ICU Medical Earnings 2019-09-30

ICUI 10Q Quarterly Report

951 Calle Amanecer

San Clemente

California

(Address of principal executive offices)

(Zip Code)

Balance Sheet	Income Statement	Cash Flow

Comparables ($MM TTM)
Ticker	M Cap	Assets	Liab	Rev	G Profit	Net Inc	EBITDA	EV	G Margin	EV/EBITDA	ROA
PODD	7,136	978	728	661	435	17	47	7,624	66%	163.9	2%
HRC	7,067	4,575	2,951	2,884	1,415	215	335	8,663	49%	25.9	5%
HAE	6,085	1,260	669	977	450	49	176	6,331	46%	35.9	4%
PEN	6,047	585	131	495	332	15	23	5,969	67%	257.6	3%
NVCR	5,679	406	247	294	212	-41	-16	5,646	72%	-357.0	-10%
ICUI	5,345	1,623	305	1,311	508	47	127	5,031	39%	39.5	3%
IART	4,669	3,290	1,869	1,493	930	101	262	5,393	62%	20.6	3%
GMED	4,300	1,391	103	743	573	143	221	4,182	77%	18.9	10%
CMD	3,630	1,070	409	918	427	55	126	3,816	47%	30.3	5%
TNDM	3,601	255	110	282	147	-55	-49	3,470	52%	-70.5	-22%

Document

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: September 30, 2019



☐	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.)

(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	x	Accelerated filer o

Non-accelerated filer o		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
Common stock, par value $0.10 per share	ICUI	(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, 2019
Common		20,673,333

ICU MEDICAL, INC. AND SUBSIDIARIES Form 10-Q September 30, 2019 Table of Contents

PART I.	Financial Information	Page Number

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets, at September 30, 2019 and December 31, 2018	3

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018	4

	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018	5

	Condensed Consolidated Statements of Stockholders' Equity for the Three and Nine Months Ended September 30, 2019 and 2018	6

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018	8

	Notes to Condensed Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41

Item 4.	Controls and Procedures	41

PART II.	Other Information
Item 1.	Legal Proceedings	41

Item1A.	Risk Factors	42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

Item 6.	Exhibits	43

	Signature	44

PART I - FINANCIAL INFORMATION


Item1.	Financial Statements (Unaudited)

ICU MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value data)



	September 30, 2019			December 31, 2018
	(Unaudited)			(1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	315,949		$	344,781
Short-term investment securities	20,845			37,329
TOTAL CASH, CASH EQUIVALENTS AND INVESTMENT SECURITIES	336,794			382,110
Accounts receivable, net of allowance for doubtful accounts of $13,439 at September 30, 2019 and $5,768 at December 31, 2018	210,449			176,298
Inventories	343,715			311,163
Prepaid income tax	19,724			11,348
Prepaid expenses and other current assets	33,807			46,117
TOTAL CURRENT ASSETS	944,489			927,036

PROPERTY AND EQUIPMENT, net	444,087			432,641
OPERATING LEASE RIGHT-OF-USE ASSETS	35,787			—
LONG-TERM INVESTMENT SECURITIES	—			2,025
GOODWILL	11,019			11,195
INTANGIBLE ASSETS, net	131,644			133,421
DEFERRED INCOME TAXES	23,242			38,654
OTHER ASSETS	47,516			40,419
TOTAL ASSETS	$	1,637,784		$	1,585,391

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	125,355		$	120,469
Accrued liabilities	130,056			128,820
TOTAL CURRENT LIABILITIES	255,411			249,289

