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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2022
or
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☐ | 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.
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Large accelerated filer | x | | Accelerated filer | ☐ |
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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 October 31, 2022 |
Common | | 23,981,588 |
ICU MEDICAL, INC. AND SUBSIDIARIES
Form 10-Q
September 30, 2022
Table of Contents
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PART I. | | | |
Item 1. | | | |
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Item 2. | | | |
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Item 3. | | | |
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Item 4. | | | |
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PART II. | | | |
Item 1. | | | |
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Item1A. | | | |
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Item 2. | | | |
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Item 6. | | | |
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PART I - FINANCIAL INFORMATION
Item1.Financial Statements (Unaudited)
ICU MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value data and treasury shares)
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| (Unaudited) | | (1) |
ASSETS | | | |
CURRENT ASSETS: | | | |
Cash and cash equivalents | $ | 243,879 | | | $ | 552,827 | |
Short-term investment securities | 2,919 | | | 14,420 | |
TOTAL CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENT SECURITIES | 246,798 | | | 567,247 | |
Accounts receivable, net of allowance for doubtful accounts of $8,006 at September 30, 2022 and $7,038 at December 31, 2021 | 212,845 | | | 105,894 | |
Inventories | 625,268 | | | 290,235 | |
Prepaid income taxes | 20,170 | | | 19,586 | |
Prepaid expenses and other current assets | 94,283 | | | 46,847 | |
| | | |
| | | |
TOTAL CURRENT ASSETS | 1,199,364 | | | 1,029,809 | |
| | | |
PROPERTY, PLANT AND EQUIPMENT, net | 656,383 | | | 468,365 | |
OPERATING LEASE RIGHT-OF-USE ASSETS | 76,438 | | | 39,847 | |
| | | |
LONG-TERM INVESTMENT SECURITIES | 1,831 | | | 4,620 | |
GOODWILL | 1,369,717 | | | 43,439 | |
INTANGIBLE ASSETS, net | 1,020,658 | | | 188,311 | |
DEFERRED INCOME TAXES | 15,482 | | | 42,604 | |
OTHER ASSETS | 110,604 | | | 63,743 | |
TOTAL ASSETS | $ | 4,450,477 | | | $ | 1,880,738 | |
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
CURRENT LIABILITIES: | | | |
Accounts payable | $ | 205,042 | | | $ | 81,128 | |
Accrued liabilities | 244,303 | | | 118,195 | |
Current portion of long-term debt | 24,375 | | | — | |
Income tax payable | 15,014 | | | 1,454 | |
Contingent earn-out liability | 300 | | | — | |
TOTAL CURRENT LIABILITIES | 489,034 | | | 200,777 | |
| | | |
CONTINGENT EARN-OUT LIABILITY | 25,942 | | | 2,589 | |
LONG-TERM DEBT | 1,629,849 | | | — | |
OTHER LONG-TERM LIABILITIES | 119,251 | | | 41,830 | |
DEFERRED INCOME TAXES | 153,599 | | | 1,490 | |
INCOME TAX LIABILITY | 19,997 | | | 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 — 23,980 shares at September 30, 2022 and 21,280 shares at December 31, 2021; and outstanding — 23,979 shares at September 30, 2022 and 21,280 shares at December 31, 2021 | 2,398 | | | 2,128 | |
Additional paid-in capital | 1,323,178 | | | 721,412 | |
Treasury stock, at cost (712 and 119 shares, respectively) | (126) | | | (27) | |
Retained earnings | 853,037 | | | 911,787 | |
Accumulated other comprehensive loss | (165,682) | | | (19,269) | |
TOTAL STOCKHOLDERS' EQUITY | 2,012,805 | | | 1,616,031 | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 4,450,477 | | | $ | 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.
ICU MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
TOTAL REVENUES | $ | 597,857 | | | $ | 336,060 | | | $ | 1,701,983 | | | $ | 975,783 | |
COST OF GOODS SOLD | 411,461 | | | 208,269 | | | 1,179,167 | | | 611,783 | |
GROSS PROFIT | 186,396 | | | 127,791 | | | 522,816 | | | 364,000 | |
OPERATING EXPENSES: | | | | | | | |
Selling, general and administrative | 153,452 | | | 74,815 | | | 465,412 | | | 221,127 | |
Research and development | 23,105 | | | 12,238 | | | 69,538 | | | 34,332 | |
Restructuring, strategic transaction and integration | 14,365 | | | 2,358 | | | 61,795 | | | 8,994 | |
Change in fair value of contingent earn-out | (4,059) | | | — | | | (31,253) | | | — | |
Contract settlement | — | | | — | | | — | | | 127 | |
TOTAL OPERATING EXPENSES | 186,863 | | | 89,411 | | | 565,492 | | | 264,580 | |
(LOSS) INCOME FROM OPERATIONS | (467) | | | 38,380 | | | (42,676) | | | 99,420 | |
| | | | | | | |
INTEREST EXPENSE | (21,151) | | | (168) | | | (51,068) | | | (492) | |
OTHER INCOME (EXPENSE), net | 311 | | | (287) | | | 782 | | | 921 | |
(LOSS) INCOME BEFORE INCOME TAXES | (21,307) | | | 37,925 | | | (92,962) | | | 99,849 | |
BENEFIT (PROVISION) FOR INCOME TAXES | 8,099 | | | (6,844) | | | 34,212 | | | (16,639) | |
NET (LOSS) INCOME | $ | (13,208) | | | $ | 31,081 | | | $ | (58,750) | | | $ | 83,210 | |
NET (LOSS) INCOME PER SHARE | | | | | | | |
Basic | $ | (0.55) | | | $ | 1.47 | | | $ | (2.47) | | | $ | 3.93 | |
Diluted | $ | (0.55) | | | $ | 1.43 | | | $ | (2.47) | | | $ | 3.83 | |
WEIGHTED AVERAGE NUMBER OF SHARES | | | | | | | |
Basic | 23,908 | | | 21,214 | | | 23,828 | | | 21,189 | |
Diluted | 23,908 | | | 21,730 | | | 23,828 | | | 21,735 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
ICU MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
NET (LOSS) INCOME | $ | (13,208) | | | $ | 31,081 | | | $ | (58,750) | | | $ | 83,210 | |
Other comprehensive income (loss), net of tax: | | | | | | | |
Cash flow hedge adjustments, net of tax of $(3,676) and $259 for the three months ended September 30, 2022 and 2021, respectively, and $(15,357) and $668 for the nine months ended September 30, 2022 and 2021, respectively. | 16,915 | | | (819) | | | 48,631 | | | (2,116) | |
Foreign currency translation adjustment, net of tax of $0 for all periods | (90,549) | | | (5,360) | | | (195,300) | | | (11,516) | |
Other adjustments, net of tax of $0 for all periods | 227 | | | 12 | | | 256 | | | 36 | |
Other comprehensive loss, net of tax | (73,407) | | | (6,167) | | | (146,413) | | | (13,596) | |
COMPREHENSIVE (LOSS) INCOME | $ | (86,615) | | | $ | 24,914 | | | $ | (205,163) | | | $ | 69,614 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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 | |
Issuance of restricted stock and exercise of stock options | | 10 | | | — | | | (4,428) | | | 4,446 | | | — | | | — | | | 18 | |
Tax withholding payments related to net share settlement of equity awards | | (8) | | | — | | | — | | | (1,695) | | | — | | | — | | | (1,695) | |
Stock compensation | | — | | | — | | | 7,762 | | | — | | | — | | | — | | | 7,762 | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | — | | | (91,647) | | | (91,647) | |
Net loss | | — | | | — | | | — | | | — | | | (7,474) | | | — | | | (7,474) | |
Balance, June 30, 2022 | | 23,899 | | | $ | 2,390 | | | $ | 1,309,598 | | | $ | (92) | | | $ | 866,245 | | | $ | (92,275) | | | $ | 2,085,866 | |
Issuance of restricted stock and exercise of stock options | | 82 | | | 8 | | | 4,837 | | | 69 | | | — | | | — | | | 4,914 | |
Tax withholding payments related to net share settlement of equity awards | | (2) | | | — | | | — | | | (103) | | | — | | | — | | | (103) | |
Stock compensation | | — | | | — | | | 8,743 | | | — | | | — | | | — | | | 8,743 | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | — | | | (73,407) | | | (73,407) | |
Net loss | | — | | | — | | | — | | | — | | | (13,208) | | | — | | | (13,208) | |
Balance, September 30, 2022 | | 23,979 | | | $ | 2,398 | | | $ | 1,323,178 | | | $ | (126) | | | $ | 853,037 | | | $ | (165,682) | | | $ | 2,012,805 | |
ICU MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)(continued)
(Amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | |
| | 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 | |
Issuance of restricted stock and exercise of stock options | | — | | | — | | | (2,685) | | | 3,237 | | | — | | | — | | | 552 | |
Tax withholding payments related to net share settlement of equity awards | | — | | | — | | | — | | | (96) | | | — | | | — | | | (96) | |
Stock compensation | | — | | | — | | | 6,681 | | | — | | | — | | | — | | | 6,681 | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | — | | | 962 | | | 962 | |
Net income | | — | | | — | | | — | | | — | | | 28,398 | | | — | | | 28,398 | |
Balance, June 30, 2021 | | 21,219 | | | $ | 2,122 | | | $ | 705,582 | | | $ | (2,269) | | | $ | 860,781 | | | $ | (8,951) | | | $ | 1,557,265 | |
Issuance of restricted stock and exercise of stock options | | 20 | | | 2 | | | (963) | | | 2,511 | | | — | | | — | | | 1,550 | |
Tax withholding payments related to net share settlement of equity awards | | (1) | | | — | | | — | | | (290) | | | — | | | — | | | (290) | |
Stock compensation | | — | | | — | | | 6,533 | | | — | | | — | | | — | | | 6,533 | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | — | | | (6,167) | | | (6,167) | |
Net income | | — | | | — | | | — | | | — | | | 31,081 | | | — | | | 31,081 | |
Balance, September 30, 2021 | | 21,238 | | | $ | 2,124 | | | $ | 711,152 | | | $ | (48) | | | $ | 891,862 | | | $ | (15,118) | | | $ | 1,589,972 | |
ICU MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2022 | | 2021 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net (loss) income | $ | (58,750) | | | $ | 83,210 | |
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | | | |
Depreciation and amortization | 178,338 | | | 66,564 | |
Amortization of inventory step-up | 22,676 | | | — | |
Noncash lease expense | 17,382 | | | 7,165 | |
Provision for doubtful accounts | 214 | | | 342 | |
Provision for warranty and returns | 3,439 | | | 752 | |
Stock compensation | 28,597 | | | 19,236 | |
Loss on disposal of property, plant and equipment and other assets | 2,391 | | | 1,083 | |
Bond premium amortization | 254 | | | 514 | |
Debt issuance costs amortization | 5,254 | | | 216 | |
Change in fair value of contingent earn-out | (31,253) | | | — | |
Product-related charges | — | | | 3,380 | |
Usage of spare parts | 7,915 | | | 9,831 | |
Other | (2,855) | | | 2,908 | |
Changes in operating assets and liabilities, net of amounts acquired: | | | |
Accounts receivable | (8,956) | | | 3,807 | |
Inventories | (151,840) | | | 16,510 | |
Prepaid expenses and other current assets | 20,074 | | | 3,557 | |
Other assets | (22,594) | | | (13,593) | |
Accounts payable | 30,413 | | | (10,374) | |
Accrued liabilities | (38,070) | | | (8,317) | |
Income taxes, including excess tax benefits and deferred income taxes | (63,047) | | | (1,874) | |
Net cash (used in) provided by operating activities | (60,418) | | | 184,917 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Purchases of property, plant and equipment | (68,715) | | | (46,464) | |
Proceeds from sale of assets | 933 | | | 218 | |
Business acquisitions, net of cash acquired | (1,844,164) | | | — | |
Intangible asset additions | (6,560) | | | (10,216) | |
Investments in non-marketable equity investments | — | | | (3,250) | |
Purchases of investment securities | (3,397) | | | (10,034) | |
Proceeds from sale and maturities of investment securities | 36,433 | | | 12,000 | |
Net cash used in investing activities | (1,885,470) | | | (57,746) | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Proceeds from issuance of long-term debt, net of lender debt issuance costs | 1,672,631 | | | — | |
Principal repayments of long-term debt | (20,250) | | | — | |
Payment of third-party debt issuance costs | (1,852) | | | — | |
Proceeds from exercise of stock options | 7,906 | | | 6,966 | |
Payments on finance leases | (477) | | | (448) | |
Tax withholding payments related to net share settlement of equity awards | (10,541) | | | (8,109) | |
Net cash provided by (used in) financing activities | 1,647,417 | | | (1,591) | |
Effect of exchange rate changes on cash | (10,477) | | | (2,192) | |
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (308,948) | | | 123,388 | |
CASH AND CASH EQUIVALENTS, beginning of period | 552,827 | | | 396,097 | |
CASH AND CASH EQUIVALENTS, end of period | $ | 243,879 | | | $ | 519,485 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
ICU MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - CONTINUED
(In thousands)
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2022 | | 2021 |
| | | |
| | | |
| | | |
| | | |
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES: | | | |
Accounts payable for property, plant and equipment | $ | 2,757 | | | $ | 2,897 | |
Non-compete agreement with associated contingent earn-out liability | $ | — | | | $ | 3,100 | |
| | | |
Detail of assets acquired and liabilities assumed in acquisitions*: | | | |
Fair value of assets acquired | $ | 1,658,937 | | | |
Cash paid for acquisitions, net of cash acquired | (1,844,164) | | | |
Share consideration | (575,975) | | | |
Contingent consideration | (55,158) | | | |
Goodwill, acquired during period | 1,442,849 | | | |
Liabilities assumed/Adjustments to liabilities assumed | $ | (626,489) | | | |
| | | |
*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. Certain reclassifications have been made to the prior year footnote information for revenue disaggregated by geography in Note 5: Revenues to conform to classifications used in the current year. These reclassifications had no impact on net loss, shareholder's equity or cash flows as previously reported.
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 September 30, 2022. During the third quarter ended September 30, 2022, Smiths Medical changed their reporting period to align with ICU's calendar quarter from their historic 4-4-5 reporting period, this change did not have a material impact on our consolidated financial statements for the three and nine months ended September 30, 2022. Our condensed consolidated statement of operations includes the results of operations for Smiths Medical from June 26, 2022 through September 30, 2022 and January 7, 2022 through September 30, 2022 for the three and nine months ended September 30, 2022, respectively.
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 opening 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 estimated 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 | | 118,522 | |
Inventories | | 226,196 | |
Prepaid expenses and other current assets | | 53,554 | |
Property, plant and equipment | | 210,000 | |
Operating lease right-of-use assets | | 55,161 | |
Intangible assets(1) | | 975,000 | |
Deferred income taxes | | 9,303 | |
Other assets | | 379 | |
Accounts payable | | (105,291) | |
Accrued liabilities(2) | | (173,901) | |
Income tax payable | | (24,332) | |
Other long-term liabilities | | (85,739) | |
Deferred income taxes | | (235,170) | |
Total identifiable net assets acquired | | $ | 1,102,473 | |
Goodwill - not tax deductible | | 1,449,977 | |
Estimated Purchase Consideration | | $ | 2,552,450 | |
_______________________________
(1) Estimated identifiable intangible assets include $540.0 million of customer relationships, $400.0 million of developed technology, $30.0 million of internally developed software, and $5.0 million of trademark. 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, five years for internally developed software, and six months for the trade mark.
(2) Estimated 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 September 30, 2022 were estimated to be $699.1 million and $79.0 million, respectively, and for the three months ended September 30, 2022 were estimated to be $261.4 million and $13.6 million. 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 September 30, | | Nine months ended September 30, |
(In thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Revenues | $ | 597,857 | | | $ | 641,115 | | | $ | 1,722,357 | | | $ | 1,862,237 | |
Net Loss | $ | (13,208) | | | $ | (8,874) | | | $ | (54,840) | | | $ | 22,026 | |
The unaudited pro forma results presented above include the impact of the following adjustments: incremental amortization expense on intangible assets acquired of $1.9 million and $1.9 million for the nine months ended September 30, 2022 and 2021, respectively, incremental interest expense, including amortization of debt discount and debt issuance costs, on the Senior Secured Credit Facilities (as defined in Note 17: Long-Term Debt) of $1.4 million and $47.1 million for the nine months ended September 30, 2022 and 2021, respectively; and a $27.4 million expense adjustment related to the increase in fair value of inventory to remove the expense for the nine months ended September 30, 2022 and to add the expense for the nine months ended September 30, 2021. In addition, there was a non-recurring adjustment directly attributable to the business combination for acquisition-related costs of $11.6 million for the nine months ended September 30, 2021. 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 September 30, 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 $14.4 million and $2.4 million for the three months ended September 30, 2022 and 2021, respectively, and $61.8 million and $9.0 million for nine months ended September 30, 2022 and 2021, respectively.
Restructuring
During the three and nine months ended September 30, 2022, restructuring charges were $2.4 million and $7.3 million, respectively, and were related to severance costs. During the third quarter 2021 we adjusted certain facility restructuring liabilities by $2.0 million to reflect actual amounts owed which resulted in net restructuring credits of $(1.9) million and $(1.8) million for the three and nine months ended September 30, 2021, respectively.
The following table summarizes the activity in our restructuring-related accrual by major type of cost for the period ended September 30, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | |
| | Severance Pay and Benefits | | | | Retention and Facility Closure Costs | | Total |
Accrued balance, January 1, 2022 | | $ | 499 | | | | | $ | 165 | | | $ | 664 | |
Acquired restructuring liabilities | | 5,796 | | | | | 1,740 | | | 7,536 | |
Charges incurred | | 3,222 | | | | | — | | | 3,222 | |
Payments | | (2,030) | | | | | — | | | (2,030) | |
Currency translation | | (147) | | | | | (40) | | | (187) | |
Accrued balance, March 31, 2022 | | $ | 7,340 | | | | | $ | 1,865 | | | $ | 9,205 | |
Charges incurred | | 1,710 | | | | | — | | | 1,710 | |
Payments | | (3,352) | | | | | (212) | | | (3,564) | |
Currency translation | | (256) | | | | | (94) | | | (350) | |
Other adjustments | | (38) | | | | | — | | | (38) | |
Accrued balance, June 30, 2022 | | $ | 5,404 | | | | | $ | 1,559 | | | |