ICU Medical, Inc. (ICUI) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q2 2016 ICU Medical Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference Mr. John Mills, ICR. Sir, you may begin.

Thank you. Good afternoon, everyone. Thank you for joining us today for the ICU Medical financial results for the second quarter ended June 30, 2016. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Scott Lamb, Chief Financial Officer. Vivek will start the call with an overview of second quarter results, and operational improvements. And then Scott will discuss second quarter financial performance in more detail. Finally, we will open the call to take your questions. Before we begin, I’d like to touch upon any forward-looking statements made during the call, including 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 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 risks and uncertainties that have a direct bearing on operating results and financial position. Please note that during today’s call, we will discuss non-GAAP financial measures, including results on adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency in ICU Medical’s ongoing results of operations, particularly when comparing underlying results from period to period. We’ve included a reconciliation of these non-GAAP measures in today’s press release and provide as much detail as possible on any addendums that are added back. In addition, the sales numbers that Scott will be covering, as well as the company’s financial statements, for the reconciliation from GAAP to adjusted EBITDA and adjusted earnings per share are available on the Investor Relations portion of the website for your review. Now with that, I will turn the call over to Vivek.

Thanks, John. Good afternoon, everybody. Our second quarter was a very productive quarter as we continue to drive revenue growth and increased EBITDA, which resulted in strong free cash flow and improved net income. We now have better visibility into the full-year, and as we expected, we worked our way through some of the backlog and bumps and OEM issues described on our last call. And as committed and provide better guidance for our entire business for the balance of the year. It has been a very busy first-half of the year operationally. We’ve executed well through a large volume of activity, and have emerged stronger and built on the positive financial and operational trajectory of the last few quarters. On today’s call, in addition to the financial results and a recap of the operational activities year-to-date, we will discuss how our direct channel is benefiting from our improved execution, allowing us to adjust our top and bottom line guidance range for full-year 2016. We’ll also provide an update on our OEM business and its full-year expectations which are in line with our early prediction from our previous two calls and illustrate how our overall mix of business is changing going forward, which should enable continued earnings growth. In Q2 of 2016, we generated revenue adjusted EBITDA and adjusted EPS slightly above our initial expectation. We finished the quarter with approximately $97 million in revenue, resulting in reported revenue growth of just over 15% with negligible currency effect. Please note that some of this revenue growth was due to catching up from certain temporary production constraints mentioned on the last call. Adjusted EBITDA came in just over $33 million, which was a growth of 18% year-over-year and adjusted EPS came in at a $1.15, which was a growth of 19% over last year. We did have a little bit of a tax benefit come early in the year, which Scott is going to explain during his comments. And our cash balance crossed over $400 million at the end of Q2 after doing some stock buyback earlier in the year. We continue to have very solid performance from our direct lines of infusion and oncology, which were slightly offset by critical care. In Q2, our overall direct operation continue to generate positive momentum with 15% growth, specifically our direct infusion and oncology segments grew 22% and 48% respectively. And critical care, as expected, offset this slightly by being down 13% for the quarter. In our direct infusion segment, we grew 22% as we continue to see positive utilization trends in our customer base. Our more focused selling efforts over the last 12 months have shown good results in getting back to the core value drivers of ICU around unique products, competitive value and deep customer service. SwabCap, the key product from our Excelsior acquisition has fully met our initial direct sales goals and we believe is on track to deliver our revenue commitments for the acquisition. We believe we will continue to see strong growth in our direct infusion business for the balance of the year and likely into next year with solid sequential growth. In our direct oncology segment, we achieved almost 50% growth year-over-year and continue to believe that we are in the early stages of a very good long-term growth opportunity. Please note the comps have been a bit easier here. Our product enables hospitals to address the increasing regulatory guideline being adopted, which is one of many reasons we’re expanding our customer base. Also our growth has largely been driven by our historical product line, as our new ChemoLock product is still in the early stages of production and we don’t expect it to be material until the end of this year and into next year. So we expect new products like ChemoLock to help drive growth into 2017 with solid sequential growth. Turning to our critical care segment, as expected we reported Q2 decline, we’re working to improve our product offering and while we do have a new 510(k) approval for our new hemodynamic monitoring system Cogent in hand, we are making improvements with application development, in order to offer a format that best utilize this technology for the customer and patient. Our critical care business was also impacted by some of the temporary production constraints we described on our last call. While, we caught up a lot in infusion, we didn’t catch up quite as much in critical care, so there are some timing issues going. As a result, Q3 critical care will look unusually stronger, but the business will be flat to slightly down for the full year as we originally guided. Our overall OEM business were approximately 15% in Q2. Our principle OEM customer grew 12% in Q2 year over year, and was up 8% sequentially from Q1 of 2016. All activities mentioned on previous calls relating to the new OEM customers of Terumo, B. Braun, Medline and SwabCaps are all moving forward. On the last call, we were extremely clear that we believed we would see declines in business from our principle OEM customer over the balance of this year. While these Q2 results imply an even steeper decline in the back-half, we now have better visibility and absolutely believe that will be the case. I’ll go into the specifics momentarily, but our view implies that our principal OEM customer be at the smallest percentage of sales in many years at the Q4 exit run rate. But then, our profitability will be generally in line in absolute dollars as our current level as our mix changes with the opportunity to deliver direct growth, new OEM customer sales and margin improvement into 2017. Let’s talk about some of the operational activities year to date and what happens with gross margins over the balance of the year and into next year. As I said, it’s been a very busy year operation. A quick recap since the last call includes, first, the closure of our Slovakian manufacturing facility and integration into Ensenada. Since the last call the facility is now been closed and it’s integrated into Mexico. We will not see the benefits largely until 2017 until all transitions are completed and as we burn off product built in Slovakia; second, the integration of SwabCap from Excelsior into our Salt Lake City facility. Since the last call, the final equipment installations have been completed in Salt Lake and are in the process of being validated. That work is vital, because it provides a large chunk of the value of the acquisition and is the primary reason we don’t have a material earnings contribution from the acquisition in 2016. Third, we had FDA inspections at both of our manufacturing sites. Since the last call, all documentation has been received closing out the Ensenada inspection and Salt Lake was already closed by the last call. Fourth, we cut over a major IT ERP update with good stability in Q2 - into Q2 and we now have two quarterly closures underneath us with the new system and makes us feel like we have better infrastructure to handle capital deployment. Lastly, the normal expectations on productivity gains and scaling up new products to ensure competitive positioning have been on the agenda of the operational team. These were all the items that we call the high hanging fruit that we started to describe in late 2015, as the next wave of improvement and they are all in progress. These items are extremely important, because they offer real value creation in 2017 and beyond, and are primarily linked to our direct operations to keep improving our direct business. The value at stake here provides an offset to some of the positive currency benefits we’re receiving currently, and more importantly, protect us from the effect of potential volume decline from our principal OEM customer. The operation teams have been working very hard on all these value drivers to ensure the timely completion, while running a business that it had good growth for a number of quarters now. On the Q1 call, we stated in the midst of all these activities that we did have some temporary production constraint that cause us to get a bit behind in our service levels customers and preview that gross margins will be impacted in Q2, as we were spending on freight and employee on boarding in Ensenada had accelerated levels to make our service levels were as high as possible to customers. The impact costs somewhere between an additional $500,000 to $1 million, more than we anticipated. And as a result, Q2 gross margins were a little lower than where we thought we would’ve been. As I said many times in my first year here, we’re small enough to be small and have a small P&L that can be influenced quickly, and this is a perfect example. It’s a really small amount of money that had an impact on one quarter is gross margin. While, we detest waste, these are the normal bumps that I’ve always said will hit one day and have been in business. But I wanted to itemize all the right fundamental things happening around the high hanging fruit for continued value creation. And please remember most of our products are sold under long-term fixed-price supply contracts. We’ve said many times, we will not manage the business for some arbitrary EBITDA margin and the same is true for gross margin. If it cost us a little more money in anyone quarter to solve our problems with their customers. We will do it and we are not going to skimp here. At the moment midway through Q3, we’re getting right back on track in the right direction and margins will improve sequentially from the Q2 results. From an operating expense standpoint, there is not much to talk about, cash expenses in general excluding some transactional nonrecurring items, will likely decline in the back half of the year. We finished the quarter with over $400 million in cash on the balance sheet. We continue to expect very strong cash generation for the balance of 2016 and believe the cash position at the end of this year will approach $440 million to $450 million with no debt. We continue to look at appropriate opportunities for additional capital deployment at the right valuation. Okay, let’s talk about our primary OEM customer guidance for the balance of the year and the case for value creation. On our last two calls, we stated that we believe the primary OEM customer will be down approximately $10 million. Obviously, we don’t want to be the team that always cries Wolf on this issue, as that prediction didn’t come true in the past. And we understand that the results from the first two quarters make this harder to believe. We see real time right now a lot of customer movement amongst the big players. And we believe we have good insight into the landscape. The changes are happening right now and we have visibility that our view is accurate. We’ve known some customer shift was coming, but it’s been hard to judge the timing and shape of the curve. And frankly we’d like it all to come this year. We know that will be down $10 million in 2016 versus 2015. And that would imply that our primary OEM customer will be down approximately $15 million in the second half of 2016 versus the first half. Running those numbers in a bit more detail, we’re just assuming in even quarterly split, it would apply them being around $24 million per quarter in the back half. At the same time, with the growth in our direct business and what we believe gross margins will be for the balance of the year, we are able to adjust upwards our revenue and EBITDA guidance moderately. Assuming it develops this way, our primary OEM customer would execute for a 25% to 26% of revenues. The lowest level in years and our EBITDA would generally be in line with where we’ve been in the first half of this year. If that run rate turns out to be the bottom of the curve for the balance of our contract. We have a solid case for revenue and EBITDA growth over the medium term, where our direct growth and margin improvement is all additive to that run rate. If they continue to deteriorate from those levels, we still believe we will deliver positive yearly aggregate revenue growth as new OEM customers are on boarded and EBITDA growth, due to the operational improvements previously described with just some tougher OEM comps in the beginning of next year. And if something strategically change, that allowed for better performance from them, we’d obviously benefit. We have described the 10 year of the relationship many times previously, so I will not go into it again. We continue to be optimists and believe that logic will prevail and that the customer’s interest will drive decisions. Most importantly, we believe customers are being well served with excellent products and unique value propositions that we both offer to different customer segments. The only party that really wins in any sort of customer disruption is competitors. Now, turning to guidance for the full year of 2016. We are adjusting our revenue range up $5 million to $360 million to $370 million. Our EBITDA range will increase from $127 million to $131 million and that will walk you through our adjusted EPS increase. The quick story is our primary OEM customer is exactly as we had originally anticipated, direct revenues are stronger, gross margins are improving year-over-year, but not quite in Q1 levels what happened in Q2 and will exit the year with lowest percentage of the primary OEM customer in our total book with cash nearing $450 million at year end with no debt. We think it’s important to understand all these variables to make the case for long-term value creation of ICU Medical, very practically we protected ourselves the best we can by driving returns on our own business, controlling what we can control on our own direct business and getting our foundation infrastructure solid. We often talk about the fundamental value drivers being one, the sticky nature of our products. Two, our manufacturing processes are significant historical capital expenditures. And three, our cash generating ability as a small company. These drivers when combined with our enhanced profitability, new products coming into the mix, improved infrastructure, diversification of the customer base, and ultimately capital deployment creates many shots on goal for us. We have real value creating scenarios with improvements across the company for 2016 and beyond. I do think, we are an interesting size company that can strategically move in a number of directions and one of an increasingly limited number of smaller med tech company that can compete globally. Things are moving fast, we’re trying to improve the company with urgency. But I wanted to remind everyone as I said in previous calls, there will be normal bumps in the road as we are still a small company, but we will overcome them and emerge stronger. We have solidified the company in certain technical competencies as evidenced by our recent execution. I really appreciate the efforts of all ICU employees to adapt, move forward and focus on improving results and our company appreciates the support that we’ve received both from our customers and our shareholders. With that, I’ll turn it over to Scott.

