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Item 7. Management’s Discussion and Analysis

2021-02-26 compared with 2020-03-02 · 170 added, 142 removed, 374 unchanged (45% of the section changed)

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Business Overview and Highlights

We are one of the world's leading pure-play infusion therapy companies with global operations and a wide-ranging product portfolio that includes IV solutions, IV smart pumps, dedicated and nondedicated IV sets and needlefree connectors, along with pain management and safety software technology designed to help meet clinical, safety and workflow goals.

In addition, we manufacture automated pharmacy IV compounding systems with workflow technology, closed system transfer devices for hazardous IV drugs and cardiac monitoring systems to optimize patient fluid levels.

The system integration of Pfizer's HIS business that was primarily completed by the end of 2018 resulted in cost improvements and operating efficiencies during 2019.

These cost improvements and operating efficiencies partially offset the revenue decrease for the current period as compared to the prior year, which was driven in part by our competitive commercial environment, primarily in our IV Solutions product line.

We are one of the world's leading pure-play infusion therapy companies with global operations and a wide-ranging product portfolio that includes IV solutions, IV smart pumps with pain management and safety software technology, dedicated and nondedicated IV sets and needlefree connectors designed to help meet clinical, safety and workflow goals.

In addition, we manufacture automated pharmacy IV compounding systems with workflow technology, closed system transfer devices for preparing and administering hazardous IV drugs and cardiac monitoring systems for critically ill patients.

COVID-19 Pandemic

As a result of the COVID-19 pandemic, our non-essential offices and facilities, including our corporate headquarters are closed to non-essential employees.

Our manufacturing, distribution, and pump service facilities are operating under our business continuity plan due to the need for our critical healthcare products, however, we have taken certain precautionary measures including the following to maximize the safety of our employees and to mitigate disruption to our operations:

• implemented physical distancing measures;

• enhanced hygiene protocols and increased frequency of cleaning procedures;

• acquired additional personal protective equipment;

• developed contingency plans and protocols to assess employee illness;

• helped employees with childcare issues due to school and daycare closures;

• implemented COVID-19 temperature screening for employees entering our manufacturing and distribution facilities;

• initiated a visitor pre-entry questionnaire to limit potential exposure in our facilities.

During the first quarter in 2020, as a precautionary measure in response to market uncertainty driven by COVID-19, we preemptively increased our liquidity by borrowing $150.0 million under our Senior Secured Revolving Credit Facility ("Credit Facility").

As 2020 progressed, financial institutions demonstrated adequate liquidity in meeting the funding needs of the market and our internal operations remained stable, as such, we fully repaid the $150.0 million borrowed under our Credit Facility during the third quarter.

During 2020, due to the COVID-19 pandemic, we saw a meaningful decline in demand for our Infusion Consumables non-dedicated sets, a decline in demand for our Infusion Systems dedicated sets and an increase in demand for our Infusion Systems hardware.

During 2020, most notably in the first quarter, we also experienced foreign exchange losses related to the strengthening of the U.S.

dollar relative to certain foreign currencies as general economic conditions declined in response to COVID-19.

The effect of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods.

The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be fully predicted at this time, as such, the impact of the pandemic on our future results of operations

and overall financial performance remain uncertain and cannot as yet be quantified.

However, our future results could be impacted by the following:

• lost revenue or additional costs associated with either disruptions at our production and distribution facilities or interruptions in our supply chain;

• fluctuations in demand from customers as a result of an increase in COVID-19 patient admissions in hospitals offset by the decline in non-COVID-19 patient admissions;

• healthcare customers that defer the more profitable elective procedures may experience financial difficulties and may be unable to pay within payment terms for the products they purchased;

• potential lower demand in future periods due to over-purchasing of our products due to the COVID-19 pandemic;

• reduced revenue due to delays in implementation of our infusion systems and oncology products at hospital locations due to restricted access;

• higher operating costs related to additional compensation paid to our manufacturing and distribution facility workers;

• volatility in cash flow, revenue and income due to foreign currency fluctuations and volatility;

• lower travel and entertainment costs due to global travel restrictions;

• lower income due to a delay in cost savings projects as a result of the travel and social distancing requirements of COVID-19;

• lower interest income on cash balances due to reductions in interest rates along with higher interest expense from borrowings under our $150.0 million Credit Facility, if necessary, to maintain adequate liquidity.

Consolidated Results of Operations

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Year Ended December 31,

2020 2019 2018

$ % of Revenue $ % of Revenue $ % of Revenue

Domestic $ 910.6 72 % $ 923.3 73 % $ 1,054.7 75 %

International 360.4 28 % 342.9 27 % 345.3 25 %

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The following table sets forth, for the periods indicated, total revenue by product line as a percentage of total revenue:

Year Ended December 31,

Product line 2020 2019 2018

Infusion Consumables 37 % 37 % 35 %

Infusion Systems 28 % 26 % 25 %

IV Solutions 31 % 33 % 36 %

Critical Care 4 % 4 % 4 %

100 % 100 % 100 %

We manage our product distribution in the U.S.

through a network of three owned distribution facilities, as well as, through direct channels, which include independent distributors and the end users of our products, and as original equipment manufacturer suppliers.

through a network of two owned and one leased distribution facilities, as well as, through direct channels, which include independent distributors and the end users of our products, and as original equipment manufacturer suppliers.

