Oct 15, 2012
Operator
Good day, ladies and gentlemen, and welcome to ICU Medical's Third Quarter 2012 Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded.
Now I'll turn the conference over to John Mills with ICR. Please begin.
John Mills
Thank you, and good afternoon, everyone. Thanks for joining us today to review ICU Medical's financial results for the third quarter and 9 months ended September 30, 2012.
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 third quarter financial performance and provide a financial guidance update for the full fiscal year.
Then the company will open the call for your questions.
John Mills
Before we begin, 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 risks 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 risks and uncertainties that have a direct bearing on operating results and performance and financial conditions.
John Mills
With that said, I'll now turn the call over to Dr. Lopez.
Go ahead, Doc.
George Lopez
Thank you, John. During the third quarter, we focused on leveraging our strong cash flow and continued to invest in new products portfolio to expand the market share and to educate distributors and customers about the benefits of our innovative devices.
Let me highlight some of our key achievements.
George Lopez
Our third quarter revenue increased to a record $81.4 million, driven by improvements in our infusion therapy and our oncology markets, which was partially offset by a decrease in critical care and impact of the euro currency translations. I am very pleased with our 346-basis-point improvement in gross margin and strong operating margin, which grew over 400 basis points to above 21%, even as we increased our research and development investment by 60%.
As I like to say, you can run but you can't hide when it comes to operating margins.
George Lopez
Net income for the third quarter grew to over $12 million or $0.82 per diluted share, which represents an increase of almost 26% compared to diluted earnings per share we recorded a year ago.
George Lopez
Now I'd like to turn the call over to our CFO, Scott Lamb, to review our third quarter financial results and our guidance. Scott?
Scott Lamb
Thank you, 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.
Scott Lamb
As Doc already mentioned, our third quarter 2012 revenue was a record $81.4 million, an increase of 6.5%, compared to $76.5 million in the same period last year. The euro decline unfavorably impacted our top line performance by $1.3 million.
Excluding the euro impact, our revenue was up 8.2% year-over-year. Net income for the third quarter of 2012 was $12.2 million or $0.82 per diluted share as compared to net income of $9.3 million or $0.65 per diluted share for the third quarter of 2011.
The third quarter of 2012 net income included approximately $0.5 million or $0.03 per diluted share related to discrete tax items.
Scott Lamb
For the 9 months ended September 30, 2012, our revenue increased 3.8% to $234.2 million compared to $225.7 million in the same period last year. The euro decline unfavorably impacted our year-to-date revenue by $3.1 million.
Excluding the euro impact, our revenue for the 9 months ended September 30, 2012, was up 5.1% year-over-year. Net income for the 9 months ended September 30, 2012, was $28.9 million or $1.98 per diluted share compared to net income of $26.8 million or $1.89 per diluted share for the same period last year.
Scott Lamb
Now let me discuss our third quarter revenue performance by market segment. You can also view our detailed market segmentation in our earnings press release.
For the third quarter of 2012, sales in the infusion therapy market increased 13.6% to $57.2 million and represented 70.2% of our total sales. The strong growth was attributable to strong performance of needlefree connectors, primarily CLAVE and MicroClave, as well as custom sets.
More specifically, sales from CLAVE and MicroClave increased 6.2% to $30.4 million compared to $28.7 million a year ago, representing 37.4% of our total company-wide sales. Custom infusion sets were up 25.8% year-over-year to $23.2 million compared to $18.4 million a year ago.
That comprised 28.5% of our total company-wide sales. We expect sales in infusion therapy to increase approximately 9% to 10% in fiscal year 2012 from fiscal year 2011 and to be driven primarily by both needlefree connectors and custom sets.
Scott Lamb
Sales in the critical care market were down 11.8% to $13 million compared to $14.7 million a year ago and represented 16% of our total sales. The decrease was attributable to competitive volume and price pressures, which began in the second half of last year.
We continued to invest in these products and believe they represent long-term growth opportunities. Given the current market conditions, we expect critical care sales to decrease year-over-year by approximately 10% to 12%.
Scott Lamb
Sales in our oncology market increased 10.2% to $7.5 million compared to $6.8 million a year ago. This growth was driven primarily by an increase in market share.
We continue to believe that our oncology products represent a great growth opportunity. We are in the right market at the right time, but conversions are taking longer than expected.
Based on the current demand and backlog of conversions, we forecast sales from this market to increase approximately 20% for fiscal year 2012. The change in our projected growth rate is based on the delay of forecasted conversions in new business.
Scott Lamb
Our other product category, which primarily includes products in the renal and enteral markets, was down 18.6% to $3.7 million compared to $4.6 million a year ago, representing 4.6% of our third quarter total revenue. Sales from TEGO increased 17.6% year-over-year to $2.6 million but were primarily offset by the elimination of Orbit sales due to the sale of that product line and which we stopped shipping in the first quarter of this year.
We expect sales in this product category to decrease approximately 15% this year.
Our third quarter sales by distribution channel were as follows
domestic sales of Hospira increased 10.1% year-over-year to $33.1 million compared to $30 million for the third quarter of 2011. This growth was primarily driven by CLAVE, MicroClave, needlefree connectors and custom infusion sets, as well as oncology products.
For the third quarter of both 2012 and 2011, domestic sales to Hospira represented approximately 31% and 39% of our total revenue respectively.
Our third quarter sales by distribution channel were as follows
Our non-Hospira domestic sales increased 5.8% to $29.3 million compared to $27.7 million a year ago, as double-digit growth in infusion therapy and oncology products was partially offset by decreases in critical care and our other product category. International sales were up 1.7% year-over-year to $18.9 million, representing 23.2% of our total revenue during the third quarter.
The decline was primarily attributable to softness in Europe and the euro decline. As I already discussed earlier, foreign exchange from Europe negatively impacted our third quarter sales by approximately $1.3 million.
Our third quarter sales by distribution channel were as follows
Our gross margins for the third quarter expanded 346 basis points year-over-year to 50%. This reflects a more favorable product mix and peso exchange rate.
The improvement in the peso exchange rate improved gross margin by approximately 100 basis points in the third quarter, with the product mix making up the majority of the rest of the improvement. Based on a strong dollar and improved product mix, we now expect our gross margins for the full fiscal year of 2012 to be approximately 49% compared to our previous range of 48% to 48.5%.
Our third quarter sales by distribution channel were as follows
SG&A expenses were $20.2 million compared to $20.4 million for the third quarter of 2011. As a percentage of sales, our SG&A expenses were down to 24.8% compared to 26.7% a year ago.
We expect SG&A as a percentage of total revenue to be approximately 26.5% for the full fiscal year of 2012 compared to our previous projection of 27%.
Our third quarter sales by distribution channel were as follows
Our research and development expenses increased 59.2% to $3 million compared to $1.9 million for the third quarter of 2011. This increase was in line with our expectations as we continue to invest in our existing and new products for all our target markets.
We expect our research and development expenses to be about 3.5% of revenue for the full fiscal year of 2012 compared to our previous guidance of 3.3%.
Our third quarter sales by distribution channel were as follows
Our tax rate for the third quarter was 31%. The lower-than-expected tax rate was due to discrete items recognized during the quarter.
We expect our tax rate to be approximately 33% for the full fiscal year of 2012.
Our third quarter sales by distribution channel were as follows
Our operating income for the third quarter of 2012 increased 31.9% to $17.5 million compared to $13.3 million a year ago. Operating margins expanded 410 basis points to 21.5% compared to 17.4% a year ago.
Our EBITDA totaled $22.4 million or 27.5% of revenue compared to $18.1 million or 23.6% of revenue for the third quarter a year ago.
Our third quarter sales by distribution channel were as follows
Now moving to our balance sheet and cash flow. As of September 30, 2012, our balance sheet remained very strong with no debt and $204.3 million in cash, cash equivalents and investment securities.
This equates to approximately $14.18 per outstanding share. Additionally, we had $283.7 million in working capital.
Our third quarter sales by distribution channel were as follows
During the third quarter, we generated $9.5 million in cash flow from operating activities. Our capital expenditures totaled $5 million during the quarter and primarily included machinery, equipment and molds for our plant in the U.S.
Day sales outstanding for the third quarter were 60 days, and we expect DSO to be approximately 55 to 60 days in the foreseeable future.
Our third quarter sales by distribution channel were as follows
Now let me update you on our financial guidance for the full fiscal year of 2012. Due to the decrease in the value of the euro and sluggish European economy, our drop in critical care business and slower growth in oncology, we are lowering our previously announced revenue guidance range for the full fiscal year of 2012.
The new range is $315 million to $318 million compared to the previous range of $318 million to $325 million. As I already stated earlier, on a market segment basis, we expect our infusion therapy sales to increase year-over-year approximately 9% to 10%.
We expect critical care to be down approximately 10% to 12%. And we expect our oncology market segment to be up approximately 20%.
We expect our other category will be down approximately 15%.
Our third quarter sales by distribution channel were as follows
We are raising our previously announced diluted earnings guidance range. The new range is $2.75 to $2.80 per share compared to the previous range of $2.55 to $2.70 per share.
The increase was primarily due to improved product mix, improved manufacturing efficiencies and the favorable peso exchange rate.
Our third quarter sales by distribution channel were as follows
For modeling purposes, our tax rate is expected to be 33% for 2012. And our operating cash flow is expected to be approximately $45 million to $50 million in 2012.
And we believe capital expenditures will be in the range of $16 million to $19 million in 2012.
Our third quarter sales by distribution channel were as follows
Now I'd like to turn the call over for your questions.
Operator
[Operator Instructions] We have a question from Matt Dolan of Roth Capital Partners.
Matthew Dolan
Scott, first question is on the gross margin. It's been up around here at the 50% level for the last 2 quarters.
So as we look a little bit further down the road, I know you called out 100 basis points from the peso. But is there any reason that we shouldn't see, not only a sustainable level here, but perhaps some improvement as we go into 2013?
Scott Lamb
Well, certainly, the peso is the variable, as you mentioned. We have built in -- we expect the peso to remain at its current levels plus or minus.
The improved product mix, that should continue, obviously, as we move forward, especially with infusion therapy and oncology doing well. So I would expect that going forward, while we should expect to see continued improved gross margins, there is some variability in the peso and product mix.
But overall, I would expect continued improvement.
Matthew Dolan
Okay. And then you called out a number of variables on the revenue side of the equation for the year.
It looks like you still look for an uptick sequentially in Q4. Can you talk a little bit more specifically about what you're seeing in Europe, dissect the euro from the actual volume in Europe?
And then the second part of the question is on critical care and some of the competitive pressures, and the guidance around critical care has certainly bounced around this year. So is there any end in sight, or is that going to remain unpredictable for the foreseeable future?
Scott Lamb
Well, first of all, with Europe, if you bifurcate the euro from the market itself, we are seeing softness. The growth outside of the euro was relatively flat in Europe, and we would expect Europe to continue to be flat to slightly up.
We are continuing to be very bullish on Europe and our factory over in Slovakia. And I think that long term, that will pay dividends for us.
As far as critical care goes, we continue to see competitive pressures coming from the marketplace. We do have some product line gaps that we will need to fill in, as well as some product line enhancements.
As you can see from the investments that we are making in R&D, a lot of that increase in expenditures is going into critical care. But it's going to take some time to see the fruits, if you will, of our labor.
But we do believe we are on the right path. We do believe that we have the right products in the pipeline.
And it's just going to take some time to get them out into the marketplace.
Matthew Dolan
Okay. If I could sneak 1 or 2 more.
In the Hospira business, hopped up quite nicely sequentially in Q3. Do you have any read or visibility on the sell-through data that, that's kind of a new level?
Or is that -- were there any one-time components to that performance?
Scott Lamb
Well, sell-through is up nicely for Hospira as well. We are continuing to keep an eye on sell-through with Hospira, and certainly, Hospira going into 2013 is looking to make some improvements in the marketplace.
And I think they're just getting ready and poised to do well going into 2013, but I certainly don't want to speak for them.
Matthew Dolan
Okay. And the last one is on the device tax.
Scott, I don't know if you've looked at it, what the impact might have been in 2012, but is there any framework you could give us as we think about models for 2013? And I'll get out of the way.
Scott Lamb
Well, just like about everyone else, we are waiting to see what the Supreme -- how the Supreme Court rules. So we're still getting our arms wrapped around the final details.
There is a lot of work involved in preparing for this come January 1. The 2.3% is obviously on revenue, excluding exports and certain OEM products.
And so we're still trying to riddle out what that's going to be exactly. You probably could get somewhere close with what that number is going to be, but we're not prepared to give the impact until our fourth quarter call.
Operator
Our next question is from Larry Solow of CJS Securities.
Lawrence Solow
Just a few follow-ups. There's -- in Slovakia, you mentioned it in terms of the utilization.
Did that bounce back down to the 35%, or can you just give us sort of an update on that?
Scott Lamb
It is back down to the 35%.
Lawrence Solow
And will increases -- I mean, are they completely dependent on uptick in Europe? Or will you still be transferring some -- will utilization still rise slowly even in a flat environment in Europe?
Scott Lamb
They are solely reliant on the European market. So every custom set that we build for Europe -- I'm sorry, that we sell into Europe is built in Slovakia.
Lawrence Solow
The majority is being done Slovakia. Exactly, okay.
Scott Lamb
Yes.
Lawrence Solow
Okay. So, okay.
In terms of -- I know you don't want -- don't give too much info on the R&D pipeline until products are out there. Any update maybe on Diana or anything you could speak of?
George Lopez
Nothing new. We are launching Diana on December 3 in the U.S.
Lawrence Solow
Okay, December 3. Okay.
Scott Lamb
Yes, and we certainly -- you can -- you're always welcome to go on to our website and take a look at Diana out there.
Lawrence Solow
Okay. And you mentioned in terms of gross margin, obviously, several factors are helping drive improvement.
And it sounds like absent of the variability in peso, we could still see some more improvement. How about in terms of leverage on the -- in the SG&A line?
Obviously, you guys have done a good job driving that down even sequentially the last 2 quarters. And as we look out into '13 and beyond, is there room for more improvement there?
Scott Lamb
Well, we are always looking. We've always talked about getting leverage off of our investments in sales, marketing and R&D.
And you can see that we're starting to get that type of leverage. Obviously, as we grow the top line, we'll have to continue to invest in sales and marketing.
But we do believe that we'll continue to get or at least see that type of leverage going forward. That's not to say that we will -- that we won't continue to invest in SG&A.
Operator
Our next question is from Junaid Husain of Dougherty & Company.
Junaid Husain
Scott or Doc, relative to Hospira, they recently had a warning letter at one of their facilities in the Caribbean. I believe it was Costa Rica.
I don't think your products flowed through that facility. But can you tell me, is there any impact that this or other manufacturing issues at Hospira could potentially have for you guys?
Scott Lamb
Well, we do have some product that flows through that facility. It hasn't have an impact on us, and hopefully, it won't going forward.
Junaid Husain
Okay. And then, Doc, I know that you don't like talking about new products that you have in the pipeline until they've reached a certain threshold.
But just kind of given the lower-than-expected guidance that you've given us, is it possible that you could -- that perhaps new products could offset a weak Europe?
George Lopez
Yes.
Junaid Husain
Care to elaborate?
George Lopez
Well, never in the history of the company we launched or will launch as many products as we are this year before December 31. And we haven't yet started in Europe with our new products.
For example, Diana, we have quite a head start. So I think it's -- we are in a great position.
Junaid Husain
Okay, fair enough. And then, Scott, can you remind us, for fourth quarter, I believe you typically shut down your plants at the end of December for maintenance.
Do you expect to do that again? And what kind of impact could that possibly have on margins?
Scott Lamb
Well, in our Mexico facility, we do shut down for a few days, not necessarily for maintenance, but there is some slowdown due to the holidays, both in Salt Lake and in Mexico. And I would imagine we'll see some of that in Slovakia as well.
It's not really a shutdown as much as it's just a slowdown. And as far as an impact goes, I would look -- if there is going to be any impact, that would be more on the first quarter than it would be on the fourth quarter at the cost of goods sold level.
Operator
Our next question is from Jayson Bedford from Raymond James.
Jayson Bedford
Just a couple of quickies. On oncology, I think you mentioned the conversion is taking longer.
Can you cite a common reason for the longer sales cycle?
George Lopez
Well, you said that -- yes, there's -- one is budgets and one is -- the other is just market awareness. We continue to work with industry leaders in the marketplace in educating the workforce out there.
And the other is just budgets. You're asking them to go from spending nothing to something.
Other than that, again, it's -- we're still up 10% year-over-year. We should do at somewhere around $30 million this year, which is, it's up from $24.5 million last year.
So again, just to reiterate, we...
Scott Lamb
I would also add that we have improved from the first product, the Spiros, quite a bit. And we're launching that product in the next couple weeks into some data sites.
So exactly as Doc mentioned, we've got new products coming out in this product line, as well as all of our other product lines.
Jayson Bedford
Okay. And what do you think is the trigger for the oncology market, which seems under-penetrated?
And I think you cited that it's your biggest growing opportunity or fastest-growing opportunity. What's the trigger to really crack that market?
And maybe as a question to augment that, can you just give us an update on where the state of Washington sits?
George Lopez
Nothing's changed in Washington.
Unknown Executive
No.
George Lopez
The key to cracking the market is to hit that inflection point that you hit with all new products that are successful. We're still in the flat line, 10% to 15% line.
And there hasn't been enough people -- early adopters. And when the early adopters completely are sold then you hit that high slope.
And we just haven't hit it yet. The pharmacists and the nurses, and -- they're aware of handling these drugs, but some of them are not aware of the risks.
Very specifically, they don't know that you have such high incidences of birth defects and such. So I just think it's just early in the marketplace.
