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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: June 30, 2024
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)
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Delaware | | 33-0022692 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
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951 Calle Amanecer | , | San Clemente | , | California | | 92673 |
(Address of principal executive offices) | | (Zip Code) |
(949) 366-2183
(Registrant’s telephone number including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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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 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 | ☐ |
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| | | 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
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 July 31, 2024 |
Common | | 24,425,279 |
ICU MEDICAL, INC. AND SUBSIDIARIES
Form 10-Q
June 30, 2024
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 5. | | | |
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Item 6. | | | |
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Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of present and historical fact, contained in this Quarterly Report on Form 10-Q, including, without limitation, statements regarding our future results of operations and financial position, business strategy and approach, expected capital expenditures; expected impacts from new accounting and tax regulations; as well as plans and objectives of management for future operations may be forward-looking statements. Without limiting the foregoing, in some cases, you can identify forward-looking statements by terms such as “aim,” “may,” “will,” “should,” “expect,” “exploring,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” “seeks,” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. No forward-looking statement is a guarantee of future results, performance, or achievements, and one should avoid placing undue reliance on such statements.
The forward looking statements in this Quarterly Report on Form 10-Q are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of known and unknown risks, uncertainties and assumptions, including without limitation, the following:
•our failure to compete successfully with our competitors and maintain market share;
•significant decline in demand for our products;
•our inability to fund substantial investment in product development and recover such investment through commercial product sales;
•prolonged periods of inflation, rising interest rates and the impact of foreign currency exchange rates as a result of the current global macroeconomic and geopolitical conditions, for example, armed conflicts between Ukraine and Russia and in Israel;
•our exposure to risks related to foreign currency exchange rates;
•continuing pressures to reduce healthcare costs and inadequate coverage and reimbursement;
•disruptions at the FDA, other government agencies or notified bodies caused by funding shortages or global health concerns;
•failure to protect our information technology systems against security breaches, service interruptions, or misappropriation of data;
•damage to any of our manufacturing facilities or disruption to our supply chain network;
•our dependence on single and limited source third-party suppliers, which subjects our business and results of operations to risks of supplier business interruptions, and a loss or degradation in performance in our suppliers;
•our failure to achieve expected operating efficiencies or expense reductions associated with cost reduction and restructuring efforts;
•significant sales through our distributors;
•additional risks from international sales, related to competition with larger international companies and established local companies and our possibly higher cost structure;
•any significant changes in U.S. trade, tax or other policies that restrict imports or increase import tariffs;
•actual or perceived failures to comply with foreign, federal, and state data privacy and security laws, regulations and standards, or certain fraud and abuse and transparency laws;
•our failure to defend and enforce our patents or other proprietary rights and the cost of enforcing and of defending patent claims or claims of other proprietary rights; and expiration of our patents;
•our failure to effectively manage our growth and change to our business resulting from the Smiths Medical acquisition or any other future acquisitions; and
•the actual impact of the Smiths Medical acquisition on our financial results and our use of a significant portion of our cash on hand and incurrence of a substantial amount of debt to finance the Smiths Medical acquisition, which could adversely affect our business, including by restricting our ability to engage in additional transactions or incur additional indebtedness.
For a more detailed discussion of these factors, see the information under the sections entitled “Summary Risk Factors,” Part I. Item 1A. “Risk Factors” and Part II. Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “2023 Annual Report on Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”), and the sections in this Quarterly
Report on Form 10-Q entitled Part II. Item 1A “Risk Factors” and Part I. Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case as updated by our periodic filings with the SEC.
Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
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)
| | | | | | | | | | | |
| June 30, 2024 | | December 31, 2023 |
| (Unaudited) | | (1) |
ASSETS | | | |
CURRENT ASSETS: | | | |
Cash and cash equivalents | $ | 302,648 | | | $ | 254,222 | |
Short-term investment securities | — | | | 501 | |
TOTAL CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENT SECURITIES | 302,648 | | | 254,723 | |
Accounts receivable, net of allowance for doubtful accounts $11,772 at June 30, 2024 and $11,064 at December 31, 2023 | 151,765 | | | 161,566 | |
Inventories | 682,870 | | | 709,360 | |
Prepaid income taxes | 17,883 | | | 21,983 | |
Prepaid expenses and other current assets | 80,825 | | | 73,640 | |
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TOTAL CURRENT ASSETS | 1,235,991 | | | 1,221,272 | |
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PROPERTY, PLANT AND EQUIPMENT, net | 594,085 | | | 612,909 | |
OPERATING LEASE RIGHT-OF-USE ASSETS | 66,408 | | | 69,909 | |
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GOODWILL | 1,450,935 | | | 1,472,446 | |
INTANGIBLE ASSETS, net | 805,794 | | | 870,588 | |
DEFERRED INCOME TAXES | 38,861 | | | 37,295 | |
OTHER ASSETS | 94,593 | | | 94,020 | |
TOTAL ASSETS | $ | 4,286,667 | | | $ | 4,378,439 | |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
CURRENT LIABILITIES: | | | |
Accounts payable | $ | 155,515 | | | $ | 150,030 | |
Accrued liabilities | 299,751 | | | 268,215 | |
Current portion of long-term debt | 51,000 | | | 51,000 | |
Income tax payable | 4,141 | | | 7,714 | |
Contingent earn-out liability | 1,500 | | | 4,879 | |
TOTAL CURRENT LIABILITIES | 511,907 | | | 481,838 | |
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CONTINGENT EARN-OUT LIABILITY | 3,947 | | | 3,991 | |
LONG-TERM DEBT | 1,554,822 | | | 1,577,770 | |
OTHER LONG-TERM LIABILITIES | 91,356 | | | 100,497 | |
DEFERRED INCOME TAXES | 53,794 | | | 55,873 | |
INCOME TAX LIABILITY | 33,029 | | | 35,060 | |
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 — 24,430 shares at June 30, 2024 and 24,144 shares at December 31, 2023; and outstanding — 24,425 shares at June 30, 2024 and 24,141 shares at December 31, 2023 | 2,443 | | | 2,414 | |
Additional paid-in capital | 1,380,703 | | | 1,366,493 | |
Treasury stock, at cost (5,128 and 2,428 shares, respectively) | (518) | | | (262) | |
Retained earnings | 746,969 | | | 807,846 | |
Accumulated other comprehensive loss | (91,785) | | | (53,081) | |
TOTAL STOCKHOLDERS' EQUITY | 2,037,812 | | | 2,123,410 | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 4,286,667 | | | $ | 4,378,439 | |
______________________________________________________
(1) December 31, 2023 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)
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| Three months ended June 30, | | Six months ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
TOTAL REVENUES | $ | 596,455 | | | $ | 549,310 | | | $ | 1,163,110 | | | $ | 1,117,959 | |
COST OF GOODS SOLD | 389,027 | | | 356,983 | | | 770,438 | | | 733,591 | |
GROSS PROFIT | 207,428 | | | 192,327 | | | 392,672 | | | 384,368 | |
OPERATING EXPENSES: | | | | | | | |
Selling, general and administrative | 159,549 | | | 150,895 | | | 317,206 | | | 303,467 | |
Research and development | 23,390 | | | 22,302 | | | 45,232 | | | 42,063 | |
Restructuring, strategic transaction and integration | 17,136 | | | 12,354 | | | 33,241 | | | 23,367 | |
Change in fair value of contingent earn-out | (339) | | | 4,016 | | | (44) | | | 3,316 | |
| | | | | | | |
TOTAL OPERATING EXPENSES | 199,736 | | | 189,567 | | | 395,635 | | | 372,213 | |
INCOME (LOSS) FROM OPERATIONS | 7,692 | | | 2,760 | | | (2,963) | | | 12,155 | |
| | | | | | | |
INTEREST EXPENSE, NET | (23,841) | | | (24,121) | | | (47,613) | | | (46,636) | |
OTHER EXPENSE, NET | (3,384) | | | (1,502) | | | (5,725) | | | (1,771) | |
LOSS BEFORE INCOME TAXES | (19,533) | | | (22,863) | | | (56,301) | | | (36,252) | |
(PROVISION) BENEFIT FOR INCOME TAXES | (1,873) | | | 12,929 | | | (4,576) | | | 16,506 | |
NET LOSS | $ | (21,406) | | | $ | (9,934) | | | $ | (60,877) | | | $ | (19,746) | |
NET LOSS PER SHARE | | | | | | | |
Basic | $ | (0.88) | | | $ | (0.41) | | | $ | (2.51) | | | $ | (0.82) | |
Diluted | $ | (0.88) | | | $ | (0.41) | | | $ | (2.51) | | | $ | (0.82) | |
WEIGHTED AVERAGE NUMBER OF SHARES | | | | | | | |
Basic | 24,393 | | | 24,075 | | | 24,295 | | | 24,045 | |
Diluted | 24,393 | | | 24,075 | | | 24,295 | | | 24,045 | |
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 June 30, | | Six months ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
NET LOSS | $ | (21,406) | | | $ | (9,934) | | | $ | (60,877) | | | $ | (19,746) | |
Other comprehensive (loss) income, net of tax: | | | | | | | |
Cash flow hedge adjustments, net of tax of $(2,054) and $1,687 for the three months ended June 30, 2024 and 2023, respectively, and $(25) and $(57) for the six months ended June 30, 2024 and 2023, respectively. | (6,382) | | | 5,274 | | | (22) | | | (303) | |
Foreign currency translation adjustment, net of tax of $0 for all periods | (15,865) | | | 7,569 | | | (38,682) | | | 32,552 | |
Other adjustments, net of tax of $0 for all periods | — | | | (34) | | | — | | | (65) | |
Other comprehensive (loss) income, net of tax | (22,247) | | | 12,809 | | | (38,704) | | | 32,184 | |
COMPREHENSIVE (LOSS) INCOME | $ | (43,653) | | | $ | 2,875 | | | $ | (99,581) | | | $ | 12,438 | |
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 | | |
| | Shares | | Amount | | | | | | Total |
Balance, January 1, 2024 | | 24,144 | | | $ | 2,414 | | | $ | 1,366,493 | | | $ | (262) | | | $ | 807,846 | | | $ | (53,081) | | | $ | 2,123,410 | |
Issuance of restricted stock and exercise of stock options | | 378 | | | 27 | | | (6,847) | | | 6,970 | | | — | | | — | | | 150 | |
Tax withholding payments related to net share settlement of equity awards | | (110) | | | — | | | — | | | (11,400) | | | — | | | — | | | (11,400) | |
| | | | | | | | | | | | | | |
Stock compensation | | — | | | — | | | 11,598 | | | — | | | — | | | — | | | 11,598 | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | — | | | (16,457) | | | (16,457) | |
Net loss | | — | | | — | | | — | | | — | | | (39,471) | | | — | | | (39,471) | |
Balance, March 31, 2024 | | 24,412 | | | $ | 2,441 | | | $ | 1,371,244 | | | $ | (4,692) | | | $ | 768,375 | | | $ | (69,538) | | | $ | 2,067,830 | |
Issuance of restricted stock and exercise of stock options | | 21 | | | 2 | | | (1,537) | | | 4,459 | | | — | | | — | | | 2,924 | |
Tax withholding payments related to net share settlement of equity awards | | (3) | | | — | | | — | | | (285) | | | — | | | — | | | (285) | |
Stock compensation | | — | | | — | | | 10,998 | | | — | | | — | | | — | | | 10,998 | |
Other comprehensive loss, net of tax | | — | | | — | | | (2) | | | — | | | — | | | (22,247) | | | (22,249) | |
Net loss | | — | | | — | | | — | | | — | | | (21,406) | | | — | | | (21,406) | |
Balance, June 30, 2024 | | 24,430 | | | $ | 2,443 | | | $ | 1,380,703 | | | $ | (518) | | | $ | 746,969 | | | $ | (91,785) | | | $ | 2,037,812 | |
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| | Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Loss | | |
| | Shares | | Amount | | | | | | Total |
Balance, January 1, 2023 | | 23,995 | | | $ | 2,399 | | | $ | 1,331,249 | | | $ | (243) | | | $ | 837,501 | | | $ | (80,978) | | | $ | 2,089,928 | |
Issuance of restricted stock and exercise of stock options | | 172 | | | 12 | | | (503) | | | 662 | | | — | | | — | | | 171 | |
Tax withholding payments related to net share settlement of equity awards | | (53) | | | — | | | — | | | (8,425) | | | — | | | — | | | (8,425) | |
| | | | | | | | | | | | | | |
Stock compensation | | — | | | — | | | 9,158 | | | — | | | — | | | — | | | 9,158 | |
Other comprehensive income, net of tax | | — | | | — | | | 4 | | | — | | | — | | | 19,375 | | | 19,379 | |
Net loss | | — | | | — | | | — | | | — | | | (9,812) | | | — | | | (9,812) | |
Balance, March 31, 2023 | | 24,114 | | | $ | 2,411 | | | $ | 1,339,908 | | | $ | (8,006) | | | $ | 827,689 | | | $ | (61,603) | | | $ | 2,100,399 | |
Issuance of restricted stock and exercise of stock options | | 2 | | | — | | | (4,626) | | | 6,688 | | | — | | | — | | | 2,062 | |
Tax withholding payments related to net share settlement of equity awards | | (2) | | | — | | | — | | | (293) | | | — | | | — | | | (293) | |
Stock compensation | | — | | | — | | | 9,773 | | | — | | | — | | | — | | | 9,773 | |
Other comprehensive income, net of tax | | — | | | — | | | 2 | | | — | | | — | | | 12,809 | | | 12,811 | |
Net loss | | — | | | — | | | — | | | — | | | (9,934) | | | — | | | (9,934) | |
Balance, June 30, 2023 | | 24,114 | | | $ | 2,411 | | | $ | 1,345,057 | | | $ | (1,611) | | | $ | 817,755 | | | $ | (48,794) | | | $ | 2,114,818 | |
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ICU MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
| | | | | | | | | | | |
| Six months ended June 30, |
| 2024 | | 2023 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net loss | $ | (60,877) | | | $ | (19,746) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
Depreciation and amortization | 110,844 | | | 113,244 | |
| | | |
Noncash lease expense | 10,524 | | | 11,110 | |
Provision for doubtful accounts | 1,370 | | | 399 | |
Provision for warranty, returns and field action | (2,458) | | | 7,070 | |
Stock compensation | 22,596 | | | 18,931 | |
(Gain) loss on disposal of property, plant and equipment and other assets | (78) | | | 1,019 | |
| | | |
| | | |
Debt issuance costs amortization | 3,411 | | | 3,404 | |
Change in fair value of contingent earn-out liability | (44) | | | 3,316 | |
| | | |
Usage of spare parts | 8,944 | | | 10,056 | |
Other | 4,925 | | | 2,917 | |
Changes in operating assets and liabilities, net of amounts acquired: | | | |
Accounts receivable | 6,715 | | | 46,796 | |
Inventories | 21,095 | | | (76,040) | |
Prepaid expenses and other current assets | (12,638) | | | 2,983 | |
Other assets | (11,124) | | | (12,698) | |
Accounts payable | 9,432 | | | (46,864) | |
Accrued liabilities | 20,245 | | | (104) | |
Income taxes, including excess tax benefits and deferred income taxes | (5,138) | | | (26,022) | |
Net cash provided by operating activities | 127,744 | | | 39,771 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Purchases of property, plant and equipment | (35,382) | | | (32,489) | |
Proceeds from sale of assets | 692 | | | 1,431 | |
| | | |
Intangible asset additions | (5,364) | | | (4,651) | |
| | | |
| | | |
Proceeds from sale and maturities of investment securities | 500 | | | 2,920 | |
Net cash used in investing activities | (39,554) | | | (32,789) | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
| | | |
Principal repayments of long-term debt | (25,500) | | | (14,813) | |
| | | |
Proceeds from exercise of stock options | 3,074 | | | 2,233 | |
Payments on finance leases | (518) | | | (436) | |
Payments of contingent earn-out liability | (2,600) | | | — | |
Tax withholding payments related to net share settlement of equity awards | (11,685) | | | (8,718) | |
Net cash used in financing activities | (37,229) | | | (21,734) | |
Effect of exchange rate changes on cash | (2,535) | | | 1,855 | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 48,426 | | | (12,897) | |
CASH AND CASH EQUIVALENTS, beginning of period | 254,222 | | | 208,784 | |
CASH AND CASH EQUIVALENTS, end of period | $ | 302,648 | | | $ | 195,887 | |
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)
| | | | | | | | | | | |
| Six months ended June 30, |
| 2024 | | 2023 |
| | | |
| | | |
| | | |
| | | |
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES: | | | |
Purchases of property, plant, and equipment in accounts payable | $ | 3,868 | | | $ | 2,362 | |
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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 of ICU Medical, Inc., ("ICU" or the "Company"), a Delaware corporation, 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 for the year ended December 31, 2023.
We develop, manufacture and sell innovative medical products used in infusion therapy, vascular access, and vital care applications. ICU's product portfolio includes ambulatory, syringe, and large volume IV pumps and safety software; dedicated and non-dedicated IV sets, needlefree IV connectors, peripheral IV catheters, and sterile IV solutions; closed system transfer devices and pharmacy compounding systems; as well as a range of respiratory, anesthesia, patient monitoring, and temperature management products. We sell the majority of our products globally 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.
Certain reclassifications have been made to the prior year cash flows from operating activities within the condensed consolidated statements of cash flows to conform to the presentation used in the current year. We reclassified bond premium amortization to other. The reclassification had no impact on cash flows from operating activities as previously reported.
Note 2: New Accounting Pronouncements
Recently Issued Accounting Standards
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements - Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative. The amendments in this update modify the disclosure or presentation requirements of a variety of Topics in the Accounting Standards Codification ("ASC") in response to the SEC’s Release No. 33-10532, Disclosure Update and Simplification Initiative, and align the ASC’s requirements with the SEC’s regulations. For entities within the scope, the guidance will be applied prospectively with the effective date for each amendment to be the date on which the SEC's removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. If the SEC has not removed the related disclosure from its regulations by June 30, 2027, the amendments will be removed from the Codification and will not become effective. We are currently assessing what impact this guidance will have on the Company's consolidated financial statements and related disclosures.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures. The amendments in this update expand disclosures about a public entity’s reportable segments and requires more enhanced information about a reportable segment’s significant expenses, interim segment profit or loss, and a description of how a public entity’s chief operating decision maker uses reported segment profit or loss information in assessing segment performance and allocating resources. The amendments clarify that a single reportable segment entity must apply ASC 280 in its entirety. The update will be effective for annual periods beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. This ASU is applicable to our Annual Report on Form 10-K for the fiscal year ended December 31, 2024, and subsequent interim periods, with early application permitted. We are currently assessing the effect of this update on our consolidated financial statements and related disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures. The amendments in this update expand disclosures in an entity’s income tax rate reconciliation table and regarding cash taxes paid information. The update will be effective for annual periods beginning after December 15, 2024 and is applicable to our Annual Report on Form 10-K for the fiscal year December 31, 2025, with early application permitted. We are currently assessing the effect of this update on our consolidated financial statements and related disclosures.
Note 3: Restructuring, Strategic Transaction and Integration
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restructuring, strategic transaction and integration expenses were $17.1 million and $33.2 million for the three and six months ended June 30, 2024, respectively, as compared to $12.4 million and $23.4 million for the three and six months ended June 30, 2023, respectively.
Restructuring
During the three and six months ended June 30, 2024, restructuring charges were $7.7 million and $13.0 million, respectively, as compared to $1.3 million and $4.0 million respectively, for the three and six months ended June 30, 2023 and were primarily related to severance costs for the periods. The restructuring charges for the six months ended June 30, 2023 is net of $0.9 million related to facility closures costs and severance costs that were reversed during the first fiscal quarter of 2023.
The following table summarizes the activity in our restructuring-related accrual by major type of cost for the six months ended June 30, 2024 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | |
| | Severance Pay and Benefits | | | | Retention and Facility Closure Costs | | Total |
Accrued balance, January 1, 2024 | | $ | 2,811 | | | | | $ | 757 | | | $ | 3,568 | |
| | | | | | | | |
Charges incurred | | 5,065 | | | | | 295 | | | 5,360 | |
Payments | | (2,760) | | | | | (184) | | | (2,944) | |
Other(1) | | (41) | | | | | — | | | (41) | |
Currency translation | | (13) | | | | | (7) | | | (20) | |
Accrued balance, March 31, 2024 | | $ | 5,062 | | | | | $ | 861 | | | $ | 5,923 | |
Charges incurred | | 7,712 | | | | | — | | | 7,712 | |
Payments | | (3,678) | | | | | — | | | (3,678) | |
Currency translation | | (33) | | | | | — | | | (33) | |
| | | | | | | | |
Accrued balance, June 30, 2024 | | $ | 9,063 | | | | | $ | 861 | | | $ | 9,924 | |
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__________________________
(1) Relates to prior year accrued restructuring charges for estimated severances costs that will not be utilized and were reversed during the three months ended March 31, 2024.
Strategic Transaction and Integration Expenses
We incurred and expensed $9.4 million and $20.2 million in strategic transaction and integration expenses during the three and six months ended June 30, 2024, respectively, as compared to $11.1 million and $19.4 million in strategic transaction and integration expenses during the three and six months ended June 30, 2023, 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 and six months ended June 30, 2024 and 2023 were primarily related to consulting expenses and employee costs incurred to integrate our Smiths Medical business acquired in 2022.
Related-party Transition Services Expenses
Smiths Group plc ("Smiths") became a related party to us when we issued 2.5 million shares of our common stock as partial consideration to Smiths for the acquisition of Smiths Medical 2020 Limited ("Smiths Medical"). Additionally, we entered into a transition services agreement ("TSA") with certain Smiths legal entities. The TSA included certain information technology, human resource and tax support services for an initial term of twelve months with the option to extend up to 24 months. During the three and six months ended June 30, 2023, we expensed $3.9 million and $7.9 million, respectively, for services provided by Smiths under the TSA. Since December 31, 2023, there were no services being provided under the TSA and we had no remaining related-party open payables as of December 31, 2023.
Note 4: Revenue
Revenue Recognition
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our business units are Consumables, Infusion Systems and Vital Care. The vast majority of our sales of products within these business units 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. Our software license renewals are considered to be transferred to a customer at a point in time at the start of each renewal period, therefore revenue is recognized at that time.
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 include variable consideration in net sales only to the extent that a significant reversal in revenue is not probable when the uncertainty is resolved. Our variable consideration includes distributor chargebacks, product returns and end customer rebates with distributor chargebacks representing the majority and subject to the greatest judgment.
Chargebacks are the difference between the prices we charge our distribution customers at the time they purchase our products and the contracted prices we have with the end customer, most often in the U.S. and Canada. When a distributor sells our products to one of our contracted end customers, the distributor typically will claim a refund from us for the chargeback amount which we process as a credit to the distributor.
In estimating the transaction price to present as net revenue for sales to distributors, we must estimate the expected chargeback amount that we will refund to the distributor after they sell our product to a contracted end customer. Determining the appropriate chargeback reserve requires judgment around the following assumptions:
(i) The estimated chargeback amount (the difference between the price we invoice the distributor and the contractually agreed price with specified end customers); and
(ii) The estimated period of time between the sale to the distributor and the receipt of a chargeback claim.
For purposes of estimating the expected chargeback amount, we utilize actual recent historical chargebacks paid to the specific distributor for similar products as determined at either a product or product-family level. While individual chargeback rates can vary significantly depending on the product and contracted prices with distributors and end customers, our chargeback reserve estimate is not overly sensitive to those individual price changes due to the long-term nature of our distributor and end customer contracts as well as consistency in purchasing patterns. Additionally, the use of the actual chargeback history to calculate an average chargeback rate has historically resulted in a reasonable estimation of overall current contract rates.
For purposes of estimating the period of time between the sale to the distributor and the receipt of a chargeback claim, we utilize several sources of information including actual inventory quantities of our products on hand at distributors. This inventory on hand information is received from the distributors or, when specific quantities are not provided, estimated by using the targeted days of inventory on hand for distributors. Historical experience of actual chargebacks paid has indicated that use of this information has reasonable predictive value of outstanding chargebacks and accounts for the variability of purchasing
patterns and expected timing and volume of sales to end customers. The value of the chargeback reserve generally represents approximately two months of obligation due to the timing difference between the initial sale to a distributor and the processing of a chargeback claim after the product is sold to the end customer.
The chargeback reserve estimates change from period-to-period primarily based on changes in revenue from/and the inventory levels of distributors. Our judgments regarding the information used to calculate the chargeback reserve are consistent from period to period; however, on a regular basis, we evaluate the adequacy of the chargeback reserve to reassess and ensure that the variable consideration is appropriately constrained, and the likelihood of future revenue reversal is not probable. We use metrics including chargeback provision as a percentage of gross revenue, movements in inventory on hand at distributors, trends in accrued versus paid chargebacks and impacts from price changes and similar metrics.
The chargeback reserve reflects a reasonable estimate of the amount of consideration using the expected value method and is recorded as a reduction of accounts receivable, net on the consolidated balance sheets.
We also offer certain volume-based rebates to both our distribution and end customers, which is recorded 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, including current contractual requirements, our historical experience with each customer and forecasted customer purchasing patterns, to estimate the most likely rebate amount.
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 stand-alone selling price, and recognize revenue over the period the warranty service is provided.
Arrangements with Multiple Performance Obligations
We also enter into arrangements which include multiple performance obligations. The most significant judgments related to these arrangements include:
•Identifying the various performance obligations of these arrangements.
•Estimating the relative standalone selling price of each performance obligation, typically using a directly observable method or calculated on a cost plus margin basis method.
Revenue Disaggregated
The following table represents our revenues disaggregated by product line (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
Product line | 2024 | | 2023 | | 2024 | | 2023 |
Consumables | $ | 261,816 | | | 236,976 | | | 505,855 | | | 473,098 | |
Infusion Systems | 163,638 | | | 153,142 | | | 320,976 | | | 314,855 | |
Vital Care | 171,001 | | | 159,192 | | | 336,279 | | | 330,006 | |
Total Revenues | $ | 596,455 | | | $ | 549,310 | | | $ | 1,163,110 | | | $ | 1,117,959 | |
For the three and six months ended June 30, 2024 and 2023, net sales to Medline made up approximately 17% and 15% of total revenues, respectively.
The following table represents our revenues disaggregated by geography (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
Geography | 2024 | | 2023 | | 2024 | | 2023 |
United States | $ | 383,140 | | | $ | 347,866 | | | $ | 749,295 | | | $ | 707,053 | |
Europe, the Middle East and Africa | 95,310 | | | 89,994 | | | 193,699 | | | 188,980 | |
APAC | 61,224 | | | 60,031 | | | 113,077 | | | 118,655 | |
Other Foreign | 56,781 | | | 51,419 | | | 107,039 | | | 103,271 | |
Total Revenues | $ | 596,455 | | | $ | 549,310 | | | $ | 1,163,110 | | | $ | 1,117,959 | |
Contract Balances
The following table presents the changes in our contract balances for the six months ended June 30, 2024 and 2023 (in thousands):
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | |
| Contract Liabilities |
Beginning balance, January 1, 2024 | $ | (42,177) | |
| |
Equipment revenue recognized | 16,951 | |
Equipment revenue deferred due to implementation | (20,593) | |
Software revenue recognized | 10,232 | |
Software revenue deferred due to implementation | (10,427) | |
Government grant income recognized(1) | 1,029 | |
Government grant income deferred | — | |
Other deferred revenue | (423) | |
Other deferred revenue recognized | 1,602 | |
Ending balance, June 30, 2024 | $ | (43,806) | |
| |
Beginning balance, January 1, 2023 | $ | (45,866) | |
| |
Equipment revenue recognized | 16,793 | |
Equipment revenue deferred due to implementation | (16,625) | |
Software revenue recognized | 9,041 | |
Software revenue deferred due to implementation | (8,875) | |
Government grant income deferred | (944) | |
Government grant income recognized(1) | 647 | |
Other deferred revenue | (688) | |
Other deferred revenue recognized | 3,514 | |
Ending balance, June 30, 2023 | $ | (43,003) | |
____________________________
(1) The government grant income deferred is amortized over the life of the related depreciable asset as a reduction to depreciation expense.
Our contract liabilities are included in accrued liabilities or other long-term liabilities in our condensed consolidated balance sheet based on the expected timing of revenue recognition.
As of June 30, 2024, revenue from remaining performance obligations is as follows:
| | | | | | | | | | | |
| Recognition Timing |
(in thousands) | < 12 Months | | > 12 Months |
Equipment deferred revenue | $ | (21,226) | | | $ | (937) | |
Software deferred revenue | (9,783) | | | (489) | |
Government grant deferred income(1) | (2,065) | | | (8,384) | |
Other deferred revenue(2) | (717) | | | (205) | |
Total | $ | (33,791) | | | $ | (10,015) | |
_________________________________
(1) The government grant deferred income is amortized over the life of the related depreciable asset as a reduction to depreciation expense.
(2) Other deferred revenue includes pump development programs, purchased training and extended warranty.
Note 5: 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
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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, manufacturing and 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 because we determined 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 June 30, | | Six months ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Operating lease cost | $ | 5,638 | | | $ | 6,043 | | | $ | 11,452 | | | $ | 12,193 | |
Finance lease cost — interest | 47 | | | 31 | | | 80 | | | 60 | |
Finance lease cost — reduction of ROU asset | 301 | | | 254 | | | 555 | | | 479 | |
Short-term lease cost | — | | | 13 | | | — | | | 26 | |
| | | | | | | |
| | | | | | | |
Total lease cost | $ | 5,986 | | | $ | 6,341 | | | $ | 12,087 | | | $ | 12,758 | |
Interest expense on our finance leases is included in interest 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 costs of goods sold and 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):
| | | | | | | | | | | |
| Six months ended June 30, |
| 2024 | | 2023 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | 11,730 | | | $ | 12,336 | |
Operating cash flows from finance leases | $ | 80 | | | $ | 60 | |
| | | |
Right-of-use assets obtained in exchange for lease obligations: | | | |
Operating leases | $ | 8,650 | | | $ | 10,153 | |
Finance leases | $ | 1,202 | | | $ | 804 | |
The following table presents the supplemental balance sheet information related to our operating leases (in thousands, except lease term and discount rate):
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | |
| As of |
| June 30, 2024 | | December 31, 2023 |
Operating leases | | | |
Operating lease right-of-use assets | $ | 66,408 | | $ | 69,909 |
| | | |
Accrued liabilities | $ | 17,915 | | $ | 20,161 |
Other long-term liabilities | 52,179 | | 52,972 |
Total operating lease liabilities | $ | 70,094 | | $ | 73,133 |
| | | |
Weighted-Average Remaining Lease Term | | | |
Operating leases | 5.6 years | | 5.6 years |
| | | |
Weighted-Average Discount Rate | | | |
Operating leases | 4.64 | % | | 4.31 | % |
The following table presents the supplemental balance sheet information related to our finance leases (in thousands, except lease term and discount rate):
| | | | | | | | | | | |
| As of |
| June 30, 2024 | | December 31, 2023 |
Finance leases | | | |
Finance lease right-of-use assets | $ | 3,273 | | $ | 2,707 |
| | | |
Accrued liabilities | $ | 998 | | $ | 860 |
Other long-term liabilities | 2,397 | | 1,954 |
Total finance lease liabilities | $ | 3,395 | | $ | 2,814 |
| | | |
Weighted-Average Remaining Lease Term | | | |
Finance leases | 4.0 years | | 4.1 years |
| | | |
Weighted-Average Discount Rate | | | |
Finance leases | 5.50 | % | | 4.93 | % |
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of June 30, 2024, the maturities of our operating and finance lease liabilities for each of the next five years and thereafter are approximately (in thousands):
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
Remainder of 2024 | $ | 11,439 | | | $ | 530 | |
2025 | 18,076 | | | 1,086 | |
2026 | 15,747 | | | 965 | |
2027 | 11,226 | | | 627 | |
2028 | 6,571 | | | 305 | |
2029 | 6,793 | | | 194 | |
Thereafter | 9,196 | | | 48 | |
Total Lease Payments | 79,048 | | | 3,755 | |
Less imputed interest | (8,954) | | | (360) | |
Total | $ | 70,094 | | | $ | 3,395 | |
Note 6: Net Loss Per Share
Basic earnings per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net loss 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. A net loss for the three and six months ended June 30, 2024 and 2023, causes all of the potentially dilutive common shares to be antidilutive, and accordingly, they were not included in the computation of diluted earnings per share and basic and diluted net loss per share are equal for each of these periods.
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 June 30, | | Six months ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Net loss | $ | (21,406) | | | $ | (9,934) | | | $ | (60,877) | | | $ | (19,746) | |
| | | | | | | |
Weighted-average number of common shares outstanding (basic) | 24,393 | | | 24,075 | | | 24,295 | | | 24,045 | |
Dilutive securities(1) | — | | | — | | | — | | | — | |
Weighted-average common and common equivalent shares outstanding (diluted) | 24,393 | | | 24,075 | | | 24,295 | | | 24,045 | |
EPS — basic | $ | (0.88) | | | $ | (0.41) | | | $ | (2.51) | | | $ | (0.82) | |
EPS — diluted | $ | (0.88) | | | $ | (0.41) | | | $ | (2.51) | | | $ | (0.82) | |
| | | | | | | |
Total anti-dilutive stock options and restricted stock awards | 216 | | 162 | | 202 | | | 72 | |
_______________________________
(1) Due to the net loss for the three and six months ended June 30, 2024 and 2023, there are no potentially dilutive common shares included in the computation of diluted earnings per share.
Note 7: 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
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
floating interest rate risk associated with future interest payments on the variable-rate term loans issued in 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 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 (loss) income 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 ("MXN"), Euros, Czech Koruna ("CZK"), Japanese Yen ("JPY"), Swedish Krona ("SEK"), Danish Krone ("DKK"), Chinese Renminbi ("CNH"), Canadian Dollar ("CAD"), U.S. Dollar ("USD") and Australian Dollar ("AUD") and have varying maturities with an average term of approximately thirteen months. The total notional amount of these outstanding derivative contracts as of June 30, 2024 was $100.9 million, which included the notional equivalent of $20.6 million in Euros, $9.3 million in JPY, $4.9 million in CNH, $12.7 million in CAD, $10.0 million in AUD, $33.9 million in USD and $9.5 million in other foreign currencies, with terms currently through November 2025.
Floating Interest Rate Risk
In 2022, we entered into interest rate swaps to reduce the interest rate volatility on our variable-rate term loan A and variable-rate term loan B (see Note 16: Long-Term Debt). 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 pay a fixed rate of 1.32% and will receive the greater of 3-months USD Secured Overnight Financing Rate ("SOFR") or (0.15)%. The total notional amount of this outstanding derivative as of June 30, 2024 was approximately $228.9 million. 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 through its final maturity on March 30, 2026. We pay a fixed rate of 1.17% and will receive the greater of 3-months USD SOFR or 0.35%. The total notional amount of this outstanding derivative as of June 30, 2024 was approximately $328.1 million.
In June 2023, we entered into an additional interest rate swap that hedges both term loan A and term loan B interest payments. The total notional amount of the swap is $300.0 million. The hedge matures on June 30, 2028. We pay a fixed rate of 3.88% and will receive 3-months USD SOFR.
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):
ICU MEDICAL, INC. AND SUBSIDIARIES
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 June 30, 2024 | | | | | | |
Prepaid expenses and other current assets | | $ | 3,623 | | | $ | 21,006 | | | $ | 24,629 | |
Other assets | | 99 | | | 9,584 | | | 9,683 | |
Total assets | | $ | 3,722 | | | $ | 30,590 | | | $ | 34,312 | |
| | | | | | |
Accrued liabilities | | $ | 1,473 | | | $ | — | | | $ | 1,473 | |
Other long-term liabilities | | 314 | | | — | | | 314 | |
Total liabilities | | $ | 1,787 | | | $ | — | | | $ | 1,787 | |
| | | | | | |
As of December 31, 2023 | | | | | | |
Prepaid expenses and other current assets | | $ | 6,785 | | | $ | 23,065 | | | $ | 29,850 | |
Other assets | | 673 | | | 4,876 | | | 5,549 | |
Total assets | | $ | 7,458 | | | $ | 27,941 | | | $ | 35,399 | |
| | | | | | |
Accrued liabilities | | $ | 2,590 | | | $ | — | | | $ | 2,590 | |
Other long-term liabilities | | 240 | | | — | | | 240 | |
Total liabilities | | $ | 2,830 | | | $ | — | | | $ | 2,830 | |
We recognized the following (loss) gains on our derivative instruments designated as cash flow hedges in other comprehensive income before reclassifications to net loss (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gain (Losses) Recognized in Other Comprehensive Income |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2024 | | 2023 | | 2024 | | 2023 |
Derivatives designated as cash flow hedging instruments: | | | | | | | | |
Foreign exchange forward contracts | | $ | (3,965) | | | $ | 6,051 | | | $ | 975 | | | $ | 8,503 | |
Interest rate swaps | | 4,512 | | | 11,324 | | | 17,905 | | | 8,740 | |
Total derivatives designated as cash flow hedging instruments | | $ | 547 | | | $ | 17,375 | | | $ | 18,880 | | | $ | 17,243 | |
The following table presents the effects of our derivative instruments designated as cash flow hedges on the Condensed Consolidated Statements of Operations (in thousands):
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gains (Losses) Reclassified From Accumulated Other Comprehensive (Loss) Income into Net Loss |
| | | | Three months ended June 30, | | Six months ended June 30, |
| | Location of Gains (Losses) Recognized in Net Loss | | 2024 | | 2023 | | 2024 | | 2023 |
Derivatives designated as cash flow hedging instruments: | | | | | | | | | | |
Foreign exchange forward contracts | | Total revenues | | $ | 633 | | | $ | 473 | | | $ | 1,333 | | | $ | (1,448) | |
Foreign exchange forward contracts | | Cost of goods sold | | 1,059 | | | 2,316 | | | 2,339 | | | 3,816 | |
Foreign exchange forward contracts | | Other expense, net | (1) | — | | | — | | | — | | | 229 | |
Foreign exchange forward contracts | | Interest expense | (2) | — | | | — | | | — | | | 13 | |
Interest rate swaps | | Interest expense | | 7,291 | | | 7,625 | | | 15,255 | | | 14,993 | |
Total derivatives designated as cash flow hedging instruments | | | | $ | 8,983 | | | $ | 10,414 | | | $ | 18,927 | | | $ | 17,603 | |
_______________________________
(1) Represents location of gain reclassified from accumulated other comprehensive loss into other expense, net as a result of ineffectiveness.
(2) Represents location of gain reclassified from accumulated other comprehensive loss into interest expense as a result of forecasted transactions no longer probable of occurring.
As of June 30, 2024, we expect an estimated $2.1 million in deferred gains on the outstanding foreign exchange contracts and an estimated $21.9 million in deferred gains on the interest rate swaps will be reclassified from accumulated other comprehensive loss to net income during the next 12 months concurrent with the underlying hedged transactions also being reported in net income.
Note 8: Fair Value Measurements
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There are three levels of inputs that may be used to measure fair value:
•Level 1: quoted prices in active markets for identical assets or liabilities;
•Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or
•Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities.
Contingent Earn-out Liabilities
In 2022, we acquired Smiths Medical with a combination of cash consideration and share consideration issued at closing. Total consideration for the acquisition included a potential earn-out payment of $100.0 million in cash contingent on our common stock achieving a certain volume-weighted average price (the "Price Targets") from the closing date to either the third or fourth anniversary of closing 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. The initial estimated fair value of the earn-out was determined to be $53.5 million. The initial fair value of the earn-out was determined using a Monte Carlo simulation model. The model utilized several assumptions including volatility and the risk-free interest rate. The assumed volatility is based on the average of the historical volatility of our common stock price and the implied volatility of certain at-the-money traded options. The risk-free interest rate is equal to the yield on U.S. Treasury securities at constant maturity for the period commensurate with the term of the earn-out. At each reporting date subsequent to the acquisition, we remeasure the earn-out liability and recognize any changes in its fair value in our consolidated statements of operations. If the probability of achieving the Price Targets during their respective measurement periods is significantly greater than initially anticipated, the realization of an additional liability and related expense will have a significant impact on our consolidated financial statements in the period recognized. As of December 31, 2023, the estimated fair value of the contingent earn-out was $4.0 million. As of June 30, 2024, the estimated fair value of the contingent earn-out was $3.9 million. During July 2024, Smiths sold 1.2 million common shares of ICU Medical,
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Inc. It was issued as partial consideration for the 2022 acquisition of Smiths Medical. The sale of shares when combined with other sales in prior periods renders Smiths unable to achieve the contingent consideration based on certain price targets during the third and fourth anniversary of closing as Smiths no longer meets the required minimum beneficial ownership percentage. Accordingly, the third quarter 2024 valuation of the contingent earn-out will reduce the contingent earn-out's fair market value to zero.
In November 2021, we acquired a small foreign infusion systems supplier. Total consideration for the acquisition included 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 ended December 31, 2022 and, separately, (ii) a cash payment of $1.5 million contingent upon obtaining certain product-related regulatory certifications. As of December 31, 2022, the measurement period related to the contingent earn-out based on certain revenue targets ended and based on the actual revenue achieved during the measurement period the fair value of the contingent earn-out was determined to be zero as the minimum threshold for earning the earn-out was not met. As of June 30, 2024, the estimated fair value of the contingent consideration related to certain product-related regulatory certifications was estimated to be $1.5 million.
In August 2021, we entered into an agreement with one of our international distributors whereby that distributor would not compete with us in a specific territory for a three-year period that ends September 2024. The terms of the agreement included a contingent earn-out payment. The contingent earn-out payment could not exceed $6.0 million and was to be earned based on certain revenue targets over a twelve-month measurement period determined by the highest four consecutive quarters commencing over a two-year period starting on the closing date of the agreement and provided that the distributor is in compliance with its obligations under the agreement. As of December 31, 2023, the fair value of the contingent earn-out was determined to be $3.4 million and was paid out during the three months ended March 31, 2024.
Our contingent earn-out liabilities are separately stated on our condensed consolidated balance sheets.
