FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- -----
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- ----- THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1999
OR
- -----
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- ----- THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM: _______ TO _________
COMMISSION FILE NO.: 0-19974
ICU MEDICAL, INC.
(Exact name of Registrant as provided in charter)
-------------------------------------------------
Delaware 33-0022692
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
951 Calle Amanecer, San Clemente, California 92673
-------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(949) 366-2183
------------------------------------------------
(Registrant's Telephone No. Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days:
Yes XXX No
----- -----
Indicate the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at October 29, 1999
----- -------------------------------
Common 8,100,739
<PAGE>
ICU MEDICAL, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
- ------------------------------ -----------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
Consolidated Balance Sheets, September 30, 1999 and
December 31, 1998 3
Consolidated Statements of Income for the three months
ended September 30, 1999 and 1998 4
Consolidated Statements of Income for the nine months ended
September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
ITEM 2.
- -------
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
ITEM 3.
- -------
Quantitative and Qualitative Disclosures About Market Risk Not Applicable
PART II - OTHER INFORMATION 15
- ---------------------------
SIGNATURES 16
2
<PAGE>
<TABLE>
ICU MEDICAL, INC.
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
(all dollar amounts in thousands except share data)
<CAPTION>
ASSETS
9/30/99 12/31/98
---------------- ----------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,816 $ 2,048
Liquid investments 33,341 36,041
---------------- ----------------
Cash and liquid investments 37,157 38,089
Accounts receivable, net of allowance for doubtful accounts of $318
and $342 as of September 30, 1999 and December 31, 1998, respectively 6,535 6,492
Inventories 1,821 1,991
Prepaid expenses and other 372 385
Deferred income taxes - current portion 1,077 991
---------------- ----------------
Total current assets 46,962 47,948
---------------- ----------------
PROPERTY AND EQUIPMENT, at cost:
Machinery and equipment 9,192 8,225
Furniture and fixtures 2,230 2,044
Molds 3,789 3,710
Land, building and building improvements 7,341 7,191
Construction in process 12,509 1,703
---------------- ----------------
Total property and equipment 35,061 22,873
Less--Accumulated depreciation (11,163) (9,109)
---------------- ----------------
Net property and equipment 23,898 13,764
---------------- ----------------
DEFERRED INCOME TAXES 101 92
OTHER ASSETS 746 555
---------------- ----------------
$ 71,707 $ 62,359
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 693 $ 683
Accrued liabilities 4,404 3,448
---------------- ----------------
Total current liabilities 5,097 4,131
---------------- ----------------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $1.00 par value
Authorized -- 500,000 shares, issued and outstanding -- none - -
Common stock, $0.10 par value-
Authorized -- 20,000,000 shares, issued -- 8,867,162 shares 887 887
Additional paid-in capital 40,840 40,241
Treasury stock -- 645,423 and 807,847 shares at
September 30, 1999 and December 31, 1998, respectively (5,485) (7,117)
Retained earnings 30,368 24,217
---------------- ----------------
Total stockholders' equity 66,610 58,228
---------------- ----------------
$ 71,707 $ 62,359
================ ================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
<TABLE>
ICU MEDICAL, INC.
Consolidated Statements of Income
For the Three Months Ended
September 30, 1999 and June 30, 1998
(all dollar amounts in thousands except per share data)
(unaudited)
<CAPTION>
For the Three Months Ended
-----------------------------------
9/30/99 9/30/98
------------- -------------
<S> <C> <C>
NET SALES $ 10,712 $ 9,618
COST OF GOODS SOLD 4,836 4,020
------------- -------------
Gross profit 5,876 5,598
------------- -------------
OPERATING EXPENSES:
Selling, general and administrative 2,806 2,887
Research and development 284 205
------------- -------------
Total operating expenses 3,090 3,092
------------- -------------
Income from operations 2,786 2,506
INVESTMENT INCOME 320 367
------------- -------------
Income before income taxes 3,106 2,873
PROVISION FOR INCOME TAXES 1,160 1,050
------------- -------------
NET INCOME $ 1,946 $ 1,823
============= =============
NET INCOME PER SHARE
Basic $ 0.24 $ 0.23
Diluted $ 0.22 $ 0.22
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 8,208,438 8,001,942
Diluted 8,736,987 8,350,717
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
<TABLE>
ICU MEDICAL, INC.
