<PAGE>
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, 2000
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 18, 2000
------ -------------------------------
Common 8,386,131
<PAGE>
ICU MEDICAL, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
------------------------------ -----------
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
Consolidated Balance Sheets, September 30, 2000
and December 31, 1999 3
Consolidated Statements of Income for the three
months ended September 30, 2000 and 1999 4
Consolidated Statements of Income for the nine
months ended September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999 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, 2000 and December 31, 1999
(all dollar amounts in thousands except share data)
ASSETS
<CAPTION>
9/30/2000 12/31/1999
--------- ---------
<S> <C> <C>
CURRENT ASSETS: (unaudited)
Cash and cash equivalents $ 2,134 $ 1,901
Liquid investments 47,691 36,541
--------- ---------
Cash and liquid investments 49,825 38,442
Accounts receivable, net of allowance for doubtful accounts of $432 and
$368 as of September 30, 2000 and December 31, 1999, respectively 7,137 7,129
Inventories 1,209 2,056
Prepaid expenses and other 196 402
Deferred income taxes - current portion 1,615 1,345
--------- ---------
Total current assets 59,982 49,374
--------- ---------
PROPERTY AND EQUIPMENT, at cost:
Land, building and building improvements 12,212 12,173
Machinery and equipment 15,087 13,752
Furniture and fixtures 2,599 2,524
Molds 5,851 5,608
Construction in process 4,422 2,866
--------- ---------
40,171 36,923
Less--Accumulated depreciation (15,986) (12,483)
--------- ---------
24,185 24,440
--------- ---------
DEFERRED INCOME TAXES 509 806
OTHER ASSETS 863 744
--------- ---------
$ 85,539 $ 75,364
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,824 $ 965
Accrued liabilities 4,299 6,385
--------- ---------
Total current liabilities 6,123 7,350
--------- ---------
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 41,534 40,843
Treasury stock -- 481,031 and 765,123 shares at
September 30, 2000 and December 31, 1999, respectively (4,756) (7,153)
Retained earnings 41,751 33,437
--------- ---------
Total stockholders' equity 79,416 68,014
--------- ---------
$ 85,539 $ 75,364
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
ICU MEDICAL, INC.
Consolidated Statements of Income
For the Three Months Ended
September 30, 2000 and September 30, 1999
(all dollar amounts in thousands except per share data)
(unaudited)
For the Three Months Ended
---------------------------
9/30/2000 9/30/1999
------------ ------------
NET SALES $ 11,698 $ 10,712
COST OF GOODS SOLD 5,517 4,836
------------ ------------
Gross profit 6,181 5,876
------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 3,091 2,806
Research and development 249 284
------------ ------------
Total operating expenses 3,340 3,090
------------ ------------
Income from operations 2,841 2,786
INVESTMENT INCOME 532 320
------------ ------------
Income before income taxes 3,373 3,106
PROVISION FOR INCOME TAXES 1,250 1,160
------------ ------------
NET INCOME $ 2,123 $ 1,946
============ ============
NET INCOME PER SHARE
Basic $ 0.25 $ 0.24
Diluted $ 0.23 $ 0.22
============ =============
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 8,382,922 8,208,438
Diluted 9,221,757 8,736,987
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
ICU Medical, Inc.
Consolidated Statements of Income
For the Nine Months Ended
September 30, 2000 and September 30, 1999
(all dollar amounts in thousands except per share data)
(unaudited)
For the Nine Months Ended
---------------------------
9/30/2000 9/30/1999
------------ ------------
NET SALES $ 39,570 $ 33,853
COST OF GOODS SOLD 17,316 14,666
------------ ------------
Gross profit 22,254 19,187
------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 10,387 9,272
Research and development 747 797
------------ ------------
Total operating expenses 11,134 10,069
------------ ------------
Income from operations 11,120 9,118
INVESTMENT INCOME 1,525 1,032
------------ ------------
Income before income taxes 12,645 10,150
PROVISION FOR INCOME TAXES 4,680 3,800
------------ ------------
NET INCOME $ 7,965 $ 6,350
============ ============
NET INCOME PER SHARE
Basic $ 0.96 $ 0.78
Diluted $ 0.89 $ 0.72
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 8,309,507 8,173,229
Diluted 8,984,629 8,767,609
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
ICU Medical, Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended
September 30, 2000 and September 30, 1999
(all dollar amounts in thousands)
(unaudited)
For the Nine Months Ended
---------------------------
9/30/2000 9/30/1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 7,965 $ 6,350
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization 3,690 2,341
Net change in current assets and current
liabilities, and other (15) 777
------------ ------------
Net cash provided by operating activities 11,640 9,468
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,694) (12,432)
Net change in liquid investments (11,150) 2,700
------------ ------------
Net cash (used in) investing activities (14,844) (9,732)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock
options and related income tax benefits,
and other 3,556 2,032
Purchase of treasury stock (119) -
------------ ------------
Net cash provided by financing activities 3,437 2,032
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 233 1,768
CASH AND CASH EQUIVALENTS, beginning of the period 1,901 2,048
------------ ------------
CASH AND CASH EQUIVALENTS, end of the period $ 2,134 $ 3,816
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
ICU MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(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 1999 Annual Report to Stockholders.
NOTE 2: Inventories consisted of the following:
9/30/00 12/31/99
-------- --------
Raw material $ 826 $ 962
Work in process 261 287
Finished goods 122 807
-------- --------
Total $ 1,209 $ 2,056
======== ========
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 838,835 and 528,549 for the three months
ended September 30, 2000 and 1999, respectively and 675,122 and 594,380 for the
nine months ended September 30, 2000 and 1999, respectively. Stock options of
subsidiaries did not have a dilutive effect.
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 and state tax
credits.
NOTE 5: The Company is involved in litigation with Medex, Inc. over patent
matters. See Part II, Item 1, "Legal Proceedings."
7
<PAGE>
<TABLE>
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:
<CAPTION>
=================================================================================================================
YTD YTD
PRODUCT LINE 1997 1998 1999 Q3-99 Q3-00 Q3-99 Q3-00
------------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
CLAVE(R) 65% 69% 68% 64% 69% 68% 70%
------------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
CLC2000(TM) - - 1% 2% 2% 1% 3%
------------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
Click Lock(R)and Piggy Lock(R) 7% 4% 3% 2% 1% 3% 2%
------------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
McGaw Protected Needle 5% 4% 3% 4% 1% 3% 2%
------------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
Lopez Valve(R)and other 4% 5% 4% 5% 3% 4% 3%
------------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
RF100-RF150 ("Rhino") 7% 5% 6% 6% 5% 6% 5%
------------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
Custom I.V. Systems 6% 8% 11% 13% 16% 11% 13%
------------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
B.Braun SafeLine Revenue Sharing 6% 5% 4% 4% 3% 4% 2%
------------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
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"),
Abbott Laboratories ("Abbott") (the "B.Braun 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 and Abbott
both purchase CLAVE Products, principally bulk, non-sterile connectors. B.Braun
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, and since July 1999,
the CLC2000. Bard purchases the Lopez Valve under a five-year agreement signed
in June 1999.
The Abbott Agreement extends to December 2009. The B.Braun Agreement
for CLAVE extends to December 2002. Both have extension provisions beyond those
dates.
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.
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 protect and expand
its market. The price reductions to date have more than been offset by increased
volume. 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.
On November 6, 2000, the federal Needlestick Safety and Prevention Act
was enacted. The Act modified standards promulgated by the Occupational Safety
and Health Administration to require employers to use needleless systems where
appropriate to reduce risk of injury to employees from needlesticks. The Company
believes the effect of this law will be to accelerate sales of the Company's
needleless systems, although it is unable to estimate the amount or timing of
such sales.
8
<PAGE>
The Company has commenced two initiatives that, if successful, will
reduce its dependence on its current proprietary products. It is seeking to
substantially expand its custom I.V. systems business with products sold to
medical product manufacturers and independent distributors. The Company is
negotiating the terms of an agreement with Abbott under which, if executed, the
Company expects to increase its sales of custom I.V. systems. The Company is
also launching SETFINDER.COM, which will contract with and distribute
commodity-type standard I.V. sets directly to healthcare providers and to group
purchasing organizations and independent dealer networks when not in common with
the Company's I.V. sets handled by its other distributors. There is no assurance
that either one of these initiatives will succeed, or that the anticipated
contract with Abbott will be concluded or those expected increases in sales
under that contract will occur.