The following tables provide a reconciliation of the Level 3 earn-out liabilities measured at estimated fair value (in thousands):
| | | | | | | | |
| | Earn-out Liability |
Accrued balance, January 1, 2024 | | $ | 5,491 | |
| | |
Change in fair value of earn-out (included in income from operations as a separate line item)(1) | | 295 | |
| | |
| | |
Accrued balance, March 31, 2024 | | 5,786 | |
Change in fair value of earn-out (included in income from operations as a separate line item)(1) | | (339) | |
| | |
| | |
Accrued balance, June 30, 2024 | | $ | 5,447 | |
| | |
| | |
| | |
| | |
| | |
| | | | | | | | |
| | Earn-out Liability |
Accrued balance, January 1, 2023 | | $ | 25,572 | |
Change in fair value of earn-out (included in income from operations as a separate line item)(1) | | (700) | |
| | |
Currency translation | | 33 | |
Accrued balance, March 31, 2023 | | 24,905 | |
Change in fair value of earn-out (included in income from operations as a separate line item)(1) | | 4,016 | |
Other | | 11 | |
Currency translation | | 1 | |
Accrued balance, June 30, 2023 | | $ | 28,933 | |
| | |
| | |
| | |
_______________________________
(1) Relates to the change in fair value of our Smiths Medical earn-out.
The following tables provide quantitative information about Level 3 inputs for fair value measurement of our earn-out liabilities related to Smiths Medical:
Smiths Medical Earn-out Liability
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | |
Simulation Input | | | | As of June 30, 2024 | | As of December 31, 2023 |
Volatility | | | | 45.00 | % | | 47.00 | % |
Risk-Free Rate | | | | 4.83 | % | | 4.18 | % |
Investments, Foreign Exchange Contracts and Interest Rate Contracts
As of June 30, 2024, we do not have any investment securities. Our investments historically consisted of corporate, government bonds and U.S. treasury securities. The fair value of our corporate and government bonds were estimated using observable market-based inputs such as quoted prices, interest rates and yield curves or Level 2 inputs. The fair value of our U.S. treasury securities were based on quoted market prices in active markets and are included in the Level 1 fair value hierarchy.
The fair value of our Level 2 foreign exchange contracts is estimated using observable market inputs such as known notional value amounts, spot and forward exchange rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative.
The fair value of our Level 2 interest rate swaps is estimated using a pricing model that reflects the terms of the contracts, including the period to maturity, and relies on observable market inputs such as known notional value amounts and USD interest rate curves.
Our assets and liabilities measured at fair value on a recurring basis consisted of the following Level 1, 2 and 3 inputs as defined above (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair value measurements as of June 30, 2024 |
| Total carrying value | | Quoted prices in active markets for identical assets (level 1) | | Significant other observable inputs (level 2) | | Significant unobservable inputs (level 3) |
Assets: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Foreign exchange contracts: | | | | | | | |
Prepaid expenses and other current assets | $ | 3,623 | | | $ | — | | | $ | 3,623 | | | $ | — | |
Other assets | 99 | | | — | | | 99 | | | — | |
| | | | | | | |
| | | | | | | |
Interest rate contracts: | | | | | | | |
Prepaid expenses and other current assets | 21,006 | | | — | | | 21,006 | | | — | |
Other assets | 9,584 | | | — | | | 9,584 | | | — | |
Total Assets | $ | 34,312 | | | $ | — | | | $ | 34,312 | | | $ | — | |
| | | | | | | |
Liabilities: | | | | | | | |
Contingent earn-out liability - ST | $ | 1,500 | | | $ | — | | | $ | — | | | $ | 1,500 | |
Contingent earn-out liability - LT | 3,947 | | | — | | | — | | | $ | 3,947 | |
Foreign exchange contracts: | | | | | | | |
Accrued liabilities | 1,473 | | | — | | | 1,473 | | | — | |
Other long-term liabilities | 314 | | | — | | | 314 | | | — | |
| | | | | | | |
| | | | | | | |
Total Liabilities | $ | 7,234 | | | $ | — | | | $ | 1,787 | | | $ | 5,447 | |
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair value measurements as of December 31, 2023 |
| Total carrying value | | Quoted prices in active markets for identical assets (level 1) | | Significant other observable inputs (level 2) | | Significant unobservable inputs (level 3) |
Assets: | | | | | | | |
Available-for-sale debt securities: | | | | | | | |
Short-term corporate bonds | $ | 501 | | | $ | — | | | $ | 501 | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Foreign exchange forwards: | | | | | | | |
Prepaid expenses and other current assets | 6,785 | | | — | | | 6,785 | | | — | |
Other assets | 673 | | | — | | | 673 | | | — | |
Interest rate contracts: | | | | | | | |
Prepaid expenses and other current assets | 23,065 | | | — | | | 23,065 | | | — | |
Other assets | 4,876 | | | — | | | 4,876 | | | — | |
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Total Assets | $ | 35,900 | | | $ | — | | | $ | 35,900 | | | $ | — | |
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Liabilities: | | | | | | | |
Contingent earn-out liability - ST | $ | 4,879 | | | $ | — | | | $ | 3,379 | | | $ | 1,500 | |
Contingent earn-out liability - LT | 3,991 | | | — | | | — | | | 3,991 | |
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Foreign exchange contracts: | | | | | | | |
Accrued liabilities | 2,590 | | | — | | | 2,590 | | — | |
Other long-term liabilities | 240 | | | — | | | 240 | | — | |
Total Liabilities | $ | 11,700 | | | $ | — | | | $ | 6,209 | | | $ | 5,491 | |
Note 9: Investment Securities
Investments in Available-for-sale Securities
Our available-for-sale investment securities historically consisted of corporate bonds, government bonds and U.S. treasury securities and were considered “investment grade” and were carried at fair value.
As of June 30, 2024, we did not have any investment securities. As of December 31, 2023, the amortized cost, unrealized holding gains (losses) and fair value of our available-for-sale investment securities were as follows (in thousands):
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| As of December 31, 2023 |
| Amortized Cost | | Unrealized Holding Gains (Losses) | | Fair Value |
Short-term corporate bonds | $ | 501 | | | $ | — |