Consolidated Statements of Income
For the Nine Months Ended
September 30, 1999 and September 30, 1998
(all dollar amounts in thousands except per share data)
(unaudited)
<CAPTION>
For the Nine Months Ended
-----------------------------------
9/30/99 9/30/98
------------- -------------
<S> <C> <C>
NET SALES $ 33,853 $ 30,030
COST OF GOODS SOLD 14,666 12,555
------------- -------------
Gross profit 19,187 17,475
------------- -------------
OPERATING EXPENSES:
Selling, general and administrative 9,272 9,415
Research and development 797 756
------------- -------------
Total operating expenses 10,069 10,171
------------- -------------
Income from operations 9,118 7,304
INVESTMENT INCOME 1,032 1,038
------------- -------------
Income before income taxes 10,150 8,342
PROVISION FOR INCOME TAXES 3,800 3,140
------------- -------------
NET INCOME $ 6,350 $ 5,202
============= =============
NET INCOME PER SHARE
Basic $ 0.78 $ 0.65
Diluted $ 0.72 $ 0.62
============= =============
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 8,173,229 7,967,903
Diluted 8,767,609 8,367,083
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
<TABLE>
ICU MEDICAL, INC.
Consolidated Statements of Cash Flows
For the Nine Months Ended
September 30, 1999 and September 30, 1998
(all dollar amounts in thousands)
(unaudited)
<CAPTION>
For the Nine Months Ended
--------------------------------------
9/30/99 9/30/98
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 6,350 $ 5,202
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization 2,341 1,876
Net change in current assets and current liabilities, and other 777 (952)
---------------- ----------------
Net cash provided by operating activities 9,468 6,126
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (12,432) (4,914)
Net change in liquid investments 2,700 (3,891)
---------------- ----------------
Net cash (used in) investing activities (9,732) (8,805)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock
options and related income tax benefits, and other 2,032 3,283
Purchase of treasury stock - (400)
---------------- ----------------
Net cash provided by financing activities 2,032 2,883
---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,768 204
CASH AND CASH EQUIVALENTS, beginning of the period 2,048 2,962
---------------- ----------------
CASH AND CASH EQUIVALENTS, end of the period $ 3,816 $ 3,166
================ ================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
ICU MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(All dollar amounts in thousands)
(unaudited)
NOTE 1: The accompanying unaudited interim consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission and reflect all adjustments which are, in the opinion of
Management, necessary to a fair statement of the consolidated results for the
interim periods presented, which adjustments consist of only normal recurring
adjustments. Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's 1998 Annual Report to Stockholders.
NOTE 2: Net inventories consisted of the following:
9/30/99 12/31/98
--------------- ---------------
Raw material $ 945 $ 1,121
Work in process 736 509
Finished goods 140 361
--------------- ---------------
Total $ 1,821 $ 1,991
=============== ===============
NOTE 3: Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding. Diluted net income per
share is computed by dividing net income by the weighted average number of
common shares outstanding plus dilutive securities. The Company's dilutive
securities are outstanding common stock options (excluding stock options with an
exercise price in excess of market value), less the number of shares that could
have been purchased with the proceeds from the exercise of the options, using
the treasury stock method, and were 528,549 and 348,775 for the three months
ended September 30, 1999 and 1998, respectively and 594,380 and 399,180 for the
nine months ended September 30, 1999 and 1998, respectively.
NOTE 4: The effective tax rate differs from that computed at the federal
statutory rate of 34% principally because of the effect of state income taxes
partially offset by the effect of tax-exempt investment income.
NOTE 5: The Company is involved in litigation with Medex, Inc. over patent
matters. See Part II, Item 1, "Legal Proceedings."
