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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2002
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 31, 2002
----- ----------------------------
Common 13,875,126
ICU MEDICAL, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
- ------------------------------ -----------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
Condensed Consolidated Balance Sheets, June 30, 2002 and
December 31, 2001 3
Condensed Consolidated Statements of Income for the three
months ended June 30, 2002 and 2001 4
Condensed Consolidated Statements of Income for the six
months ended June 30, 2002 and 2001 5
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2002 and 2001 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2.
- -------
Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
ITEM 3.
- -------
Quantitative and Qualitative Disclosures About Market Risk 18
PART II - OTHER INFORMATION 18
- ---------------------------
SIGNATURES 20
2
ICU MEDICAL, INC.
Condensed Consolidated Balance Sheets
June 30, 2002 and December 31, 2001
(all dollar amounts in thousands except share data)
ASSETS
6/30/02 12/31/01
---------- ----------
CURRENT ASSETS: (unaudited)
Cash and cash equivalents $ 1,590 $ 3,901
Liquid investments 86,126 69,126
---------- ----------
Cash and liquid investments 87,716 73,027
Accounts receivable, net of allowance for doubtful accounts of $631
and $581 as of June 30, 2002 and December 31, 2001, respectively 16,554 13,062
Inventories 3,399 1,594
Prepaid income taxes 796 -
Prepaid expenses and other 569 605
Deferred income taxes - current portion 2,113 2,113
---------- ----------
Total current assets 111,147 90,401
---------- ----------
PROPERTY AND EQUIPMENT, at cost: 49,458 44,947
Less--Accumulated depreciation (22,294) (19,825)
---------- ----------
Property and equipment, net 27,164 25,122
---------- ----------
DEFERRED INCOME TAXES 963 963
OTHER ASSETS 776 856
---------- ----------
$ 140,050 $ 117,342
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,783 $ 2,401
Accrued liabilities 6,598 8,264
---------- ----------
Total current liabilities 9,381 10,665
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $1.00 par value
Authorized -- 500,000 shares, issued and outstanding -- none - -
Common stock, $0.10 par value-
Authorized -- 80,000,000 shares, issued -- 13,871,376 and 13,300,743
shares at June 30, 2002 and December 31, 2001, respectively 1,387 887
Additional paid-in capital 58,749 45,765
Treasury stock, at cost -- 174,688 shares at December 31, 2001 - (987)
Retained earnings 70,533 61,012
---------- ----------
Total stockholders' equity 130,669 106,677
---------- ----------
$ 140,050 $ 117,342
========== ==========
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 Ended
June 30, 2002 and June 30, 2001 (all
dollar amounts in thousands except per share data)
(unaudited)
For the Three Months Ended
-----------------------------
6/30/02 6/30/01
------------ ------------
NET SALES $ 22,668 $ 16,952
COST OF GOODS SOLD 9,332 6,891
------------ ------------
Gross profit 13,336 10,061
------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 5,416 4,222
Research and development 346 338
------------ ------------
Total operating expenses 5,762 4,560
------------ ------------
Income from operations 7,574 5,501
INVESTMENT INCOME 364 498
------------ ------------
Income before income taxes 7,938 5,999
PROVISION FOR INCOME TAXES 2,940 2,235
------------ ------------
NET INCOME $ 4,998 $ 3,764
============ ============
NET INCOME PER SHARE
Basic $ 0.36 $ 0.29
Diluted $ 0.32 $ 0.26
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 13,854,070 12,776,625
Diluted 15,403,283 14,444,461
============ ============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
ICU MEDICAL, INC.
Condensed Consolidated Statements of Income
For the Six Months Ended
June 30, 2002 and June 30, 2001 (all
dollar amounts in thousands except per share data)
(unaudited)
For the Six Months Ended
-----------------------------
6/30/02 6/30/01
------------ ------------
NET SALES $ 43,573 $ 31,958
COST OF GOODS SOLD 17,888 13,348
------------ ------------
Gross profit 25,685 18,610
------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 10,655 7,603
Research and development 649 631
------------ ------------
Total operating expenses 11,304 8,234
------------ ------------
Income from operations 14,381 10,376
INVESTMENT INCOME 740 1,176
------------ ------------
Income before income taxes 15,121 11,552
PROVISION FOR INCOME TAXES 5,600 4,255
------------ ------------
NET INCOME $ 9,521 $ 7,297
============ ============
NET INCOME PER SHARE
Basic $ 0.70 $ 0.57
Diluted $ 0.62 $ 0.51
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 13,616,595 12,693,619
Diluted 15,234,070 14,274,072
============ ============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
ICU MEDICAL, INC.
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended
June 30, 2002 and June 30, 2001
(all dollar amounts in thousands)
(unaudited)
For the Six Months Ended
------------------------
06/30/02 06/30/01
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 9,521 $ 7,297
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization 2,703 2,374
Net change in current assets and current liabilities, and other (7,342) (1,779)
--------- ---------
4,882 7,892
--------- ---------
Tax benefits from exercise of stock options 7,446 1,415
--------- ---------
Net cash provided by operating activities 12,328 9,307
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,664) (2,290)
Net change in liquid investments (17,000) (7,700)
--------- ---------
Net cash (used in) investing activities (21,664) (9,990)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 7,025 2,092
--------- ---------
Net cash provided by financing activities 7,025 2,092
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,311) 1,409
CASH AND CASH EQUIVALENTS, beginning of the period 3,901 1,945
--------- ---------
CASH AND CASH EQUIVALENTS, end of the period $ 1,590 $ 3,354
========= =========
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, 2002
(All dollar amounts in thousands)
(unaudited)
NOTE 1: The accompanying unaudited interim condensed consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and pursuant to the rules and
regulations of the Securities and Exchange Commission and reflect all
adjustments, which consist of only normal recurring adjustments, which are, in
the opinion of Management, necessary to a fair statement of the consolidated
results for the interim periods presented. Results for the interim period are
not necessarily indicative of results for the full year. Certain information and
footnote disclosures normally included in consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in our 2001 Annual Report to
Stockholders.
NOTE 2: Inventories consisted of the following:
6/30/02 12/31/01
--------- ---------
Raw material $ 2,502 $ 1,290
Work in process 372 179
Finished goods 525 125
--------- ---------
Total $ 3, 399 $ 1,594
========= =========
NOTE 3: Property and equipment, at cost, consisted of the following:
6/30/02 12/31/01
------- --------
Land, building and building improvements $ 13,584 $ 13,584
Machinery and equipment 17,551 15,663
Furniture and fixtures 3,844 3,568
Molds 8,589 8,566
Construction in process 5,890 3,566
---------- ----------
Total $ 49,458 $ 44,947
========== ==========
NOTE 4: Basic net income per share is computed by dividing net income
by the weighted average number of common shares outstanding. Diluted net income
per share is computed by dividing net income by the weighted average number of
common shares outstanding plus dilutive securities. Our dilutive securities are
outstanding common stock options (excluding stock options with an exercise price
in excess of market value), less the number of shares that could have been
purchased with the proceeds from the exercise of the options, using the treasury
stock method, and were 1,549,213 and 1,667,836 for the three months ended June
30, 2002 and June 30, 2001, respectively and 1,617,475 and 1,580,453 for the six
months ended June 30, 2002 and June 30, 2001, respectively. Options that are
antidilutive because their average exercise price exceeded the average market
price of our common stock for the period approximated 100,000 and 50,000 for the
three months ended June 30, 2002 and 2001, respectively, and approximately
200,000 and 75,000 for the six months ended June 30, 2002 and 2001,
respectively. Stock options of subsidiaries did not have a dilutive effect.
7
NOTE 5: The effective tax rate differs from that computed at the
federal statutory rate of 34% principally because of the effect of state income
taxes partially offset by the effect of tax-exempt investment income and state
tax credits.
NOTE 6: The Company had sales equal to ten percent or greater to two
customers, as follows:
Quarter ended June 30, Six Months ended June 30,
---------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Abbott Laboratories 65% 43% 66% 48%
B. Braun Medical Inc. 10% 27% 9% 21%
NOTE 7: We are from time to time involved in various legal
proceedings, either as a defendant or plaintiff, most of which are routine
litigation in the normal course of business. We believe that the resolution of
the legal proceedings in which we are involved will not have a material effect
on our financial position or results of operations.
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 also produce custom I.V. systems that incorporate our
proprietary products and low-cost generic I.V. systems.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
Our significant accounting policies are summarized in Note 1 to the
Consolidated Financial Statements included in our 2001 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 "Quantitative and Qualitative Disclosures about Market Risk" below.
Under our current investment policies, there is no significant difference
between cost and fair value. If our investment policies were to change, and
there were differences between cost and fair value, that difference, net of tax
effect, would be reflected as a separate component of stockholders' equity.
We record sales and related costs upon shipment of products to medical
product manufacturers or distributors. Our customers do not have any right of
return or price protection with respect to unsold product, except that we will
accept return of defective product. Returns, which historically have not been
significant, are estimated and provided for at the time of sale. We provide
price adjustments in the form of rebates to independent distributors in certain
circumstances; they are not payable until the product is resold by the
distributor, but they are accrued based on historical experience at the time we
sell the product to the distributor. All sales are in U.S. dollars.
8
Accounts receivable are stated at net realizable value. An allowance is
provided for estimated collection losses. Loss exposure is principally with
international distributors for whom normal payment terms are long in comparison
to our other customers and, to a lesser extent, domestic distributors. Many of
these distributors are relatively small and we are vulnerable to adverse
developments in their businesses that can hinder our collection of amounts due.
If there are significant doubts as to the collectibility of receivables at the
time of shipment, we defer recognition of the sale in income until the
receivable is collected. If actual collection losses exceed expectations, we
could be required to accrue additional bad debt expense, which could have an
adverse effect on our operating results in the period in which the accrual
occurs.
Inventories are stated at the lower of cost or market. We need to carry
many components to accommodate our rapid product delivery, and if we misestimate
demand or if customer requirements change, we may have components in inventory
that we may not be able to use. Most finished products are made only after we
receive orders, but for those that are not, we need to estimate what may not be
saleable. We regularly review inventory for slow moving items and write off all
items we do not expect to use in manufacturing, or finished products we do not
expect to sell. If actual usage of components or sales of finished goods
inventory varies from our estimates, we would be required to write off
additional inventory, which could have an adverse effect on our operating
results in the period in which the write-off occurs.
Property and equipment is carried at cost and depreciated on the
straight-line method over their estimated useful lives. The estimates of useful
lives are significant judgments in accounting for property and equipment,
particularly for molds and automated assembly machines which 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 which 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.
GENERAL
- -------
The following table sets forth the net sales by product as a
percentage of total net sales for the periods indicated:
======================================= ========== ========== ========== ========== ========== ========== ==========
YTD YTD
PRODUCT LINE 1999 2000 2001 Q2-01 Q2-02 Q2-01 Q2-02
- --------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
CLAVE(R) 68% 71% 74% 74% 71% 73% 74%
- --------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Custom and Generic I.V. Systems 11% 12% 13% 15% 17% 14% 15%
- --------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
CLC2000(R) 1% 4% 3% 2% 5% 3% 4%
- --------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Lopez Valve(R) 4% 3% 2% 3% 2% 3% 2%
- --------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
RF100-RF150 ("Rhino") 6% 5% 3% 3% 2% 4% 2%
- --------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Protected Needle Products and Other 10% 5% 5% 3% 3% 3% 3%
- --------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total 100% 100% 100% 100% 100% 100% 100%
======================================= ========== ========== ========== ========== ========== ========== ==========
9
We sell our products to independent distributors and through agreements
with Abbott Laboratories ("Abbott") and B.Braun Medical Inc. ("B.Braun"), (the
"Abbott Agreements" and the "B.Braun Agreements," respectively) and certain
other medical product manufacturers. Most independent distributors handle the
full line of our products. Abbott and B.Braun both purchase CLAVE products,
principally bulk, non-sterile connectors. Abbott also purchases the Rhino, a
low-priced connector specifically designed for Abbott, and the CLC2000, and
under an agreement signed February 27, 2001, custom I.V. sets. B.Braun also
purchases the McGaw Protected Needle and pays us revenue sharing payments on its
sales of its SafeLine products. We also sell certain other products to a number
of other medical product manufacturers.
The Abbott Agreements extend to December 2009 and have extension
provisions beyond 2009. The B.Braun Agreement for CLAVE extends to December
2002.
We believe that as the healthcare provider market continues to
consolidate, our success in marketing and distributing CLAVE products will
depend, in part, on our ability, either independently or through strategic
supply and distribution arrangements, to secure long-term CLAVE contracts with
major buying organizations. Further, our marketing and distribution strategy may
result in a significant share of our revenues being concentrated among a small
number of distributors and manufacturers. The loss of a strategic supply and
distribution agreement with a customer or the loss of a large contract by such a
customer could have a material adverse effect on our operating results.
We believe the success of the CLAVE has and will continue to motivate
others to develop one piece needleless connectors that may incorporate many of
the same functional and physical characteristics as the CLAVE. We are aware of a
number of such products. In response to competitive pressure, we have been
reducing prices to protect and expand our market. The price reductions to date
have been more than offset by increased volume. We expect that the average price
of our CLAVE products will 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 the effect
of this law will be to accelerate sales of our needleless systems, although we
are unable to estimate the amount or timing of such sales.
We are taking steps to reduce our dependence on our current proprietary
products. We are seeking to substantially expand our custom I.V. systems
business with products sold to medical product manufacturers and independent
distributors and expand selectively into the production of generic I.V. sets. On
February 27, 2001, we signed an agreement with Abbott under which we will
manufacture all new custom I.V. sets for sale by Abbott, and we will jointly
promote the products under the name SetSource(TM). We expect a significant
increase in sales of custom I.V. systems under this agreement. We had also
launched SetFinder as a separate subsidiary and it has been contracting with and
distributing commodity-type standard I.V. sets directly to healthcare providers
and to group purchasing organizations and independent dealer networks. SetFinder
operations were merged into independent domestic distribution operations in the
second quarter of 2002 and will continue as part of those operations. Custom and
generic I.V. systems accounted for almost $7 million of net sales in the first
half of 2002 and net sales under the Abbott SetSource program exceeded $2
million in the same period. SetFinder has achieved a modest amount of sales
under its initiative, and we expect future increases from contracts it has
concluded and expects to conclude. However, there is no assurance as to the
longer-term success of either of these initiatives.
We have an ongoing program to increase systems capabilities, improve
manufacturing efficiency, reduce labor costs, reduce time needed to produce an
order, and minimize investment in inventory. The original focus was on
production of custom I.V. systems, which is relatively labor intensive; it now
includes all automated manufacturing operations as well. Manual assembly is now
performed at the facility opened in December 1998 in Ensenada, Baja California,
10
Mexico. In 1999, we made significant investments in automated molding and
assembly equipment. In the third quarter of 2002, we will commence use of
automated assembly equipment for the CLC2000(TM) and the 1o2 Valve(R).