Most of our independent distributors handle the full line of our products.

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We believe that as healthcare providers continue to either consolidate or join major buying organizations, the success of our products will depend, in part, on our ability, either independently or through strategic relationships to secure long-term contracts with large healthcare providers and major buying organizations.

Although we believe that we are not dependent on any single distributor, large healthcare provider or major buying organization for distribution of our products, the loss of a strategic relationship with any one of these or a decline in demand for our products could have a material adverse effect on our operating results.

Although we believe that we are not dependent on any single distributor, large healthcare provider or major buying organization for distribution of our products, the loss of a strategic relationship with any one of these organizations or a decline in demand for our products could have a material adverse effect on our operating results.

We believe that achievement of our growth objectives worldwide will require increased efforts by us in sales and marketing and product acquisition and development;

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Our expenses often do not fluctuate in the same manner as net sales, which may cause fluctuations in operating income that are disproportionate to fluctuations in our revenue.

On November 2, 2019, we acquired 100% interest in Pursuit for total consideration of approximately $75.0 million in cash and a potential contingent earn-out of up to $50.0 million payable in 2021.

See Note 2 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further details of our acquisitions.

We present summarized income statement data in Item 6.

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Percentage of Revenues

2020 2019 2018

Total revenues 100 % 100 % 100 %

Selling, general and administrative expenses

Research and development expenses

Restructuring and transaction expense

Gross profit 36 % 37 % 41 %

Selling, general and administrative 22 % 22 % 23 %

Research and development 3 % 4 % 4 %

Restructuring, strategic transaction and integration 2 % 6 % 8 %

Change in fair value of contingent earn-out 1 % (4) % 1 %

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Total operating expenses 28 % 28 % 39 %

Income (loss) from operations

Bargain Purchase Gain

Income from operations 8 % 9 % 2 %

Interest expense — % — % — %

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Provision (benefit) for income taxes 1 % 1 % — %

Net income 7 % 9 % 2 %

Total revenues for 2020, 2019 and 2018 were $1.3 billion, $1.3 billion and $1.4 billion, respectively.

In addition to comparing changes in revenue on a U.S.

GAAP basis, we also compare the changes in revenue from one period to another using constant currency.

We provide constant currency information to enhance the visibility of underlying business trends, excluding the effects of changes in foreign currency translation rates.

To calculate our constant currency results, we apply the average exchange rate for revenues from the prior year to the current year results.

These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP.

Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with GAAP.

Infusion Consumables

The following table summarizes our total Infusion Consumables revenue (in millions, except percentages):

Year Ended December 31,

2019 over 2018

2018 over 2017

Year Ended December 31, $ change % change $ change % change

2020 2019 2018 2020 over 2019 2019 over 2018

Infusion Consumables $ 473.7 $ 477.6 $ 483.0 $ (3.9) (0.8) % $ (5.4) (1.1) %

Infusion Consumables revenue decreased in 2020, as compared to 2019.

The decrease was mostly driven by overall lower demand for our products due to the COVID-19 pandemic, partially offset by sales from new customers and sales of our ClearGuard HD product, which we acquired in our fourth quarter 2019 acquisition of Pursuit.

On a constant currency basis,

Infusion Consumables revenue was comparable at $474.0 million for 2020, as the full year impact of foreign currency was negligible.

Infusion Consumables revenue decreased in 2019, as compared to 2018.

The decrease was mostly driven by foreign exchange rates.

On a constant currency basis, Infusion Consumables revenue would have been $485.8 million for 2019, an increase of $2.8 million or 0.6%, as compared to 2018.

The increase in Infusion Consumables revenue in 2018, as compared to 2017 was primarily driven by three factors, (i) the classification of revenue related to certain foreign jurisdiction HIS entities with deferred closes during 2017 as "Other Revenue" for 2017, due to the fact that we were unable to allocate the revenue to a specific product line, (ii) the addition of new customers in Infusion for IV therapy and oncology products in 2018, and (iii) the completion of acquisitions in 2018.

In addition, 2017 includes approximately eleven months of revenue from the point of closing of the HIS transaction to the end of the year.

Infusion Systems

The following table summarizes our total Infusion Systems revenue (in millions, except percentages):

Year Ended December 31,

2019 over 2018

2018 over 2017

Year Ended December 31, $ change % change $ change % change

2020 2019 2018 2020 over 2019 2019 over 2018

Infusion Systems $ 359.7 $ 328.3 $ 355.5 $ 31.4 9.6% $ (27.2) (7.7)%

Infusion Systems revenue increased in 2020, as compared to 2019.

The increase in revenue was primarily due to high demand for our infusion pumps during the COVID-19 pandemic, offset partially by lower demand for our dedicated infusion sets and losses of our non-core ambulatory pump business.

On a constant currency basis Infusion Systems revenue in 2020 would have been $364.7 million, an increase of $36.4 million or 11.1%, as compared to 2019.

Infusion Systems revenue decreased in 2019, as compared to 2018.

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On a constant currency basis Infusion Systems revenue in 2019 would have been $338.6 million, a decrease of $16.9 million or 4.8%, as compared to 2018.

Infusion Systems revenue increased in 2018, as compared to 2017, primarily due to the revenue related to certain foreign jurisdiction HIS entities that had deferred closes during 2017.

The revenue related to these deferred close entities in 2017 was included in "Other Revenue", as we were unable to allocate the revenue to a specific product line.

In addition, 2017 includes approximately eleven months of revenue from the point of closing of the HIS transaction to the end of the year.

The following table summarizes our total IV Solutions revenue (in millions, except percentages):

Year Ended December 31,

2019 over 2018

2018 over 2017

Year Ended December 31, $ change % change $ change % change

2020 2019 2018 2020 over 2019 2019 over 2018

IV Solutions $ 389.0 $ 415.0 $ 508.0 $ (26.0) (6.3)% $ (93.0) (18.3)%

IV Solutions sales decreased in 2020, as compared to 2019, due to lower contract manufacturing sales to Pfizer and higher sales in the first quarter of 2019 to non-contracted customers.

IV Solutions sales decreased in 2019, as compared to 2018.

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These market shortages temporarily drove up the demand for our product during the latter part of 2017, in 2018 and during the first part of 2019.

In addition, the temporary increase in IV Solutions sales that we had as a result of competitor supply constraints has generally normalized as customers have returned to their original contract supplier.

IV Solutions sales decreased in 2018, as compared to 2017.

In 2017, the supply constraints at our competitors, mentioned above, temporarily drove up the demand for our products.

During 2018, supply normalized, which started to normalize customer demand.

IV Solutions revenue for 2017 includes approximately eleven months of revenue from the point of closing of the HIS transaction to the end of the year.

The temporary increase in IV Solutions sales that we had as a result of competitor supply constraints normalized in mid-2019 as customers returned to their original contract supplier.

Critical Care

The following table summarizes our total Critical Care revenue (in millions, except percentages):

Year Ended December 31,

2019 over 2018

2018 over 2017

Year Ended December 31, $ change % change $ change % change

2020 2019 2018 2020 over 2019 2019 over 2018

Critical Care $ 48.6 $ 45.3 $ 53.5 $ 3.3 7.3 % $ (8.2) (15.3) %

Critical Care revenue increased in 2020, as compared to 2019, primarily as a result of growth in the Asia region and improved manufacturing capacity.

Critical Care revenue decreased in 2019, as compared to 2018, primarily due to manufacturing constraints.

In 2018, Critical Care revenue increased, as compared to 2017, primarily due to new product shipments of the Cogent patient monitor and due to timing of orders.

Revenue from Deferred Close Entities

As part of the HIS business acquisition, the closing of certain foreign jurisdictions were deferred, as such, we entered into a Net Economic Benefit agreement with Pfizer (see Note 2 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information).

The revenue data related to these deferred closing entities was not available by product line, therefore our revenue by product line for 2017 described above did not include amounts related to these entities.

A ll of the deferred closing entities were effectively closed in 2018, which allowed for allocation of all of the revenue to a specific product line for 2018 and beyond.

The following table summarizes our revenue from our deferred close entities (in millions):

Year Ended December 31,

2018 over 2017

Revenue from Deferred Close Entities

______________________________

* Not meaningful.

Gross Margins

Gross margins for 2019 , 2018 and 2017 were 37.3% , 40.7% , and 33.0% , respectively.

The decrease in gross margin in 2019, as compared to 2018 was primarily due to the slowdown in manufacturing of IV Solutions and additional supply chain costs related to higher than optimal inventory levels.

Gross Profits

Gross profits for 2020, 2019 and 2018 were 36.3%, 37.3%, and 40.7%, respectively.

The decrease in gross profit in 2020, as compared to 2019 was primarily due to lower IV Solutions manufacturing volumes and unfavorable product mix as a result of lower demand for our consumables products during the COVID-19 pandemic.

The decrease in gross profit in 2019, as compared to 2018 was primarily due to the slowdown in manufacturing of IV Solutions and additional supply chain costs related to higher than optimal inventory levels.

In 2019, we also recorded a one-time supply chain inventory optimization charge of $16.3 million for the initial ramp down of IV Solution production to align supply to market demand.

The increase in gross margin in 2018, as compared to 2017, was primarily due to a change in product mix related to increased Infusion Consumables and increased factory efficiencies.

2017 was negatively impacted by the step-up of inventory from the purchase accounting related to the HIS acquisition.

Selling, General and Administrative ("SG&A") Expenses

The following table summarizes our SG&A expenses (in millions, except percentages):

Year Ended December 31,

2019 over 2018

2018 over 2017

Year Ended December 31, $ change % change $ change % change

2020 2019 2018 2020 over 2019 2019 over 2018

SG&A $ 284.0 $ 277.0 $ 320.0 $ 7.0 2.5 % $ (43.0) (13.4) %

Consolidated SG&A expenses increased in 2020, as compared to 2019.

Dealer fees increased $9.3 million, depreciation and amortization expense increased $7.1 million, compensation expense increased $5.5 million, and stock compensation increased $2.0 million.

Offsetting these expense increases was a $6.3 decrease in bad debt expense, a $6.3 million decrease in travel expenses, a $3.7 million decrease in consulting expenses, and a $2.8 million decrease in sales and marketing expenses.

Dealer fees increased due to a change to a distribution model from a direct model in Canada and an increase in revenue from distributors.

Depreciation and amortization expense increased primarily as a result of the increase in amortization base due to the November 2019 acquisition of Pursuit.

Compensation expense increased as a result of lower incentive compensation recognized in the prior year due to results below performance targets.

Stock compensation increased in the current year due to a change in the number of performance shares estimated to vest on one of our non-executive performance awards.

Bad debt expense is estimated based on an analysis of the expected losses on the accounts receivables at the reporting date, which varies from period-to-period due to the quality of those receivables.

Travel expenses decreased in the current year, as compared to prior year, due to travel restrictions in response to COVID-19.

Consulting expense was higher in 2019 due to charges incurred related to tax compliance and IT infrastructure expenses.

Sales and marketing expenses decreased due to the impact of COVID-19 on trade shows, conferences, and related expenses.

Consolidated SG&A expenses decreased in 2019, as compared to 2018.

Consulting expenses decreased $33.9 million, compensation expense decreased $17.9 million, legal expense decreased $3.8 million, marketing expenses decreased $3.4 million, information technology decreased $3.3 million, stock based compensation decreased $3.2 million and travel expenses decreased $2.8 million.

Partially offsetting these decreases was a $10.6 million increase in depreciation and amortization and a

$7.9 million increase in bad debt and warranty expense.

Partially offsetting these decreases was a $10.6 million increase in depreciation and amortization and a $7.9 million increase in bad debt and warranty expense.

Consulting expenses decreased as our transitional services agreement with Pfizer ended in the fourth quarter of 2018.

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Bad debt expense increased as a result of the quarterly assessment of our reserves related to our accounts receivable.

Consolidated SG&A expense increased in 2018, as compared to 2017, primarily attributable to the impact of the integration of HIS as we incurred duplicative costs as we added resources to stand up the business that will replace the services provided under the transitional services agreement with Pfizer.

Compensation expense increased $19.5 million, information technology expense increased $7.7 million, marketing expenses increased $4.5 million, legal expenses increased $3.5 million, travel expenses increased $3.3 million and dealer fees increased $2.2 million.

Offsetting these increases was a $23.9 million decrease in consulting expenses and decreases in other miscellaneous expenses.

Compensation increased due to an increase in headcount from new employees hired to support the company post-acquisition of HIS.

Information technology expense increases were due to the HIS post-acquisition needs to stand up the company.

Marketing expenses increased primarily due to the continued integration of HIS and the post-acquisition operational activity.

Legal expenses increased due to the continued integration of HIS and legal services needed to support a larger business.

Travel expense increased as a result of the operational needs of the company.

Dealer fees increased due to the increase in revenue.

We reclassified $8.1 million and $1.8 million of foreign exchange losses for 2018 and 2017, respectively, from SG&A to other income (expense), net to conform to our current year reporting of those gains and losses.

Research and Development ("R&D") Expenses

The following table summarizes our total R&D Expenses (in millions, except percentages):

Year Ended December 31,

2019 over 2018

2018 over 2017

R&D expenses decreased slightly in 2019, as compared to 2018.

The current year expense is primarily related to compensation and benefit expenses incurred on our current R&D projects.

In 2018, as compared to 2017, R&D expenses increased due to post-acquisition operational activity attributable to a larger business and 2017 includes approximately eleven months of R&D expense from the point of closing of the transaction to the end of the year.

Year Ended December 31, $ change % change $ change % change

2020 2019 2018 2020 over 2019 2019 over 2018

R&D $ 42.9 $ 48.6 $ 52.9 $ (5.7) (11.7) % $ (4.3) (8.1) %

R&D expenses decreased in 2020, as compared to 2019, and decreased in 2019, as compared to 2018.

R&D expenses are primarily related to compensation and benefit expenses incurred on our R&D projects in progress during each year.

Restructuring, Strategic Transaction and Integration Expenses

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In 2020, restructuring charges were $7.9 million.

These charges 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.

These charges were primarily related to severance and costs related to office and other facility closures.

We expect to pay unpaid restructuring charges as of December 31, 2020, in 2021.

In 2019, restructuring charges were $8.4 million.

These charges were related to (i) severance costs from the reduction in our workforce as a result of the continued integration of HIS.

All material charges in regard to these restructuring activities have been paid as of December 31, 2019.

These charges 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.

In 2018, restructuring charges were $4.5 million.

These charges were related to (i) severance costs from the reduction in our workforce needed to eliminate duplicative positions created as a result of the HIS acquisition and (ii) we

closed our Dominican Republic manufacturing facility and incurred expenses associated with the closure and transfer of assets and production to our Costa Rica and Mexico manufacturing facilities.

These charges were related to severance costs from the reduction in our workforce as a result of the continued integration of HIS.

Strategic Transaction and Integration Expenses

In 2020, we incurred $20.5 million in strategic transaction and integration expenses primarily related to the integration of HIS, which included the migration of IT systems at our Austin facility.

In 2019, we incurred $72.2 million in strategic transaction and integration expenses primarily related to the integration of the HIS business.

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In 2018, we incurred $100.9 million in strategic transaction and integration expenses primarily related to our continued integration of the HIS business and IT systems.

In 2017, we incurred $59.2 million in strategic transaction and integration expenses primarily related to our acquisition of the HIS business.

Change in fair value of contingent earn-out

In 2020, the fair value revaluation of our Pursuit contingent earn-out liability resulted in an increase in value of $9.0 million.

In 2019, the fair value revaluation of our HIS contingent earn-out liability resulted in a change in value of $47.4 million reducing the liability balance to zero.

The earn-out period ended on December 31, 2019 and we did not meet the required performance targets in order to pay out any of the earn-out.

The earn-out period ended on December 31, 2019.

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.

We expect the dispute will be resolved by binding arbitration unless both parties are able to come to an agreement on this issue.

In 2018, the fair value revaluation of our HIS contingent earn-out liability resulted in a change in fair value of $20.4 million.

In 2017, the fair value revaluation of our HIS contingent earn-out liability resulted in a loss of $8.0 million.

Contract Settlement

In 2020, we recorded $1.0 million in contract settlement income related to the resolution of a dispute with one of our suppliers.

In 2019 and 2018, we incurred a $5.7 million and $41.6 million charge, respectively, related to the resolution of a dispute with a product partner, which resulted in a redefinition of our contractual arrangement and in the rights and remedies determined under such arrangement.

Bargain Purchase Gain

In 2017, in connection with the HIS acquisition, we recognized a bargain purchase gain of $70.9 million.

The bargain purchase gain represented the excess of the estimated fair market value of the identifiable tangible and intangible assets acquired and liabilities assumed, net of deferred tax liabilities over the total purchase consideration.

We determined that the bargain purchase gain was primarily attributable to expected restructuring costs as well as a reduction to the initially agreed upon transaction price caused primarily by revenue shortfalls across all market segments of the HIS business, negative manufacturing variance due to the drop in revenue and higher operating and required stand up costs, when compared to forecasts of the HIS business at the time that the purchase price was agreed upon.

Interest Expense

Interest expense was $1.8 million, $0.5 million and $0.7 million in 2020, 2019 and 2018, respectively.

In 2019 and 2018, the interest expense was related to amortization of the financing cost incurred in 2017 in connection with the five-year Revolving Credit Facility ("Credit Facility") and a related per annum commitment fee charged on the unused portion of the revolver under such Credit Facility (see Note 11, Long-Term Obligations in our accompanying consolidated financial statements for additional information).

In 2017, the interest expense was related to (i) the $75 million seller note from Pfizer as part of the HIS business acquisition and (ii) the per annum commitment fee charged on the unused portion of our revolver under the five-year $150 million Credit Facility.

The three-year interest only seller note bore interest based on the London Interbank Offered Rate ("LIBOR") plus (i) 2.25% per year for the first 12 months, and (ii) 2.50% per annum thereafter.

On November 8, 2017, we fully repaid the $75 million in outstanding principal under the senior note payable to Pfizer.

The per annum commitment fee is based on consolidated total leverage ratio in effect and can range between 0.15% to 0.30% on the unused portion of the Credit Facility.

In 2020, interest expense was primarily related to borrowings under our five-year Revolving Credit Facility ("Credit Facility") and the amortization of financing costs that were incurred in 2017 in connection with entering into the Credit Facility.

In 2019 and 2018, the interest expense includes the amortization of financing costs and a per annum commitment fee charged on the unused portion of the revolver under such Credit Facility.

Borrowing under the Credit Facility bears interest, at our option, based on the Base Rate (as defined in Note 11 in our accompanying consolidated financial statements) plus applicable margin or the London Interbank Offered Rate plus applicable margin.

The per annum commitment fee is based on consolidated total leverage ratio in effect and can range between 0.15% to 0.30% on the unused portion of the Credit Facility (see Note 11, Long-Term Obligations in our accompanying consolidated financial statements for additional information).

Other Income (Expense), net

Other income (expense), net was $1.1 million, $7.9 million and $(6.7) million in 2020, 2019 and 2018, respectively.

In 2019, other income (expense), net was primarily due to interest income of $6.8 million related to our banking and investment accounts.

In 2018, other income (expense), net included $5.4 million of interest income offset by $3.9 million loss on disposal of or write-off of property, plant and equipment and an $8.1 million reclassification of foreign exchange losses, net from SG&A to conform to the current year's presentation.

In 2017, we reclassified $1.8 million of foreign exchange losses to other income (expense), net from SG&A.

In 2020, the other income, net was primarily related to interest income of $3.7 million, miscellaneous income, net of $2.8 million and gain from the disposal of property, plant and equipment of $1.8 million, which was mostly offset by $7.2 million in foreign exchange losses incurred as a result of the strengthening of the U.S.

dollar from the impact of COVID-19 during the first half of the year.

In 2019, other income, net was primarily due to interest income of $6.8 million related to our banking and investment accounts.

In 2018, other expense, net included $8.1 million of foreign exchange losses and a $3.9 million loss on disposal of or write-off of property, plant and equipment offset by $5.4 million of interest income.

Income taxes were accrued at an estimated annual effective tax rate of 11%, 12% and (29%) in 2020, 2019 and 2018, respectively.

On December 22, 2017, the Tax Act was enacted into law, which includes a broad range of provisions affecting businesses.

The Tax Act significantly revises how companies compute their U.S.

corporate tax liability by, among other provisions, reducing the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017.

The effective tax rate in 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") and tax credits.

and foreign incomes, state income taxes, global intangible low-taxed income ("GILTI"), foreign-derived intangible income ("FDII") and tax credits.

The effective tax rate in 2020 included a tax benefit of $5.3 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period.

The effective tax rate for 2020 also included U.S.

federal and state return-to-provision adjustments net of related reserve changes for the year ended December 31, 2019 of $3.8 million tax benefit primarily due to changes in estimates for GILTI, FDII, and related foreign tax credits.

The effective tax rate in 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.

The effective tax rate for 2019 included a tax benefit of $9.6 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period.

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The effective tax rate for 2018 included a tax benefit of $12.6 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period.

The effective tax rate for 2017 differs from the federal statutory rate of 35% because of the effect of the mix of foreign and state incomes, state taxes, tax credits, and impact of the gain on bargain purchase.

The tax effect of the gain on bargain purchase is treated as a part of purchase accounting and is not a component of the income tax provision.

The effective tax rate during 2017 also included a tax benefit of $20.8 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period.

In 2017, after the enactment of the Tax Act, we were able to reasonably estimate certain effects and, therefore, recorded provisional adjustments associated with the toll charge on undistributed foreign earnings and profits and revaluation of deferred taxes related to the Tax Act.

In 2017, we recorded income tax expense of $3.1 million as a result of the Tax Act, which is comprised of $1.1 million of income tax expense as a result of the re-measurement of deferred tax assets and liabilities at the new lower statutory tax rate of 21%, and a net tax expense of $2.0 million as a result of the mandatory deemed repatriation on earnings and profits of U.S.-owned foreign subsidiaries.

Liquidity and Capital Resources

Our primary sources of cash are cash flows from operating activities, proceeds from the exercise of employee options and available borrowings under our Credit Facility (as defined above).

Our primary sources of cash are cash flows from operating activities, proceeds from the exercise of employee options and borrowings under our Credit Facility (as defined above).

Our primary uses of cash are to meet working capital requirements, finance capital expenditures and acquisitions along with acquisition-related incremental transaction and integration costs.

During 2019 , our cash, cash equivalents and short-term investment securities decreased by $89.5 million from $382.1 million at December 31, 2018 to $292.6 million at December 31, 2019 .

Our cash provided by operations was offset primarily

by acquisitions, the purchases of property and equipment and cash taxes paid by us on the employees behalf related to net share settlement of their equity awards.

During 2020, our cash, cash equivalents and short-term investment securities increased by $118.1 million from $292.6 million at December 31, 2019 to $410.8 million at December 31, 2020.

Our cash provided by operations was partially offset by purchases of property and equipment and cash taxes paid by us on behalf of employees related to net share settlement of their equity awards.

Future Cash Flows

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We anticipate making additional investments in machinery and equipment in our manufacturing operations in Costa Rica, the U.S.

and Mexico to support new and existing products, in infusion devices that get placed with customers outside the U.S., and in IT to benefit world-wide operations.

and Mexico to support new and existing products and in infusion pumps that get placed with customers outside the U.S.

We expect to use our cash and cash equivalents to fund our capital purchases.

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$150 million in borrowing capacity available for revolving credit loans and may also be used to borrow, on same-day notice under a swingline, the lesser of $10 million and the aggregate unused amount of the revolving credit available.

As of December 31, 2019, we had no borrowings and $150 million of availability under the revolving credit facility.

During the first quarter in 2020, as a result of market uncertainty caused by COVID-19, we preemptively increased our liquidity as a precautionary measure by borrowing $150.0 million under our revolving Credit Facility.

As of December 31, 2020, we had $150 million of availability under the revolving Credit Facility.

All of our obligations under the Credit Facility are guaranteed by ICU Medical, Inc.

16 unchanged sentences

Net cash used in operations as a result of changes in operating assets and liabilities was $17.0 million.

The changes in operating assets and liabilities included a $46.4 million decrease in accounts payable, a $29.4 million decrease in accrued liabilities, $18.0 million in net changes in income taxes, including excess tax benefits and deferred income taxes, a $16.1 million increase in other assets, and a $4.3 million increase in prepaid expenses and other current assets.

Offsetting these amounts was a $78.0 million decrease in accounts receivable and a $19.2 million decrease in inventories.

The decrease in accounts payable was due to the payment of integration-related expenses with extended payment terms and the timing of other payments.

The decrease in accrued liabilities was due to the payment of one-time accrued supply chain reorganization costs.

The increase in other assets was due to the purchase of spare parts.

The net changes in income taxes was a result of the timing of payments.

The increase in prepaid expenses and other current assets was primarily due to an increase in deferred costs.

The decrease in accounts receivable is primarily due to collection efforts.

The decrease in inventory was primarily due to improved inventory management and increased demand for certain products driven by the COVID-19 pandemic at the end of the year.

Our cash provided by operations was $101.9 million in 2019.

Net income plus adjustments for non-cash net expenses contributed $213.6 million to cash provided by operations.

Net cash used in operations as a result of changes in operating assets and liabilities was $111.6 million.

The changes in operating assets and liabilities included a $43.7 million decrease in accrued liabilities, a $29.8 million increase in other assets, a $25.0 million increase in inventories, a $23.7 million increase in accounts receivable, and a $2.7 million decrease in accounts payable.

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The increase in other assets was primarily due to the purchase of spare parts.

The decrease in related-party receivables was a result of the transition services agreement with Pfizer nearing its end.

The decrease in related-party receivables was a result

of the transition services agreement with Pfizer nearing its end.

The increase in accounts payable was due to the timing of payments.

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The following table summarizes the changes in our investing cash flows (in thousands):

For the Years Ended December 31,

For the Years Ended December 31, Variance

2020 2019 2018 2020 2019

Investing Cash Flows:

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Proceeds from sale of investment securities 28,900 41,292 15,440 (12,392) 25,852 (6)

Net cash (used in) provided by investing activities

Net cash used in investing activities $ (98,139) $ (166,888) $ (103,370) $ 68,749 $ (63,518)

______________________________

(1) Our purchases of property, plant and equipment will vary from period to period based on additional investments needed to support new and existing products and expansion of our manufacturing facilities.

(2) In 2020, we sold our Farmers Branch, Texas, U.S.

distribution facility for $6.0 million.

(3) In 2018, we sold the land and building related to our Dominican Republic manufacturing facilities acquired as part of the 2017 HIS acquisition.

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In 2019, we acquired Pursuit for approximately $75.0 million in cash consideration and we acquired a small foreign distributor for approximately $4.6 million.

In 2017, we acquired HIS for $256 million in cash consideration (net of working capital adjustments), financed with existing cash balances and a three-year interest-only seller note of $75 million and we delivered 3.2 million shares of our common stock to Pfizer and we acquired two small foreign distributors for $10.5 million in cash consideration.

(4) Our purchases of investment securities will vary from period to period based on current cash needs, planning for known future transactions and due to changes in our investment strategy.

In 2016, we amended our investment policy to allow for the purchase of securities with final maturities in excess of one year.

(5) Our purchases of investment securities will vary from period to period based on current cash needs, planning for known future transactions and changes in our investment strategy.

Our investment policy allows for the purchase of securities with final maturities in excess of one year.

If cash is not needed for known future transactions our investment strategy takes advantage of the long-term securities with higher yields.

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(6) Proceeds from the sale of our investment securities will vary based on the maturity dates of the investments.

The proceeds from the sale of our investment securities increased in 2018, as compared to 2017, as by the end of 2016, we had liquidated all of our investment securities and used the proceeds to fund the acquisition of HIS.

Accordingly, we did not have an investment balance in 2017 until purchases were made in September of that year.

Cash Flows from Financing Activities

The following table summarizes the changes in our financing cash flows (in thousands):

For the Years Ended December 31,

For the Years Ended December 31, Variance

2020 2019 2018 2020 2019

Financing Cash Flows:

Repayment of long-term obligations

Proceeds from short-term debt $ 150,000 $ — $ — $ 150,000 $ — (1)

Repayment of short-term debt (150,000) — — (150,000) — (1)

Proceeds from exercise of stock options 13,193 7,732 14,275 5,461 (6,543) (2)

Proceeds from employee stock purchase plan

Purchase of treasury stock/tax withholding payments on net share settlement of equity awards

Payments on finance leases (357) — — (357) —

Tax withholding payments related to net share settlement of equity awards (12,876) (18,639) (6,252) 5,763 (12,387) (3)

Net cash (used in) provided by financing activities $ (40) $ (10,907) $ 8,023 $ 10,867 $ (18,930)

______________________________

(1) The repayment of long-term obligations is related to the repayment of the $75 million seller note from Pfizer.

(1) During 2020, as a result of market uncertainty caused by COVID-19, we borrowed $150.0 million under our revolving Credit Facility as a precautionary measure to increase liquidity.

We had fully repaid all amounts borrowed as of December 31, 2020.

(2) Proceeds from the exercise of stock options will vary from period to period based on the volume of options exercised and the exercise price of the specific options exercised.

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(in thousands)

Contractual Obligations

Contractual Obligations Total 2021 2022 2023 2024 2025 Thereafter

Operating leases $ 58,274 $ 10,981 $ 9,956 $ 8,767 $ 8,279 $ 5,002 $ 15,289

Commitment fee on Credit Facility 423 228 195 — — — —

Minimum purchase obligations

Warehouse service agreements 12,026 5,426 3,363 3,117 120 — —

$ 70,723 $ 16,635 $ 13,514 $ 11,884 $ 8,399 $ 5,002 $ 15,289

Critical Accounting Policies and Estimates

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We evaluate our estimates, assumptions and judgments on a regular basis and apply our accounting policies on a consistent basis.

We believe that the estimates, assumptions and judgments involved in the accounting for investment securities, revenue recognition, accounts receivable, inventories, property, plant and equipment and related depreciation, income taxes and business combinations have the most potential impact on our consolidated financial statements.

We believe that the estimates, assumptions and judgments involved in the accounting for revenue recognition, accounts receivable, inventories, property, plant and equipment and related depreciation, and business combinations have the most potential impact on our consolidated financial statements.

Historically, our estimates, assumptions and judgments relative to our critical accounting policies have not differed materially from actual results.

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We offer certain volume-based rebates to our distribution customers, which we consider 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.

In estimating the most likely rebate and chargeback amounts for use in determining the transaction price, we use information available at the time and our historical experience.

Chargebacks are the difference between prices we charge our distribution customers and contracted prices we have with the end customer which are processed as credits to our distribution customers.

In estimating the expected value of chargeback amounts for use in determining the transaction price, we use information available at the time, including our historical experience.

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 and our historical experience.

Our revenues are recorded at the net sales price, which includes an estimate for variable consideration related to rebates, chargebacks and product returns.

The vast majority of our sales of Infusion Consumables, IV Solutions, Infusion Systems and Critical Care products are sold on a standalone basis and control of these products transfers to the customer upon shipment.

The vast majority of our sales of Infusion Consumables, Infusion Systems, IV Solutions and Critical Care products are sold on a standalone basis and control of these products transfers to the customer upon 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.

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Accounts receivable are stated at net realizable value.

An allowance is provided for estimated collection losses based on the age of the receivable or on specific past due accounts for which we consider collection to be doubtful.

An allowance is provided for estimated collection losses based on an analysis of the age of the receivable, on specific past due accounts for which we consider collection to be doubtful and based on current receivables where known economic conditions specific to individual significant customers may indicate collection is doubtful.

We rely on prior payment trends, financial status and other factors to estimate the cash which ultimately will be received.

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For finished products in inventory, we need to estimate what may not be saleable.

We regularly review inventory and reserve for slow moving items, and write off all items that we do not expect to

use in manufacturing, and finished products that we do not expect to sell.

We regularly review inventory and reserve for slow moving items, and write off all items that we do not expect to use in manufacturing, and finished products that we do not expect to sell.

If actual usage of components or sales of finished goods inventory is less than our estimates, we could be required to write off additional inventory, which could have an adverse effect on our operating results in the period in which the write-off occurs.

If our excess and obsolete reserve changed by 1% our cost of goods sold and gross margin would be impacted by $0.7 million with no impact to our gross margin percentage.

If our excess and obsolete reserve changed by 1% our cost of goods sold and gross margin would be impacted by $0.4 million with no meaningful impact to our gross margin percentage.

Property, plant and equipment/depreciation

5 unchanged sentences

An unexpected shortening of useful lives of property, plant and equipment that significantly increases depreciation provisions, or other circumstances causing us to record an impairment loss on such assets, could have an adverse effect on our operating results in the period in which the related charges are recorded.

We utilize the asset and liability method of accounting for income taxes as set forth in ASC 740.

Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse.

A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.

In determining the need for valuation allowances we consider projected future taxable income and the availability of tax planning strategies.

If in the future we determine that we would not be able to realize our recorded deferred tax assets, an increase in the valuation allowance would be recorded, decreasing earnings in the period in which such determination is made.

We are subject to income taxes throughout the U.S.

and in numerous foreign jurisdictions.

We recognize the financial statement benefits for uncertain tax positions as set forth in ASC 740 only if it is more-likely-than-not to be sustained in the event of challenges by relevant taxing authorities based on the technical merit of each tax position.

The amounts of uncertain tax positions recognized are the largest benefits that have a greater than 50 percent likelihood of being realized upon settlement with the relevant tax authorities.

Business Combinations

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The income approach values the asset based on its earnings potential.

The fair value of land was estimated

using a sales comparison approach.

The fair value of land was estimated using a sales comparison approach.

Land and building improvements were valued using the cost approach.

40 unchanged sentences

increases in systems capabilities;

introduction, development and sales of new products, acquisition and integration of businesses and product lines, including Pursuit, the HIS business and SwabCap;

introduction, development and sales of new products, acquisition and integration of businesses and product lines, including the HIS business and Pursuit;

benefits of our products over competing systems;

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Also, actual future operating results are subject to other important factors and risks that we cannot predict or control, including without limitation, the following:

• the impacts of the COVID-19 pandemic on us, our business and on domestic and global economies generally;

• general economic and business conditions, both in the U.S.

17 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis