ICU MEDICAL INC/DE [ICUI] Filings

10-Q 1 icui-20220331.htm 10-Q icui-20220331

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


☐			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

California

92673

(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 filer

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 class	Trading Symbol	Name of each exchange on which registered
Common stock, par value $0.10 per share	ICUI	The 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.	Financial Information
Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets at March 31, 2022 and December 31, 2021	3

	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021	4

	Condensed Consolidated Statements of Comprehensive (L oss) Income for the Three Months Ended March 31, 2022 and 2021	5

	Condensed Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2022 and 2021	6

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021	7

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54

Item 4.	Controls and Procedures	54

PART II.	Other Information
Item 1.	Legal Proceedings	55

Item1A.	Risk Factors	55

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56

Item 6.	Exhibits	56

	Signature	58

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 securities	14,864		14,420
TOTAL CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENT SECURITIES	344,292		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
Inventories	536,314		290,235
Prepaid income taxes	10,219		19,586
Prepaid expenses and other current assets	80,273		46,847


TOTAL CURRENT ASSETS	1,173,995		1,029,809

PROPERTY, PLANT AND EQUIPMENT, net	674,412		468,365
OPERATING LEASE RIGHT-OF-USE ASSETS	92,027		39,847

LONG-TERM INVESTMENT SECURITIES	2,539		4,620
GOODWILL	1,526,866		43,439
INTANGIBLE ASSETS, net	1,094,710		188,311
DEFERRED INCOME TAXES	77,566		42,604
OTHER ASSETS	104,617		63,743
TOTAL ASSETS	$	4,746,732	$	1,880,738

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	200,991	$	81,128
Accrued liabilities	261,820		118,195
Current portion of long-term debt	13,813		—
Income tax payable	17,491		1,454

TOTAL CURRENT LIABILITIES	494,115		200,777

CONTINGENT EARN-OUT LIABILITY	57,701		2,589
LONG-TERM DEBT	1,642,171		—
OTHER LONG-TERM LIABILITIES	134,208		41,830
DEFERRED INCOME TAXES	220,628		1,490
INCOME TAX LIABILITY	19,007		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 capital	1,306,264		721,412
Treasury stock, at cost (12,684 and 119 shares, respectively)	(2,843)		(27)
Retained earnings	873,719		911,787
Accumulated other comprehensive loss	(628)		(19,269)
TOTAL STOCKHOLDERS' EQUITY	2,178,902		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.

Table of Contents

ICU MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share data)


	Three months ended March 31,
	2022		2021
TOTAL REVENUES	$	543,122	$	318,046
COST OF GOODS SOLD	374,295		205,366
GROSS PROFIT	168,827		112,680
OPERATING EXPENSES:
Selling, general and administrative	153,212		72,391
Research and development	23,871		10,709
Restructuring, strategic transaction and integration	33,905		2,883

Contract settlement	—		127
TOTAL OPERATING EXPENSES	210,988		86,110
(LOSS) INCOME FROM OPERATIONS	(42,161)		26,570

INTEREST EXPENSE	(13,644)		(161)
OTHER INCOME, net	1,004		683
(LOSS) INCOME BEFORE INCOME TAXES	(54,801)		27,092
BENEFIT (PROVISION) FOR INCOME TAXES	16,733		(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
Basic	23,646		21,149
Diluted	23,646		21,695

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

Table of Contents

ICU MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)

(In thousands)


	Three months ended March 31,
	2022		2021
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 tax	18,641		(8,391)
COMPREHENSIVE (LOSS) INCOME	$	(19,427)	$	15,340

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

Table of Contents

ICU MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

(Amounts in thousands)


	Common Stock			Additional Paid-in Capital		Treasury Stock		Retained Earnings		Accumulated Other Comprehensive (Loss) Income
	Shares	Amount										Total
Balance, January 1, 2022	21,280	$	2,128	$	721,412	$	(27)	$	911,787	$	(19,269)	$	1,616,031
Issuance of restricted stock and exercise of stock options	154	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 acquisitions	2,500	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, 2022	23,897	$	2,390	$	1,306,264	$	(2,843)	$	873,719	$	(628)	$	2,178,902


	Common Stock			Additional Paid-in Capital		Treasury Stock		Retained Earnings		Accumulated Other Comprehensive Loss
	Shares	Amount										Total
Balance, January 1, 2021	21,058	$	2,106	$	693,068	$	(39)	$	808,652	$	(1,522)	$	1,502,265
Issuance of restricted stock and exercise of stock options	198	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, 2021	21,219	$	2,122	$	701,586	$	(5,410)	$	832,383	$	(9,913)	$	1,520,768

Table of Contents

ICU MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)


	Three months ended March 31,
	2022		2021
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 amortization	53,138		22,155
Amortization of inventory step-up	14,370		—
Noncash lease expense	5,286		2,372
Provision for doubtful accounts	(548)		—
Provision for warranty and returns	726		209
Stock compensation	12,092		6,022
Loss on disposal of property, plant and equipment and other assets	596		659
Bond premium amortization	130		168
Debt issuance costs amortization	1,643		72


Usage of spare parts	2,223		2,825
Other	(1,649)		(1,287)
Changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable	22,489		1,506
Inventories	(36,170)		13,208
Prepaid expenses and other current assets	2,607		(742)
Other assets	(14,371)		(3,463)
Accounts payable	19,504		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 assets	900		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 securities	3,500		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 costs	1,672,698		—
Principal repayments of long-term debt	(16,000)		—
Payment of third-party debt issuance costs	(1,852)		—
Proceeds from exercise of stock options	2,974		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 activities	1,648,917		(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 period	552,827		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.

Table of Contents

ICU MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - CONTINUED

(In thousands)


	Three months ended March 31,
	2022		2021




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 period	1,485,987
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.

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.

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):

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 Smiths	53,520

Issuance of ICU Medical, Inc. common shares:
Number of shares issued to Smiths	2,500
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 receivable	120,497
Inventories	226,996
Prepaid expenses and other current assets	34,554
Property, plant and equipment	210,000
Operating lease right-of-use assets	57,225
Intangible assets(1)	925,000
Deferred income taxes	9,303
Other assets	379
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 deductible	1,493,115
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.

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)	2022		2021
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.

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 Liabilities		Charges Incurred		Payments		Currency Translation		Accrued Balance March 31, 2022
Severance pay and benefits	$	499	5,796		$	3,222	$	(2,030)	$	(147)	$	7,340

Facility closure expenses	165		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

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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 line	2022		2021
Infusion Consumables	$	140,521	$	126,370
Infusion Systems	87,012		84,334
IV Solutions	88,480		94,176
Critical Care	12,157		13,166
Infusion Systems-Smiths Medical	66,290		—
Vascular Access-Smiths Medical	79,008		—
Vital Care-Smiths Medical	69,654		—
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,
Geography	2022		2021
Europe, the Middle East and Africa	$	86,204	$	34,800



Other Foreign	109,127		55,895
Total Foreign	195,331		90,695
United States	347,791		227,351
Total Revenues	$	543,122	$	318,046

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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 recognized	5,574
Equipment revenue deferred due to implementation	(3,447)
Software revenue recognized	4,299
Software revenue deferred due to implementation	(4,777)
Government grant deferred revenue	(2,266)
Government grant recognized	171
Other deferred revenue	(767)
Other deferred revenue recognized	1,683
Ending balance, March 31, 2022	$	(58,236)

Beginning balance, January 1, 2021	$	(6,430)
Equipment revenue recognized	461
Equipment revenue deferred due to implementation	(2,921)
Software revenue recognized	1,796
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 revenue	7.7		2.6
Government grant revenue	1.3		12.8
Other revenue*	2.1		7.6
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

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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,
	2022		2021
Operating lease cost	$	5,178	$	2,835
Finance lease cost — interest	29		31
Finance lease cost — reduction of ROU asset	170		151
Short-term lease cost	3		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,
	2022		2021
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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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, 2022			December 31, 2021
Operating leases
Operating lease right-of-use assets	$	92,027		$	39,847

Accrued liabilities	$	20,786		$	9,009
Other long-term liabilities	73,391			33,971
Total operating lease liabilities	$	94,177		$	42,980

Weighted-Average Remaining Lease Term
Operating leases	6.5 years			5.9 years

Weighted-Average Discount Rate
Operating leases	4.06		%	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, 2022			December 31, 2021
Finance leases
Finance lease right-of-use assets	$	2,545		$	2,673

Accrued liabilities	$	669		$	643
Other long-term liabilities	1,923			2,067
Total finance lease liabilities	$	2,592		$	2,710

Weighted-Average Remaining Lease Term
Finance leases	5.4 years			5.6 years

Weighted-Average Discount Rate
Finance leases	4.28		%	4.28		%

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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 Leases		Finance Leases
Remainder of 2022	$	18,934	$	577
2023	20,911		770
2024	17,106		464
2025	12,481		267
2026	11,121		213
2027	7,839		189
Thereafter	18,121		426
Total Lease Payments	106,513		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,
	2022		2021
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

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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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	Derivatives Designated as Cash Flow Hedging Instruments
Condensed Consolidated Balance Sheet Location	Foreign Exchange Contracts		Interest Rate Swaps		Gross Derivatives

As of March 31, 2022
Prepaid expenses and other current assets	$	7,629	$	—	$	7,629
Other assets	115		28,570		28,685
Total assets	$	7,744	$	28,570	$	36,314

Accrued liabilities	$	895	$	—	$	895
Other long-term liabilities	27		—		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,

	2022		2021
Derivatives designated as cash flow hedging instruments:
Foreign exchange contracts	$	3,112	$	(402)
Interest rate swaps	30,051		—
Total derivatives designated as cash flow hedging instruments	$	33,163	$	(402)

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 Income

2022

2021

Derivatives designated as cash flow hedging instruments: