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ICUI > SEC Filings for ICUI > Form 10-Q on 25-Jul-2013All Recent SEC Filings

Show all filings for ICU MEDICAL INC/DE

Form 10-Q for ICU MEDICAL INC/DE


25-Jul-2013

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 and patients from exposure to infectious diseases or hazardous drugs and monitoring continuous cardiac output of critical care patients. Our complete product line includes custom infusion systems, closed delivery systems for 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 37% of our revenues in 2012 and 36% of our revenues in the first half of 2013.

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. We recently introduced the Neutron, a catheter patency device using Clave technology, the NanoClave, a smaller Clave product
designed for neonatal and pediatric patients, CardioFlo Hemodynamic Monitoring Sensor System, a minimally invasive


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monitoring sensor for use on critical care patients and the Diana Hazardous Drug Compounding System, an automated sterile compounding system for preparing hazardous drugs. 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 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 ?MicroClave/ MicroClave Clear ?Anti-Microbial MicroClave ?Neutron ?Clave ?NanoClave ?Y-Clave ?Anti-Microbial Clave
•Custom infusion sets

Critical Care
•Hemodynamic monitoring systems ?Transpac disposable pressure transducers ?SAFESET closed needlefree blood conservation systems ?CardioFlo hemodynamic monitoring sensor system ?Custom monitoring systems
•Catheters ?Advanced sensor catheters ?Pulmonary artery thermodilution catheters ?Central venous oximetry catheters ?Multi-lumen central venous catheters
•Custom angiography and interventional radiology kits Oncology
•ChemoClave closed system transfer device including:
?Genie closed vial access device
?Spiros closed male luer
?Vial and bag access devices
•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 40% and 42% of our worldwide revenues in the first six months of 2013 and each of the years ended 2012 and 2011, 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. 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.


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Revenues for the first six months of 2013 and the years ended 2012 and 2011 were $153.0 million, $316.9 million and $302.2 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 sterile, bulk, non-sterile connectors and oncology products. 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 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 June 30,       Six months ended June 30,         Fiscal year ended
Product line                 2013              2012            2013             2012          2012           2011
 Clave products                 37 %              35 %            36 %              36 %         37 %           36 %
 Custom infusion
therapy                         28 %              27 %            28 %              26 %         27 %           25 %
 Other infusion
therapy                          3 %               5 %             4 %               5 %          4 %            5 %
Infusion therapy                68 %              67 %            68 %              67 %         68 %           66 %
Critical care                   16 %              20 %            17 %              19 %         17 %           20 %
Oncology                        12 %               9 %            11 %               9 %         10 %            8 %
 TEGO                            3 %               3 %             3 %               3 %          3 %            3 %
 Other products/other
revenue                          1 %               1 %             1 %               2 %          2 %            3 %
Other                            4 %               4 %             4 %               5 %          5 %            6 %
                               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 June 30,       Six months ended June 30,         Fiscal year ended
Channel                         2013              2012            2013             2012          2012           2011
Medical product
manufacturers                      37 %              37 %            36 %              38 %         40 %           39 %
Domestic
distributors/direct sales          35 %              36 %            35 %              35 %         35 %           35 %
International customers            28 %              27 %            29 %              27 %         25 %           26 %
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 six months ended June 30, 2013 and 2012
and the year ended December 31, 2012, the percentages of each income statement
caption in relation to total revenues.

                                                                Percentage of revenues
                                      Three months ended June 30,       Six months ended June 30,      Fiscal year
                                        2013              2012            2013             2012           2012
Total revenues                            100 %             100 %           100 %             100 %         100 %
Gross margin                               48 %              51 %            49 %              48 %          49 %
Selling, general and
administrative expenses                    29 %              29 %            30 %              28 %          27 %
Research and development expenses           5 %               4 %             4 %               4 %           3 %
Total operating expenses                   34 %              33 %            34 %              32 %          30 %
Income from operations                     14 %              18 %            15 %              16 %          19 %
Other income                                - %               - %             - %               - %           - %
Income before income taxes                 14 %              18 %            15 %              16 %          19 %
Income taxes                                5 %               6 %             5 %               5 %           6 %
Net income                                  9 %              12 %            10 %              11 %          13 %

Quarter Ended June 30, 2013 Compared to the Quarter Ended June 30, 2012

Revenues were $78.7 million in the second quarter of 2013, compared to $77.3 million in the second quarter of 2012.

Domestic sales: Net domestic sales in the second quarter of 2013 were $57.0 million, compared to net domestic sales of $56.5 million in second quarter of 2012, an increase of 1%.


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Net domestic sales to Hospira were $28.3 million in the second quarter of 2013, compared to $27.2 million in the second quarter of 2012, an increase of 4%. Infusion therapy sales increased $0.9 million in the second quarter of 2013 from the second quarter of 2012. Oncology sales increased $0.3 million in the second quarter of 2013 from the second quarter of 2012. The increase in infusion therapy was from $2.1 million in higher Clave product unit sales, primarily from Hospira, partially offset by lower custom infusion and other infusion therapy product sales.

Net other domestic sales (excluding Hospira) in the second quarter of 2013 were $28.7 million, a decrease of $0.7 million, or 2%, from the second quarter of 2012. Infusion therapy sales increased $0.8 million, or 6%, from the second quarter of 2012, which was primarily from an increase in custom infusion set sales due to increased unit sales. Oncology sales increased $0.5 million, or 34%, from the second quarter of 2012. The increased oncology sales were due to increased unit sales from increased market share and demographic growth. Critical care sales decreased $2.1 million, or 18%, from the second quarter of 2012. The critical care decrease was due to lower unit sales, primarily from continued competition in this market. We expect modest increases in other domestic sales (excluding Hospira) in 2013 compared to 2012, 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 $21.6 million in the second quarter of 2013, an increase of $0.9 million, or 4%, from the second quarter of 2012. Infusion therapy sales decreased $0.1 million, or 1%, from the second quarter of 2012. Oncology sales increased $1.4 million, or 36% from the second quarter of 2012. Critical care sales decreased $0.9 million, or 22% from the second quarter of 2012. Other product sales increased $0.5 million, or 82% from the second quarter of 2012. The increase in oncology sales was primarily from increased unit sales in Europe. The decrease in critical care was from lower unit sales inside and outside of Europe. The increase in other product sales were primarily from increased Tego sales inside and outside of Europe.

Geographically, our second quarter of 2013 international sales were primarily in Europe, the Pacific Rim, Latin American and Canada. The increase in international sales was primarily attributable to $1.8 million increased sales in Europe, partially offset by $0.6 million of lower sales in Latin America. 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 $53.1 million in the second quarter of 2013, an increase of $1.7 million, or 3%, from the second quarter of 2012. The increases in infusion therapy were primarily from $1.9 million in higher Clave product sales and $1.2 million in increased custom infusion set sales, partially offset by lower other infusion product sales. The increase in Clave product sales was primarily from higher domestic sales to Hospira. The increase in custom infusion set sales was from higher domestic sales to distributors and through direct sales and from higher sales in Europe. We expect modest increases in infusion therapy sales in 2013 compared to 2012, primarily from higher sales in Clave products and custom infusion set sales. There is no assurance, however, that these expectations will be realized.

Net critical care sales were $12.7 million in the second quarter of 2013, a decrease of $3.0 million, or 19%, from the second quarter of 2012. The decrease was primarily from lower domestic unit sales from continued competition. We expect critical care sales to decrease in 2013 compared to 2012 from increased competition, although there is no assurance that these expectations will be realized.

Net oncology sales were $9.4 million in the second quarter of 2013, an increase of $2.3 million, or 32%, from the second quarter of 2012. The increase was from higher sales in all channels. We expect growth in oncology sales in 2013 compared to 2012, although there is no assurance that these expectations will be realized.

Net other product sales were $3.4 million in the second quarter of 2013, an increase of $0.4 million, or 16%, from the second quarter of 2012. The increase is primarily from higher Tego unit sales

Other revenue consists of license, royalty and revenue share income and was approximately $0.1 million in the second quarters of 2013 and 2012.

Gross margins for the second quarters of 2013 and 2012 were 48% and 51%, respectively. Manufacturing inefficiencies and unfavorable exchange rate changes on the Peso contributed to approximately three percentage points of the gross margin decrease and were partially offset by a favorable product mix.

Selling, general and administrative expenses ("SG&A") were $23.2 million, or 29% of revenues, in the second quarter of 2013, compared with $22.8 million, or 29%, of revenues in second quarter of 2012. The new medical device excise


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tax, which became effective in 2013, contributed $0.4 million to our 2013 SG&A expenses. We expect SG&A expenses in 2013 to be approximately 28% of revenue, although there is no assurance that these expectations will be realized.

