ICU Medical Inc (ICUI) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2016 ICU Medical 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, Mr. John Mills, ICR. Sir, you may begin.

Thank you. Good afternoon everyone. Thank you for joining us today for the ICU Medical earnings results for the second quarter ending 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 calls to take your questions.

Before we begin I would like to touch on 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 available and assumptions that 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 financial position.

Please note that during today's call we will be discussing non-GAAP financial measures including results on an 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 have included a reconciliation of these non-GAAP measures in today's press release and will 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 portions of the website for your review.

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 continued to provide 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 can 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 have executed well through a large volume of activity and have emerged stronger and built on the positive financial and operational trajectory the last few quarters. On today's call, in addition to the financial results and a recap of the financial 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 will also update on our OEM business and its full-year expectations, which are in line with early predictions 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 expectations. We finished the quarter with approximately $97 million in revenue resulting in reported revenue growth of just over 15% with negligible currency effects. Please note, some of this revenue growth was due to catching up from certain temporary production constraints mentioned on the last call. Adjusted EBITDA came in at just over $33 million, which was growth of 18% year-over-year; and adjusted EPS came in at $1.15, which was 19% over last year. We did have a little bit of a tax benefit come earlier 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 operations continued 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 continued 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, for our 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 products enable hospitals to address the increasing regulatory guidelines being adopted, which is one of many reasons we are 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 do not expect it to be material until the end of this year and into next year. 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 declines. We are working to improve our product offerings and while we do have a new 510(k) approval for our new hemodynamic monitoring system, [Cogent in hand], we are making improvements to its application development in order to offer a format that best utilizes its technology for the customer and patient. Our critical care business was also impacted by the some of the temporary production constraints we described on our last call. While we caught up a lot in infusion, we did not catch up quite as much and critical care, so there are some timing issues going on. 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 grew approximately 15% in Q2. Our principal 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 principal OEM customer over the balance of this year. While these Q2 results implying even steeper decline in the back half, we now have better visibility and absolutely believe that will be the case. I will go into the specifics momentarily, but our view implies that principal OEM customer be at the smallest percentage of sales in many years at the Q4 exit run rate, but that our profitability will be generally in line in absolute dollars as our current levels, 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 has been a very busy year operationally. A quick recap since the last call includes first, the closure of our Slovakian manufacturing facility and integration to Ensenada. Since the last call the facility has now been closed and has integrated into Mexico. We will not see the benefits largely until 2017 until all transitions are completed as we burn off products 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 do not 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 into Q2 and we now have two quarterly closes 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 operations team. These were all the items that we called the high hanging fruit that we started to describe in late 2015 as the next wave of improvements, 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 are receiving currently. More importantly, protects us from the effects of potential volume decline from our principal OEM customer.

The operations teams have been working very hard on all these value drivers to ensure their time and completion while running a business that has 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 constraints that caused us to get a bit behind in our service levels with customers and previewed that gross margins would be impacted in Q2 as we were spending on freight and employee onboarding at Ensenada at accelerated levels to make sure our service levels were as high as possible for customers. The impact cost somewhere between an additional $500,000 to $1 million more than we anticipated. As a result, Q2 gross margins were a little lower than where we thought we would have been.

As I said many times in my first year here, we are small enough to be small, and have a small P&L that can be influenced quickly. This is a perfect example. It is a really small amount of money that had an impact on one quarter's gross margins. While we detest waste, these are the normal bumps that I have always said will hit one day, and happen in business. But I wanted to itemize all the right fundamental things happening around the high hanging fruit for continued value creation. Please remember, most of our products are sold under long-term fixed-price supply contracts.

We have said many times we will not manage the business for some arbitrary EBITDA margin, and the same is true for gross margins. If it costs us a little more money in any one quarter to solve our problems or serve customers, we will do it, and we are not going to skimp here. At the moment, midway through Q3, we are getting right back on track in the right direction and margins will improve sequentially from the Q2 results.

From an operating expense standpoint, there's 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 in 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.

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 we believed our primary OEM customer would be down approximately $10 million. Obviously we do not want to be the team that always cries wolf on this issue, as that prediction did not come true in the past. We understand that the results from the first two quarters makes this harder to believe. We see real time, right now, a lot of customer movement among 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 have known some customer shift was coming, but it has been hard to judge the timing and shape of the curve, and, frankly, we would like it all to come this year.

We know they will be down $10 million in 2016 versus 2015. 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 are just assuming an 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 items moderately.

Assuming it develops this way, our primary OEM customer would exit Q4 at 25% to 26% of revenues, the lowest level in years, and our EBITDA would generally be in line with where we have 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 onboarded, and EBITDA growth due to the operational improvements previously described, which has some tougher OEM comps at the beginning of next year. If something strategically changed that allowed for better performance from them, we would obviously benefit.

