ICU MEDICAL INC/DE 10-Q

Item1. Financial Statements (Unaudited) ICU MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value data) September 30, 2020 December 31, 2019 (Unaudited) (1) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 350,993 $ 268,670 Short-term investment securities 12,544 23,967 TOTAL CASH, CASH EQUIVALENTS AND INVESTMENT SECURITIES 363,537 292,637 Accounts receivable, net of allowance for doubtful accounts of $ 22,299 at September 30, 2020 and $ 20,219 at December 31, 2019 164,538 202,219 Inventories 321,961 337,640 Prepaid income tax 8,032 15,720 Prepaid expenses and other current assets 42,071 33,981 TOTAL CURRENT ASSETS 900,139 882,197 PROPERTY AND EQUIPMENT, net 456,348 456,085 OPERATING LEASE RIGHT-OF-USE ASSETS 47,802 34,465 GOODWILL 32,651 31,245 INTANGIBLE ASSETS, net 200,428 211,408 DEFERRED INCOME TAXES 36,373 27,998 OTHER ASSETS 55,795 48,984 TOTAL ASSETS $ 1,729,536 $ 1,692,382 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 81,027 $ 128,629 Accrued liabilities 103,397 117,776 Income tax liability 935 2,063 TOTAL CURRENT LIABILITIES 185,359 248,468 CONTINGENT EARN-OUT LIABILITY 24,300 17,300 OTHER LONG-TERM LIABILITIES 48,750 32,820 DEFERRED INCOME TAXES 2,091 2,091 INCOME TAX LIABILITY 16,816 14,459 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 — 20,969 shares at September 30, 2020 and 20,743 shares at December 31, 2019 and outstanding — 20,968 shares at September 30, 2020 and 20,742 shares at December 31, 2019 2,097 2,074 Additional paid-in capital 683,326 668,947 Treasury stock, at cost ( 180 ) ( 157 ) Retained earnings 782,510 721,782 Accumulated other comprehensive loss ( 15,533 ) ( 15,402 ) TOTAL STOCKHOLDERS' EQUITY 1,452,220 1,377,244 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,729,536 $ 1,692,382 ______________________________________________________ (1) December 31, 2019 balances were derived from audited consolidated financial statements. The accompanying notes are an integral part of these condensed consolidated financial statements. 3 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, 2020 2019 2020 2019 TOTAL REVENUES $ 318,567 $ 307,471 $ 950,553 $ 950,685 COST OF GOODS SOLD 204,643 188,919 608,930 592,961 GROSS PROFIT 113,924 118,552 341,623 357,724 OPERATING EXPENSES: Selling, general and administrative 70,854 65,876 210,401 206,333 Research and development 10,126 12,002 31,151 36,024 Restructuring, strategic transaction and integration 4,114 7,975 22,903 69,408 Change in fair value of contingent earn-out 4,300 ( 200 ) 7,000 ( 47,400 ) Contract settlement ( 1,000 ) — ( 975 ) 3,822 TOTAL OPERATING EXPENSES 88,394 85,653 270,480 268,187 INCOME FROM OPERATIONS 25,530 32,899 71,143 89,537 INTEREST EXPENSE ( 616 ) ( 139 ) ( 1,583 ) ( 411 ) OTHER INCOME (EXPENSE), net 1,252 ( 10 ) ( 2,175 ) 4,660 INCOME BEFORE INCOME TAXES 26,166 32,750 67,385 93,786 PROVISION FOR INCOME TAXES ( 1,180 ) ( 6,187 ) ( 6,657 ) ( 13,392 ) NET INCOME $ 24,986 $ 26,563 $ 60,728 $ 80,394 NET INCOME PER SHARE Basic $ 1.19 $ 1.29 $ 2.91 $ 3.90 Diluted $ 1.16 $ 1.24 $ 2.82 $ 3.73 WEIGHTED AVERAGE NUMBER OF SHARES Basic 20,948 20,666 20,870 20,607 Diluted 21,556 21,487 21,561 21,556 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents ICU MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (In thousands) Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 NET INCOME $ 24,986 $ 26,563 $ 60,728 $ 80,394 Other comprehensive income (loss), net of tax: Cash flow hedge adjustments, net of taxes of ($321) and $118 for the three months ended September 30, 2020 and 2019, respectively, and $256 and ($204) for the nine months ended September 30, 2020 and 2019, respectively 1,016 ( 375 ) ( 810 ) 644 Foreign currency translation adjustment, net of taxes of $0 for all periods 6,626 ( 7,533 ) 754 ( 6,287 ) Other adjustments, net of taxes of $0 for all periods 3 — ( 75 ) 6 Other comprehensive income (loss), net of taxes 7,645 ( 7,908 ) ( 131 ) ( 5,637 ) TOTAL COMPREHENSIVE INCOME $ 32,631 $ 18,655 $ 60,597 $ 74,757 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 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, 2020 20,742 $ 2,074 $ 668,947 $ ( 157 ) $ 721,782 $ ( 15,402 ) $ 1,377,244 Issuance of restricted stock and exercise of stock options 155 9 ( 10,207 ) 10,758 — — 560 Tax withholding payments related to net share settlement of equity awards ( 64 ) — — ( 12,174 ) — — ( 12,174 ) Stock compensation — — 6,939 — — — 6,939 Other comprehensive loss, net of tax — — — — — ( 13,510 ) ( 13,510 ) Net income — — — — 16,834 — 16,834 Balance, March 31, 2020 20,833 $ 2,083 $ 665,679 $ ( 1,573 ) $ 738,616 $ ( 28,912 ) $ 1,375,893 Issuance of restricted stock and exercise of stock options 106 11 4,408 1,820 — — 6,239 Tax withholding payments related to net share settlement of equity awards ( 2 ) — — ( 387 ) — — ( 387 ) Stock compensation — — 5,410 — — — 5,410 Other comprehensive income, net of tax — — — — — 5,734 5,734 Net income — — — — 18,908 — 18,908 Balance, June 30, 2020 20,937 $ 2,094 $ 675,497 $ ( 140 ) $ 757,524 $ ( 23,178 ) $ 1,411,797 Issuance of restricted stock and exercise of stock options 33 3 1,564 220 — — 1,787 Tax withholding payments related to net share settlement of equity awards ( 1 ) — — ( 260 ) — — ( 260 ) Stock compensation — — 6,265 — — — 6,265 Other comprehensive income, net of tax — — — — — 7,645 7,645 Net income — — — — 24,986 — 24,986 Balance, September 30, 2020 20,969 $ 2,097 $ 683,326 $ ( 180 ) $ 782,510 $ ( 15,533 ) $ 1,452,220 6 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 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 7 Table of Contents ICU MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Nine months ended September 30, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 60,728 $ 80,394 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 64,037 57,025 Amortization of right-of-use assets 6,859 6,149 Provision for doubtful accounts 2,785 7,839 Provision for warranty and returns ( 1,296 ) 1,277 Stock compensation 18,614 16,161 Loss on disposal of property and equipment and other assets 1,673 13,350 Bond premium amortization 126 103 Debt issuance costs amortization 216 216 Change in fair value of contingent earn-out 7,000 ( 47,400 ) Product-related charges 2,626 — Usage of spare parts 8,391 20,044 Other 2,523 1,757 Changes in operating assets and liabilities: Accounts receivable 38,933 ( 32,484 ) Inventories 8,859 ( 30,924 ) Prepaid expenses and other assets ( 6,535 ) 8,815 Other assets ( 12,121 ) ( 29,494 ) Accounts payable ( 38,032 ) ( 3,038 ) Accrued liabilities ( 20,417 ) ( 23,214 ) Income taxes, including excess tax benefits and deferred income taxes ( 743 ) 6,478 Net cash provided by operating activities 144,226 53,054 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ( 62,362 ) ( 73,253 ) Proceeds from sale of asset 154 19 Business acquisitions, net of cash acquired — ( 4,600 ) Intangible asset additions ( 6,325 ) ( 6,461 ) Purchases of investment securities ( 9,603 ) ( 17,994 ) Proceeds from sale of investment securities 20,900 36,400 Net cash used in investing activities ( 57,236 ) ( 65,889 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term debt 150,000 — Repayment of short-term debt ( 150,000 ) — Proceeds from exercise of stock options 8,586 4,240 Payments on finance leases ( 231 ) — Tax withholding payments related to net share settlement of equity awards ( 12,821 ) ( 18,478 ) Net cash used in financing activities ( 4,466 ) ( 14,238 ) Effect of exchange rate changes on cash ( 201 ) ( 1,759 ) NET INCREASE (DECREASE) CASH AND CASH EQUIVALENTS 82,323 ( 28,832 ) CASH AND CASH EQUIVALENTS, beginning of period 268,670 344,781 CASH AND CASH EQUIVALENTS, end of period $ 350,993 $ 315,949 The accompanying notes are an integral part of these condensed consolidated financial statements. 8 Table of Contents ICU MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - CONTINUED (In thousands) Nine months ended September 30, 2020 2019 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES: Accounts payable for property and equipment $ 3,633 $ 11,365 The accompanying notes are an integral part of these condensed consolidated financial statements. 9 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, 2019. 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. Note 2: New Accounting Pronouncements Recently Adopted 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 adopted this ASU effective January 1, 2020. This ASU did not have a material impact on our condensed consolidated financial statements or 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 10 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) beginning after December 15, 2019. Early adoption is permitted. We adopted this ASU effective January 1, 2020. This ASU did not have a material impact on our condensed consolidated financial statements or 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 adopted this ASU effective January 1, 2020. This ASU did not have a material impact on our condensed consolidated financial statements or related disclosures. Recently Issued Accounting Standards In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional guidance for a limited period of time to ease the potential burden for reference rate reform on financial reporting. Due to concerns about structural risks of interbank offered rates and, particularly, the risk of cessation of the London Interbank Offered Rate ("LIBOR"), regulators around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued as a result of reference rate reform. Optional expedients may be applied to contracts that are modified as a result of the reference rate reform. Modifications of contracts within the scope of Topic 470, Debt, should be accounted for by prospectively adjusting the effective interest rate. Modifications of contracts within the scope of ASC 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate (incremental borrowing rate). Exceptions to Topic 815, Derivatives and Hedging, results in not having a dedesignation of a hedging relationship if certain criteria are met. The amendments in this ASU are effective for all entities as of March 12, 2020 through December 31, 2022. We are currently reviewing the impact of this ASU on our contracts. Note 3: Restructuring, Strategic Transaction and Integration Restructuring, strategic transaction and integration expenses were $ 4.1 million and $ 22.9 million for the three and nine months ended September 30, 2020, respectively, as compared to $ 8.0 million and $ 69.4 million for the three and nine months ended September 30, 2019, respectively. Restructuring During the three and nine months ended September 30, 2020, restructuring charges were $ 0.0 million and $ 8.1 million, respectively. During the three and nine months ended September 30, 2019, restructuring charges were $ 0.8 million and $ 8.4 million, respectively. Restructuring charges for the nine months ended September 30, 2020 were primarily related to severance and costs related to office and other facility closures. Restructuring charges for the three and nine months ended September 30, 2019 were 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, 2020 (in thousands): 11 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Accrued Balance January 1, 2020 Charges Incurred Payments Currency Translation Accrued Balance September 30, 2020 Severance pay and benefits $ 3,878 $ 3,706 $ ( 5,215 ) $ ( 43 ) $ 2,326 Employment agreement buyout 460 — ( 370 ) — 90 Facility closure expenses 1,211 4,402 ( 4,299 ) 230 1,544 $ 5,549 $ 8,108 $ ( 9,884 ) $ 187 $ 3,960 Strategic transaction and integration expenses We incurred and expensed $ 4.1 million and $ 14.8 million in strategic transaction and integration expenses during the three and nine months ended September 30, 2020, respectively, as compared to $ 7.2 million and $ 61.0 million during the three and nine months ended September 30, 2019, respectively. The strategic transaction and integration expenses during the three and nine months ended September 30, 2020 and 2019, were primarily related to the integration of the Hospira Infusion Systems ("HIS") business acquired in 2017 from Pfizer, which for the nine months ended September 30, 2020, included expenses for the migration of IT systems at our Austin facility. The strategic transaction and integration expenses during the nine months ended September 30, 2019, included a one-time strategic supply chain restructuring charge of $ 22.1 million, which reduced our contracted commitments to our third party manufacturer. The nine months ended September 30, 2019 also included a $ 12.7 million non-cash write-off of assets related to our final Pfizer separation costs. Note 4: Revenue Our primary product lines are Infusion Consumables, Infusion Systems, IV Solutions 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 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 2020 2019 2020 2019 Europe, the Middle East and Africa $ 32,596 $ 31,474 $ 99,107 $ 96,830 Other Foreign 48,525 53,398 175,618 156,353 Total Foreign 81,121 84,872 274,725 253,183 United States 237,446 222,599 675,828 697,502 Total Revenues $ 318,567 $ 307,471 $ 950,553 $ 950,685 The following table represents our revenues disaggregated by product (in thousands): 12 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the three months ended September 30, For the nine months ended September 30, Product line 2020 2019 2020 2019 Infusion Consumables $ 116,054 $ 119,745 $ 350,554 $ 357,994 Infusion Systems 88,388 78,932 267,856 244,523 IV Solutions 101,900 98,159 295,369 313,976 Critical Care 12,225 10,635 36,774 34,192 Total Revenues $ 318,567 $ 307,471 $ 950,553 $ 950,685 Contract balances The following table presents our changes in the contract balances for the nine months ended September 30, 2020 and 2019 (in thousands): Contract Liabilities Beginning balance, January 1, 2020 $ ( 4,855 ) Equipment revenue recognized 9,920 Equipment revenue deferred due to implementation ( 13,679 ) Software revenue recognized 4,715 Software revenue deferred due to implementation ( 5,033 ) Ending balance, September 30, 2020 $ ( 8,932 ) 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 ) As of September 30, 2020, revenue from remaining performance obligations related to implementation of software and equipment is $ 7.6 million. We expect to recognize substantially all of this revenue within the next three to six months dependent on implementation restrictions due to the novel coronavirus ("COVID-19"). Revenue from remaining performance obligations related to annual software licenses is $ 1.3 million. We expect to recognize substantially all of this revenue over the next twelve months. Note 5: Leases Leases We determine if an arrangement is a lease at inception. Our operating lease assets are separately stated in operating lease right-of-use ("ROU") assets and our financing lease assets are included in other assets on our condensed consolidated balance sheets. Our lease liabilities are included in accrued liabilities, and other long-term liabilities on our condensed consolidated balance sheets. We have elected not to recognize an ROU asset and lease liability for leases with terms of twelve months or less. Lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Most of our leases do not provide an implicit rate, therefore we use our incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term based on the information available at commencement date. Our lease ROU assets exclude lease incentives and initial direct costs incurred. Our lease terms include options to extend when it is reasonably certain that we will exercise that option. All of our leases have 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. 13 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Our leases are for corporate offices, sales and support offices, a distribution facility, 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, For the nine months ended September 30, 2020 2019 2020 2019 Operating lease cost $ 2,861 $ 2,996 $ 8,428 $ 7,528 Finance lease cost - interest 29 — 62 — Finance lease cost - amortization of ROU asset 125 — 252 — Short-term lease cost 74 49 200 229 Total lease cost $ 3,089 $ 3,045 $ 8,942 $ 7,757 Interest expense on our finance leases is included in other income (expense), net in our condensed consolidated statement of operations. The amortization of the operating and finance ROU asset is included in selling, general and administrative expenses in our condensed consolidated statement of operations. The following table presents the supplemental cash flow information related to our leases (in thousands): For the nine months ended September 30, 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 7,303 $ 7,161 Operating cash flows from finance leases $ 62 $ — Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 20,264 $ 2,495 Finance leases $ 2,870 $ — 14 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table presents the supplemental balance sheet information related to our operating leases (in thousands, except lease term and discount rate): As of September 30, 2020 As of December 31, 2019 Operating leases Operating lease right-of-use assets $ 47,802 $ 34,465 Accrued liabilities $ 8,456 $ 7,362 Other long-term liabilities 42,512 28,896 Total operating lease liabilities $ 50,968 $ 36,258 Weighted Average Remaining Lease Term Operating leases 6.8 years 6.0 years Weighted Average Discount Rate Operating leases 5.03 % 5.57 % The following table presents the supplemental balance sheet information related to our finance leases (in thousands, except lease term and discount rate): As of September 30, 2020 Financing leases Financing lease right-of-use assets $ 2,729 Accrued liabilities $ 473 Other long-term liabilities 2,274 Total financing lease liabilities $ 2,747 Weighted Average Remaining Lease Term Financing leases 7.0 years Weighted Average Discount Rate Financing leases 4.27 % As of September 30, 2020, the maturities of our operating and financing lease liabilities for each of the next five years is approximately (in thousands): Operating Leases Finance Leases Remainder of 2020 $ 2,789 $ 145 2021 10,571 578 2022 9,639 578 2023 8,685 578 2024 8,235 283 2025 4,958 189 Thereafter 15,113 804 Total Lease Payments 59,990 3,155 Less imputed interest ( 9,022 ) ( 408 ) Total $ 50,968 $ 2,747 15 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 6: Net Income Per Share Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period plus dilutive securities. Dilutive securities include outstanding common stock options and unvested restricted stock units, less the number of shares that could have been purchased with the proceeds from the exercise of the options, using the treasury stock method. Options and restricted stock units that are anti-dilutive are not included in the treasury stock method calculation. There were 14,017 and 20,116 anti-dilutive securities for the three months ended September 30, 2020 and 2019, respectively. There were 12,182 and 9,375 anti-dilutive securities for the nine months ended September 30, 2020 and 2019, respectively. The following table presents the calculation of net earnings per common share (“EPS”) — basic and diluted (in thousands, except per share data): Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Net income $ 24,986 $ 26,563 $ 60,728 $ 80,394 Weighted-average number of common shares outstanding (for basic calculation) 20,948 20,666 20,870 20,607 Dilutive securities 608 821 691 949 Weighted-average common and common equivalent shares outstanding (for diluted calculation) 21,556 21,487 21,561 21,556 EPS — basic $ 1.19 $ 1.29 $ 2.91 $ 3.90 EPS — diluted $ 1.16 $ 1.24 $ 2.82 $ 3.73 Note 7: Derivatives and Hedging Activities Hedge Accounting and Hedging Program The purpose of our hedging program is to manage the foreign currency exchange rate risk on forecasted expenses denominated in currencies other than the functional currency of the operating unit. 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 par forward contract is designated and qualifies as a cash flow hedge. 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 changes in the intrinsic value of the effective portion of the gain or loss on the derivative instrument as a component of Other Comprehensive Income and we reclassify that gain or loss into earnings in the same line item associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. In March 2020, we entered into a one-year cross-currency par forward contract that extends our current hedge of a portion of our Mexico forecasted expenses denominated in Pesos ("MXN"). The total notional amount of this outstanding derivative as of September 30, 2020 was approximately 473.2 million MXN. The term of the one-year contract is November 3, 2020 to December 1, 2021. The derivative instrument matures in equal monthly amounts at a fixed forward rate of 24.26 MXN/USD. In November 2018, we entered into a one-year cross-currency par forward contract that hedges of a portion of our Mexico forecasted expenses denominated in MXN. The total notional amount of this outstanding derivative as of September 30, 2020 was approximately 66.3 million MXN. The term of the one-year hedge is November 1, 2019 to November 3, 2020. The derivative instrument matures in equal monthly amounts at a fixed forward rate of 22.109 MXN/USD. The following table presents the fair values of our derivative instruments included within the Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 (in thousands): 16 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Derivatives Condensed Consolidated Balance Sheet Location September 30, 2020 December 31, 2019 Derivatives designated as cash flow hedging instruments Foreign exchange forward contract: Prepaid expenses and other current assets $ 1,090 $ 2,366 Other assets 216 — Accrued liabilities ( 6 ) — Total derivatives designated as cash flow hedging instruments $ 1,300 $ 2,366 The following table presents the amounts affecting the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 (in thousands): Line Item in the Condensed Consolidated Statements of Operations Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Derivatives designated as cash flow hedging instruments Foreign exchange forward contracts Cost of goods sold $ ( 49 ) $ 229 $ 423 $ 573 We recognized the following gains (losses) on our foreign exchange contracts designated as a cash flow hedge (in thousands): Amount of Gain Recognized in Other Comprehensive Income on Derivatives Amount of (Loss) Gain Reclassified From Accumulated Other Comprehensive Income into Income Three months ended September 30, Three months ended September 30, 2020 2019 Location of (Loss) Gain Reclassified From Accumulated Other Comprehensive Income into Income 2020 2019 Derivatives designated as cash flow hedges: Foreign exchange forward contract $ 1,287 $ ( 264 ) Cost of goods sold $ ( 49 ) $ 229 Total derivatives designated as cash flow hedging instruments $ 1,287 $ ( 264 ) $ ( 49 ) $ 229 Amount of (Loss) Gain Recognized in Other Comprehensive Income on Derivatives Amount of Gain Reclassified From Accumulated Other Comprehensive Income into Income Nine months ended September 30, Nine months ended September 30, 2020 2019 Location of Gain Reclassified From Accumulated Other Comprehensive Income into Income 2020 2019 Derivatives designated as cash flow hedges: Foreign exchange forward contract $ ( 642 ) $ 1,421 Cost of goods sold $ 423 $ 573 Total derivatives designated as cash flow hedging instruments $ ( 642 ) $ 1,421 $ 423 $ 573 17 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of September 30, 2020, we expect approximately $ 1.1 million of the deferred gains on the outstanding derivatives in accumulated other comprehensive income to be reclassified to net income during the next twelve months concurrent with the underlying hedged transactions also being reported in net income. Note 8: Fair Value Measurement 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. Earn-out Liability In 2017, we recognized an earn-out liability upon the acquisition of HIS from Pfizer. Pfizer was entitled up to $ 225 million in cash if certain performance targets for the combined company for the three years ending December 31, 2019 were achieved. The initial fair value of the earn-out was determined by employing a Monte Carlo simulation in a risk neutral framework. The underlying simulated variable was adjusted EBITDA. The adjusted EBITDA volatility estimate was based on a study of historical asset volatility for a set of comparable public companies. The model included other assumptions including the market price of risk, which was calculated as the weighted average cost of capital ("WACC") less the long term risk free rate. The initial value assigned to the contingent consideration was a result of forecasted product demand of our HIS business. At each reporting date subsequent to the acquisition we remeasured the earn-out using the same methodology above and recognized any changes in value. As of December 31, 2019, we determined that we did not meet the necessary performance targets that would require payout of any of the HIS earn-out liability. As of the date of this filing, Pfizer has disputed our determination that the performance targets requiring payout of the HIS earn-out liability were not met. If we do not reach agreement on this issue with Pfizer, the dispute will be resolved by binding arbitration, that will likely be concluded within the next three to six months. In the fourth quarter of 2019, we recognized an earn-out liability related to the acquisition of Pursuit Vascular, Inc. ("Pursuit"). Pursuit's former equity holders are entitled up to $ 50.0 million in additional cash consideration contingent upon the achievement of certain sales and gross profit targets for specific customers. The earn-out will be calculated as a percentage of gross profit achieved during the earn-out period against a pre-determined target gross profit, not to exceed $ 50.0 million. We used a Monte Carlo simulation model to determine the fair value of the earn-out liability. The Monte Carlo simulation model utilizes multiple input variables to determine the value of the earn-out liability including historical volatility, a risk free interest rate, counter party credit risk and projected future gross profit, see below simulation input table related to Pursuit. The historical volatility was based on the median of ICU and a certain peer group. The risk-free interest rate is equal to the yield, as of the valuation date, of the zero-coupon U.S. Treasury bill that is commensurate with the term of the earn-out. The counter party credit risk is based on a synthetic credit rating of B1. If the probabilities in the model significantly change from what we initially and subsequently anticipate, the change could have a significant impact on our financial statements in the period recognized. Our contingent earn-out liability is separately stated in 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): 18 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Pursuit Earn-out Liability Accrued balance, January 1, 2020 $ 17,300 Change in fair value of earn-out (included in income from operations as a separate line item) — Accrued balance, March 31, 2020 $ 17,300 Change in fair value of earn-out (included in income from operations as a separate line item) 2,700 Accrued balance, June 30, 2020 $ 20,000 Change in fair value of earn-out (included in income from operations as a separate line item) 4,300 Accrued balance, September 30, 2020 $ 24,300 HIS Earn-out Liability Accrued balance, January 1, 2019 $ 47,400 Change in fair value of earn-out (included in income from operations as a separate line item) ( 7,700 ) Accrued balance, March 31, 2019 $ 39,700 Change in fair value of earn-out (included in income from operations as a separate line item) ( 39,500 ) Accrued balance, June 30, 2019 $ 200 Change in fair value of earn-out (included in income from operations as a separate line item) ( 200 ) Accrued balance, September 30, 2019 $ — The fair value of the Pursuit earn-out increased at September 30, 2020 from the fair value calculated at December 31, 2019 primarily due to changes in the probabilities within the valuation model. The following tables provide quantitative information about Level 3 inputs for fair value measurement of our earn-out liabilities: Pursuit Earn-out Simulation Input As of September 30, 2020 At Acquisition November 2, 2019 Revenue/Gross Profit Volatility 35.00 % 20.00 % Discount Rate 12.50 % 15.00 % Risk Free Rate 0.12 % 1.55 % Counter Party Risk 4.50 % 6.00 % HIS Earn-out Simulation Input As of December 31, 2018 Adjusted EBITDA Volatility 30.00 % WACC 8.25 % 20-year risk free rate 2.87 % Market price of risk 5.24 % Cost of debt 5.25 % 19 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Investments and Foreign Currency Contracts The fair value of our investments is estimated using observable market-based inputs such as quoted prices, interest rates and yield curves or Level 2 inputs, which consisted of corporate bonds. The fair value of our Level 2 forward currency contracts are 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. 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 at September 30, 2020 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 securities: Short-term $ 12,544 $ — $ 12,544 $ — Foreign exchange forwards: Prepaid expenses and other current assets 1,090 — 1,090 — Other assets 216 — 216 — Total Assets $ 13,850 $ — $ 13,850 $ — Liabilities: Earn-out liability $ 24,300 $ — $ — $ 24,300 Foreign exchange forwards: Accrued liabilities 6 — 6 — Total Liabilities $ 24,306 $ — $ 6 $ 24,300 Fair value measurements at December 31, 2019 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 securities: Short-term $ 23,967 $ — $ 23,967 $ — Foreign exchange forwards: Prepaid expenses and other current assets 2,366 — 2,366 — Total Assets $ 26,333 $ — $ 26,333 $ — Liabilities: Earn-out liability $ 17,300 $ — $ — $ 17,300 Total Liabilities $ 17,300 $ — $ — $ 17,300 Note 9: Investment Securities Our investment securities currently consist of short-term corporate bonds. Our investment securities are considered available-for-sale and are “investment grade” and carried at fair value. Available-for-sale securities are recorded at fair value, and unrealized holding gains and losses are recorded, net of tax, as a component of accumulated other comprehensive income. Unrealized losses on available-for-sale securities are charged against net earnings when a decline in fair value is determined to 20 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) be other than temporary. Our management reviews several factors to determine whether a loss is other than temporary, such as the length and extent of the fair value decline, the financial condition and near term prospects of the issuer, and for equity investments, our intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. The amortized cost of the debt securities are adjusted for the amortization of premiums computed under the effective interest method. Such amortization is included in investment income in other income (expense), net on our condensed consolidated statements of operations. There have been no realized gains or losses on their disposal. Realized gains and losses are accounted for on the specific identification method. The scheduled maturities of the debt securities are between 2020 and 2021. All short-term investment securities are callable within one year. Our short investment securities consisted of the following (in thousands): As of September 30, 2020 Amortized Cost Unrealized Holding Gains (Losses) Fair Value Short-term corporate bonds $ 12,544 $ — $ 12,544 As of December 31, 2019 Amortized Cost Unrealized Holding Gains (Losses) Fair Value Short-term corporate bonds $ 23,967 $ — $ 23,967 Note 10: Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of the following (in thousands): September 30, 2020 December 31, 2019 Other prepaid expenses and receivables 17,384 13,778 Deferred costs 11,047 3,332 Prepaid insurance and property taxes 1,034 5,450 VAT/GST receivable 3,982 4,422 Deferred tax charge 4,769 1,266 Deposits 1,334 1,375 Other 2,521 4,358 $ 42,071 $ 33,981 Note 11: Inventories Inventories are stated at the lower of cost or net realizable value with cost determined using the first-in, first-out method. Inventory costs consist of those costs directly attributable to products prior to sale including among other things raw material, labor and overhead. Inventories consisted of the following (in thousands): September 30, 2020 December 31, 2019 Raw materials $ 126,475 $ 119,709 Work in process 30,151 39,515 Finished goods 165,335 178,416 Total inventories $ 321,961 $ 337,640 21 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 12: Property and Equipment Property and equipment consisted of the following (in thousands): September 30, 2020 December 31, 2019 Machinery and equipment $ 258,083 $ 219,057 Land, building and building improvements 234,368 230,454 Molds 60,379 60,155 Computer equipment and software 96,990 83,217 Furniture and fixtures 7,602 7,498 Instruments placed with customers (1) 83,844 74,434 Construction in progress 78,557 101,425 Total property and equipment, cost 819,823 776,240 Accumulated depreciation ( 363,475 ) ( 320,155 ) Property and equipment, net $ 456,348 $ 456,085 ______________________________ (1) Instruments placed with customers consist of drug-delivery and monitoring systems placed with customers under operating leases. Depreciation expense was $ 15.6 million and $ 46.7 million for the three and nine months ended September 30, 2020, respectively, as compared to $ 14.8 million and $ 44.6 million for the three and nine months ended September 30, 2019, respectively. Note 13: Goodwill and Intangible Assets, Net Goodwill The following table presents the changes in the carrying amount of our goodwill (in thousands): Total Balance as of January 1, 2020 $ 31,245 Other (1) 1,346 Currency translation 60 Balance as of September 30, 2020 $ 32,651 _______________________________________________ (1) Other relates to a measurement period adjustment to deferred taxes related to our 2019 acquisition of Pursuit. Intangible Assets, Net Intangible assets, carried at cost less accumulated amortization and amortized on a straight-lined basis, were as follows (in thousands): 22 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Weighted Average September 30, 2020 Amortization Life in Years Cost Accumulated Amortization Net Patents 10 $ 24,260 $ 14,654 $ 9,606 Customer contracts 12 10,251 5,758 4,493 Non-contractual customer relationships 9 57,261 24,722 32,539 Trademarks 4 425 425 — Trade name 15 18,258 3,183 15,075 Developed technology 13 152,893 33,752 119,141 Non-compete 3 2,500 764 1,736 Total amortized intangible assets $ 265,848 $ 83,258 $ 182,590 Internally developed software* $ 17,838 $ 17,838 Total intangible assets $ 283,686 $ 83,258 $ 200,428 ______________________________ * Internally developed software will be amortized when the projects are complete and the assets are ready for their intended use. Weighted Average December 31, 2019 Amortization Life in Years Cost Accumulated Amortization Net Patents 10 $ 22,322 $ 13,519 $ 8,803 Customer contracts 12 10,122 5,506 4,616 Non-contractual customer relationships 9 57,296 19,787 37,509 Trademarks 4 425 425 — Trade name 15 18,256 2,254 16,002 Developed technology 13 152,354 24,228 128,126 Non-compete 3 2,500 139 2,361 Total amortized intangible assets $ 263,275 $ 65,858 $ 197,417 Internally developed software* $ 13,991 $ 13,991 Total intangible assets $ 277,266 $ 65,858 $ 211,408 ______________________________ * Internally developed software will be amortized when the projects are complete and the assets are ready for their intended use. Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives. During the three and nine months ended September 30, 2020, intangible asset amortization expense was $ 5.8 million and $ 17.4 million, respectively, as compared to $ 4.4 million and $ 12.4 million for the three and nine months ended September 30, 2019, respectively. As of September 30, 2020 estimated annual amortization for our intangible assets for each of the next five years is approximately (in thousands): 23 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Remainder of 2020 $ 6,363 2021 23,148 2022 22,506 2023 21,663 2024 21,573 2025 16,666 Thereafter 70,671 Total $ 182,590 Note 14: Accrued Liabilities and Other Long-Term Liabilities Accrued liabilities consist of the following (in thousands): September 30, 2020 December 31, 2019 Salaries and benefits $ 26,536 $ 21,116 Incentive compensation 20,030 15,221 Accrued supply chain restructuring costs 753 23,119 Operating lease liability-ST 8,456 7,362 Accrued product field action 334 2,096 Accrued sales taxes 2,160 2,615 Restructuring accrual 3,960 5,459 Deferred revenue 8,425 4,761 Accrued other taxes 3,738 4,054 Accrued professional fees 2,128 4,782 Legal accrual 700 826 Distribution fees 7,153 3,942 Warranties and returns 1,067 782 Accrued freight 10,065 11,238 Contract liabilities-ST — 1,935 Contract settlement 417 1,667 Other 7,475 6,801 $ 103,397 $ 117,776 Other long-term liabilities consist of the following (in thousands): September 30, 2020 December 31, 2019 Operating lease liability-LT $ 42,512 $ 28,896 Benefits 1,064 1,131 Accrued rent 1,445 1,642 Contract liabilities-LT 371 472 Financing lease liability-LT 2,274 — Other 1,084 679 $ 48,750 $ 32,820 24 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 15: Income Taxes Income taxes were accrued at an estimated effective tax rate of 5 % and 10 % for the three and nine months ended September 30, 2020, respectively, as compared to 19 % and 14 % for the three and nine months ended September 30, 2019, respectively. The effective tax rate for the three and nine months ended September 30, 2020 differs from the federal statutory rate of 21 % principally because of the effect of the mix of U.S. and foreign incomes, state income taxes, global intangible low-taxed income ("GILTI"), foreign-derived intangible income ("FDII"), tax credits and the following discrete tax items recognized during the interim periods: • Excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the three and nine months