Thanks, Vivek. As Vivek mentioned, we are pleased with our revenue adjusted EBITDA and net income results in the second quarter. As we’ve achieved growth in both our direct and OEM sales channels. Our second quarter 2016 revenue increased 15% to $97 million, compared to $84 million in the same period last year. GAAP net income for the second quarter of 2016 was $16.6 million or $0.98 per diluted share, compared to GAAP net income of $13.6 million or $0.83 per diluted share for the second quarter of 2015. Adjusted diluted earnings per share for the second quarter of 2016 were $1.15 as compared to $0.97 for the second quarter of 2015. Adjusted EBITDA was $33.1 million for the second quarter of 2016 compared to $28.1 million for the second quarter of 2015. The increase in adjusted EPS and adjusted EBITDA is primarily attributable to improved top line growth and improved leverage in our operating expenses. For the second quarter, GAAP net income, GAAP EPS and adjusted EPS benefited slightly from a change in equity compensation accounting policy, which I’ll discuss under my tax comments. Now, let me discuss our second quarter revenue by market segment and then more specifically by direct in OEM, and as always we also have these results posted on our website. Direct sales totaled $61 million or 63% of total revenue, while OEM totaled $36 million. Our primary OEM partner share of overall revenue decreased to 34% compared to 35% from the same period last year. For the second quarter sales in infusion therapy were $71 million, an increase of 21% from the same period last year, and represented 73% of our total sales. Direct infusion therapy sales were $39 million, an increase of 22% from the same period last year and were primarily due to sales of our needlefree product and our SwabCap product line, which was acquired through acquisition on October, 2015. Sales in oncology were $13 million, an increase of 25% from the same period last year and represented 13% of our total sales. Direct oncology sales were $9 million, an increase of 48% and were due to increases in both existing and new customer sales. Sales in critical care which are essentially all direct were $13 million, a decrease of 13% from the same period last year and represented 14% of our total sales. As Vivek mentioned, our Q3 critical care revenue will look unusually strong due to timing issues. Our second quarter sales for domestic and international were as follows. Domestic sales were $70 million, an increase of 21% from the same period last year and were driven by sales in both infusion therapy and oncology. International sales were $27 million, an increase of 3% from the same period last year or a 6% increase through our direct channel, and were driven by increased sales in both infusion therapy and oncology and have a large offset on critical care. Our gross margin decreased 40 basis points on a year-over-year basis and as expected was down from the first quarter of this year. This was caused by temporary production constraints primarily in the first quarter, which caused higher costs, which included higher freight and labor for products manufactured in the first quarter and shipped in the second quarter. And which continued longer into the second quarter than we wanted. We did see improvements through our efficiencies and fulfillment rates during the second quarter, and continue to see improvements as we enter the third quarter. As we see these improvements continue, we expect gross margins to improve in the third and fourth quarter on a sequential basis. SG&A expenses increased $2.2 million in absolute terms, but decreased 100 basis points to 23.2% of revenue as compared to 24.2% of the prior year. The $2.2 million increase was in part, due to selling positions that were opened during 2015. Additional employees retained as part of the acquired SwabCap product line, and an increase in sales commissions and dealer fees related to an increase in direct sales, offset by the elimination of the medical devices tax. Going forward, we expect SG&A expenses to decrease in absolute dollars in the back half of the year when compared to second quarter level. R&D expenses increased slightly on a year-over-year basis and were flat on a sequential basis, as we continue to spend resources on new products, including bringing our 510(k) approved Cogent hemodynamic monitoring system to the market. Our tax rate was approximately 31% in the second quarter of 2016 and 34% in the second quarter of 2015. Our 2016 Q1 and Q2 tax rate benefited from the adoption of ASU 2016-09, in the second quarter we adopted this new accounting standard related to equity compensation. Beginning this year excess tax benefits and tax efficiencies are prospectively recognized through the tax rate rather than as an adjustment to APIC [ph] under the old GAAP guidance. This has a corresponding effect on the computation of diluted earnings per share when applied in the treasury stock method. The adoption of this standard has a positive net impact to our diluted GAAP and adjusted EPS of $0.03 in Q2, and it will have a larger retrospective effect on Q1. We originally expected to adopt this new standard later in the year and with part of our original annual tax rate estimate. So this earlier adoption does not affect our original annual tax rate estimate. We expect our tax rate to be between 30% and 32% for the full year of 2016. Now, moving on to our balance sheet and cash flow. As of the end of June, our balance sheet remained very strong and with no debt. We generated strong operating cash flow of $24 million and free cash flow of $19 million during the quarter, and as expected ended the quarter with cash, cash equivalents and investment securities of over $400 million. This equates to approximately $25 per outstanding common share. Accounts receivable increased $4.8 million from March, due to larger revenues in the quarter and our DSO decreased from 57.1 as of June 30, 2016 compared to 59.2 as of December 31, 2015. As of June 30, 2016, accounts receivable from Pfizer decreased as a percent of consolidated accounts receivable to 35% from 40% as of December 31, 2015. And as expected, inventories as of June 30, 2016 were essentially flat when compared to March 31, 2016, and we have completed the transfer of manufacturing from our closed plant in Slovakia to our plant in Mexico. Now turning to guidance, we now expect our direct infusion revenue to increase 12% to 16%, direct oncology to increase 30% to 35% and critical care to be flat to down 3%, with total revenue to be in the range of $360 million to $370 million. We expect adjusted diluted earnings per share to be in the range of $4.45 to $4.60, and adjusted EBITDA to be in the range of $127 million to $131 million. We continue to expect to expand approximately $20 million on CapEx, including our expense in our manufacturing facility in Mexico, which is on schedule and we expect to generate approximately $70 million of free cash flow. We are all working hard executing on the opportunities ahead of us and continue to achieve very strong growth rates in the aspect of our business that are under our control. We are excited about the medium- and long-term opportunity ahead of us and look forward to keeping everyone updated on our next quarter’s earnings call. And with that, I’d like to turn the call over for any questions. Operator?

[Operator Instructions] And our first question comes from Larry Solow from CJS Securities. Your line is now open.

Great, thanks. Good afternoon. I wonder if you guys can just give us a little more color on the continued strong direct infusion sales. I guess, I realized some of that is from the SwabCap. I don’t know if you have an organic number, but sure it’s still well into double-digit. Is it market share? Is it - obviously, you reorganized your sales force early last year? Are you still reaping benefits from that? Is it just a combination of bunch of factors there? If you can help us, give it a little more color now that would be great.

Hey, Larry, it’s Vivek. Hope you’re doing well.

Yes.

Yes, SwabCap is roughly half. I don’t want to get into the numbers, because it’s so small. I mean, it’s again a small P&L. I don’t want to talk about every little product line individually. But I think it’s the category is growing globally. And so infusion does well both in the U.S. and outside the U.S. I think we’re doing very well outside the U.S. and inside the U.S., it’s kind of getting back to our roots, right? We’ve had a stable team now for a year-and-a-half. In my previous experience, yes, I sort of went through the same thing. And I feel like you got some stability, people know what they’re doing and focus. I don’t think it’s that much more than that right now.

Okay. And then on the gross margin, sounds like obviously a little short-term or little more of an issue, but it seems it’s going to be resolved or is resolved. Q3 and Q4, do they get back sort of - or do we get back to the Q1 levels by Q4. And a second part of that question, could you just remind us that the expected benefits from Slovakia? And I assume most of that will go through the gross margin line or cost of goods.

Yes. I’ll start and then go back to Scott. I care about serving the customers. And we had some self-inflicted wounds. We had to put up the money to do it right. It’s annoying, but I don’t think it affects long-term value, that’s why I went through that.

Absolutely.

It’s going to make the year not as strong as Q1. We build back up there. Scott noted the specific. We still until a couple of weeks ago, we’re going to prepare a little bit. So I don’t want to overestimate on the good side here.

Yes, and the only thing I would add to that is to reiterate what we believe previously, or we just mentioned, which is we are seeing improvements at the factories as we speak. We’re continuing to see those improvements. We spent a little bit more than we wanted to, but it was to serve the customer really. And so, we expect sequential improvement over the next two quarters, and then we’ll start to realize some additional good guys next year that Vivek brought up earlier in the call.

Okay. And just last question on the SG&A, you mentioned that was going to go up a little bit in the back-half of the year. Anything specific to that and just…

No, I said, cash expenses are going to go down, so SG&A went up, because the revenues were a lot, so sales accruals for commissions that is over [ph] a lot. We’re kind of implying the back-half will be a little smaller than the front-half. There will be some accruals coming out and just some spend related to the [excels and stuff out of it] [ph], it should all be out.

Okay, so you’re saying it won’t go up on an absolute basis next quarterly…?

Cash costs will be down sequentially.

Okay, okay, great.

Compared to the first-half.

Got it, okay. Great, I understood [ph] that. Okay, great. Thanks a lot, guys. I appreciate it.

[Operator Instructions] Our next question comes from Jayson Bedford from Raymond James. Your line is now open.

Hi, good afternoon. Thanks for taking the questions, guys. I guess, let me just take it back to the gross margin question, even if I back out kind of the quantified disruption you mentioned in the second quarter there, was there anything that stood out in the first quarter that would make that level not attainable over the next year or so?

I’d say, eventually no. There is nothing outstanding that would prevent us from getting back there, whether it’s this year or next year.

I think the one thing that could hurt us is the one we don’t coach, is currency, right? If currency went the other direction, then I think - if currency went materially in another direction it would be hard to get back there. But if things stayed constant with currency, I think we’d feel pretty comfortable with that statement.

But was there anything exceptional in the first quarter that causes that gross margin to be near 50%, 55%?

No, no. When we look at - most of what we sell is under long-term fixed price contracts, we had lower volumes, gross margins - it’s a better way to lock more volume revenue-wise this quarter. But it was with additional costs to get it out the door, right? And we’ve had a lot more - remember we’ve closed Slovakia, put that into Ensenada’s, lot of new people working through some of the productivity. We thought we had it all licked. And we do know it’s going to be a little bit lower in Q2, it costs us even more than we expected.

Okay, fair enough. Okay. You went through, Scott, a lot of numbers there at the end of your talk. The guidance, your expectation for OEM sales, is it still flat year over year? I know you quantified your primary OEM customer there, but just overall OEM is it still flat?

Yes, I think roughly flat, to go a little bit in either directions.

Okay. And then, you’re obviously growing well in oncology. When do you let ChemoLock go and ramp production and really put a little more effort behind that?

I think we’ve made the investments into production capacity. They’re just not fully online yet. So I don’t think there is any changing our mind, we’re just waiting to get the tooling in house to get the stuff validated and start running it into the system. We’re just not there yet. But everything has been ordered. Everything we need for next year has been ordered and ready.

Okay. And then, maybe just lastly for me on…

Jayson, which tells you we believed, right, we put up the money.

Right. Can you view that as additive to ChemoClave? It’s not necessarily cannibalistic?

It depends on the use-case pharmacy-by-pharmacy. In some cases, a customer may like the convenience and additional features of ChemoLock versus the ChemoClave. In some cases, we believe it will help us add safety to hospitals, where safety wasn’t being practiced, right. So it’s really depends on the used cases by hospital.

Okay. Lastly, capital deployment, Vivek, you mentioned valuation it look like you had a related expense to that in the quarter. Are you seeing deals out there, but valuation is just the sticky point, is that the message?

We are looking - we look every day it’s hard that’s the candid answer. It’s not that easy.

All right. Thanks.

And our next question comes from Chris Lewis from Roth Capital Partners. Your line is now open.

Hey, guys, thanks for taking the question.

Hey, Chris.

First on the Cogent monitor, when do you feel like you have that product kind of at a point where you can fully go out and sell that with all of the bells and whistles and applications that you refer to.

I think our best guess right now is early next year, right. We are working hard on getting the feature set done, it’s another four or five months away.

How important is that product just to stabilize that critical care business and do you see that product as potentially being a driver or sometime in 2017 see critical care and return to kind of a normalized growth rate?

First of all, let’s take that in two parts. The first part is the company, we have spent a lot of money on that program, so we need to get it out and we do believe it stabilizes the critical care business, where we are getting hurt is when our installed base get stood up and we need to hang on to our installed base first and foremost. So that the lens we see it in. The second in terms of what is I mean, from a growth perspective. I think, that will take some time, I think the challenge is the critical - like all businesses, the critical care business is five or six different sub-businesses underneath that. And some of the big ones for clinical reasons are having shrinkage in the size of the marketplace and that makes keeping our head above water difficult. So I think we were feeling pretty good that we’ve been able to stabilize the business, if not, be reasonably flat, get the new monitor and hold on to our installed base prove that we can do that after that we can talk about growth, until it’s out there, I don’t really want to spend a lot of time talking about critical care growth.

Got you. And then, can you just provide an update on how the on boarding processes are going for Terumo and B. Braun?