We have described the tenure 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.

Turning to guidance for the full year 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 Scott 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 at Q1 levels due to what happened in Q2; and we will exit the year with the 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 is important to understand all of these variables to make the case for long-term value creation at ICU Medical. Very practically, we have protected ourselves the best we can by driving returns on our own business, controlling what we can control in our own direct business, and getting our foundation and infrastructure solid.

We often talk about the fundamental value drivers being, one, the sticky nature of our products; two, our manufacturing processes and 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-sized company that can strategically move in a number of directions and with an increasingly limited number of smaller med tech companies that can compete globally. Things are moving fast and we are trying to improve the Company with urgency. But I wanted to remind everyone, as I said on 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 effort of all ICU employees to adapt, move forward, and focus on improving results; and our Company appreciates the support we've received both from our customers and our shareholders.

With that, I will 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 have 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 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 will discuss under my tax comments.

Now let me discuss our second-quarter revenue by market segment, and then more specifically by direct and 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's 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 needle-free products and our SwabCap product line in, which was acquired through acquisition in 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 had a large offset from critical care.

Our gross margin decreased 40 basis points on a year-over-year basis, and as expected, was down from the first quarter 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 to our efficiency 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 the gross margin to improve in the third and fourth quarters 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% the prior year. The $2.2 million increase was in part due to filling positions that were open 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 device 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 levels.

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 out 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 under the old GAAP guidance. This has a corresponding effect on the computation of diluted earnings per share when applying 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 was part of our original annual tax rate estimate. So this earlier adoption does not affect our original annual tax rate estimates. 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 to 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%. 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 spend approximately $20 million on CapEx, including our expansion of 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 aspects of our business that are under our control. We are excited about the medium- and long-term opportunity and of us, and look forward to keeping everyone updated on our next quarter's earnings call.

With that, I would like to turn the call over for any questions.

(Operator Instructions)

Our first question comes from Larry Solow from CJS Securities. Your line is now open.

Great, thanks. Good afternoon. I was wondering if you guys can give us a little more color on the continued strong Direct Infusion sales? I realize some of that is from the SwabCap. I don't know if you have an organic number, but I'm sure it's still well into the double digits. Is it market share?

Obviously, reorganizing sales force early last year, are you still reaping benefits from that? Is it just a combination of a bunch of factors? Or if you could help with -- give a little bit more color on that would be great.

Hi, Larry, it's Vivek. I hope you're doing well. Yes, SwabCap, roughly half. I don't want to get into the numbers because it is so small. (Inaudible) I don't want to talk about every little product line individually. But I think if the category is growing globally, and so infusion does well both in the US and outside the US, I think we are doing very well outside the US.

Inside the US it is kind of getting back to our roots. We've had a stable team now for a year and a half. My previous experiences I've sort of went through the same thing. And I feel like we've got some stability, people know what they are doing, and focus. I don't think it is that much more than that right now.

Okay. On the gross margin it sounds like, obviously a little short term a little bit more of an issue. But it seems like it's going to be resolved or is resolved.

Q3 and Q4, did they get back sort of, or do we get back to Q1 levels by Q4? And then a second part of that question, can you just remind us of the expected benefits from Slovakia? And I assume most of that will go to the gross margin line, possibly?

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

It is going to make the year not as strong as Q1. We build back up there, Scott can go into the specifics. We still, until a couple of weeks ago, were [going into repair] a little bit. So I don't want to overestimate on the good side here.

The only thing I would add to that is to reiterate what we previously just mentioned, which is we are seeing improvements at the factories as we speak. We are continuing to see those improvements.

We spent a little more than we wanted to, but it was to serve the customer really. So we expect sequential improvements over the next two quarters, and then we will start to realize some additional good [guys] next year that Vivek brought up earlier on the call.

Last question on the SG&A. You mentioned it was going to go up a little bit in the back half of the year. Anything specific to that? And just --

I said cash expenses are going to go down. So SG&A went up because sales -- the revenues were [a lot], so sales accruals for commissions [and stuff like that], we're kind of implying the back half would be a little slower than the first half. There will be some accruals coming out and to some spend related to the Excelsior stuff, it should all be out.

Okay, so SG&A won't be -- you're saying it won't go up on an asset basis quarterly? I thought you --

Cash cost will be down sequentially compared to the first half.

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 maybe just to get back to the gross margin question. Even if I backed 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 would say eventually no, there is nothing outstanding that would prevent us from getting back there whether it is this year or next year.

I think the one thing that can hurt us is the one we don't approach is currency. If currency went in the other direction then I'd 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.

Was there anything exceptional in the first quarter that caused that gross margin to be near 55%?

No. No. Look at -- most of what we sell is under long-term, fixed-price contracts. We had lower volumes, gross margins was better, we had a lot more volume revenue-wise this quarter, but it was with additional cost to get it out the door.

And we have had a lot more -- remember, we closed Slovakia, put that into Ensenada, there are a lot of new people working through some of the productivity. We thought we had it all licked, and we knew it was going to be a little bit lower in Q2, but it cost us even more than we expected.

Okay, fair enough. You went through, Scott, a lot of numbers there at the end of your talk. The guidance, your expectations 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, you know, I think roughly flat, but it could go a little bit in either direction.

Okay. And then, you are 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 have made the investments into production capacity, they are just not fully online yet. So I don't think there's any changing our mind, we are just waiting to get the tooling, in-house, get the stuff validated and started running it through the system. We are just not there yet. But everything has been ordered. Everything we need for next year has been ordered already.

Okay. And then, maybe just lastly for me, and I'll --

Jayson, which tells you we believe, right? We put up the money.

Right. And 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 the ChemoLock versus the ChemoClave. In some cases we believe it will help us add safety to hospitals where safety was not being practiced. So it really depends on the use case by hospital.

Okay. Lastly, capital deployment, Vivek, you mentioned valuation. It looked 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 is hard. That's the candid answer. It's not that easy.

Okay, thanks.

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

Thanks for taking the question.

Hi Chris.

First, on the Cogent monitor, when do you feel like you will 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 know, you refer to?

I think our best guess right now is early next year. 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 where you can some time in 2017 see Critical Care return to kind of a normalized growth rate?

First of all, let's take that in two parts. The first part is -- look, the Company, we have spent a lot of money on that program. We need to get it out, and we do believe it stabilizes the Critical Care bases. Because where we are getting hurt is when our install base gets chewed up, and we need to hang on to our install based first and foremost. That's the lens we see it in.

The second, in terms of what does it mean from a growth perspective. I think that will take some time. I think the challenge is that the critical -- like all businesses, the Critical Care business is five or six different sub-businesses underneath it; 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 for a number of years and be flat, get the new monitor, [hold our] install [bases], and prove that we can do that. After that we can talk about growth. Until it is out there I don't really want to spend a lot of time talking about Critical Care growth.

Got you. Can you provide an update on how the onboarding processes are going for Terumo and B. Braun?

Sure. In terms of Terumo, it has been a ton of regulatory work. It is nearing completion. We've made a lot of progress. So I think, it is an involved process, as anybody who has done business in some of those geography knows, but we are executing well through it.

I think we feel like there is a very clear roadmap to getting it on board. On the Braun [thing], which is still in its very early days, and very small [on] SwabCap, that is happening. Business is being transacted every day. They have the product in hand. It's just more of a discussion of where else could we sell it.

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

Yes, there was a -- you know, there was a -- on the P&L there was a $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 was not an expense, it was actually [a gain].

Okay, got you. And then just one more from me. You know, Vivek, in the past you've 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 the gross margin line stabilizing and perhaps --

Tailwinds not headwinds, right?

I'm sorry, tailwinds. Did I say headwinds?

Big difference.

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

I think that is exactly why we are talking about it, right? Because if we look at the pieces of the puzzle, our direct revenue growth -- I said I felt like it was solid for the balance of the year into next year in infusion and Oncology. We felt like we had margins in a good place, the opportunity to do better. Albeit it has been a little bumpy for the last 90 days. That was in a good place.

And then what is going to happen with the principal OEM customer? If we can get down to a low enough percentage of sales and still deliver this amount of profitability, both our direct revenues and the margins should offer value creation on top of that. That's exactly the model we're trying to drive to.

(Operator Instructions)

Our next question comes from Tom Bakas from Piper Jaffray.

Hi guys, good afternoon. Congrats on a strong quarter and thank you for my taking my question. First, it seems like your Direct Infusion and Oncology businesses are performing well.

Can you just give us a little color on the reasons for that? And then also the sustainability there, can you see that continuing into next year?

Sure. Hi Tom. I think we just talked about it a little bit. It's a time and feat for some of our team members, stability, consistent marketing, understanding our own value proposition, better customer service. A lot of things that frankly had 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's been [all churned up].

Oncology, it is a little bit of the macro, which is people see the need for safety in the handling of hazardous drugs, and we are in a good position in that market. Our current market share and our innovation, I think, gets attention of customers, and we have 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 for what we could 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. I'm just wondering why there were not any buybacks in the quarter?

I will let Scott answer the share count question, and then I will come back to the buybacks.

So Tom, if you are talking about the primarily the diluted share accounts, that is one of the affects 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 a positive effect 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 another. But it does have an offsetting effect on the treasury buyback method. 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 will continue to do it opportunistically.

I think the mission of small companies is to grow. I would much rather hoard 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'm 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. 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.