10-Q 1 icui-20220331.htm 10-Q icui-20220331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: March 31, 2022
 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from:              to
 
Commission File No.: 001-34634
 ICU MEDICAL, INC.
(Exact name of registrant as specified in its charter)
 
Delaware 33-0022692
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
951 Calle Amanecer,San Clemente,California92673
(Address of principal executive offices)(Zip Code)
 (949) 366-2183
(Registrant’s telephone number including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filerx Accelerated filer
Non-accelerated filer Smaller reporting company
 Emerging growth company
 If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):  Yes  No x

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common stock, par value $0.10 per shareICUIThe Nasdaq Stock Market LLC
(Global Select Market)

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
Class Outstanding at April 30, 2022
Common 23,896,032




ICU MEDICAL, INC. AND SUBSIDIARIES
Form 10-Q
March 31, 2022

Table of Contents
 Page Number
PART I.  
Item 1.  
   
 
   
 
   
 
 
   
 
   
Item 2. 
   
Item 3. 
   
Item 4. 
   
PART II.  
Item 1. 
   
Item1A. 
   
Item 2. 
   
Item 6. 
   
 
2


PART I - FINANCIAL INFORMATION
Item1.Financial Statements (Unaudited)

ICU MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value data) 
 March 31,
2022
December 31,
2021
 (Unaudited)(1)
ASSETS  
CURRENT ASSETS:  
Cash and cash equivalents$329,428 $552,827 
Short-term investment securities14,864 14,420 
TOTAL CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENT SECURITIES344,292 567,247 
Accounts receivable, net of allowance for doubtful accounts of $6,921 at March 31, 2022 and $7,038 at December 31, 2021
202,897 105,894 
Inventories536,314 290,235 
Prepaid income taxes10,219 19,586 
Prepaid expenses and other current assets80,273 46,847 
TOTAL CURRENT ASSETS1,173,995 1,029,809 
PROPERTY, PLANT AND EQUIPMENT, net674,412 468,365 
OPERATING LEASE RIGHT-OF-USE ASSETS92,027 39,847 
LONG-TERM INVESTMENT SECURITIES2,539 4,620 
GOODWILL1,526,866 43,439 
INTANGIBLE ASSETS, net1,094,710 188,311 
DEFERRED INCOME TAXES77,566 42,604 
OTHER ASSETS104,617 63,743 
TOTAL ASSETS$4,746,732 $1,880,738 
LIABILITIES AND STOCKHOLDERS’ EQUITY  
CURRENT LIABILITIES:  
Accounts payable$200,991 $81,128 
Accrued liabilities261,820 118,195 
Current portion of long-term debt13,813  
Income tax payable17,491 1,454 
TOTAL CURRENT LIABILITIES494,115 200,777 
CONTINGENT EARN-OUT LIABILITY57,701 2,589 
LONG-TERM DEBT1,642,171  
OTHER LONG-TERM LIABILITIES134,208 41,830 
DEFERRED INCOME TAXES220,628 1,490 
INCOME TAX LIABILITY19,007 18,021 
COMMITMENTS AND CONTINGENCIES (Note 19)  
STOCKHOLDERS’ EQUITY:  
Convertible preferred stock, $1.00 par value; Authorized — 500 shares; Issued and outstanding — none
  
Common stock, $0.10 par value; Authorized — 80,000 shares; Issued — 23,897 shares at March 31, 2022 and 21,280 shares at December 31, 2021; and outstanding — 23,884 shares at March 31, 2022 and 21,280 shares at December 31, 2021
2,390 2,128 
Additional paid-in capital1,306,264 721,412 
Treasury stock, at cost (12,684 and 119 shares, respectively)
(2,843)(27)
Retained earnings873,719 911,787 
Accumulated other comprehensive loss(628)(19,269)
TOTAL STOCKHOLDERS' EQUITY2,178,902 1,616,031 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$4,746,732 $1,880,738 
______________________________________________________
(1) December 31, 2021 balances were derived from audited consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
3

ICU MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
 
 Three months ended
March 31,
 20222021
TOTAL REVENUES$543,122 $318,046 
COST OF GOODS SOLD374,295 205,366 
GROSS PROFIT168,827 112,680 
OPERATING EXPENSES:  
Selling, general and administrative153,212 72,391 
Research and development23,871 10,709 
Restructuring, strategic transaction and integration33,905 2,883 
Contract settlement 127 
TOTAL OPERATING EXPENSES210,988 86,110 
(LOSS) INCOME FROM OPERATIONS(42,161)26,570 
INTEREST EXPENSE(13,644)(161)
OTHER INCOME, net1,004 683 
(LOSS) INCOME BEFORE INCOME TAXES(54,801)27,092 
BENEFIT (PROVISION) FOR INCOME TAXES16,733 (3,361)
NET (LOSS) INCOME$(38,068)$23,731 
NET (LOSS) INCOME PER SHARE  
Basic$(1.61)$1.12 
Diluted$(1.61)$1.09 
WEIGHTED AVERAGE NUMBER OF SHARES  
Basic23,646 21,149 
Diluted23,646 21,695 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
4

ICU MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)
(In thousands)
 
 Three months ended
March 31,
 20222021
NET (LOSS) INCOME$(38,068)$23,731 
Other comprehensive income (loss), net of tax:
Cash flow hedge adjustments, net of tax of ($7,312) and $298 for the three months ended March 31, 2022 and 2021, respectively
23,572 (945)
Foreign currency translation adjustment, net of tax of $0 for all periods
(4,946)(7,458)
Other adjustments, net of tax of $0 for all periods
15 12 
Other comprehensive income (loss), net of tax18,641 (8,391)
COMPREHENSIVE (LOSS) INCOME$(19,427)$15,340 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

5

ICU MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
(Amounts in thousands)


Common StockAdditional
Paid-in
Capital
Treasury
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss) Income
SharesAmountTotal
Balance, January 1, 202221,280 $2,128 $721,412 $(27)$911,787 $(19,269)$1,616,031 
Issuance of restricted stock and exercise of stock options154 12 (2,965)5,927 — — 2,974 
Tax withholding payments related to net share settlement of equity awards(37)— — (8,743)— — (8,743)
Issuance of common stock for acquisitions2,500 250 575,725 — — — 575,975 
Stock compensation— — 12,092 — — — 12,092 
Other comprehensive income, net of tax— — — — — 18,641 18,641 
Net loss— — — — (38,068)— (38,068)
Balance, March 31, 202223,897 $2,390 $1,306,264 $(2,843)$873,719 $(628)$2,178,902 

 Common StockAdditional
Paid-in
Capital
Treasury
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
SharesAmountTotal
Balance, January 1, 202121,058 $2,106 $693,068 $(39)$808,652 $(1,522)$1,502,265 
Issuance of restricted stock and exercise of stock options198 16 2,496 2,352 — — 4,864 
Tax withholding payments related to net share settlement of equity awards(37)— — (7,723)— — (7,723)
Stock compensation— — 6,022 — — — 6,022 
Other comprehensive loss, net of tax— — — — — (8,391)(8,391)
Net income— — — — 23,731 — 23,731 
Balance, March 31, 202121,219 $2,122 $701,586 $(5,410)$832,383 $(9,913)$1,520,768 
6

ICU MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands) 

 Three months ended
March 31,
 20222021
CASH FLOWS FROM OPERATING ACTIVITIES:  
Net (loss) income$(38,068)$23,731 
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: 
Depreciation and amortization53,138 22,155 
Amortization of inventory step-up14,370  
Noncash lease expense5,286 2,372 
Provision for doubtful accounts(548) 
Provision for warranty and returns726 209 
Stock compensation12,092 6,022 
Loss on disposal of property, plant and equipment and other assets596 659 
Bond premium amortization130 168 
Debt issuance costs amortization1,643 72 
Usage of spare parts2,223 2,825 
Other(1,649)(1,287)
Changes in operating assets and liabilities, net of amounts acquired: 
Accounts receivable22,489 1,506 
Inventories(36,170)13,208 
Prepaid expenses and other current assets2,607 (742)
Other assets(14,371)(3,463)
Accounts payable19,504 2,411 
Accrued liabilities(19,238)(19,965)
Income taxes, including excess tax benefits and deferred income taxes(26,102)1,439 
Net cash (used in) provided by operating activities(1,342)51,320 
CASH FLOWS FROM INVESTING ACTIVITIES:  
Purchases of property, plant and equipment(23,606)(14,028)
Proceeds from sale of assets900 55 
Business acquisitions, net of cash acquired(1,844,164) 
Intangible asset additions(2,387)(1,874)
Purchases of investment securities(1,993)(10,034)
Proceeds from sale of investment securities3,500 7,000 
Net cash used in investing activities(1,867,750)(18,881)
CASH FLOWS FROM FINANCING ACTIVITIES:  
Proceeds from issuance of long-term debt, net of lender debt issuance costs1,672,698  
Principal repayments of long-term debt(16,000) 
Payment of third-party debt issuance costs(1,852) 
Proceeds from exercise of stock options2,974 4,864 
Payments on finance leases(160)(141)
Tax withholding payments related to net share settlement of equity awards(8,743)(7,723)
Net cash provided by (used in) financing activities1,648,917 (3,000)
Effect of exchange rate changes on cash(3,224)(1,287)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS(223,399)28,152 
CASH AND CASH EQUIVALENTS, beginning of period552,827 396,097 
CASH AND CASH EQUIVALENTS, end of period$329,428 $424,249 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


