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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-19974
ICU MEDICAL, INC.
(Exact name of Registrant as specified in its 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)
Registrant's Telephone Number, Including Area Code: (949) 366-2183
Securities registered pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12 (g) of the Act:
Common Stock, $.10 par value
Preferred Stock Purchase Rights
Indicate by check mark whether Registrant: (1) has filed all reports
required 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 Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by checkmark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). [X] Yes [ ] No
The aggregate market value of the voting stock held by non-affiliates
of Registrant as of June 30, 2003, the last business day of Registrant's most
recently completed second fiscal quarter, was $379,861,351*.
The number of shares outstanding of Registrant's Common Stock, $.10 par
value, as of January 31, 2004 was 13,691,221.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's 2004 Annual Meeting of
Stockholders filed or to be filed pursuant to Regulation 14A within 120 days
following Registrant's fiscal year ended December 31, 2003, are incorporated by
reference into Part III of this Report.
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* Without acknowledging that any persons other than Dr. George A. Lopez and Dr.
Diana K. Lopez are affiliates, all directors and executive officers have been
included as affiliates solely for purposes of this computation.
PART I
ITEM 1. BUSINESS.
We are a leader in the development, manufacture and sale of
proprietary, disposable medical connection systems for use in intravenous
("I.V.") therapy applications. Our devices are designed to protect healthcare
workers and their patients from exposure to infectious diseases such as
Hepatitis B and C and Human Immunodeficiency Virus ("HIV") through accidental
needlesticks. We are also a leader in the production of custom I.V. systems and
low cost generic I.V. systems and we incorporate our proprietary products on
many of those custom I.V. systems. We also manufacture and sell the
Punctur-Guard(R) line of blood collection needles, which we acquired in October
2002.
In 1993, we launched the CLAVE(R), an innovative one-piece, needleless
I.V. connection device that accounts for approximately 59% of our revenue,
exclusive of CLAVEs incorporated into custom I.V. systems. We believe that the
CLAVE offers healthcare providers a combination of safety, ease of use,
reliability and cost effectiveness that is superior to any other protective I.V.
connection system on the market. It allows protected, secure and sterile I.V.
connections without needles and without failure-prone mechanical valves used in
the I.V. connection systems of some competitors. The CLAVE is a successor to our
protected needle products first introduced in 1984. We designed the CLAVE to
eliminate needles from certain applications in acute care hospitals, home
healthcare, ambulatory surgical centers, nursing homes, convalescent facilities,
physicians' offices, medical clinics, and emergency centers. Reduction in the
use of needles not only decreases needlesticks but also reduces the number of
needles to be disposed of and certain safety risks inherent in needle handling
and disposal.
Although CLAVE sales have increased steadily since we introduced it in
1993, we have undertaken a strategic initiative to reduce our dependence on the
CLAVE. The initiative involves a planned transition from being primarily a
manufacturer of I.V. system components to producing and distributing complete
I.V. systems, both custom and low-cost, generic systems, blood collection
devices and other products. Many of the I.V. systems include our I.V.
proprietary component products.
We have been manufacturing and distributing custom and generic I.V.
systems since late 1995. In 1999, we decided to substantially increase our
emphasis on marketing and selling custom I.V. systems. A key element of our
strategy to expand our custom I.V. system business has been the development and
implementation of our proprietary software for custom product design, customer
orders and order tracking, combined with an innovative system to coordinate the
manufacture of components in the U.S., assembly of components into sets in
Mexico and Italy and distribution of finished products. We believe that we offer
customers substantially shorter delivery times and lower costs than other
manufacturers of I.V. systems can currently offer.
The principal products that we have introduced in recent years are the
CLC2000(R), the 1o2 Valve(R), and, with the acquisition of Bio-Plexus, Inc.
("Bio-Plexus") in late 2002, the Punctur-Guard line of blood collection needles.
We currently sell substantially all of our products to I.V. product
manufacturers and independent distributors. Our largest customer is Abbott
Laboratories ("Abbott"), who accounted for 67% of our revenues in 2003.
First person pronouns used in this Report, such as "we," "us," and
"our," refer to ICU Medical, Inc. and its subsidiaries unless context requires
otherwise.
Our website address is http://www.icumed.com. We make available our
Annual Reports on Form 10-K, Quarterly Reports on 10-Q and Current Reports on
Form 8-K free of charge on our website as soon as reasonably practicable after
filing them with the Securities and Exchange Commission. The information on our
website is not incorporated into this annual report.
I.V. USAGE AND INFECTION CONTROL
Primary I.V. therapy lines, used in hospitals, nursing homes, emergency
units and in home healthcare, consist of a tube running from a bottle or plastic
bag containing an I.V. solution to a catheter inserted in a patient's vein. The
tube typically has several injection ports or Y sites (conventionally, entry
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tubes covered by latex caps) to which a secondary I.V. line can be connected to
permit constant intravenous administration of medications, fluids and nutrients,
and to allow instantaneous intravenous administration of emergency medication.
In conventional practice, primary I.V. system connections are made by
inserting an exposed steel hollow-bore needle attached to the primary I.V. line
into an injection port connected to the catheter. Conventional secondary I.V.
connections, so called piggyback connections, are made by inserting an exposed
steel hollow-bore needle attached to a secondary I.V. line into an injection
port or other I.V. connector. In a conventional I.V. connection, the needle,
which typically is secured only with tape, can detach from the catheter or
injection port resulting in disconnection and a serious and sometimes fatal
interruption of the flow of the I.V. solution to the patient. The exposed
needles can easily be contaminated by contact with unsterile objects or through
contact with fluid in the I.V. lines. Accidental needlesticks from contaminated
needles can result in infection to healthcare workers and, less frequently,
patients. Increasing awareness of the risk of infection from needlesticks and
the substantial and increasing expense to healthcare providers of complying with
regulatory protocols when needlesticks occur have led to a growing demand for
safe medical devices such as our protective I.V. connectors.
Hepatitis B and C and HIV are transmitted through blood and other body
fluids, and workers who come in contact with such infectious materials are at
risk of contracting these diseases. Transmissions may occur from needlesticks by
contaminated needles or exposure of mucous membranes to infectious body fluids
containing blood traces. Following each needlestick, the healthcare employer is
required to perform a series of tests on the healthcare worker for both
Hepatitis B and C and HIV, as well as track and record each needlestick
incident. Thus, needlesticks result in time lost from work and substantial
expense regardless of whether transmission of an infectious disease is detected.
Our protective I.V. connectors are designed to prevent accidental needlesticks
from needles originating from primary and secondary I.V. connections.
Heightened awareness of the risk of infection from needlesticks and the
substantial expense to healthcare providers of complying with regulatory
protocols when needlesticks occur have led to growing demand for safe medical
devices such as our needleless I.V. connectors. This awareness has also lead to
significant federal and state legislation. In addition, the federal Needlestick
Safety and Prevention Act, enacted in 2000, modified standards promulgated by
the Occupational Safety and Health Administration ("OSHA"), to require employers
to use needle-safe systems where appropriate to reduce risk of injury to
employees from needlesticks. This is a significant expansion of the previous
OSHA mandate that "universal precautions" be observed to minimize exposure to
blood and other body fluids. In September 1998, the State of California enacted
the bloodborne pathogen standard under the state's occupational safety and
health statute. This standard mandates use of needlestick prevention controls,
including needleless systems. California was the first state to enact such
legislation, and since then many other states have enacted similar legislation.
Our devices will allow a healthcare provider to be compliant with any of these
standards.
PRODUCTS
CLAVE PRODUCTS
A conventional I.V. line terminates with a male luer connector to which
a hollow-bore needle would be attached to penetrate a latex or non-latex rubber
covered injection port to make a primary or secondary I.V. connection. With the
CLAVE system, instead of attaching a hollow-bore needle to the male luer, a
CLAVE is used in place of the injection port and the male luer, without a
needle, is simply threaded into the CLAVE with a half turn. The CLAVE consists
of a cylindrical housing, which contains a silicone compression seal and a
recessed plastic piercing element. As the luer tip enters the CLAVE housing, it
depresses the silicone seal back into the housing and slides over the piercing
element, which penetrates through the compressed silicone. Fluid channels in the
piercing element create a continuous fluid pathway from the I.V. line, through
the CLAVE into the primary I.V. line and into the catheter. The luer tip creates
a tight seal against the top of the silicone thereby preventing contaminants
from entering the fluid pathway or from fluid escaping the connection. When the
I.V. line is disconnected from the CLAVE, the silicone compression seal expands
to again fill the housing and reseal the opening. When the CLAVE is not in use,
the silicone compression seal fills the opening in the housing and covers the
plastic piercing element, thus completely sealing the connector and presenting a
flush surface that can be cleansed with an alcohol swab. The CLAVE contains no
natural rubber latex.
3
Emergency medications can be administered through the CLAVE by using a
standard syringe without a hypodermic needle attached. The CLAVE can be used
with any conventional peripheral or central vascular access systems, both for
venous and arterial applications. The resilience of the silicone compression
seal permits repeated connections and disconnections without replacing the
CLAVE.
The CLAVE Integrated Y site is designed to be integrated directly into
primary and secondary I.V. sets, thus eliminating the need for special adapters,
pre-slit injection ports, or metal needles when making piggyback I.V.
connections. Currently, many popular I.V. connection systems that compete with
our systems require either a metal needle, a pre-slit injection port or a
special adapter to make piggyback connections. The original CLAVE can be used to
make a piggyback connection, but it also requires a special adapter when used in
piggyback applications. We believe the CLAVE Integrated Y site offers a lower
cost alternative to existing systems by eliminating the need for multiple parts.
The healthcare professional simply inserts the male luer of any secondary I.V.
set, without a needle, into the CLAVE Integrated Y site and twists to make the
connection. The CLAVE Integrated Y site will not replace CLAVE products used in
non-piggyback connections. Unlike the original CLAVE site, the CLAVE Integrated
Y site is marketed exclusively to I.V. set manufacturers, such as Abbott, to
build directly into their I.V. sets or used by us in our custom I.V. sets.
The CLAVE is our largest selling product line, and accounted for 59% of
our net revenue in 2003, or 73% if custom I.V. systems including one or more
CLAVEs are included.
In October 2001, we commenced production of the "MicroCLAVE(R)." It is
smaller than the existing CLAVE but is functionally similar. We are marketing it
as an extension of the CLAVE product line for use where its smaller size is
advantageous, such as pediatric care.
CUSTOM I.V. SYSTEMS
During late 1995, we entered the low end of the safe medical connector
market by manufacturing and distributing I.V. sets which incorporated lower
priced safe medical connectors, and also commenced manufacturing and
distributing custom I.V. sets incorporating the CLAVE. In 1999, we substantially
increased our emphasis on marketing and selling custom I.V. systems. To promote
the growth of the business, we have developed innovative software systems and
manufacturing processes that permit us to design a custom I.V. set to a
hospital's or clinician's exact specifications, commence production within less
than a day after we receive the customer order and ship the custom I.V. sets to
the customer within three of receipt for smaller orders. While we are capable of
meeting customer demand on this accelerated three-day schedule, in normal
circumstances we ship within twenty-one to thirty days of receipt of the
customers' order. This is a fraction of the time required by other custom set
manufacturers. The use of sophisticated design, ordering and order tracking
systems and streamlined assembly and distribution processes allows us to sell
custom I.V. sets at prices substantially lower than those charged by other
producers of custom I.V. sets.
We have also developed proprietary Internet-based electronic ordering,
order tracking, invoicing and payment systems. Hospitals and other healthcare
providers have been slow to change from traditional methods of ordering products
and supplies to ordering over the internet, and to date we receive most of our
orders by facsimile or telephone. We believe, however, that customers will
gradually make the transition from traditional ordering methods to internet
ordering.
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 the two
companies will jointly promote the products under the name SetSource(TM). Sales
of custom I.V. systems increased as a result of the agreement and we expect
further significant increases in sales of custom I.V. systems, although there is
no assurance that such increase will be achieved.
We have committed significant resources to the strategic initiative to
expand our custom I.V. system businesses and expect to incur additional expenses
for continuing software development and enhancements in the manufacturing
process. To date, most of the I.V. set sales volume is in custom I.V. systems,
and we expect this to continue.
4
During 2001, 2002 and 2003, net sales of custom I.V. systems were
approximately $9,263,000, $15,205,000 and $22,823,000, respectively.
Approximately 70% of the growth in 2003 custom I.V. systems net sales was
because of the SetSource program.
PUNCTUR-GUARD
We acquired the Punctur-Guard product line and technology with the
purchase of Bio-Plexus on October 31, 2002. The Punctur-Guard products are based
on a patented technology that internally blunts a needle while still in the
patient's vein, and are the only products which allow the procedure to continue
while the needle is rendered safe. We currently use the technology to make blood
collection needles ("BCN") and Winged Sets, primarily for use by phlebotomists
and other medical personnel in hospitals and independent clinical laboratories.
Hollow bore needles are broadly used for venous access to a patient,
and expose healthcare workers to accidental needlesticks. There are essentially
three safety technology platforms for use with hollow-bore needles:
"outer-sheath" which uses an outer sheath stored behind the needle during use
and is advanced over the needle after use; "retractable" which uses a chamber
behind the needle and a spring that retracts the needle into the chamber after
use; and, internal needle blunting. The majority of the first two technologies
require that the needle be withdrawn from the patient prior to activation of the
safety feature, exposing the healthcare worker to a sharp, contaminated needle
during the procedure and/ or following removal of the needle from the patient.
However, with the internal blunting that we use in the Punctur-Guard products,
the safety feature can be activated while the needle is in the patient
immediately upon achieving venous access, thereby significantly reducing any
risk of accidental needlestick during or after the procedure.
The internal blunting is achieved by positioning a blunt hollow-bore
needle within the conventional sharp needle. The healthcare worker is able to
activate the safety device that causes the blunt needle to advance just beyond
the sharp tip of the outer needle. It can be activated immediately after
achieving venous access, either at the beginning of the procedure or at the end
immediately before withdrawing the needle from the patient. We believe that
products using our internal blunting technology provide safety that is superior
to that of the products using other safety technologies.
Our internal needle blunting technology is licensed to Medex, Inc.
(successor to Johnson & Johnson Medical) and to TFX Medical, a division of
Teleflex Incorporated, for use in various types of catheters. None of the
applications of the patented technology under those licenses compete with our
Punctur-Guard line of blood collection products.
After our acquisition of Bio-Plexus on October 31, 2002, we made
significant improvements to the Punctur-Guard products and manufacturing
processes. We did not actively promote sales of those products until completion
of those product improvements. We completed improvements on the Winged Set
products and re-launched them on March 1, 2003. We completed improvements on the
BCN and started selling the improved product in late September 2003. Sales of
Punctur-Guard products and royalties from licenses of the related technology for
2003 totaled $8,446,000.
CLC2000
The CLC2000 is a one piece, swabable connector used to connect I.V.
lines to catheters, which is engineered to prevent the back-flow of blood into
the catheter. The CLC2000 does not permit the use of needles, thereby ensuring
compliance with needle-free policies of healthcare providers. The CLC2000 also
contains no natural rubber latex.
The CLC2000 is typically used on central venous catheters where
catheter occlusion is most prevalent. Generally, when an I.V. line is
disconnected, there is a back-flow of blood into the catheter that is in the
patient's vein. That blood in time coagulates and occludes the catheter.
Occlusion ("clotting off") of catheters requires expensive drugs and procedures
to "flush" the catheter, or if those procedures are not effective, replacement
of the catheter.
5
The CLC2000 was developed to reduce clotting of catheters because of
"back-flow" when the I.V. line is disconnected. The CLC2000 consists of a "T"
shaped cylindrical housing, which contains a poppet that is depressed as the
luer tip enters the CLC2000. Fluid flows around the poppet and through the
housing and into the catheter. When the luer is removed from the CLC2000, a
portion of the fluid remaining in the housing is expelled out through the tip of
the catheter while a constant positive pressure is maintained to prevent any
back-flow into the catheter.
We began marketing the CLC2000 in November 1997. We are concentrating
the marketing of the CLC2000 where its "no back-flow" features are of maximum
benefit in patient care. These are generally therapies that use long-term
indwelling catheters such as oncology, dialysis and long-term infusion of
medication. We commenced production on automated assembly equipment in the
fourth quarter of 2002. CLC2000 accounted for 4% of our net revenue in 2003.
1O2 VALVE
The 1o2 Valve is the first one-way or two-way drug delivery system. It
functions as a single unit or in multiple "ganged" units as a manifold, for use
throughout a hospital. It provides the safety features of an automatic one-way
valve, yet allows aspiration, or two-way function by simply pushing a button.
The 1o2 Valve can be used in place of products such as stopcocks and check valve
manifolds. We actively commenced sales in April 2000. Our initial manufacturing
focus has been on anesthesia and critical care usage and we are selling the 1o2
Valve only as part of I.V. sets that we manufacture. In the third quarter of
2002, we commenced production on automated assembly equipment. Sales of I.V.
sets containing 1o2 Valves were approximately $3,613,000 in 2003.
OTHER PRODUCTS AND REVENUES
The Lopez Enteral Valve(R) is a small "T" valve designed to be
connected into nasogastric, gastric or jejunostomy tube systems. The valve
permits intermittent injection of medications, irrigation or suction without
having to disconnect the line and thereby opening the system. By eliminating the
need to open the system, the Lopez Valve helps prevent the splashing of and risk
of contact with potentially infectious stomach fluids and also saves valuable
time.
We have developed a family of inexpensive single-use needleless
connectors for use in piggyback and non-piggyback applications. The RF100 is
designed for use in piggyback applications. We developed the RF150, called the
"Rhino," specifically for Abbott for use with pre-slit injection ports in
piggyback and non-piggyback applications.
Although we believe that the CLAVE has significant functional advantages over
the RF100 and RF150, these products are alternative and less expensive
needleless I.V. connectors.
We manufactured and sold Click Lock and Piggy Lock products, which were
our first products, introduced in 1984. They use needles recessed in a clear
plastic shroud. We discontinued these products in early 2003. We also
manufacture the McGaw Protected Needle, which is similar to the Click Lock, for
B. Braun Medical Inc. ("B. Braun"). B. Braun also pays us a share of its
revenues on its SafeLine products. The market for all of these products has been
declining as the market shifts to swabable needleless products.
We have a significant number of patents on the technology in our
products and methods used to manufacture them. We have continuing royalty,
license fee and revenue share income from our technology and from time to time
may receive license fees or royalties from other entities for the use of our
technology.
NEW PRODUCTS
We are developing several new products that we intend to introduce in
2004 and later. We believe innovative products continue to be important to
maintaining and increasing our sales levels.
We plan to launch, in limited markets, a new I.V. connector currently
under development. We expect to apply in 2004 to the Food & Drug Administration
("FDA") under Section 510(k) of the Federal Food, Drug and Cosmetics Act ("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.
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MARKETING AND DISTRIBUTION
The influence of managed care and the growing trend toward
consolidation among healthcare providers are the driving forces behind our sales
and marketing strategies. Many healthcare providers are consolidating to create
economies of scale and to increase negotiating power with suppliers. In an
effort to further control costs, many of these consolidated groups are entering
into long-term contracts with medical suppliers at fixed pricing. In this
changing market place, we believe it is becoming increasingly important to
secure contracts with major buying organizations in addition to targeting
specific healthcare providers.
As of January 31, 2004, we employed 34 product specialists in the
United States and Canada to support the salespeople employed by the medical
product manufacturers and independent domestic distributors. Our product
specialists call on prospective customers, demonstrate products and support
programs to train the salespeople and customers' staffs in the use of our
products.
MEDICAL PRODUCTS MANUFACTURERS
We have a strategic supply and distribution relationship with Abbott, a
major I.V. product supplier, which has a significant share of the I.V. set
market under contract. The agreement confers to Abbott conditional exclusive and
nonexclusive rights to distribute certain CLAVE and our other products to
certain categories of customers.
Abbott purchases CLAVE products packaged separately for distribution to
healthcare providers and in bulk for assembly into Abbott's full range of I.V.
products. MicroCLAVE, 1o2 Valve, CLC2000, Punctur-Guard, Lopez Valve and Rhino
products are purchased packaged separately.
Under another agreement with Abbott that extends to December 2014, we
have the exclusive right to manufacture all new custom I.V. sets for sale by
Abbott, and Abbott and we will jointly promote the products under the name
SetSource. Abbott is the exclusive and non-exclusive distributor and co-promoter
of SetSource products to certain categories of customers, including SetSource
products containing both companies' proprietary products.
The Abbott agreements were extended in January 2004 from 2009 to 2014,
their scope was expanded to include all of our products not previously included,
and the scope further expanded to be worldwide.
Sales to Abbott accounted for approximately 67%, 57% and 53% of net
sales in 2003, 2002 and 2001 respectively. The loss of Abbott as a customer
could have a significant adverse effect on our business and operating results
because they have full-line contracts with numerous healthcare providers to
supply substantially all I.V. products and solutions to those customers.
In August 2003, Abbott announced that it will spin off its core
Hospital Products Division to its stockholders as an independent company. The
Hospital Products Business, which will become Hospira, Inc., accounts for
virtually all of our sales to Abbott. We believe the spin-off is a positive
development for us and will result in new business opportunities with the new
Hospira. We have agreed for Abbott to assign our contracts to Hospira.
Through December 31, 2002, we had a supply and distribution agreement
with B. Braun under which B. Braun had conditional exclusive and nonexclusive
rights to distribute certain CLAVE products to certain categories of customers.
Revenue from B. Braun was approximately $9.9 million in 2002, of which CLAVE
products accounted for $8.6 million, or 10% of our total revenue. In connection
with the settlement in November 2002 of our contract litigation against B.
Braun, we terminated the manufacture and supply agreement under which we sold
CLAVE products to B. Braun effective December 31, 2002. We sold virtually no
CLAVE products to B. Braun in 2003 and will not sell CLAVE product sales to B.
Braun in the future. As explained further in Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, while the termination
of the B. Braun CLAVE agreement has had a short-term adverse effect on us, we do
not believe there will be any material adverse long-term effects. We believe
many of B. Braun's customers prefer the CLAVE to B. Braun's products and that
many of them will continue to buy CLAVE products through either Abbott or our
independent distributors when they are no longer available from B. Braun. We
have contracts to supply B. Braun a protected needle product, and B. Braun pays
us under the Safeline revenue sharing agreement. We expect both of these revenue
streams to continue to decrease as the market shifts to one piece, swabable,
needleless technology.
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INDEPENDENT DOMESTIC DISTRIBUTORS
We currently have approximately 22 independent distributors in the
United States and Canada who employ approximately 185 salespeople in the
aggregate and which accounted for approximately 23% of our net revenues in 2003.
We include Canada as "domestic" for administrative purposes. Distributors
purchase and stock our products for resale to healthcare providers.
No single independent distributor accounts for as much as 4% of net
sales. Although the loss of one or more of our larger distributors could have an
adverse affect on our business, we believe we could readily locate other
distributors in the same territories who could continue to distribute our
products to the same customers.
For several years before 2001, our sales to independent distributors
had been declining. In 2001, they showed a modest 6% increase in sales after we
took steps to provide better field support for independent distributors in order
to increase our net sales to them. In 2003, sales to our independent
distributors grew 42% in total, and 12% without the inclusion of sales
originating with Bio-Plexus. While we believe that the declining trend in sales
to the independent distributors has been reversed, and that sales to them will
grow in 2004, there is no assurance that continuing growth will be achieved, or
that sales to them will not decline in the future.
INTERNATIONAL
We distribute products in the principal countries in Western Europe,
the Pacific Rim, Latin America and in South Africa. Foreign sales (excluding
Canada) accounted for approximately 6%, 8% and 8% of our net sales in each of
the years 2003, 2002 and 2001 respectively. The International Division currently
has approximately 68 distributors. We have three business development managers
in Europe, one each in New Zealand and Australia who together serve the entire
Pacific Rim, Southeast Asia, the Middle East, Africa and South America. We
expect to add several more business development managers in 2004. Administrative
operations are in Roncanova in northern Italy (at the site of our assembly
plant) and San Clemente.
Currently, we export from the United States substantially all the
products sold internationally. All sales from the United States are denominated
in U.S. dollars and sales from Italy are denominated in Euros. We believe it
will be necessary for us to establish production facilities in a number of
locations outside North America to meet local demands and avoid high
transportation costs.
MANUFACTURING
Manufacturing of our products involves injection molding of plastic and
silicone parts, manual and automated assembly of the molded plastic parts,
needles and other components, quality control inspection, packaging and
sterilization. We mold all of our proprietary components, and perform all
assembly, quality control, inspection, packaging, labeling and shipping of our
products. Our manufacturing operations function as a separate group, producing
products for the marketing and sales groups.
We own a fully integrated medical device manufacturing facility in two
adjacent buildings totaling 78,000 square feet in San Clemente, California. A
mold maintenance shop supports the repair and maintenance needs of our molding
operation and manufactures some of our production molds. In addition, the mold
maintenance shop serves as a research and development prototype shop, and
utilizes advanced computer assisted design systems and automated machining
equipment. The state-of-the-art medical device molding facility includes a
24,425 square foot class 100,000 clean room in which all molding and automated
assembly of our proprietary medical components is performed. The clean room is
equipped with 42 injection molding machines and ancillary equipment including
robots designed to minimize human intervention, and sophisticated, highly
automated assembly systems to assemble the CLAVE, CLAVE Integrated Y site,
MicroCLAVE, CLAVE vial access spike, CLC2000, 1o2 Valve, RF150 and the McGaw
Protected Needle products. The assembly systems are custom designed and
manufactured for us.
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We assemble our Punctur-Guard products in our 37,500 square foot
manufacturing facility in Vernon, Connecticut (near Hartford), which includes
two clean rooms. The assembly processes for both the BCN and the Winged Set use
custom made automated assembly systems. Molding of Punctur-Guard components,
which had been done by outside custom molding companies, will all be transfered
in our San Clemente facility by the end of the second quarter of 2004.
Most of our manual assembly is done at our facilities in Ensenada, Baja
California, Mexico. Those facilities include approximately 60,000 square feet of
production and warehousing space and an electron beam sterilizer. Principal
products assembled manually are I.V. therapy systems, the Lopez Valve, and CLAVE
ancillary products and accessories. We also assemble I.V. therapy systems in our
approximately 10,000 square foot leased facility in northern Italy that we
acquired in June 2003.
Our state-of-the-art injection molding technology and highly automated
assembly systems are designed to maintain a high level of product quality and
achieve high volume production at low unit manufacturing costs. To achieve these
advantages and to gain greater control over raw material and finished product
delivery times, we mold our entire requirements of proprietary molded
components. The raw materials for our molding operation are principally resins
and silicones, and these materials are available from several sources. Generic,
"off-the-shelf" items are purchased from outside vendors unless significant cost
savings can be achieved by molding in-house. We are not dependent on any
individual vendor for purchased parts and have no contracts with our suppliers
beyond the terms of purchase orders issued.
Our products are sterilized in processes which use either gamma or
electron beam ("e-beam") radiation. Most of the sterilization is by e-beam,
which is less expensive and quicker than gamma radiation sterilization. While
all sterilization was performed by independent companies through the end of
2003, we commenced limited operation of our own sterilization facility at our
plant in Mexico in February 2004 and we will sterilize all of our products that
are assembled in Mexico at that facility. We will continue to use independent
contractors to sterilize products assembled in San Clemente and Italy.
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. In the third quarter of 2002 we
commenced use of automated assembly equipment for the 1o2 Valve and commenced
use of automated assembly equipment for the CLC2000 in the fourth quarter of
2002. Throughout 2002 and through mid 2003 we added molding and automated
assembly capacity for CLAVE production. In the third quarter of 2002 we
commenced a significant expansion of our manual assembly capacity in Mexico;
clean room and warehouse space was completed in June 2003, and we completed
construction and installation and limited production start-up of an electron
beam sterilizer in the first quarter of 2004. In late 2003 and early 2004, we
commenced moving plastic injection molding done for our Connecticut Division
(formerly Bio-Plexus) to our San Clemente facility, which is scheduled for
completion by the end of the second quarter of 2004; the purpose of the move is
to ensure more consistent quality in our molded components and decrease costs.
Ongoing steps also include automation of the production of new products and
other products for which volume is growing. We have been considering
establishment of production facilities outside North America for some time, and
in June 2003 we acquired a manufacturer of I.V. sets in Italy. We continue to
consider establishment of production facilities in other areas. Because
significant innovation is required to achieve these goals, there is no assurance
that these steps will achieve the desired results. Further, our Connecticut and,
more recently, our Italian facilities are transitioning to our manufacturing
methods, but there is no assurance as to the completion or success of those
transitions.
GOVERNMENT REGULATION
Government regulation is a significant factor in the development,
marketing and manufacturing of our products. The FDA regulates medical product
manufacturers and their products under a number of statutes including the FDC
Act, and we and our products are subject to the regulations of the FDA. The FDC
Act provides two basic review procedures for medical devices. Certain products
may qualify for a submission authorized by Section 510(k) of the FDC Act, under
9
which the manufacturer gives the FDA a pre-market notification of the
manufacturer's intention to commence marketing the product. The manufacturer
must, among other things, establish that the product to be marketed is
substantially equivalent to another legally marketed product. Marketing may
commence when the FDA issues a letter finding substantial equivalence. If a
medical device does not qualify for the Section 510(k) procedure, the
manufacturer must file a pre-market approval ("PMA") application. This requires
substantially more extensive pre-filing testing than the Section 510(k)
procedure and involves a significantly longer FDA review process. FDA approval
of a PMA application occurs only after the applicant has established safety and
efficacy to the satisfaction of the FDA. Each of our current products has
qualified, and we anticipate that any new products that we are likely to market
will qualify, for the expedited Section 510(k) clearance procedure. There is no
assurance, however, that new products that we develop or any manufacturers that
we might acquire, or claims that we may make concerning those products, will
qualify for expedited clearance rather than the more time consuming PMA
procedure or that, in any case, they will receive clearance from the FDA. FDA
regulatory processes are time consuming and expensive. Uncertainties as to time
required to obtain FDA clearances or approvals could adversely affect the timing
and expense of new product introductions. All of the regulated products that we
currently manufacture are classified as Class II medical devices by the FDA.
Class II medical devices are subject to performance standards relating to one or
more aspects of the design, manufacturing, testing and performance or other
characteristics of the product in addition to general controls involving
compliance with labeling and record keeping requirements.
We must comply with FDA regulations governing medical device
manufacturing practices. The FDA and the California Department of Health
Services ("DHS") require manufacturers to register and subject manufacturers to
periodic FDA and DHS inspections of their manufacturing facilities. We are an
FDA registered medical device manufacturer, and must demonstrate that we and our
contract manufacturers comply with the FDA's current Quality System Regulations
("QSR"). Under these regulations, the manufacturing process must be regulated
and controlled by the use of written procedures and the ability to produce
devices that meet the manufacturer's specifications must be validated by
extensive and detailed testing of every critical aspect of the process. They
also require investigation of any deficiencies in the manufacturing process or
in the products produced and detailed record keeping. Further, the FDA's
interpretation and enforcement of these requirements has been increasingly
strict in recent years and seems likely to be even more stringent in the future.
Failure to adhere to QSRs would cause the products produced to be considered in
violation of the applicable law and subject to enforcement action. The FDA
monitors compliance with these requirements by requiring manufacturers to
register with the FDA, and by subjecting them to periodic FDA inspections of
manufacturing facilities. If an FDA inspector observes conditions that might be
violative, the manufacturer must correct those conditions or explain them
satisfactorily, or face potential regulatory action that might include physical
removal of the product from the marketplace.
We believe that our products and procedures are in compliance with all
applicable FDA and DHS regulations. There can be no assurance, however, that
other products we are developing or products that we may develop in the future
will be cleared by the FDA and classified as Class II products, or that
additional regulations restricting the sale of our present or proposed products
will not be promulgated by the FDA or DHS. In addition, changes in FDA, DHS or
other federal or state health, environmental or safety regulations or their
applications could adversely affect our business.
To market our products in the European Community ("EC"), we must
conform to additional requirements of the EC and demonstrate conformance to
established quality standards and applicable directives. As a manufacturer that
designs, manufactures and markets its own devices, we must comply with the
quality management standards of EN ISO 9001(1994) / EN 46001 (1996). Those
quality standards are similar to the QSR regulations but incorporate the quality
requirements for product design and development.
Manufacturers of medical devices must also conform to EC Directives
such as Council Directive 93/42/EEC ("Medical Device Directive") and their
applicable annexes. Those regulations assure that medical devices are both safe
and effective and meet all applicable established standards prior to being
marketed in the EC. Once a manufacturer and its devices are in conformance with
the Medical Device Directive, the "CE" Mark may be affixed to its devices. The
CE Mark gives devices an unobstructed entry to all the member countries of the
EC.
We have demonstrated conformity to the regulations of both ISO 9001
(1994) / EN 46001 (1996), ISO 13485 (1996) and the Medical Device Directive and
we affix the CE Mark to our device labeling for product sold in member countries
of the EC.
10
We believe our products and systems are in compliance with all EC
requirements. There can be no assurance, however, that other products we are
developing or products that we may develop in the future will conform or that
additional regulations restricting the sale of our present or proposed products
will not be promulgated by the EC.
COMPETITION
The market for I.V. products is intensely competitive. We believe that
our ability to compete depends upon our continued product innovation, the
quality, convenience and reliability of our products, access to distribution
channels, patent protection, and pricing. We encounter significant competition
in this market both from large established medical device manufacturers and from
smaller companies. Our ability to compete effectively depends on our ability to
differentiate our products based on safety features, product quality, cost
effectiveness, ease of use and convenience, as well as our ability to perceive
and respond to changing customer needs. In the long term, we expect that our
ability to compete will continue to be affected by our ability to reduce unit
manufacturing costs through higher volume production.
In addition to competing with conventional needle I.V. connection
systems and protected needle connection systems marketed by companies such as
Baxter Healthcare Corporation ("Baxter") and Abbott, our present and future
products will compete with needleless I.V. connection systems like those
marketed by Baxter, Becton-Dickinson and Company ("BD"), B.Braun, Alaris
Corporation and others. Although we believe that our needleless CLAVE has
distinct advantages over competing systems, there is no assurance that it will
be able to compete successfully with these products.
The blood collection needle market is highly competitive, and a large
segment of the market continues to use non-safety devices that are generally
less expensive than safety devices such as the Punctur-Guard products. The
largest share of the blood collection needle market is held by BD.
Manufacturers of products with which we currently compete, or might
compete in the future, include large companies with an established presence in
the healthcare products market and substantially greater financial, marketing
and distribution, managerial and other resources. In particular, Baxter, Abbott
and B.Braun are leading distributors of I.V. therapy systems, while BD dominates
the blood collection needle market. Several of these competitors have broad
product lines and have been successful in obtaining full-line contracts with a
significant number of hospitals to supply substantially all of their I.V.
product requirements. In order to penetrate more of these hospitals, we have
established a strategic supply and distribution relationship with Abbott.
We believe the success of the CLAVE has, and will continue to motivate
others to develop one-piece needleless connectors, which may incorporate many of
the same functional and physical characteristics as the CLAVE. We are aware of a
number of such products. We believe most of those products were developed
primarily by companies who currently do not have the distribution or financial
capabilities that we have, although some of those products may be distributed in
the future by larger companies that do have such capabilities. We believe these
products have had a modest impact on our CLAVE business to date, but there is no
assurance that our current or future products will be able to successfully
compete with these or future products developed by others.
We believe that our ability to compete in the custom I.V. systems
market depends upon the same factors affecting our existing products, but will
be particularly affected by cost to the customer and delivery times. While we
believe we have advantages in these two areas, there is no assurance that other
companies will not be able to compete successfully with our custom I.V. systems.
11
PATENTS
We have United States and certain foreign patents on the CLAVE,
CLC2000, Punctur-Guard technology, Click Lock, and Piggy Lock I.V. connectors
and have United States patents on the Lopez Valve connector. We have
applications pending for additional United States and foreign patents on the 1o2
Valve, CLC2000, CLAVE, Punctur-Guard, Click Lock and Piggy Lock I.V. connectors.
The expiration dates of our patents range from 2006 to 2019. (While we no longer
manufacture and sell the Click Lock and Piggy Lock, the patents have
considerable value for potential use in other devices.)
Our success may depend in part on our ability to obtain patent
protection for our products and to operate without infringing the proprietary
rights of third parties. While we have obtained certain patents and applied for
additional United States and foreign patents covering certain of our products,
there is no assurance that any additional patents will be issued, that the scope
of any patent protection will prevent competitors from introducing similar
devices or that any of our patents will be held valid if subsequently
challenged. We also believe that patents on the Click Lock and the Lopez Valve
products may have been, and that patent protection on the CLAVE may be,
important in preventing others from introducing competing products that are as
effective as our products. The loss of patent protection on CLAVE, CLC2000,
Punctur-Guard, Click Lock or Lopez Valve products could adversely affect our
ability to exclude other manufacturers from producing effective competitive
products and could have an adverse impact on our financial results.
The fact that a patent is issued to us does not eliminate the
possibility that patents owned by others may contain claims that are infringed
by our products.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. Litigation, which
would result in substantial cost to us and in diversion of our resources, may be
necessary to defend us against claimed infringement of the rights of others and
to determine the scope and validity of the proprietary rights of others. Adverse
determinations in such litigation could subject us to significant liabilities to
third parties or could require us to seek licenses from third parties and could
prevent us from manufacturing, selling or using our products, any of which could
have a material adverse effect on our business. In addition, we have initiated
litigation, and will continue to initiate litigation in the future, to enforce
our intellectual property rights against those we believe to be infringing on
our patents. Such litigation could result in substantial cost and diversion of
resources.
ICU FINANCE
In 2002 we established ICU Finance, Inc., a wholly-owned consolidated
subsidiary, to provide financing to healthcare entities. As of December 31, 2003
we had finance loans receivable of approximately $8.9 million; they are fully
secured by real and personal property. We plan to hold the loans to maturity or
payoff. Weighted average maturity (principal and interest) at December 31, 2003
was 2.2 years and the weighted average interest rate was 5.5%. We discontinued
new lending activities in October 2003 but will honor existing lending
commitments. Unfunded commitments were approximately $4.0 million at December
31, 2003.
EMPLOYEES
At January 31, 2004 we had 574 full-time employees, consisting of 94
engaged in sales, marketing and administration, and 480 in manufacturing,
molding, product development and quality control, including approximately 300 in
Mexico. We contract with an independent temporary agency to provide some of the
production personnel at our manufacturing facility in San Clemente, California;
we employ none of the personnel provided through the agency. At January 31,
2004, the number of temporary production personnel was approximately 30.
ITEM 2. PROPERTIES.
We own two adjacent 39,000 square foot buildings in San Clemente,
California, another 28,000 square foot building in the same business park, a
37,500 square foot building in Vernon, Connecticut a 60,000 square foot building
on approximately 94 acres of land in Ensenada, Baja California, Mexico and a
17,500 square foot building in Roncanova, Italy. We also lease a 10,000 square
foot building in Roncanova, Italy.
12
ITEM 3. LEGAL PROCEEDINGS.
In an action filed August 21, 2001 entitled ICU MEDICAL, INC. V. B
BRAUN MEDICAL, INC. pending in the United States District Court for the Northern
District of California, we allege that B. Braun infringes ICU's patent by the
manufacture and sale of its UltraSite medical connector. On December 30, 2003,
we were awarded an additional patent and on December 30, 2003 we filed an
additional action against B. Braun for patent infringement and moved to amend
the 2001 action to include that allegation. The 2001 action has since been
amended to include our claim of infringement of the additional patent. We seek
monetary damages and injunctive relief and intend to vigorously pursue this
matter. The outcome of this matter cannot be determined at this time.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
EXECUTIVE OFFICERS OF REGISTRANT.
The following table lists the names, ages, certain positions and
offices held by our executive officers and key employees. Officers serve at the
pleasure of the Board of Directors.
Age Office Held
--- -----------
George A. Lopez, M.D. 56 Chairman of the Board, President
and Chief Executive Officer
Alison D. Burcar 31 Vice President of Marketing
Richard A. Costello 40 Vice President of Sales
Francis J. O'Brien 61 Chief Financial Officer, Secretary
and Treasurer
Steven C. Riggs 45 Vice President of Operations
Dr. Lopez and Messrs. Costello and O'Brien have been employed by us in
their current positions for more than five years.
Ms. Burcar became Vice President of Marketing in August 2002, after
having been Marketing Operations Manager since March 1998. Ms. Burcar has been
with us since 1995. She is the niece of Dr. Lopez
Mr. Riggs became Vice President of Operations in August 2002, after
having been Director of Operations since 1998. Mr. Riggs has been with us since
1992.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Common Stock has been traded on the Nasdaq Stock Market National
Market Tier under the symbol "ICUI" since our initial public offering on March
31, 1992. The following table sets forth, for the quarters indicated, the high
and low closing prices for our Common Stock quoted by the Nasdaq:
2002 High Low
---- ---- ---
First Quarter $37.30 $29.29
Second Quarter 41.97 29.55
Third Quarter 38.61 25.75
Fourth Quarter 43.89 32.60
2003 High Low
---- ---- ---
First Quarter $37.50 $25.87
Second Quarter 33.33 26.41
Third Quarter 30.22 22.95
Fourth Quarter 35.55 25.35
We have never paid dividends and do not anticipate paying dividends in
the foreseeable future as the Board of Directors intends to retain future
earnings for use in our business. Any future determination as to payment of
dividends will depend upon our financial condition, results of operations and
such other factors as the Board of Directors deems relevant.
As of December 31, 2003 we had 155 stockholders of record and believe
we have approximately 5,000 beneficial stockholders.
We have a 1993 Stock Incentive Plan and a 2003 Stock Option Plan under
which we grant options to purchase our Common Stock to our employees and have a
2001 Directors' Stock Option Plan under which we grant options to purchase our
Common stock to our Directors. We also have an Employee Stock Purchase Plan. All
plans were approved by our stockholders. Further information about the plans is
in Note 5 to the consolidated financial statements. Certain information about
the plans is as follows:
Number of shares
remaining available for
Number of shares to be issued Weighted-average future issuance under
upon exercise of exercise price of equity compensation
outstanding options, outstanding options, plans (excluding shares reflected
warrants and rights warrants and rights in column (a))
(a) (b) (c)
4,367,330 $16.91 3,754,864
14
ITEM 6. SELECTED FINANCIAL DATA
ICU MEDICAL, INC.
-----------------
SELECTED FINANCIAL DATA
-----------------------
Year ended December 31,
-----------------------------------------------------------------
(in thousands, except per share data)
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
INCOME DATA:
Revenue
Net Sales $102,726 $ 84,218 $ 69,055 $ 56,191 $ 47,014
Other 4,628 3,589 -- -- --
--------- --------- --------- --------- ---------
Total Revenue 107,354 87,807 69,055 56,191 47,014
Cost of Sales 48,444 36,464 28,932 23,787 19,883
--------- --------- --------- --------- ---------
Gross profit 58,910 51,343 40,123 32,404 27,131
Selling, general and administrative
expenses 23,029 19,871 16,816 14,302 12,529
Research and development expenses 1,757 1,472 1,188 1,480 1,214
--------- --------- --------- --------- ---------
Total operating expenses 24,786 21,343 18,004 15,782 13,743
--------- --------- --------- --------- ---------
Income from operations 34,124 30,000 22,119 16,622 13,388
Investment income 1,123 1,432 1,988 2,096 1,431
--------- --------- --------- --------- ---------
Income before income taxes 35,247 31,432 24,107 18,718 14,819
Provision for income taxes 12,950 11,750 8,720 6,930 5,400
--------- --------- --------- --------- ---------
Net income $ 22,297 $ 19,682 $ 15,387 $ 11,788 $ 9,419
========= ========= ========= ========= =========
Net income per common share
Basic $ 1.62 $ 1.43 $ 1.20 $ 0.94 $ 0.77
Diluted $ 1.48 $ 1.28 $ 1.06 $ 0.87 $ 0.72
========= ========= ========= ========= =========
Weighted average number of shares
Basic 13,753 13,793 12,841 12,495 12,232
Diluted 15,050 15,352 14,454 13,588 13,036
========= ========= ========= ========= =========
CASH FLOW DATA:
Cash flows from operations,
excluding tax benefits from
exercise of stock options $ 21,987 $ 17,905 $ 20,565 $ 12,760 $ 14,767
Total cash flows from operations $ 22,829 $ 28,097 $ 24,329 $ 13,462 $ 15,518
BALANCE SHEET DATA:
Cash and liquid investments $ 73,137 $ 88,465 $ 73,027 $ 50,786 $ 38,442
Working capital 102,932 102,564 79,736 57,718 42,024
Total assets 164,288 157,032 117,342 92,860 75,364
Long-term debt -- -- -- -- --
Stockholders' equity 156,003 145,387 106,677 83,380 68,014
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
We are a leader in the development, manufacture and sale of
proprietary, disposable medical connection systems for use in intravenous
("I.V.") therapy applications. Our devices are designed to protect healthcare
workers and their patients from exposure to infectious diseases such as
Hepatitis B and C and Human Immunodeficiency Virus (HIV") through accidental
needlesticks. We are also a leader in the production of custom I.V. systems and
low cost generic I.V. systems and we incorporate our proprietary products on
many of those custom I.V. systems. We also manufacture and sell the
Punctur-Guard line of blood collection needles, which we acquired in October
2002.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are summarized in Note 1 to the
Consolidated Financial Statements and our critical accounting policies are
summarized below. In preparing our financial statements, we make estimates and
assumptions that affect the expected amounts of assets and liabilities and
disclosure of contingent assets and liabilities. We apply our accounting
policies on a consistent basis. As circumstances change, they are considered in
our estimates and judgments, and future changes in circumstances could result in
changes in amounts at which assets and liabilities are recorded.
Investment securities are all marketable and considered "available for
sale". See Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Under our current investment policies, the securities in which we invest have no
significant difference between cost and fair value. If our investment policies
were to change, and there were differences between cost and fair value, that
difference, net of tax effect, would be reflected as a separate component of
stockholders' equity.
We record sales and related costs when ownership of the product
transfers to the customer. Under the terms of most purchase orders, ownership
transfers on shipment, but in some cases it transfers on delivery. If there are
significant doubts at the time of shipment as to the collectibility of the
receivable, we defer recognition of the sale in revenue until the receivable is
collected. Most of our customers are medical product manufacturers or
distributors, although some are end-users. Our only post-sale obligations are
warranty and certain rebates. We warrant products against defects and have a
policy permitting the return of defective products. We provide a reserve for
warranty returns as an expense; amounts have been insignificant. Customers, with
certain exceptions, do not retain any right of return and there is no price
protection with respect to unsold products; returns from customers with return
rights have not been significant. We accrue rebates as a reduction in revenue
based on contractual commitments and historical experience. Adjustments of
estimates of warranty claims, rebates or returns, which have not been, and are
not expected to be material, affect current operating results when they are
determined.
Accounts receivable are stated at net realizable value. An allowance is
provided for estimated collection losses based on specific past due accounts for
which we consider collection to be doubtful. Loss exposure is principally with
international distributors for whom normal payment terms are long in comparison
to those of our other customers and, to a lesser extent, domestic distributors.
Many of these distributors are relatively small and we are vulnerable to adverse
developments in their businesses that can hinder our collection of amounts due.
If actual collection losses exceed expectations, we could be required to accrue
additional bad debt expense, which could have an adverse effect on our operating
results in the period in which the accrual occurs.
Inventories are stated at the lower of cost or market. We need to carry
many components to accommodate our rapid product delivery, and if we misestimate
demand or if customer requirements change, we may have components in inventory
that we may not be able to use. Most finished products are made only after we
receive orders, but for those that are not, we need to estimate what may not be
saleable. We regularly review inventory for slow moving items and write off all
items we do not expect to use in manufacturing, or finished products we do not
expect to sell. If actual usage of components or sales of finished goods
inventory is less than our estimates, we would be required to write off
additional inventory, which could have an adverse effect on our operating
results in the period in which the write-off occurs.
16
Property and equipment is carried at cost and depreciated on the
straight-line method over the estimated useful lives. The estimates of useful
lives are significant judgments in accounting for property and equipment,
particularly for molds and automated assembly machines that are custom made for
us. We may retire them on an accelerated basis if we replace them with larger or
more technologically advanced tooling. The remaining useful lives of all
property and equipment are reviewed regularly and lives are adjusted or assets
written off based on current estimates of future use. As part of that review,
property and equipment is reviewed for other indicators of impairment, but to
date we have not encountered circumstances indicating the carrying amount of an
asset, or group of assets, may not be recoverable. An unexpected shortening of
useful lives of property and equipment that significantly increases depreciation
provisions, or other circumstances causing us to record an impairment loss on
such assets, could have an adverse effect on our operating results in the period
in which the related charges are recorded.
NEW ACCOUNTING PRONOUNCEMENTS
We have implemented all new accounting pronouncements that are in
effect and that may impact our consolidated financial statements and do not
believe that there are any other new accounting pronouncements that have been
issued that might have a material impact on our consolidated financial
statements.
BUSINESS OVERVIEW
Until the late 1990s, our primary emphasis in product development,
sales and marketing was disposable medical connectors for use in I.V. therapy,
and our principal product was the CLAVE. In the late 1990s, we commenced a
transition from a product-centered company to an innovative, fast, efficient,
low-cost manufacturer of custom I.V. systems, using processes that we believe
can be readily applied to a variety of disposable medical devices. This strategy
enables us to capture revenue on the entire I.V. system, and not just a
component of the system.
We are also increasing our efforts to acquire new products. We acquired
the Punctur-Guard line of blood collection needles in 2002 and are continuing to
seek other opportunities. However, there can be no assurance that we will be
successful in finding acquisition opportunities, or in acquiring companies or
products.
Custom I.V. systems and new products will be of increasing importance
to us in future years. We expect CLAVE products to continue to grow in the U.S.,
but at a slower percentage growth rate than in the past because of our large
market penetration. Growth of all our products outside the U.S. could be
substantial, although to date it has been modest. Therefore, we will be
directing increasing product development, acquisition, sales and marketing
efforts to custom I.V. systems and new products in the U.S. and increasing our
emphasis on the markets outside the U.S.
Our relationship with Abbott has been and will continue to be of
singular importance to our growth. In 2003, approximately 67% of our revenue was
from sales to Abbott, and we expect this percentage to increase in the future.
Abbott has a significant share of the I.V. set market in the U.S., and provides
us access to that market. We expect that Abbott will be important to our growth
for CLAVE, custom I.V. systems, and our other products in the U.S. and also
outside the U.S.
We believe that achievement of our growth objectives, both within the
U.S., and outside the U.S., will require increased efforts by us in sales and
marketing and product development, and we expect to increase expenditures for
those starting in 2004.
There is no assurance that we will be successful in implementing our
growth strategy. The custom I.V. systems market is still small and we could
encounter customer resistance to custom products. Further, we could encounter
increased competition as other companies see opportunity. Product development or
acquisition efforts may not succeed, and even if we do develop or acquire
products, there is no assurance that we will achieve profitable sales of such
products. An adverse change in our relationship with Abbott, or a deterioration
of Abbott's position in the market, could have an adverse effect on us.
Increased expenditures for sales and marketing and product acquisition and
development may not yield desired results when expected, or at all. While we
have taken steps to control all these risks, there are certain of those risks
which may be outside of our control, and there is no assurance that steps we
have taken will succeed.
17
OVERVIEW OF OPERATIONS
The following table sets forth, for the periods indicated, net revenues
by product as a percentage of total net revenues:
---------------------------------------- ------------------------ ----------------------- -----------------------
Product Line 2003 2002 2001
---------------------------------------- ------------------------ ----------------------- -----------------------
CLAVE 59% 67% 74%
Custom and Generic I.V. Systems 22% 17% 13%
Punctur-Guard 7% 1% -
CLC2000 4% 4% 3%
Other Products 4% 7% 10%
License, royalty and revenue share 4% 4% -
---------------------------------------- ------------------------ ----------------------- -----------------------
Total 100% 100% 100%
---------------------------------------- ------------------------ ----------------------- -----------------------
Most custom I.V. systems include one or more CLAVEs. Total CLAVE sales
including custom I.V. systems with at least one CLAVE were 77% of net revenue in
2002 and 73% of net revenue in 2003.
We sell our products to independent distributors and through agreements
with Abbott (the "Abbott Agreements") and certain other medical product
manufacturers. Most independent distributors handle the full line of our
products. Abbott purchases CLAVE products, principally bulk, non-sterile
connectors, and the CLC2000. In addition, we sell custom I.V. systems to Abbott
under a program referred to as SetSource. In January 2004, we announced the
execution of amendments to our existing agreements with Abbott. The amendments
extend the terms of our agreements to 2014 and provide Abbott with rights to
distribute all existing ICU Medical products worldwide. We signed another
contract amendment with Abbott in January 2004 to distribute our Punctur-Guard
line of blood collection needles in the U.S. and the rest of the world. We also
sell certain other products to a number of other medical product manufacturers.
In August 2003, Abbott announced that it will spin off its core
Hospital Products Division to its stockholders as an independent company. The
Hospital Products Business, which will become Hospira, Inc., accounts for
virtually all of our sales to Abbott. We believe the spin-off is a positive
development for us and will result in new business opportunities with the new
Hospira.
We believe that as healthcare providers continue to either consolidate
or join major buying organizations, our success in marketing and distributing
CLAVE products will depend, in part, on our ability, either independently or
through strategic relationships such as our Abbott relationship, to secure
long-term CLAVE contracts with large healthcare providers and major buying
organizations. As a result of this marketing and distribution strategy we derive
most of our revenues from a relatively small number of distributors and
manufacturers. The loss of a strategic relationship with a customer or a decline
in demand for a manufacturing customer's products could have a material adverse
effect on our operating results.
We believe the success of the CLAVE has motivated, and will continue to
motivate others to develop one-piece, swabbable, needleless connectors that may
incorporate many of the same functional and physical characteristics as the
CLAVE. We are aware of a number of such products. In response to competitive
pressure, we have been reducing prices to protect and expand our market,
although overall pricing has been stable recently. The price reductions to date
have been more than offset by increased volume. We expect that the average price
of our CLAVE products may continue to decline. There is no assurance that our
current or future products will be able to successfully compete with products
developed by others.
18
The federal Needlestick Safety and Prevention Act, enacted in November
2000, modified standards promulgated by the Occupational Safety and Health
Administration to require employers to use safety I.V. systems where appropriate
to reduce risk of injury to employees from needlesticks. We believe this law has
had and will continue to have a positive effect on sales of our needleless
systems, although we are unable to quantify the current or anticipated effect of
the law on our sales.
We are taking steps to reduce our dependence on our current proprietary
products. We are seeking to substantially expand our custom I.V. systems
business through increased sales to medical product manufacturers and
independent distributors. Under one of our Abbott Agreements, we manufacture all
new custom I.V. sets for sale by Abbott and jointly promote the products under
the name SetSource. We expect continuing significant increases in sales of
custom I.V. systems under this agreement. We also contract with group purchasing
organizations and independent dealer networks for inclusion of our products
among those available to members of those entities. Custom I.V. systems
accounted for approximately $22.8 million of net sales in 2003, including net
sales under the Abbott SetSource program of approximately $10.4 million. There
is no assurance that either one of these initiatives will continue to succeed.
In the fourth quarter of 2002 we acquired Bio-Plexus. Inc. for
approximately $8.8 million (before expenses), net of cash acquired, and
Bio-Plexus has been included in our consolidated financial statements since
October 31, 2002. Bio-Plexus's principal products are blood collection needles,
under the Punctur-Guard name, that are designed to eliminate exposure to sharp,
contaminated needles. Bio-Plexus's revenues in 2003, including royalties, were
$8.4 million, and its effect on net income was immaterial.
We have an ongoing program to increase systems capabilities, improve
manufacturing efficiency, reduce labor costs, reduce time needed to produce an
order, and minimize investment in inventory. These include use of automated
assembly equipment for new products and other products for which volume is
growing, use of larger molds and molding machines, centralization of all
proprietary molding in San Clemente, expansion of our production facility in
Mexico, and the establishment of other production facilities outside the U.S.
We distribute products through three distribution channels. Net product
revenues for each distribution channel were as follows:
---------------------------------------- ------------------------ ----------------------- -----------------------
Channel 2003 2002 2001
---------------------------------------- ------------------------ ----------------------- -----------------------
Medical product manufacturers 71% 73% 72%
Independent domestic distributors 23% 19% 20%
International 6% 8% 8%
---------------------------------------- ------------------------ ----------------------- -----------------------
Total 100% 100% 100%
---------------------------------------- ------------------------ ----------------------- -----------------------
QUARTERLY RESULTS: The healthcare business in the United States is
subject to seasonal fluctuations, and activity tends to diminish somewhat in the
summer months of June, July and August, when illness is less frequent than in
winter months and patients tend to postpone elective procedures. This typically
causes seasonal fluctuations in our business. In addition, we can experience
fluctuations in net sales as a result of variations in the ordering patterns of
our largest customers, which may be driven more by production scheduling and
their inventory levels, and less by seasonality. Our expenses often do not
fluctuate in the same manner as net sales, which may cause fluctuations in
operating income that are disproportionate to fluctuations in our revenue.
19
YEAR-TO-YEAR COMPARISONS
We present summarized income statement data in Item 6. Selected
Financial Data. The following table shows, for the three most recent years, the
percentages of each income statement caption in relation to revenues, and the
percentage change in each caption in each year. (We currently calculate our
gross profit percentage based on net sales, which includes only product sales
and excludes non-product revenue such as license fees. (See below for more
information on non-product revenue. We present the alternative calculation based
on total revenue for the convenience of readers who prefer to view it that way).
- -----------------------------------------------------------------------------------------------------------------------
Percentage of Revenues Changes
---------------------------- --------------------------------
2003 2002 2001 2003 v. 2002 2002 v. 2001
---- ---- ---- ------------ ------------
Revenue
Net Sales 96% 96% 100% 22% 22%
Other 4% 4% - 29% 100%
----- ----- ----- ----- -----
Total Revenues 100% 100% 100% 22% 27%
Cost of Sales 47% 43% 42% 33% 26%
Gross Profit
Percentage of Net Sales 53% 57% 58% 14% 19%
Percentage of All Revenues 55% 58% 58% 15% 28%
Selling, General and Administrative expenses 21% 22% 24% 16% 17%
Research and Development expenses 2% 2% 2% 19% 24%
----- ----- ----- ----- -----
Total operating expenses 23% 24% 26% 16% 18%
----- ----- ----- ----- -----
Income from operations 32% 34% 32% 14% 36%
----- ----- ----- ----- -----
Investment income 1% 2% 3% (22%) (28%)
----- ----- ----- ----- -----
Income before income taxes 33% 36% 35% 12% 31%
Income taxes 12% 14% 13% 10% 35%
----- ----- ----- ----- -----
Net income 21% 22% 22% 13% 29%
===== ===== ===== ===== =====
- -----------------------------------------------------------------------------------------------------------------------
As further explained below, our growth in net income of 13% in 2003 was
less than our revenue growth of 22%, principally because our gross margin
decreased and the decrease was only partially offset by a reduction of operating
expenses and income taxes as a percentage or revenues.
COMPARISON OF 2003 TO 2002
In 2003 we had total revenues of $107,354,000, which was $19,547,000,
or 22%, higher than the total revenues of $87,807,000 reported in 2002. The
increase was primarily attributable to the increase in sales of custom I.V.
systems, which increased $7,652,000, Punctur-Guard, which increased by
$6,201,000 and CLAVE products, which increased by $4,393,000,
DISTRIBUTION CHANNELS: Net sales to Abbott were $71,294,000 in 2003,
compared to $49,990,000 in 2002, an increase of 43%. CLAVE sales to Abbott
increased 38% to $55,745,000 from $40,494,000 principally because of an increase
in unit volume as the CLAVE product penetration of Abbott customer accounts
increased. Sales of custom I.V. systems to Abbott under the SetSource program
approximated $10,447,000 for the year, up from $5,666,000 in 2002 principally
because of an increase in the number of units sold. We expect a continued
increase in CLAVE unit and dollar sales volume with Abbott, as well as a
significant increase in SetSource unit and dollar sales volume in 2004. Net
sales of the CLC2000 to Abbott increased to approximately $1,927,000 from
$1,608,000 in 2002 and we expect sales of the CLC2000 to Abbott will continue to
increase in the future. Net sales of Rhino decreased 14% to $1,674,000 for 2003.
20
Sales of Rhino started to decline in early 2001, and they are expected to
continue to decline in the future as the market shifts to swabbable technology.
There is no assurance as to the amount of any of the future sales increases to
Abbott.
In connection with the November 2002 settlement of our contract
litigation against B. Braun, we terminated the manufacture and supply agreement
under which we sold CLAVE products to B. Braun effective December 31, 2002. We
sold virtually no CLAVE products to B. Braun in 2003 as compared with $8,183,000
in 2002, and will not sell CLAVE product sales to B. Braun in the future.
Revenue derived from B. Braun was $1,365,000 in 2003 compared to $9,861,000 in
2002. The termination of the CLAVE agreement has had a short-term adverse effect
on us because B. Braun has been filling customer orders from its inventory of
CLAVE products, with the result that some former B. Braun customers may not
order from alternative CLAVE distribution channels until B. Braun's CLAVE
inventory is exhausted. We do not believe the termination of the B. Braun
agreement will have any material long-term adverse effect on us. We have lost
some sales unit volume to B. Braun products that compete with CLAVE, but we
believe many of B. Braun's customers prefer the CLAVE to B. Braun's products and
will continue to buy CLAVE products from alternative distribution channels,
which are either Abbott or our independent distributors. We estimate, based on
information from distribution channels, that B. Braun customers that accounted
for approximately 50% of the unit volume of CLAVE products formerly sold by B.
Braun were purchasing CLAVE products from alternative distribution channels by
December 31, 2003. We believe that the unit volume to former B. Braun CLAVE
customers through other CLAVE distribution channels will increase when CLAVE
products are no longer available from B. Braun. To the extent that customers'
needs are filled through independent distributors, we generate higher revenue
and profit per CLAVE connector, because independent distributors purchase
packaged sterilized products, often complete I.V. sets, from us at higher prices
than the bulk nonsterile CLAVE sites which accounted for most of the CLAVEs that
we sold to B. Braun. We have contracts to supply B. Braun a protected needle
product, and B. Braun pays us under the Safeline revenue sharing agreement. We
expect both of these revenue streams to continue to decrease as the market
shifts to one piece, swabbable, needleless technology.
Net sales to independent domestic distributors (including Canada)
increased approximately 42% to $24,106,000 in 2003 from $16,966,000 in 2002. The
increase was due principally to the inclusion of $6,260,000 of Punctur-Guard
product sales which included 12 months of revenue compared to $1,063,000 in
2002, which included revenue only for the last two months of the year following
our acquisition of Bio-Plexus on October 31, 2002. Also contributing to this
increase is a 19% increase in custom I.V. systems, and a 9% increase in CLAVE
product sales, both principally due to an increase in unit volume. We believe
this increase in sales of CLAVE and custom I.V. systems with CLAVEs is because
of acquisition by our independent distributors of market share from B. Braun and
we expect a continued increase in unit sales of CLAVE and custom I.V. systems
with CLAVEs to independent distributors. There is no assurance as to the amount
of any future sales increases to the independent domestic distributors.
Net sales to international distributors (excluding Canada) were
$5,111,000 in 2003, as compared with $7,085,000 in 2002. The decrease in 2003
was due primarily to a decrease in CLAVE product sales as distributors slowed
their orders to reduce their inventory levels. This decrease was partially
offset by an increase in custom I.V. system product sales and Punctur-Guard
product sales. We expect increases in foreign sales in the future in response to
increased sales and marketing efforts including additional business development
managers. Also, we believe we will see a positive impact beginning late in 2004
or 2005 from our recently announced Abbott contract amendments with rights to
distribute all ICU Medical products and Punctur-Guard products outside the
United States. There is no assurance that these expectations will be realized.
PRODUCT AND OTHER REVENUE: Total net sales of CLAVE products (excluding
custom CLAVE I.V. systems) increased approximately 8% to $62,864,000 in 2003
from $58,471,000 in 2002. Total net sales of CLAVE products including custom
I.V. systems with CLAVE increased from $66,951,000 in 2002 to $78,748,000 in
2003, or 16%. This increase was due primarily to an increase in unit shipments
of CLAVE products to Abbott and our domestic distributors, offset by a decrease
in unit shipments to our international distributors and the absence of shipments
to B. Braun. The aggregate average net selling price of CLAVE products in 2003
changed little from 2002 and while we expect some decrease in 2004, we expect
the decreases to be minimal. We expect continued growth in CLAVE unit and dollar
sales volume in 2004, notwithstanding the termination of distribution through B.
Braun, because of the growth that we expect in our other distribution channels.
However, there is no assurance that the expectations will be realized.
21
In October 2001, we commenced production of the MicroCLAVE. It is
smaller than the existing CLAVE but is functionally similar. We market it as an
extension of the CLAVE product line for use where its smaller size is
advantageous, such as pediatric care. Sales are included in CLAVE product sales.
Net sales of custom and generic I.V. systems, which included custom
I.V. sets, both with a CLAVE and without a CLAVE, were $22,823,000 in 2003
compared to $15,205,000 in 2002, an increase of $6,974,000, or 50%. The
SetSource program with Abbott accounted for approximately 69% of the increase,
with most of the balance in sales to independent domestic and international
distributors.
We acquired the Punctur-Guard product line and technology with the
purchase of Bio-Plexus on October 31, 2002. We now produce the Punctur-Guard
line of products and also license the technology to two medical device
manufacturers for use in catheters. After our acquisition of Bio-Plexus on
October 31, 2002, we made significant improvements to the Punctur-Guard products
and manufacturing processes. We did not actively promote sales of those products
until completion of those product improvements. We completed improvements on the
Winged Set products and re-launched them on March 1, 2003. We completed
improvements on the BCN and started selling the improved product in late
September 2003. Sales of Punctur-Guard products (excluding royalties) were
$7,264,000 in 2003 compared to $1,063,000 for the last two months of 2002. We
expect sales of these products to increase in the future, but we give no
assurance that such increases will be achieved.
Net sales of the CLC2000 grew slightly from $3,744,000 in 2002 to
$3,903,000 in 2003, an increase of 4%. Sales to Abbott and domestic distributors
accounted for all the growth offset by a decrease in sales to foreign
distributors. We expect sales of the CLC2000 to increase in 2004 and later years
through all of our distribution channels, but there is no assurance as to the
amount or timing of future CLC2000 sales.
Other products consist principally of the Lopez Valve and protected
needle products. Increases in Lopez Valve sales in 2003 were offset by decreases
in protected needle sales as the safe connector market continues its shift to
needleless technology.
Other revenue consists of license, royalty and revenue share income,
and has been presented separately in our financial statements since the fourth
quarter of 2002; amounts were not significant prior to this. The principal
component was ongoing royalties received for other companies' use of
Punctur-Guard technology of $1,182,000, SafeLine revenue share payments from B.
Braun of approximately $791,000 and one-time license fees of $2,657,000. We
expect to receive ongoing royalties for the use of Punctur-Guard technology and
SafeLine revenue share payments from B. Braun as well as additional payments
under another license of approximately $235,000 per quarter for four years
starting in the first quarter of 2004. We may receive other license fees or
royalties in the future for the use of our technology. We give no assurance as
to amounts or timing of any future payments, or whether such payments will be
received.
We expect revenue growth in 2004 to be lower than it was in 2003. The
percentage growth in our CLAVE business (including custom I. V. systems) in 2004
is expected to be lower than in 2003, although similar in dollar amount. We
expect significant growth in custom I.V. systems and in the Punctur-Guard
product line and modest growth in our international markets. We do expect
significant new revenues under the amendments to the Abbott contracts signed in
January 2004, but we cannot, at this time, estimate how quickly such revenues
will be achieved or whether they will have any significant effect on 2004
results. We do expect to have a greater percentage of revenue growth in 2005
than our current expectations for 2004. However, there can be no assurance that
our expectations for 2004 and 2005 will be achieved.
GROSS MARGIN for 2003, calculated on net sales and excluding other
revenue, was 53% as compared to 57% in 2002. We believe approximately half of
this difference is due to several temporary factors, the principal one relating
to improvements in our automated production in San Clemente during the third
quarter which resulted in a period of unabsorbed overhead. The other half
relates principally to gross margins in our Punctur-Guard products being lower
than most of our other products. In the fourth quarter of 2003 gross margin had
improved to 55%. We expect margins on the Punctur-Guard products to improve over
the next year as we continue to improve sales and fully convert this product
line to our manufacturing techniques. We anticipate that improvements in the
Punctur-Guard margin and improvements in our automated production in San
Clemente will result in a modest increase in the gross margin in 2004, but we do
not expect it to be as high as it was in 2002. We give no assurance as to the
amount or timing of future improvements to our gross margins.
22
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") in 2003,
excluding research and development expenses, increased 16% to $23,029,000 and
was approximately 21% of revenue in 2003 as compared with $19,871,000, or 23% of
revenue in 2002. A portion of the increase was because of the inclusion of
Bio-Plexus and a small increase in sales and marketing costs related to
increased sales. Administrative costs were higher because of personnel additions
and increased information technology expenses, but those higher costs were
offset by decreased litigation expenses. We expect SG&A costs to increase in
2004 because of growth in the Company, and addition of new sales personnel and
additional sales and marketing expenses in order to support sales growth,
including support of the expanding business with Abbott.
RESEARCH AND DEVELOPMENT EXPENSES ("R&D") in 2003 increased 19% to
$1,757,000 and was 1.6% of revenue in 2003 as compared to 1.7% in 2002. Spending
was principally on new product development, product improvements to
Punctur-Guard, and software development to support manufacturing and
distribution of custom and generic I.V. systems. We estimate that R&D costs will
increase in 2004 to support on-going new product development and various product
and process improvements. However, R&D costs could differ from these estimates
and the R&D may not be completed as expected.
INCOME FROM OPERATIONS increased $4,124,000 or 14% and was 32% of
revenues as compared to 34% in 2002. The decline in income from operations as a
percentage of revenue was because of the decrease in gross margin as a
percentage of sales. The effect of that decrease was partially offset by the
level of operating expenses, which increased only 16% while net revenue
increased 22%.
INVESTMENT INCOME decreased in 2003 as compared with 2002, principally
because of a decrease in the investment portfolio and declines in interest rates
slightly offset by higher interest rates through our finance loans receivable.
INCOME TAXES: Our effective income tax rate in 2003 was 36.7%, a
decrease from 37.4% in 2002 principally because of savings in state income
taxes. We expect a slight increase in the effective tax rate in 2004.
NET INCOME in 2003 increased 13%. While revenues increased 22%, gross
margin decreased from 57% to 53%. That decrease caused the amount of gross
profit to increase only 15%. Operating expenses increased slightly more than
that, 16%, causing income from operations to increase only 14%. The drop in
investment income caused the increase in revenue before income taxes to be only
12%, and this was partially offset by a savings in income taxes, leaving the
overall increase at 13%. Net income per share (diluted) increased $0.20 or 16%.
The percentage increase in earnings per share was more than that of net income
because there were fewer shares outstanding due to our stock repurchase of
common shares and there were fewer dilutive shares as a result of the lower
average market price of our common stock.
COMPARISON OF 2002 TO 2001
In 2002, we had total revenues of $87,807,000, which was $18,752,000,
or 27%, higher than the total revenues of $69,055,000 reported in 2001. The
increase was primarily attributable to the increase in sales of CLAVE products,
which increased by $7,341,000 and custom I.V. systems, which increased
$5,492,000.
Net sales to Abbott were $49,990,000 in 2002, compared to $36,793,000
in 2001. CLAVE sales to Abbott increased to $40,494,000 from $32,282,000
principally because of an increase in unit volume as the CLAVE product
penetration of Abbott customer accounts increased. Sales of custom I.V. systems
to Abbott under the SetSource program approximated $5,666,000 for the year, up
from $1,171,000 in 2001, the year the program was initiated. Net sales of the
CLC2000 to Abbott almost tripled to approximately $1.6 million from the low
levels of 2001 when Abbott was balancing its inventory position. Net sales of
Rhino were virtually unchanged, at just below $2.0 million for 2002.
23
Revenue from B.Braun, including revenue sharing, amounted to $9,861,000
in 2002, compared to $12,872,000 in 2001. The decrease was principally because
of a decrease in sales of CLAVE products from $10,544,000 to $8,183,000, on
lower unit volume. CLAVE product sales to B.Braun in the fourth quarter of 2002
accounted for approximately 40% of B.Braun's annual CLAVE volume, as B.Braun
made its final purchases under the agreement to purchase CLAVE products. Most of
the balance of the decrease in net revenue from B.Braun was in sales of the
McGaw Protected Needle. SafeLine revenue sharing payments decreased slightly
from last year.
Net sales to independent domestic distributors increased approximately
24% to $16,966,000 in 2002 from $13,669,000 in 2001. (These sales include
$1,063,000 of Punctur-Guard sales after we acquired Bio-Plexus on October 31,
2002. The increase was due principally to an 18% increase in custom I.V.
systems, the inclusion of Punctur-Guard sales for two months, and a 4% increase
in CLAVE product sales. The increase in sales of custom I.V. systems was
attributable to an increase in unit volume. The increase in CLAVE product sales
was also because of higher unit volume. We believe the increase in sales of
CLAVE products to independent distributors was principally because of
acquisition of market share from B. Braun.
Total sales to international distributors (excluding Canada) were
$7,085,000 in 2002, as compared with $5,384,000 in 2001. We have distribution
arrangements in the principal countries in Western Europe, the Pacific Rim and
Latin America and in South Africa.
Total net sales of CLAVE products (excluding custom CLAVE I.V. systems)
increased approximately 14% to $58,471,000 in 2002 from $51,130,000 in 2001.
Unit shipments of CLAVE products in 2002 increased approximately 15% over 2001.
Abbott accounted for 112% of the growth in dollar sales of CLAVE, International
approximately 18%, partially offset by the decline in sales to B.Braun. The
aggregate average net selling price of CLAVE products in 2002 was virtually the
same as in 2001.
Net sales of custom I.V. systems were $15,205,000 in 2002 compared to
$9,263,000 in 2001, an increase of $5,942,000, or 64%. The SetSource program
with Abbott accounted for about 75% of the increase, with most of the balance in
sales to independent domestic distributors.
