Apr 22, 2013
Executives
John Mills - Senior Managing Director George A. Lopez - Founder, Chairman, Chief Executive Officer and President Scott E.
Lamb - Chief Financial Officer, Secretary and Treasurer
Analysts
Thomas J. Gunderson - Piper Jaffray Companies, Research Division Lawrence Solow - CJS Securities, Inc.
Matthew Dolan - Roth Capital Partners, LLC, Research Division Jayson T. Bedford - Raymond James & Associates, Inc., Research Division Gregory M.
Macosko - Lord, Abbett & Co. LLC L.
Mitra Ramgopal - Sidoti & Company, LLC
Operator
Good day, ladies and gentlemen, and welcome to the ICU Medical Inc. First Quarter 2013 Earnings Conference Call.
[Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, John Mills, Managing Director of ICR.
You may begin.
John Mills
Thank you. Good afternoon, everyone.
Thank you for joining us today to review ICU Medical's financial results for the first quarter ended March 31, 2013. On the call today representing ICU Medical is: Dr.
George Lopez, Chairman and Chief Executive Officer; and Scott Lamb, Chief Financial Officer. We will start the call by reviewing key operating and financial achievements for the quarter.
Then, Scott will discuss first quarter financial performance and provide financial guidance for the second quarter and fiscal year 2013. Finally, the company will open the call for your questions.
Before we start, I want to touch upon any forward-looking statements made during the call, including management's beliefs and expectations about the company's future results. Please be aware, they are based on the best available information to management and assumptions that management believes are reasonable.
Such statements are not intended to be a representation of future results and are subject to risk and uncertainties. Future results may differ materially from management's current expectations.
We refer all of you to the company's SEC filings for more detailed information on the risk and uncertainties that have a direct bearing on operating results and performance and financial conditions. With that, I'll now turn the call over to Dr.
Lopez. Go ahead, Doc.
George A. Lopez
Thank you, John. Good afternoon, everybody.
We are pleased to start the fiscal year with solid results. Our revenue totaled $74.3 million and was driven by growth in the custom infusion and oncology products, offset by unexpected decreases in critical care and needle-free connectors.
Gross margins expanded to 320 basis points to 49.5%, as we continue to benefit from the cost efficiencies across all manufacturing facilities. During the quarter, we launched a new version of our Diana hazardous drug compounding system at the European Association of Hospital Pharmacists.
The new Diana features an enhanced user interface and workflow enhancements to improve safety and efficiency. We have more than a dozen trials of the Diana hazardous drug compounding system scheduled, with major hospitals and health care systems in the U.S.
over the next several weeks. And are actually following up on more than 80 qualified leads.
We are pleased with the way the Diana system has allowed us to change the hazardous drugs handling conversation with the pharmacist. None of our competitors in the oncology space offer user-controlled automated compounding systems.
Diana's opening doors and allowing us to engage in customers in a broader discussion of their safe handling needs, in a way that differentiates us and set us apart as leaders. Now I'd like to turn the call over to our CFO, Scott Lamb.
Scott?
Scott E. Lamb
Thanks, Doc. Before I begin, let me remind all of you that the sales numbers we are covering, as well as our financial statements are available on the investor portion of our website for your review.
Our first quarter of 2013 revenue was $74.3 million compared to $75.5 million in the same period last year. As expected, our top line performance during the quarter, was temporarily affected by Hospira's initiative to more efficiently manage its inventories.
We expect shipments to Hospira to increase during the second quarter. Net income for the first quarter of 2013 was $8.7 million or $0.58 per diluted share as compared to net income of $7.6 million or $0.53 per diluted share for the first quarter of 2012.
Now let me discuss our first quarter revenue performance by market segment. You can also view our detailed market segmentation in our earnings press release.
For the first quarter of 2013, sales in the infusion therapy market decreased 1.1% to $50.4 million, and represented 68% of our total sales. The decrease was attributable to an expected $4 million decline in CLAVE sales to U.S.