Research and development expenses ("R&D") were $3.9 million, or 5% of revenue, in the second quarter of 2013 compared to $2.7 million, or 4%, of revenue in the second quarter of 2012. 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 2013 to be approximately 3% of revenue, although there is no assurance that these expectations will be realized.

Other income was $0.2 million in the second quarter of 2013 and $0.1 million in the second quarter of 2012.

Income taxes were accrued at an estimated effective tax rate of 34% in the second quarter of 2013 and 33% in the second quarter of 2012. 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 2013, including discrete tax items.

Six Months Ended June 30, 2013 Compared to the Six Months Ended June 30, 2012

Revenues were $153.0 million in the first six months of 2013, compared to $152.8 million in the first six months of 2012.

Domestic sales: Net domestic sales in the first six months of 2013 were $109.0 million, compared to net domestic sales of $112.2 million in the first six months of 2012, a decrease of 3%.

Net domestic sales to Hospira in the first six months of 2013 were $53.3 million, a decrease of $2.7 million, or 5%, from the first six months of 2012. The decrease was primarily from infusion therapy unit sales which decreased $3.1 million from the first six months of 2012. The decrease in infusion therapy was primarily from $2.0 million in lower Clave product unit sales and $0.5 million in lower custom infusion set unit sales. The decrease in infusion therapy was primarily from Hospira's planned reduction in Clave shipments in the first quarter of 2013. Hospira's planned reduction in the first quarter of 2013 was to achieve carrying lower levels of inventory. Oncology sales increased $0.5 million. The increase in oncology sales was from higher unit sales.

Net other domestic sales (excluding Hospira) in the first six months of 2013 were $55.6 million, a decrease of $0.6 million, or 1%, from the first six months of 2012. Infusion therapy sales increased $2.3 million, or 9%, from the first six months of 2012, which was primarily from a $2.0 million increase in custom infusion set sales, due to increased unit sales. Critical care sales decreased $3.0 million, or 14%, from the first six months of 2012. The critical care decrease was primarily from increased competition in this market. Oncology sales increased $0.9 million, or 30%, from the first six months of 2012 due to higher unit sales.

International sales: Net sales to international customers were $44.0 million in the first six months of 2013, an increase of $3.4 million, or 8%, from the first six months of 2012. Infusion therapy sales increased $2.0 million, or 8%, from the first six months of 2012, which was primarily from a $1.2 million increase in Clave product sales and a $1.8 million increase in custom infusion set sales, partially offset by $0.9 million in lower other infusion product sales. Oncology sales increased $2.6 million from the first six months of 2012. Critical care sales decreased $1.0 million from the first six months of 2012. Other product sales decreased $0.2 million. The increases in infusion therapy and oncology sales were from increased unit sales due to increased market share and demographic growth. The decrease in critical care sales was primarily from increased competition in this market. In other product sales, renal product sales increased $0.6 million from the first six months of 2012. Sales from our former diabetes product line, Orbit, were $0.6 million lower from the first six months of 2012. The Orbit product line was sold in November 2011 and Orbit sales concluded in the first quarter of 2012.

Geographically, our first six months of 2013 international sales were primarily in Europe, the Pacific Rim, Latin America and Canada. The increase in international sales was primarily attributable to increased sales of $2.6 million in Europe and $0.5 million in Canada.

Sales by market segment and other revenue: Net infusion therapy sales were $103.6 million in the first six months of 2013, an increase of $1.1 million, or 1%, from the first six months of 2012. The increases in infusion therapy were primarily from $3.4 million in increased custom infusion set sales, partially offset by $0.6 million in lower Clave sales and $1.6 million in lower other infusion product sales. The increase in custom infusion set sales was from higher domestic sales to distributors


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and through direct sales and higher international sales. The decrease in Clave product sales was from lower sales to Hospira, partially offset by higher sales to domestic distributors and direct customers and to international customers. The decrease in other infusion therapy sales was due to lower unit sales to Hospira in the U.S. and international sales.

Net critical care sales were $25.4 million in the first six months of 2013, a decrease of $4.0 million, or 14%, from the first six months of 2012. The decrease was from lower domestic and international sales from increased competition.

Net oncology sales were $17.5 million in the first six months of 2013, an increase of $4.0 million, or 30%, from the first six months of 2012. The . . .

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