Net sales of the CLC2000 grew from $2,043,000 in 2001 to $3,744,000, an
increase of 83%. Abbott accounted for approximately 60% of the increase, with
the balance among domestic and international distributors.
Other products consist principally of the Lopez Valve and protected
needle products. Net sales of the Lopez Valve increased 8% in 2002 to
$1,563,000, on higher unit volume to domestic and international distributors.
Net sales of protected needle products decreased 37%, principally because of a
decrease in sales of the McGaw Protected Needle. Sales of Click Lock and Piggy
Lock products were the same in both years at approximately $730,000. We
discontinued sales of Click Lock and Piggy Lock Products in the first quarter of
2003, and sales of the other protected needle products decreased in 2003 as the
safe connector market continues its shift to needleless technology.
Other revenue consisted primarily of a payment for a fully paid up
license to use certain of our patents of $3.2 million received in December 2002,
royalties received for other companies' use of Punctur-Guard technology of
$156,000 and SafeLine revenue share (fourth quarter only) of approximately $0.2
million.
Gross margin for 2002, calculated on Net sales and excluding Other
Revenue, declined from 58% in 2001 to 57% in 2002 because of significant
unabsorbed overhead in the fourth quarter of 2002. This occurred because of
three weeks of substantially reduced production in Mexico as a result of
difficulty in processing orders and preparing production orders at the time we
implemented our new enterprise software, and because of a planned two-week
shutdown of the automated production facility in San Clemente for preventive
maintenance in December. Until the fourth quarter, gross margins had been at
58%.
Selling, general and administrative ("SG&A") costs increased by
$3,055,000, or 18%, to $19,871,000 in 2002, compared to $16,816,000 in 2001.
SG&A costs were 23% of net revenue in 2002 compared to 24% in 2001. Sales and
marketing costs increased approximately $1.7 million, but decreased as a
percentage of sales from 14% to 13%. Increases were principally in salaries and
related costs and travel. General and administrative costs increased
approximately $1.3 million, and were approximately 10% of net revenue in both
years. Increases were principally in salary and benefits.
24
Research and development ("R&D") costs increased in 2002 by $284,000 to
$1,472,000, and were approximately 2% of net revenue in both 2002 and 2001. The
principal increase in spending was on product development for the Punctur-Guard
product line to make product improvements that we felt were necessary to
successfully market and sell the products. Spending on new product development
also increased from 2001.
The operating margin increased to 34% in 2002, compared to 32% in 2001,
principally because operating expenses decreased as a percentage of net sales.
Investment income decreased by $556,000 in 2002, notwithstanding an
increase in the investment portfolio, because of the effect of continuing
declines in interest rates since the beginning of 2001.
Our effective income tax rate in 2002 was 37%, up from 36% in 2001
principally because state tax credits were lower in 2002 than in 2001 and tax
exempt investment income declined as a percentage of taxable income.
Net income in 2002 increased 28% from 2001 principally because the
gross profit increased 28%, but operating expenses increased only 19%. This
resulted in a 36% increase in operating margin that was partially offset by the
decline in investment income and the increase in the effective income tax rate.
Net income per share (diluted) increased $0.22, or 21%. The percentage increase
in earnings per share was less than that for net income because there were more
shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
During 2003, our working capital increased slightly by $368,000 to
$102,932,000 from $102,564,000. The increase was due to working capital
generated by operations which was virtually offset by the purchases of treasury
stock, investment in property and equipment, acquisitions and new finance loans.
Our cash and cash equivalents and investment securities position decreased in
2003 by $15,328,000 to $73,137,000 from $88,465,000 at December 31, 2002. This
is because the purchase of $15,324,000 of treasury stock, purchases of property
and equipment of $10,668,000, net advances of $8,907,000 made under finance
loans and cash payment of $5,882,000 for acquisitions exceeded the aggregate of
cash provided by operating activities (excluding the tax benefits from exercise
of stock options) of $21,987,000 and cash provided by the company's employee
equity plans of $3,466,000.
During 2002, our working capital increased approximately $22,828,000 to
$102,564,000 from $79,736,000. Our cash and cash equivalents and liquid
investment securities increased by $15,438,000 to $88,465,000 from $73,027,000.
That increase was due primarily to $17,905,000 of cash flows from operating
activities (excluding tax benefits from exercise of stock options) and
$18,911,000 from exercise of stock options (including tax benefits), partially
offset by $11,894,000 used to purchase property and equipment and $9,484,000
used to acquire Bio-Plexus (net of cash acquired).
INVESTING ACTIVITIES: Capital expenditures continued at a relatively
high rate in 2003 principally because of our expansion in Mexico, including an
electron-beam sterilizer, and investment in molds, molding equipment, automated
assembly equipment, computers and software.
Capital expenditures increased in 2002 principally for investment in
molding machines, molds and automated assembly machines, as well as recurring
facilities improvements and acquisition of computer equipment and software. We
also replaced our enterprise software with Oracle Corporation's R11i business
suite in 2002.
Upon completing an evaluation of the design and capacity of our
manufacturing facilities, we estimate that our current facilities will be
adequate through 2004, but that production after 2004 may require additional
clean room facilities for molding and automated assembly. We expect to decide in
the future how to meet the need for any additional facilities and the location
of additional clean room facilities for molding and automated assembly.
25
We currently estimate that capital expenditures for 2004 will be
approximately $6 million and will be paid from cash we generate from operations.
We expect the $6 million will be spent on molds, molding equipment and automated
assembly equipment, computers and software to maintain current capacity
including targeted growth for 2004. Of those amounts, approximately $1 million
was committed under contracts at December 31, 2003, and we expect to commit the
balance in 2004. Amounts of spending are estimates and actual spending may
substantially differ from those amounts.
In June 2003 we acquired the assets of two affiliated manufacturers of
I.V. systems located in northern Italy for a cash payment of approximately $4.6
million. Principal assets acquired are assembly facilities and related equipment
and inventories and intangible assets. The acquired assets and related operating
results are included in our consolidated financial statements since June 30,
2003. Their effect on our financial statements is immaterial. We may acquire
other businesses or product lines in the future.
ICU Finance, Inc. is a wholly owned consolidated subsidiary that we
established in 2002 as a licensed commercial lender to provide financing to
companies involved in distribution of healthcare products and provision of
healthcare services. Loans are made only to credit-worthy healthcare entites and
are fully secured by real and personal property. At December 31, 2003, it had
$8,907,000 in loans outstanding. Scheduled maturities are: 2004 $4,142,000; 2005
$1,336,000; 2006 $1,306,000; 2007 $1,289,000 and 2008 $834,000. Weighted average
maturity (principal and interest) at December 31, 2003 was 2.2 years and the
weighted average interest rate was 5.5%. In October 2003, we discontinued new
lending activities. We will honor unfunded lending commitments on existing
credit facilities, which totaled approximately $4,030,000 at December 31, 2003.
FINANCING ACTIVITIES: In 2003 we purchased 589,292 shares of our common
stock for $15,324,000. Until those purchases, we had not purchased treasury
stock since October 1999, except for a small amount in March 2000. We may
purchase additional shares in the future. However, future purchases, if any,
will depend on market conditions and other factors.
Cash provided by stock options and the employee stock purchase plan,
including tax benefits, was $3,467,000 in 2003 as compared with $18,911,000 in
2002; options were exercised on 167,996 shares in 2003 as compared with 962,193
shares in 2002.
OPERATING ACTIVITIES: Our cash provided by operating activities tends
to increase over time because of increases in our net income. However, it is
subject to fluctuations, principally from changes in accounts receivable,
inventories, current liabilities and tax benefits from exercise of stock
options.
Normally the substantial majority of our accounts receivable are
current or no more than thirty days past due. In recent years, the majority of
each quarter's sales have been in that last half of the quarter with the result
that the amount of accounts receivable reported as of the end of each quarter
tend to be higher than the amounts at other times during a quarter.
Accounts receivable increased from $16,633,000 at December 31, 2002 to
$24,943,000 at December 31, 2003, or 50%; the increase was because of a 25%
increase in fourth quarter revenue from year-to-year, and because shipments in
the fourth quarter of 2003 were generally made later in the quarter than in
2002.
We generally try to maintain a minimal amount of inventory of finished
goods and work in process, but will maintain larger amounts of components
(classified as raw material) acquired from third parties to avoid production
delays if deliveries by our suppliers are late. However, in order to avoid
production inefficiencies caused by fluctuating production levels, we will level
out our production volumes and build finished goods of our standard (non-custom)
products to meet future orders. This may cause fluctuations in our quarterly
inventory levels.
Inventories decreased from $5,749,000 at December 31, 2002 to
$3,398,000 at December 31, 2003 principally because of a $1,554,000 decrease in
finished goods (offsetting the effect of shipments that were deferred from
December 2002 to early 2003) and a $603,000 decrease in raw materials because of
better inventory controls.
26
Our current liabilities tend to fluctuate based on the timing of when
liabilities are incurred and paid. The largest single source of fluctuation has
been income tax liabilities, and those fluctuations are generally a function of
the timing and amount of estimated tax payments in relation to actual tax
liabilities.
The tax benefits from the exercise of stock options, which we believe
is more properly related to the sale of our stock which is a financing activity,
fluctuates based principally on when employees choose to exercise their vested
stock options.
Tax benefits from the exercise of stock options fluctuated from
$842,000 in 2003 to $10,192,000 in 2002 to $3,764,000 in 2001. Options exercised
were 167,996, 962,193 and 526,960 in the respective years, with the balance in
the fluctuation related to differences between the market prices at date of
exercise and exercise prices in each year.
We expect that sales of our products will continue to grow in 2004. If
sales continue to increase, accounts receivable and inventories are expected to
increase as well. As a result of these and other factors, we expect the use of
working capital to fund our operations to continue to increase.
We have a large cash and liquid investment position generated from
profitable operations and stock sales, principally from the exercise of employee
stock options. We maintain this position to fund our growth, meet increasing
working capital requirements, fund capital expenditures, and potentially to take
advantage of acquisition opportunities that may arise. Our primary investment
goal is capital preservation, as further described in Item 7A. 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 our capital expenditures and
increased working capital requirements for the foreseeable future.
OFF BALANCE SHEET ARRANGEMENTS
In the normal course of business, we have agreed to indemnify officers
and directors of the Company to the maximum extent permitted under Delaware law
and to indemnify customers as to certain intellectual property matters related
to sales of our products. There is no maximum limit on the indemnification that
may be required under these agreements. We have never incurred, nor do we expect
to incur, any liability for indemnification. Except for indemnification
agreements, we do not have any "off balance sheet arrangements".
CONTRACTUAL OBLIGATIONS
We have the following contractual obligations of approximately the
following amounts. These amounts exclude purchase orders for goods and services
for cur