Hospira as they start to manage their inventory more efficiently. This decrease was primarily offset by the $3.5 million increase in sales through our global direct sales and specialty distributors, as customers continue to take advantage of our strong and unique product offerings.
The $3.5 million increase was in both custom and needle-free products. Sales in the critical care market were down 7.1% to $12.7 million, compared to $13.6 million a year ago and represented 17% of our total sales.
The decrease was attributable to volume as pricing continues to stay constant. Sales in our oncology market increased 27.4% year-over-year to $8.2 million, compared to $6.4 million a year ago.
This increase was driven by both sales to new customers and higher sales to existing customers. We expect continued growth through new and existing customers in this new market opportunity.
Our other product category, which primarily includes products in the renal and enteral markets, decreased 32.1% to $3 million, representing a 4.1% of our first quarter total revenue. Sales from TEGO were down 8.2% year-over-year to $2 million.
Additionally, the other product category was impacted by the elimination of Orbit revenue, due to the sale of that product line and which we concluded recognizing revenue in the first quarter of last year. Orbit contributed $1 million to the first quarter last year.
Now our first quarter sales by distribution channel we are as follows: Domestic sales to Hospira were down as expected to $25 million, compared to $28.8 million for the first quarter of 2012, as they reduced their weeks of inventory of CLAVE products, offset by a slight increase in oncology products. For the first quarter of 2013 and 2012, domestic sales to Hospira represented approximately 33.7% and 38.2% of our total revenue, respectively.
Our non-Hospira domestic sales were flat year-over-year, and were comprised of an 11.4% increase in infusion therapy; a 25.9% increase in oncology; an 8.9% decrease in critical care; and a 25.8% decrease in other, caused by a temporary decrease in TEGO due to the timing of orders. International sales were up 12.5% year-over-year to $22.3 million, representing 30.1% of our total revenue during the first quarter.
Our strong performance in international markets was driven by robust growth in infusion therapy and oncology, which increased 18.2% and 34.1%, respectively. Our gross margins for the first quarter expanded 320 basis points year-over-year to 49.5%, which was attributable to improved cost efficiencies across all of our manufacturing facilities, including Slovakia.
We expect gross margins for the full fiscal year of 2013 to be approximately 50%. SG&A expenses increased 9.5% to $22.9 million or 31% of revenues in the first quarter of 2013, compared to $20.9 million or 28% of revenues for the first quarter of 2012.
The increase was driven primarily from the new medical device tax of approximately $500,000, with the remaining increase coming from IT, sales and marketing and higher compensation costs. We expect SG&A, including the medical device tax, as a percentage of total revenue, to be in the range of 27.5% to 28% of revenue for the full fiscal year of 2013.
Our research and development expenses decreased year-over-year to $1.9 million due to a delay in outside project-related costs. Starting in the second quarter, we expect our R&D expenses to accelerate, and we project them to be in the range of 3.2% to 3.3% of our total revenue for the full fiscal year of 2013.
Our operating income for the first quarter of 2013 increased 5.6% to $12 million, or 16.2% of sales when compared to last year $11.4 million or 15.1% of sales. Our EBITDA totaled $16.9 million or 23% of revenue compared to $16.3 million or 21.6% of revenue for the first quarter a year ago.
Now moving to our balance sheet and cash flow. As of March 31, 2013, our balance sheet remained very strong with no debt and $233.6 million in cash, cash equivalents and investment securities.
This equates to approximately $16.02 per outstanding share. Additionally, we had $308.6 million in working capital.
During the first quarter of 2013, we generated $10.8 million in cash flow from operating activities. Our capital expenditures totaled $5.8 million and primarily included machinery, equipment and molds for our plants in the U.S.
Day sales outstanding for the first quarter were 64 days. We expect DSOs to be approximately 55 days to 60 days in the foreseeable future.
Now let me update you on our financial guidance for the second quarter and fiscal year 2013. For the second quarter of 2013, we expect our revenues to be in the range of $82 million to $84.5 million.
We expect our diluted earnings per share to be in the range of $0.62 to $0.67. Now moving to our annual guidance.
Due to the current business trends in certain market segments, we are lowering the upper end of our previously issued revenue guidance. For the full fiscal year of 2013, we now expect to generate revenue in the range of $330 million to $337 million, compared to the previous guidance of $330 million to $340 million.
On a market segment basis, we expect our infusion therapy sales to increase year-over-year approximately 6%. We expect critical care to be down approximately 3% to 12%, and we expect our oncology market segment to be up approximately 27% to 35%.
And we expect our other category to be down approximately 10%. We are reiterating our previous guidance of diluted earnings in the range of $2.70 to $2.85 per share.
This includes the medical device tax expense, which we still estimate to be approximately 0.6% of our total revenue. Excluding the medical device tax, our guidance would have been in the range of $2.78 to $2.94 per share for fiscal 2013.
For modeling purposes, we plan to continue to invest in our direct sales force in 2013, and to add approximately 13 additional salespeople worldwide. Also, our tax rate is expected to be 34%, excluding first quarter's discrete item of approximately $600,000.
Including the discrete item, our tax rate is expected to be approximately 33% for the year. Our operating cash flow is expected to be approximately $45 million to $50 million in 2013.
Our 2 main manufacturing facilities in Salt Lake City, Utah and Ensenada, Mexico are now both at approximately 85% capacity, and later this year, we will begin to expand the manufacturing square footage at each facility to accommodate expected future growth. Our Slovakia plant is now approximately at 40% capacity.
We also expect 2013 capital expenditures will be $30 million to $35 million, which is primarily for manufacturing capacity expansion, tooling and equipment for new products and maintenance costs of approximately $14 million. In conclusion, I would like to add that looking at the remainder of 2013, we are staying focused on innovation, operating improvements and product expansion.
We believe our strong financial position enables us to achieve additional improvements in our infrastructure and success in pursuing additional growth strategies. And with that, I would like to now turn the call back to the operator in order to take your questions.
Operator
[Operator Instructions] Our first question comes from the line of Tom Gunderson of -- from Piper Jaffray.
Thomas J. Gunderson - Piper Jaffray Companies, Research Division
So overall, let's just start, Scott, with the guidance. For the earnings side of things, for Q2, it's a little less than what's out there right now from consensus.
I guess the question would be, what do you see improving in the second half that allows the lower Q2, but still stay with the same annual guidance? Is there some big change, either in gross margin or in operating expense somewhere along the line in Q3 or Q4?
Scott E. Lamb
Well, the bottom line improvement comes, primarily from improvement in our gross margins. We believe that we should be able to do about 50 basis points better than what we had previously forecasted, and that's due to the continued improvements across all of our factories.
Thomas J. Gunderson - Piper Jaffray Companies, Research Division
Okay. And then, more specifically, where are we on the SG&A and specifically, on the hiring of salespeople.
I think you said you had targeted 8 for the year, have any come on board in the first quarter?
Scott E. Lamb
No, in fact, we've increased that to about 13 total from where we're at today. We're a little bit late in some of our hiring.
We had expected to have a few more hired than we have some more, but we'll be ramping that up this quarter.
Thomas J. Gunderson - Piper Jaffray Companies, Research Division
And then last question, I'll get back in queue, and that is, you continue to beat your comparable companies with your international growth rate on revenues. Scott, last quarter, you broke out Europe and rest of world.
Can you do that for this quarter, too?
Scott E. Lamb
Sure, so Europe for the quarter -- Europe for this quarter was 15.2% of total revenue or $11.3 million. Then the rest of the world, which obviously, just makes up the difference, was 14.9% or $11 million.
Operator
Our next question comes from the line of Larry Solow from CJS Securities.
Lawrence Solow - CJS Securities, Inc.
Just a quick follow-up, firstly, on the -- is it fair to say that some of the, I guess, if you look at a consensus and whatnot, I know you guys didn't guided on -- on Q2, but it looks like it's down versus my numbers and the rest of -- and -- some of the -- my colleague analysts. Is that -- or competing analysts -- is that mostly timing, because it looks like, obviously, in Q1 your R&D was a little bit less than we would've expected, SG&A was perhaps a hair less than expected.
So certainly R&D, I imagine, was a timing-related thing. A good portion of sort of the higher Q1, lower Q2 than maybe you originally expected?
Scott E. Lamb
Yes, we still plan on spending 3.2% to 3.3% of -- actually a little bit more than we had originally planned in R&D this year. We're just squeezing that -- squeezing a lot more into 3 quarters than 4.
Lawrence Solow - CJS Securities, Inc.
And you said you had not hired any of those, and I know you -- I think it sounded you upped it from 8 to 13. You have begun to hire some of those people, or are you did not hire any yet?
George A. Lopez
Well, net-net, we're about where we were on our last call. So we've -- we're looking to hire a few additional on top of our original plan.
Lawrence Solow - CJS Securities, Inc.
Okay. And I know -- I realize some of these little tweaks on your percentages, in terms of growth are generally small numbers, but it looks like infusion may be doing -- it's sort of at the higher end of your prior expectations in oncology, which moves a lot more because it's a smaller number, but it looks like you have cut that a little bit.
And you're, 10% -- 10 basis points or so. Anything, any color you can add to those 2 markets or reasons?
Scott E. Lamb
Well not necessarily. Certainly, oncology being the newer market for us, with newer products continuing to get released, it's a little bit more difficult for us to predict that market than it is for infusion therapy, but that's all it is.
It's continuing to do well, obviously, and the market continues to get better educated and we're seeing increases, both in our existing customer base, as well as new customers.
Lawrence Solow - CJS Securities, Inc.
Okay. And in terms of Hospira, and you -- this just may not be a question you could answer, but -- I know they were expecting to have a, what, $6 million -- $8 million or $7 million to $8 million inventory drawdown.
It -- from what you can tell, was that about what the number turned out to be, and is the end market still sort of growing? It sounds like in-line with where you expected it to be?
Is it fair to say, or has anything changed there?
Scott E. Lamb
Not much. They came in about where we had expected maybe slightly better, but not too far off.
Their second quarter ordering pattern seemed to be getting back to more of a normal ordering pattern. The orders are up in the second quarter over the first quarter, but it's still -- we're still early in the year.
But we're not concerned right now.
Lawrence Solow - CJS Securities, Inc.
And I know you've also gotten into the question on there, their increased spend or the extension of their ban on the infusion pumps. Is that not impacting you yet?
Any thoughts on that, on whether or not when that -- what could go wrong that could potentially start impacting you more?
Scott E. Lamb
Well, I'm not going to get into the what ifs with their pumps per se. We don't believe, at least at this moment, anyway that, that has impacted us.
Again, we believe that the majority of the decrease in the first quarter was due to them trying to lower their inventories, that's all.
Lawrence Solow - CJS Securities, Inc.
Okay. And just last question.
I know you guys don't comment much on new products but your recent -- your January launch, just a product in critical care, which will allow you to at least target a larger portion of the market, getting into the noninvasive side. Is it fair to say that there'll be other critical products in critical care being launched in the next 6 to 12 months?
Scott E. Lamb
Yes, that's a fair statement.
Operator
Our next question comes from the line of Matt Dolan.
Matthew Dolan - Roth Capital Partners, LLC, Research Division
I wanted to follow up on the Hospira inventory reduction program, just to be definitive. So I think you said the impact was $4 million versus an estimate of $7 million, is that correct?