Sure. In terms of Terumo, it’s been just a ton of regulatory work, it’s nearing completion. We’ve made a lot of progress, and so I think it’s in involved process as anybody who has done business in some of the geography knows. But we’re executing well through it. And I think we feel like there is a very clear roadmap getting it on board. On the Braun thing which is still in its very early days and very small on SwabCap, that’s happening. Business is being transacted every day. They have the products in hand. It’s just more of a discussion of where else could we sell it.

Okay, great. And then, just one or two more, I may have missed it, but it looks like there was a $1.5 million strategic transaction expense. Am I reading that right or was that related to the Slovakia closure?

Yes, on the P&L, there was $1 million purchase gain and that was just related to…

There was a piece of technology we purchased out there. And it had some other benefits. It was not an operating item and it wasn’t an expense, it was actually a gain.

Okay, got you. And then, just one more for me, Vivek, in the past you kind of talked about, your goal is not really to expand margins at least in the near term. As we think about 2017 and the leverage story. It seems like you have a few meaningful headwinds converging with Slovakia SwabCap and kind of gross margin line stabilizing and perhaps…

Tail, tailwind, not headwind, right?

I’m sorry, tailwind. Did I say headwind?

Yes, big difference, yes.

Quite a different. As you think about those tailwinds converging, are you a little bit more bullish by your expansion - your margin expansion story here over the next 12 to 18 months? Thanks.

I think, that’s exactly why we’re talking about it right, because I think, if we look - the pieces of the puzzle, our direct revenue growth - I said, I felt like it was solid for the balance of the year and into next year on infusion oncology. We felt like we had margins in a good place for the opportunity to do better, right, albeit it is been a little bumpy for the last 90 days. That was in a good place. And then, what’s going to happen with the principle OEM customer, well, if we can get down to a lower enough percentage of sales and still deliver this amount of profitability, both our direct revenues and the margin should offer value creation on top of that. It’s exactly the model we’re trying to drive to.

[Operator Instructions] And our next question comes from Tom Bakas from Piper Jaffray. Your line is now open.

Hey, guys, good afternoon. Congrats on a strong quarter and thanks for taking my question. Just first, it seems like your direct infusion and oncology businesses are performing well. Just if you just give us a little color on the reasons for that. And then, also the sustainability there, can you see that continue into next year?

Sure, hi, Tom. I think we just talked about it a little bit, which is just - it’s time in feet for some of our team members, stability, consistent marketing, understanding our own value proposition, better customer service. Lot of things have frankly gotten away from getting back to the core of some of the unique products, the custom products, the things people want to talk about, at least on the infusion side, I feel like it, but not sure of that. Oncology, it’s a little bit of the macro, which is people see the need for safety in the handling of hazardous drugs. And we’re in a good position in that market. Our current market share and our innovation, I think gets attention of customers and we’ve been executing well through that. In the comments I made in the script, that’s what we believe, which is we see solid growth in both of those areas for the balance of the year. And I probably can see right now into early next year.

Great, thanks. And then a quick follow-up, it looks like the share count ticked up sequentially and I think you guys said your cash balance is about $400 million now. Just wondering why there weren’t any buybacks in the quarter.

Well, I’ll let Scott answer the share count question and then I’ll come back to buybacks?

Okay. So okay, Tom, if you’re talking about primarily the diluted share count, that’s one of the effects of adopting this new accounting standard on equity compensation. Where in the past on the treasury buyback method that amount used to run through the income for purchasing back shares that no longer run through it. So while we get positive effective on the tax rate to get our tax rate more in line with - really what it does is get the GAAP rate and the cash tax rate more in line with one and other. But it does have an offsetting effect on the treasury buyback method. And so that is one of the major reasons for the increase.

On the buyback, earlier this year we bought back almost $20 million of stock. We think we did that wisely. And we’ll continue to do it opportunistically. I think the mission of small companies is to grow. And I’d much rather horde capital frankly and use it when the time is right to expand the value of the company than minor changes on the share count line for EPS to be super blunt about it.

Thank you very much.

I am showing no further questions. I would now like to turn the call back to Vivek Jain for any further remarks.

Thanks everybody for your interest in the company and participating in our Q2 call. I hope everybody sees we’ve been executing well and delivering value and driving our results. And we look forward to updating everybody on our Q3 call later this year. Thanks. Have a great summer.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.