The Company is currently taking steps aimed at improving manufacturing
efficiency principally by reducing labor costs and minimizing investment in
inventory. The original focus was on production of custom I.V. systems, which is
relatively labor intensive; it has now been expanded to include all of the
Company's automated and manual manufacturing operations. Substantially all
manual assembly is now performed at the facility that the Company opened in
December 1998 in Ensenada, Baja California, Mexico. In 1999, the Company made
significant investment in automated molding and assembly equipment. Both of
these steps have reduced unit production costs. Ongoing steps are aimed at
increasing systems capabilities, improving manufacturing efficiency and
enhancing distribution, as well as automation of the production of new products,
such as the CLC2000 and the 1o2 Valve(TM), and other products for which volume
is growing. Because significant innovation is required to achieve these goals,
there is no assurance that these steps will achieve the desired results.
Effective January 1, 2000, the Company reoriented its manufacturing and
distribution operations. Marketing and sales operations are now in four groups:
medical product manufacturers under the ICU Medical name, independent domestic
distributors under the Budget Medical Products ("BMP") name, international
manufacturers and distributors under the ICU Medical name, and SetFinder(TM).
Manufacturing is in a separate group, producing products for the four marketing
and sales groups. BMP, until this reorientation, had been responsible for
marketing and sales of only custom I.V. systems to both independent distributors
and medical product manufacturers. Because BMP now represents not a product
line, but a distribution channel, the custom I.V. systems product line, formerly
referred to as the BMP product line, is now referred to as the "custom I.V.
systems" product line.
<TABLE>
Net sales for each distribution channel, based on the new grouping, were as follows:
<CAPTION>
=================================================================================================================
YTD YTD
CHANNEL 1997 1998 1999 Q3-99 Q3-00 Q3-99 Q3-00
------------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Medical product manufacturers 52% 64% 71% 71% 72% 70% 74%
------------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
Independent domestic distributors 45% 33% 25% 26% 23% 27% 22%
------------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
International 3% 3% 4% 3% 5% 3% 4%
------------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total 100% 100% 100% 100% 100% 100% 100%
==================================== ========== ========== ========== ========== ========== ========== ==========
9
</TABLE>
<PAGE>
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO THE SAME QUARTER LAST YEAR
-----------------------------------------------------------------------
NET SALES increased $986,000, or approximately 9%, to $11,698,000 in
the third quarter of 2000, compared to $10,712,000 during the same period last
year. The increase was primarily attributable to a 20% increase in sales of
CLAVE Products, including custom CLAVE I.V. systems.
Net sales in the third quarter of 2000 fell below Management's
expectations and were adversely affected by seasonality and negative
fluctuations in ordering patterns, especially by the Company's medical product
manufacturer customers. Based on customer orders and market information,
Management expects that orders which it had expected in the third quarter of
2000 will be received and filled in the fourth quarter of 2000, and that net
sales for the fourth quarter of 2000 will show strong improvement over those for
the third quarter of 2000 and the fourth quarter of 1999. However, there can be
no assurance that those expectations will be realized.
Net sales to Abbott in the third quarter of 2000 were $6,153,000, as
compared with net sales of $3,472,000 in the third quarter of 1999. Net sales of
CLAVE Products increased to $4,921,000 in the third quarter of 2000 from
$2,528,000 in the third quarter of 1999 on a significant increase in unit
volume. The balance of the increase in net sales to Abbott was principally in
custom CLAVE I.V. systems. Based on terms of the Abbott Agreement, Management
expects a substantial increase in CLAVE unit and dollar sales volume with Abbott
through the remainder of 2000, although there is no assurance as to the amount
of such an increase.
