ICU Medical, Inc. (ICUI) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the ICU Medical Q4 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the call over to your host, John Mills with ICR. Please begin.

Good afternoon, everyone. Thank you for joining us today to review ICU Medical's financial results for the fourth quarter and fiscal year ended December 31, 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 year. Then, Scott will discuss fourth quarter financial performance and provide financial guidance for the first quarter and fiscal year 2013. Finally, the company will open the call for your questions. Before we begin, I want to touch upon any forward-looking statements made during this 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. With that, I'll now turn the call over to Dr. Lopez. Go ahead, Doc.

Thank you, John. Good afternoon, everyone. Fiscal 2012 was another successful year, highlighted by record financial performance and significant operating achievements. Our revenue increased to a record $316 million, and was driven by growth in our oncology and infusion therapy markets, which were partially offset by expected decreases in critical care. Our gross margins expanded 230 basis points year-over-year to 49.4%, and our operating cash flow was a record $66.1 million. Focus on innovation in all of our large -- target markets remained the key strategic initiative during the year, resulting in launches of new products, including the Diana, an automated sterile compounding system for the oncology market; and NanoClave, a needlefree connector for the infusion therapy market. Also, just a couple weeks ago, we introduced CardioFlo, a minimally invasive hemodynamic monitoring sensor system, which is the beginning of the new critical care products and a great addition to our critical care product portfolio. Now I would like to turn the call over to our CFO, Scott Lamb, who will review our fourth quarter financial results and provide financial guidance for the first quarter and full year of 2013. Scott?

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 fourth quarter 2012 revenue was a record $82.7 million, an increase of 8.1% compared to $76.5 million in the same period last year. Net income from the fourth quarter of 2012 was $12.3 million or $0.82 per diluted share, as compared to net income of $17.8 million or $1.26 per diluted share for the fourth quarter of 2011. The fourth quarter of 2011 net income included a net $12.6 million pretax gain, which included $1.6 million of SG&A expenses associated with the sale of assets related to our Orbit product line. Excluding this gain and the related income tax expense, net income for the fourth quarter of 2011 was $9.8 million or $0.70 per diluted share. For the full fiscal year ended December 31, 2012, our revenue increased 4.9% to a record $316.9 million, compared to $302.2 million in the same period last year. Net income for the full fiscal year ended December 31, 2012, was $41.3 million or $2.81 per diluted share compared to net income of $44.7 million or $3.15 per diluted share for the same period last year. Excluding the gain on sale of Orbit and the related expenses, our net income for the fiscal year ended December 31, 2011, was $36.7 million or $2.59 per diluted share. Now let me discuss our fourth quarter revenue performance by market segment. You can also view our detailed market segmentation in our earnings press release. For the fourth quarter of 2012, sales in the infusion therapy market increased 6.2% to $55.7 million and represented 67.4% of our total sales. This growth was attributable to strong contributions from needlefree connectors, primarily CLAVE and MicroClave, as well as custom sets. More specifically, sales from CLAVE and MicroClave increased 3.9% to $30.2 million compared to $29.1 million a year ago, representing 36.6% of our total company-wide sales. Custom infusion sets were up 7.5% year-over-year to $22.3 million compared to $20.7 million a year ago, and comprised 27% of our total company-wide sales. Sales in the critical care market were down 7.1% to $13.2 million compared to $14.2 million a year ago, and represented 16% of our total sales. The decrease was attributable to volume. Sales in our oncology market increased 73.7% year-over-year to $9.3 million compared to $5.3 million a year ago. The strong growth was driven primarily by an increase in market share. We continue to be positive about growth opportunities for our oncology products, as the market demand continues to increase and we are well positioned to capitalize on customer needs. Our other product category, which primarily includes products in the renal and enteral markets, was basically flat year-over-year at $4.4 million, representing 5.4% of our fourth quarter total revenue. Sales from TEGO increased 30.3% year-over-year to $2.8 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 second quarter of this year. Our fourth quarter sales by distribution channel were as follows: Domestic sales to Hospira increased 4.4% year-over-year to $32.1 million compared to $30.7 million for the fourth quarter of 2011. This growth was primarily driven by oncology products and was offset by decreases in CLAVE and MicroClave needlefree connectors and custom infusion sets. For the fourth quarter of both 2012 and 2011, domestic sales to Hospira represented approximately 39% and 40% of our total revenue, respectively. Our non-Hospira domestic sales increased 7.3% to $30.1 million compared to $28 million a year ago, as double-digit growth in infusion therapy, oncology and other product categories was partially offset by a decrease in critical care. International sales were up 16% year-over-year to $20.4 million, representing 24.7% of our total revenue during the fourth quarter. Our strong performance in international markets was driven by strong growth in infusion therapy, oncology, as well as critical care. Our gross margins for the fourth quarter expanded 350 basis points year-over-year to 50.5%, primarily reflecting a more favorable product mix. We expect gross margins for the full fiscal year of 2013 to be approximately 49.5%. SG&A expenses decreased 7% to $20.7 million compared to $22.3 million for the fourth quarter of 2011. The decrease is primarily due to a onetime $1.6 million expense associated with the sale of assets related to our Orbit product line, which we recorded in the fourth quarter of 2011, a decrease in compensation for officers' year-end accrual and lower legal costs. As a percentage of sales, our SG&A expenses were down to 25.1% compared to 29.1% a year ago. We expect SG&A as a percentage of total revenue to be approximately 27% for the full fiscal year of 2013. This guidance incorporates higher expenses due to more aggressive marketing initiatives and compensation for additional salespeople, as well as additional general and administrative costs. Our research and development expenses increased 2.4% year-over-year to $2.2 million. In 2013, we will continue to invest in innovation and new products and expect our research and development expenses to be about 3% of revenue. Excluding the 2011 gain on sale of assets discussed earlier, our operating income for the fourth quarter of 2012 increased 43.5% to $18.8 million or 22.8% of sales compared to $13.1 million or 17.2% of sales for the fourth quarter of 2011. Our EBITDA totaled $23.7 million or 28.6% of revenue compared to $30.6 million or 40% of revenue for the fourth quarter a year ago, which also includes the gain on sale of assets. Now moving to our balance sheet and cash flow. As of December 31, 2012, our balance sheet remains very strong with no debt and $226.2 million in cash, cash equivalents and investments. This equates to approximately $15.64 per outstanding share. Additionally, we had $296.4 million in working capital. During the fiscal year 2012, we generated $66.1 million in cash flow from operating activities. Our capital expenditures totaled $19.2 million during the year and primarily included machinery, equipment and molds for our plant in the U.S. Day sales outstanding for the fourth quarter, were 55 days, and 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 first quarter and fiscal year 2013. For the first quarter of 2013, we expect our revenues to be in the range of $73 million to $75 million. Gross margin is projected to be approximately 48% to 48.5% during the first quarter, which includes lower revenue and higher manufacturing costs for our inventory build during the fourth quarter because of less factory overhead absorption during the holidays. We expect our diluted earnings per share to be in the range of $0.41 to $0.46, which include a discrete tax item of approximately $600,000 attributable to recently enacted scheduled tax legislation. Our first quarter revenue will be temporarily affected by Hospira's initiative to more efficiently manage its inventories. As a result, we expect orders from Hospira during the quarter to be lower by approximately $7 million to $8 million when compared to the fourth quarter last year, or approximately 23% less than the previous quarter. Beginning in the second quarter, we expect Hospira to resume its normal ordering pattern. As has been the case for many years, we continue to receive sell-through results from Hospira as we continue to work closely together to ensure a more efficient balance of inventory. Over the past few years, Hospira's worked very hard to make improvements in its operational efficiencies, and this is another step in that direction. Now moving to our annual guidance. For the full fiscal year of 2013, we expect to generate revenue in the range of $330 million to $340 million. On a market segment basis, we expect our infusion therapy sales to increase year-over-year, approximately 3% to 6%. We expect critical care to be down approximately 2% to 5%, and we expect the oncology market segment to be up approximately 38% to 42%. We also expect our other category to be down approximately 7% to 9%. We expect our diluted earnings for the full fiscal year of 2013 to be in the range of $2.70 to $2.85 per diluted share. This incorporates the medical device tax expense, which we estimate to be approximately 0.6% of our total revenue. Excluding the medical 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 8 additional salespeople worldwide. Also, our tax rate is expected to be 34%, excluding the first quarter's discrete tax item of approximately $600,000. 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. We 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. Now before we open the call for questions, I would like to update you on the progress we have made with our new products. While we believe all of our products represent tremendous value proposition for customers worldwide, we don't expect them to make significant contributions to our top line in 2013, with new product revenue contributing less than $10 million of our total revenue. However, we are excited about the long-term growth opportunities these products represent, and we will continue to invest in sales and marketing initiatives to establish these products in our target markets. Now let me talk in more detail about our recently introduced new products. As Doc mentioned earlier, at the end of 2012, we officially launched Diana, the world's first user-controlled automated sterile compounding system for the accurate, safe and efficient preparation of hazardous drugs. Diana has been in limited use in Europe for more than a year. Unlike automated technologies that require huge investments and do not fit within existing workflows, the Diana system cost-effectively keeps pharmacists and technicians in control of the compounding process from beginning to end. The system fits under the hood of a pharmacy's existing biological safety cabinet to protect clinicians from exposure to hazardous drugs and accidental needle sticks, while protecting the patient preparation from exposure to environmental contaminants. Initial responses by early adopters in the United States to the Diana system has been positive, and we hope to have as many as 35 systems in use, domestically, by the end of 2013. We expect each Diana system sold or placed to generate additional disposable revenue streams and estimate the overall global market potential for just the Diana system and consumables to be approximately $400 million, which does not include the rest of our ChemoClave system and associated ancillary products. We are obviously very excited about long-term growth opportunities for Diana and all of our oncology products. Just a couple of weeks ago, we launched CardioFlo, a minimally invasive hemodynamic monitoring sensor system. As part of our critical care product line, CardioFlo facilitates the real-time accurate assessment of hemodynamic and cardiovascular status at a significant cost savings to other systems on the market, helping guide clinical decision-making and effective management of critically ill patients. As we discussed numerous times in our previous conference calls, we believe that critical care represents profitable growth opportunities for our company, and we are excited about market opportunities for CardioFlo. In conclusion, I would like to add that we are confident that our backlog of new products in development, enhanced product portfolio and solid balance sheet position us well for profitable growth in 2013 and beyond. We will continue to utilize our strong financial position to enhance shareholder value through potential share buyback, strategic acquisitions and increased investment in innovation and strengthening our operating infrastructure. And with that, I would like to turn the call to your questions.

[Operator Instructions] Our first question comes from Matt Dolan with Roth Capital Partners.

This is Chris Lewis on the line for Matt. Scott, first question just on the guidance for this year, particularly on the EPS guidance. Revenue, you're implying modest revenue growth, but it looks like EPS stays relatively flat for the year, even slightly down if you're looking at the midpoint. So can you help us just understand what's factoring into that EPS guidance for that number to stay relatively flat despite the revenue growth you guided?

Well, a big chunk of that, Chris, you have to look at the med device tax. That's going to be -- we're estimating that at approximately 0.6% of revenue. So that's going to be about $0.08 to $0.09 per share right off the bat. SG&A is the other area where we continue to invest, and we mentioned that there will be additional investment in sales and marketing initiatives. So those are primarily the 2 main reasons for the downturn or the lack of significant change between 2012 and 2013.

Okay. And then, moving towards gross margin. Another nice quarter there, third consecutive quarter with gross margins at or above 50%. So I know you guided slightly below 49.5%, I think you said, for the year and maybe below that, for the first quarter. But can you walk us through how we should expect gross margins to trend throughout the year?

Well, the obvious -- the biggest difference is going to be in the first quarter where we're looking at 48%, 48.5%. And so we'll, obviously, gravitate back up towards that 50%, 50.5% range by the end of the year. On a year-over-year comparison, we are not expecting there to be any change in the peso, as an example. So we ended the year at 40 -- almost 49.5%, and we ought to be able to continue to keep that going to 2013.

Okay. And then, just turning quickly to the Hospira orders. What gives you confidence that those orders will resume back to normal levels after the first quarter?

Well, a couple of reasons. One, as I mentioned already, we see their sell-through data, and that continues to be up. We also get 3 months firm and 9 months rolling forecasts from them, and that data all seems to be in line with our expectations and what I described on the call.

Our next question comes from Larry Solow with CJS Securities.

Just to clarify, the device tax, that will be in your cost of goods sold, right? So the good gross margin guidance you're giving, that actually includes that tax, or is that not correct?

No, that's going to be in our SG&A.

Oh, it's going to be in your SG&A then. Okay. So the -- okay, the 27% of sales includes about 50 bps of -- or so from the tax?

About 60 bps.

60 bps, right. Right, okay. Okay, that's fair enough. Okay. And in your guidance, you're assuming for gross margin the -- for full year, that there's -- the peso is sort of flat or slightly, actually up. So that will hurt you a little bit, is that...

Actually, we're planning on it being flat on the year-over-year basis.

Okay. And can you just run those numbers? The Hospira, you said it was 7 million to 8 million less. Was that sequentially or that was a year-over-year number? Because I thought I heard Q4 '11 there, so it kind of confused me.

Sequentially.

Okay. Okay, sequential. So it's Q-to-Q and then, year-over-year, it's similar...

I don't have the year-over-year number in front of me, but Hospira, overall, was up about 4% on a year-over-year basis.

Okay, okay. So clearly, those numbers obviously, that sort of inventory thing, I mean -- I guess, you're -- it looks like you're actually running at a higher sort of rate than that excess inventory, you have markets that sounds like they're still growing at similar rates, they haven't really slowed down much. Is that fair to say?

I think that's a fair statement, yes.

Okay. And just lastly, I know you guys don't discuss new products or whatnot, but just, can you -- on your last call, you had said that you expected 6 to 8 new products out in -- during the fourth quarter. Did that actually occur?

I'm not keeping a running total. In the fourth quarter, we launched Diana and NanoClave. Then, in early January, we launched Diana or maybe, even in December, actually -- I can't remember if it was December or January.

Okay, okay. Just lastly, the tax rate going up a little bit from 33 to 34, is that just sort of -- I think it was around 33 or even below that in 2011. Is a trend sort of up a little bit towards mid-30s? Or is it just year-over-year slight variances?

Just like demand, you never know what tax credits you're going to be able to take during the year. And there's always valuation allowances that come up, so it's -- 34 is a good starting point, less the discrete tax item that we'll take through in the first quarter. And by the way, I need to clarify, the 0.6% med device tax is not included in the 27% SG&A.

Okay, it's not included. Okay. But it won't be in there, so essentially, we can almost think of it as 27.5-ish?

Correct.

Our next question comes from Jayson Bedford of Raymond James. Jayson T. Bedford - Raymond James & Associates, Inc., Research Division: I guess, just to kind of summarize on the Hospira agreement. There's been no change in the agreement per se. It sounds like 4Q was probably inflated a little bit, 1Q will be down a little bit because of this dynamic, but you still have good visibility into quarters 2 and 3. Is that fair?

Oh, yes, absolutely. That's a fair statement, and nothing has changed in the agreement. Jayson T. Bedford - Raymond James & Associates, Inc., Research Division: Okay. And then, the fourth quarter gross margin, we touched upon it. It looks strong. It was all mixed, correct? There was no meaningful benefit from the peso at all?

Nothing from the peso, no. It was mix and some factory improvements as well. Jayson T. Bedford - Raymond James & Associates, Inc., Research Division: So why is gross margin effectively coming down in '13 off of 4Q levels, off a higher revenue base?

Primarily, the fourth -- sorry, the first quarter is going to be affected in 2 ways: one, because revenue will be down that first quarter. And number two, as I explained on the call already, the fourth quarter inventory that we built was a little bit more expensive due to less factory absorption in the fourth quarter due to the holidays. That product will primarily ship in the first quarter. Jayson T. Bedford - Raymond James & Associates, Inc., Research Division: And then, in terms of oncology, it looked like that rebounded nicely in the fourth quarter, your guidance looking for some robust growth. Is it fair to say that it seems like Hospira is a little more aggressive in its promotion. Is that fair?

Well, we continue to work with Hospira. I don't know if I would say more aggressive, less aggressive. They're a very good partner of ours, and they are excited. I think I can speak for them and say they are excited about the oncology market opportunities, and we continue to work with them to further those product sales. Jayson T. Bedford - Raymond James & Associates, Inc., Research Division: Okay. And lastly for me, international growth was also pretty strong. Is that reflecting just kind of better productivity coming out of Slovakia and just in Europe, or were there other geographies that were driving that growth?

It actually was driven around the world. Europe was up about 9% for the quarter, and the rest of the world was up about 25% for the quarter. So it was a nice bump coming out of the rest of the world.

[Operator Instructions] Our next question comes from Mitra Ramgopal with Sidoti. L. Mitra Ramgopal - Sidoti & Company, LLC: For Scott, just quickly on the sales force additions. I can't remember if you mentioned if most of it is going to be international, or if it's going to be split evenly between domestic and international.

It will be a little more heavily weighted towards the U.S. L. Mitra Ramgopal - Sidoti & Company, LLC: Okay. And switching, just quickly, on the critical care, would you say you pretty much turned the corner on that now, and given the outlook for 2013 and beyond?

Well, I think we'll see some continued decline in 2013, certainly not at the rate that we saw in 2012. So you can call it turning the corner or anything else. But we should see less decrease in critical care this year than we did in 2012. L. Mitra Ramgopal - Sidoti & Company, LLC: And again I know there's only so much you can say regarding new products. But aside from the ones you mentioned and specifically, for critical care, are there anything that you see over the next couple of years you probably would be introducing that to really help that line?

Well, we've been saying there are some product line gaps and some product enhancements that we are working on. CardioFlo is the first example of that. We have others coming out this year and next year. Again, there are some very good, profitable opportunities within critical care. It's a market that we continue to invest in and are, frankly, excited about.

It's a rapidly growing market is oncology. L. Mitra Ramgopal - Sidoti & Company, LLC: Okay. And finally again, I think looking at the cash, et cetera, record levels now, and I believe you talked early about potential share repurchases, acquisitions, et cetera, I don't know if you have anything else to share on that front as it relates to acquisitions.

Nothing at this time. We continue to look.

Our next question comes from Michael Rich of Raymond James.

Jayson asked most of my questions. I just have a couple of quick follow-ups for you. Number one, I heard you mentioned that Europe is very strong in the quarter, or stronger than it has been. What was the utilization level at the Slovakia plant?

It's still right around 35%.

Okay. And do you have any expectations for that rising above that level anytime soon, or is it sort of status quo?

Well, I think it's going to be more status quo for the time being. There -- obviously, we have expectations for that to grow and to do much better. And Europe is a geography that we'll continue to invest and have great expectations for.

Okay, great. Was Neutron included in that $10 million new product number you gave? Or is that considered outside of that bucket?

That's included in that bucket.

Okay, okay, great. And then lastly, any new updates regarding oncology safety device legislation in Washington or anywhere else?

None that I know of. Doc, unless you know?

Not really, no.

Our next question comes from Gregory Macosko with Lord, Abbett. Gregory M. Macosko - Lord, Abbett & Co. LLC: Most have been asked. With -- just with respect to Hospira, you mentioned that CLAVE was down in the quarter, or...

Right. Yes, slightly, about 1.5% or so. Gregory M. Macosko - Lord, Abbett & Co. LLC: Okay. Is that -- is there anything particular to that? I guess, I mean, I can understand why first quarter is down. But that's a little -- I mean, given the growth of the rest of the overall growth for that sector?

No, it can be timing. Keep in mind, I don't have the exact number in front of me, Gregory, but the third quarter increase in revenue to Hospira was quite high. And so it's just that you can't take their ordering patterns from 1 quarter to the next. You have do smooth it out a little bit more. And for the year, we were up about 4%, 4.5%. Gregory M. Macosko - Lord, Abbett & Co. LLC: Okay. And then, just with regard to critical care. I know Mitra asked about that as well. We're down, I guess, 9% to almost 10% last year and we're going to be down another 3 to 5. Can you give me more color to that, why it continues to fall? Is it a tough comp in the first quarter or something? Or is there any -- something particular there? Is it just bleeding away or what?

Well, being down 3% to 5%, I wouldn't call that bleeding away. I think that slowing down, the 2012 decline is, I think, fairly significant. Like we keep saying now for the past few quarters, it's the ability to bring new products to the market that's going to help, significantly, the critical care space.

Our next question comes from James Terwilliger with Benchmark Company.

A couple of quick questions. When you look at the oncology growth that you posted in 2012 for the year, about 24%, and then you look at the acceleration into 2013. Can you, at a high level, kind of add more color in terms of what drives the accelerated growth in the oncology business?

Well, a lot of it is market awareness and education. Along with that now, we're going into a new budgeting season and people have had the ability to now include in their 2013 budgets the cost of closed system transfer devices. So -- Doc may have more to add to it, but I would say, education, education and the ability to budget it into their existing budgets.

Okay. And Scott, real quick on the -- what was the R&D expense guidance for next year as a percentage of revenue?

Right around 3%.

Okay. And most of my other questions have been answered. I've got 2 more quick questions. Did you see any type -- any change in your customer's tone in the fourth quarter and maybe, in the first quarter with the presidential elections and Obamacare and the medical device tax? Did you get any tone from your customers that they are becoming more cautious?

None that I have heard.

Okay. And then lastly, if you kind of back out, say, the inventory adjustment from Hospira, other than that, do you believe that most of the businesses, as you have moved from 2012 into 2013, pretty much, they're in line with what you thought?

Yes.

I'm not showing any other questions in the queue at this time, gentlemen.

Okay. Great. Thank you, everyone. I also wanted -- we wanted to let you know that we will be participating in a number of marketing events and investor conferences over the next few months, and hope to see you there. Thank you.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You made now disconnect. Good day.