What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-02-26 compared with 2020-03-02 · 410 added, 494 removed, 945 unchanged (49% of the section changed)

11 unchanged sentences

To the stockholders and the Board of Directors of ICU Medical, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of ICU Medical, Inc.

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In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 2, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

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Chargebacks are accounted for as variable consideration when determining the transaction price for purposes of recognizing revenue.

The Company estimates and reserves for chargebacks as a reduction of revenue at the time of sale to its distribution customers using information available at that time, including customer agreements and historical experience.

Accounts receivables as of December 31, 2019 of $202 million and net sales for the year ended December 31, 2019 of $1,266 million are recorded net of estimated chargebacks.

Given the subjectivity and complexity of evaluating management’s assumptions used in the determination of the chargeback reserve, including the amount of monthly sales to distribution customers and the time to settle chargeback obligations, auditing the chargeback reserve requires a high degree of auditor judgment and an increased extent of effort.

Accounts receivable as of December 31, 2020 of $124 million and total revenues for the year ended December 31, 2020 of $1,271 million are recorded net of estimated chargebacks.

Given the subjectivity and complexity of evaluating management’s assumptions used in the determination of the chargeback reserve, including the chargeback amounts related to monthly sales to distribution customers and the time to settle chargeback obligations, auditing the chargeback reserve requires a high degree of auditor judgment and an increased extent of effort.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the chargeback reserves included the following, among others:

We tested the effectiveness of controls related to chargeback reserves, management’s assessment of assumptions related to estimating the provision for chargeback reserves, and the processing and monitoring of chargeback transactions.

We tested chargeback estimates for purposes of determining whether net revenue recognized at the time of sale was recorded in the proper period.

Our audit procedures related to the chargeback reserve included the following, among others:

• We tested the effectiveness of controls related to:

◦ Management’s assessment of assumptions related to estimating the provision for chargeback reserves.

◦ The provisioning, processing and monitoring of chargeback transactions.

◦ The reconciliation of chargeback reserves.

• We tested chargeback estimates for purposes of determining whether revenues recognized at the time of sale were recorded in the proper period.

• We evaluated the methods and assumptions used by management to estimate the chargeback reserve by:

Analyzing trends in chargeback provision as a percent of revenues and the chargeback reserve as a percent of revenues.

Testing the underlying data, including historical sales to distributor customers and chargeback settlements with distributor customers, that are utilized as the basis for the chargeback reserve, to test whether the inputs to the estimate were reasonable.

Developing an expectation of the chargeback reserve based on our evaluation of the amount of monthly sales to distribution customers and the time to settle chargeback obligations and comparing our expectation to the amount recorded by management.

Performing a retrospective review comparing management’s estimates of the expected chargeback reserves to actual amounts incurred subsequent to management’s estimates to assess management’s ability to reasonably estimate these obligations and to identify potential bias in management’s assessment of the reserve.

◦ Analyzing trends in the chargeback provision as a percent of revenues and the chargeback reserve as a percent of revenues.

◦ Testing the underlying data, including historical sales to distribution customers and chargeback settlements with distribution customers, that are utilized as the basis for the chargeback reserve, to test whether the inputs to the estimate were reasonable.

◦ Developing an expectation of the chargeback reserve based on monthly sales to distribution customers, historical experience, and the time to settle chargeback obligations, and comparing our expectation to the amount recorded by management.

◦ Performing retrospective reviews comparing management’s estimates of expected chargeback reserves to actual amounts incurred subsequent to the dates of estimation, to assess management’s ability to reasonably estimate these obligations and to identify potential bias in management’s assessment of the reserve.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California

March 2, 2020

February 26, 2021

We have served as the Company's auditor since 2008

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Accounts receivable, net of allowance for doubtful accounts of $ 21,490 and $ 20,219 at December 31, 2020 and 2019, respectively

124,093 202,219

Inventories 314,928 337,640

Prepaid income taxes 29,480 15,720

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LONG-TERM INVESTMENT SECURITIES 12,974 —

GOODWILL 33,001 31,245

INTANGIBLE ASSETS, net 197,231 211,408

DEFERRED INCOME TAXES 31,034 27,998

OTHER ASSETS 55,475 48,984

TOTAL ASSETS $ 1,763,691 $ 1,692,382

LIABILITIES AND STOCKHOLDERS’ EQUITY

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Income tax payable 303 2,063

Contingent earn-out liability 26,300 —

TOTAL CURRENT LIABILITIES 195,488 248,468

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Common stock, $ 0.10 par value — Authorized— 80,000 shares;

Issued — 20,743 shares at December 31, 2019 and 20,492 at December 31, 2018 and outstanding — 20,742 shares at December 31, 2019 and 20,491 shares at December 31, 2018

Issued and outstanding — 21,058 shares at December 31, 2020 and issued 20,743 at December 31, 2019 and outstanding — 20,742 shares at December 31, 2019

Additional paid-in capital 693,068 668,947

Treasury stock, at cost

Treasury stock, at cost ( 209 and 850 shares, respectively)

( 39 ) ( 157 )

Retained earnings 808,652 721,782

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Year ended December 31,

2020 2019 2018

TOTAL REVENUES $ 1,271,004 $ 1,266,208 $ 1,400,040

COST OF GOODS SOLD 809,507 794,344 830,012

GROSS PROFIT 461,497 471,864 570,028

OPERATING EXPENSES:

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TOTAL OPERATING EXPENSES 363,335 364,504 540,272

INCOME (LOSS) FROM OPERATIONS

BARGAIN PURCHASE GAIN

INCOME FROM OPERATIONS 98,162 107,360 29,756

INTEREST EXPENSE ( 1,753 ) ( 549 ) ( 709 )

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(PROVISION) BENEFIT FOR INCOME TAXES ( 10,624 ) ( 13,672 ) 6,419

NET INCOME $ 86,870 $ 101,035 $ 28,793

NET INCOME PER SHARE

Basic $ 4.16 $ 4.90 $ 1.41

Diluted $ 4.02 $ 4.69 $ 1.33

WEIGHTED AVERAGE NUMBER OF SHARES

Basic 20,907 20,629 20,394

Diluted 21,591 21,545 21,601

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

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Year ended December 31,

2020 2019 2018

Net income $ 86,870 $ 101,035 $ 28,793

Other comprehensive income (loss), net of tax:

Cash flow hedge adjustments, net of tax of $ 285 , $ 392 and $ 317 for the years ended December 31, 2020, 2019 and 2018, respectively

Foreign currency translation adjustment, net of tax of $0 for both the years ended December 31, 2019 and 2018, and $56 for the year ended December 31, 2017

904 1,242 1,003

Foreign currency translation adjustment, net of tax of $ 0 for all periods

12,929 372 ( 3,104 )

Other adjustments, net of tax of $ 0 for all periods

47 ( 71 ) 115

Other comprehensive income (loss), net of tax 13,880 1,543 ( 1,986 )

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(Amounts in thousands)

Comprehensive

(Loss) Income

Common Stock Accumulated

Additional Other

Shares Amount Paid-In

Capital Treasury

Stock Retained

Earnings Comprehensive

(Loss) Income Total

Balance, January 1, 2018 20,210 $ 2,021 $ 625,568 $ — $ 585,624 $ ( 14,959 ) $ 1,198,254

Cumulative effect of accounting change — — — — 6,330 — 6,330

Issuance of restricted stock and exercise of stock options 307 28 8,090 6,157 — — 14,275

Tax withholding payments related to net share settlement of equity awards ( 26 ) — — ( 6,252 ) — — ( 6,252 )

Issuance of common stock for acquisitions

Proceeds from employee stock purchase plan

Stock compensation — — 24,241 — — — 24,241

Other comprehensive income, net of tax

Other comprehensive loss, net of tax — — — — — ( 1,986 ) ( 1,986 )

Net income — — — — 28,793 — 28,793

Balance, December 31, 2018 20,491 2,049 657,899 ( 95 ) 620,747 ( 16,945 ) 1,263,655

Cumulative effect of accounting change

Issuance of restricted stock and exercise of stock options 331 25 ( 10,870 ) 18,577 — — 7,732

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Stock compensation — — 21,918 — — — 21,918

Other comprehensive loss, net of tax

Other comprehensive income, net of tax — — — — — 1,543 1,543

Net income — — — — 101,035 — 101,035

Balance, December 31, 2019 20,742 2,074 668,947 ( 157 ) 721,782 ( 15,402 ) 1,377,244

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Other comprehensive income, net of tax — — — — — 13,880 13,880

Net income — — — — 86,870 — 86,870

Balance, December 31, 2020 21,058 $ 2,106 $ 693,068 $ ( 39 ) $ 808,652 $ ( 1,522 ) $ 1,502,265

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Year ended December 31,

2020 2019 2018

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income $ 86,870 $ 101,035 $ 28,793

Adjustments to reconcile net income to net cash provided by operating activities:

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Stock compensation 23,954 21,918 24,241

Loss on disposal or write-off of property, plant and equipment

(Gain) loss on disposal or write-off of property, plant and equipment ( 1,789 ) 12,872 8,867

Contract settlement — — 12,696

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Impairment of assets held-for-sale — — 269

Bargain purchase gain

Change in fair value of contingent earn-out 9,000 ( 47,400 ) 20,400

Product-related charges 2,626 — —

Usage of spare parts 11,191 24,301 7,310

Other 6,939 447 3,856

Changes in operating assets and liabilities, net of amounts acquired:

Accounts receivable 78,049 ( 23,684 ) ( 76,742 )

Inventories 19,196 ( 24,997 ) ( 21,770 )

Prepaid expenses and other assets ( 4,311 ) 8,588 3,719

Related-party receivables — — 97,443

Other assets ( 16,069 ) ( 29,837 ) ( 9,086 )

Accounts payable ( 46,415 ) ( 2,697 ) 23,270

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CASH FLOWS FROM FINANCING ACTIVITIES:

Repayment of long-term obligations

Proceeds from short-term debt 150,000 — —

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

Proceeds from exercise of stock options 13,193 7,732 14,275

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 ) — —

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

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

Effect of exchange rate changes on cash 2,854 ( 234 ) ( 10,159 )

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 127,427 ( 76,111 ) 54,709

CASH AND CASH EQUIVALENTS, beginning of period 268,670 344,781 290,072

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Year ended December 31,

2020 2019 2018

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

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Cash paid for acquisitions, net of cash acquired ( 76,133 )

Non-cash seller note

Estimated working capital adjustment

Contingent consideration ( 17,300 )

Issuance of common stock for acquisitions

Bargain purchase gain

Goodwill, acquired during period 20,026

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ICU Medical, Inc.

("ICU" or "we"), a Delaware corporation, operates in one business segment engaged in the development, manufacturing and sale of innovative medical devices used in vascular therapy, and critical care applications.

("ICU" or "we"), a Delaware corporation, operates in one business segment engaged in the development, manufacturing and sale of innovative medical devices used in infusion therapy, and critical care applications.

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

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Actual results could differ from those estimates.

Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year.

These reclassifications had no impact on net income, stockholders' equity or cash flows as previously reported.

For the years ended December 31, 2018 and 2017, we reported foreign exchange gains and losses in other income (expense), net, and removed them from selling, general and administrative expenses.

We reclassified related-party receivables to prepaid expenses and other current assets for the current year's presentation, as Pfizer, Inc.

("Pfizer") had sold all of its shares of our ICU common stock as of December 31, 2018, thereby ending its related-party relationship with us.

For the year ended December 31, 2018, we reclassified operating cash flows due to the purchase and usage of spare parts.

The operating cash flows due to the usage of spare parts are included as an adjustment to reconcile net income to net cash provided by operating activities and the purchase of spare parts are presented as cash outflows in operating assets and liabilities-other assets.

Cash, Cash Equivalents

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Inventories are stated at the lower of cost or net realizable value with cost determined using the first-in, first-out method.

Inventory costs include material, labor and overhead related to the manufacturing of medical devices.

Inventory costs include material, labor and overhead related to the manufacturing of our products.

ICU MEDICAL, INC.

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Inventories consist of the following at December 31 (in thousands):

As of December 31,

Raw materials $ 126,499 $ 119,709

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Finished goods 155,376 178,416

Total $ 314,928 $ 337,640

Property, Plant and Equipment

Property, plant and equipment consist of the following at December 31 (in thousands):

As of December 31,

Machinery and equipment $ 291,331 $ 219,057

Land, building and building improvements 241,199 230,454

Molds 60,381 60,155

Computer equipment and software 98,311 83,217

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Instruments placed with customers 1

90,383 74,434

Construction in progress 53,724 101,425

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Accumulated depreciation ( 376,468 ) ( 320,155 )

Net property, plant and equipment

Property, plant and equipment, net $ 466,628 $ 456,085

______________________________

1 Instruments placed with customers consist of drug-delivery and monitoring systems placed with customer under operating leases.

1 Instruments placed with customers consist of drug-delivery and monitoring systems placed with customers under operating leases.

All property, plant and equipment are stated at cost.

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Estimated useful lives are:

15 - 30 years

Building improvements

15 - 30 years

Machinery, equipment and molds

Furniture, fixtures and office equipment

Computer equipment and software

Buildings 15 - 30 years

Building improvements 15 - 30 years

Machinery, equipment and molds 2 - 15 years

Furniture, fixtures and office equipment 2 - 5 years

Computer equipment and software 3 - 5 years

Instruments placed with customers

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Balance as of December 31, 2019 31,245

Goodwill acquired (4)

Balance as of December 31, 2020 $ 33,001

______________________________

(1) In 2017, the goodwill acquired primarily relates to our acquisition of Medical Australia Limited ("MLA").

(1) In 2018, we acquired the consulting arm of a small software company, which resulted in $ 1.3 million of goodwill.

(3) In 2018, "Other" relates to a $ 1.9 million measurement period adjustment on our MLA acquisition and foreign currency translation.

(2) In 2018, "Other" relates to a $ 1.9 million measurement period adjustment on our Medical Australia Limited acquisition and foreign currency translation.

(3) In 2019, we acquired Pursuit Vascular, Inc.

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We also acquired a small foreign distributor, which resulted in $ 0.9 million of goodwill.

(4) In 2020, "Other" relates to a $ 1.3 million measurement period adjustment to deferred taxes related to the Pursuit acquisition and foreign currency translation.

Intangible Assets

Intangible assets, carried at cost less accumulated amortization and amortized on a straight-lined basis , were as follows (in thousands):

Life in Years

December 31, 2019

Life in Years December 31, 2020

Cost Accumulated

Amortization Net

Patents 10 $ 24,797 $ 15,056 $ 9,741

Customer contracts 12 10,365 5,852 4,513

Non-contractual customer relationships 9 58,061 26,711 31,350

Trademarks 4 425 425 —

Trade name 15 18,270 3,500 14,770

Developed technology 13 152,893 36,927 115,966

Non-compete 3 2,500 972 1,528

Total amortized intangible assets

$ 267,311 $ 89,443 $ 177,868

Internally developed software* $ 19,363 $ 19,363

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2018

Life in Years

Average December 31, 2019

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 $ 263,275 $ 65,858 $ 197,417

Internally developed software* $ 13,991 $ 13,991

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As of December 31, 2020 estimated annual amortization for our intangible assets for each of the next five years is approximately (in thousands):

2021 $ 23,563

Thereafter 71,104

Total $ 177,868

Our intangible assets that are not subject to amortization are reviewed annually for impairment or more often if there are indications of possible impairment.

We perform our annual intangible assets impairment test in November of each year.

We did not have any intangible asset impairments in 2020, 2019 or 2018.

Long-Lived Assets

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Fair values are based on estimates of market prices and assumptions concerning the amount and timing of estimated future cash flows and discount rates, reflecting varying degrees of perceived risk.

We did not have any long-lived asset impairments in 2020, 2019 or 2018.

Investment Securities

Short-term investments, exclusive of cash equivalents, are marketable securities intended to be sold within one year and may include trading securities, available-for-sale securities, and held-to-maturity securities (if maturing within one year at the time of acquisition).

Long-term investments are marketable securities intended to be sold after one year and may include trading securities, available-for-sale securities, and held-to-maturity securities.

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

the time of acquisition).

Long-term investments are marketable securities intended to be sold after one year and may include trading securities, available-for-sale securities, and held-to-maturity securities.

Our investment securities are considered available-for-sale and are “investment grade” and carried at fair value.

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There have been no realized gains or losses on the disposal of investments.

Our investments mature in 2020.

Our investments mature in 2021 and 2022.

All short-term investment securities are all callable within one year.

Our investment securities consist of the following (in thousands):

December 31, 2019

Amortized Cost

Unrealized Holding Gains (Losses)

As of December 31, 2020

Amortized Cost Unrealized Holding Gains (Losses) Fair Value

Short-term corporate bonds $ 14,687 $ — $ 14,687

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Total investment securities $ 27,661 $ — $ 27,661

December 31, 2018

Amortized Cost

Unrealized Holding Gains (Losses)

As of December 31, 2019

Amortized Cost Unrealized Holding Gains (Losses) Fair Value

Short-term corporate bonds $ 23,967 $ — $ 23,967

Long-term corporate bonds

Total investment securities

Deferred taxes are determined based on the differences between the financial statements and the tax bases using rates as enacted in the laws.

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In those cases, we follow a step by step translation process utilizing the same sequence as the consolidation process.

Translation adjustments are recorded as a component of accumulated other comprehensive income (loss), a separate component of stockholders' equity on our consolidated balance sheets and the effect of exchange rate changes on cash and cash equivalents are reflected on our consolidated statements of cash flows.

Gains and losses for transactions denominated in a currency other than the functional currency of the entity are included in our statements of operations in other income (expense), net.

Foreign currency transaction (gains) losses, net were $( 0.7 ) million in 2019 , $ 7.9 million in 2018 and $ 1.8 million in 2017 .

Translation adjustments are recorded as a component of accumulated other comprehensive (loss) income, a separate component of stockholders' equity on our consolidated balance sheets and the effect of exchange rate changes on cash and cash equivalents are reflected on our consolidated statements of cash flows.

Gains and losses for transactions denominated in a currency other than the functional

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

currency of the entity are included in our statements of operations in other income (expense), net.

Foreign currency transaction losses (gains), net were $ 7.2 million in 2020, $( 0.7 ) million in 2019 and $ 7.9 million in 2018.

Revenue Recognition

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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.

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

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.

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Our contributions to our 401(k) plan were approximately $ 10.7 million in 2020, $ 11.4 million in 2019 and $ 11.4 million in 2018.

As a result of the Hospira Infusion Systems ("HIS") acquisition, we assumed certain post-retirement and post-employment obligations related to employees located in certain international countries.

We also have post-retirement and post-employment obligations related to employees located in certain international countries.

These obligations are immaterial to our financial statements taken as a whole.

Research and Development

The majority of our research and development costs are expensed as incurred.

In certain circumstances when an asset will have an alternative future use we capitalize the costs related to those assets.

Research and development costs include salaries and related benefits, consulting fees, production supplies, samples, travel costs, utilities and other miscellaneous administrative costs.

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The majority of our research and development costs are expensed as incurred.

In certain circumstances when an asset will have an alternative future use we capitalize the costs related to those assets.

Research and development costs include salaries and related benefits, consulting fees, production supplies, samples, travel costs, utilities and other miscellaneous administrative costs.

Net Income Per Share

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Options that are anti-dilutive, where their exercise price exceeds the average market price of the common stock are not included in the treasury stock method calculation.

Restricted stock units that are anti-dilutive are not included in the treasury stock method.

There were 12,083 , 10,760 and 5,300 anti-dilutive shares in 2020, 2019 and 2018, respectively.

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(in thousands, except per share data)

2020 2019 2018

Net income $ 86,870 $ 101,035 $ 28,793

Weighted average number of common shares outstanding (basic) 20,907 20,629 20,394

1 unchanged sentence

Weighted average common and common equivalent shares outstanding (diluted) 21,591 21,545 21,601

EPS - basic $ 4.16 $ 4.90 $ 1.41

EPS - diluted $ 4.02 $ 4.69 $ 1.33

1 unchanged sentence

Recently Adopted Accounting Standards

In February 2016, the FASB issued Accounting Standard Update ("ASU") No.

2016-02, Leases (Topic 842).

The amendments in this update require an entity to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months.

Recognition, measurement and presentation of expenses will depend on classification as finance or operating lease.

The amendments also require certain quantitative and qualitative disclosures about leasing arrangements.

The updated guidance required a modified retrospective adoption.

In July 2018, the FASB issued ASU No.

2018-11, Targeted Improvements.

The amendments in this update provide entities with an additional (and optional) transition method to adopt the new lease requirements by allowing entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

The amendments in this update also provided lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease contract.

This expedient is limited to circumstances in which the nonlease components otherwise would be accounted for under the new revenue guidance and both (1) the timing and pattern of transfer are the same for the nonlease components and associated lease component and (2) the lease component, if accounted for separately, would be classified as an operating lease.

If the lessor uses this practical expedient they would account for the lease contract in accordance with Topic 606 if the nonlease component is the predominant component otherwise, the lessor should account for the combined component as an operating lease in accordance with Topic 842.

In July 2018, the FASB issued ASU No.

2018-10, Codification Improvements to Topic 842, Leases.

This ASU clarifies certain language in ASU 2016-02 and corrects certain references and inconsistencies.

We adopted these standards effective January 1, 2019 (see Note 5, Leases for a discussion of the impact and required disclosures).

In January 2017, the FASB issued ASU No.

2017-04, Intangibles-Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment.

The amendments in this update remove the second step of the impairment test.

An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

The new guidance does not amend the optional qualitative assessment of goodwill impairment.

The amendments in ASU 2017-04 are effective for the annual or interim impairment test in fiscal years beginning after December 15, 2019.

Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.

We early adopted this ASU effective April

ICU MEDICAL, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1, 2019, which had no impact on our consolidated financial statements or related footnote disclosures.

We adopted this ASU early ahead of our annual impairment test to reduce the complexity of the quantitative test if necessary.

Recently Issued Accounting Standards

In August 2018, the FASB issued ASU No.

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We adopted this ASU effective January 1, 2020.

This ASU will not have a material impact on our consolidated financial statements or related disclosures.

This ASU did not have a material impact on our consolidated financial statements or related disclosures.

In August 2018, the FASB issued ASU No.

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The amendments remove from disclosure:

the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy;

the amount of and reasons for transfers between Level 1

ICU MEDICAL, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

and Level 2 of the fair value hierarchy;

the policy for timing of transfers between levels;

10 unchanged sentences

We adopted this ASU effective January 1, 2020.

This ASU will not have a material impact on our consolidated financial statements or related disclosures.

This ASU did not have a material impact on our consolidated financial statements or related disclosures.

In June 2016, the FASB issued ASU No.

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The ASU also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

The amendments in this update 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.

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)- 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 are effective for fiscal years beginning after December 15, 2019.

The updated guidance requires a modified retrospective adoption.

In November 2018, the FASB issued ASU No.

2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses.

This update clarifies that receivables arising from operating leases are not within the scope of this guidance, instead, impairment of receivables arising from operating leases should be accounted for in accordance with the lease guidance.

In November 2019, the FASB issued ASU No.

2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses.

We adopted these ASUs effective January 1, 2020.

These ASUs will not have a material impact on our consolidated financial statements or related disclosures.

ICU MEDICAL, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We adopted this ASU effective January 1, 2020.

This ASU did not have a material impact on our 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.

The impact of this ASU on our contracts has not been material.

2019 Acquisitions

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The acquisition of Pursuit and their ClearGuard HD is a natural extension of our needlefree IV connector and other infection control technologies, which together provides us the best of breed solutions.

Preliminary Purchase Price

The following table summarizes the preliminary purchase price and the preliminary allocation of the purchase price related to the assets and liabilities purchased (in thousands):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Final Purchase Price

The following table summarizes the final purchase price and the final allocation of the purchase price related to the assets and liabilities purchased (in thousands):

Cash consideration for acquired assets, net $ 71,533

Fair value of contingent consideration 17,300

Total Estimated Consideration

Preliminary Purchase Price Allocation:

Total Consideration $ 88,833

Final Purchase Price Allocation:

Trade receivables $ 973

Inventories 2,464

Prepaid expenses and other current assets 74

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Deferred tax liability ( 15,769 )

Estimated Purchase Consideration

Purchase Consideration $ 88,833

____________________________________________

(1) Identifiable intangible assets includes $ 69.0 million of developed technology, $ 10.8 million of trade name and $ 2.5 million of non-compete agreement.

(1) Identifiable intangible assets included $ 69.0 million of developed technology, $ 10.8 million of trade name and $ 2.5 million of non-compete agreement.

The weighted amortization period for the total identifiable intangible assets is approximately fifteen years for developed technology, and trade name the weighted amortization period is fifteen years , and for the non-compete agreement the weighted amortization period is three years .

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The trade receivables, prepaid expenses and other current assets and assumed liabilities were recorded at their carrying values as of the date of the acquisition, as their carrying values approximated their fair values due to their short-term nature.

The above purchase price and purchase price allocation are preliminary and subject to finalization.

During 2019, we also acquired a small foreign distributor for approximately $ 4.6 million in cash.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Significant 2017 Acquisitions

On February 3, 2017, we acquired 100 % interest in Pfizer's HIS business for total cash consideration of approximately $ 260.0 million (net of estimated working capital adjustments paid at closing), which was financed with existing cash balances and a $ 75 million three-year interest-only seller note.

We also issued 3.2 million shares of our common stock.

The fair value of the common shares issued to Pfizer was determined based on the closing price of our common shares on the closing date, discounted to reflect a contractual lock-up period whereby Pfizer cannot transfer the shares, subject to certain exceptions, until the earlier of (i) the expiration of Pfizer’s services to us in the related transitional services agreement or (ii) eighteen months from the closing date.

Additionally, Pfizer was entitled up to an additional $ 225 million in cash contingent consideration based on the achievement of performance targets for the combined company for the three years ending December 31, 2019 ("Earnout Period").

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

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 includes 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 acquisition of the HIS business, which includes IV pumps, solutions and consumable devices complements our pre-existing business by creating a company that has a complete infusion therapy product portfolio.

We believe that the acquisition significantly enhances our global footprint and platform for continued competitiveness and growth.

With the acquisition of HIS, pre-existing long-term supply and distribution contracts between ICU and HIS were effectively terminated.

Deferred Closings

In the Asset Purchase Agreement between us and Pfizer, we agreed to defer the local closing of the HIS business in certain foreign jurisdictions (the “Deferred Closing Businesses”) for periods ranging by jurisdiction from 3 to 12 months after the February 3, 2017 closing date (the "Deferred Closing Period").

The net assets in these jurisdictions represent an immaterial portion of the total HIS business net assets.

At the February 3, 2017 HIS business transaction closing, we entered into a Net Economic Benefit Agreement with Pfizer under which we agreed that (i) during the Deferred Closing Period, the economic benefits and burdens of the Deferred Closing Businesses are for our account, and we are to be treated as the beneficial owner of the Deferred Closing Businesses and (ii) Pfizer would continue to operate the Deferred Closing Businesses under our direction.

All of the deferred closing businesses were effectively closed in 2017.

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Purchase Price

The following table summarizes the final purchase price and the final allocation of the purchase price related to the assets and liabilities purchased (in thousands, except per share data):

Cash consideration for acquired assets

Fair value of Seller Note

Fair value of contingent consideration payable to Pfizer (long-term)

Issuance of ICU Medical, Inc.

common shares:

Number of shares issued to Pfizer

Price per share (ICU's trading closing share price on the Closing Date)

Market price of ICU shares issued to Pfizer

Discount due to lack of marketability of 8.3%

Equity portion of purchase price

Total Consideration

Purchase Price Allocation:

Cash and cash equivalents

Trade receivables

Prepaid expenses and other assets

Property, plant and equipment

Intangible assets (1)

Accounts payable

Accrued liabilities

Long-term liabilities (2)

Total identifiable net assets acquired

Deferred tax, net

Estimated Gain on Bargain Purchase

Estimated Purchase Consideration

______________________________

(1) Identifiable intangible assets includes $ 48 million of customer relationships, $ 44 million of developed technology - pumps and dedicated sets, $ 34 million of developed technology - consumables, and $ 5 million of in-process research and development ("IPR&D").

The weighted amortization period for the total identifiable assets is approximately nine years , for customer relationships the weighted amortization period is eight years , for the developed technology - pumps and dedicated sets the weighted amortization period is ten years and for the developed technology - consumables the weighted amortization period is twelve years .

The IPR&D is non-amortizing until the associated research and development efforts are complete.

(2) Long-term liabilities primarily consisted of contract liabilities, product liabilities and long-term employee benefits.

The fair value of the assets acquired and liabilities assumed exceeded the fair value of the consideration to be paid resulting in a bargain purchase gain.

Before recognizing a gain on a bargain purchase, we reassessed the methods used in the purchase accounting and verified that we had identified all of the assets acquired and all of the liabilities assumed, and that there were no additional assets or liabilities to be considered.

We also reevaluated the fair value of the contingent consideration transferred to determine that it was appropriate.

We determined that the bargain purchase gain was primarily attributable to

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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.

After the continuing review of the product demand and operations of the HIS Business, including the resulting expected restructuring activities, we forecasted our estimated Adjusted EBITDA from the HIS business in 2017 to be $ 35 million - $ 40 million , which was considerably lower than the forecast contemplated in initial negotiations with Pfizer, which resulted in an estimated fair value of $ 19 million related to the $ 225 million earn out.

The bargain purchase gain is separately stated below income from operations in the accompanying consolidated statements of operations for the year ended December 31, 2017.

The identifiable intangible assets and other long-lived assets acquired have been valued as Level 3 assets at fair market value.

The estimated fair value of identifiable intangible assets were developed using the income approach and are based on critical estimates, judgments and assumptions derived from:

analysis of market conditions;

discount rate;

discounted cash flows;

royalty rates;

customer retention rates;

and estimated useful lives.

Fixed assets were valued with the consideration of remaining economic lives.

The raw materials inventory was valued at historical cost and adjusted for any obsolescence, the work in process was valued at estimated sales proceeds less costs to complete and costs to sell, and finished goods inventory was valued at estimated sales proceeds less a nominal profit and costs to sell.

The prepaid expenses and other current assets and assumed liabilities were recorded at their carrying values as of the date of the acquisition, as their carrying values approximated their fair values due to their short-term nature.

Unaudited Pro Forma Information

The pro forma financial information in the table below summarizes the combined results of operations for ICU and HIS as though the companies were combined as of the beginning of fiscal 2016.

The pro forma financial information includes the business combination accounting effects resulting from this acquisition including our amortization charges from acquired intangible assets, nonrecurring expense related to the fair value adjustment to acquisition-date inventory, acquisition and integration-related costs, interest expense on the Pfizer seller note and the related tax effects.

(In millions)

Actual from 2/3/2017 - 12/31/2017 (3)

2017 supplemental pro forma from 1/1/2017 - 12/31/2017 (1)(2)

______________________________

* Impracticable to calculate.

(1) 2017 supplemental pro forma earnings were adjusted to exclude $ 66.3 million of nonrecurring expense related to the fair value adjustment to acquisition-date inventory, $ 59.2 million of acquisition and integration-related costs and $ 70.9 million in bargain purchase gain.

(2) Unaudited.

(3) Amount represents activity of HIS from the date of the acquisition.

RESTRUCTURING, STRATEGIC TRANSACTION AND INTEGRATION

Restructuring and strategic transaction and integration expenses were $ 80.6 million , $ 105.4 million and $ 78.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Restructuring, strategic transaction and integration expenses were $ 28.4 million, $ 80.6 million and $ 105.4 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Restructuring

Restructuring charges were $ 8.4 million , $ 4.5 million and $ 18.8 million for the years ended December 31, 2019, 2018 and 2017, respectively, and are included in the above restructuring, strategic transaction and integration amounts on a separate line item in our consolidated statement of operations.

During the year ended December 31, 2019, restructuring charges were primarily related to severance and facility closure costs.

Restructuring charges were $ 7.9 million, $ 8.4 million and $ 4.5 million for the years ended December 31, 2020, 2019 and 2018, respectively, and are included in the above restructuring, strategic transaction and integration expenses in our consolidated statement of operations.

In 2020, restructuring charges were primarily related to severance and costs related to office and other facility closures.

In 2019, restructuring charges were primarily related to severance and facility closure costs.

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.

The cumulative amount incurred to date in connection with the HIS acquisition is $ 25.1 million .

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In 2018 and 2017, we incurred restructuring charges related to the acquisition of the HIS business (see Note 2, Acquisitions).

In 2018, we incurred restructuring charges related our 2017 acquisition of Hospira Infusion Systems ("HIS").

The restructuring charges were incurred as a result of integrating the acquired operations into our business and include severance costs related to involuntary employee terminations and facility exit costs related to the closure of the Dominican Republic manufacturing facilities acquired from Pfizer.

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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, will be paid in equal monthly installments until December 2020.

The remaining payments owed are included in accrued liabilities in our consolidated balance sheet.

Lopez's right to employment under his then-existing employment agreement, the buy-out, including payroll taxes, were paid in equal monthly installments until December 2020.

This has been fully paid as of December 31, 2020.

The following table summarizes the activity for the restructuring-related charges discussed above and related accrual (in thousands):

Accrued Balance January 1, 2018

Charges incurred

Other Adjustments

Accrued Balance December 31, 2018

Charges incurred

Other Adjustments

Accrued Balance December 31, 2019

Accrued Balance January 1, 2019 Charges incurred Payments Accrued Balance December 31, 2019 Charges incurred Payments Currency Translation Accrued Balance December 31, 2020

Severance pay and benefits $ 677 $ 5,634 $ ( 2,433 ) $ 3,878 $ 4,288 $ ( 6,331 ) $ 23 $ 1,858

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Retention and facility closure expenses — 2,741 ( 1,530 ) 1,211 3,641 ( 3,570 ) 281 1,563

$ 1,416 $ 8,375 $ ( 4,242 ) $ 5,549 $ 7,929 $ ( 10,361 ) $ 304 $ 3,421

Strategic Transaction and Integration Expenses

During the years ended December 31, 2019, 2018 and 2017, we incurred $ 72.2 million , $ 100.9 million and $ 59.2 million , respectively, in transaction and integration costs.

These costs were primarily related to the acquisition and integration of HIS business, (see Note 2, Acquisitions).

The integration expenses for the year ended December 31, 2019, included a one-time strategic supply chain restructuring charge of $ 22.1 million , which reduces our contracted commitments to our third party manufacturer and charges related to our Pfizer separation costs, which included a $ 12.7 million non-cash write-off of related assets.

Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

We adopted ASU No.

2014-09, Revenue from Contracts with Customers (ASC Topic 606), effective January 1, 2018 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018.

Results for reporting beginning after January 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and will continue to be reported in accordance with our historic accounting under ASC Topic 605, Revenue Recognition.

Due to the cumulative impact, net of tax, of adopting ASC Topic 606, we recorded a net increase of $ 6.3 million to opening retained earnings as of January 1, 2018.

The impact is primarily related to our bundled arrangements where we sell software licenses and implementation services, in addition to equipment, consumables and solutions.

Under ASC Topic 605, revenue for the equipment was recognized upon delivery and software licenses and implementation services were typically recognized over the contract term.

Under ASC Topic 606, revenue for the bundled equipment, software and software implementation services are recognized upon implementation.

This results in an acceleration of software related revenue, offset by a delay in the recognition of related revenue of the equipment.

Under ASC Topic 605, consumables and solutions revenues were typically recognized upon delivery.

Under ASC 606, consumables and solutions revenues are recognized as the customer obtains control of the asset, which is at shipping point.

This results in an acceleration in the recognition of consumables and solutions revenue.

Additionally, the timing of revenue recognition for software license renewals changed under ASC Topic 606.

Under ASC Topic 605, revenue related to software renewals was recognized on a ratable basis over the license period.

During the years ended December 31, 2020, 2019 and 2018, we incurred $ 20.5 million, $ 72.2 million and $ 100.9 million, respectively, in strategic transaction and integration expenses, which are included in restructuring, strategic transaction and integration expenses in our consolidated statement of operations.

The integration expenses during 2020 were related to the integration of HIS and included expenses for the migration of IT systems at our Austin facility.

The strategic transaction and integration expenses during 2019 were primarily related to HIS, included a one-time strategic supply chain restructuring charge of $ 22.1 million, which reduced our contracted commitments to our third party manufacturer and charges related to our Pfizer separation costs, which included a $ 12.7 million non-cash write-off of related assets.

In 2018, our integration expenses were also primarily related to HIS.

During 2018, in connection with the sale of the 2.5 million of the shares Pfizer held in our common stock, we incurred a one-time fee payable to Pfizer in the amount of $ 8.0 million.

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Topic 606, the license, which is considered functional IP, is considered to be transferred to the customer at a point in time, specifically, at the start of each annual renewal period.

As a result, under ASC Topic 606, revenue related to our annual software license renewals is accelerated when compared to ASC Topic 605.

Revenue Recognition

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Revenue is typically recognized upon transfer of control of the products, which we deem to be at point of shipment.

Our software licenses and renewals are considered to be transferred to a customer at a point in time therefore revenue is recognized at the start of the license term.

Payment is typically due in full within 30 days of delivery or the start of the contract term.

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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 use information available at the time, including our historical experience to estimate the expected value in recording provisions for chargebacks.

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The following table represents our revenues disaggregated by product line (in thousands) and our disaggregated product line revenue as a percentage of total revenue:

For the year ended

Year ended December 31,

2020 2019 2018

Product line Revenue % of Revenue Revenue % of Revenue Revenue % of Revenue

Infusion Consumables $ 473,740 37 % $ 477,611 37 % $ 483,039 35 %

Infusion Systems 359,691 28 % 328,282 26 % 355,484 25 %

IV Solutions 388,971 31 % 414,971 33 % 507,985 36 %

Critical Care 48,602 4 % 45,344 4 % 53,532 4 %

Total Revenues $ 1,271,004 100 % $ 1,266,208 100 % $ 1,400,040 100 %

We report revenue on a "where sold" basis, which reflects the revenue within the country or region in which the ultimate sale is made to our external customer.

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We report revenue on a "where sold" basis, which reflects the revenue within the country or region in which the ultimate sale is made to our external customer.

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

ended December 31,

Year ended December 31,

Geography 2020 2019 2018

Europe, the Middle East and Africa $ 132,763 $ 130,530 $ 134,363

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As of December 31, 2020, revenue from remaining performance obligations related to implementation of software and equipment is $ 4.8 million.

We expect to recognize substantially all of this revenue within the next three months.

We expect to recognize substantially all of this revenue within the next three to six months.

Revenue from remaining performance obligations related to annual software licenses is $ 1.7 million.

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Under ASC Topic 606, we have elected to expense these costs as incurred as the period of benefit is less than one year.

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Practical expedients and exemptions

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We will continue to treat these costs as a fulfillment cost rather than as an additional promised service.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Adoption of ASC Topic 842, "Lease Accounting"

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We determine if an arrangement is a lease at inception.

Our operating leases with a term greater than one year are included in operating lease ROU assets, accrued liabilities, and other long-term liabilities on our consolidated balance sheets.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date.

Our operating leases with a term greater than one year are included in operating lease ROU assets and our financing lease assets are included in other assets.

Our lease liabilities are included in accrued liabilities, and other long-term liabilities on our consolidated balance sheets.

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.

The operating lease ROU asset excludes initial direct costs incurred.

The lease ROU asset excludes initial direct costs incurred.

Our lease terms include options to extend when it is reasonably certain that we will exercise that option.

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Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

We have operating leases for corporate, R&D and sales and support offices, device service centers, distribution warehouses and certain equipment.

We have operating leases for corporate, R&D and 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.

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The following table presents the components of our lease cost (in thousands):

ended December 31, 2019

Year ended December 31,

Operating lease cost $ 11,284 $ 10,011

Finance lease cost - interest 91 —

Finance lease cost - amortization of ROU asset 383 —

Short-term lease cost 263 322

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

ended December 31, 2019

Year ended December 31,

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases $ 10,185 $ 10,344

Operating cash flows from finance leases $ 91 $ —

Right-of-use assets obtained in exchange for lease obligations:

Operating leases $ 20,847 $ 3,230

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

Finance leases $ 3,062 $ —

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

As of December 31,

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Weighted Average Remaining Lease Term

Operating leases

Operating leases 6.7 years 6 years

Weighted Average Discount Rate

Operating leases 5.02 % 5.57 %

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

Finance leases

Finance lease right-of-use assets $ 2,915

Accrued liabilities $ 554

Other long-term liabilities 2,388

Total finance lease liabilities $ 2,942

Weighted Average Remaining Lease Term

Finance leases 6.4 years

Weighted Average Discount Rate

Finance leases 4.27 %

As of December 31, 2020, the maturities of our lease liabilities for each of the next five years are approximately (in thousands):

Operating Leases

Operating Leases Finance Leases

2021 $ 10,981 $ 666

2022 9,956 666

2023 8,767 666

2024 8,279 338

2025 5,002 207

Thereafter 15,289 805

Total Lease Payments 58,274 3,348

Less imputed interest ( 8,515 ) ( 406 )

Total $ 49,759 $ 2,942

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 31, 2018, the maturities of our operating lease liabilities for each of the next five years were approximately (in thousands):

Operating Leases

Total Lease Payments (1)

____________________________

(1) The lease payment maturities as of December 31, 2018 are not calculated at present value.

During the third quarter 2019, we signed a ten-year lease for a 610,806 square foot warehouse.

The commencement of the lease is not expected until the first quarter of 2020 subject to the completion of landlord build-outs which will make the space available for use.

Over the ten-year lease term, we expect the lease payments to total at least $ 21.8 million .

SHARE BASED AWARDS

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We incur stock compensation expense for stock options, restricted stock units ("RSU"), performance restricted stock units ("PRSU") and in years prior to 2018 stock purchased under our employee stock purchase plan ("ESPP"), which was suspended in 2017.

We receive a tax benefit on stock compensation expense and direct tax benefits from the exercise of stock options.

We also have indirect tax benefits upon exercise of stock options related to research and development tax credits which are recorded as a reduction of income tax expense.

We receive a tax benefit on stock compensation expense and direct tax benefits from the exercise of stock options and vesting of restricted stock units.

We also have indirect tax benefits upon exercise of stock options and vesting of restricted stock units related to research and development tax credits which are recorded as a reduction of income tax expense.

The table below summarizes compensation costs and related tax benefits (in thousands):

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Indirect tax benefit $ 1,203 $ 680 $ 2,199

As of December 31, 2019 , we had $ 23.6 million of unamortized stock compensation cost which we will recognize as an expense over approximately 0.8 years.

As of December 31, 2020, we had $ 26.3 million of unamortized stock compensation cost which we will recognize as an expense over a weighted-average period of approximately 0.9 years.

Stock Incentive and Stock Option Plans

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Options may be granted with exercise prices at no less than fair market value at date of grant.

Options granted under the 2011 Plan may be

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“non-statutory stock options” which expire no more than ten years from date of grant or “incentive stock options” as defined in Section 422 of the Internal Revenue Code of 1986, as amended.

Options granted under the 2011 Plan may be “non-statutory stock options” which expire no more than ten years from date of grant or “incentive stock options” as defined in Section 422 of the Internal Revenue Code of 1986, as amended.

In 2014, our Compensation Committee of the Board of Directors awarded our then new Chief Executive Officer an employment inducement option to purchase 182,366 shares of our common stock and an employment inducement grant of restricted stock units with respect to 68,039 shares of our common stock.

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The options generally expire 10 years from the grant date.

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The fair value of time-based option grants is calculated using the Black-Scholes option valuation model.

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Year ended December 31,

2020 2019 2018

Number of time-based options granted 7,190 6,265 5,815

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A summary of our stock option activity as of and for the year ended December 31, 2020 is as follows:

Weighted Average Exercise Price Per Share

Weighted Average Contractual Life (Years)

Aggregate Intrinsic Value (in thousands)

Shares Weighted Average Exercise Price Per Share Weighted Average Contractual Life (Years) Aggregate Intrinsic Value (in thousands)

Outstanding at December 31, 2019 1,047,854 $ 66.08

Granted 7,190 $ 181.99

Exercised ( 237,244 ) $ 55.60

Forfeited or expired — $ —

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Vested and expected to vest, December 31, 2020 817,800 $ 70.13 3.3 $ 118,444

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The intrinsic values for options exercisable, outstanding and vested or expected to vest at December 31, 2020 is based on our closing stock price of $ 214.49 at December 31, 2020 and are before applicable taxes.

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Tax benefit from stock option exercises $ 5,179 $ 9,653 $ 12,617

In 2019, we granted performance restricted stock units ("PRSU") to our executive officers.

For the executive officers other than the Chief Executive Officer ("CEO") and the Chief Operations Officer ("COO"), the PRSUs will vest subject to a three-year time vesting and further subject to a determination by the Compensation Committee that the officers have met their individual performance goals for the applicable years.

In 2020, we granted PRSUs to our executive officers.

For the executive officers other than the Chief Executive Officer ("CEO"), Chief Financial Officer ("CFO") and the Chief Operations Officer ("COO"), the PRSUs will vest subject to a three-year time vesting and further subject to a determination by the Compensation Committee that the officers have met their individual performance goals for the applicable years.

For the CEO, CFO and the COO, the performance shares will cliff-vest

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ending on March 6, 2023 and further be subject to the achievement of minimum three-year cumulative revenue and EPS targets, which when reviewed against a predetermined vesting matrix could result in 0% to 250% of the awarded units that could vest.

In 2019, we granted PRSUs to our executive officers.

For the executive officers other than the CEO and the COO, the PRSUs will vest subject to a three-year time vesting and further subject to a determination by the Compensation Committee that the officers have met their individual performance goals for the applicable years.

For the CEO and the COO, the performance shares will cliff-vest ending on March 6, 2022 and further subject to the achievement of a minimum Cumulative Adjusted EBITDA.

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During the first quarter of 2019, the Compensation Committee determined the award granted vested at 300%, as a minimum specified compound annual growth rate ("CAGR") in adjusted EBITDA per share of greater than 12% was reached for the 3-year performance period January 1, 2016 through December 31, 2018.

The total number of shares of 2016 PRSUs that were earned by our executive officers was 109,110 shares.

Restricted stock units ("RSU") are granted annually to our Board of Directors and vest on the first anniversary of the grant date.

Restricted stock units are granted annually to our Board of Directors and vest on the first anniversary of the grant date, or the date of our annual meeting, whichever occurs first.

In 2020, 2019 and 2018, we granted RSUs to certain employees that vest ratably on the anniversary of the grant over three years.

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The grant date fair market value of our PRSUs and RSUs is determined by our stock price on the grant date.

The table below summarizes our restricted stock award activity (dollars in thousands):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The table below summarizes our restricted stock award activity (dollars in thousands):

Year ended December 31,

1 unchanged sentence

Shares granted 38,633 37,657 30,348

Shares earned

Shares earned (a)

80,654 114,032 —

Grant date fair value per share $ 188.34 $ 231.63 $ 248.65

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Intrinsic value vested $ 12,314 $ 16,753 $ 17,086

___________________________

(a) PRSU shares earned in 2019 were related to performance awards granted to executives in 2016 and 2018 and PRSU shares earned in 2020 were related to performance awards granted to executives in 2017, 2018, and 2019.

The table below provides a summary of our PRSU and RSU activity as of and for the year ended December 31, 2020:

Number of Units

Grant Date Fair Value Per Share

Weighted Average Contractual Life (Years)

Aggregate Intrinsic Value

Number of Units Grant Date Fair Value Per Share Weighted Average Contractual Life (Years) Aggregate Intrinsic Value

Non-vested at December 31, 2019 232,527 $ 205.82

Change in units due to performance expectations (a)

15,454 $ 238.66

Granted 126,463 $ 188.19

Vested ( 145,820 ) $ 187.97

Forfeited ( 7,864 ) $ 207.02

Non-vested and expected to vest at December 31, 2020 220,760 $ 209.77 1.0 $ 47,351

___________________________

(a) Relates to 2018 and 2019 CEO and COO PRSUs, assumes attainment of a reduced payout rate based on performance expectations.

(a) Relates to 2018 CEO and COO PRSUs granted and 2019 and 2020 PRSUs granted to a non-executive employee, assumes attainment of an increased payout rate based on performance expectations.

We have an ESPP under which U.S.

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We suspended our ESPP in 2017.

The fair value of rights to purchase shares under the ESPP is calculated using the Black-Scholes option valuation model.

The table below summarizes the number and intrinsic value of ESPP share purchases and the weighted average valuation assumptions for the 2017 purchase period.

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

ESPP shares purchased by employees

Intrinsic value of ESPP purchases (in thousands)

Weighted average assumptions for ESPP valuation:

Expected term (in years)

Expected stock price volatility

Risk-free interest rate

Expected dividend yield

DERIVATIVES AND HEDGING ACTIVITIES

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We do not issue derivatives for trading or speculative purposes.

In May 2017, we entered into a two-year cross-currency par forward contract to hedge a portion of our Mexico forecasted expenses denominated in Pesos ("MXN").

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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We record changes in the fair value of the effective portion of the derivative instrument as a component of Other Comprehensive Income (Loss) 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.

We began hedging a portion of our Mexico forecasted expenses denominated in Pesos ("MXN") in May 2017 by entering into a two-year cross-currency par forward contract.

The term of this currency forward contract was May 1, 2017 to May 1, 2019.

The derivative instrument had a fixed forward rate of 20.01 MXN/USD over the term of the two-year contract.

In January 2018, we entered into an additional six-month cross-currency par forward contract that extended our previous hedge of a portion of our Mexico forecasted expenses denominated in MXN.

In January 2018, we entered into a six-month cross-currency par forward contract.

The term of this six-month contract was May 1, 2019 to November 1, 2019.

The derivative instrument had a fixed forward rate of 20.43 MXN/USD over the term of the six-month contract.

In November 2018, we entered into a one-year cross-currency par forward contract again extending the hedge of a portion of our Mexico forecasted expenses denominated in MXN.

In November 2018, we entered into a one-year cross-currency par forward contract.

The term of the one-year hedge was November 1, 2019 to November 3, 2020.

The derivative instrument matured in equal monthly amounts at a fixed forward rate of 22.109 MXN/USD.

In March 2020, we entered into a one-year cross-currency par forward contract.

The total notional amount of this outstanding derivative as of December 31, 2020 was approximately 436.8 million MXN.

The term of the one-year hedge is November 1, 2019 to November 3, 2020.

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.

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the fair values of our derivative instruments included within the Consolidated Balance Sheets (in thousands):

As of December 31,

Consolidated Balance Sheet

Location 2020 2019

Derivatives designated as cash flow hedging instruments

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Year Ended December 31,

Line Item in the

Location of Gain in the

Consolidated Statements of Operations 2020 2019 2018

Derivatives designated as cash flow hedging instruments

Foreign exchange forward contracts

Cost of goods sold

Foreign exchange forward contracts Cost of goods sold $ 790 $ 916 $ 743

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We recognized the following gains on our foreign exchange contract designated as a cash flow hedge (in thousands):

Amount of Gain Recognized in Other Comprehensive Income on Derivatives

Amount of Gain Reclassified From Accumulated Other Comprehensive Income into Income

Year Ended December 31,

Amount of Gain Recognized in Other Comprehensive Income on Derivatives Amount of Gain Reclassified From Accumulated Other Comprehensive Income into Income

Year Ended December 31, Year Ended December 31,

2020 2019 2018 Location of Gain Reclassified From Accumulated Other Comprehensive Income into Income 2020 2019 2018

Derivatives designated as cash flow hedges:

Foreign exchange forward contract

Cost of goods sold

Foreign exchange forward contract $ 1,980 $ 2,550 $ 2,063 Cost of goods sold $ 790 $ 916 $ 743

Total derivatives designated as cash flow hedging instruments $ 1,980 $ 2,550 $ 2,063 $ 790 $ 916 $ 743

As of December 31, 2019, we expect approximately $ 2.4 million of the deferred gain on the outstanding derivatives in accumulated other comprehensive income to be reclassified to net income during the next 12 months concurrent with the underlying hedged transactions also being reported in net income.

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 31, 2020, we expect approximately $ 3.6 million of the deferred gain on the outstanding derivatives in accumulated other comprehensive (loss) income to be reclassified to net income during the next 12 months concurrent with the underlying hedged transactions also being reported in net income.

FAIR VALUE MEASUREMENTS

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unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities.

Contingent earn-out liabilities

In 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.

Pfizer was entitled to receive between $191.3 million and $ 225.0 million in additional cash consideration based on the achievement of certain performance targets for the combined company for the three years ending December 31, 2019.

The initial fair value of the earn-out was determined by employing a Monte Carlo simulation in a risk neutral framework.

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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, as discussed further in Note 2:

Acquisitions.

At each reporting date subsequent to the acquisition we remeasured the earn-out using the same methodology above and recognize any changes in value.

As of December 31, 2019, it was determined that we did not meet the necessary performance targets that would require payout of any of the HIS earn-out liability.

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.

We expect the dispute will be resolved by binding arbitration unless both parties are able to come to an agreement on this issue, that will likely be concluded during 2021.

ICU MEDICAL, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In the fourth quarter of 2019, we recognized an earn-out liability related to the acquisition of Pursuit (see Note 2, Acquisitions).

Pursuit's equity holders are potentially 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 paid 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 .

The earn-out paid 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.

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Contingent earn-out liability, January 1, 2018 $ 27,000

Acquisition date fair value estimate of earn-out

Change in fair value of contingent earn-out (included in income from operations as a separate line item) (1)

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Contingent earn-out liability, December 31, 2019 17,300

Acquisition date fair value estimate of earn-out (1)

Change in fair value of contingent earn-out (included in income from operations as a separate line item) (4)

Contingent earn-out liability, December 31, 2020 $ 26,300

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

_________________________

(1) Changes in the fair value of the HIS earn-out during the performance period are due to a change in the forecast of the underlying target, adjusted EBITDA, and due to changes in other assumptions used in the Monte Carlo simulation.

(2) Relates to our acquisition of Pursuit, (see Note 2, Acquisitions).

Changes in the fair value of the HIS earn-out subsequent to the fair value calculated at acquisition are due to a change in the forecast of the underlying target, adjusted EBITDA, and due to changes in other assumptions used in the Monte Carlo simulation, as detailed in the below table.

(3) The change in the fair value of the HIS earn-out was based on actual results as compared to the earn-out performance targets.

(4) The fair value of the Pursuit earn-out increased during 2020 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 as of the acquisition date to December 31, 2020.

Significant increases or decreases in these inputs in isolation could result in a significant impact on our fair value measurement.

Simulation Input

December 31, 2018

December 31, 2017

At Acquisition February 3, 2017

Simulation Input As of

December 31, 2018 At January 1, 2018

Adjusted EBITDA Volatility 30.00 % 26.00 %

WACC 8.25 % 8.75 %

20-year risk free rate 2.87 % 2.58 %

Market price of risk 5.24 % 5.99 %

Cost of debt 5.25 % 4.08 %

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Pursuit Earn-out

Simulation Input

December 31, 2019

At Acquisition November 2, 2019

As of December 31, At Acquisition

Simulation Input 2020 2019 November 2, 2019

Revenue/Gross Profit Volatility 25.00 % 20.00 % 20.00 %

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Counter Party Risk 3.10 % 6.00 % 6.00 %

Investments and foreign currency contracts

The fair value of our investments, which consists of corporate bonds, is estimated using observable market based inputs such as quoted prices, interest rates and yield curves or Level 2 inputs.

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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):

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Fair value measurements at December 31, 2019

Fair value measurements as of December 31, 2020

Total carrying

Quoted prices

assets (level 1)

inputs (level 2)

value Quoted prices

assets (level 1) Significant

inputs (level 2) Significant

inputs (level 3)

Available for sale debt securities:

Short-term $ 14,687 $ — $ 14,687 $ —

Long-term 12,974 — 12,974 —

Foreign exchange forwards:

Prepaid expenses and other current assets 3,555 — 3,555 —

Total Assets $ 31,216 $ — $ 31,216 $ —

Earn-out liability $ 26,300 $ — $ — $ 26,300

Total Liabilities $ 26,300 $ — $ — $ 26,300

Fair value measurements at December 31, 2018

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Fair value measurements as of December 31, 2019

Total carrying

Quoted prices

assets (level 1)

inputs (level 2)

value Quoted prices

assets (level 1) Significant

inputs (level 2) Significant

inputs (level 3)

Available for sale debt 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 $ —

Earn-out liability $ 17,300 $ — $ — $ 17,300

Total Liabilities $ 17,300 $ — $ — $ 17,300

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following (in thousands):

As of December 31,

Other prepaid expenses and receivables $ 14,964 $ 13,778

Receivables from Pfizer related to HIS business acquisition (1)

Deferred costs 6,402 3,332

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Deferred tax charge 3,542 1,266

Foreign exchange forward contract 3,555 2,366

Deposits 1,353 1,375

Other 1,822 1,992

$ 41,492 $ 33,981

(1) We reclassified the December 31, 2018 related-party receivable due from Pfizer to prepaid expenses and other current assets for current year presentation purposes.

During the years 2018 and 2017, Pfizer was a related party to us as we issued 3.2 million shares of our common stock as partial consideration for the 2017 acquisition of HIS.

As of December 31, 2018, Pfizer had sold all of its shares of our common stock.

During 2018, in connection with the sale of the 2.5 million of the shares Pfizer held, we incurred a one-time fee payable to Pfizer in the amount of $ 8.0 million included in restructuring, strategic transaction and integration expense in our consolidated statement of operations.

Related-party revenue for goods manufactured for Pfizer under our Manufacturing and Supply Agreements with Pfizer (see Note 16, Collaborative and Other Arrangements) was $ 78.2 million and $ 72.4 million during the years 2018 and 2017, respectively, and the cost of product manufactured by Pfizer for us under those agreements was $ 81.0 million and $ 70.2 million during the years 2018 and 2017, respectively.

ICU MEDICAL, INC.

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Accrued liabilities consist of the following (in thousands):

As of December 31,

Salaries and benefits $ 25,786 $ 21,116

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Accrued product field action — 2,096

Consigned inventory

Third-party inventory

Legal accrual 900 826

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Contract settlement — 1,667

Accrued research and development

Other 5,515 6,801

$ 97,021 $ 117,776

Other long-term liabilities consist of the following (in thousands):

As of December 31,

Operating lease liabilities-LT $ 41,019 $ 28,896

Finance lease liability-LT 2,388 —

Contract liabilities (1)

Deferred revenue 864 94

Contract settlement

Benefits 1,183 1,131

Accrued rent 1,462 1,642

Other 582 585

$ 47,835 $ 32,820

__________________________________________

(1) Consists of contracts with customers and suppliers that were valued at below market at the time of the HIS acquisition.

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LONG-TERM OBLIGATIONS

Five-year Revolving Credit Facility ("Credit Facility")

Five-year Senior Secured Revolving Credit Facility ("Credit Facility")

On November 8, 2017, we entered into a five-year Revolving Credit Facility ("Credit Facility") with various lenders for $ 150 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 the COVID-19 pandemic, we preemptively borrowed $150.0 million on our Credit Facility as a conservative measure to manage any potential short-term liquidity risk.

As of December 31, 2020, we had fully repaid all amounts borrowed.

As of December 31, 2020 and 2019, we had no borrowings and $ 150 million of availability under the Credit Facility.

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The applicable interest margins and the commitment fee with respect to the Credit Facility shall be based on the Total Leverage Ratio pursuant to the following pricing grid:

Consolidated Total

Leverage Ratio

Less than 1.00 to 1.00

Greater than or equal to 1.00 to 1.00 but less than 2.00 to 1.00

Greater than or equal to 2.00 to 1.00 but less than 2.50 to 1.00

Greater than or equal to 2.50 to 1.00

Level Consolidated Total

Leverage Ratio Commitment

I Less than 1.00 to 1.00 0.15 % 1.25 % 0.25 %

II Greater than or equal to 1.00 to 1.00 but less than 2.00 to 1.00 0.20 % 1.50 % 0.50 %

III Greater than or equal to 2.00 to 1.00 but less than 2.50 to 1.00 0.25 % 1.75 % 0.75 %

IV Greater than or equal to 2.50 to 1.00 0.30 % 2.00 % 1.00 %

Guarantors and Collateral

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Our obligations are secured by:

(i) 100% of the equity interests of our guarantor subsidiaries;

and (ii) all of the tangible and intangible personal property and assets related to us and our guarantor subsidiaries

(i) 100% of the equity interests of our guarantor

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(including, without limitation, all accounts, equipment, inventory and other goods, all instruments, intellectual property and other general intangibles, deposit accounts, securities accounts and other investment property and cash), and (iii) all products, profits and proceeds of the foregoing.

subsidiaries;

and (ii) all of the tangible and intangible personal property and assets related to us and our guarantor subsidiaries (including, without limitation, all accounts, equipment, inventory and other goods, all instruments, intellectual property and other general intangibles, deposit accounts, securities accounts and other investment property and cash), and (iii) all products, profits and proceeds of the foregoing.

Notwithstanding the foregoing, the collateral shall not include certain excluded property.

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We were in compliance with all financial covenants as of December 31, 2020.

Three-Year Interest-Only Senior Note

On February 3, 2017, we partially funded the acquisition of the HIS business from Pfizer with a $ 75 million Seller Note issued by Pfizer contemporaneous with the acquisition.

We had fully repaid the seller note as of December 31, 2017.

Income from continuing operations before taxes consisted of the following (in thousands):

Year Ended December 31,

2020 2019 2018

United States $ 41,194 $ 32,849 $ ( 8,600 )

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The (benefit) provision for income taxes consisted of the following (in thousands):

Foreign 56,300 81,858 30,974

$ 97,494 $ 114,707 $ 22,374

The provision (benefit) for income taxes consisted of the following (in thousands):

Year Ended December 31,

2020 2019 2018

Federal $ 6,032 $ 6,851 $ 492

State 2,422 2,532 1,865

Foreign 7,290 7,994 9,136

15,744 17,377 11,493

Federal $ ( 5,319 ) $ ( 6,720 ) $ ( 9,118 )

State ( 1,850 ) ( 325 ) ( 3,072 )

Foreign 2,049 3,340 ( 5,722 )

( 5,120 ) ( 3,705 ) ( 17,912 )

$ 10,624 $ 13,672 $ ( 6,419 )

We have accrued for tax contingencies for potential tax assessments, and in 2020 we recognized a $ 3.2 million net increase, most of which related to various federal, state and foreign tax reserves.

On December 22, 2017, the Tax Act was enacted into legislation, 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, implementing a territorial tax system, and requiring a mandatory one-time tax on U.S.

owned undistributed foreign earnings and profits known as the toll charge or transition tax.

Pursuant to the SEC Staff Accounting Bulletin ("SAB") No.

118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" ("SAB 118"), a company selects between one of three scenarios to reflect the impact of the Tax Act in its financial statements within a measurement period.

Those scenarios are (i) a final estimate which effectively closes the measurement period;

(ii) a reasonable estimate leaving the measurement period open for future revisions;

and (iii) no estimate as the law is still being analyzed in which case a company continues to apply its accounting on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

SAB 118 allows for the reporting provisional amounts for certain income tax effects in scenario (ii) and (iii).

The measurement period begins in the reporting period that includes the Act’s enactment date and ends when an entity has obtained, prepared, and analyzed the information that was needed in order to complete the accounting requirements under ASC Topic 740.

As of December 31, 2018, our accounting for the Tax Act was complete.

The toll charge on undistributed foreign earnings and profits (the “Transition Tax”) is a tax on certain untaxed accumulated and current earnings and profits ("E&P") of our foreign subsidiaries.

We were able to reasonably estimate the Transition Tax and recorded a provisional Transition Tax expense of $ 2.0 million for the year ended December 31, 2017.

On the basis of revised E&P computations that were completed during the reporting period, we recognized an additional measurement-period adjustment of $ 0.6 million to the Transition Tax obligation, with a corresponding adjustment of $ 0.6 million to income tax expense.

The revaluation of deferred taxes is an adjustment to future tax obligations as a result of the reduction of the corporate tax rate from 35% to 21%.

We were able to reasonably estimate the effect of the revaluation of deferred taxes and recorded a provisional tax expense of $ 1.1 million for the year ended December 31, 2017.

The computation of timing differences was completed during the reporting period.

We recognized an additional measurement-period adjustment of $ 0.2 million , with a corresponding adjustment of $ 0.2 million to income tax expense.

ICU MEDICAL, INC.

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Year Ended December 31,

2020 2019 2018

Amount Percent Amount Percent Amount Percent

Federal tax at the expected statutory rate $ 20,474 21.0 % $ 24,088 21.0 % $ 4,699 21.0 %

State income tax, net of federal effect 2,099 2.2 % 1,269 1.1 % 927 4.1 %

Tax credits ( 3,269 ) ( 3.4 ) % ( 2,896 ) ( 2.5 ) % ( 4,961 ) ( 22.2 ) %

Global intangible low-taxed income ( 2,555 ) ( 2.6 ) % 6,118 5.3 % 2,363 10.6 %

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IP installment sale and repatriation — — % ( 2,118 ) ( 1.8 ) % 3,252 14.5 %

Bargain purchase gain

Contingent consideration 1,566 1.6 % — — % — — %

Section 162(m) 1,079 1.1 % 203 0.2 % 456 2.0 %

Other ( 196 ) ( 0.2 ) % 1,393 1.2 % 3 0.1 %

$ 10,624 10.9 % $ 13,672 11.9 % $ ( 6,419 ) ( 28.7 ) %

Tax credits in 2020, 2019 and 2018 consist principally of research and developmental tax credits.

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.

Certain intellectual property and assets were repatriated in 2019 from a liquidation of foreign subsidiaries to the U.S.

The tax effect of the repatriation is included as IP repatriation.

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The tax effect of the repatriation is included as IP installment sale and repatriation.

The components of our deferred income tax assets (liabilities) are as follows (in thousands):

As of December 31,

Deferred tax asset:

Accruals/other $ 5,668 $ 2,632

Contingent consideration

Net operating loss carryforwards

Acquired future tax deductions 7,781 8,711

1 unchanged sentence

Foreign currency translation adjustments 2,406 2,716

Tax credits 12,444 11,331

Inventory reserves 8,493 4,305

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Valuation allowance ( 3,891 ) ( 3,677 )

$ 68,666 $ 67,961

Deferred tax liability:

State income taxes $ 2,398 $ 2,600

Foreign 776 997

Depreciation and amortization 26,375 23,839

Section 481(a) adjustment - change in accounting method 9,746 14,618

$ 39,295 $ 42,054

Deferred tax asset, net

$ 29,371 $ 25,907

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Tax Holidays and Carryforwards

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tax as a result of dividends received deductions and/or foreign tax credit relief.

We intend to invest

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

substantially all of our foreign subsidiary earnings, as well as our capital in our foreign subsidiaries, indefinitely outside of the U.S.

We intend to invest substantially all of our foreign subsidiary earnings, as well as our capital in our foreign subsidiaries, indefinitely outside of the U.S.

in those jurisdictions in which we incur significant additional costs upon repatriation of such amounts.

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Year Ended December 31,

2020 2019 2018

Beginning balance $ 15,027 $ 10,824 $ 6,527

Increases to prior year tax positions 502 138 —

Increases due to acquisitions

Increases to current year tax positions 2,987 4,231 4,536

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Ending balance $ 18,443 $ 15,027 $ 10,824

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS

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As of December 31,

Costa Rica $ 104,015 $ 96,442

Mexico 76,004 69,141

Other LATAM 37,485 31,905

Canada 4,672 4,769

Italy 11,098 7,921

Spain 8,701 6,411

Other Europe 3,795 3,135

APAC 19,836 17,200

Total Foreign $ 265,606 $ 236,924

1 unchanged sentence

Worldwide Total $ 843,096 $ 776,240

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

STOCKHOLDERS' EQUITY

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In August 2019, our Board of Directors approved a common stock purchase plan to purchase up to $ 100.0 million of our common stock.

This plan replaced our prior plan and has no expiration date.

This plan has no expiration date.

We have $ 100.0 million remaining on this purchase plan.

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In 2018, we withheld 26,307 shares of our common stock from employee vested restricted stock units in consideration for $ 6.3 million in payments for the employee's share award income tax withholding obligations.

We had no shares remaining in treasury at December 31, 2017.

We use treasury stock to issue shares for stock option exercises, restricted stock grants.

We had 408 shares remaining in treasury at December 31, 2018.

We use treasury stock to issue shares for stock option exercises and restricted stock grants.

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accumulated Other Comprehensive (Loss) Income ("AOCI")

The components of AOCI, net of tax, were as follows (in thousands):

Foreign Currency Translation Adjustments

Unrealized Gains on Cash Flow Hedges

Other Adjustments

Foreign Currency Translation Adjustments Unrealized (Losses) Gains on Cash Flow Hedges Other Adjustments Total

Balance as of January 1, 2018 $ ( 14,578 ) $ ( 365 ) $ ( 16 ) $ ( 14,959 )

Other comprehensive income (loss) before reclassifications

Amounts reclassified from AOCI

Other comprehensive income (loss)

Balance as of December 31, 2017

Other comprehensive (loss) income before reclassifications ( 3,104 ) 1,568 115 ( 1,421 )

6 unchanged sentences

Balance as of December 31, 2019 $ ( 17,310 ) $ 1,880 $ 28 $ ( 15,402 )

ICU MEDICAL, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other comprehensive income before reclassifications 12,929 1,505 47 14,481

Amounts reclassified from AOCI — ( 601 ) — ( 601 )

Other comprehensive income 12,929 904 47 13,880

Balance as of December 31, 2020 $ ( 4,381 ) $ 2,784 $ 75 $ ( 1,522 )

COMMITMENTS AND CONTINGENCIES

Legal Proceedings

Beginning in November 2016, purported class actions were filed in the U.S.

District Court for the Northern District of Illinois against Pfizer, Inc.

subsidiaries, Hospira, Inc., Hospira Worldwide, Inc.

and certain other defendants relating to the intravenous saline solutions part of the HIS business.

Plaintiffs seek to represent classes consisting of all persons and entities in the U.S.

who directly purchased intravenous saline solution sold by any of the defendants from January 1, 2013 until the time the defendants’ allegedly unlawful conduct ceases.

Plaintiffs allege that U.S.

manufacturer defendants conspired together to restrict output and artificially fix, raise, maintain and/or stabilize the prices of intravenous saline solution sold throughout the U.S.

in violation of federal antitrust laws.

Plaintiffs seek treble damages (for themselves and on behalf of the putative classes) and an injunction against defendants for alleged price overcharges for intravenous saline solution in the U.S.

since January 1, 2013.

On July 5, 2018, the District Court granted defendants’ motion to dismiss the operative complaint for failing to state a valid antitrust claim, but allowed the plaintiffs to file a second amended complaint.

On September 6, 2018, plaintiffs filed a second amended complaint adding new allegations in support of their conspiracy claims and adding ICU as a defendant.

All defendants have filed a motion to dismiss this second amended complaint.

Briefing is complete and we are awaiting the Court's ruling.

On February 3, 2017, we completed the acquisition of the HIS business from Pfizer.

This litigation is the subject of a claim for indemnification against us by Pfizer and a cross-claim for indemnification against Pfizer by us under the HIS stock and asset purchase agreement.

In addition, in August 2015, the New York Attorney General issued a subpoena to Hospira, Inc.

requesting that the company provide information regarding certain business practices in the intravenous solutions part of the HIS business.

Separately, in April 2017, we received a grand jury subpoena issued by the United States District Court for the Eastern District of Pennsylvania, in connection with an investigation by the U.S.

Department of Justice, Antitrust Division.

The subpoenas call for production of documents related to the manufacturing, selling, pricing and shortages of intravenous solutions, including saline, as well as communications among market participants regarding these issues.

On December 10, 2018, we were informed by the U.S.

Department of Justice, Antitrust Division, that their investigation has been closed.

In April 2018, the U.S.

Department of Justice issued a HIPAA subpoena to Hospira, Inc., requesting production of documents and records regarding the manufacturing, production, testing, quality and validation of the Sapphire™ infusion pumps, sets and related accessories distributed by the company.

We have coordinated with Pfizer to produce the requested records to the Department of Justice.

In March 2018, a dispute with a product partner resulted in a redefinition of our contractual arrangement and in the rights and remedies determined under such arrangement.

In March 2018, the resolution of the dispute resulted in a $ 28.9 million net charge to the consolidated statement of operations.

In addition, during the fourth quarter of 2018, we incurred $ 12.7 million in additional contract settlement charges related to this arrangement as a result of the write-off of assets and additional expenses associated with the restructuring of products.

From time to time, we are involved in various legal proceedings, most of which are routine litigation, in the normal course of business.

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Contingencies

We had a contractual earn-out arrangement in connection with our acquisition of the HIS business that ended on December 31, 2019, whereby Pfizer was entitled up to an additional $ 225 million in cash upon achievement of performance

We had a contractual earn-out arrangement 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.

We expect the dispute will be resolved by binding arbitration unless both parties are able to come to an agreement on this issue (see Note 8, Fair Value Measurements).

During November 2019, we acquired Pursuit (see Note 2, Acquisitions).

Total consideration for the acquisition includes a potential contractual earn-out of up to $ 50.0 million calculated based upon the achievement of certain performance targets during the earn-out period.

ICU MEDICAL, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

targets for the company for the three years ending December 31, 2019.

We did not meet the performance targets required for payout of this earn-out.

During November 2019, we acquired Pursuit (see Note 2, Acquisitions).

COLLABORATIVE AND OTHER ARRANGEMENTS

On February 3, 2017, we entered into two MSA's, (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.

On February 3, 2017, we entered into two manufacturing and supply agreements ("MSA's"), (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 MSA's provide each party with mutually beneficial interests and both of the MSA's 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.

On February 3, 2017, as part of the HIS business acquisition, we had entered into an agreement with Pfizer, whereby Pfizer were to provide certain transitional services to us for finance, business technology, regulatory, human resources, global operations, procurement, quality and global commercial operation services ("Enabling Function Services").

We paid a monthly service fee for each service provided, and shared equally with Pfizer in certain set-up costs and, as applicable, service exit costs.

Our share of the set-up costs and service exit costs, in the aggregate, were not to exceed $ 22.0 million .

The service fees were subject to a fee cap of (i) $ 62.5 million during the initial twelve month period and (ii) $ 31.3 million during the subsequent six month period.

Only the Enabling Function Services were subject to the fee cap, any services provided after expiration of the agreement or services that were not Enabling Function Services were to result in service fees outside the fee cap.

The service fees were intended to reasonably approximate Pfizer’s cost of providing the Enabling Function Services.

We had also entered into a reverse transitional services agreement, where we provided to Pfizer certain transitional services ranging in term from three to eighteen months.

Services included support for real estate, research and development, infrastructure, logistics, quality, site operations, safety, commercial and finance, and regulatory support services.

This transitional service agreement with Pfizer ended in 2018.

Related-party revenue for goods manufactured for Pfizer under our Manufacturing and Supply Agreements with Pfizer was $ 78.2 million during 2018, and the cost of product manufactured by Pfizer for us under those agreements was $ 81.0 million during 2018.

SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED

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Total revenue $ 328,607 $ 303,379 $ 318,567 $ 320,451

Gross profit $ 121,415 $ 106,284 $ 113,924 $ 119,874

Net income $ 16,834 $ 18,908 $ 24,986 $ 26,142

Net income per share:

Basic $ 0.81 $ 0.91 $ 1.19 $ 1.24

Diluted $ 0.78 $ 0.88 $ 1.16 $ 1.21

Total revenue $ 330,932 $ 312,282 $ 307,471 $ 315,523

Gross profit $ 135,303 $ 103,869 $ 118,552 $ 114,140

Net income (loss) $ 30,998 $ 22,833 $ 26,563 $ 20,641

Net income (loss) per share:

______________________________________

Net loss for the quarter ended December 31, 2018 included the impact of $ 41.1 million in restructuring, strategic transaction and integration expenses.

We also incurred an $ 8.6 million non-cash charge in the quarter ended December 31, 2018 associated

ICU MEDICAL, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

with a contract settlement that took place in the quarter ended March 31, 2018, which is included in contract settlement.

Management of the Company concluded the contract settlement charge is not material to the three months ended December 31, 2018, or to any previously issued interim financial statements.

Basic $ 1.51 $ 1.11 $ 1.29 $ 1.00

Diluted $ 1.44 $ 1.06 $ 1.24 $ 0.96

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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 8. Financial Statements and Supplementary Data