Throughout 2002, we are adding molding and automated assembly capacity for CLAVE
production and in the second half of 2002 will commence a significant expansion
of our manual assembly capacity in Mexico. All these steps have reduced and will
continue to reduce unit production costs. Ongoing steps also include automation
of the production of new products and other products for which volume is
growing, and consideration of establishment of production facilities outside
North America. Because significant innovation is required to achieve these
goals, there is no assurance that these steps will achieve the desired results.
We distribute our products through three distribution channels. Net
sales for each distribution channel were as follows:
==================================== ========== ========== ========== ========== ========== ========== ==========
CHANNEL 1999 2000 2001 Q2-01 Q2-02 YTD YTD
Q2-01 Q2-02
- ------------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
Medical product manufacturers 71% 74% 72% 71% 75% 70% 75%
- ------------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
Independent domestic distributors 25% 21% 20% 24% 19% 22% 18%
- ------------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
International 4% 5% 8% 5% 6% 8% 7%
- ------------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total 100% 100% 100% 100% 100% 100% 100%
==================================== ========== ========== ========== ========== ========== ========== ==========
QUARTER ENDED JUNE 30, 2002 COMPARED TO THE QUARTER ENDED JUNE 30, 2001
- -----------------------------------------------------------------------
NET SALES increased $5,716,000, or approximately 34%, to $22,668,000 in
the second quarter of 2002, compared to $16,952,000 during the same period last
year.
Net sales to Abbott in the second quarter of 2002 were $14,591,000, as
compared with net sales of $7,340,000 in the second quarter of 2001. Net sales
of CLAVE Products to Abbott, excluding custom CLAVE I.V. systems, increased to
$12,135,000 in the second quarter of 2002 from $6,354,000 in the second quarter
of 2001 due to an increase in unit volume partially offset by lower average
selling prices. Sales to Abbott under the SetSource program approximated
$1,250,000 in the second quarter of 2002 as compared with approximately $850,000
in the first quarter of 2002. We expect a substantial increase in CLAVE unit and
dollar sales volume with Abbott through the balance of 2002, as well as a
significant increase in SetSource unit and sales volume. Net sales of CLC2000
increased substantially over those in the second quarter of 2001 and the first
quarter of 2002, both of which were relatively low because Abbott was balancing
its inventory position. We expect sales of the CLC2000 to Abbott will increase
for the balance of 2002. Sales of the Rhino were virtually unchanged, and we
expect them to decline in the future as the market shifts to swabbable
technology. While we expect significant future sales increases to Abbott, there
is no assurance as to the amount of such increases.
Net sales to B.Braun, including revenue sharing, amounted to $2,291,000
in the second quarter of 2002, as compared with $4,547,000 in the second quarter
of 2001. Net sales of CLAVE Products were $1,655,000, or less than half of what
they were in the second quarter of 2001. The decrease in the second quarter was
in line with expectations. Based on orders received to date, we expect sales to
B.Braun in the third quarter to be less than they were in the second quarter of
2002. We are not able to accurately estimate sales for the fourth quarter of
2002. Other net sales to B.Braun, which consist of the McGaw Protected Needle
and SafeLine revenue sharing, were about the same as the second quarter of 2001,
but we expect those sales to decrease in the future as the market for safe
connectors continues to shift to needleless, swabbable technology. In 2001, we
became involved as plaintiff in litigation with B.Braun over contractual and
patent matters. See Part II, Item 1. Legal Proceedings. In July 2002 we informed
B.Braun that because it was in breach of the B.Braun Agreement for its purchase
of CLAVE Products from us, it does not have the right to extend the Agreement,
11
and the existing Agreement will expire by its terms on December 31, 2002. We
also expressed a willingness to discuss terms under which B.Braun could purchase
additional CLAVE Products beginning January 1, 2003 but we do not know whether
such an agreement will be reached. While we hope to resolve the matters that are
the subject of the litigation, even if they are resolved, the effect on our
relationship with B.Braun is not known at this time. Unless we reach an
agreement on terms for sale of CLAVE Products after 2002, we do not expect to
sell CLAVE Products to B.Braun after December 31, 2002. B.Braun does have a
product, called UltraSite(TM), that is competitive with the CLAVE, and which we
have alleged is being marketed and sold in violation of two of our patents and
the provisions of our agreement with B.Braun. B.Braun also sells a number of
other I.V. connectors. If B.Braun continues to market the UltraSite or its other
I.V. connectors and they erode sales of CLAVE Products to B.Braun's current
customers, there could be an adverse effect on us, even if we ultimately prevail
on the matters that are subject to litigation. We believe many of B.Braun's
customers prefer the CLAVE to competitive products, including the UltraSite, and
that many of them will continue to buy CLAVE Products through B.Braun or other
distribution channels.
Net sales to independent domestic distributors, including sales through
SetFinder, increased approximately 4% from $4,078,000 in the second quarter of
2001 to $4,235,000 in the second quarter of 2002. This is attributed to a 30%
increase in custom I.V. systems sales and a 22% increase in net sales of the
CLC2000, both due principally to increased unit volume. The increases were
partially offset by an 18% decrease in sales of standard CLAVE Products and
decreases in sales of the Lopez Valve and other products. We expect continuing
growth in sales to independent domestic distributors, principally from sales of
custom I.V. systems, and new products such as the CLC2000 and the 1o2 Valve. We
also expect additional sales growth from sales by independent domestic
distributors to former B.Braun accounts. However, there is no assurance that we
will achieve increased net sales to independent domestic distributors in the
future. Further, the ability of the independent distributors to sustain or
increase their sales may be impacted by competition from existing and new
competitive products or acquisition of market share by Abbott.
Total sales to foreign distributors were $1,389,000 in the second
quarter of 2002, as compared with $920,000 in the second quarter of 2001. (Those
amounts do not include distribution in Canada, but do include other export sales
to Abbott.) We now have distribution arrangements in the principal countries in
Western Europe, the Pacific Rim and South America and in South Africa.
Furthermore, we have been increasing the number of our international business
development managers. We expect significant increases in sales to foreign
customers in the future, although there is no assurance that those expectations
will be realized.
Total net sales of CLAVE Products (excluding custom CLAVE I.V. systems)
increased from $12,296,000 in the second quarter of 2001 to $16,100,000 in the
second quarter of 2002, or 31%. The increase in unit shipments was approximately
47%, principally because unit shipments to Abbott more than doubled; this was
partially offset by decreased unit shipments to B.Braun and independent domestic
distributors. Average net selling prices decreased approximately 10% because a
greater proportion of sales were the lower priced bulk non-sterile CLAVEs and in
response to market pressure. We expect continued significant growth in CLAVE
unit and dollar sales volume in the second half of 2002, notwithstanding any
decline in sales to B.Braun, because of the large growth that we expect with
Abbott and international distribution. Further, we expect the decline in average
selling prices to abate somewhat from the decline rates of the past several
years. However, we give no assurance that the expectations will be realized.
In October 2001, we commenced production of the "MicroCLAVE(R)." It is
smaller than the existing CLAVE but is functionally similar. We will initially
market it as an extension of the CLAVE product line for use where its smaller
size is advantageous, such as pediatric care. Sales are included in CLAVE
product sales.
Net sales of custom and generic I.V. systems increased approximately
57% in the second quarter over those in the second quarter of 2001. Most of the
increase was in the Abbott SetSource program. Unit volume accounted for the
majority of the increase, and the balance resulted from higher average selling
prices due to a higher proportion of larger, more expensive, sets.
12
Net sales of the CLC2000 almost tripled in the second quarter of 2002
as compared with the second quarter of 2001. Abbott, which had purchased only a
small amount of CLC2000s in the second quarter of 2001 as it balanced its
inventory position, accounted for about 80% of the increase. We expect sales of
the CLC2000 to increase in 2002 and later years, but there is no assurance as to
the amount or timing of future CLC2000 sales.
Net sales of the Lopez Valve decreased 27% in the second quarter of
2002, principally because of a 37% decline in sales of this product to
independent domestic distributors. We believe that the focus of the sales and
marketing efforts of our personnel and our distributors on other products may
continue to dilute sales of the Lopez Valve. We now expect sales of the Lopez
Valve in the second half of 2002 to be somewhat higher than they were in the
first half of 2002.
Net sales of protected needle products decreased slightly in the second
quarter of 2002 compared to the same period last year. The decline is because of
the safe-connector market's continued shift to swabbable, needleless technology.
We expect to continuing decrease in protected needle sales.
In November 1998, we introduced the 1o2 Valve, the first one-way or
two-way drug delivery system. After overcoming initial delays in production, we
re-launched the product in January 2000. Substantially all sales of the 1o2
Valve are in custom I.V. systems, and are included in sales reported in that
category.
Our sales can fluctuate on a quarter-to-quarter basis because of
fluctuations in orders from our medical product manufacturer customers that may
not reflect their current sales volumes and normal seasonal fluctuations due to
lower censuses in healthcare facilities in summer months.
GROSS MARGIN was 59% during the second quarters of 2002 and 2001. The
results of our continuing extensive efforts to improve manufacturing efficiency
and the increased absorption of overhead by higher production volumes offset the
effect of lower average unit selling prices. We expect that gross margins for
custom and generic I.V. systems and certain other manually assembled products
will be lower than those we have historically achieved on other products because
their production is relatively labor intensive. We expect the gross margin
percentage in the second half of 2002 will be slightly lower than that achieved
for the first half of 2002. While our unit production costs will continue to
decrease in 2002, the effect of the decrease will be more than offset by the
continuing decrease in average unit sales prices and the effect of manually
assembled products becoming a greater percentage of our sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"), excluding
research and development expenses, increased $1,194,000, or 28%, to $5,416,000,
and was approximately 24% of sales in 2002 as compared with 25% of sales in
2001. The increase was principally in administrative expenses and sales and
marketing expenses. Administrative expenses increased principally because of
legal fees, most of which relate to the litigation with B.Braun. Sales and
marketing expenses increased approximately $650,000 because of increases in
headcount and in promotional costs, but overall sales and marketing expenses
decreased as a percentage of sales in the second quarter of 2002 from 15% to
14%. We expect continued growth in SG&A expenses in 2002, but we expect them to
grow at a lower rate than our growth in net sales. However, there can be no
assurance that these expectations will be realized
RESEARCH AND DEVELOPMENT EXPENSES ("R&D") increased approximately 2% in
the second quarter of 2002 as compared with the second quarter of 2001. Spending
is principally on new product development and software development to support
manufacturing and distribution of custom and generic I.V. systems. We estimate
that R&D costs will continue in 2002 at approximately the same percentage of net
sales as in 2001. However R&D costs could differ from those estimates and the
R&D may not be completed as expected.
13
We plan to launch, in limited markets, a new I.V. connector currently
under development. We expect to apply later in 2002 to the FDA under Section
510(k) of the FDC Act for approval to market this new connector. There is no
assurance that the FDA will grant marketing clearance, that we will launch this
new product, or that it will achieve sales if and when we commence marketing it.
INCOME FROM OPERATIONS increased $2,073,000 or 38% and was 33% of net
sales in the second quarter of 2002, as compared with 32% in the second quarter
of 2001. Gross profit increased $3,275,000 while operating expenses increased
only $1,202,000.
INVESTMENT INCOME declined in the second quarter of 2002 as compared
with the second quarter of 2001, notwithstanding the increase in the investment
portfolio, because of declines in interest rates since the beginning of 2001.
INCOME TAXES were accrued at an effective tax rate of 37% in the second
quarter of both 2002 and 2001. We expect our effective tax rate for the full
year 2002 to be approximately 37%.
NET INCOME increased 33% to $4,998,000 in the second quarter of 2002 as
compared with $3,764,000 in the comparable period last year. NET INCOME PER
SHARE - DILUTED increased 23% to $0.32 per share in the second quarter of 2002.
The percentage increase was less than that for net income because there were
more shares outstanding and there were more dilutive shares as a result of the
higher market price of our common stock.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2001
- -----------------------------------------------------------------------------
NET SALES increased $11,615,000, or approximately 36%, to $43,573,000
in the first six months of 2002 compared to $31,958,000 during the same period
last year. The increase was primarily attributable to a 39% increase in sales of
CLAVE Products and a 49% increase in sales of custom and generic I.V. systems.
Net sales to Abbott in the first half of 2002 were $28,560,000, as
compared with net sales of $15,372,000 in the first half of 2001. Net sales of
CLAVE Products to Abbott, excluding custom CLAVE I.V. systems, increased to
$24,476,000 in the first half of 2002 from $13,149,000 in the first half of 2001
due to an increase in unit volume partially offset by lower average selling
prices. Sales to Abbott under the SetSource program, which was new in 2001,
approximated $2,100,000 in the first half of 2002 as compared with less than
$200,000 in the first half of 2001.
Net sales to B.Braun, including revenue sharing, amounted to $3,951,000
in the first half of 2002, as compared with $6,625,000 in the first half of
2001. Net sales of CLAVE Products in the first half of 2002 decreased to
$3,122,000, or slightly more than half of what they were in the first half of
2001. The decrease was principally because of a decrease in unit sales of CLAVE
Products, in part because we believe B.Braun's purchase of CLAVE Products in the
latter half of 2001 exceeded their sales to customers, and in part for the
reasons described above under "Quarter Ended June 30, 2002 Compared to the
Quarter Ended June 30, 2001". The decrease in the first half was in line with
expectations.
Net sales to independent domestic distributors, including sales through
SetFinder, increased approximately 7% from $7,225,000 in the first half of 2001
to $7,706,000 in the first half of 2002. This is attributed to an increase in
net sales of custom I.V. systems and of the CLC2000. These increases were
principally from increased unit volume. They were partially offset by a decrease
in sales of standard CLAVE Products and decreases in sales of the Lopez Valve
and other products.
Total sales to foreign distributors were $3,071,000 in the first half
of 2002, as compared with $2,596,000 in the first half of 2001. (These amounts
do not include distribution in Canada, but do include other export sales to
Abbott.)
14
Total sales of CLAVE Products (excluding custom CLAVE I.V. systems)
increased form $23,173,000 in the first half of 2001 to $32,141,000 in the first
half of 2002, or 39%. Increased unit shipments to Abbott were partially offset
by decreased unit shipments to B.Braun and independent domestic distributors and
a decrease in average net selling prices of approximately 10%.
Net sales of custom and generic I.V. systems increased approximately
49% in the first half over those in the first half of 2001. Most of the
increase was in the Abbott SetSource program. Unit volume accounted for the
majority of the increase.
Net sales of the CLC2000 increased from $863,000 in the first half of
2001 to $1,601,000 in the first half of 2002. Abbott accounted for over half of
the increase, with most of the balance from independent domestic distributors.
Net sales of the Lopez Valve decreased 28% in the first half of 2002,
principally because of a decline in sales of this product to independent
domestic distributors.
Net sales of protected needle products decreased 25% in the first half
of 2002 compared to the same period last year. The decline is because of the
safe-connector market's continued shift to swabbable, needleless technology.
GROSS MARGIN was 59% for the first six months of 2002 as compared to
58% during the first six months of 2001. Although average selling prices have
continued to decrease over the first six months of 2002, this was more than
offset by a decrease in unit manufacturing costs.
