ICU Medical, Inc. (ICUI) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the ICU Medical Incorporated Third 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 of ICR. Please go ahead.

Great. Thank you. Good afternoon, everyone. Thank you for joining us today to review ICU Medical's financial results for the third quarter and 9 months ended September 30, 2013. On the call today, representing ICU Medical is Steven Riggs, Acting Chief Executive Officer; and Scott Lamb, Chief Financial Officer. Steve will start the call with a brief review of the quarter, then Scott will discuss third quarter financial performance and provide financial guidance for the fiscal year 2013. Finally, we will open the call for your questions. Before we start, I would like 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 believe 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. And with that, I'll now turn the call over to Steven Riggs. Go ahead, Steve.

Thank you, John, and good afternoon, everyone. This afternoon, we announced that Dr. Lopez has stepped down as President and CEO of ICU Medical due to health reasons. He will remain Chairman of the Board and will be transitioning into a new role in our Research & Development department, where Doc will continue to assist in developing our next generation of medical products. On behalf of the company and the Board of Directors, I would like to express our appreciation to Doc for his leadership and contribution in building ICU Medical into a leader in the development, manufacturing, marketing of innovative medical products used in infusion therapy, oncology and critical care applications. I would also like to acknowledge the board, as well as the senior management team at ICU Medical for their support and confidence in me to lead the company going forward. It is truly an honor and privilege to be asked to guide this talented organization and to build on its proven track record of financial and operational achievements. As a way of background, I have been with ICU Medical since 1992 and the last 10 years as Vice President of Operations, overseeing all supply chain, manufacturing and quality regulatory aspects of our company. And now let me briefly review highlights for the third quarter. During the quarter, we continue to leverage our strong cash flow to expand our presence in target markets to drive our innovation strategies and to invest in new product development. Our revenue totaled $82.8 million, and we earned $11 million or $0.72 per diluted share. Our international sales were up 19%, while domestic sales decreased 3.5% year-over-year. We are very proud to report that our ChemoLock needlefree closed system transfer device, or CSTD, has become the first and only CSTD to receive FDA 510(k) clearance for pharmacy applications, as well as patient administration applications. ChemoLock offers significant advantages over competitive products on the market and is a perfect complement to our current product line, which includes the ChemoClave CSTD product line and the Diana Hazardous Drug Compounding System. Finally, in August, we received 3 separate 6-year group purchasing contracts from the Premier healthcare alliance, covering offering our complete line of clinically-proven, needlefree IV connectors, sets and accessories, our complete line of Diana products -- of oncology products and Diana. Effective in 2014, this is the first time that group purchasing contracts have separated needlefree IV connectors from IV pump and solution group purchasing contracts, allowing Premier hospitals greater freedom in making cost-effective clinical decisions based on what is best for patient care and safety. The new contract also marks the first time that our complete line of needlefree IV connectors, which includes Neutron, catheter patency device, the MicroClave and MicroClave Clear neutral displacement needlefree connectors and the NanoClave low-profile neutral displacement connector have all been on a single Premier contract. Now with that, I'd like to turn the call over to our CFO, Scott Lamb.

Thank you, Steve. Before I begin, on behalf of myself, the entire management team and all the employees of ICU Medical, I wish to extend our congratulations to you, Steve. We believe that your knowledge of the industry and experience at ICU Medical make you an ideal person to lead our team during this transition stage. Now let me move to our third quarter financial results. As a reminder, all of the sales numbers we are covering in this call, as well as our financial statements are available on the Investor portion of our website for your review. For the third quarter of 2013, our revenue increased 1.7% to $82.8 million compared to $81.4 million in the same period last year. Our top line performance during the quarter was driven by strong growth in oncology and robust improvements across critical care, particularly outside the U.S., which was offset by a decrease in infusion therapy and other product categories. Net income for the third quarter of 2013 was $11 million or $0.72 per diluted share as compared to net income of $12.2 million or $0.82 per diluted share for the third quarter of 2012. The decrease in our earnings per share was primarily due to lower gross margins, the new medical device tax, costs incurred with the strategic transaction, investments in IT and a 3.3% increase in our diluted share count when compared to the same period last year. And this was partially offset by a lower tax rate. For the 9 months ended September 30, 2013, our revenue increased 0.7% to $235.8 million compared to $234.2 million in the same period last year. Net income for the 9 months ended September 30, 2013, was $27.1 million or $1.79 per diluted share compared to net income of $28.9 million or $1.98 per diluted share in the corresponding period of the prior year. The decrease in our earnings per share was primarily due to increased investments in R&D and IT, the new medical device tax, again, costs incurred with the strategic transaction and a 3.6% increase in our diluted share count when compared to the same period last year, which was partially offset by a more favorable gross margin and lower tax rate. 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 2013, sales in the infusion therapy market decreased 1.5% to $56.3 million compared to $57.1 million a year ago and represented 68% of our total sales. The decrease was primarily attributable to performance of CLAVE and custom set sales to Hospira in the U.S., although their reported sell-through data to us remains positive. This decrease was offset by increases in Hospira o U.S. and our non-Hospira sales of both needlefree connectors and custom sets. Sales in the critical care market driven by increased sales outside the U.S. increased 4.1% year-over-year to $13.5 million compared to $13 million a year ago and represented 16% of our total sales. On a sequential basis, sales from critical care in the third quarter of 2013 were up 6.1%. As we discussed on our previous call, we continue to see some signs of stabilization of this business, and we are very encouraged that critical care returned to positive growth. Sales in our oncology market increased 31.9% year-over-year to $9.9 million compared to $7.5 million a year ago, representing 12% of our total sales for the third quarter. We believe that oncology products are well positioned for continued growth as market demand remains strong. Our other product category, which primarily includes products in the renal and enteral markets, decreased 17.4% to $3.2 million compared to $3.8 million a year ago, representing 4% of our third quarter total revenue. This performance was primarily attributable to a 16.70% decrease in the TEGO product line to $2.2 million compared to $2.6 million a year ago. We now have strong clinical evidence that shows when our TEGO needlefree connector is used during dialysis treatments, patients achieve significant benefits, such as reduced catheter-related bloodstream infection rates, as well as lower heparinized flush solution usage. We expect these studies will help drive future growth of this product line. Our third quarter sales by distribution channel were as follows: Domestic sales to Hospira decreased 9.9% to $29.8 million compared to $33.1 million a year ago, as strong performance of oncology products was offset by the aforementioned decrease in infusion therapy. For the third quarter of 2013 and 2012, domestic sales to Hospira represented approximately 36% and 40.6% of our total revenue, respectively. Our non-Hospira domestic sales were up 3.8% year-over-year to $30.5 million compared to $29.3 million in the third quarter of 2012. This growth was attributable to oncology and infusion therapy products, which increased 28% and 8.9%, respectively, and was offset by a 3.2% decrease in critical care and an 11.5% decrease in the other product category that was primarily TEGO. International sales were up 19% year-over-year to $22.5 million compared to $18.9 million a year ago, representing 27.2% of our total revenue during the third quarter. Our strong performance in international markets was driven by a 39.8% increase in oncology, a 30.9% increase in critical care and a 13.1% increase in infusion therapy. The other product category was down 33.9%. Our gross margins for the third quarter were 49.5% compared to 50% a year ago. The decrease is primarily from the mix of products sold during the third quarter of 2013 compared with the third quarter of 2012 and was partially offset by lower freight expenses. We expect gross margins in the fourth quarter to be similar to the third quarter of 49.5%. SG&A expenses increased 11% to $22.4 million in the third quarter of 2013 compared to $20.2 million for the third quarter of 2012. As a percentage of revenue, our SG&A expenses increased to 27% compared to 24.8% a year ago. The new medical device excise tax, which became effective in 2013 contributed $473,000 to our 2013 SG&A expenses. Sales and marketing promotion costs increased by $468,000 in the third quarter of 2013 when compared to the third quarter of 2012. We also incurred $781,000 in expenses associated with the strategic transaction that we do not expect going forward. We expect SG&A expenses in 2013 to be approximately 28% of revenue. Our research and development expenses were up 5.1% year-over-year to $3.1 million compared to $3 million a year ago. This increase was in line with our expectations. We project R&D expenses to be approximately 3.8% of our total revenue for the full fiscal year of 2013, which is slightly higher than we previously expected, as we continue to invest in our new product pipeline. Our operating income for the third quarter of 2013 decreased $2.1 million to $15.4 million or 18.6% of sales when compared to $17.5 million or 21.5% of sales for the third quarter of 2012. Our EBITDA totaled $20.5 million or 25% of revenue compared to $22.4 million or 28% of revenue for the third quarter a year ago. Our tax rate of 29.3% for the quarter included discrete items and other tax credits. Now moving to our balance sheet and cash flow. As of September 30, 2013, our balance sheet remained very strong with no debt and $260.8 million in cash, cash equivalents and investment securities. This equates to approximately $17.71 per outstanding share. Additionally, we had $336.7 million in working capital. During the third quarter of 2013, we generated $16.3 million in cash flow from operating activities. Our capital expenditures totaled $3.4 million and primarily included machinery, equipment and molds for our plant in the U.S. Days sales outstanding for the third quarter were 58 days. And we expect DSOs to be approximately 55 to 60 days in the foreseeable future. Our inventory turns continue to run about 4x. Now let me update you on our financial guidance for the fiscal year 2013. Due to our performance to date and current business trends, we are slightly adjusting our previously issued revenue and earnings guidance. For the full fiscal year of 2013, we now expect to generate revenue in the range of $319 million to $321 million compared to the previous guidance of $320 million to $325 million. On a market-segment basis, we expect our infusion therapy sales to change year-over-year, approximately down 1% to flat. We expect critical care to be down approximately 3% to 4%. And we expect our oncology market segment to be up approximately 29% to 30%. We expect our other product category to be down approximately 16% to 17%. We expect our diluted earnings to be in the range of $2.50 to $2.55 per diluted share compared to the previous guidance of $2.50 to $2.60 per diluted share. This incorporates the medical device tax expense, which we still estimate to be approximately 0.6% of our total revenue. Excluding the medical tax, our guidance would've been in the range of $2.58 to $2.63 per diluted share for fiscal 2013. Also, our tax rate is expected to be approximately 31%, including all tax credits and discrete items year-to-date. Our operating cash flow is expected to be approximately $55 million to $60 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 Salt Lake City to accommodate expected future growth. Our Slovakia plant is now approximately at 45% capacity. We expect 2013 capital expenditures will be $20 million to $24 million, which are primarily for manufacturing capacity expansion, tooling and equipment for new products. And this also includes maintenance costs of approximately $14 million. And with that, I'd like to turn the call to your questions.

[Operator Instructions] And our first question comes from the line of Mitra Ramgopal with Sidoti. L. Mitra Ramgopal - Sidoti & Company, LLC: Just a couple of questions. For Scott, I know after a number of years, since you took over, ICU pretty much had a nice record of meeting numbers or raising guidance. I've seen now back-to-back quarters guidance being revised. I mean, what has changed, would you say, in the last several months or couple of quarters that lead to this?

Well, to start off with what has improved, obviously, is the fact that critical care is in more of a stable environment, averaging somewhere in the $13 million range. Hospira, obviously, is down $2.3 million globally for the year. We expect it on a global basis to be a little bit more flatter, that in conjunction with oncology maybe not being exactly the growth that we expected, although it continues to grow very well, being at 30%. Expectation, 29% to 30% for the year. And then, finally, it's just the timing of conversions. If you look at the pipeline of conversions that we have in place and those that we expect to be putting in place over the next, call it, 3 to 9 months, the pipeline looks very robust. And so it's just a combination of all of the above. L. Mitra Ramgopal - Sidoti & Company, LLC: And again, you feel comfortable with the visibility going forward now once you get these things in order, so to speak?

Yes. And in fact, we're gaining greater and greater visibility into some of these conversions. That's been sort of the difficult part, both in oncology and then on the infusion therapy side. With the new Premier contract, we're seeing a lot more activity and interest in the infusion therapy products, particularly. And that's part of the conversions in the pipeline that we're talking about. L. Mitra Ramgopal - Sidoti & Company, LLC: Okay. And just on Doc's stepping down, clearly, very surprising. I hope he is doing well. And I just wanted to get a sense from you in terms of how involved he is going to be? I know you talked about R&D, et cetera. And give us a sense as to maybe the CEO search, how long that process might be expected to take?

Well, first of all, we're really pleased that Doc has accepted a role in R&D. Obviously, we looked at him for any innovative innovation, as well as he remains Chairman of the Board, so his influence with the company is going to remain very strong. As far as the search goes, it's in process. And we'll both -- we'll look at both internal and external candidates. And timing will -- as I said, it started, and the timing will take on somewhat of a -- of its own life. And, ultimately, it's up to the Board of Directors. L. Mitra Ramgopal - Sidoti & Company, LLC: And can we assume the business will not be affected in terms of things being held back until a new person is in place? Or it's going to continue as is?

We have no intention of holding back, only moving forward. L. Mitra Ramgopal - Sidoti & Company, LLC: Okay. And then just a final question on the sales force expansion, I know the last quarter, you mentioned that's something you're looking to do. If you can fill us in as to how far along in the process you are? And when should we sort of expect that number to start coming down as a percentage of revenue?

Well, first of all, we have not made the progress that we were hoping for during the quarter, as far as bringing on additional salespeople. We'll continue to invest in sales organization and making certain that it is organized in a manner that optimizes the sales and marketing commercialization of our products. So we'll update you more on that in our January call. Certainly, we look forward to optimizing that organization as best we can, going forward.

Our next question comes from the line of Tom Gunderson with Piper Jaffray.

The -- just a quick follow-up on the last question. And that is, I think you are at 150 sales guys, and you're going to add 12. And Scott, you said you didn't do as well as you had hope to do. Did you add any of the 12 in the quarter? Or you're still in the stage of evaluating the various sales opportunities?

Yes. I think net-net, we may be up a few. But again, we didn't execute as well as we would have liked, so we still have a ways to go.

Okay. And then also on Doc stepping down from CEO. Companies across the board, med tech and others, when the longtime Founder, CEO, President finally steps down, that's a culture shock to an organization. You get that minimized a little by having him stay on not only as Chairman but in the R&D lab. But I'm just curious from a overall employee standpoint, how Steve's role stepping up and Doc's role stepping down is being taken?

Well, it was just announced a few minutes ago, so we haven't had an opportunity to meet with the rest of the employees yet. And, however, I think that they'll take it in stride. Obviously, everyone, from a day-to-day perspective is going to miss Dr. Lopez. His influence has been great in the company, and he's not going away. He'll remain in R&D, he'll remain Chairman of the Board. I think, Steve, with his many years of service in ICU Medical, working directly with Dr. Lopez, learning a lot from him, obviously, a lot of the culture's ingrained in us. So I think going forward, you -- as a company, we have probably the optimal situation that we could have in this type of a transition.

Got it. And small detail, have you hired a search firm, or are you going to do this yourself?

That's up to the board. And the board is in process, and that's all we'll discuss about the process at this point in time.

Okay. And then critical care, you hinted at this last quarter, now we've got 2 quarters where it's not, we wouldn't call it doing well, but it's doing better, particularly, sequentially. Do you feel like -- it took more than a year to get to the anniversary point? Do you feel like we've got most of the decline behind us, and now it's stable and maybe going up a little bit sequentially, going forward?

I think we've got most of it, Tom, behind us. I think that there's still some work to do here in the U.S. And we're going to have to, maybe, work on that a little bit harder. But I think, overall, on a global basis, we should be there. I'd like to see the U.S. business doing better.

Got it. And then last small question here. But I'm just curious on manufacturing expansion in Salt Lake City. I think when you started the year, you're going to include expansion in Ensenada as well. My overall question is, are you comfortable? You said by the start -- by the end of the year, next week's November, and the end of the year just keeps closer and closer. Do you -- are you comfortable that you've got capacity in the United -- for the United States market as we go into first and second quarter next year?

Yes, absolutely, we do. And we still have plans. We've picked a contractor. And the plans are to begin demolition this year with a -- probably, an April, March -- late March or early April completion date. So yes, we're very comfortable that -- and this expansion is really going to cover our needs for the next 2 to 3 years based on our growth projections, so we're comfortable with it getting completed by April, and we're comfortable that we have adequate capacity until that time.

Our next question comes from the line of Chris Lewis with Roth Capital.

First, just want to send Doc our best, and congratulate Steve, here on the new role.

Thank you.

Scott, just first on the guidance, you came in above the high end here for EPS in the quarter, but you lowered the top end range there for the full year. So I was hoping you could just kind of walk us through what factors are playing into that progression there, as we look at the full year EPS guidance?

Absolutely. Well, it really starts a couple of places. First of all, is in the quarter, we had a more favorable tax rate than we had anticipated, and that was due to some discrete tax credits falling through in the third quarter. We don't expect those to necessarily flow through again since they were discrete and one-time into the fourth quarter, number one. Number two, we did bring our revenue down slightly. Again, nothing that we are overly concerned about. As we talked about the pipeline for these new conversions that we are starting to see, coming from both Premier and other sales efforts, are really starting to take hold. As well as, oncology continues to be strong. So it's really just driven by top line probably a little less factory overhead absorption in the fourth quarter, with sales being down just a little bit lower than we had anticipated. So slightly lower gross margin, higher tax rate and slightly lower revenue top line.

Okay, great. And then IV therapy, you took down expectations this year, I think that's maybe the second quarter in a row you've done that. So I know you said there is Hospira U.S. IV weakness. Now what other factors are playing into that reduced outlook? And then on that Hospira side, you mentioned your sell-through data looks good, so what factors are playing into the weakness you're seeing with the Hospira IV business in the U.S.?

Well, first of all, to answer your second question first, Hospira continues to do well by us. If you look at Hospira through the first 9 months, they're only down $2.3 million. And so while we do see some growth in oncology coming from them, it's -- their overall -- the majority of our business with them is in the infusion therapy space. So while sell-through remains positive, Hospira is only down $2.3 million overall. And going forward, we continue to expect Hospira to do well. As far as the rest goes, infusion therapy, again, I know we're sort of belaboring this point, I apologize, but I have nothing more to point towards other than the facts, which are that the pipeline of these new account conversions, they have been a little difficult to predict the timing in both infusion and in oncology. And so now that the Premier agreement is signed, we're seeing more confidence in the potential customer base going forward, those customers that also are ready to -- or were prepared to move forward as soon as there was an agreement. Those folks are now starting to move forward. So when we spoke about the conversion pipeline in the last 2 quarters, we were -- I think it's very safe to say that we were not as well versed in that pipeline as we are today.

Okay. And then did you buy back any stock during the quarter? And if not, is there any specific reason?

Well, we did not. And just to reiterate, we do have authorization from the board. Under that authorization, I believe we still have over $28 million left to spend when we think appropriate.

Okay. And then just your cash balance continues to build here. One of the stated goals is, obviously, M&A. So what's your appetite for M&A at this point? And how do you feel about the opportunities that you're seeing out there?

Sure. So just to reiterate our uses of cash, obviously, it's investing back into the business through these capacity expansions. And we've invested significantly over the years in expanding greatly our sales force and, as well as investing in additional marketing efforts. We -- also, our stock buyback program is an authorized use of that cash, as well as M&A. We continue to look at M&A. And where we can find strategic value added at a good return, then we will pursue it.

[Operator Instructions] Our next question comes from the line of Jayson Bedford with Raymond James. Jayson T. Bedford - Raymond James & Associates, Inc., Research Division: Just, actually, to piggyback on the last question. Steven, I think you mentioned leveraging cash flow in your prepared comments, as well as in the press release, you talk about leveraging cash flow to achieve your goals. You, obviously, have a lot of cash. Is the comment meant to be some sort of shift in capital allocation policy, or is that the wrong way to look at it?

Yes, I think -- as of right now, there really hasn't been any fundamental changes in our strategies. Obviously, you can appreciate I just took this role over today. And we're going to work with the management group, and we're going to, obviously, be looking for both short- and long-term opportunities for top and bottom line performance improvements. And as we move forward in the coming months, we would expect on our fourth quarter call to provide you with more concrete details of what a go-forward plan looks like. Jayson T. Bedford - Raymond James & Associates, Inc., Research Division: Okay. And not to get into too much detail here, but you guys have performed well here. Steven, in your view, are there kind of visible sources of improvement in -- over the next 6 to 12 months that you could be doing better to drive margins?

Again, we're going to look at all of those over the next coming weeks. What I can tell you is we want to be, let's say -- measure twice and cut once. But we certainly are very interested in driving some velocity in these improvements sooner than later. So that's really all I can say on that at this point. Jayson T. Bedford - Raymond James & Associates, Inc., Research Division: Okay, that's fair. In terms of the Premier agreement and just kind of the separation of pumps and needlefree connectors, can you just talk about the importance of this for you and your business? And does this lessen your dependence on Hospira to some extent?

Oh, I don't see it as -- I mean, I'm not sure in how you phrase the question around lessening our dependence on Hospira. I mean, obviously, they're a valued customer, and we'll continue to work with them in expanding and growing our business. Now outside of Hospira, yes, it does allow us to go out, and it gives more choice to the customer base. And I think it's all about how we can better serve the customer. No longer are they going to be required to bundle all of their infusion therapy purchases. So it allows them to go out and pick the best value in needlefree and IV systems, going forward. So in that respect, it's a win for the customer, and obviously, we believe, it's a win for us as well. Jayson T. Bedford - Raymond James & Associates, Inc., Research Division: And then, Scott, I may have missed this, you went through a bunch of numbers there. But on the critical care side, did you breakout what was U.S. and o U.S.? It seemed like international was strong. Were there any kind of one-time orders associated with that strength?

No. The strength coming from o U.S., that is strength that we're seeing in bringing back some of our former customers, as well as selling into new accounts. The -- I can give you the numbers here. The critical care -- the total critical care domestic for the quarter was $9.8 million. And o U.S. was $3.7 million. That's for 2013. I'll give you the 2012 numbers as well, Jason. $10,151,000 domestic and $2,801,000 o U.S..

Our next question comes from the line of Larry Solow with CJS Securities.

Just seconding or thirding, just good luck to Doc and congrats to Steve. Just a quick couple of quickies on the infusion therapy market. And Hospira has been sort of flat for several quarters. The issues they're having with their pumps, is that one of the reasons that's sort of capping growth. And you talked about sell-through data still looking good. Is the end market still growing? And some of it just inventory adjustments by them?

Well, in the first quarter call, we talked about the inventory adjustments that they were making. So that was expected, that was a fairly significant adjustment, I think, $5 million-plus on the -- on that side. We're probably looking at slight adjustments in Q4 as well, and that's part of why we're bringing down infusion therapy in the fourth and overall revenue in the fourth quarter. Again though, let me just reiterate that Hospira is only down globally, $2.3 million, as they work through their global supply chain of inventory products. Obviously, it's very well known some of the issues that Hospira's been having with their pumps and the FDA. But as far as how it's affected us so far this year, again, sell-through is up, and we're real hopeful and bullish on Hospira going forward.

Historically, this has been sort of our least [ph] from Hospira besides the last, I'd say, 18 months or so, sort of, mid-single-digit grower or better. Is the end market still growing in that sort of range? Or are you seeing a little bit of a deterioration?

No. I mean, hospital utilization is up in the U.S. and elsewhere. So no, we're not seeing a deterioration in the market overall. And I would think that the other companies in our space would probably say the same. So in addition to the market growth being up, we also have other opportunities in growing the business into our competitors accounts.

Okay. And just in terms of critical care, and just as you look across the whole company in terms of new products. I know you guys don't -- you're pretty tight to the vest in terms of what's coming out and whatnot. But I think at the beginning of the year you had talked about, if I'm not mistaken, a $10 million -- or less than $10 million contribution from new products this year. Is there anyway you can sort of update us on where sort of you think it's coming in at? And where we might get some updates on the pipeline?

I think in the -- in our fourth quarter call, we'll give you an update there for both how we came in under 2013 and what are our expectations going forward in 2014. Some of those conversions also included new product introductions. So I think to be fair, we'll wait until the fourth quarter call.

Got it. And just on the -- on TEGO, I realize it's sort of the land on small numbers that gives you the sort of the large percentage drop year-over-year. But the 17%, but only $400,000, is that just sort of correly [ph] volatility timing? Or is there any underlying weakness?

I think as a market, the opportunity is still there. Catheter-related dialysis in the U.S., I don't have specific numbers for you in that market. But I would say -- it's safe to say that utilization is down for catheter dialysis, as the industry continues to try and move more and more towards -- fistula catheters will not go away. And as we mentioned on the call based on these studies that we now have, which show significant improvement, which translates into cost savings, both in infection rates and the reduction in heparization in the flesh. So we're certainly bullish on TEGO going forward. And we're looking for increased opportunities. Also, as we were, last year, continuing to sell into new conversions, you probably are looking at a little bit of stocking going in 2012, which then puts more pressure on 2013.

Got it. Just last question, on housekeeping. Just on the tax rate, sounds like you expect it to sort of bounce back to the 33%, 34% range in Q4. Is that...

Yes.

Our final question is a follow-up from the line of Tom Gunderson with Piper Jaffray.

Just a quick piece that I missed in your prepared remarks, Scott.

Sure.

And that is you were talking about SG&A expense and going through some of the reasons that it was different than last year's Q3. And there was something on a -- I didn't catch it, on a strategic analysis or strategic transaction cost. What was that? I missed it.

Yes. Yes, on both the 3 months and 9 months, there were costs associated with a strategic transaction that we don't expect to go forward.

So, usually, when I hear that from companies, especially ones with a lot of cash on their -- that's -- just so I understand, the wording here, the way it usually looks to me is as a company goes out, they're looking at M&A, they've got a lot of different companies they're evaluating. Some of them, they roll up their sleeves and get into a little bit more due diligence and it doesn't always work out. Is that the way I should look at this?

We really don't talk about, Tom, our confidential strategic transactions. So I really don't have any more to say on that.

Can you give me a number? Or is that confidential too?

No. We spent in third quarter $781,000 in expenses.

That does conclude today's question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Well, thank you, everyone, for participating in today's call. And we look forward to updating you on 2013 results and outlook for 2014 on our fourth quarter call, which will be in February. We also will be attending some conferences and marketing in the upcoming months as well. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone, have a good day.