7

ICU MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - CONTINUED
(In thousands)

Three months ended
March 31,
20222021
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
  Accounts payable for property, plant and equipment$5,178 $1,068 
Detail of assets acquired and liabilities assumed in acquisitions*:
Fair value of assets acquired$1,594,776 
Cash paid for acquisitions, net of cash acquired(1,844,164)
Share consideration(575,975)
Contingent consideration(55,158)
Goodwill, acquired during period1,485,987 
Liabilities assumed/Adjustments to liabilities assumed$(605,466)
*Includes amounts related to the acquisition of Smiths Medical 2020 Limited and measurement period adjustments related to a 2021 acquisition of a small foreign infusion systems supplier.

The accompanying notes are an integral part of these condensed consolidated financial statements.
8

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note 1:Basis of Presentation
 
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S.") and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and reflect all adjustments, consisting of only normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the consolidated results for the interim periods presented. Results for the interim period are not necessarily indicative of results for the full year. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K of ICU Medical, Inc., ("ICU") a Delaware corporation, filed with the SEC for the year ended December 31, 2021.
 
We are engaged in the development, manufacturing and sale of innovative medical products used in infusion therapy and critical care applications. We sell the majority of our products through our direct sales force and through independent distributors throughout the U.S. and internationally. We also sell certain products on an original equipment manufacturer basis to other medical device manufacturers. All subsidiaries are wholly owned and are included in the condensed consolidated financial statements. All intercompany balances and transactions have been eliminated.

On January 6, 2022, we acquired Smiths Medical 2020 Limited ("Smiths Medical"), see Note 3: Acquisitions. Our condensed consolidated statement of operations includes the results of operations for Smiths Medical from January 7, 2022 through March 26, 2022, which is the current end of their 4-4-5 accounting period.

Note 2:    New Accounting Pronouncements

Recently Issued Accounting Standards

    In March 2020, the Financial Accounting Standards Board issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional guidance for a limited period of time to ease the potential burden for reference rate reform on financial reporting. Due to concerns about structural risks of interbank offered rates and, particularly, the risk of cessation of the London Interbank Offered Rate ("LIBOR"), regulators around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued as a result of reference rate reform. Optional expedients may be applied to contracts that are modified as a result of the reference rate reform. Modifications of contracts within the scope of Topic 470, Debt, should be accounted for by prospectively adjusting the effective interest rate. Modifications of contracts within the scope of ASC 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate (incremental borrowing rate). Exceptions to Topic 815, Derivatives and Hedging, results in not having a dedesignation of a hedging relationship if certain criteria are met. The amendments in this ASU are effective for all entities as of March 12, 2020 through December 31, 2022. In November 2021, we entered into two forward-starting swaps whereby the variable leg of the swap referenced LIBOR. These swaps were amended in early 2022 to transition to an alternative reference rate (see Note 8: Derivatives and Hedging Activities). The amendments in this ASU allow for certain expedients that will allow us to assume that our hedged interest payments are probable of occurring regardless of any expected modification in their terms related to reference rate reform and will allow us to continue hedge accounting for a cash flow hedge for which the hedged interest rate risk changes if the hedge is highly effective under ASC 815, Derivatives and Hedging, or the optional expedient under this ASU is elected. The impact of this ASU on our contracts has not been and is not expected to be material.
        
9

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3:    Acquisitions

2022 Acquisition

On January 6, 2022, we acquired 100.0% of the equity interests in Smiths Medical, the holding company of Smiths Group plc's global medical device business, from Smiths Group International Holdings Limited (“Smiths”). The acquisition of Smiths Medical aligns with our strategic growth plans, enabling us to broaden our product offerings to include syringe and ambulatory infusion devices, vascular access, and vital care products and to strengthen and expand our global market reach.

Total cash consideration for the acquisition was $1.9 billion, which was financed with existing cash balances and proceeds from the credit agreement entered into on January 6, 2022 (see Note 17: Long-Term Debt). We also issued share consideration to Smiths of 2.5 million shares of our common stock. The fair value of the common shares issued to Smiths was determined based on the closing market price of our common stock on the acquisition date. Smiths may be entitled to an additional $100.0 million in cash consideration contingent on our common stock achieving certain price targets for certain periods after closing in accordance with the terms of the Share Sale and Purchase Agreement (the "Purchase Agreement"). In the event that (a) on or prior to the third anniversary of closing the 30-day volume-weighted average price for our common stock, as defined in the Purchase Agreement, equals or exceeds $300.00 per share or (b) on or prior to the fourth anniversary of closing the 45-day volume-weighted average price for our common stock, as defined in the Purchase Agreement, equals or exceeds $300.00 per share (each a "Price Target"), and provided Smiths beneficially owns at least 50.0% of the shares of common stock issued at closing at the time the Price Target is achieved, then Smiths will be entitled to receive the additional $100.0 million in cash consideration. The fair value of the contingent consideration was determined using an option pricing model, specifically the Monte Carlo Simulation. In the analysis, the determinants of payout are simulated in a risk neutral framework over a large number of simulation paths. The fair value of the contingent consideration is then calculated as the average present value across all simulated paths.

Preliminary Purchase Price Allocation

The following table summarizes the preliminary purchase price and the preliminary allocation of the purchase price related to the assets acquired and liabilities assumed (in thousands):
10

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Estimated cash consideration for acquired assets$1,922,955 
Preliminary fair value of contingent consideration payable to Smiths53,520 
Issuance of ICU Medical, Inc. common shares:
Number of shares issued to Smiths2,500 
Price per share (ICU's opening market price on the acquisition date)$230.39 
Fair value of ICU shares issued to Smiths$575,975 
Total estimated consideration to be paid$2,552,450 
Preliminary Purchase Price Allocation:
Cash and cash equivalents$78,791 
Accounts receivable120,497 
Inventories226,996 
Prepaid expenses and other current assets34,554 
Property, plant and equipment210,000 
Operating lease right-of-use assets57,225 
Intangible assets(1)
925,000 
Deferred income taxes9,303 
Other assets379 
Accounts payable(105,291)
Accrued liabilities(2)
(175,098)
Income tax payable(24,332)
Other long-term liabilities(85,739)
Deferred income taxes(212,950)
Total identifiable net assets acquired$1,059,335 
Goodwill - not tax deductible1,493,115 
Estimated Purchase Consideration$2,552,450 
_______________________________
(1)    Preliminary identifiable intangible assets include $500.0 million of customer relationships, $420.0 million of developed technology, and $5.0 million of trade mark. The estimated weighted-average amortization period for the total identifiable intangible assets is approximately nine years, and, for each identifiable intangible asset is estimated as follows: eight years for customer relationships, ten years for developed technology, and six months for the trade mark.
(2)    Preliminary accrued liabilities includes, among other things, accrued warranty reserves, accrued restructuring initiatives, accrued salaries and related benefits, deferred revenue and accrued sales and use taxes.

The above purchase price and purchase price allocation are preliminary and subject to future revision as the acquired assets and liabilities assumed are dependent upon the finalization of the related valuations.

The identifiable intangible assets and other long-lived assets acquired have been valued as Level 3 assets at fair value. The estimated fair value of identifiable intangible assets were developed using the income approach and are based on critical estimates, judgments and assumptions derived from: analysis of market conditions; discount rate; discounted cash flows; royalty rates; customer retention rates; and/or estimated useful lives. Certain other intangible assets were valued using a cost to replace method, estimating the labor and non-labor costs required to replace the asset under the premise that it was not part of the transaction. Property, plant and equipment was valued with the consideration of remaining economic lives. The raw materials inventory was valued at historical cost and adjusted for any obsolescence which we estimate to approximate replacement cost, the work in process was valued at estimated sales proceeds less costs to complete and costs to sell, and finished goods inventory was valued at estimated sales proceeds less costs to sell. The prepaid expenses and other current assets and assumed liabilities were recorded at their carrying values as of the date of the acquisition, as their carrying values approximated their fair values due to their short-term nature.