SG&A excluding research and development expenses, increased by
$3,052,000 to $10,655,000, and were 24% of sales in both years. The spending
increase was principally for administrative expenses, including litigation
costs; administrative expenses increased approximately $1,763,000 and were 10%
of sales in the first half of 2002 as compared with 9% in the first half of
2001. Sales and marketing costs increased approximately $1,289,000 because of
increases in headcount and in promotional costs, but decreased as a percentage
of sales from 15% to 14%.
R&D increased for the first half of 2002 by approximately 3%. Spending
is principally on a new product development and software development to support
manufacturing and distribution of custom and generic I.V. systems.
INCOME FROM OPERATIONS increased $4,005,000, or 39%, principally
because of the increase in net sales and the improvement in the gross margin
percentage. It was 33% of sales in the first half of 2002, as compared with 32%
of sales in the first half of 2001.
INVESTMENT INCOME decreased $436,000, or 37%, as compared with the
first half of 2001, notwithstanding an approximate 45% increase in the average
investment portfolio in the first half of 2002 compared with the first half of
2001. This was because of the effect of declines in interest rates since the
beginning of 2001.
INCOME TAXES were accrued at an effective tax rate of 37% in the first
half of both 2002 and 2001.
NET INCOME increased $2,224,000, or 30%, to $9,521,000 as compared with
$7,297,000 for the first six months of 2001. NET INCOME PER SHARE - DILUTED
increased 22% to $0.62 per share in the first six months of 2002 as compared
with $0.51 for the first six months of 2001. This was a lower percentage than
the increase in net income because of increases in both the weighted average
number of shares outstanding and the dilutive effect of stock options.
15
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the six months ended June 30, 2002, our cash and cash
equivalents and investment securities position increased $14,689,000 to
$87,716,000 from $73,027,000 at December 31, 2001. Cash provided by operating
activities and the exercise of stock options was partially offset by the cost of
additions to property and equipment. Cash provided by stock options, including
tax benefits, was $14,471,000 in the first half of 2002 as compared with
$3,507,000 in the first half of 2001; options were exercised on 746,544 shares
in the first half of 2002 as compared with 272,362 shares in the first half of
2001.
We expect that sales of our products will continue to grow in 2002. If
sales continue to increase, accounts receivable and inventories are expected to
increase as well. As a result of these and other factors, including increased
capital expenditures, our working capital requirements may increase in the
foreseeable future.
We currently expect that capital expenditures for property and
equipment will be between approximately $14 million and $15 million in 2002. We
are making additional investments in molding machines, molds and automated
assembly machines as well as recurring facilities improvements and acquisition
of computer equipment and software. We are also acquiring sterilization
equipment to support our assembly facility in Mexico, and expanding that
facility. We are also replacing our current enterprise software with Oracle
Corporation's R11i business suite at a cost of over $1 million; we expect most
of the new software will be installed in the fourth quarter of 2002, and that it
will substantially enhance our business and information processes.
We are currently evaluating the design and capacity of our
manufacturing facilities. We estimate that our current facilities and additions
in process in 2002 will be adequate through 2003, but that production after 2003
will require additional clean room facilities for molding and automated
assembly. We expect to decide later in the year how to meet the need for
additional facilities and the location of additional clean room facilities for
molding and automated assembly.
We have not purchased treasury stock since October 1999, except for a
small amount in March 2000. We may purchase additional shares in the future.
However, future acquisitions, 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, so, as further described below in "Quantitative
and Qualitative Disclosures about Market Risk," our liquid investments have very
little credit risk or market risk.
We believe that our existing working capital, supplemented by income
from operations, will be sufficient to fund capital expenditures and increased
working capital requirements for the foreseeable future.
FORWARD LOOKING STATEMENTS
- --------------------------
Various portions of this Report, including this Management's Discussion
and Analysis, describe trends in our business and finances that we perceive and
state some of our expectations and beliefs about our future. These statements
about the future are "forward looking statements," and we identify them by using
words such as "believes," "expects," "estimates," "plans," "will," "continue,"
"could," and by similar expressions and statements about aims, goals and plans.
The forward looking statements are based on the best information currently
available to us and assumptions that we believe are reasonable, but we do not
intend the statements to be representations as to future results. They include,
among other things, statements about:
16
o future operating results and various elements of operating results,
including sales and unit volumes of products, future increases in sales
of custom and generic I.V. systems, production costs, gross margins,
SG&A, and R&D expense and income taxes;
o factors affecting operating results, such as shipments to specific
customers, foreign sales, product mix, quarterly sales fluctuations,
selling prices, the market shift to needleless and swabbable products,
declines in sales of certain products, impact of safety legislation,
achievement of business expansion goals, development of innovative
systems capabilities, introduction and sales of new products, direct
sales of commodity-type I.V. sets, manufacturing efficiencies, labor
costs, unit production costs, acquisition and use of production
equipment and expansion of facilities and assembly capacity, and
expansion of markets, establishment of production facilities outside
North America, and acquisition of sterilization equipment;
o new or extended contracts with manufacturers and buying organizations,
and dependence on a small number of customers;
o regulatory approval and outcome of litigation;
o competitive and market factors, including continuing development of
competing products by other manufacturers, consolidation of the
healthcare provider market and downward pressure on selling prices; and
o working capital requirements, changes in accounts receivable and
inventories, capital expenditures 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 or
products incorporating 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.
17
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We have a portfolio of corporate preferred stocks and
federal-tax-exempt state and municipal government debt securities. The
securities are all "investment grade" and we believe that we have virtually no
exposure to credit risk. Dividend and interest rates reset at auction for most
of the securities from between seven and forty-nine day intervals, with some
longer but none beyond twelve months, so we have very little market risk, that
is, risk that the fair value of the security will change because of changes in
market interest rates.
Our future earnings are subject to potential increase or decrease
because of changes in short-term interest rates. Generally, each one-percentage
point change in the discount rate will cause our overall yield to change by
two-thirds to three-quarters of a percentage point, depending upon the relative
mix of federal-tax-exempt securities and corporate preferred stocks in the
portfolio and market conditions specific to the securities in which we invest.
We do not have any significant foreign currency risk. Sales to foreign
distributors are all denominated in U.S. dollars. Cash and receivables in
entities outside the United States, principally in Mexico, which are denominated
in foreign currency are insignificant and are generally offset by accounts
payable in the same foreign currency.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
In an action filed June 29, 2001, entitled ICU Medical, Inc. v. B.Braun
Medical, Inc. filed originally in the Superior Court of the State of California,
County of Orange, we are seeking certain judicial declarations concerning a
controversy over each of the parties' rights, duties and obligations under the
Manufacture and Supply Agreement for CLAVE Products (the "CLAVE Agreement)". On
July 27, 2001, the case was removed to the United States District Court for the
Central District of California. B.Braun filed a counter-claim against us on
December 3, 2001, as amended July 3, 2002, alleging that we breached the CLAVE
Agreement and engaged in unfair competition and seeking specific performance, a
preliminary injunction, disgorgement and damages. On June 3, 2002, B.Braun
asserted its right to extend the CLAVE Agreement. On July 2, 2002, we informed
B.Braun that because of its breach of the CLAVE Agreement, it does not have the
right to extend the CLAVE Agreement, and the existing CLAVE Agreement will
expire by its terms on December 31, 2002. We also stated that we are willing to
discuss with B.Braun the terms under which B.Braun could purchase additional
CLAVE Products beginning January 1, 2003. We are not seeking monetary damages at
this time. Attempts at mediation in November 2001 to resolve these issues were
not successful.
In an action filed August 21, 2001 entitled ICU Medical, Inc. v. B
Braun Medical, Inc. pending in the United States District Court for the Northern
District of California, we allege that B.Braun Medical, Inc. infringes two of
our patents by the manufacture and sale of its UltraSite medical connector. We
seek monetary damages and injunctive relief and intend to vigorously pursue this
matter. The outcome of this matter cannot be determined at this time.
We are from time to time involved in various other legal proceedings,
either as a defendant or plaintiff, most of which are routine litigation in the
normal course of business. We believe that the resolution of the legal
proceedings in which we are involved will not have a material adverse effect on
our financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES
- ------------------------------
Inapplicable
18
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 16, 2002:
A. John J. Connors, Michael T. Kovalchik, III, M.D. and Joseph R.
Saucedo were elected as directors to hold office until the
2005 Annual Meeting. Votes cast for and withheld with respect
to the nominee were as follows:
Votes For Votes Withheld
--------- --------------
John J. Connors 12,345,842 124,628
Michael T. Kovalchik, III, M.D. 12,354,207 111,263
Joseph R. Saucedo 12,345,025 125,445
The terms of the following directors were continued after the
Annual Meeting: Jack W. Brown, George A. Lopez, M.D., Richard
H. Sherman, M.D., and Robert S. Swinney, M.D.
B. A proposal to approve the ICU Medical, Inc. 2001 Directors'
Stock Option Plan was approved. Votes cast were as follows:
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
7,968,884 3,201,243 49,163 1,251,180
C. A proposal to approve the ICU Medical, Inc. 2002 Employee
Stock Purchase Plan was approved. Votes cast were as follows:
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
7,441,264 3,742,576 35,450 1,251,180
D. A proposal to amend our Certificate of Incorporation to
increase the number of shares of our Common Stock from
20,000,000 to 80,000,000 was approved. Votes cast were as
follows:
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
9,380,859 3,053,918 35,692 0
E. A proposal to ratify the selection of Arthur Andersen LLP as
our auditors was withdrawn.
ITEM 5. OTHER INFORMATION
- --------------------------
On July 22, 2002, we engaged Deloitte & Touche LLP as our independent public
accountants.
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 99.1 Certifications of Chief Executive Officer and Chief
Financial Officer
(b) Reports on Form 8-K:
The Registrant filed the following Report on Form 8-K during the
quarter for which this Report is filed: Item 5 - May 15, 2002 Item 4 -
June 18, 2002
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 12, 2002
- ----------------------
Francis J. O'Brien
Chief Financial Officer
(Principal Financial Officer and)
Chief Accounting Officer)
20