CONTINGENT EARN-OUT LIABILITY	—			47,400
OTHER LONG-TERM LIABILITIES	37,614			20,592
DEFERRED INCOME TAXES	690			721
INCOME TAX LIABILITY	3,734			3,734
COMMITMENTS AND CONTINGENCIES (Note 18)	—			—
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 and outstanding 20,671 shares at September 30, 2019, Issued 20,492 shares at December 31, 2018 and outstanding 20,491 shares at December 31, 2018	2,067			2,049
Additional paid-in capital	659,709			657,899
Treasury stock, at cost	—			(95		)
Retained earnings	701,141			620,747
Accumulated other comprehensive loss	(22,582		)	(16,945		)
TOTAL STOCKHOLDERS' EQUITY	1,340,335			1,263,655
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,637,784		$	1,585,391

______________________________________________________

(1) December 31, 2018 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 September 30,						Nine months ended September 30,
	2019			2018			2019			2018
TOTAL REVENUES	$	307,471		$	327,169		$	950,685		$	1,059,662
COST OF GOODS SOLD	188,919			192,582			592,961			624,274
GROSS PROFIT	118,552			134,587			357,724			435,388
OPERATING EXPENSES:
Selling, general and administrative	65,876			76,640			206,333			243,471
Research and development	12,002			13,181			36,024			39,342
Restructuring, strategic transaction and integration	7,975			24,012			69,408			64,271
Change in fair value of contingent earn-out	(200		)	18,500			(47,400		)	20,500
Contract settlement	—			—			3,822			28,917
TOTAL OPERATING EXPENSES	85,653			132,333			268,187			396,501
INCOME FROM OPERATIONS	32,899			2,254			89,537			38,887
INTEREST EXPENSE	(139		)	(283		)	(411		)	(548		)
OTHER (EXPENSE) INCOME, net	(10		)	(534		)	4,660			(3,482		)
INCOME BEFORE INCOME TAXES	32,750			1,437			93,786			34,857
(PROVISION) BENEFIT FOR INCOME TAXES	(6,187		)	(1,218		)	(13,392		)	1,291
NET INCOME	$	26,563		$	219		$	80,394		$	36,148
NET INCOME PER SHARE
Basic	$	1.29		$	0.01		$	3.90		$	1.78
Diluted	$	1.24		$	0.01		$	3.73		$	1.67
WEIGHTED AVERAGE NUMBER OF SHARES
Basic	20,666			20,474			20,607			20,362
Diluted	21,487			21,633			21,556			21,588

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 INCOME (LOSS) (Unaudited)

(In thousands)



	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
NET INCOME	$	26,563		$	219		$	80,394		$	36,148
Other comprehensive income (loss), net of tax:
Cash flow hedge adjustments, net of taxes of $118 and ($372) for the three months ended September 30, 2019 and 2018, respectively, and ($204) and ($376) for the nine months ended September 30, 2019 and 2018, respectively	(375		)	1,178			644			1,192
Foreign currency translation adjustment, net of taxes of $0 for all periods	(7,533		)	(5,415		)	(6,287		)	(7,705		)
Other adjustments, net of taxes of $0 for all periods	—			6			6			11
Other comprehensive loss, net of taxes	(7,908		)	(4,231		)	(5,637		)	(6,502		)
TOTAL COMPREHENSIVE INCOME (LOSS)	$	18,655		$	(4,012	)	$	74,757		$	29,646

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												Accumulated
					Additional								Other
	Shares		Amount		Paid-In Capital			Treasury Stock			Retained Earnings		Comprehensive Loss			Total
Balance, January 1, 2019	20,492		$	2,049	$	657,899		$	(95	)	$	620,747	$	(16,945	)	$	1,263,655
Issuance of restricted stock and exercise of stock options	254		18		(4,289		)	5,196			—		—			925
Tax withholding payments related to net share settlement of equity awards	(78	)	—		—			(18,157		)	—		—			(18,157		)
Stock compensation	—		—		6,209			—			—		—			6,209
Other comprehensive loss, net of tax	—		—		—			—			—		(936		)	(936		)
Net income	—		—		—			—			30,998		—			30,998
Balance, March 31, 2019	20,668		$	2,067	$	659,819		$	(13,056	)	$	651,745	$	(17,881	)	$	1,282,694
Issuance of restricted stock and exercise of stock options	—		—		(8,505		)	11,514			—		—			3,009
Tax withholding payments related to net share settlement of equity awards	—		—		—			(108		)	—		—			(108		)
Stock compensation	—		—		6,229			—			—		—			6,229
Other comprehensive income, net of tax	—		—		—			—			—		3,207			3,207
Net income	—		—		—			—			22,833		—			22,833
Balance, June 30, 2019	20,668		$	2,067	$	657,543		$	(1,650	)	$	674,578	$	(14,674	)	$	1,317,864
Issuance of restricted stock and exercise of stock options	4		—		(1,556		)	1,863			—		—			307
Tax withholding payments related to net share settlement of equity awards	(1	)	—		—			(213		)	—		—			(213		)
Stock compensation	—		—		3,722			—			—		—			3,722
Other comprehensive loss, net of tax	—		—		—			—			—		(7,908		)	(7,908		)
Net income	—		—		—			—			26,563		—			26,563
Balance, September 30, 2019	20,671		$	2,067	$	659,709		$	—		$	701,141	$	(22,582	)	$	1,340,335

Table of Contents

ICU MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) - CONTINUED

(Amounts in thousands)



	Common Stock											Accumulated
					Additional							Other
	Shares		Amount		Paid-In Capital		Treasury Stock			Retained Earnings		Comprehensive (Loss) Income			Total
Balance, January 1, 2018	20,210		$	2,021	$	625,568	$	—		$	585,624	$	(14,959	)	$	1,198,254
Cumulative effect of accounting change	—		—		—		—			6,330		—			6,330
Issuance of restricted stock and exercise of stock options	130		11		982		2,162			—		—			3,155
Tax withholding payments related to net share settlement of equity awards	(23	)	—		—		(5,338		)	—		—			(5,338		)
Stock compensation	—		—		5,462		—			—		—			5,462
Other comprehensive income, net of tax	—		—		—		—			—		17,213			17,213
Net income	—		—		—		—			4,875		—			4,875
Balance, March 31, 2018	20,317		$	2,032	$	632,012	$	(3,176	)	$	596,829	$	2,254		$	1,229,951
Issuance of restricted stock and exercise of stock options	143		14		6,080		3,288			—		—			9,382
Tax withholding payments related to net share settlement of equity awards	—		—		—		(132		)	—		—			(132		)
Stock compensation	—		—		6,297		—			—		—			6,297
Other comprehensive loss, net of tax	—		—		—		—			—		(19,484		)	(19,484		)
Net income	—		—		—		—			31,054		—			31,054
Balance, June 30, 2018	20,460		$	2,046	$	644,389	$	(20	)	$	627,883	$	(17,230	)	$	1,257,068
Issuance of restricted stock and exercise of stock options	31		3		1,130		541			—		—			1,674
Tax withholding payments related to net share settlement of equity awards	(2	)	—		—		(649		)	—		—			(649		)
Stock compensation	—		—		6,233		—			—		—			6,233
Other comprehensive loss, net of tax	—		—		—		—			—		(4,231		)	(4,231		)
Net income										219					219
Balance, September 30, 2018	20,489		$	2,049	$	651,752	$	(128	)	$	628,102	$	(21,461	)	$	1,260,314

Table of Contents

ICU MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)



	Nine months ended September 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	80,394		$	36,148
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	57,025			55,069
Amortization of right-of-use assets	6,149			—
Provision for doubtful accounts	7,839			638
Provision for warranty and returns	1,277			1,817
Stock compensation	16,161			17,992
Loss on disposal of property and equipment and other assets	13,350			760
Bond premium amortization	103			313
Debt issuance costs amortization	216			216
Change in fair value of contingent earn-out	(47,400		)	20,500
Impairment of assets held for sale	—			269
Write-off of acquired intangible	—			5,000
Usage of spare parts	20,044			6,999
Other	1,757			2,100
Changes in operating assets and liabilities:
Accounts receivable	(32,484		)	(38,957		)
Inventories	(30,924		)	12,201
Prepaid expenses and other assets	8,815			(506		)
Related-party receivables	—			31,004
Other assets	(29,494		)	(8,319		)
Accounts payable	(3,038		)	(2,094		)
Accrued liabilities	(23,214		)	(18,509		)
Income taxes, including excess tax benefits and deferred income taxes	6,478			(12,359		)
Net cash provided by operating activities	53,054			110,282
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(73,253		)	(75,057		)
Proceeds from sale of assets held-for-sale, net	—			13,000
Proceeds from sale of asset	19			—
Business acquisitions, net of cash acquired	(4,600		)	(1,300		)
Intangible asset additions	(6,461		)	(5,375		)
Purchases of investment securities	(17,994		)	(30,495		)
Proceeds from sale of investment securities	36,400			14,940
Net cash used in investing activities	(65,889		)	(84,287		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options	4,240			14,211
Tax withholding payments related to net share settlement of equity awards	(18,478		)	(6,119		)
Net cash (used in) provided by financing activities	(14,238		)	8,092
Effect of exchange rate changes on cash	(1,759		)	(5,343		)
NET (DECREASE) INCREASE CASH AND CASH EQUIVALENTS	(28,832		)	28,744
CASH AND CASH EQUIVALENTS, beginning of period	344,781			290,072
CASH AND CASH EQUIVALENTS, end of period	$	315,949		$	318,816

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

Table of Contents

ICU MEDICAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - CONTINUED

(In thousands)



	Nine months ended September 30,
	2019		2018
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Accounts payable for property and equipment	$	11,365	$	1,184

The accompanying notes are an integral part of these 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, 2018.

We are engaged in the development, manufacturing and sale of innovative medical products used in vascular 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. Additionally, we sell our 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.

Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year. These reclassifications had no impact on net income, stockholders' equity or cash flows as previously reported. The reclassifications included reporting foreign exchange gains and losses in other income (expense), net, and removing them from selling, general and administrative expenses. We reclassified related-party receivables to prepaid expenses and other current assets for the current year's presentation, as Pfizer, Inc. ("Pfizer") had sold all of its shares of our ICU common stock as of December 31, 2018, thereby ending its related-party relationship with us. We reclassified operating cash flows due to the purchase and usage of spare parts. The operating cash flows due to the usage of spare parts are included as an adjustment to reconcile net income to net cash provided by operating activities and the purchase of spare parts are presented as cash outflows in operating assets and liabilities-other assets.

Note 2: New Accounting Pronouncements

Recently Adopted Accounting Standards

In February 2016, the FASB issued Accounting Standard Update ("ASU") No. 2016-02, Leases (Topic 842). The amendments in this update require an entity to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as finance or operating lease. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements. The updated guidance required a modified retrospective adoption. In July 2018, the FASB issued ASU No. 2018-11, Targeted Improvements. The amendments in this update provide entities with an additional (and optional) transition method to adopt the new lease requirements by allowing entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The amendments in this update also provided lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease contract. This expedient is limited to circumstances in which the nonlease components otherwise would be accounted for under the new revenue guidance and both (1) the timing and pattern of transfer are the same for the nonlease components and associated lease component and (2) the lease component, if accounted for separately, would be classified as an operating lease. If the lessor uses this practical expedient they would account for the lease contract in accordance with Topic 606 if the nonlease component is the predominant component otherwise, the lessor should account for the combined component as an operating lease in accordance with Topic 842. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases. This ASU clarifies certain language in ASU 2016-02 and corrects certain references and inconsistencies. We adopted these standards effective January 1, 2019 (see Note 5: Leases for a discussion of the impact and required disclosures).

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this update remove the second step of the impairment test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The amendments in ASU 2017-04 are effective for the annual or interim impairment test in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or

ICU MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

annual goodwill impairment tests performed on testing dates after January 1, 2017. We early adopted this ASU effective April 1, 2019, which had no impact on our consolidated financial statements or related footnote disclosures. We adopted this ASU early ahead of our annual impairment test to reduce the complexity of the quantitative test if necessary.

Recently Issued Accounting Standards

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Topic 350): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal use software license. Costs to develop or obtain internal-use software that cannot be capitalized under subtopic 350-40, such as training costs and certain data conversion costs, also cannot be capitalized for a hosting arrangement that is a service contract. Therefore, an entity in a hosting arrangement that is a service contract determines which project stage (that is, preliminary project stage, application development stage, or post-implementation stage) an implementation activity relates to. Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. The amendments in this update require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating the impact of this ASU on the consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements in Topic 820. The amendments remove from disclosure: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The amendments also made the following disclosure modifications: for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The amendments also added the following disclosure requirements: the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The amendments in ASU 2018-02 are effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating the impact of this ASU on the consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update amends the FASB's guidance on the impairment of financial instruments by requiring timelier recording of credit losses on loans and other financial instruments. The ASU adds an impairment model that is based on expected losses rather than incurred losses. The ASU also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. In April 2019, the FASB issued ASU No. 2019-04 - Codification Improvements to Topic 326, Financial Instruments - Credit Losses and in May 2019, the FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses to Topic 326, Financial Instruments - Targeted Transition Relief. ASU 2019-04 clarifies and corrects certain areas of the Codification and ASU 2019-05 provides entities with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments—Overall, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326. The amendments in these updates will be effective for fiscal years beginning after December 15, 2019. Early adoption is permitted as of the fiscal years beginning after December 15, 2018. The updated guidance requires a modified retrospective adoption. We are currently evaluating the impact of this ASU on the consolidated financial statements and related disclosures.

ICU MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3: Restructuring, Strategic Transaction and Integration

Restructuring and strategic transaction and integration expenses were $8.0 million and $69.4 million for the three and nine months ended September 30, 2019, respectively, as compared to $24.0 million and $64.3 million for the three and nine months ended September 30, 2018, respectively.

Restructuring

During the three and nine months ended September 30, 2019, restructuring charges were $0.8 million and $8.4 million, respectively, primarily related to severance and facility closure costs. These charges are primarily related to a one-time charge to move our U.S. pump service depot to our existing Salt Lake City facility and other plant restructuring. Restructuring charges are included in the restructuring, strategic transaction and integration line item in our condensed consolidated statement of operations.

During the year ended December 31, 2015, we incurred restructuring charges related to an agreement with Dr. Lopez, a member of our Board of Directors and a former employee in our research and development department, pursuant to which we bought out Dr. Lopez's right to employment under his then-existing employment agreement. The buy-out, including payroll taxes, is paid in equal monthly installments until December 2020.

The following table summarizes the details of changes in our restructuring-related accrual for the period ended September 30, 2019 (in thousands):



	Accrued Balance January 1, 2019		Charges Incurred		Payments			Accrued Balance September 30, 2019
Severance pay and benefits	$	677	$	5,349	$	(1,900	)	$	4,126
Employment agreement buyout	739		—		(279		)	460
Facility closure expenses	—		3,095		(595		)	2,500
	$	1,416	$	8,444	$	(2,774	)	$	7,086

Strategic transaction and integration expenses

We incurred and expensed $7.2 million and $61.0 million in strategic transaction and integration expenses during the three and nine months ended September 30, 2019, respectively, as compared to $23.5 million and $61.3 million during the three and nine months ended September 30, 2018, respectively. The strategic transaction and integration expenses during the three months ended September 30, 2019 and the three and nine months ended September 30, 2018 were primarily related to the integration of the Hospira Infusion Systems ("HIS") business acquired in 2017 from Pfizer. The nine months ended September 30, 2019 also included a one-time strategic supply chain restructuring charge of $22.1 million, which reduces our contracted commitments to our third party manufacturer and charges related to our Pfizer separation costs and clean-up, which included a $12.7 million non-cash write-off of related assets.

Note 4: Revenue

Our primary product lines are Infusion Consumables, IV Solutions, Infusion Systems and Critical Care. 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.

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. We use information available at the time and our historical experience to estimate and record provisions for chargebacks.

We also warrant 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

ICU MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 the period the warranty service is provided.

Revenue disaggregated

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



	For the three months ended September 30,				For the nine months ended September 30,
Geography	2019		2018		2019		2018
Europe, the Middle East and Africa	$	31,474	$	30,759	$	96,830	$	104,150
Other Foreign	53,398		51,569		156,353		154,278
Total Foreign	84,872		82,328		253,183		258,428
United States	222,599		244,841		697,502		801,234
Total Revenues	$	307,471	$	327,169	$	950,685	$	1,059,662

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



	For the three months ended September 30,				For the nine months ended September 30,
Product line	2019		2018		2019		2018
Infusion Consumables	$	119,745	$	117,797	$	357,994	$	361,490
IV Solutions	98,159		114,433		313,976		394,198
Infusion Systems	78,932		81,456		244,523		263,271
Critical Care	10,635		13,483		34,192		40,703
Total Revenues	$	307,471	$	327,169	$	950,685	$	1,059,662

Contract balances

The following table presents our changes in the contract balances for the nine months ended September 30, 2019 and 2018 (in thousands):



	Contract Liabilities
Beginning balance, January 1, 2019	$	(4,282	)
Equipment revenue recognized	3,619
Equipment revenue deferred due to implementation	(6,869		)
Software revenue recognized	2,955
Software revenue deferred due to implementation	(3,115		)
Ending balance, September 30, 2019	$	(7,692	)

Beginning balance, January 1, 2018	$	(7,066	)
Equipment revenue recognized	3,136
Equipment revenue deferred due to implementation	(4,086		)
Software revenue recognized	5,649
Software revenue deferred due to implementation	(5,507		)
Ending balance, September 30, 2018	$	(7,874	)

As of September 30, 2019, revenue from remaining performance obligations related to implementation of software and equipment is $6.3 million. We expect to recognize substantially all of this revenue within the next three months. Revenue from

ICU MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

remaining performance obligations related to annual software licenses is $1.4 million. We expect to recognize substantially all of this revenue over the next twelve months.

Note 5: Leases

Adoption of ASC Topic 842, "Lease Accounting"

We adopted ASU No. 2016-02, Leases (ASC Topic 842), effective January 1, 2019 on a modified retrospective transition method through a cumulative-effect adjustment at the beginning of the first quarter of 2019. We elected the 'package of practical expedients', which permitted us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us. We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we did not recognize right-of-use ("ROU") assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. Furthermore, we elected the practical expedient to not separate lease and non-lease components for all of our leases, non-lease components are primarily common area maintenance charges that we combine with the lease component when applying this ASU.

The impact of adopting this standard was the recognition of ROU assets and lease liabilities for our operating leases of $40.4 million as of January 1, 2019. The adoption of ASC 842 did not have a material impact on our consolidated earnings and had no impact on our cash flows.

Leases

We determine if an arrangement is a lease at inception. Most operating leases with a term greater than one year are included in operating lease ROU assets, accrued liabilities, and other long-term liabilities on our condensed consolidated balance sheets.

Operating lease ROU assets and operating 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. The operating lease ROU asset excludes 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 operating leases have 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.

We have operating leases for corporate offices, sales and support offices, 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):



	For the three months ended September 30, 2019		For the nine months ended September 30, 2019
Operating lease cost	$	2,996	$	7,528

Short-term lease cost	49		229

Total lease cost	$	3,045	$	7,757

ICU MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the supplemental cash flow information related to our leases (in thousands):



	For the nine months ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	7,161

Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	2,495

The following table presents the supplemental balance sheet information related to our leases (in thousands, except lease term and discount rate):



	As of September 30, 2019
Operating leases
Operating lease right-of-use assets	$	35,787

Accrued liabilities	$	7,150
Other long-term liabilities	29,791
Total operating lease liabilities	$

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$0.00	22	$5,345

10-Q	2019-11-12	Quarter: 2019-09-30
10-Q	2019-08-09	Quarter: 2019-06-30
10-Q	2019-05-10	Quarter: 2019-03-31
10-K	2019-03-01	Annual: 2018-12-31
10-Q	2018-11-09	Quarter: 2018-09-30
10-Q	2018-08-09	Quarter: 2018-06-30
10-Q	2018-05-10	Quarter: 2018-03-31
10-K	2018-03-16	Annual: 2017-12-31
10-Q	2017-11-09	Quarter: 2017-09-30
10-Q	2017-08-09	Quarter: 2017-06-30
10-Q	2017-05-12	Quarter: 2017-03-31
10-K	2017-03-01	Annual: 2016-12-31
10-Q	2016-11-09	Quarter: 2016-09-30
10-Q	2016-08-09	Quarter: 2016-06-30
10-Q	2016-05-10	Quarter: 2016-03-31
10-K	2016-02-26	Annual: 2015-12-31
10-Q	2015-11-05	Quarter: 2015-09-30
10-Q	2015-08-10	Quarter: 2015-06-30
10-Q	2015-05-06	Quarter: 2015-03-31
10-K	2015-02-20	Annual: 2014-12-31
10-Q	2014-11-10	Quarter: 2014-09-30
10-Q	2014-08-11	Quarter: 2014-06-30
10-Q	2014-05-07	Quarter: 2014-03-31
10-K	2014-02-21	Annual: 2013-12-31
10-Q	2013-10-22	Quarter: 2013-09-30
10-Q	2013-07-25	Quarter: 2013-06-30
10-Q	2013-04-22	Quarter: 2013-03-31
10-K	2013-02-26	Annual: 2012-12-31
10-Q	2012-10-19	Quarter: 2012-09-30
10-Q	2012-07-20	Quarter: 2012-06-30
10-Q	2012-04-20	Quarter: 2012-03-31
10-K	2012-03-23	Annual: 2011-12-31
10-Q	2011-10-21	Quarter: 2011-09-30
10-Q	2011-07-22	Quarter: 2011-06-30
10-Q	2011-04-22	Quarter: 2011-03-31
10-K	2011-02-18	Annual: 2010-12-31
10-Q	2010-10-22	Quarter: 2010-09-30
10-Q	2010-07-23	Quarter: 2010-06-30
10-Q	2010-04-23	Quarter: 2010-03-31
10-K	2010-02-19	Annual: 2009-12-31

8-K	2019-12-31	Officers, Exhibits
8-K	2019-11-12	Earnings, Exhibits
8-K	2019-08-07	Earnings, Exhibits
8-K	2019-07-08	Officers, Exhibits
8-K	2019-05-16	Shareholder Vote
8-K	2019-05-09	Earnings, Exhibits
8-K	2019-04-05	Officers
8-K	2019-03-04	Officers
8-K	2019-02-28	Earnings, Exhibits
8-K	2018-11-15	Other Events, Exhibits
8-K	2018-11-08	Earnings, Exhibits
8-K	2018-08-09	Earnings, Exhibits
8-K	2018-05-15	Officers, Shareholder Vote
8-K	2018-05-09	Earnings, Exhibits
8-K	2018-03-01	Earnings, Exhibits
8-K	2018-01-05	Officers

EX-31.1	icui-ex31193019.htm
EX-31.2	icui-ex31293019.htm
EX-32.1	icui-ex32193019.htm