11

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited Pro Forma Information

Smiths Medical is included in our consolidated results beginning on January 7, 2022. Total revenues and net loss attributable to Smiths Medical for the period from January 7, 2022 to March 31, 2022 were $214.9 million and $40.4 million, respectively. The following unaudited pro forma financial information presents the combined results of operations of ICU and Smiths Medical as if the acquisition had occurred on January 1, 2021. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on the date indicated or of results that may occur in the future.

Three months ended March 31,
(In thousands)20222021
Revenues$563,743 $594,144 
Net Loss$(34,994)$(1,994)

The unaudited pro forma results presented above include the impact of the following adjustments: incremental amortization expense on intangible assets acquired of $3.3 million and $26.3 million for the three months ended March 31, 2022 and 2021, respectively, incremental interest expense, including amortization of debt discount and debt issuance costs, on the Credit Facilities of $0.8 million and $12.6 million for the three months ended March 31, 2022 and 2021, respectively; and a $18.8 million expense related to the increase in fair value of inventory for the three months ended March 31, 2021. In addition, there were non-recurring adjustments directly attributable to the business combination, including acquisition-related cost of $13.5 million for the three months ended March 31, 2021 and adjustments related to the extinguishment of related party loans receivable and payable equal to $81.0 million and $31.0 million for the three months ended March 31, 2022 and 2021, respectively. The unaudited pro forma results include IFRS to U.S. GAAP adjustments for Smiths Medical historical results and adjustments for accounting policy alignment, which were materially similar to the Company. Any differences in accounting policies were adjusted to reflect the accounting policies of the Company in the unaudited pro forma results presented.

2021 Acquisition

During November 2021, we acquired a small foreign infusion systems supplier and paid an initial gross cash payment of approximately $15.4 million. In addition to the initial cash consideration, total consideration for the acquisition includes an additional holdback of $0.5 million, to be paid two years from the completion date of the acquisition, and also a potential earn-out payment of up to $2.5 million, consisting of (i) a cash payment of $1.0 million contingent on the achievement of certain revenue targets for the annual period ending December 31, 2022 and, separately, (ii) a cash payment of $1.5 million contingent on certain product-related regulatory certifications obtained by May 26, 2024. As of March 31, 2022, the total consideration which includes the acquisition date fair value of the contingent consideration was $17.1 million.

12

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 4: Restructuring, Strategic Transaction and Integration

    Restructuring, strategic transaction and integration expenses were $33.9 million and $2.9 million for the three months ended March 31, 2022 and 2021, respectively.

Restructuring

    During the three months ended March 31, 2022, restructuring charges were $3.2 million and were related to severance costs. Restructuring charges during the three months ended March 31, 2021 were not material.    
    
The following table summarizes the activity in our restructuring-related accrual by major type of cost for the period ended March 31, 2022 (in thousands):
Accrued Balance
January 1, 2022
Acquired Restructuring LiabilitiesCharges
Incurred
PaymentsCurrency
Translation
Accrued Balance
March 31, 2022
Severance pay and benefits$499 5,796 $3,222 $(2,030)$(147)$7,340 
Facility closure expenses165 1,740   (40)1,865 
$664 $7,536 $3,222 $(2,030)$(187)$9,205 

Strategic Transaction and Integration Expenses

    We incurred and expensed $30.7 million and $2.9 million in strategic transaction and integration expenses during the three months ended March 31, 2022 and 2021, respectively, which are included in restructuring, strategic transaction and integration expenses in our condensed consolidated statements of operations. The strategic transaction and integration expenses during the three months ended March 31, 2022 were primarily related to transaction and integration expenses associated with our acquisition of Smiths Medical on January 6, 2022 (see Note 3: Acquisitions) which primarily included legal expenses, bank fees, a United Kingdom stamp tax and employee costs. The strategic transaction and integration expenses for the three months ended March 31, 2021 were primarily related to integration costs associated with acquisitions, the Hospira Infusion Systems ("HIS") earn-out dispute with Pfizer and one-time costs incurred to comply with regulatory initiatives.

Note 5: Revenue

Revenue Recognition

    Following our acquisition of Smiths Medical, our primary product lines are Infusion Consumables, Infusion Systems, IV Solutions, Critical Care, Infusion Systems-Smiths Medical, Vascular Access-Smiths Medical and Vital Care-Smiths Medical. The vast majority of our sales of these products are made on a stand-alone basis to hospitals and distributors. Revenue is typically recognized upon transfer of control of the products, which we deem to be at point of shipment. However, for purposes of revenue recognition for our software licenses and renewals, we consider the control of these products to be transferred to a customer at a certain point in time; therefore, we recognize revenue at the start of the applicable license term.