It will hit that strategic inflection point and then take off. I have no doubt about it, and we're in the first position.
We're the leading company out there with these products. And then we have another product called ChemoGuard [ph] that we're beta citing -- testing in our product there.
I think it's the first time that anybody's ever made a dry connector without a needle. And the pharmacists will love the products.
So we'll see after we're through our beta site testing. And the answer to your question is it's early in the market life cycle.
Jayson Bedford
Okay. And there has been a few comments around new products.
Can you just maybe give us an idea of how many new products you expect to launch between now and year-end and maybe in 2013 as well?
George Lopez
I will when they get to a certain size, and when they get to $1-million size, I'll let you know. Up until then, rather not talk about them.
Jayson Bedford
I guess I was just looking for the number, meaning 3, 4, 5, 2?
George Lopez
I think more like 6 to 8.
Jayson Bedford
By year-end?
George Lopez
By year-end.
Operator
Our next question is from Mitra Ramgopal with Sidoti & Company.
Mitra Ramgopal
Most of my questions have pretty much been answered, but I just wanted to follow up on the critical care business. In light of the decline you're seeing, I mean, would you attribute it more to, say, pricing, the breadth of products you're offering?
Or is a solution, for example, to add more sales people? I don't know if there's anything in particular you might share with us.
Scott Lamb
At the moment, it's just -- it's more about -- it's -- pricing affected us at the first half of the year on a year-over-year comparison. But right now, it's really about filling in some of the product line gaps that we have and making a few enhancements.
That's really all that is needed. In addition, we've got new products coming in that should give us additional market opportunities, and that's what we're looking for.
There's definitely money to be made in this market.
Operator
[Operator Instructions] Next question is from James Terwilliger of The Benchmark Company.
James Terwilliger
My first question is going back to oncology and the conversions. I'm very excited about the opportunity you have in that market.
I think that market is going to be very robust. Could you comment a little bit on not necessarily the conversions taking longer, but a little bit on just the length of the sales cycle from when you [Audio Gap] to a customer to when you actually are selling product to that customer?
And then secondly, is it a -- is it an issue there as it relates to any type of increased investment that you may need in sales and marketing to support and develop that oncology market?
Scott Lamb
Well, first of all, the sales cycle itself varies just depending on hospitals or the facility. It can take some time.
As you may know, there are 2 distinct call points within the U.S., one being the pharmacy and the other, nursing. So it does, it can -- it does and can take time to get the 2 organizations together and on the same page.
And that can be a part of it. And it's just literally going back then to the market awareness.
There may be a need recognized at the facility, but they just don't have a budget for it. And you've got pharmacists that are already working under vented hoods and think that, that takes care of them.
So it really is just educating everybody out there to the dangers, the exposure to these hazardous drugs.
James Terwilliger
And then the second part of my question was more on the sales and marketing perspective. How do you develop this market?
You're most likely going to have to be investing sales and marketing going forward.
Scott Lamb
That's why I...
George Lopez
We have a partner.
Scott Lamb
Right, there's Hospira, for example, distributes for us.
George Lopez
Hospira has been very successful in Spain in oncology. It's a matter of fact.
Scott Lamb
So as Doc just mentioned, Spain is a good example of success from Hospira. As well as we'll continue to make investments in our own sales force, as I mentioned at the beginning of the call.
James Terwilliger
Okay. And then I've got -- actually I was wondering, Dr.
Lopez, if you could comment on the new product announcement or the announcement that went out this morning concerning the NanoClave just from a very high level. When I looked at some of the clinical data with neonatal and pediatric patients, it's very positive.
And then you've got 3 conferences coming up with that, where that product will be featured. I was just wondering if you could comment on the high level as it relates to the NanoClave.
George Lopez
Watch the next week of the ABA [ph] show. It's a CLAVE, but CLAVE specifically designed for neonates.
It's extremely small, extremely low-dense space, which the nurses require because the babies are so small. You don't want medication tied up in the connector or the tubing.
It's very robust, and it doesn't cause catheter occlusion, which is negative. So we're -- we will make a lot of sales in the neonatology with our product.
We'll sell a lot.
Operator
There are no further questions at this time. I'd like to turn the call over to management for any closing remarks.
John Mills
Well, thank you, everyone, for participating in today's call, and we look forward to updating you on our 2012 progress on the fourth quarter conference call in January. And as a reminder, we will be going to a number of investor conferences and marketing events over the next few months as well.
Thank you.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program.
You may now disconnect. Have a wonderful day.