Net sales to B.Braun, including revenue sharing, amounted to $2,252,000
in the third quarter of 2000, as compared with $3,921,000 in the third quarter
of 1999. Net sales of CLAVE Products decreased from $2,885,000 in the third
quarter of 1999 to $1,757,000 in the third quarter of 2000. Fluctuations in the
ordering patterns caused sales in the third quarter of 1999 to be unusually high
and sales in the third quarter of 2000 to be unusually low. Net sales of CLAVE
Products to B.Braun are up 27% over the first nine months of 2000 as compared to
the first nine months of 1999. Estimated revenue sharing payments due on B.Braun
sales of its SafeLine products and sales of McGaw Protected Needle both
decreased from last year. Management expects net sales of the McGaw Protected
Needle will continue to decline as the market for safe connectors continues its
shift to needleless technology. Management expects that SafeLine revenue sharing
payments will continue, and although it is unable to accurately forecast such
amounts, it does expect the payments to trend downward in the future.
Net sales to independent domestic distributors decreased approximately
1% from $2,736,000 in 1999 to $2,705,000 in 2000. This is attributed to a 12%
decrease in CLAVE net sales caused principally by a decrease in unit volume and
average selling prices of CLAVE Products, partially offset by a 26% increase in
custom I.V. system sales. Management expects a continued decrease in the net
sales of standard CLAVE Products to the independent domestic distributors, but
expects later in 2000 and 2001 that the decrease will be partially offset by
sales of custom I.V. systems and new products such as the CLC2000 and the 1o2
Valve. There is no assurance that the Company will achieve increased net sales
to independent domestic distributors in the future. Further, the ability of the
independent distributors to sustain or increase their sales may be impacted by
competition from existing and new competitive products or acquisition of market
share by Abbott and B.Braun. Management expects to encounter continued pricing
pressure from individual end users, and expects continued declines in net prices
to the independent distributors.
Total sales to foreign distributors were $551,000 in the third quarter
of 2000, as compared with $351,000 in the third quarter of 1999 (Those amounts
do not include distribution in Canada.). The Company now has distribution
arrangements in all of the principal countries in Europe and has recently
initiated or expanded distribution in the Middle East, South America and a
number of major countries in the Pacific Rim. Net sales to European customers
increased moderately from the third quarter of 1999; net sales in the rest of
the world increased substantially and accounted for most of the increase in the
sales to foreign distributors. Management expects that its sales to European and
other foreign customers will continue to increase in the future, although there
is no assurance that those expectations will be realized.
10
<PAGE>
In the fourth quarter of 1999, the Company launched SetFinder, doing
business as SETFINDER.COM. Net sales of SetFinder to date have not been
significant. The Company believes that, in time, a major portion of the sales of
disposable medical products will be initiated on the internet, although the
transition to the internet has been slow so far. The Company has and continues
to spend a significant effort on the launch and development of SetFinder,
although it has temporarily curtailed internet related marketing activities
until market opportunities expand. There is no assurance that SetFinder will
achieve significant sales and the amount of future operating profits or losses
of SetFinder is dependent upon the future development of the SetFinder business,
the outcome of which is not known at this time.
Total net sales of CLAVE Products (excluding custom CLAVE I.V. systems)
increased from $6,849,000 in the third quarter of 1999 to $8,126,000 in the
third quarter of 2000, or 19%. The increase in unit shipments was approximately
86%, almost all of which was accounted for by Abbott. Aggregate average net
selling prices decreased approximately 36% 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 medical products manufacturers.
Management expects unit shipments of CLAVE Products to medical products
manufacturers to account for most of the increase in unit shipments of CLAVE
Products for the balance of the year 2000 and for 2001 with the balance of the
increase to foreign distributors and a small decrease in shipments to domestic
distributors.
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. Net sales during the introductory period, which extended through most
of 1999, were not significant, but sales to Abbott and the independent domestic
distributors started to accelerate in late 1999. Abbott currently accounts for
over half of the year-to-date net sales of the CLC2000, although their
proportion was somewhat below half in the third quarter of 2000. Management
expects continued increases in CLC2000 sales, but there is no assurance as to
the amount or timing of future CLC2000 sales.
Net sales of Click Lock and Piggy Lock decreased approximately 41% in
the third quarter of 2000 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 in the third quarter of 2000 decreased 42%
from those in 1999 because there was virtually no sales to Bard in the quarter.
Sales to distributors (including foreign distributors) were up approximately 6%
in the third quarter of 2000 over the third quarter of 1999. Management expects
that net sales of the Lopez Valve to distributors will continue to increase, but
that total sales of the Lopez Valve for the fourth quarter of 2000 will be less
than in the fourth quarter of 1999 because it does not expect any significant
purchases by Bard in the fourth quarter.
Net sales of custom I.V. systems increased to $1,851,000 in the third
quarter of 2000, as compared with $1,366,000 in the third quarter of 1999. Unit
sales increased approximately 111%, with most of that increase with the medical
product manufacturers. Management expects continued increase in custom I.V.
systems sales for the balance of 2000 and in 2001.
In November 1998, the Company introduced the 1o2 Valve, the first
one-way or two-way drug delivery system. After initial delays in production, the
Company actively commenced sales in April 2000. The Company to date has only
sold the 1o2 Valve configured as part of a custom I.V. system, and intends to
continue selling it that way for the immediate future. Sales of the 1o2 Valve to
date have not been significant, but have been increasing monthly. There is no
assurance as to the amount or timing of future 1o2 Valve sales.
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 and Abbott have often offset the expected seasonal
sales decline.
11
<PAGE>
Further, those medical product manufacturers order bulk non-sterile product many
months before sale to the healthcare facility to allow for normal manufacturing
lead-times. Thus, Management believes that the large percentage of sales to
medical 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 53% during the third quarter of 2000 compared to 55%
during the same period last year. Fluctuation in production during the quarter
and the relatively low level of sales resulted in unabsorbed overhead. The
Company expects the gross margin to increase in the fourth quarter of 2000 as
expected increased production volume results in greater absorption of overhead.
That, coupled with the benefits of capital equipment added in 1999, is expected
to offset the effect of continuing decreases in average selling prices.
Management expects that gross margins for custom I.V. systems, SetFinder
products and certain other manually assembled products will be lower than those
historically recorded by the Company because their production is relatively
labor intensive. The Company expects that its unit production costs will
continue to decrease in 2001, but that the gross margin percentage will be equal
to or slightly lower than that ultimately achieved for the full year 2000, as
average unit sales prices continue to decrease, and manually assembled products
become a greater percentage of the Company's sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"), excluding
research and development expenses, increased 10% to $3,091,000, and were 26% of
net sales in the third quarter of 2000 compared to 26% during the same period
last year. Spending increased for administrative and litigation costs, while
sales and marketing costs were relatively unchanged. Management expects SG&A the
fourth quarter of 2000 to increase over last year at a higher rate than in the
third quarter, but to decline as a percentage of sales if the fourth quarter
sales expectations are realized.
In 2001, Management expects SG&A will be a somewhat higher percentage
of sales than in the first three quarters of 2000 because of higher spending in
all categories.
RESEARCH AND DEVELOPMENT EXPENSES ("R&D") were lower in the third
quarter of 2000 than in the same quarter of 1999, principally because of
spending on clinical evaluations of the new CLC2000 was less than expected.
Management expects that continuing work on the clinical evaluations, as well as
software development for SetFinder and the custom I.V. systems business, in
addition to work on new products will cause R&D expenses to increase for the
balance of the year. 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.
The Company plans to launch, in limited markets, a new I.V. connector
currently under development. The Company expects to apply in early 2001 to the
Food & Drug Administration ("FDA") under Section 510(k) of the Federal Food,
Drug and Cosmetics Act for approval to market this new connector. There is no
assurance that the FDA will grant marketing clearance, that the Company will
launch this new product, or that it will achieve sales if and when the Company
commences marketing it.
INCOME FROM OPERATIONS increased $55,000 or 2% and was 24% of net sales
in the third quarter of 2000, as compared with 26% in the third quarter of 1999.
The $305,000 increase in gross profit was substantially offset by the $250,000
increase in operating expenses.
INVESTMENT INCOME increased $212,000, or 66%, on the third quarter of
2000 as compared with the third quarter of 19999, because of an increase in the
investment portfolio as well as an increase in yield, as market rates have
generally moved higher.
NET INCOME increased 9% to $2,123,000 in the third quarter of 2000 as
compared with $1,946,000 in the comparable period last year. NET INCOME PER
SHARE - DILUTED increased $0.01, in the third quarter of 2000 over the third
quarter of 1999.
12
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE SAME NINE MONTHS LAST YEAR
-------------------------------------------------------------------------------
NET SALES increased $5,717,000, or approximately 17%, to $39,570,000 in
the first nine months of 2000 compared to $33,853,000 during the same period
last year. The increase was primarily attributable to increased sales of CLAVE
Products including custom CLAVE I.V. sets.
GROSS MARGIN was 56% during the first nine months of 2000 as compared
to 57% in the first nine months of 1999. The decrease in average selling prices
over the first nine months of 2000 was only partially offset by a decrease in
unit manufacturing costs, principally because of unabsorbed overhead in the
third quarter.
SELLING, GENERAL AND ADMINISTRATIVE expenses ("SG&A"), excluding
research and development expenses, increased by $1,115,000 to $10,387,000, and
decreased as a percentage of net sales to 26% during the first nine months of
2000 compared to 27% during the first nine months of 1999. The spending increase
was principally for administrative and litigation costs. Sales and marketing
costs were approximately the same, in the aggregate in the first nine months of
both 1999 and 2000.
INCOME FROM OPERATIONS increased $2,002,000, or 22%, principally
because of the increase in net sales and the reduction, as a percentage of net
sales, in operating expenses.
INVESTMENT INCOME increased $493,000, or 48%, over the first nine
months of 1999. Approximately half the increase is because of an increase in the
investment portfolio, and about half is because of an increase in investment
yield, principally because of the general increase in market rates.
NET INCOME increased $1,615,000, or 25%, NET INCOME PER SHARE - DILUTED
increased 24%, a somewhat lower percentage than the increase in net income
because of an increase in the weighted average number of shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
During the nine months ended September 30, 2000, the Company's cash and
cash equivalents and investment securities position increased $11,383,000 to
$49,825,000. Cash provided by operating activities and the exercise of stock
options was partially offset by the cost of additions to property and equipment.
Management expects that sales of the Company's products will continue
to grow in 2000. 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. The decrease in inventory
from December 1999 to September 2000 is because of aggressive efforts by the
Company to minimize its investment in inventory.
Management currently expects that capital expenditures for property and
equipment will be between approximately $4 million and $5 million in 2000 to
meet the future growth in CLAVE and other products. All automated production is
performed in San Clemente, California, and automated production capacity, after
the significant expenditures in 1999, significantly exceeds the Company's
current production requirements.
The Company has not purchased treasury stock since October 1999, except
for a small amount in March 2000. 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.
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, SafeLine revenue share, production costs,
impact of legislation, gross margins, SG&A, and research and development
expense;
o factors affecting operating results, such as shipments to specific customers,
the timing of receipt of orders from customers, product mix, selling prices,
the market shift to needleless products, achievement of business expansion
goals, development of innovative systems capabilities, introduction and sales
of new products, production delays, sales initiated on the internet,
manufacturing efficiencies, production volumes, overhead absorption, expansion
of markets, seasonality and customers' ordering patterns;
o new contracts with specific customers, buying organizations and dependence on
a small number of customers;
o outcome of litigation;
o competitive and market factors, including continuing development of competing
products by other manufacturers, consolidation of the healthcare provider
market and downward pressure on selling prices and market acceptance of
innovative ordering and distribution systems;
o working capital requirements, changes in accounts receivable and inventory,
capital expenditures, costs to develop SetFinder and common stock repurchases.
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. Those 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, 1999, 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 or
products incorporating 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.
14
<PAGE>
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.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-------------------------
In an action filed July 19, 1999, 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 one of its patents 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. On July 29, 1999, the Company 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.
On April 7, 1998, in an action entitled ALLEN PETTY, DBA CARMEL
DEVELOPMENT INTERNATIONAL V. ICU MEDICAL, INC., an Orange County, California,
Superior Court jury rendered a verdict in favor of the Plaintiff and against the
Company. The Company has appealed to have the judgment overturned. The Company
accrued a provision for this matter in its June 1998 financial statements.
The Company is 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. 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
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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 13, 2000
----------------------
Francis J. O'Brien
Chief Financial Officer
(Principal Financial Officer and)
Chief Accounting Officer)
16
