may be outside of our control, and there is no assurance that steps we have taken will succeed.

The following table sets forth, for the periods indicated, total revenues by market segment and its major product groups as a percentage of total revenues:

                            Three months ended September 30,        Nine months ended September 30,         Fiscal year ended
Product line                   2012                  2011               2012                2011           2011           2010
 CLAVE products                   37 %                  37 %               37 %                  35 %         36 %           35 %
 Custom infusion
therapy                           28 %                  24 %               27 %                  25 %         25 %           27 %
 Other infusion
therapy                            5 %                   5 %                4 %                   5 %          5 %            4 %
Infusion therapy                  70 %                  66 %               68 %                  65 %         66 %           66 %
Critical care                     16 %                  19 %               18 %                  21 %         20 %           23 %
Oncology                           9 %                   9 %                9 %                   8 %          8 %            6 %
 TEGO                              3 %                   3 %                3 %                   3 %          3 %            2 %
 Other products/other
revenue                            2 %                   3 %                2 %                   3 %          3 %            3 %
Other                              5 %                   6 %                5 %                   6 %          6 %            5 %
                                 100 %                 100 %              100 %                 100 %        100 %          100 %

We have ongoing efforts to increase systems capabilities, improve manufacturing efficiency, reduce labor costs, reduce time needed to produce an order, and minimize investment in inventory. These efforts include the use of automated assembly equipment for new and existing products and use of larger molds and molding machines. In 2006, we centralized our proprietary molding in Salt Lake City and expanded our production facility in Mexico, which took over the majority of our manual assembly previously done in Salt Lake City. In 2010 and early 2011, we expanded our production facility in Mexico. In late 2010, we completed construction of an assembly plant in Slovakia that serves our European product distribution. We may establish additional production facilities outside the U.S.; however, there is no assurance that we will achieve success in establishing manufacturing facilities outside the U.S.


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We distribute products through three distribution channels. Product revenues for each distribution channel as a percentage of total channel product revenue were as follows:

                               Three months ended September 30,        Nine months ended September 30,         Fiscal year ended
Channel                           2012                  2011               2012                2011           2011           2010
Medical product
manufacturers                        41 %                  41 %               39 %                  39 %         40 %           42 %
Domestic
distributors/direct sales            36 %                  35 %               35 %                  34 %         36 %           35 %
International customers              23 %                  24 %               26 %                  27 %         24 %           23 %
Total                               100 %                 100 %              100 %                 100 %        100 %          100 %

Sales to international customers do not include bulk CLAVE products sold to Hospira in the U.S. but used in I.V. products manufactured by Hospira and exported. Those sales are included in sales to medical product manufacturers. Other sales to Hospira for destinations outside the U.S. are included in sales to international customers.

Seasonality/Quarterly Results

The healthcare business in the United States is subject to quarterly fluctuations due to frequency of illness during the seasons, elective procedures, and, over the last few years, the economy. In Europe, the healthcare business generally slows down in the summer months due to vacations resulting in fewer elective surgeries. Also in Europe, hospitals' budgets tend to finish at the end of the year, which may cause fewer purchases in the last three months of the year as hospitals await their new budgets in January. 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-to-Quarter Comparisons

We present income statement data in Part I, Item 1 - Financial Statements. The
following table shows, for the three and nine months ended September 30, 2012
and 2011 and the year ended December 31, 2011, the percentages of each income
statement caption in relation to total revenues.

                                                                         Percentage of revenues
                                       Three months ended September 30,          Nine months ended September 30,        Fiscal year
                                          2012                  2011              2012                   2011               2011
Total revenues                              100 %                 100 %             100 %                100  %             100  %
Gross margin                                 50 %                  47 %              49 %                 47  %              47  %
Selling, general and
administrative expenses                      25 %                  27 %              27 %                 28  %              28  %
Research and development expenses             3 %                   2 %               4 %                  3  %               3  %
Legal settlement                              - %                   - %               - %                 (1 )%              (1 )%
Gain on sale of assets                        - %                   - %               - %                  -  %              (5 )%
Total operating expenses                     28 %                  29 %              31 %                 30  %              25  %
Income from operations                       22 %                  18 %              18 %                 17  %              22  %
Other income                                  - %                   - %               - %                  1  %               -  %
Income before income taxes                   22 %                  18 %              18 %                 18  %              22  %
Income taxes                                  7 %                   6 %               6 %                  6  %               7  %
Net income                                   15 %                  12 %              12 %                 12  %              15  %

Quarter Ended September 30, 2012 Compared to the Quarter Ended September 30, 2011

Revenues were $81.4 million in the third quarter of 2012, compared to $76.5 million in the third quarter of 2011.