ended September 30, 2020 of $ 0.1 million and $ 3.6 million, respectively. • The revaluation of the contingent consideration during the three and nine months ended September 30, 2020, which resulted in a tax benefit of $ 0.7 million and $ 1.1 million, respectively. • U.S. federal and state return-to-provision adjustments net of related reserve changes for the year ended December 31, 2019 resulted in a tax benefit of $ 3.8 million primarily due to changes in estimates for GILTI, FDII, and related foreign tax credits. The effective tax rate for the three and nine months ended September 30, 2019 differs from the federal statutory rate of 21 % principally because of the effect of the mix of U.S. and foreign incomes, state income taxes, GILTI and tax credits and the following discrete tax items recognized during the interim periods: • Excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the three and nine months ended September 30, 2019 of $ 0.3 million and $ 7.7 million, respectively. • The revaluation of the contingent consideration during the nine months ended September 30, 2019 resulted in a tax expense of $ 11.4 million. • The repatriation of certain intellectual property and assets from one of our foreign subsidiaries to the U.S. parent resulted in a net tax benefit of $ 3.8 million. • A return-to-provision adjustment for the year ended December 31, 2018 included a tax expense of $ 2.2 million primarily due to changes in estimates for GILTI. Note 16: Long-Term Obligations Five-year Senior Secured Revolving Credit Facility ("Credit Facility") On November 8, 2017, we entered into a Credit Facility with various lenders for $ 150.0 million, with Wells Fargo Bank, N.A. as the administrative agent, swingline lender and issuing lender. During March 2020, as a result of market uncertainty caused by COVID-19, we preemptively borrowed $ 150.0 million on our Credit Facility as a conservative measure to manage any potential short-term liquidity risk. In September 2020, we fully repaid the borrowings under our Credit Facility. As of September 30, 2020, we had no borrowings and $ 150.0 million of availability under the Credit Facility. Principal payments on the revolving Credit Facility are made at our discretion with the unpaid amount due at maturity. The Credit Facility matures on November 8, 2022 . Interest on borrowings under the Credit Facility, at our option, is based on the Base Rate plus applicable margin or the London Interbank Offered Rate ("LIBOR") plus applicable margin, see further details in Part II, Item 8, of our 2019 Annual Report on Form 10-K. Debt Covenants The Credit Facility contains certain financial covenants pertaining to Consolidated Fixed Charge Coverage and Consolidated Total Leverage Ratios. In addition, the Credit Facility has restrictions pertaining to limitations on debt, liens, negative pledges, loans, advances, acquisitions, other investments, dividends, distributions, redemptions, repurchases of equity interests, fundamental changes and asset sales and other dispositions, prepayments, redemptions and purchases of subordinated debt and other junior debt, transactions with affiliates, dividend and payment restrictions affecting subsidiaries, changes in line of business, fiscal year and accounting practices and amendment of organizational documents and junior debt documents. 25 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Consolidated Leverage Ratio is defined as the ratio of Consolidated Total Funded Indebtedness on such date, to Consolidated Adjusted EBITDA, as defined under the Credit Facility Agreement, for the most recently completed four fiscal quarters. The maximum Consolidated Leverage Ratio is not more than 3.00 to 1.00. The Consolidated Fixed Charge Coverage Ratio is defined as the ratio of: (a) Consolidated Adjusted EBITDA less the sum of (i) capital expenditures, (ii) federal, state, local and foreign income taxes paid in cash and (iii) cash restricted payments made after the closing date, to (b) Consolidated Fixed Charges for the most recently completed four fiscal quarters, calculated on a pro forma basis. The minimum Consolidated Fixed Charge Coverage Ratio is 2.00 to 1.00. We were in compliance with all financial covenants as of September 30, 2020. Note 17: Stockholders' Equity Treasury Stock In August 2019, our Board of Directors approved a new share purchase plan to purchase up to $ 100.0 million of our common stock. This plan replaced our existing plan and has no expiration date. During the nine months ended September 30, 2020, we did not purchase any shares of our common stock under our stock purchase plans. As of September 30, 2020, all of the $ 100.0 million available for purchase was remaining under the plan. We are currently limited on share purchases in accordance with the terms and conditions of our Credit Facility (see Note 16: Long-Term Obligations). For the nine months ended September 30, 2020, we withheld 66,749 shares of our common stock from employee vested restricted stock units in consideration for $ 12.8 million in payments made on the employee's behalf for their minimum statutory income tax withholding obligations. For the nine months ended September 30, 2019, we withheld 79,313 shares of our common stock from employee vested restricted stock units in consideration for $ 18.5 million in payments made on the employee's behalf for their minimum statutory income tax withholding obligations. Treasury stock is used to issue shares for stock option exercises, restricted stock grants and employee stock purchase plan stock purchases. Accumulated Other Comprehensive (Loss) Income The components of accumulated other comprehensive (loss) income ("AOCI"), net of tax, were as follows (in thousands): Foreign Currency Translation Adjustments Unrealized Gains on Cash Flow Hedges Other Adjustments Total Balance as of January 1, 2020 $ ( 17,310 ) $ 1,880 $ 28 $ ( 15,402 ) Other comprehensive loss before reclassifications ( 10,477 ) ( 2,426 ) ( 81 ) ( 12,984 ) Amounts reclassified from AOCI — ( 526 ) — ( 526 ) Other comprehensive loss ( 10,477 ) ( 2,952 ) ( 81 ) ( 13,510 ) Balance as of March 31, 2020 $ ( 27,787 ) $ ( 1,072 ) $ ( 53 ) $ ( 28,912 ) Other comprehensive income before reclassifications 4,604 960 4 5,568 Amounts reclassified from AOCI — 166 — 166 Other comprehensive income 4,604 1,126 4 5,734 Balance as of June 30, 2020 $ ( 23,183 ) $ 54 $ ( 49 ) $ ( 23,178 ) Other comprehensive income before reclassifications 6,626 978 3 7,607 Amounts reclassified from AOCI — 38 — 38 Other comprehensive income 6,626 1,016 3 7,645 Balance as of September 30, 2020 $ ( 16,557 ) $ 1,070 $ ( 46 ) $ ( 15,533 ) 26 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Foreign Currency Translation Adjustments Unrealized Gains on Cash Flow Hedges Other Adjustments Total Balance as of January 1, 2019 $ ( 17,682 ) $ 638 $ 99 $ ( 16,945 ) Other comprehensive (loss) income before reclassifications ( 1,592 ) 768 6 ( 818 ) Amounts reclassified from AOCI — ( 118 ) — ( 118 ) Other comprehensive (loss) income ( 1,592 ) 650 6 ( 936 ) Balance as of March 31, 2019 $ ( 19,274 ) $ 1,288 $ 105 $ ( 17,881 ) Other comprehensive income before reclassifications 2,838 513 — 3,351 Amounts reclassified from AOCI — ( 144 ) — ( 144 ) Other comprehensive income 2,838 369 — 3,207 Balance as of June 30, 2019 $ ( 16,436 ) $ 1,657 $ 105 $ ( 14,674 ) Other comprehensive income before reclassifications ( 7,533 ) ( 201 ) — ( 7,734 ) Amounts reclassified from AOCI — ( 174 ) — ( 174 ) Other comprehensive income ( 7,533 ) ( 375 ) — ( 7,908 ) Balance as of September 30, 2019 $ ( 23,969 ) $ 1,282 $ 105 $ ( 22,582 ) Note 18: Commitments and Contingencies Legal Proceedings From time to time, we are involved in various legal proceedings, most of which are routine litigation, in the normal course of business. Our management does not believe that the resolution of the unsettled legal proceedings that we are involved with will have a material adverse impact on our financial position or results of operations. Off-Balance Sheet Arrangements In the normal course of business, we have agreed to indemnify our officers and directors to the maximum extent permitted under Delaware law and to indemnify customers as to certain intellectual property matters or other matters related to sales of our products. There is no maximum limit on the indemnification that may be required under these agreements. Although we can provide no assurances, we have never incurred, nor do we expect to incur, any material liability for indemnification. Contingencies During November 2019, we acquired Pursuit. Total consideration for the acquisition includes a potential contractual earn-out of up to $ 50.0 million, to be paid to former Pursuit equity holders, calculated based upon the achievement of certain performance targets during the earn-out period (see Note 8: Fair Value Measurement). We had a contractual obligation in connection with our 2017 acquisition of HIS, which as of December 31, 2019 we determined did not meet the necessary performance targets that would require payout of any of the HIS earn-out liability. As of the date of this filing, Pfizer has disputed our determination that the performance targets requiring payout of the HIS earn-out liability were not met. If we do not reach agreement on this issue with Pfizer, the dispute will be resolved by binding arbitration (see Note 8, Fair Value Measurements). Commitments We have non-cancellable operating lease agreements where we are contractually obligated to pay certain lease payment amounts (see Note 5: Leases). 27 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 19: Collaborative and Other Arrangements On February 3, 2017, we entered into two Manufacturing and Supply Agreements ("MSAs"), (i) whereby Pfizer will manufacture and supply us with certain agreed upon products for an initial five-year term with a one-time two-year option to extend and (ii) whereby we will manufacture and supply Pfizer certain agreed upon products for a term of five or ten years depending on the product, also with a one-time two-year option to extend. The MSAs provide each party with mutually beneficial interests and both of the MSAs are to be jointly managed by both Pfizer and ICU. The initial supply price, which will be annually updated, is in full consideration for all costs associated with the manufacture, documentation, packaging and certification of the products. Note 20: COVID-19 Pandemic In late 2019, a novel coronavirus (“COVID-19”) was first reported in Wuhan, China, and on March 11, 2020, the World Health Organization characterized COVID-19 as a global pandemic. The spread of COVID-19 around the world in 2020 has caused significant volatility in U.S. and international markets. During the first nine months of 2020, our operations have been impacted globally by lower admission rates and procedural volumes at our hospital customers. Specifically, since the beginning of the second quarter we have generally seen decreased demand for products within our Infusion Consumables and IV Solutions businesses along with the dedicated infusion sets within Infusion Systems. This decline has been partially offset by increased demand for infusion pump hardware within Infusion Systems. We have also incurred increased expenses as a result of COVID-19 for additional compensation paid to our manufacturing and distribution facility workers along with personal protection equipment and other items. At the same time, we have seen some expense decreases due to reductions in travel and other discretionary spending. We have also incurred foreign exchange losses related to fluctuations in certain foreign currencies as a result of deteriorating economic conditions. However, the impacts of COVID-19 and the measures taken to limit its spread may increase in severity and may result in a material adverse impact on our financial position, results of operations and cash flows in the future. In addition to the effects discussed above, possible impact may include, but is not limited to: lost revenue or additional costs associated with a disruption to our production or distribution facilities; customers may experience financial difficulties and may be unable to pay within payment terms for the products they purchased; reduced revenue due to restricted access to healthcare customers; lower revenue and income due to foreign currency fluctuations; lower travel and entertainment costs due to travel restrictions; and lower income due to a delay in cost savings projects. While our operations have been designated as essential activities by certain state and city jurisdictions, COVID-19 is likely to negatively impact our operating results and financial position, the extent and duration cannot be reasonably estimated at this time.