Scott E. Lamb
Well, just in the connector business alone, they were down approximately $4 million. We thought that they would be down, maybe $7 million to $8 million.
Their orders are up in the second quarter. Whether or not they are -- they're finished with their inventory reductions, it's a little difficult to say.
They're still working on their numbers as well, but like I said, the second quarter is up. And we're -- and I'll just state also that our current guidance does not count on any significant reduction, any further significant reductions in their ordering.
Matthew Dolan - Roth Capital Partners, LLC, Research Division
Okay, and your sell-through data suggest that it's up, as well?
Scott E. Lamb
Sell-through data is positive.
Matthew Dolan - Roth Capital Partners, LLC, Research Division
Okay. And then on the earnings side, you beat the quarter pretty handily from what you anticipated, but maintain the full year.
I know R&D got squeezed out a little bit. Can you make any other comments on why it didn't quite come through, in terms of being able to raise your earnings guidance?
Scott E. Lamb
Well, like I said, R&D, we expect R&D to accelerate, beginning this second quarter. So that's a big part of it.
And we'll end up hiring a few additional salespeople than we have originally planned. So the 50 base improvement in gross margin is partially getting offset by slight decrease to the top line, as well as slight increase in R&D and SG&A.
Matthew Dolan - Roth Capital Partners, LLC, Research Division
Okay. And then on the gross margin line, what are you expecting to exit the year at?
Scott E. Lamb
I would expect us to be slightly above 50% by the end of this year.
Matthew Dolan - Roth Capital Partners, LLC, Research Division
Okay. And then last one, for us, is the buyback.
Where are you? Did you buy any in the quarter?
And what were the plans for this year?
Scott E. Lamb
We did not buyback any this quarter, and our 3 stated uses of cash remain, that is: Buyback, the authorization we have in place, which is $40 million; as well as investing it back into the business. As you know, we're expanding our 2 main manufacturing facilities, as well as we continue to look for good opportunities in the M&A market.
And so we are -- we're comfortable with our cash balance as it is today.
Operator
[Operator Instructions] Our next question comes from Jayson Bedford, from Raymond James.
Jayson T. Bedford - Raymond James & Associates, Inc., Research Division
I guess just looking at the revenue guidance. You seem to lower critical care and oncology.
Just wanted to focus on oncology a little bit. You're pretty enthusiastic last quarter.
What's gone on or what's happened to give you a little less confidence in the growth profile, realizing that we're dealing with some pretty high-growth rates to start with? What's happened over the last few months to give you a little more caution on that side?
George A. Lopez
Scott?
Scott E. Lamb
Well, we've always said that oncology is a little bit more difficult for us to predict. We're still very bullish on it.
As you saw, oncology grew over 27% in this first quarter. And we expect it to continue to do well, adding Diana as an example is a real positive for the revenue trail that it creates.
So we are continuing to see more enthusiasm in the marketplace, more states are looking for-- pushing through regulation that requires closed systems for the safe handling of hazardous drugs. Budgets seem to be loosening up a little bit, Europe and the rest of the world continues to be a good driving force for growth in oncology as well.
It's just that it's a newer market for us, with newer products and a little bit more difficult for us to predict is all.
Jayson T. Bedford - Raymond James & Associates, Inc., Research Division
And have you launched Diana in full, in the U.S.?
George A. Lopez
No.
Jayson T. Bedford - Raymond James & Associates, Inc., Research Division
When will that happen?
George A. Lopez
Well actually the -- probably right around December.
Jayson T. Bedford - Raymond James & Associates, Inc., Research Division
Sorry, December?
George A. Lopez
December. We're -- in the mean time, we're selling it to individual hospitals to get a knowledge base on the things they like and dislike, so.
Scott E. Lamb
And as we mentioned in the call, we have over 12 evaluations going on right now. And we have significantly more than that, that have expressed qualified interest in the product.
And so we're in the process of getting it out to those folks as well.
George A. Lopez
And we've gone through numerous versions of it, 1.1, 1.2, 1.3, so it's really adapting the products to meet the customers' needs. And once we know -- we think we're very close, 1.3, but you never know until you get out there in volume.
We're very bullish on oncology, I mean. Nothing's changed.
Scott E. Lamb
And Jason, just to reiterate our description of Diana in this market, having Diana gives us a differentiation from everyone else in getting in and talking to people, especially in the pharmacy.
Jayson T. Bedford - Raymond James & Associates, Inc., Research Division
Right, okay. And just maybe, either qualitative or quantitatively, can you comment on some of the traction in new products, either Neutron, CardioFlo and NanoClave?
Scott E. Lamb
Really not enough to talk about at the moment.
Jayson T. Bedford - Raymond James & Associates, Inc., Research Division
Okay. And then on your 2Q EPS guidance, what's the assumed gross margin in that guidance?
Scott E. Lamb
Approaching 50%, if not there already.
Operator
And our next question comes from the line of Gregory Macosko from Lord, Abbett.
Gregory M. Macosko - Lord, Abbett & Co. LLC
Just one question on Europe and how Slovakia is going. You mentioned that with regard -- how's utilization there?
And kind of what are your expectations there for the custom sets?
Scott E. Lamb
Well, as we mentioned on the call, they're approximately 40% capacity utilization at the moment. Europe is up around 12% on a year-over-year basis.
So Europe's doing well. That's just one quarter, let me just caution everyone.
But we -- we're cautiously optimistic about the rest of the year in Europe, all things being equal. So we believe that Slovakia was the right investment, at the right time.
Being able to take advantage of this lull in the European market and that's given us time to just dial in and tune in the factory to get it even more efficient.
George A. Lopez
And the more -- majority of the sales, of the sets are custom, because of the tendering processing they have. So it's custom business, the way you think about it, the majority of our sales there.
Gregory M. Macosko - Lord, Abbett & Co. LLC
Now how about the inventory fill, do you feel like there was this, perhaps some of that was inventory fill so the 12 -- it maybe grew a little faster than it might, normally?
Scott E. Lamb
There may have been a little bit of that, especially on the oncology side, but I wouldn't look to that as the primary driver.
Gregory M. Macosko - Lord, Abbett & Co. LLC
Okay. And again, in -- with regard to Europe, are you -- how is the new hospital or new location sign-ups, new account penetration?
Scott E. Lamb
I don't have a number on that, Gregory, so I couldn't quantitatively answer that for you. Obviously, growth in that business is qualitatively positive.
Operator
Our next question comes from the line of Mitra Ramgopal from the line of Sidoti.
L. Mitra Ramgopal - Sidoti & Company, LLC
Most of my questions have been answered, but just a couple of quick ones. Scott, if you can just let us know again, as we look at the guidance for critical care and oncology, it looks as though you're not assuming much of a contribution from new products, at least for this year, is that fair?
Scott E. Lamb
Right. As you remember on our last call, we said that new products would contribute less than $10 million for the year.
And we still believe that.
L. Mitra Ramgopal - Sidoti & Company, LLC
And again, I know you said you're going to add about 13 to the sales force. Is the focus going to be mostly domestic, or is some of that also going to be international?
Scott E. Lamb
Some will be in Europe and the rest of world as well. The majority though will be in the U.S.
L. Mitra Ramgopal - Sidoti & Company, LLC
Okay. And roughly again, what was the size of the sales force entering this year?
Scott E. Lamb
Around where we are currently, which is a little north of 150.
Operator
I'm not showing any further questions at this time. I would now like to turn the call back to Scott Lamb for closing remarks.
Scott E. Lamb
Well, thank you for participating in today's call. And we look forward to updating you on our 2013 progress on the second quarter call on July.
Thank you.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect.
Everyone, have a great day.