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) June 30, 2021 December 31, 2020 (Unaudited) (1) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 462,037 $ 396,097 Short-term investment securities 14,661 14,687 TOTAL CASH, CASH EQUIVALENTS AND INVESTMENT SECURITIES 476,698 410,784 Accounts receivable, net of allowance for doubtful accounts of $ 14,590 at June 30, 2021 and $ 21,490 at December 31, 2020 120,782 124,093 Inventories 299,610 314,928 Prepaid income tax 38,285 29,480 Prepaid expenses and other current assets 37,979 41,492 TOTAL CURRENT ASSETS 973,354 920,777 PROPERTY AND EQUIPMENT, net 458,785 466,628 OPERATING LEASE RIGHT-OF-USE ASSETS 43,315 46,571 LONG-TERM INVESTMENT SECURITIES 15,670 12,974 GOODWILL 32,927 33,001 INTANGIBLE ASSETS, net 189,620 197,231 DEFERRED INCOME TAXES 31,120 31,034 OTHER ASSETS 58,051 55,475 TOTAL ASSETS $ 1,802,842 $ 1,763,691 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 69,782 $ 71,864 Accrued liabilities 85,283 97,021 Income tax liability 2,299 303 Contingent earn-out liability 26,300 26,300 TOTAL CURRENT LIABILITIES 183,664 195,488 OTHER LONG-TERM LIABILITIES 42,951 47,835 DEFERRED INCOME TAXES 1,663 1,663 INCOME TAX LIABILITY 17,299 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 June 30, 2021 and 21,058 shares at December 31, 2020 and outstanding — 21,208 shares at June 30, 2021 and 21,058 shares at December 31, 2020 2,122 2,106 Additional paid-in capital 705,582 693,068 Treasury stock, at cost ( 11,223 and 209 shares, respectively) ( 2,269 ) ( 39 ) Retained earnings 860,781 808,652 Accumulated other comprehensive loss ( 8,951 ) ( 1,522 ) TOTAL STOCKHOLDERS' EQUITY 1,557,265 1,502,265 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,802,842 $ 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 June 30, Six months ended June 30, 2021 2020 2021 2020 TOTAL REVENUES $ 321,677 $ 303,379 $ 639,723 $ 631,986 COST OF GOODS SOLD 198,148 197,095 403,514 404,287 GROSS PROFIT 123,529 106,284 236,209 227,699 OPERATING EXPENSES: Selling, general and administrative 73,921 67,242 146,312 139,547 Research and development 11,385 10,279 22,094 21,025 Restructuring, strategic transaction and integration 3,753 6,482 6,636 18,789 Change in fair value of contingent earn-out — 2,700 — 2,700 Contract settlement — 25 127 25 TOTAL OPERATING EXPENSES 89,059 86,728 175,169 182,086 INCOME FROM OPERATIONS 34,470 19,556 61,040 45,613 INTEREST EXPENSE ( 163 ) ( 771 ) ( 324 ) ( 967 ) OTHER INCOME (EXPENSE), net 525 2,053 1,208 ( 3,427 ) INCOME BEFORE INCOME TAXES 34,832 20,838 61,924 41,219 PROVISION FOR INCOME TAXES ( 6,434 ) ( 1,930 ) ( 9,795 ) ( 5,477 ) NET INCOME $ 28,398 $ 18,908 $ 52,129 $ 35,742 NET INCOME PER SHARE Basic $ 1.34 $ 0.91 $ 2.46 $ 1.72 Diluted $ 1.31 $ 0.88 $ 2.40 $ 1.66 WEIGHTED AVERAGE NUMBER OF SHARES Basic 21,200 20,880 21,176 20,831 Diluted 21,703 21,506 21,718 21,545 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 June 30, Six months ended June 30, 2021 2020 2021 2020 NET INCOME $ 28,398 $ 18,908 $ 52,129 $ 35,742 Other comprehensive income (loss), net of tax: Cash flow hedge adjustments, net of taxes of $( 111 ) and $ 356 for the three months ended June 30, 2021 and 2020, respectively, and $( 409 ) and $( 577 ) for the six months ended June 30, 2021 and 2020, respectively ( 352 ) 1,126 ( 1,296 ) ( 1,826 ) Foreign currency translation adjustment, net of taxes of $ — for all periods 1,302 4,604 ( 6,156 ) ( 5,872 ) Other adjustments, net of taxes of $ — for all periods 12 4 23 ( 78 ) Other comprehensive income (loss), net of taxes 962 5,734 ( 7,429 ) ( 7,776 ) TOTAL COMPREHENSIVE INCOME $ 29,360 $ 24,642 $ 44,700 $ 27,966 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 Shares Amount Additional Paid-in Capital Treasury Stock Retained Earnings Accumulated Other 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 Issuance of restricted stock and exercise of stock options — — ( 2,685 ) 3,237 — — 552 Tax withholding payments related to net share settlement of equity awards — — — ( 96 ) — — ( 96 ) Stock compensation — — 6,681 — — — 6,681 Other comprehensive income, net of tax — — — — — 962 962 Net income — — — — 28,398 — 28,398 Balance, June 30, 2021 21,219 $ 2,122 $ 705,582 $ ( 2,269 ) $ 860,781 $ ( 8,951 ) $ 1,557,265 Common Stock Shares Amount Additional Paid-in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Loss Total Balance, January 1, 2020 20,742 $ 2,074 $ 668,947 $ ( 157 ) $ 721,782 $ ( 15,402 ) $ 1,377,244 Issuance of restricted stock and exercise of stock options 155 9 ( 10,207 ) 10,758 — — 560 Tax withholding payments related to net share settlement of equity awards ( 64 ) — — ( 12,174 ) — — ( 12,174 ) Stock compensation — — 6,939 — — — 6,939 Other comprehensive loss, net of tax — — — — — ( 13,510 ) ( 13,510 ) Net income — — — — 16,834 — 16,834 Balance, March 31, 2020 20,833 $ 2,083 $ 665,679 $ ( 1,573 ) $ 738,616 $ ( 28,912 ) $ 1,375,893 Issuance of restricted stock and exercise of stock options 106 11 4,408 1,820 — — 6,239 Tax withholding payments related to net share settlement of equity awards ( 2 ) — — ( 387 ) — — ( 387 ) Stock compensation — — 5,410 — — — 5,410 Other comprehensive income, net of tax — — — — — 5,734 5,734 Net income — — — — 18,908 — 18,908 Balance, June 30, 2020 20,937 $ 2,094 $ 675,497 $ ( 140 ) $ 757,524 $ ( 23,178 ) $ 1,411,797 6 Table of Contents ICU MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Six months ended June 30, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 52,129 $ 35,742 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 44,319 42,575 Amortization of right-of-use assets 4,780 4,527 Provision for doubtful accounts 342 162 Provision for warranty and returns ( 345 ) ( 1,221 ) Stock compensation 12,703 12,349 Loss on disposal of property and equipment and other assets 829 1,078 Bond premium amortization 364 85 Debt issuance costs amortization 144 144 Change in fair value of contingent earn-out — 2,700 Product-related charges — 2,626 Usage of spare parts 5,356 5,045 Other 1,574 1,615 Changes in operating assets and liabilities: Accounts receivable 2,078 5,293 Inventories 13,368 8,481 Prepaid expenses and other assets 759 ( 9,333 ) Other assets ( 7,632 ) ( 7,223 ) Accounts payable ( 1,648 ) ( 23,305 ) Accrued liabilities ( 17,068 ) ( 15,257 ) Income taxes, including excess tax benefits and deferred income taxes ( 5,970 ) 2,657 Net cash provided by operating activities 106,082 68,740 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ( 29,693 ) ( 38,517 ) Proceeds from sale of asset 203 147 Intangible asset additions ( 4,136 ) ( 4,104 ) Purchases of investment securities ( 10,034 ) ( 7,082 ) Proceeds from sale of investment securities 7,000 16,400 Net cash used in investing activities ( 36,660 ) ( 33,156 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term debt — 150,000 Proceeds from exercise of stock options 5,416 6,799 Payments on finance leases ( 296 ) ( 116 ) Tax withholding payments related to net share settlement of equity awards ( 7,819 ) ( 12,561 ) Net cash (used in) provided by financing activities ( 2,699 ) 144,122 Effect of exchange rate changes on cash ( 783 ) ( 2,242 ) NET INCREASE CASH AND CASH EQUIVALENTS 65,940 177,464 CASH AND CASH EQUIVALENTS, beginning of period 396,097 268,670 CASH AND CASH EQUIVALENTS, end of period $ 462,037 $ 446,134 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) Six months ended June 30, 2021 2020 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES: Accounts payable for property and equipment $ 1,857 $ 9,775 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 $ 3.8 million and $ 6.6 million for the three and six months ended June 30, 2021 respectively, as compared to $ 6.5 million and $ 18.8 million for the three and six months ended June 30, 2020 respectively. Restructuring During the three and six months ended June 30, 2021 restructuring charges were $ 0.1 million and $ 0.1 million, respectively. During the three and six months ended June 30, 2020 restructuring charges were $ 0.9 million and $ 8.1 million, respectively. Restructuring charges for the three and six months ended June 30, 2021 were primarily related to severance charges. Restructuring charges for the three and six months ended June 30, 2020 were primarily related to severance charges 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 June 30, 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 June 30, 2021 Severance pay and benefits $ 1,858 $ 143 $ ( 695 ) $ 28 $ 1,334 Facility closure expenses 1,563 — — 39 1,602 $ 3,421 $ 143 $ ( 695 ) $ 67 $ 2,936 Strategic transaction and integration expenses We incurred and expensed $ 3.7 million and $ 6.5 million in strategic transaction and integration expenses during the three and six months ended June 30, 2021, as compared to $ 5.6 million and $ 10.7 million during the three and six months ended June 30, 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 and six months ended June 30, 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 and six months ended June 30, 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 June 30, For the six months ended June 30, Geography 2021 2020 2021 2020 Europe, the Middle East and Africa $ 37,761 $ 28,583 $ 72,560 $ 66,511 Other Foreign 59,249 66,572 115,145 127,093 Total Foreign 97,010 95,155 187,705 193,604 United States 224,667 208,224 452,018 438,382 Total Revenues $ 321,677 $ 303,379 $ 639,723 $ 631,986 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 June 30, For the six months ended June 30, Product line 2021 2020 2021 2020 Infusion Consumables $ 136,200 $ 110,993 $ 262,569 $ 234,500 Infusion Systems 84,661 91,088 168,995 179,468 IV Solutions 88,421 89,178 182,597 193,469 Critical Care 12,395 12,120 25,562 24,549 Total Revenues $ 321,677 $ 303,379 $ 639,723 $ 631,986 Contract balances The following table presents our changes in the contract balances for the six months ended June 30, 2021 and 2020 (in thousands): Contract Liabilities Beginning balance, January 1, 2021 $ ( 6,430 ) Equipment revenue recognized 4,754 Equipment revenue deferred due to implementation ( 5,435 ) Software revenue recognized 4,355 Software revenue deferred due to implementation ( 2,212 ) Ending balance, June 30, 2021 $ ( 4,968 ) Beginning balance, January 1, 2020 $ ( 4,855 ) Equipment revenue recognized 3,263 Equipment revenue deferred due to implementation ( 10,347 ) Software revenue recognized 3,340 Software revenue deferred due to implementation ( 3,643 ) Ending balance, June 30, 2020 $ ( 12,242 ) As of June 30, 2021, revenue from remaining performance obligations related to implementation of software and equipment is $ 3.7 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 $ 1.3 million. We expect to recognize substantially all of this revenue over the next twelve months. Note 5: Leases Leases We determine if an arrangement is a lease at inception. Our operating lease assets are separately stated in operating lease right-of-use ("ROU") assets and our financing lease assets are included in other assets on our condensed consolidated balance sheets. Our lease liabilities are included in accrued liabilities, and other long-term liabilities on our condensed consolidated balance sheets. We have elected not to recognize an ROU asset and lease liability for leases with terms of twelve months or less. Lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Most of our leases do not provide an implicit rate, therefore we use our incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term based on the information available at commencement date. Our lease ROU assets exclude lease incentives and initial direct costs incurred. Our lease terms include options to extend when it is reasonably certain that we will exercise that option. All of our leases have 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 June 30 For the six months ended June 30 2021 2020 2021 2020 Operating lease cost $ 2,822 $ 2,776 $ 5,657 $ 5,567 Finance lease cost - interest 32 26 63 32 Finance lease cost - amortization of ROU asset 166 102 317 126 Short-term lease cost 6 73 9 128 Total lease cost $ 3,026 $ 2,977 $ 6,046 $ 5,853 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 six months ended June 30, 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 5,657 $ 4,706 Operating cash flows from finance leases $ 63 $ 32 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 1,282 $ 20,175 Finance leases $ 332 $ 2,815 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 June 30, 2021 As of December 31, 2020 Operating leases Operating lease right-of-use assets $ 43,315 $ 46,571 Accrued liabilities $ 8,846 $ 8,740 Other long-term liabilities 37,636 41,019 Total operating lease liabilities $ 46,482 $ 49,759 Weighted Average Remaining Lease Term Operating leases 6.3 years 6.7 years Weighted Average Discount Rate Operating leases 4.99 % 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 June 30, 2021 As of December 31, 2020 Financing leases Financing lease right-of-use assets $ 2,861 $ 2,915 Accrued liabilities $ 624 $ 554 Other long-term liabilities 2,284 2,388 Total financing lease liabilities $ 2,908 $ 2,942 Weighted Average Remaining Lease Term Financing leases 5.9 years 6.4 years Weighted Average Discount Rate Financing leases 4.28 % 4.27 % As of June 30, 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 $ 5,568 $ 367 2022 10,395 733 2023 9,192 733 2024 8,348 419 2025 5,023 219 2026 4,747 189 Thereafter 10,649 615 Total Lease Payments 53,922 3,275 Less imputed interest ( 7,440 ) ( 367 ) Total $ 46,482 $ 2,908 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 12,107 and 57,091 anti-dilutive securities for the three months ended June 30, 2021 and 2020, respectively. There were 12,080 and 15,045 anti-dilutive securities for the six months ended June 30, 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 June 30, Six months ended June 30, 2021 2020 2021 2020 Net income $ 28,398 $ 18,908 $ 52,129 $ 35,742 Weighted-average number of common shares outstanding (for basic calculation) 21,200 20,880 21,176 20,831 Dilutive securities 503 626 542 714 Weighted-average common and common equivalent shares outstanding (for diluted calculation) 21,703 21,506 21,718 21,545 EPS — basic $ 1.34 $ 0.91 $ 2.46 $ 1.72 EPS — diluted $ 1.31 $ 0.88 $ 2.40 $ 1.66 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 June 30, 2021 was approximately 218.4 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 June 30, 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 June 30, 2021 December 31, 2020 Derivatives designated as cash flow hedging instruments Foreign exchange forward contract: Prepaid expenses and other current assets $ 1,849 $ 3,555 Total derivatives designated as cash flow hedging instruments $ 1,849 $ 3,555 The following table presents the amounts affecting the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020 (in thousands): Line Item in the Condensed Consolidated Statements of Operations Three months ended June 30, Six months ended June 30, 2021 2020 2021 2020 Derivatives designated as cash flow hedging instruments Foreign exchange forward contracts Cost of goods sold $ 903 $ ( 219 ) $ 1,744 $ 473 We recognized the following gains (losses) on our foreign exchange contracts designated as a cash flow hedge (in thousands): Amount of Gain Recognized in Other Comprehensive Income on Derivatives Amount of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income Three months ended June 30, Three months ended June 30, 2021 2020 Location of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income 2021 2020 Derivatives designated as cash flow hedges: Foreign exchange forward contract $ 441 $ 1,262 Cost of goods sold $ 903 $ ( 219 ) Total derivatives designated as cash flow hedging instruments $ 441 $ 1,262 $ 903 $ ( 219 ) 15 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives Amount of Gain Reclassified From Accumulated Other Comprehensive Income into Income Six months ended June 30, Six months ended June 30, 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 $ 39 $ ( 1,930 ) Cost of goods sold $ 1,744 $ 473 Total derivatives designated as cash flow hedging instruments $ 39 $ ( 1,930 ) $ 1,744 $ 473 As of June 30, 2021, we expect approximately $ 1.8 million of the deferred gains on the outstanding derivatives in accumulated other comprehensive income to be reclassified to net income during the next six months concurrent with the underlying hedged transactions also being reported in net income. Note 8: Fair Value Measurement Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There are three levels of inputs that may be used to measure fair value: • Level 1: quoted prices in active markets for identical assets or liabilities; • Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or • Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities. Earn-out Liability In 2017, we recognized an earn-out liability upon the acquisition of HIS from Pfizer. Pfizer was entitled 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. Pfizer disputed our determination that the performance targets requiring payout of the HIS earn-out liability were not met, therefore the dispute is being resolved by binding arbitration. As of this filing, we expect the arbitrator to render a decision on this matter in August 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 is 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. During the earn-out period, we used a Monte Carlo simulation model to determine the fair value of the earn-out liability. The Monte Carlo 16 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 the simulation input table below related to Pursuit). The historical volatility is 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. As of June 30, 2021, the earn-out measurement period had ended. Based on the actual sales and gross profit achieved during the measurement period, we calculated the actual earn-out amount to be $ 26.3 million. Pursuit's former equity holders are entitled to an earn-out review period during which they may dispute the final earn-out amount. Assuming Pursuit's former equity holders accept out calculation, we expect to pay the $ 26.3 million earn-out during the third quarter of 2021. 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 Change in fair value of earn-out (included in income from operations as a separate line item) — Accrued balance, June 30, 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 Change in fair value of earn-out (included in income from operations as a separate line item) 2,700 Accrued balance, June 30, 2020 $ 20,000 The following tables provide quantitative information about Level 3 inputs for fair value measurement of our earn-out liabilities during the earn-out measurement period: Pursuit Earn-out Simulation Input As of December 31, 2020 As of June 30, 2020 Revenue/Gross Profit Volatility 25.00 % 30.00 % Discount Rate 12.50 % 12.50 % Risk Free Rate 0.09 % 0.16 % Counter Party Risk 3.10 % 6.30 % 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. 17 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 June 30, 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 $ 14,661 $ — $ 14,661 $ — Long-term 15,670 — 15,670 — Foreign exchange forwards: Prepaid expenses and other current assets 1,849 — 1,849 — Total Assets $ 32,180 $ — $ 32,180 $ — 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 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): 18 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of June 30, 2021 Amortized Cost Unrealized Holding Gains (Losses) Fair Value Short-term corporate bonds $ 14,661 $ — $ 14,661 Long-term corporate bonds 15,670 — 15,670 Total investment securities $ 30,331 $ — $ 30,331 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): June 30, 2021 December 31, 2020 Other prepaid expenses and receivables $ 17,705 $ 14,964 Deferred costs 4,341 6,402 Prepaid insurance and property taxes 3,099 6,178 VAT/GST receivable 3,519 3,676 Deferred tax charge 4,053 3,542 Foreign exchange forward contract 1,849 3,555 Deposits 1,349 1,353 Other 2,064 1,822 $ 37,979 $ 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): June 30, 2021 December 31, 2020 Raw materials $ 119,424 $ 126,499 Work in process 37,571 33,053 Finished goods 142,615 155,376 Total inventories $ 299,610 $ 314,928 19 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 12: Property and Equipment Property and equipment consisted of the following (in thousands): June 30, 2021 December 31, 2020 Machinery and equipment $ 301,573 $ 291,331 Land, building and building improvements 242,163 241,199 Molds 60,381 60,381 Computer equipment and software 99,408 98,311 Furniture and fixtures 7,711 7,767 Instruments placed with customers (1) 97,095 90,383 Construction in progress 57,250 53,724 Total property and equipment, cost 865,581 843,096 Accumulated depreciation ( 406,796 ) ( 376,468 ) Property and equipment, net $ 458,785 $ 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 $ 32.7 million for the three and six months ended June 30, 2021, respectively, as compared to $ 15.8 million and $ 31.0 million for the three and six months ended June 30, 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 ( 74 ) Balance as of June 30, 2021 $ 32,927 Intangible Assets, Net Intangible assets, carried at cost less accumulated amortization and amortized on a straight-lined basis, were as follows (in thousands): 20 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Weighted Average June 30, 2021 Amortization Life in Years Cost Accumulated Amortization Net Patents 10 $ 26,083 $ 15,889 $ 10,194 Customer contracts 12 10,390 6,023 4,367 Non-contractual customer relationships 9 57,817 29,947 27,870 Trademarks 4 425 425 — Trade name 15 18,266 4,117 14,149 Developed technology 13 152,893 43,177 109,716 Non-compete 3 2,500 1,389 1,111 Total amortized intangible assets $ 268,374 $ 100,967 $ 167,407 Internally developed software* $ 22,213 $ 22,213 Total intangible assets $ 290,587 $ 100,967 $ 189,620 ______________________________ * 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 and six months ended June 30, 2021, respectively, intangible asset amortization expense was $ 5.8 million and $ 11.6 million, respectively, as compared to $ 5.8 million and $ 11.6 million for the three and six months ended June 30, 2020, respectively. As of June 30, 2021 estimated annual amortization for our intangible assets for each of the next five years is approximately (in thousands): 21 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Remainder of 2021 $ 12,052 2022 22,877 2023 21,854 2024 21,765 2025 16,094 2026 15,188 Thereafter 57,577 Total $ 167,407 Note 14: Accrued Liabilities and Other Long-Term Liabilities Accrued liabilities consist of the following (in thousands): June 30, 2021 December 31, 2020 Salaries and benefits $ 27,708 $ 25,786 Incentive compensation 14,779 27,023 Operating lease liability-ST 8,846 8,740 Accrued sales taxes 2,024 2,146 Restructuring accrual 2,936 3,421 Deferred revenue 5,358 5,566 Accrued other taxes 2,418 3,540 Accrued professional fees 596 1,273 Legal accrual 852 900 Distribution fees 4,862 5,300 Warranties and returns 487 1,027 Accrued freight 7,576 6,784 Other 6,841 5,515 $ 85,283 $ 97,021 Other long-term liabilities consist of the following (in thousands): June 30, 2021 December 31, 2020 Operating lease liability-LT $ 37,636 $ 41,019 Benefits 1,150 1,183 Accrued rent 1,397 1,462 Contract liabilities-LT 270 337 Financing lease liability-LT 2,284 2,388 Other 214 1,446 $ 42,951 $ 47,835 Note 15: Income Taxes Income taxes were accrued at an estimated effective tax rate of 18 % and 16 % for the three and six months ended June 30, 2021, respectively, as compared to 9 % and 13 % for the three and six months ended June 30, 2020, respectively. The effective tax rate for the three and six months ended June 30, 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 and six months ended June 30, 2021 included a discrete tax benefit of $ 0.4 million and $ 2.2 million, respectively, related to excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period. 22 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) The effective tax rate for the three and six months ended June 30, 2020 differs from the federal statutory rate of 21 % principally because of the effect of the mix of U.S. and foreign incomes, state income taxes, GILTI, FDII and tax credits. The effective tax rate during the three and six months ended June 30, 2020 included a discrete tax benefit of $ 3.0 million and $ 3.5 million, respectively, related to excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period. 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 June 30, 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 2020 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 June 30, 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 six months ended June 30, 2021, we did not purchase any shares of our common stock under our stock purchase plans. As of June 30, 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 six months ended June 30, 2021, we withheld 37,882 shares of our common stock from employee vested restricted stock units in consideration for $ 7.8 million in payments made on the employee's behalf for their minimum statutory income tax withholding obligations. For the six months ended June 30, 2020, we withheld 65,392 shares of our common stock from employee vested restricted stock units in consideration for $ 12.6 million in payments made on the employee's behalf for 23 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) their minimum statutory income tax withholding obligations. Treasury stock is used to issue shares for stock option exercises, restricted stock grants and employee stock purchase plan stock purchases. Accumulated Other Comprehensive (Loss) Income The components of accumulated other comprehensive (loss) income ("AOCI"), net of tax, were as follows (in thousands): Foreign Currency Translation Adjustments Unrealized Gains on Cash Flow Hedges Other Adjustments Total Balance as of January 1, 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 ) Other comprehensive income before reclassifications 1,302 335 12 1,649 Amounts reclassified from AOCI — ( 687 ) — ( 687 ) Other comprehensive income 1,302 ( 352 ) 12 962 Balance as of June 30, 2021 $ ( 10,537 ) $ 1,487 $ 99 $ ( 8,951 ) Foreign Currency Translation Adjustments Unrealized Gains on Cash Flow Hedges Other Adjustments Total Balance as of January 1, 2020 $ ( 17,310 ) $ 1,880 $ 28 $ ( 15,402 ) Other comprehensive loss before reclassifications ( 10,477 ) ( 2,426 ) ( 81 ) ( 12,984 ) Amounts reclassified from AOCI — ( 526 ) — ( 526 ) Other comprehensive loss ( 10,477 ) ( 2,952 ) ( 81 ) ( 13,510 ) Balance as of March 31, 2020 $ ( 27,787 ) $ ( 1,072 ) $ ( 53 ) $ ( 28,912 ) Other comprehensive income before reclassifications 4,604 960 4 5,568 Amounts reclassified from AOCI — 166 — 166 Other comprehensive income 4,604 1,126 4 5,734 Balance as of June 30, 2020 $ ( 23,183 ) $ 54 $ ( 49 ) $ ( 23,178 ) 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. 24 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. As of June 30, 2021, the earn-out measurement period has ended and based on the actual sales and gross profit achieved during the measurement period we calculated the actual earn-out to be $26.3 million. Pursuit's former equity holders are entitled to an earn-out review period, during which they may dispute the final earn-out amount (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. Pfizer disputed our determination that the performance targets requiring payout of the HIS earn-out liability were not me, therefore the dispute is being resolved by binding arbitration. As of this filing, we expect the arbitrator to render a decision on this matter in August 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 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.