    Payment is typically due in full within 30 days of delivery or the start of the contract term. Revenue is recorded in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We offer certain volume-based rebates to our distribution customers, which we record as variable consideration when calculating the transaction price. Rebates are offered on both a fixed and tiered/variable basis. In both cases, we use information available at the time and our historical experience with each customer to estimate the most likely rebate amount. We also provide chargebacks to distributors that sell to end customers at prices determined under a contract between us and the end customer. Chargebacks are the difference between the prices we charge our distribution customers and the contracted prices we have with the end customer which are processed as credits to our distribution customers. In estimating the expected value of chargeback amounts in order to determine the transaction price, we use information available at the time, including our historical experience.

    We also warranty products against defects and have a policy permitting the return of defective products, for which we accrue and expense at the time of sale using information available at that time and our historical experience. We also provide for extended service-type warranties, which we consider to be separate performance obligations. We allocate a portion of the transaction price to the extended service-type warranty based on its estimated relative selling price, and recognize revenue over
13

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the period the warranty service is provided. Our revenues are recorded at the net sales price, which includes an estimate for variable consideration related to rebates, chargebacks and product returns.

Revenue disaggregated

The following table represents our revenues disaggregated by product line (in thousands):

Three months ended
March 31,
Product line20222021
Infusion Consumables$140,521 $126,370 
Infusion Systems87,012 84,334 
IV Solutions88,480 94,176 
Critical Care12,157 13,166 
Infusion Systems-Smiths Medical66,290  
Vascular Access-Smiths Medical79,008  
Vital Care-Smiths Medical69,654  
Total Revenues$543,122 $318,046 

Infusion Systems-Smiths Medical, Vascular Access-Smiths Medical and Vital Care-Smiths Medical represent our newly integrated product lines following our acquisition of Smiths Medical on January 6, 2022.

    The following table represents our revenues disaggregated by geography (in thousands):
Three months ended
March 31,
Geography20222021
Europe, the Middle East and Africa$86,204 $34,800 
Other Foreign109,127 55,895 
Total Foreign195,331 90,695 
United States347,791 227,351 
Total Revenues$543,122 $318,046 
    




14

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contract balances

    The following table presents the changes in our contract balances for the three months ended March 31, 2022 and 2021 (in thousands):
Contract Liabilities
Beginning balance, January 1, 2022$(7,461)
Fair value of acquired deferred revenue(51,245)
Equipment revenue recognized5,574 
Equipment revenue deferred due to implementation(3,447)
Software revenue recognized4,299 
Software revenue deferred due to implementation(4,777)
Government grant deferred revenue(2,266)
Government grant recognized171 
Other deferred revenue(767)
Other deferred revenue recognized1,683 
Ending balance, March 31, 2022$(58,236)
Beginning balance, January 1, 2021$(6,430)
Equipment revenue recognized461 
Equipment revenue deferred due to implementation(2,921)
Software revenue recognized1,796 
Software revenue deferred due to implementation(1,794)
Ending balance, March 31, 2021$(8,888)
    
    As of March 31, 2022, revenue from remaining performance obligations is as follows:

Recognition Timing
(in millions)< 12 Months> 12 Months
Equipment revenue$24.1 $ 
Software revenue7.72.6
Government grant revenue1.312.8
Other revenue*2.17.6
Total$35.2 $23.0 
_________________________________
*Other deferred revenue includes pump development programs, purchased training and extended warranty.
Note 6: Leases
    
    We determine if an arrangement is a lease at inception. Our operating lease assets are separately stated in operating lease right-of-use ("ROU") assets and our financing lease assets are included in other assets on our condensed consolidated balance sheets. Our lease liabilities are included in accrued liabilities, and other long-term liabilities on our condensed consolidated balance sheets. We have elected not to recognize an ROU asset and lease liability for leases with terms of twelve months or less.

    Lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Most of our leases do not provide an implicit rate, therefore we use our incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term based on the information available at commencement date. Our lease ROU assets exclude lease incentives and initial direct costs incurred. Our lease terms include options to extend when it is reasonably certain that we will exercise that option. All of our leases have
15

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
stated lease payments, which may include fixed rental increases. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
    
    Our leases are for corporate, research and development and sales and support offices, distribution facilities, device service centers and certain equipment. Our leases have original lease terms of one year to fifteen years, some of which include options to extend the leases for up to an additional five years. For all of our leases, we do not include optional periods of extension in our current lease terms for the exercise of options to extend is not reasonably certain.
    
The following table presents the components of our lease cost (in thousands):
Three months ended
March 31,
20222021
Operating lease cost$5,178 $2,835 
Finance lease cost — interest29 31 
Finance lease cost — reduction of ROU asset170 151 
Short-term lease cost3 3 
Total lease cost $5,380 $3,020 
    
Interest expense on our finance leases is included in other income (expense), net in our condensed consolidated statements of operations. The reduction of the operating and finance ROU assets is included as noncash lease expense in selling, general and administrative expenses in our condensed consolidated statements of operations.    

The following table presents the supplemental cash flow information related to our leases (in thousands):
Three months ended
March 31,
20222021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$6,548 $2,821 
Operating cash flows from finance leases$29 $31 
Right-of-use assets obtained in exchange for lease obligations:
Operating leases$1,493 $1,095 
Finance leases$ $184 
    

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ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the supplemental balance sheet information related to our operating leases (in thousands, except lease term and discount rate):
As of
March 31, 2022December 31, 2021
Operating leases
Operating lease right-of-use assets$92,027$39,847
Accrued liabilities$20,786$9,009
Other long-term liabilities73,39133,971
Total operating lease liabilities$94,177$42,980
Weighted-Average Remaining Lease Term
Operating leases6.5 years5.9 years
Weighted-Average Discount Rate
Operating leases4.06 %4.98 %
    
The following table presents the supplemental balance sheet information related to our finance leases (in thousands, except lease term and discount rate):
As of
March 31, 2022December 31, 2021
Finance leases
Finance lease right-of-use assets$2,545$2,673
Accrued liabilities$669$643
Other long-term liabilities1,9232,067
Total finance lease liabilities$2,592$2,710
Weighted-Average Remaining Lease Term
Finance leases5.4 years5.6 years
Weighted-Average Discount Rate
Finance leases4.28 %4.28 %
        
    
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ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of March 31, 2022, the maturities of our operating and finance lease liabilities for each of the next five years are approximately (in thousands):
Operating LeasesFinance Leases
Remainder of 2022$18,934 $577 
202320,911 770 
202417,106 464 
202512,481 267 
202611,121 213 
20277,839 189 
Thereafter18,121 426 
Total Lease Payments106,513 2,906 
Less imputed interest(12,336)(314)
Total$94,177 $2,592 

Note 7:    Net Income Per Share
 
Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period plus dilutive securities. Dilutive securities include outstanding common stock options and unvested restricted stock units, less the number of shares that could have been purchased with the proceeds from the exercise of the options, using the treasury stock method. Options and restricted stock units that are anti-dilutive are not included in the treasury stock method calculation. Due to the net loss for the three months ended March 31, 2022, any potentially common shares were not included in the computation of diluted earnings per share as they would have had an anti-dilutive effect, therefore basic and diluted net loss per share are equal for the period. There were nil and 12,080 anti-dilutive securities for the three months ended March 31, 2022 and March 31, 2021, respectively.

    The following table presents the calculation of net earnings per common share (“EPS”) — basic and diluted (in thousands, except per share data): 
 Three months ended
March 31,
 20222021
Net (loss) income$(38,068)$23,731 
Weighted-average number of common shares outstanding (basic)23,646 21,149 
Dilutive securities(1)
 546 
Weighted-average common and common equivalent shares outstanding (diluted)23,646 21,695 
EPS — basic$(1.61)$1.12 
EPS — diluted$(1.61)$1.09 
_______________________________
(1)    No dilutive effect for the three months ended March 31, 2022; therefore, zero incremental shares included for the period.

Note 8:    Derivatives and Hedging Activities

Hedge Accounting and Hedging Program

     The purposes of our cash flow hedging programs are to manage the foreign currency exchange rate risk on forecasted revenues and expenses denominated in currencies other than the functional currency of the operating unit, and to manage floating interest rate risk associated with future interest payments on the variable-rate term loans issued in January 2022. We do not issue derivatives for trading or speculative purposes.

    To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. The derivative
18

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
instruments we utilize, including various foreign exchange contracts and interest rate swaps, are designated and qualify as cash flow hedges. Our derivative instruments are recorded at fair value on the condensed consolidated balance sheets and are classified based on the instrument's maturity date. We record gains or losses from changes in the fair values of the derivative instruments as a component of other comprehensive income (loss) and we reclassify those gains or losses into earnings in the same line item associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. If the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related derivative instrument from accumulated other comprehensive loss into earnings immediately.

