ICU MEDICAL INC/DE 10-Q

Item1. Financial Statements (Unaudited) ICU MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value data) March 31, 2021 December 31, 2020 (Unaudited) (1) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 424,249 $ 396,097 Short-term investment securities 11,693 14,687 TOTAL CASH, CASH EQUIVALENTS AND INVESTMENT SECURITIES 435,942 410,784 Accounts receivable, net of allowance for doubtful accounts of $ 21,782 at March 31, 2021 and $ 21,490 at December 31, 2020 120,365 124,093 Inventories 300,086 314,928 Prepaid income tax 31,480 29,480 Prepaid expenses and other current assets 40,309 41,492 TOTAL CURRENT ASSETS 928,182 920,777 PROPERTY AND EQUIPMENT, net 459,072 466,628 OPERATING LEASE RIGHT-OF-USE ASSETS 45,259 46,571 LONG-TERM INVESTMENT SECURITIES 18,834 12,974 GOODWILL 32,952 33,001 INTANGIBLE ASSETS, net 193,074 197,231 DEFERRED INCOME TAXES 29,115 31,034 OTHER ASSETS 58,742 55,475 TOTAL ASSETS $ 1,765,230 $ 1,763,691 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 73,049 $ 71,864 Accrued liabilities 79,056 97,021 Income tax liability 1,457 303 Contingent earn-out liability 26,300 26,300 TOTAL CURRENT LIABILITIES 179,862 195,488 OTHER LONG-TERM LIABILITIES 46,110 47,835 DEFERRED INCOME TAXES 1,663 1,663 INCOME TAX LIABILITY 16,827 16,440 COMMITMENTS AND CONTINGENCIES (Note 18) — — STOCKHOLDERS’ EQUITY: Convertible preferred stock, $ 1.00 par value Authorized— 500 shares; Issued and outstanding — none — — Common stock, $ 0.10 par value — Authorized, 80,000 shares; Issued — 21,219 shares at March 31, 2021 and 21,058 shares at December 31, 2020 and outstanding — 21,192 shares at March 31, 2021 and 21,058 shares at December 31, 2020 2,122 2,106 Additional paid-in capital 701,586 693,068 Treasury stock, at cost ( 26,785 and 209 shares, respectively) ( 5,410 ) ( 39 ) Retained earnings 832,383 808,652 Accumulated other comprehensive loss ( 9,913 ) ( 1,522 ) TOTAL STOCKHOLDERS' EQUITY 1,520,768 1,502,265 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,765,230 $ 1,763,691 ______________________________________________________ (1) December 31, 2020 balances were derived from audited consolidated financial statements. The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Table of Contents ICU MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data) Three months ended March 31, 2021 2020 TOTAL REVENUES $ 318,046 $ 328,607 COST OF GOODS SOLD 205,366 207,192 GROSS PROFIT 112,680 121,415 OPERATING EXPENSES: Selling, general and administrative 72,391 72,305 Research and development 10,709 10,746 Restructuring, strategic transaction and integration 2,883 12,307 Change in fair value of contingent earn-out — — Contract settlement 127 — TOTAL OPERATING EXPENSES 86,110 95,358 INCOME FROM OPERATIONS 26,570 26,057 INTEREST EXPENSE ( 161 ) ( 196 ) OTHER INCOME (EXPENSE), net 683 ( 5,480 ) INCOME BEFORE INCOME TAXES 27,092 20,381 PROVISION FOR INCOME TAXES ( 3,361 ) ( 3,547 ) NET INCOME $ 23,731 $ 16,834 NET INCOME PER SHARE Basic $ 1.12 $ 0.81 Diluted $ 1.09 $ 0.78 WEIGHTED AVERAGE NUMBER OF SHARES Basic 21,149 20,780 Diluted 21,695 21,507 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents ICU MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (In thousands) Three months ended March 31, 2021 2020 NET INCOME $ 23,731 $ 16,834 Other comprehensive income (loss), net of tax: Cash flow hedge adjustments, net of taxes of $ 298 and $ 932 for the three months ended March 31, 2021 and 2020, respectively ( 945 ) ( 2,952 ) Foreign currency translation adjustment, net of taxes of $ — for all periods ( 7,458 ) ( 10,477 ) Other adjustments, net of taxes of $ — for all periods 12 ( 81 ) Other comprehensive loss, net of taxes ( 8,391 ) ( 13,510 ) TOTAL COMPREHENSIVE INCOME $ 15,340 $ 3,324 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents ICU MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (Amounts in thousands) Common Stock Accumulated Additional Other Shares Amount Paid-In Capital Treasury Stock Retained Earnings Comprehensive Loss Total Balance, January 1, 2021 21,058 $ 2,106 $ 693,068 $ ( 39 ) $ 808,652 $ ( 1,522 ) $ 1,502,265 Issuance of restricted stock and exercise of stock options 198 16 2,496 2,352 — — 4,864 Tax withholding payments related to net share settlement of equity awards ( 37 ) — — ( 7,723 ) — — ( 7,723 ) Stock compensation — — 6,022 — — — 6,022 Other comprehensive loss, net of tax — — — — — ( 8,391 ) ( 8,391 ) Net income — — — — 23,731 — 23,731 Balance, March 31, 2021 21,219 $ 2,122 $ 701,586 $ ( 5,410 ) $ 832,383 $ ( 9,913 ) $ 1,520,768 Common Stock Accumulated Additional Other Shares Amount Paid-In Capital Treasury Stock Retained Earnings Comprehensive Loss Total Balance, January 1, 2020 20,742 $ 2,074 $ 668,947 $ ( 157 ) $ 721,782 $ ( 15,402 ) $ 1,377,244 Issuance of restricted stock and exercise of stock options 155 9 ( 10,207 ) 10,758 — — 560 Tax withholding payments related to net share settlement of equity awards ( 64 ) — — ( 12,174 ) — — ( 12,174 ) Stock compensation — — 6,939 — — — 6,939 Other comprehensive loss, net of tax — — — — — ( 13,510 ) ( 13,510 ) Net income — — — — 16,834 — 16,834 Balance, March 31, 2020 20,833 $ 2,083 $ 665,679 $ ( 1,573 ) $ 738,616 $ ( 28,912 ) $ 1,375,893 6 Table of Contents ICU MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Three months ended March 31, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 23,731 $ 16,834 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 22,155 20,957 Amortization of right-of-use assets 2,372 2,305 Provision for doubtful accounts — 5 Provision for warranty and returns 209 ( 821 ) Stock compensation 6,022 6,939 Loss on disposal of property and equipment and other assets 659 562 Bond premium amortization 168 34 Debt issuance costs amortization 72 72 Product-related charges — 2,626 Usage of spare parts 2,825 4,900 Other ( 1,287 ) 876 Changes in operating assets and liabilities: Accounts receivable 1,506 899 Inventories 13,208 19,372 Prepaid expenses and other assets ( 742 ) 2,634 Other assets ( 3,463 ) ( 6,402 ) Accounts payable 2,411 ( 35,063 ) Accrued liabilities ( 19,965 ) 465 Income taxes, including excess tax benefits and deferred income taxes 1,439 2,325 Net cash provided by operating activities 51,320 39,519 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ( 14,028 ) ( 25,463 ) Proceeds from sale of asset 55 131 Intangible asset additions ( 1,874 ) ( 1,958 ) Purchases of investment securities ( 10,034 ) ( 7,082 ) Proceeds from sale of investment securities 7,000 10,900 Net cash used in investing activities ( 18,881 ) ( 23,472 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term debt — 150,000 Proceeds from exercise of stock options 4,864 560 Payments on finance leases ( 141 ) — Tax withholding payments related to net share settlement of equity awards ( 7,723 ) ( 12,174 ) Net cash (used in) provided by financing activities ( 3,000 ) 138,386 Effect of exchange rate changes on cash ( 1,287 ) ( 3,546 ) NET INCREASE CASH AND CASH EQUIVALENTS 28,152 150,887 CASH AND CASH EQUIVALENTS, beginning of period 396,097 268,670 CASH AND CASH EQUIVALENTS, end of period $ 424,249 $ 419,557 The accompanying notes are an integral part of these condensed consolidated financial statements. 7 Table of Contents ICU MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - CONTINUED (In thousands) Three months ended March 31, 2021 2020 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES: Accounts payable for property and equipment $ 1,068 $ 7,112 The accompanying notes are an integral part of these condensed consolidated financial statements. 8 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1: Basis of Presentation The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S.") and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and reflect all adjustments, consisting of only normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the consolidated results for the interim periods presented. Results for the interim period are not necessarily indicative of results for the full year. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K of ICU Medical, Inc., ("ICU") a Delaware corporation, filed with the SEC for the year ended December 31, 2020. We are engaged in the development, manufacturing and sale of innovative medical products used in vascular therapy and critical care applications. We sell the majority of our products through our direct sales force and through independent distributors throughout the U.S. and internationally. Additionally, we sell our products on an original equipment manufacturer basis to other medical device manufacturers. All subsidiaries are wholly owned and are included in the condensed consolidated financial statements. All intercompany balances and transactions have been eliminated. Note 2: New Accounting Pronouncements Recently 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. Note 3: Restructuring, Strategic Transaction and Integration Restructuring, strategic transaction and integration expenses were $ 2.9 million and $ 12.3 million for the three months ended March 31, 2021, and 2020 respectively. Restructuring During the three months ended March 31, 2021 and 2020, restructuring charges were $ 0.0 million and $ 7.2 million, respectively. Restructuring charges for the three months ended March 31, 2020 were primarily related to severance and costs related to office and other facility closures. Restructuring charges are included in the above restructuring, strategic transaction and integration expenses in our condensed consolidated statement of operations. The following table summarizes the details of changes in our restructuring-related accrual for the period ended March 31, 2021 (in thousands): 9 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Accrued Balance January 1, 2021 Charges Incurred Payments Currency Translation Accrued Balance March 31, 2021 Severance pay and benefits $ 1,858 $ 43 $ ( 435 ) $ 12 $ 1,478 Facility closure expenses 1,563 — — 17 1,580 $ 3,421 $ 43 $ ( 435 ) $ 29 $ 3,058 Strategic transaction and integration expenses We incurred and expensed $ 2.9 million and $ 5.1 million in strategic transaction and integration expenses during the three months ended March 31, 2021 and 2020, respectively, which are included in restructuring, strategic transaction and integration expenses in our condensed consolidated statement of operations. The strategic transaction and integration expenses during the three months ended March 31, 2021 were primarily related to integration costs associated with acquisitions, the Hospira Infusion Systems ("HIS") earn-out dispute with Pfizer and one-time costs incurred to comply with regulatory initiatives. The strategic transaction and integration expenses during the three months ended March 31, 2020 were primarily related to the integration of the HIS business acquired in 2017 from Pfizer, which included the migration of IT systems at our Austin facility. Note 4: Revenue Our primary product lines are Infusion Consumables, Infusion Systems, IV Solutions and Critical Care. The vast majority of our sales of these products are made on a stand-alone basis to hospitals and distributors. Revenue is typically recognized upon transfer of control of the products, which we deem to be at point of shipment. However, for purposes of revenue recognition for our software licenses and renewals, we consider the control of these products to be transferred to a customer at a certain point in time; therefore, we recognize revenue at the start of the applicable license term. Payment is typically due in full within 30 days of delivery or the start of the contract term. Revenue is recorded in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We offer certain volume-based rebates to our distribution customers, which we record as variable consideration when calculating the transaction price. Rebates are offered on both a fixed and tiered/variable basis. In both cases, we use information available at the time and our historical experience with each customer to estimate the most likely rebate amount. We also provide chargebacks to distributors that sell to end-customers at prices determined under a contract between us and the end-customer. Chargebacks are the difference between the prices we charge our distribution customers and the contracted prices we have with the end customer which are processed as credits to our distribution customers. In estimating the expected value of chargeback amounts in order to determine the transaction price, we use information available at the time, including our historical experience. We also warranty products against defects and have a policy permitting the return of defective products, for which we accrue and expense at the time of sale using information available at that time and our historical experience. We also provide for extended service-type warranties, which we consider to be separate performance obligations. We allocate a portion of the transaction price to the extended service-type warranty based on its estimated relative selling price, and recognize revenue over the period the warranty service is provided. Our revenues are recorded at the net sales price, which includes an estimate for variable consideration related to rebates, chargebacks and product returns. Revenue disaggregated The following table represents our revenues disaggregated by geography (in thousands): For the three months ended March 31, Geography 2021 2020 Europe, the Middle East and Africa $ 34,800 $ 37,928 Other Foreign 55,895 60,521 Total Foreign 90,695 98,449 United States 227,351 230,158 Total Revenues $ 318,046 $ 328,607 10 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table represents our revenues disaggregated by product (in thousands): For the three months ended March 31, Product line 2021 2020 Infusion Consumables $ 126,370 $ 123,507 Infusion Systems 84,334 88,380 IV Solutions 94,176 104,291 Critical Care 13,166 12,429 Total Revenues $ 318,046 $ 328,607 Contract balances The following table presents our changes in the contract balances for the three months ended March 31, 2021 and 2020 (in thousands): Contract Liabilities Beginning balance, January 1, 2021 $ ( 6,430 ) Equipment revenue recognized 461 Equipment revenue deferred due to implementation ( 2,921 ) Software revenue recognized 1,796 Software revenue deferred due to implementation ( 1,794 ) Ending balance, March 31, 2021 $ ( 8,888 ) Beginning balance, January 1, 2020 $ ( 4,855 ) Equipment revenue recognized 1,802 Equipment revenue deferred due to implementation ( 3,990 ) Software revenue recognized 1,235 Software revenue deferred due to implementation ( 2,664 ) Ending balance, March 31, 2020 $ ( 8,472 ) As of March 31, 2021, revenue from remaining performance obligations related to implementation of software and equipment is $ 7.3 million. We expect to recognize substantially all of this revenue within the next three to six months dependent on implementation restrictions due to the novel coronavirus and its variants ("COVID-19"). Revenue from remaining performance obligations related to annual software licenses is $ 1.5 million. We expect to recognize substantially all of this revenue over the next twelve months. Note 5: Leases Leases We determine if an arrangement is a lease at inception. Our operating lease assets are separately stated in operating lease right-of-use ("ROU") assets and our financing lease assets are included in other assets on our condensed consolidated balance sheets. Our lease liabilities are included in accrued liabilities, and other long-term liabilities on our condensed consolidated balance sheets. We have elected not to recognize an ROU asset and lease liability for leases with terms of twelve months or less. Lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Most of our leases do not provide an implicit rate, therefore we use our incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term based on the information available at commencement date. Our lease ROU assets exclude lease incentives and initial direct costs incurred. Our lease terms include options to extend when it is reasonably certain that we will exercise that option. All of our leases have 11 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) stated lease payments, which may include fixed rental increases. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Our leases are for corporate, research and development and sales and support offices, a distribution facility, device service centers and certain equipment. Our leases have original lease terms of one year to fifteen years , some of which include options to extend the leases for up to an additional five years . For all of our leases, we do not include optional periods of extension in our current lease terms for the exercise of options to extend is not reasonably certain. The following table presents the components of our lease cost (in thousands): For the three months ended March 31 2021 2020 Operating lease cost $ 2,835 $ 2,791 Finance lease cost - interest 31 29 Finance lease cost - amortization of ROU asset 151 — Short-term lease cost 3 54 Total lease cost $ 3,020 $ 2,874 Interest expense on our finance leases is included in other income (expense), net in our condensed consolidated statement of operations. The amortization of the operating and finance ROU asset is included in selling, general and administrative expenses in our condensed consolidated statement of operations. The following table presents the supplemental cash flow information related to our leases (in thousands): For the three months ended March 31, 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 2,821 $ 2,457 Operating cash flows from finance leases $ 31 $ 29 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 1,095 $ 19,094 Finance leases $ 184 $ 800 The following table presents the supplemental balance sheet information related to our operating leases (in thousands, except lease term and discount rate): 12 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of March 31, 2021 As of December 31, 2020 Operating leases Operating lease right-of-use assets $ 45,259 $ 46,571 Accrued liabilities $ 8,872 $ 8,740 Other long-term liabilities 39,588 41,019 Total operating lease liabilities $ 48,460 $ 49,759 Weighted Average Remaining Lease Term Operating leases 6.5 years 6.7 years Weighted Average Discount Rate Operating leases 5.00 % 5.02 % The following table presents the supplemental balance sheet information related to our finance leases (in thousands, except lease term and discount rate): As of March 31, 2021 As of December 31, 2020 Financing leases Financing lease right-of-use assets $ 2,877 $ 2,915 Accrued liabilities $ 583 $ 554 Other long-term liabilities 2,330 2,388 Total financing lease liabilities $ 2,913 $ 2,942 Weighted Average Remaining Lease Term Financing leases 6.2 years 6.4 years Weighted Average Discount Rate Financing leases 4.27 % 4.27 % As of March 31, 2021, the maturities of our operating and financing lease liabilities for each of the next five years is approximately (in thousands): Operating Leases Finance Leases Remainder of 2021 $ 8,352 $ 520 2022 10,316 693 2023 9,120 693 2024 8,317 379 2025 5,008 211 2026 4,733 189 Thereafter 10,602 614 Total Lease Payments 56,448 3,299 Less imputed interest ( 7,988 ) ( 386 ) Total $ 48,460 $ 2,913 Note 6: Net Income Per Share 13 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period plus dilutive securities. Dilutive securities include outstanding common stock options and unvested restricted stock units, less the number of shares that could have been purchased with the proceeds from the exercise of the options, using the treasury stock method. Options and restricted stock units that are anti-dilutive are not included in the treasury stock method calculation. There were 12,080 and 15,333 anti-dilutive securities for the three months ended March 31, 2021 and 2020, respectively. The following table presents the calculation of net earnings per common share (“EPS”) — basic and diluted (in thousands, except per share data): Three months ended March 31, 2021 2020 Net income $ 23,731 $ 16,834 Weighted-average number of common shares outstanding (for basic calculation) 21,149 20,780 Dilutive securities 546 727 Weighted-average common and common equivalent shares outstanding (for diluted calculation) 21,695 21,507 EPS — basic $ 1.12 $ 0.81 EPS — diluted $ 1.09 $ 0.78 Note 7: Derivatives and Hedging Activities Hedge Accounting and Hedging Program The purpose of our hedging program is to manage the foreign currency exchange rate risk on forecasted expenses denominated in currencies other than the functional currency of the operating unit. We do not issue derivatives for trading or speculative purposes. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. The par forward contract is designated and qualifies as a cash flow hedge. Our derivative instruments are recorded at fair value on the condensed consolidated balance sheets and are classified based on the instrument's maturity date. We record changes in the intrinsic value of the effective portion of the gain or loss on the derivative instrument as a component of Other Comprehensive Income and we reclassify that gain or loss into earnings in the same line item associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. In March 2020, we entered into a one-year cross-currency par forward contract that extends our current hedge of a portion of our Mexico forecasted expenses denominated in Pesos ("MXN"). The total notional amount of this outstanding derivative as of March 31, 2021 was approximately 327.6 million MXN. The term of the one-year contract is November 3, 2020 to December 1, 2021. The derivative instrument matures in equal monthly amounts at a fixed forward rate of 24.26 MXN/USD. In November 2018, we entered into a one-year cross-currency par forward contract that hedges of a portion of our Mexico forecasted expenses denominated in MXN. The 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. The following table presents the fair values of our derivative instruments included within the Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020 (in thousands): 14 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Derivatives Condensed Consolidated Balance Sheet Location March 31, 2021 December 31, 2020 Derivatives designated as cash flow hedging instruments Foreign exchange forward contract: Prepaid expenses and other current assets $ 2,312 $ 3,555 Total derivatives designated as cash flow hedging instruments $ 2,312 $ 3,555 The following table presents the amounts affecting the Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020 (in thousands): Line Item in the Condensed Consolidated Statements of Operations Three months ended March 31, 2021 2020 Derivatives designated as cash flow hedging instruments Foreign exchange forward contracts Cost of goods sold $ 841 $ 692 We recognized the following (losses) gains on our foreign exchange contracts designated as a cash flow hedge (in thousands): Amount of Loss Recognized in Other Comprehensive Income on Derivatives Amount of Gain Reclassified From Accumulated Other Comprehensive Income into Income Three months ended March 31, Three months ended March 31, 2021 2020 Location of Gain Reclassified From Accumulated Other Comprehensive Income into Income 2021 2020 Derivatives designated as cash flow hedges: Foreign exchange forward contract $ ( 402 ) $ ( 3,192 ) Cost of goods sold $ 841 $ 692 Total derivatives designated as cash flow hedging instruments $ ( 402 ) $ ( 3,192 ) $ 841 $ 692 As of March 31, 2021, we expect approximately $ 2.3 million of the deferred gains on the outstanding derivatives in accumulated other comprehensive income to be reclassified to net income during the next twelve months concurrent with the underlying hedged transactions also being reported in net income. Note 8: Fair Value Measurement Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There are three levels of inputs that may be used to measure fair value: • Level 1: quoted prices in active markets for identical assets or liabilities; • Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or 15 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) • Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities. Earn-out Liability In 2017, we recognized an earn-out liability upon the acquisition of HIS from Pfizer. Pfizer was entitled 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. The underlying simulated variable was adjusted EBITDA. The adjusted EBITDA volatility estimate was based on a study of historical asset volatility for a set of comparable public companies. The model included other assumptions including the market price of risk, which was calculated as the weighted average cost of capital ("WACC") less the long term risk free rate. The initial value assigned to the contingent consideration was a result of forecasted product demand of our HIS business. At each reporting date subsequent to the acquisition we remeasured the earn-out using the same methodology above and recognized any changes in value. As of December 31, 2019, we determined that we did not meet the necessary performance targets that would require payout of any of the HIS earn-out liability. As of the date of this filing, Pfizer has disputed our determination that the performance targets requiring payout of the HIS earn-out liability were not met. The dispute is being resolved by binding arbitration that will likely be concluded during the third quarter of 2021. Given the uncertainty of any arbitration, it may be possible that we will incur a loss with regards to this matter. If we are unsuccessful in arbitration such that it is determined that we met the necessary performance targets for any of the HIS earn-out liability, we will be obligated to pay Pfizer between $191.3 million and $225.0 million in additional cash consideration. In the fourth quarter of 2019, we recognized an earn-out liability related to the acquisition of Pursuit Vascular, Inc. ("Pursuit"). Pursuit's former equity holders are entitled up to $ 50.0 million in additional cash consideration contingent upon the achievement of certain sales and gross profit targets for specific customers. The earn-out will be calculated as a percentage of gross profit achieved during the earn-out period against a pre-determined target gross profit, not to exceed $ 50.0 million. We used a Monte Carlo simulation model to determine the fair value of the earn-out liability. The Monte Carlo simulation model utilizes multiple input variables to determine the value of the earn-out liability including historical volatility, a risk free interest rate, counter party credit risk and projected future gross profit, see below simulation input table related to Pursuit. The historical volatility was based on the median of ICU and a certain peer group. The risk-free interest rate is equal to the yield, as of the valuation date, of the zero-coupon U.S. Treasury bill that is commensurate with the term of the earn-out. The counter party credit risk is based on a synthetic credit rating of B1. If the probabilities in the model significantly change from what we initially and subsequently anticipate, the change could have a significant impact on our financial statements in the period recognized. Our contingent earn-out liability is separately stated in our condensed consolidated balance sheets. The following tables provide a reconciliation of the Level 3 earn-out liabilities measured at estimated fair value (in thousands): Pursuit Earn-out Liability Accrued balance, January 1, 2021 $ 26,300 Change in fair value of earn-out (included in income from operations as a separate line item) — Accrued balance, March 31, 2021 $ 26,300 Pursuit Earn-out Liability Accrued balance, January 1, 2020 $ 17,300 Change in fair value of earn-out (included in income from operations as a separate line item) — Accrued balance, March 31, 2020 $ 17,300 The following tables provide quantitative information about Level 3 inputs for fair value measurement of our earn-out liabilities: Pursuit Earn-out 16 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Simulation Input As of March 31, 2021 As of December 31, 2020 As of March 31, 2020 Revenue/Gross Profit Volatility 25.00 % 25.00 % 20.00 % Discount Rate 12.50 % 12.50 % 15.00 % Risk Free Rate 0.09 % 0.09 % 1.55 % Counter Party Risk 3.10 % 3.10 % 6.00 % Investments and Foreign Currency Contracts The fair value of our investments is estimated using observable market-based inputs such as quoted prices, interest rates and yield curves or Level 2 inputs, which consisted of corporate bonds. The fair value of our Level 2 forward currency contracts are estimated using observable market inputs such as known notional value amounts, spot and forward exchange rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative. Our assets and liabilities measured at fair value on a recurring basis consisted of the following (Level 1, 2 and 3 inputs as defined above) (in thousands): Fair value measurements at March 31, 2021 Total carrying value Quoted prices in active markets for identical assets (level 1) Significant other observable inputs (level 2) Significant unobservable inputs (level 3) Assets: Available for sale securities: Short-term $ 11,693 $ — $ 11,693 $ — Long-term 18,834 — 18,834 — Foreign exchange forwards: Prepaid expenses and other current assets 2,312 — 2,312 — Total Assets $ 32,839 $ — $ 32,839 $ — Liabilities: Earn-out liability $ 26,300 $ — $ — $ 26,300 Total Liabilities $ 26,300 $ — $ — $ 26,300 Fair value measurements at December 31, 2020 Total carrying value Quoted prices in active markets for identical assets (level 1) Significant other observable inputs (level 2) Significant unobservable inputs (level 3) Assets: Available for sale securities: Short-term $ 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 $ — Liabilities: Earn-out liability $ 26,300 $ — $ — $ 26,300 Total Liabilities $ 26,300 $ — $ — $ 26,300 17 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 9: Investment Securities Our investment securities currently consist of short-term and long-term corporate bonds. Our investment securities are considered available-for-sale and are “investment grade” and carried at fair value. Available-for-sale securities are recorded at fair value, and unrealized holding gains and losses are recorded, net of tax, as a component of accumulated other comprehensive income. Unrealized losses on available-for-sale securities are charged against net earnings when a decline in fair value is determined to be other than temporary. Our management reviews several factors to determine whether a loss is other than temporary, such as the length and extent of the fair value decline, the financial condition and near term prospects of the issuer, and for equity investments, our intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. The amortized cost of the debt securities are adjusted for the amortization of premiums computed under the effective interest method. Such amortization is included in investment income in other income (expense), net on our condensed consolidated statements of operations. There have been no realized gains or losses on their disposal. Realized gains and losses are accounted for on the specific identification method. The scheduled maturities of the debt securities are between 2021 and 2024. All short-term investment securities are callable within one year. Our short investment securities consisted of the following (in thousands): As of March 31, 2021 Amortized Cost Unrealized Holding Gains (Losses) Fair Value Short-term corporate bonds $ 11,693 $ — $ 11,693 Long-term corporate bonds 18,834 — 18,834 Total investment securities $ 30,527 $ — $ 30,527 As of December 31, 2020 Amortized Cost Unrealized Holding Gains (Losses) Fair Value Short-term corporate bonds $ 14,687 $ — $ 14,687 Long-term corporate bonds 12,974 — 12,974 Total investment securities $ 27,661 $ — $ 27,661 Note 10: Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of the following (in thousands): March 31, 2021 December 31, 2020 Other prepaid expenses and receivables $ 16,084 $ 14,964 Deferred costs 6,554 6,402 Prepaid insurance and property taxes 4,639 6,178 VAT/GST receivable 3,674 3,676 Deferred tax charge 3,856 3,542 Foreign exchange forward contract 2,312 3,555 Deposits 1,343 1,353 Other 1,847 1,822 $ 40,309 $ 41,492 Note 11: Inventories Inventories are stated at the lower of cost or net realizable value with cost determined using the first-in, first-out method. Inventory costs consist of those costs directly attributable to products prior to sale including among other things raw material, labor and overhead. Inventories consisted of the following (in thousands): 18 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2021 December 31, 2020 Raw materials $ 122,703 $ 126,499 Work in process 39,713 33,053 Finished goods 137,670 155,376 Total inventories $ 300,086 $ 314,928 Note 12: Property and Equipment Property and equipment consisted of the following (in thousands): March 31, 2021 December 31, 2020 Machinery and equipment $ 293,653 $ 291,331 Land, building and building improvements 241,608 241,199 Molds 60,381 60,381 Computer equipment and software 98,780 98,311 Furniture and fixtures 7,712 7,767 Instruments placed with customers (1) 91,909 90,383 Construction in progress 55,757 53,724 Total property and equipment, cost 849,800 843,096 Accumulated depreciation ( 390,728 ) ( 376,468 ) Property and equipment, net $ 459,072 $ 466,628 ______________________________ (1) Instruments placed with customers consist of drug-delivery and monitoring systems placed with customers under operating leases. Depreciation expense was $ 16.3 million and $15.2 million for the three months ended March 31, 2021 and 2020, respectively. Note 13: Goodwill and Intangible Assets, Net Goodwill The following table presents the changes in the carrying amount of our goodwill (in thousands): Total Balance as of January 1, 2021 $ 33,001 Currency translation ( 49 ) Balance as of March 31, 2021 $ 32,952 Intangible Assets, Net Intangible assets, carried at cost less accumulated amortization and amortized on a straight-lined basis, were as follows (in thousands): 19 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Weighted Average March 31, 2021 Amortization Life in Years Cost Accumulated Amortization Net Patents 10 $ 25,423 $ 15,466 $ 9,957 Customer contracts 12 10,310 5,929 4,381 Non-contractual customer relationships 9 57,748 28,233 29,515 Trademarks 4 425 425 — Trade name 15 18,268 3,808 14,460 Developed technology 13 152,893 40,062 112,831 Non-compete 3 2,500 1,181 1,319 Total amortized intangible assets $ 267,567 $ 95,104 $ 172,463 Internally developed software* $ 20,611 $ 20,611 Total intangible assets $ 288,178 $ 95,104 $ 193,074 ______________________________ * Internally developed software will be amortized when the projects are complete and the assets are ready for their intended use. Weighted Average December 31, 2020 Amortization Life in Years 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 Total intangible assets $ 286,674 $ 89,443 $ 197,231 ______________________________ * Internally developed software will be amortized when the projects are complete and the assets are ready for their intended use. Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives. During the three months ended March 31, 2021 and 2020, respectively, intangible asset amortization expense was $ 5.8 million and $ 5.8 million, respectively. As of March 31, 2021 estimated annual amortization for our intangible assets for each of the next five years is approximately (in thousands): 20 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Remainder of 2021 $ 17,807 2022 22,806 2023 21,783 2024 21,694 2025 15,980 2026 15,116 Thereafter 57,277 Total $ 172,463 Note 14: Accrued Liabilities and Other Long-Term Liabilities Accrued liabilities consist of the following (in thousands): March 31, 2021 December 31, 2020 Salaries and benefits $ 26,118 $ 25,786 Incentive compensation 8,130 27,023 Operating lease liability-ST 8,872 8,740 Accrued sales taxes 2,435 2,146 Restructuring accrual 3,058 3,421 Deferred revenue 8,195 5,566 Accrued other taxes 923 3,540 Accrued professional fees 730 1,273 Legal accrual 1,291 900 Distribution fees 5,080 5,300 Warranties and returns 554 1,027 Accrued freight 7,715 6,784 Other 5,955 5,515 $ 79,056 $ 97,021 Other long-term liabilities consist of the following (in thousands): March 31, 2021 December 31, 2020 Operating lease liability-LT $ 39,588 $ 41,019 Benefits 1,180 1,183 Accrued rent 1,427 1,462 Contract liabilities-LT 303 337 Financing lease liability-LT 2,330 2,388 Deferred revenue 693 864 Other 589 582 $ 46,110 $ 47,835 Note 15: Income Taxes Income taxes were accrued at an estimated effective tax rate of 12 % and 17 % for the three months ended March 31, 2021 and 2020, respectively. The effective tax rate for the three months ended March 31, 2021 differs from the federal statutory rate of 21 % principally because of the effect of the mix of U.S. and foreign incomes, state income taxes, global intangible low-taxed income ("GILTI"), foreign-derived intangible income ("FDII") and tax credits. The effective tax rate during the three months ended 21 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2021 included a discrete tax benefit of $ 1.8 million related to excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period. The effective tax rate for the three months ended March 31, 2020 differs from the federal statutory rate of 21 % principally because of the effect of the mix of U.S. and foreign incomes, state income taxes, GILTI, FDII and tax credits. Note 16: Long-Term Obligations Five-year Senior Secured Revolving Credit Facility ("Credit Facility") On November 8, 2017, we entered into a Credit Facility with various lenders for $ 150.0 million, with Wells Fargo Bank, N.A. as the administrative agent, swingline lender and issuing lender. During March 2020, as a result of market uncertainty caused by COVID-19, we preemptively borrowed $ 150.0 million on our Credit Facility as a conservative measure to manage any potential short-term liquidity risk. In September 2020, we fully repaid the borrowings under our Credit Facility. As of March 31, 2021, we had no borrowings and $ 150.0 million of availability under the Credit Facility. Principal payments on the revolving Credit Facility are made at our discretion with the unpaid amount due at maturity. The Credit Facility matures on November 8, 2022 . Interest on borrowings under the Credit Facility, at our option, is based on the Base Rate plus applicable margin or the London Interbank Offered Rate ("LIBOR") plus applicable margin, see further details in Part II, Item 8, of our 2019 Annual Report on Form 10-K. Debt Covenants The Credit Facility contains certain financial covenants pertaining to Consolidated Fixed Charge Coverage and Consolidated Total Leverage Ratios. In addition, the Credit Facility has restrictions pertaining to limitations on debt, liens, negative pledges, loans, advances, acquisitions, other investments, dividends, distributions, redemptions, repurchases of equity interests, fundamental changes and asset sales and other dispositions, prepayments, redemptions and purchases of subordinated debt and other junior debt, transactions with affiliates, dividend and payment restrictions affecting subsidiaries, changes in line of business, fiscal year and accounting practices and amendment of organizational documents and junior debt documents. The Consolidated Leverage Ratio is defined as the ratio of Consolidated Total Funded Indebtedness on such date, to Consolidated Adjusted EBITDA, as defined under the Credit Facility Agreement, for the most recently completed four fiscal quarters. The maximum Consolidated Leverage Ratio is not more than 3.00 to 1.00. The Consolidated Fixed Charge Coverage Ratio is defined as the ratio of: (a) Consolidated Adjusted EBITDA less the sum of (i) capital expenditures, (ii) federal, state, local and foreign income taxes paid in cash and (iii) cash restricted payments made after the closing date, to (b) Consolidated Fixed Charges for the most recently completed four fiscal quarters, calculated on a pro forma basis. The minimum Consolidated Fixed Charge Coverage Ratio is 2.00 to 1.00. We were in compliance with all financial covenants as of March 31, 2021. Note 17: Stockholders' Equity Treasury Stock In August 2019, our Board of Directors approved a new share purchase plan to purchase up to $ 100.0 million of our common stock. This plan replaced our existing plan and has no expiration date. During the three months ended March 31, 2021, we did not purchase any shares of our common stock under our stock purchase plans. As of March 31, 2021, all of the $ 100.0 million available for purchase was remaining under the plan. We are currently limited on share purchases in accordance with the terms and conditions of our Credit Facility (see Note 16: Long-Term Obligations). For the three months ended March 31, 2021, we withheld 37,423 shares of our common stock from employee vested restricted stock units in consideration for $ 7.7 million in payments made on the employee's behalf for their minimum statutory income tax withholding obligations. For the three months ended March 31, 2020, we withheld 63,511 shares of our common stock from employee vested restricted stock units in consideration for $ 12.2 million in payments made on the employee's behalf for their minimum statutory income tax withholding obligations. Treasury stock is used to issue shares for stock option exercises, restricted stock grants and employee stock purchase plan stock purchases. 22 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Accumulated Other Comprehensive (Loss) Income The components of accumulated other comprehensive (loss) income ("AOCI"), net of tax, were as follows (in thousands): Foreign Currency Translation Adjustments Unrealized Gains on Cash Flow Hedges Other Adjustments Total Balance as of January 1, 2021 $ ( 4,381 ) $ 2,784 $ 75 $ ( 1,522 ) Other comprehensive (loss) income before reclassifications ( 7,458 ) ( 306 ) 12 ( 7,752 ) Amounts reclassified from AOCI — ( 639 ) — ( 639 ) Other comprehensive (loss) income ( 7,458 ) ( 945 ) 12 ( 8,391 ) Balance as of March 31, 2021 $ ( 11,839 ) $ 1,839 $ 87 $ ( 9,913 ) Foreign Currency Translation Adjustments Unrealized Gains on Cash Flow Hedges Other Adjustments Total Balance as of January 1, 2020 $ ( 17,310 ) $ 1,880 $ 28 $ ( 15,402 ) Other comprehensive loss before reclassifications ( 10,477 ) ( 2,426 ) ( 81 ) ( 12,984 ) Amounts reclassified from AOCI — ( 526 ) — ( 526 ) Other comprehensive loss ( 10,477 ) ( 2,952 ) ( 81 ) ( 13,510 ) Balance as of March 31, 2020 $ ( 27,787 ) $ ( 1,072 ) $ ( 53 ) $ ( 28,912 ) Note 18: Commitments and Contingencies Legal Proceedings From time to time, we are involved in various legal proceedings, most of which are routine litigation, in the normal course of business. Our management does not believe that the resolution of the unsettled legal proceedings that we are involved with will have a material adverse impact on our financial position or results of operations. Off-Balance Sheet Arrangements In the normal course of business, we have agreed to indemnify our officers and directors to the maximum extent permitted under Delaware law and to indemnify customers as to certain intellectual property matters or other matters related to sales of our products. There is no maximum limit on the indemnification that may be required under these agreements. Although we can provide no assurances, we have never incurred, nor do we expect to incur, any material liability for indemnification. Contingencies During November 2019, we acquired Pursuit. Total consideration for the acquisition includes a potential contractual earn-out of up to $ 50.0 million, to be paid to former Pursuit equity holders, calculated based upon the achievement of certain performance targets during the earn-out period (see Note 8: Fair Value Measurement). We had a contractual obligation in connection with our 2017 acquisition of HIS, which as of December 31, 2019 we determined did not meet the necessary performance targets that would require payout of any of the HIS earn-out liability. As of the date of this filing, Pfizer has disputed our determination that the performance targets requiring payout of the HIS earn-out liability were not met. The dispute is being resolved by binding arbitration that will likely be concluded during the third quarter of 2021. Given the uncertainty of any arbitration, it may be possible that we will incur a loss with regards to this matter. If we are unsuccessful in arbitration such that it is determined that we met the necessary performance targets for any of the HIS earn- 23 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) out liability, we will have to pay between $191.3 million and $225.0 million in additional cash consideration (see Note 8, Fair Value Measurements). Commitments We have non-cancellable operating lease agreements where we are contractually obligated to pay certain lease payment amounts (see Note 5: Leases). Note 19: Collaborative and Other Arrangements On February 3, 2017, we entered into two Manufacturing and Supply Agreements ("MSAs"), (i) whereby Pfizer will manufacture and supply us with certain agreed upon products for an initial five-year term with a one-time two-year option to extend and (ii) whereby we will manufacture and supply Pfizer certain agreed upon products for a term of five or ten years depending on the product, also with a one-time two-year option to extend. The MSAs provide each party with mutually beneficial interests and both of the MSAs are to be jointly managed by both Pfizer and ICU. The initial supply price, which will be annually updated, is in full consideration for all costs associated with the manufacture, documentation, packaging and certification of the products. On January 1, 2021, we amended our MSA with Pfizer, whereby we manufacture and supply certain agreed upon products to Pfizer. The amendments included a change to the term of the agreement to end on December 31, 2024 with Pfizer's unilateral election to extend through December 31, 2025. Other changes to the terms of the MSA included (i) amendments to our level of supply of products to Pfizer, (ii) certain changes to our manufacturing lines, (iii) updates to our supply price with added volume price tiers for annual periods and (iv) certain minimum purchase requirements for certain products.