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Domestic sales: Net domestic sales in the third quarter of 2012 were $62.5 million, compared to net domestic sales of $57.9 million in third quarter of 2011, an increase of 8%. Net domestic sales to Hospira accounted for 53% and 52% of our domestic sales in the third quarters of 2012 and 2011, respectively. Domestic sales to distributors, through direct sales, through other OEM and other revenue account for the balance of domestic sales, making up 47% and 48% in the third quarters of 2012 and 2011, respectively.

Net domestic sales to Hospira were $33.1 million in the third quarter of 2012, compared to $30.0 million in the third quarter of 2011, an increase of 10%. Infusion therapy sales increased $2.7 million in the third quarter of 2012 from the third quarter of 2011. Oncology sales increased $0.3 million in the third quarter of 2012 from the third quarter of 2011. The increase in infusion therapy was from $0.9 million in higher CLAVE product unit sales, $1.0 million in higher custom infusion set sales and $0.8 million in higher other infusion therapy unit sales. The increases in sales to Hospira were from higher unit sales from increased market share through Hospira. We expect modest increases in U.S. sales to Hospira in 2012 compared to 2011, primarily from higher infusion therapy and oncology sales, although there is no assurance that these expectations will be realized.

Net other domestic sales (excluding Hospira) in the third quarter of 2012 were $29.4 million, an increase of $1.6 million, or 6%, from the third quarter of 2011. Infusion therapy sales increased $2.8 million, or 23%, from the third quarter of 2011, which was primarily from a $0.8 million increase in CLAVE product sales and a $2.0 million increase in custom infusion set sales. The increased CLAVE and custom infusion set sales were primarily due to increased unit sales. Oncology sales increased $0.3 million, or 26%, from the third quarter of 2011. The increased oncology sales were due to increased unit sales from increased market share and demographic growth. Critical care sales decreased $1.3 million, or 11%, from the third quarter of 2011. The critical care decrease was due to lower unit sales, primarily from increased competition in this market. We expect modest increases in other domestic sales (excluding Hospira) in 2012 compared to 2011, primarily from higher infusion therapy and oncology sales, although there is no assurance that these expectations will be realized.

International sales: Net sales to international customers were $18.9 million in the third quarter of 2012, an increase of $0.3 million, or 2%, from the third quarter of 2011. Infusion therapy sales increased $1.3 million, or 13%, from the third quarter of 2011. Oncology sales in the third quarter of 2012 remained the same compared to oncology sales in the third quarter of 2011. Critical care sales in the third quarter of 2012 decreased $0.4 million from the third quarter of 2011. Other product sales decreased $0.6 million from the third quarter of 2011. The increase in infusion therapy sales was from increased international sales outside of Europe. The decrease in critical care sales was primarily from Europe's soft economy and the weakened Euro to the U.S. dollar. The decrease in other product sales is primarily due to our sale of our former diabetes product line, Orbit, which was sold in November 2011, and consequently there were no sales of this product line in the third quarter of 2012.

Geographically, our international sales were primarily in Europe and the Pacific Rim. The decrease in international sales was primarily attributable to decreased sales in Europe. Our third quarter of 2012 international sales were negatively impacted by an estimated $1.3 million due to the decrease in the exchange rate of the Euro to the U.S. dollar compared to the third quarter of 2011. We expect moderate increases in international sales from higher infusion therapy and oncology sales, partially offset by lower critical care sales, although there is no assurance that these expectations will be realized.

Sales by market segment and other revenue: Net infusion therapy sales were $57.2 million in the third quarter of 2012, an increase of $6.8 million, or 14%, from the third quarter of 2011. The increases in infusion therapy were primarily from $1.8 million in higher CLAVE product sales and $4.8 million in increased custom infusion set sales. The increase in CLAVE product sales was from higher domestic sales to distributors and through direct sales. The increase in custom infusion set sales was from higher sales in all channels. We expect modest increases in infusion therapy sales in 2012 compared to 2011, primarily from higher sales in CLAVE products and custom infusion set sales. There is no assurance that these expectations will be realized.

Net critical care sales were $13.0 million in the third quarter of 2012, a decrease of $1.7 million, or 12%, from the third quarter of 2011. The decrease was from lower domestic and international sales from increased competition. We experienced lower unit sales in certain products and decreased our domestic critical care prices in the middle of 2011 to retain existing customers and attract new customers. We expect critical care sales to decrease in 2012 compared to 2011 because of our price decreases, increased competition and unfavorable exchange rates on the Euro to the U.S. dollar, although there is no assurance that these expectations will be realized.

Net oncology sales were $7.5 million in the third quarter of 2012, an increase of $0.7 million, or 10%, from the third quarter of 2011. The increase was primarily from higher domestic sales. We expect growth in oncology sales in 2012 compared to 2011, although there is no assurance that these expectations will be realized.


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Net other product sales were $3.6 million in the third quarter of 2012, a decrease of $0.9 million, or 19%, from the third quarter of 2011. The decrease is primarily from the sale of our former diabetes product line, Orbit, which was sold in November 2011, and consequently there were no sales of this product line in the third quarter of 2012. Orbit sales in the third quarter of 2011 were $0.7 million. Excluding Orbit, we expect a modest decrease in our other product sales in 2012 compared to 2011, although there is no assurance that these expectations will be realized.

Other revenue consists of license, royalty and revenue share income and was approximately $0.1 million in the third quarters of 2012 and 2011.

Gross margins for the third quarters of 2012 and 2011 were 50% and 47%, respectively. Product mix contributed to two percentage points of the gross margin increase. Favorable exchange rates on the Mexican Peso contributed to one percentage point of the gross margin increase.

Selling, general and administrative expenses ("SG&A") were $20.2 million, or 25% of revenues, in the third quarter of 2012, compared with $20.4 million, or 27%, of revenues in third quarter of 2011. The decrease in SG&A was primarily due to a decrease of $0.5 million in promotion expenses, partially offset by $0.3 million in higher stock compensation expense. We expect SG&A expenses in 2012 to be approximately 26.5% of revenue, although there is no assurance that these expectations will be realized.

Research and development expenses ("R&D") were $3.0 million, or 3% of revenue, in the third quarter of 2012 compared to $1.9 million, or 2%, of revenue in the third quarter of 2011. The increase in R&D expenses was primarily from higher project related R&D expenses supporting all our infusion therapy, critical care and oncology market segments. Our R&D projects focus on filling in product line gaps and product enhancements for our product line target markets and creating additional market opportunities. We expect R&D expenses in 2012 to be approximately 3.6% of revenue, although there is no assurance that these expectations will be realized.

Other income was $0.2 million in the third quarter of 2012 and $0.1 million in the third quarter of 2011.

Income taxes were accrued at an estimated effective tax rate of 31% in the third quarter of 2012 and 31% in the third quarter of 2011. The rate differed from the statutory corporate rate of 35% principally because of the effect of foreign and state income taxes, tax credits, deductions for domestic production activities and discrete tax items. While we can provide no assurances, we expect our effective tax rate to be approximately 33% in 2012.

Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011

Revenues were $234.2 million in the first nine months of 2012, compared to $225.7 million in the first nine months of 2011.

Domestic sales: Net domestic sales in the first nine months of 2012 were $174.7 million, compared to net domestic sales of $165.6 million in the first nine months of 2011, an increase of 6%. Net domestic sales to Hospira accounted for 51% of our domestic sales in the first nine months of 2012 and 2011. Domestic sales to distributors, through direct sales, through other OEM and other revenue account for the balance of domestic sales, making up 49% in the first nine months of 2012 and 2011.

Net domestic sales to Hospira in the first nine months of 2012 were $89.1 million, an increase of $4.1 million, or 5%, from the first nine months of 2011. The increase was primarily from higher infusion therapy unit sales which increased $3.7 million from the first nine months of 2011. The increase in infusion therapy was primarily from $1.8 million in higher CLAVE product unit sales and $1.9 million in higher custom infusion set unit sales, partially offset by lower other infusion therapy unit sales. The increase in CLAVE and custom infusion set sales product sales was from higher unit sales due to conversion of products sold for needlefree connectors and increased market share through Hospira.

Net other domestic sales (excluding Hospira) in the first nine months of 2012 were $85.6 million, an increase of $5.0 million, or 6%, from the first nine months of 2011. Infusion therapy sales increased $6.8 million, or 20%, from the first nine months of 2011, which was primarily from a $3.3 million increase in CLAVE product sales and a $3.4 million increase in custom infusion set sales. The increased CLAVE and custom infusion set sales were primarily due to increased unit sales. Critical care sales decreased $2.9 million, or 8%, from the first nine months of 2011. The critical care decrease was primarily from increased competition in this market that resulted in lower average sales prices and lower unit sales on certain items. Oncology sales increased $1.2 million, or 37%, from the first nine months of 2011 due to higher unit sales.


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