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
- -------
The following table sets forth the net sales by product as a percentage
of total net sales for the periods indicated:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
YTD YTD
PRODUCT LINE 1996 1997 1998 Q3-98 Q3-99 Q3-98 Q3-99
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLAVE(R) 68% 65% 69% 67% 64% 67% 68%
- ----------------------------------------------------------------------------------------------------------------
Click Lock(R)and Piggy Lock(R) 12% 7% 4% 4% 2% 8% 3%
- ----------------------------------------------------------------------------------------------------------------
McGaw Protected Needle 8% 5% 4% 4% 4% 6% 3%
- ----------------------------------------------------------------------------------------------------------------
Lopez Valve(R)and other 4% 4% 5% 4% 7% 4% 5%
- ----------------------------------------------------------------------------------------------------------------
RF100-RF150 ("Rhino") 3% 7% 5% 7% 6% 6% 6%
- ----------------------------------------------------------------------------------------------------------------
Budget Medical Products 2% 6% 8% 9% 13% 5% 11%
- ----------------------------------------------------------------------------------------------------------------
B.Braun / McGaw SafeLine Revenue Sharing 3% 6% 5% 5% 4% 4% 4%
- ----------------------------------------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100% 100% 100%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The Company sells its products to independent distributors and through
supply and distribution agreements with B.Braun Medical, Inc. ("B.Braun /
McGaw"), Abbott Laboratories ("Abbott") (the "B.Braun / McGaw Agreement" and the
"Abbott Agreement," respectively) and C. R. Bard, Inc. ("Bard"). Most
independent distributors handle the full line of the Company's products. B.Braun
/ McGaw and Abbott both purchase CLAVE products, principally bulk, non-sterile
connectors. B.Braun / McGaw also purchases the McGaw Protected Needle and pays
the Company revenue sharing payments on its sales of its SafeLine products.
Abbott also purchases the Rhino, a low-priced connector specifically designed
for Abbott. Bard distributes the Lopez Valve under a five-year agreement signed
in June 1999.
The B.Braun / McGaw Agreement extends to December 2002, and has
extension provisions beyond then.
In January 1999, the Company and Abbott agreed to a significant
expansion of their agreement for CLAVE products. The new agreement has
assurances of substantial increases in sales unit volume, accompanied by price
reductions. The new agreement was extended from April 2002 to December 2009, and
designates the Company as Abbott's preferred supplier for all Abbott's
needlefree technology. In July 1999 the contract was amended to add the
CLC2000(TM) to the agreement.
Management believes that as the healthcare provider market continues to
consolidate, the Company's success in marketing and distributing CLAVE products
will depend, in part, on the Company's ability, either independently or through
strategic supply and distribution arrangements, to secure long-term CLAVE
contracts with major buying organizations. Further, the Company's marketing and
distribution strategy may result in a significant share of the Company's
revenues being concentrated among a small number of customers. The loss of a
strategic supply and distribution agreement with a customer or the loss of a
large contract by such a customer, could have a material adverse effect on
operating results.
8
<PAGE>
Management believes 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. The
Company is aware of a number of such products. In response to competitive
pressure, the Company has been reducing prices to its independent distributors,
as well as to I.V. product manufacturers, to protect and expand its market. The
price reductions to date have more than been offset by increased volume,
although this has not occurred to date for independent distributors in the
aggregate. Management expects that the average price of its CLAVE products will
continue to decline. There is no assurance that the Company's current or future
products will be able to successfully compete with products developed by others.
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO THE SAME QUARTER LAST YEAR
- -----------------------------------------------------------------------
NET SALES increased $1,094,000, or approximately 11%, to $10,712,000 in
the third quarter of 1999, compared to $9,618,000 during the same period last
year. The increase was primarily attributable to the increase in sales of CLAVE
products, including custom CLAVE I.V. sets sold by the Company's subsidiary,
Budget Medical Products ("BMP").
Net sales to Abbott in the third quarter of 1999 were $3,472,000, as
compared with net sales of $2,922,000 in the third quarter of 1998.
Substantially all of the increase in net sales was accounted for by CLAVE
products, including custom CLAVE I.V. sets. Net sales of the low-priced Rhino
were virtually unchanged. Based on communication with Abbott, Management
currently expects the monthly net sales rate to Abbott in the fourth quarter of
1999 to approximate what it was in the first half 1999. Management expects
continued increases in sales volume with Abbott after 1999. There can be no
assurance as to the amount or timing of future sales to Abbott and whether
Management's expectations will be realized.
Net sales to B.Braun / McGaw, including revenue sharing, amounted to
$3,921,000 in the third quarter of 1999, as compared with $3,154,000 in the
third quarter of 1998. Substantially all of the increase in net sales was
accounted for by CLAVE products, including custom CLAVE I.V. sets. Estimated
revenue sharing payments due on B.Braun / McGaw sales of its SafeLine products
and sales of McGaw Protected Needle were virtually unchanged. The increase in
net sales of CLAVE products to B.Braun / McGaw reflects a return of B.Braun /
McGaw to more normal ordering patterns for CLAVE products. Management expects
that net sales of the McGaw Protected Needle will decline in the future as the
market for safe connectors continues its shift to needleless technology.
Management expects that SafeLine revenue sharing payments will continue,
although it is unable to accurately forecast such amounts. Management currently
expects net sales to B.Braun / McGaw in the fourth quarter of 1999 to
approximate those in the third quarter of 1999, although there is no assurance
that those expectations will be realized.
Total net sales of CLAVE products (excluding custom CLAVE I.V. sets)
increased from $6,415,000 in the third quarter of 1998 to $6,849,000 in the
third quarter of 1999, or 7%. The increase in unit shipments was approximately
28%, substantially all of which was accounted for by Abbott and B.Braun / McGaw.
CLAVE unit shipments to independent distributors were virtually unchanged.
9
<PAGE>
Average net selling prices decreased approximately 16% on a year-to-year basis
in response to market pressures and because a greater proportion of sales were
the lower priced bulk non-sterile CLAVEs sold to Abbott and B.Braun / McGaw.
Management expects unit shipments of CLAVE products to independent distributors
in 1999 to be at or somewhat below those for 1998. Net sales of CLAVE products
to independent distributors are expected to decrease as average selling prices
continue to decline.
Net sales of Click Lock and Piggy Lock decreased approximately 31% in
the third quarter of 1999 compared to the same period last year. The decline is
because of the safe-connector market's continued shift to needleless technology.
Management expects the trend to continue.
Net sales of the Lopez Valve increased 48% in the third quarter of 1999
compared to the same period last year due to an increase in unit shipments.
Management expects that net sales of the Lopez Valve will continue to increase
for the rest of 1999 on increased shipments to independent distributors and to
Bard under the new agreement.
Net sales of custom I.V. sets through BMP increased to $1,366,000 in
the third quarter of 1999, as compared with $878,000 in the third quarter of
1998, principally because of increased unit shipments of custom I.V. sets
incorporating the CLAVE, which account for approximately 60% of BMP's net sales.
BMP's production, much of which is performed manually, is relatively
labor-intensive, resulting in a generally lower gross profit margin than for the
Company's other products. The Company is continuing steps to expand BMP by
increasing systems capabilities, improving manufacturing efficiency, reducing
labor cost and enhancing distribution. Because significant innovation is
required to achieve these goals, there is no assurance that these steps will
achieve the desired results. However, even if they are successful, Management
expects that gross profit margins in BMP will continue to be lower than the
average historical gross profit margins recorded by the Company because
production of its products will continue to be relatively labor intensive. BMP
has moved substantially all of its manual assembly operations to the facility
that the Company opened in December 1998 in Ensenada, Baja California, Mexico.
BMP had an improved gross profit in the first, second and third quarters of 1999
and was profitable in all three quarters.
Total sales to foreign distributors, principally in Europe, were
$351,000 in the third quarter of 1999, as compared with $190,000 in the third
quarter of 1998. (Those amounts do not include distribution in Canada.) In April
1998, BOC OHMEDA AB ("Ohmeda"), who was the Company's principal distributor in
Europe, sold its European distribution to a competitor of the Company, and the
Company has terminated substantially all distribution by Ohmeda since August
1998. The Company believes that the loss of distribution through Ohmeda had an
adverse effect on the amount of European sales. The Company is currently making
new distribution arrangements in Europe. Management expects that its sales to
European and other foreign distributors will increase in the future, although
there can be no assurance that it will succeed in arranging new distribution in
Europe or increase sales in Europe or other areas outside the United States.
In November 1997, the Company commenced marketing the CLC2000, a one
piece, swabable connector, engineered to prevent the back-flow of blood into the
catheter. Although the Company expects CLC2000 sales to increase throughout 1999
based current conditions, sales to date have not been significant and the
Company does not expect CLC2000 sales to make a significant contribution to
total sales for 1999. However, there can be no assurance as to the amount or
timing of future CLC2000 sales.
10
<PAGE>
In November 1998, the Company introduced the 1o2 Valve(TM), the first
one-way or two-way drug delivery system. The Company continues to work at
overcoming delays in production but did commence limited shipments to customers
late in the second quarter of 1999. However, there can be no assurance as to
when significant shipments will commence.
In the third quarter of 1999, the Company continued development work on
SetFinder(TM), which will directly distribute commodity-type standard I.V. sets.
Orders can be taken over the internet at a special "web-site" named
SETFINDER.COM , and initially will also be accepted by telephone, facsimile and
e-mail. Proprietary technology will enable the Company to minimize working
capital requirements. SetFinder products will be assembled at BMP's facility in
Mexico. Management launched SETFINDER.COM in the fourth quarter of 1999. Because
significant innovation is required to launch and operate SETFINDER.COM, there is
no assurance that it will be launched successfully or that current plans for
SetFinder will not change materially. Further, there can be no assurance that
SetFinder will achieve sales and the amount of future operating profits or
losses is dependent upon future development of the SetFinder business, the
outcome of which is not known at this time.
Historically, the Company has experienced lower usage of its products
in the summer months due to lower censuses in healthcare facilities. That would
generally cause the Company's sales in the second and third quarters of the year
to be lower than sales in the first and fourth quarters. Since 1995, there have
been significant departures from that pattern because significant increases in
sales volumes with B.Braun / McGaw and Abbott have often offset the expected
seasonal sales decline. Further, those I.V. product manufacturers order bulk
non-sterile product many months before sale to the healthcare facility to allow
for normal manufacturing times. Thus, Management believes that the large
percentage of sales to I.V. product manufacturers could lead to non-seasonal
quarterly fluctuations in net sales because their ordering patterns may not
directly reflect their current sales volumes.
GROSS MARGIN was 55% during the third quarter of 1999 compared to 58%
during the same period last year. The decrease in the gross margin percentage
resulted from a decrease in average selling prices that was not entirely offset
by a decrease in unit manufacturing costs. Management currently believes that
the gross margin percentage for the remainder of 1999 will be slightly better
than that for the third quarter of 1999. The future gross margin percentage is
dependent upon average selling prices, actual production costs and overhead
absorption through production volume. There can be no assurance that the Company
will be able to maintain production volumes, which are dependent upon
fluctuating sales volumes, or selling prices, at levels necessary to realize its
expectations as to the gross margin percentage for the remainder of 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"), excluding
research and development expenses, were $2,806,000, a slight decrease from last
year's third quarter, and decreased as a percentage of net sales to 26% during
the third quarter of 1999 compared to 30% during the same period last year. A
significant decrease in litigation costs was only partially offset by increased
sales and marketing expenses related to the introduction of new products and
expansion of the business.
11
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES ("R&D") were higher in the third
quarter of 1999 than in the same quarter of 1998, and increased as a percentage
of net sales to 3% from 2%. Management expects R&D expenses to continue to
increase as the year progresses because of the clinical evaluations of the new
CLC2000. However, no assurance can be given that such costs will not differ
materially from those estimates or that the R&D will be completed as expected.
INCOME FROM OPERATIONS increased 11%, because of the increase in net
sales and because the decrease in gross margin percentage was substantially
offset by the decrease in total operating expenses as a percentage of net sales.
NET INCOME increased 7% to $1,946,000 in the third quarter of 1999 as
compared with $1,823,000 in the comparable period last year. NET INCOME PER
SHARE - DILUTED remained the same comparatively between the third quarter of
1999 and the third quarter of 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE SAME NINE MONTHS LAST YEAR
- -------------------------------------------------------------------------------
NET SALES increased $3,823,000, or approximately 13%, to $33,853,000 in
the first nine months of 1999 compared to $30,030,000 during the same period
last year. The increase was primarily attributable to increased sales of CLAVE
products including custom CLAVE I.V. sets sold by BMP.
GROSS MARGIN was 57% during the first nine months of 1999 and 58%
during the same period in 1998. Although average selling prices have continued
to decrease over the first nine months of 1999, this was partially offset by a
decrease in unit manufacturing costs.
SELLING, GENERAL AND ADMINISTRATIVE expenses ("SG&A"), excluding
research and development expenses, decreased slightly to $9,272,000, and
decreased as a percentage of net sales to 27% during the nine months of 1999
compared to 31% during the nine months of 1998. In the nine months of 1998,
there were significant costs related to patent litigation in which the Company
was the plaintiff and which was settled in the second quarter of 1998. The costs
of that and other litigation in the first half of 1998 was significantly higher
than litigation costs in the first half of 1999. The decrease in litigation
costs was partially offset by increased sales and marketing costs related to the
introduction of new products and the expansion of the business.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the nine months ended September 30, 1999, the Company's cash and
cash equivalents and investment securities position decreased $932,000 to
$37,157,000. Cash provided by operating activities and the exercise of stock
options was more than offset by the cost of additions to property and equipment.
Management expects that sales of the Company's products will continue
to grow after 1999. If sales continue to increase, accounts receivable and
inventories are expected to increase as well. As a result of these and other
factors, including increased capital expenditures, the Company's working capital
requirements may increase in the foreseeable future.
12
<PAGE>
Management currently expects that capital expenditures for property and
equipment will be between approximately $15 million and $16 million in 1999 to
meet the future growth in CLAVE and other products, of which approximately $12.4
million has been incurred in the nine months ended September 30, 1999. Most of
the additions will be in the Company's San Clemente, California production
facilities and will be for molding machines, molds and automated assembly
machines, which are expected to be placed in service later in 1999 or in 2000
and 2001. In addition, the Company, in April 1999 purchased a 28,000 square foot
building near its other two buildings in San Clemente to accommodate its
expansion, and costs will be incurred to add improvements to that building and
one of the Company's existing buildings. Production capacity provided by these
additions significantly exceed the Company's current production requirements.
In October 1999, it purchased 121,000 shares at a cost of approximately
$1.6 million. The Company had not purchased treasury stock from August 1998
through September 30, 1999. It may purchase additional shares in the future.
However, future acquisitions, if any, will depend on market conditions and other
factors.
The Company believes that its existing working capital, supplemented by
income from operations, will be sufficient to fund capital expenditures and
increased working capital requirements for the foreseeable future.
YEAR 2000 COMPLIANCE
- --------------------
Many older computer programs use only the last two digits to refer to a
year. Therefore, they do not properly recognize a year that begins with "20"
rather than "19." This is referred to as the Year 2000, or Y2K problem. The Y2K
problem has been eliminated in many new programs and systems, which are said to
be "Y2K compliant." The Company does not believe it will encounter any
difficulties related to the Y2K problem with its own programs and systems,
including its information technology ("IT") systems and applications and related
hardware and its non-IT systems (e.g. manufacturing systems). The Company has
inquired of parties with whom it deals, such as customers, vendors and
governments as to their Y2K compliance; while it is still awaiting some
responses, based on responses to date, the Company is not aware of any problems
that could affect it. Any such problems, however, could result in interruptions
in delivery of services and materials and payments, among other things. The
Company has not developed Y2K non-compliance contingency plans, and based upon
the results of its assessments to date, does not expect that such plans will be
necessary. Costs to assure Y2K compliance have so far been and are expected to
remain nominal.
While the Company is not currently aware of any Y2K compliance problems
in its own systems, the Company cannot assure that the information it receives
from third parties about their Y2K compliance is accurate. Failure of the
Company's systems to be Y2K compliant, or failure of significant third parties
with which the Company deals to be Y2K compliant, could have a material adverse
effect on the Company's operations.
13
<PAGE>
FORWARD LOOKING STATEMENTS
- --------------------------
Various portions of this Report, including this Management's Discussion
and Analysis, describe trends in the Company's business and finances that
Management perceives and state some of its expectations and beliefs about the
Company's future. These statements about the future are "forward looking
statements," and the Company identifies them by using words such as "believes,"
"expects," "estimates," "plans," "will," "continue," "could," and by similar
expressions and statements about aims, goals and plans. The forward looking
statements are based on the best information currently available to Management
and assumptions that Management believes are reasonable, but Management does not
intend the statements to be representations as to future results. They include,
among other things, statements about:
o future operating results and various elements of operating results,
including sales and unit volumes of products, production costs, gross
margins, and research and development expense;
o factors affecting operating results, such as shipments to specific
customers, product mix, selling prices, future revenue sharing payments to
the Company, the market shift to needleless products, achievement of
business expansion goals, development of innovative systems capabilities,
sales of new products, manufacturing efficiencies, production volumes,
overhead absorption, expansion of markets, seasonality and customers'
ordering patterns;
o new contracts with buying organizations and dependence on a small number of
customers;
o competitive and market factors, including continuing development of
competing products by other manufacturers, consolidation of the healthcare
provider market and downward pressure on selling prices;
o working capital requirements, capital expenditures and common stock
repurchases; and
o Y2K issues.
The kinds of statements described above and similar forward looking
statements about the Company's future performance are subject to a number of
risks and uncertainties which one should consider in evaluating the statements.
First, one should consider the factors and risks described in the statements
themselves. These factors are uncertain, and if one or more of them turn out
differently than Management currently expects, the Company's operating results
may differ materially from Management's current expectations.
Second, one should read the forward looking statements in conjunction
with the Risk Factors in the Company's Current Report on Form 8-K to the
Securities and Exchange Commission dated November 5, 1998, which is incorporated
by reference.
Third, the Company's actual future operating results are subject to
other important factors that the Company cannot predict or control, including
among others the following:
o general economic and business conditions;
o the effect of price and safety considerations on the healthcare industry;
o competitive factors, such as product innovation, new technologies,
marketing and distribution strength and price erosion;
o unanticipated market shifts and trends;
o the impact of legislation affecting government reimbursement of healthcare
costs;
o changes by the Company's major customers and independent distributors in
their strategies that might affect their efforts to market the Company's
products;
o unanticipated production problems; and
o the availability of patent protection and the cost of enforcing and of
defending patent claims.
The Company disclaims any obligation to update the statements or to
announce publicly the result of any revision to any of the statements contained
herein to reflect future events or developments.
14
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- -------------------------
In an action entitled MEDEX, INC. V. ICU MEDICAL, INC. pending in the
United States District Court for the Southern District of Ohio, Eastern
Division, and served on the Company on November 4, 1999, Medex alleges that ICU
Medical infringes its patent by the manufacture and sale of the CLAVE connector,
and Medex seeks monetary damages and injunctive relief. The Company, based on
advice of counsel, believes the suit against the Company is without merit and
the Company intends to vigorously defend itself in the action. The Company has
brought an action entitled ICU MEDICAL, INC. V. MEDEX, INC. in the United States
District Court for the Central District of California against Medex, Inc. for
infringing several patents of the Company by the manufacture and sale of certain
blood access devices. The Company seeks monetary damages and injunctive relief.
The Company intends to vigorously pursue this matter.
The Company is from time to time involved in various other legal
proceedings, either as a defendant of plaintiff, most of which are routine
litigation in the normal course of business. The Company believes that the
resolution of the legal proceedings in which it is involved will not have a
material adverse effect on the Company's financial position or results of
operations.
ITEM 2. CHANGES IN SECURITIES
- -----------------------------
Inapplicable
ITEM 3. DEFAULT UPON SENIOR SECURITIES
- --------------------------------------
Inapplicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
Inapplicable
ITEM 5. OTHER INFORMATION
- -------------------------
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ICU Medical, Inc.
(Registrant)
/s/ Francis J. O'Brien Date: November 12, 1999
- ----------------------
Francis J. O'Brien
Chief Financial Officer
(Principal Financial Officer and)
Chief Accounting Officer)
16
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