Foreign Currency Exchange Rate Risk

Foreign Exchange Forward Contracts

We enter into foreign exchange forward contracts to hedge a portion of our forecasted foreign currency-denominated revenues and expenses to minimize the effect of foreign exchange rate movements on the related cash flows. These contracts are agreements to buy or sell a quantity of a currency at a predetermined future date and at a predetermined exchange rate. Our foreign exchange forward contracts hedge exposures principally denominated in Mexican Pesos, Euros, Czech Koruna and Japanese Yen, and have varying maturities with an average term of approximately twelve months. The total notional amount of these outstanding derivative contracts as of March 31, 2022 was $231.8 million, which included the notional equivalent of $58.7 million in Mexican Pesos, $42.4 million in Euros, $23.5 million in Czech Koruna, $22.2 million in Japanese Yen and $85.0 million in other foreign currencies, with terms currently through July 2023. We did not have such derivative contracts as of December 31, 2021.

Cross-currency Par Forward Contracts

We enter into cross-currency par forward contracts to hedge a portion of our Mexico forecasted expenses denominated in Mexican Pesos ("MXN"). These contracts are agreements to exchange cash flows from one currency to another at specified intervals over the contract term with all exchanges occurring at the same predetermined rate. In November 2021, we entered into a one-year cross-currency par forward contract with a term from December 1, 2021 to December 1, 2022. The total notional amount of this outstanding derivative as of March 31, 2022 and December 31, 2021 was approximately 311.6 million MXN and 413.1 million MXN, respectively. The derivative instrument matures in equal monthly amounts at a fixed forward rate of 21.60 MXN/USD. Preceding this contract we had a one-year cross-currency par forward contract with a term from November 3, 2020 to December 1, 2021 that matured in equal monthly amounts at a fixed forward rate of 24.26 MXN/USD.

Floating Interest Rate Risk

In November 2021, in anticipation of entering into the new senior secured credit facilities in January 2022, which includes a variable-rate term loan A and a variable-rate term loan B (see Note 17: Long-Term Debt), we entered into two forward-starting interest rate swaps. In February 2022, certain terms under the agreements were amended to reflect the transition from LIBOR to the Secured Overnight Financing Rate ("SOFR"), an alternative reference rate. Under the interest rate swap agreements we exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount. Effective March 30, 2022, the term loan A swap, as amended, has an initial notional amount of $300.0 million, reducing to $150.0 million evenly on a quarterly basis excluding its final maturity on March 30, 2027. We will pay a fixed rate of 1.32% and will receive the greater of 3-month USD SOFR or (0.15)%. Effective March 30, 2022, the term loan B swap, as amended, has an initial notional amount of $750.0 million, reducing to $46.9 million evenly on a quarterly basis excluding its final maturity on March 30, 2026. We will pay a fixed rate of 1.17% and will receive the greater of 3-month USD SOFR or 0.35%. These swaps effectively convert the relevant portion of the floating-rate term loans to fixed rates.
    
    
The following table presents the fair values of our derivative instruments included within the Condensed Consolidated Balance Sheets (in thousands):

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ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivatives Designated as Cash Flow Hedging Instruments
Condensed Consolidated Balance Sheet LocationForeign Exchange ContractsInterest Rate SwapsGross Derivatives
As of March 31, 2022
Prepaid expenses and other current assets$7,629 $ $7,629 
Other assets115 28,570 28,685 
Total assets$7,744 $28,570 $36,314 
Accrued liabilities$895 $ $895 
Other long-term liabilities27  27 
Total liabilities$922 $ $922 
As of December 31, 2021
Prepaid expenses and other current assets$1,061 $ $1,061 
Other assets   
Total assets$1,061 $ $1,061 
Accrued liabilities$ $ $ 
Other long-term liabilities 1,480 1,480 
Total liabilities$ $1,480 $1,480 


We recognized the following gains (losses) on our derivative instruments designated as cash flow hedges (in thousands):
Gain (Loss) Recognized in Other Comprehensive Income
Three months ended
March 31,
20222021
Derivatives designated as cash flow hedging instruments:
Foreign exchange contracts$3,112 $(402)
Interest rate swaps30,051  
Total derivatives designated as cash flow hedging instruments$33,163 $(402)








20

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the effects of our derivative instruments designated as cash flow hedges on the Condensed Consolidated Statements of Operations (in thousands):
Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income
Three months ended
March 31,
Location of Gain (Loss) Recognized in Income20222021
Derivatives designated as cash flow hedging instruments: