ICU MEDICAL INC/DE 10-Q

Item1. Financial Statements (Unaudited) ICU MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value data) September 30, 2021 December 31, 2020 (Unaudited) (1) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 519,485 $ 396,097 Short-term investment securities 18,009 14,687 TOTAL CASH, CASH EQUIVALENTS AND INVESTMENT SECURITIES 537,494 410,784 Accounts receivable, net of allowance for doubtful accounts of $ 7,126 at September 30, 2021 and $ 21,490 at December 31, 2020 116,043 124,093 Inventories 291,601 314,928 Prepaid income tax 31,381 29,480 Prepaid expenses and other current assets 34,718 41,492 TOTAL CURRENT ASSETS 1,011,237 920,777 PROPERTY AND EQUIPMENT, net 458,041 466,628 OPERATING LEASE RIGHT-OF-USE ASSETS 40,979 46,571 LONG-TERM INVESTMENT SECURITIES 7,172 12,974 GOODWILL 32,760 33,001 INTANGIBLE ASSETS, net 192,778 197,231 DEFERRED INCOME TAXES 35,585 31,034 OTHER ASSETS 60,799 55,475 TOTAL ASSETS $ 1,839,351 $ 1,763,691 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 62,008 $ 71,864 Accrued liabilities 94,133 97,021 Income tax liability 2,636 303 Contingent earn-out liability 26,300 26,300 TOTAL CURRENT LIABILITIES 185,077 195,488 CONTINGENT EARN-OUT LIABILITY 3,100 — OTHER LONG-TERM LIABILITIES 40,853 47,835 DEFERRED INCOME TAXES 1,663 1,663 INCOME TAX LIABILITY 18,686 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 — 21,238 shares at September 30, 2021 and 21,058 shares at December 31, 2020 and outstanding — 21,238 shares at September 30, 2021 and 21,058 shares at December 31, 2020 2,124 2,106 Additional paid-in capital 711,152 693,068 Treasury stock, at cost ( 237 and 209 shares, respectively) ( 48 ) ( 39 ) Retained earnings 891,862 808,652 Accumulated other comprehensive loss ( 15,118 ) ( 1,522 ) TOTAL STOCKHOLDERS' EQUITY 1,589,972 1,502,265 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,839,351 $ 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 September 30, Nine months ended September 30, 2021 2020 2021 2020 TOTAL REVENUES $ 336,060 $ 318,567 $ 975,783 $ 950,553 COST OF GOODS SOLD 208,269 204,643 611,783 608,930 GROSS PROFIT 127,791 113,924 364,000 341,623 OPERATING EXPENSES: Selling, general and administrative 74,815 70,854 221,127 210,401 Research and development 12,238 10,126 34,332 31,151 Restructuring, strategic transaction and integration 2,358 4,114 8,994 22,903 Change in fair value of contingent earn-out — 4,300 — 7,000 Contract settlement — ( 1,000 ) 127 ( 975 ) TOTAL OPERATING EXPENSES 89,411 88,394 264,580 270,480 INCOME FROM OPERATIONS 38,380 25,530 99,420 71,143 INTEREST EXPENSE ( 168 ) ( 616 ) ( 492 ) ( 1,583 ) OTHER (EXPENSE) INCOME, net ( 287 ) 1,252 921 ( 2,175 ) INCOME BEFORE INCOME TAXES 37,925 26,166 99,849 67,385 PROVISION FOR INCOME TAXES ( 6,844 ) ( 1,180 ) ( 16,639 ) ( 6,657 ) NET INCOME $ 31,081 $ 24,986 $ 83,210 $ 60,728 NET INCOME PER SHARE Basic $ 1.47 $ 1.19 $ 3.93 $ 2.91 Diluted $ 1.43 $ 1.16 $ 3.83 $ 2.82 WEIGHTED AVERAGE NUMBER OF SHARES Basic 21,214 20,948 21,189 20,870 Diluted 21,730 21,556 21,735 21,561 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents ICU MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (In thousands) Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 NET INCOME $ 31,081 $ 24,986 $ 83,210 $ 60,728 Other comprehensive (loss) income, net of tax: Cash flow hedge adjustments, net of taxes of $ 259 and $( 321 ) for the three months ended September 30, 2021 and 2020, respectively, and $ 668 and $ 256 for the nine months ended September 30, 2021 and 2020, respectively ( 819 ) 1,016 ( 2,116 ) ( 810 ) Foreign currency translation adjustment, net of taxes of $ 0 for all periods ( 5,360 ) 6,626 ( 11,516 ) 754 Other adjustments, net of taxes of $ 0 for all periods 12 3 36 ( 75 ) Other comprehensive (loss) income, net of taxes ( 6,167 ) 7,645 ( 13,596 ) ( 131 ) TOTAL COMPREHENSIVE INCOME $ 24,914 $ 32,631 $ 69,614 $ 60,597 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 Issuance of restricted stock and exercise of stock options 20 2 ( 963 ) 2,511 — — 1,550 Tax withholding payments related to net share settlement of equity awards ( 1 ) — — ( 290 ) — — ( 290 ) Stock compensation — — 6,533 — — — 6,533 Other comprehensive loss, net of tax — — — — — ( 6,167 ) ( 6,167 ) Net income — — — — 31,081 — 31,081 Balance, September 30, 2021 21,238 $ 2,124 $ 711,152 $ ( 48 ) $ 891,862 $ ( 15,118 ) $ 1,589,972 6 Table of Contents 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 Issuance of restricted stock and exercise of stock options 33 3 1,564 220 — — 1,787 Tax withholding payments related to net share settlement of equity awards ( 1 ) — — ( 260 ) — — ( 260 ) Stock compensation — — 6,265 — — — 6,265 Other comprehensive income, net of tax — — — — — 7,645 7,645 Net income — — — — 24,986 — 24,986 Balance, September 30, 2020 20,969 $ 2,097 $ 683,326 $ ( 180 ) $ 782,510 $ ( 15,533 ) $ 1,452,220 7 Table of Contents ICU MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Nine months ended September 30, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 83,210 $ 60,728 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 66,564 64,037 Noncash lease expense 7,165 6,859 Provision for doubtful accounts 342 2,785 Provision for warranty and returns 752 ( 1,296 ) Stock compensation 19,236 18,614 Loss on disposal of property and equipment and other assets 1,083 1,673 Bond premium amortization 514 126 Debt issuance costs amortization 216 216 Change in fair value of contingent earn-out — 7,000 Product-related charges 3,380 2,626 Usage of spare parts 9,831 8,391 Other 2,908 2,523 Changes in operating assets and liabilities: Accounts receivable 3,807 38,933 Inventories 16,510 8,859 Prepaid expenses and other assets 3,557 ( 6,535 ) Other assets ( 13,593 ) ( 12,121 ) Accounts payable ( 10,374 ) ( 38,032 ) Accrued liabilities ( 8,317 ) ( 20,417 ) Income taxes, including excess tax benefits and deferred income taxes ( 1,874 ) ( 743 ) Net cash provided by operating activities 184,917 144,226 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ( 46,464 ) ( 62,362 ) Proceeds from sale of asset 218 154 Intangible asset additions ( 10,216 ) ( 6,325 ) Investments in non-marketable equity investments ( 3,250 ) — Purchases of investment securities ( 10,034 ) ( 9,603 ) Proceeds from sale of investment securities 12,000 20,900 Net cash used in investing activities ( 57,746 ) ( 57,236 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term debt — 150,000 Repayment of short-term debt — ( 150,000 ) Proceeds from exercise of stock options 6,966 8,586 Payments on finance leases ( 448 ) ( 231 ) Tax withholding payments related to net share settlement of equity awards ( 8,109 ) ( 12,821 ) Net cash used in financing activities ( 1,591 ) ( 4,466 ) Effect of exchange rate changes on cash ( 2,192 ) ( 201 ) NET INCREASE CASH AND CASH EQUIVALENTS 123,388 82,323 CASH AND CASH EQUIVALENTS, beginning of period 396,097 268,670 CASH AND CASH EQUIVALENTS, end of period $ 519,485 $ 350,993 The accompanying notes are an integral part of these condensed consolidated financial statements. 8 Table of Contents ICU MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - CONTINUED (In thousands) Nine months ended September 30, 2021 2020 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES: Accounts payable for property and equipment $ 2,897 $ 3,633 Non-compete agreement with associated contingent earn-out liability $ 3,100 $ — The accompanying notes are an integral part of these condensed consolidated financial statements. 9 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1: Basis of Presentation The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S.") and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and reflect all adjustments, consisting of only normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the consolidated results for the interim periods presented. Results for the interim period are not necessarily indicative of results for the full year. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K of ICU Medical, Inc., ("ICU") a Delaware corporation, filed with the SEC for the year ended December 31, 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 $ 2.4 million and $ 9.0 million for the three and nine months ended September 30, 2021 respectively, as compared to $ 4.1 million and $ 22.9 million for the three and nine months ended September 30, 2020 respectively. Restructuring During the third quarter we adjusted certain facility restructuring liabilities by $2.0 million, shown in the table below under "other adjustments", to reflect actual amounts owed which resulted in net restructuring credits of $( 1.9 ) million and $( 1.8 ) million, for the three and nine months ended September 30, 2021, respectively. During the three and nine months ended September 30, 2020 restructuring charges were $ 0.0 million and $ 8.1 million, respectively. Restructuring charges for the three and nine months ended September 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 September 30, 2021 (in thousands): 10 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Accrued Balance January 1, 2021 Charges Incurred Payments Currency Translation Other Adjustments(1) Accrued Balance September 30, 2021 Severance pay and benefits $ 1,858 $ 143 $ ( 872 ) $ ( 3 ) $ ( 528 ) $ 598 Facility closure expenses 1,563 — — 31 ( 1,429 ) 165 $ 3,421 $ 143 $ ( 872 ) $ 28 $ ( 1,957 ) $ 763 _______________________________ (1) The estimated liabilities related to a prior year's facility closure restructuring were adjusted to actual amounts owed during the third quarter ended September 30, 2021. We expect to pay our unpaid restructuring charges as of September 30, 2021 by the end of the year. Strategic transaction and integration expenses We incurred and expensed $ 4.3 million and $ 10.8 million in strategic transaction and integration expenses during the three and nine months ended September 30, 2021, as compared to $ 4.1 million and $ 14.8 million during the three and nine months ended September 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 months ended September 30, 2021 were primarily related to transaction expenses incurred related to entering into a definitive agreement to acquire Smiths Medical 2020 Limited ("Smiths") (see Note 20: Acquisitions). The strategic transaction and integration expenses for the nine months ended September 30, 2021 were primarily related to integration costs associated with acquisitions, the Hospira Infusion Systems ("HIS") earn-out dispute with Pfizer, one-time costs incurred to comply with regulatory initiatives and the transaction costs related to the Smiths transaction. The strategic transaction and integration expenses during the three and nine months ended September 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): 11 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Three months ended September 30, Nine months ended September 30, Geography 2021 2020 2021 2020 Europe, the Middle East and Africa $ 36,239 $ 32,596 $ 108,800 $ 99,107 Other Foreign 54,523 48,525 169,667 175,618 Total Foreign 90,762 81,121 278,467 274,725 United States 245,298 237,446 697,316 675,828 Total Revenues $ 336,060 $ 318,567 $ 975,783 $ 950,553 The following table represents our revenues disaggregated by product line (in thousands): Three months ended September 30, Nine months ended September 30, Product line 2021 2020 2021 2020 Infusion Consumables $ 144,850 $ 116,054 $ 407,419 $ 350,554 Infusion Systems 90,688 88,388 259,683 267,856 IV Solutions 89,237 101,900 271,834 295,369 Critical Care 11,285 12,225 36,847 36,774 Total Revenues $ 336,060 $ 318,567 $ 975,783 $ 950,553 Contract balances The following table presents our changes in the contract balances for the nine months ended September 30, 2021 and 2020 (in thousands): Contract Liabilities Beginning balance, January 1, 2021 $ ( 6,430 ) Equipment revenue recognized 7,193 Equipment revenue deferred due to implementation ( 8,652 ) Software revenue recognized 6,194 Software revenue deferred due to implementation ( 2,967 ) Ending balance, September 30, 2021 $ ( 4,662 ) Beginning balance, January 1, 2020 $ ( 4,855 ) Equipment revenue recognized 9,920 Equipment revenue deferred due to implementation ( 13,679 ) Software revenue recognized 4,715 Software revenue deferred due to implementation ( 5,033 ) Ending balance, September 30, 2020 $ ( 8,932 ) As of September 30, 2021, revenue from remaining performance obligations related to implementation of software and equipment is $ 3.3 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 $ 1.3 million. We expect to recognize substantially all of this revenue over the next twelve months. Note 5: Leases Leases 12 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) We determine if an arrangement is a lease at inception. Our operating lease assets are separately stated in operating lease right-of-use ("ROU") assets and our financing lease assets are included in other assets on our condensed consolidated balance sheets. Our lease liabilities are included in accrued liabilities, and other long-term liabilities on our condensed consolidated balance sheets. We have elected not to recognize an ROU asset and lease liability for leases with terms of twelve months or less. Lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Most of our leases do not provide an implicit rate, therefore we use our incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term based on the information available at commencement date. Our lease ROU assets exclude lease incentives and initial direct costs incurred. Our lease terms include options to extend when it is reasonably certain that we will exercise that option. All of our leases have stated lease payments, which may include fixed rental increases. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. 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): Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Operating lease cost $ 2,798 $ 2,861 $ 8,455 $ 8,428 Finance lease cost - interest 29 29 92 62 Finance lease cost - reduction of ROU asset 166 125 478 252 Short-term lease cost 4 74 14 200 Total lease cost $ 2,997 $ 3,089 $ 9,039 $ 8,942 Interest expense on our finance leases is included in other income (expense), net in our condensed consolidated statement of operations. The reduction of the operating and finance ROU assets is included as noncash lease expense 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): Nine months ended September 30, 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 8,461 $ 7,303 Operating cash flows from finance leases $ 29 $ 62 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 1,394 $ 20,264 Finance leases $ 373 $ 2,870 The following table presents the supplemental balance sheet information related to our operating leases (in thousands, except lease term and discount rate): 13 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of September 30, 2021 As of December 31, 2020 Operating leases Operating lease right-of-use assets $ 40,979 $ 46,571 Accrued liabilities $ 8,669 $ 8,740 Other long-term liabilities 35,478 41,019 Total operating lease liabilities $ 44,147 $ 49,759 Weighted Average Remaining Lease Term Operating leases 6.2 years 6.7 years Weighted Average Discount Rate Operating leases 4.98 % 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 September 30, 2021 As of December 31, 2020 Financing leases Financing lease right-of-use assets $ 2,690 $ 2,915 Accrued liabilities $ 624 $ 554 Other long-term liabilities 2,122 2,388 Total financing lease liabilities $ 2,746 $ 2,942 Weighted Average Remaining Lease Term Financing leases 5.8 years 6.4 years Weighted Average Discount Rate Financing leases 4.27 % 4.27 % As of September 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 $ 2,783 $ 182 2022 10,370 726 2023 9,194 726 2024 8,347 421 2025 4,999 225 2026 4,725 189 Thereafter 10,574 615 Total Lease Payments 50,992 3,084 Less imputed interest ( 6,845 ) ( 338 ) Total $ 44,147 $ 2,746 Note 6: Net Income Per Share 14 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 12,235 and 14,017 anti-dilutive securities for the three months ended September 30, 2021 and 2020, respectively. There were 12,132 and 12,182 anti-dilutive securities for the nine months ended September 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 September 30, Nine months ended September 30, 2021 2020 2021 2020 Net income $ 31,081 $ 24,986 $ 83,210 $ 60,728 Weighted-average number of common shares outstanding (for basic calculation) 21,214 20,948 21,189 20,870 Dilutive securities 516 608 546 691 Weighted-average common and common equivalent shares outstanding (for diluted calculation) 21,730 21,556 21,735 21,561 EPS — basic $ 1.47 $ 1.19 $ 3.93 $ 2.91 EPS — diluted $ 1.43 $ 1.16 $ 3.83 $ 2.82 Note 7: Derivatives and Hedging Activities Hedge Accounting and Hedging Program The purpose of our hedging program is to manage the foreign currency exchange rate risk on forecasted expenses denominated in currencies other than the functional currency of the operating unit. We do not issue derivatives for trading or speculative purposes. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. The par forward contract is designated and qualifies as a cash flow hedge. Our derivative instruments are recorded at fair value on the condensed consolidated balance sheets and are classified based on the instrument's maturity date. We record changes in the intrinsic value of the effective portion of the gain or loss on the derivative instrument as a component of Other Comprehensive Income and we reclassify that gain or loss into earnings in the same line item associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. In March 2020, we entered into a one-year cross-currency par forward contract that extends our current hedge of a portion of our Mexico forecasted expenses denominated in Pesos ("MXN"). The total notional amount of this outstanding derivative as of September 30, 2021 was approximately 109.2 million MXN. The term of the one-year contract is November 3, 2020 to December 1, 2021. The derivative instrument matures in equal monthly amounts at a fixed forward rate of 24.26 MXN/USD. In November 2018, we entered into a one-year cross-currency par forward contract that hedges of a portion of our Mexico forecasted expenses denominated in MXN. The 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 September 30, 2021 and December 31, 2020 (in thousands): 15 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Derivatives Condensed Consolidated Balance Sheet Location September 30, 2021 December 31, 2020 Derivatives designated as cash flow hedging instruments Foreign exchange forward contract: Prepaid expenses and other current assets $ 772 $ 3,555 Total derivatives designated as cash flow hedging instruments $ 772 $ 3,555 The following table presents the gain (loss) affecting the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020 (in thousands): Line Item in the Condensed Consolidated Statements of Operations Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Derivatives designated as cash flow hedging instruments Foreign exchange forward contracts Cost of goods sold $ 968 $ ( 49 ) $ 2,713 $ 423 We recognized the following gains (losses) on our foreign exchange contracts designated as a cash flow hedge (in thousands): Amount of (Loss) Gain Recognized in Other Comprehensive Income on Derivatives Amount of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income Three months ended September 30, Three months ended September 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 $ ( 109 ) $ 1,287 Cost of goods sold $ 968 $ ( 49 ) Total derivatives designated as cash flow hedging instruments $ ( 109 ) $ 1,287 $ 968 $ ( 49 ) 16 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Amount of Loss Recognized in Other Comprehensive Income on Derivatives Amount of Gain Reclassified From Accumulated Other Comprehensive Income into Income Nine months ended September 30, Nine months ended September 30, 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 $ ( 70 ) $ ( 642 ) Cost of goods sold $ 2,713 $ 423 Total derivatives designated as cash flow hedging instruments $ ( 70 ) $ ( 642 ) $ 2,713 $ 423 As of September 30, 2021, we expect approximately $ 0.7 million of the deferred gains on the outstanding derivatives in accumulated other comprehensive income to be reclassified to net income during the next three 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 August 2021, we entered into an agreement with one of our international distributors whereby that distributor would not compete with us in a specific territory for a three-year period that will end in September 2024. The terms of the agreement include a contingent earn-out payment. The contingent earn-out payment shall not exceed $ 6.0 million, which will be earned based on certain revenue targets over a twelve-month measurement period determined by the highest four consecutive quarters commencing over a two-year period starting on the closing date of the agreement and provided that the distributor is in compliance with its obligations under the agreement. As of September 30, 2021, the fair value of the contingent earn-out is estimated at $ 3.1 million. The estimated fair value of the contingent earn-out was calculated using a probability-weighted cash flow model based on historical revenue streams and the likelihood that the revenue targets will be met. 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 were 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 was 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 simulation model utilized 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 was based on the median of ICU and a certain peer group. The risk-free interest rate was equal to the yield, as of the valuation date, of the zero-coupon U.S. Treasury bill that was commensurate with the term of the earn-out. The counter party credit risk was based on a synthetic credit rating of B1. As of June 30, 2021, the earn-out measurement period 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. The $ 26.3 million earn-out calculation was finalized and accepted by 17 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Pursuit's former equity holders and was paid out in October 2021. The Pursuit earn-out liability was transferred out of Level 3 and into Level 2 as the amount of the actual payment in known. Our contingent earn-out liabilities are 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): 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 Contingent earn-out - non-compete arrangement 3,100 Transfer of Pursuit earn-out liability into Level 2 ( 26,300 ) Accrued balance, September 30, 2021 $ 3,100 Earn-out Liability Accrued balance, January 1, 2020 $ 17,300 Change in fair value of earn-out (included in income from operations as a separate line item) — Accrued balance, March 31, 2020 $ 17,300 Change in fair value of earn-out (included in income from operations as a separate line item) 2,700 Accrued balance, June 30, 2020 $ 20,000 Change in fair value of earn-out (included in income from operations as a separate line item) 4,300 Accrued balance, September 30, 2020 $ 24,300 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 September 30, 2020 Revenue/Gross Profit Volatility 25.00 % 35.00 % Discount Rate 12.50 % 12.50 % Risk Free Rate 0.09 % 0.12 % Counter Party Risk 3.10 % 4.50 % 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): 18 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Fair value measurements at September 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 $ 18,009 $ — $ 18,009 $ — Long-term 7,172 — 7,172 — Foreign exchange forwards: Prepaid expenses and other current assets 772 — 772 — Total Assets $ 25,953 $ — $ 25,953 $ — Liabilities: Earn-out liability $ 29,400 $ — $ 26,300 $ 3,100 Total Liabilities $ 29,400 $ — $ 26,300 $ 3,100 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 Investments in Available-for-sale Securities Our available-for-sale investment securities currently consist of short-term and long-term corporate bonds and are considered “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. 19 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Our short and long-term investments in available-for-sale securities consisted of the following (in thousands): As of September 30, 2021 Amortized Cost Unrealized Holding Gains (Losses) Fair Value Short-term corporate bonds $ 18,009 $ — $ 18,009 Long-term corporate bonds 7,172 — 7,172 Total investment securities $ 25,181 $ — $ 25,181 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 Investments in Non-Marketable Equity Securities In September 2021, we acquired approximately a 20% non-marketable equity interest in a nonpublic company and entered into a three-year distribution agreement where we have the exclusive rights to market, sell and distribute the company's products in exchange for a cash payment of $3.3 million. In addition, we were granted an exclusive license for all of the sellers intellectual property. At the expiration of the distribution agreement we have the right but not the obligation to acquire the remaining interest in the business. We apply the equity method of accounting for investments when we determine we have a significant influence, but not a controlling interest in the investee. We determine whether we have significant influence by considering key factors such as ownership interest, representation on the board of directors, participation in policy making decisions, business relationship and material intercompany transactions, among other factors. Our equity method investment is reported at cost and adjusted each period for our share of the investee's income or (loss) and dividend paid, if any. We eliminate any intra-entity profits to the extent of our beneficial interest. We record our share of the investee's income or (loss) on a one quarter lag. We report our proportionate share of the investee's income or (loss) resulting from this investment in "other income (expense), net" in our Condensed Consolidated Statements of Operations. The carrying value of our equity method investment is reported in "Other Assets" in our Condensed Consolidated Balance Sheets (see Note 10, Prepaid Expenses and Other Current Assets and Other Assets). We assess our equity method investments for impairment on an annual basis or whenever events or circumstances indicate that the carrying value of the investment may not be recoverable. We have not recorded any income or (loss) resulting for this investment as of September 30, 2021. Our non-marketable equity method investments consisted of the following (in thousands): As of September 30, 2021 As of December 31, 2020 Equity method investments $ 3,250 $ — 20 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 10: Prepaid Expenses and Other Current Assets and Other Assets Prepaid expenses and other current assets consist of the following (in thousands): September 30, 2021 December 31, 2020 Other prepaid expenses and receivables $ 17,175 $ 14,964 Deferred costs 5,676 6,402 Prepaid insurance and property taxes 968 6,178 VAT/GST receivable 2,562 3,676 Deferred tax charge 4,130 3,542 Foreign exchange forward contract 772 3,555 Deposits 1,317 1,353 Other 2,118 1,822 $ 34,718 $ 41,492 Other assets consist of the following (in thousands): September 30, 2021 December 31, 2020 Pump lease receivables $ 27,043 $ 28,948 Spare parts 26,486 22,725 Equity method investments 3,250 — Financed lease assets 2,690 2,915 Other 1,330 887 60,799 55,475 Note 11: Inventories Inventories are stated at the lower of cost or net realizable value with cost determined using the first-in, first-out method. Inventory costs consist of those costs directly attributable to products prior to sale including among other things raw material, labor and overhead. Inventories consisted of the following (in thousands): September 30, 2021 December 31, 2020 Raw materials $ 119,552 $ 126,499 Work in process 42,312 33,053 Finished goods 129,737 155,376 Total inventories $ 291,601 $ 314,928 21 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 12: Property and Equipment Property and equipment consisted of the following (in thousands): September 30, 2021 December 31, 2020 Machinery and equipment $ 310,651 $ 291,331 Land, building and building improvements 242,786 241,199 Molds 60,380 60,381 Computer equipment and software 99,781 98,311 Furniture and fixtures 7,686 7,767 Instruments placed with customers (1) 96,499 90,383 Construction in progress 61,890 53,724 Total property and equipment, cost 879,673 843,096 Accumulated depreciation ( 421,632 ) ( 376,468 ) Property and equipment, net $ 458,041 $ 466,628 ______________________________ (1) Instruments placed with customers consist of drug-delivery and monitoring systems placed with customers under operating leases. Depreciation expense was $ 16.4 million and $ 49.1 million for the three and nine months ended September 30, 2021, respectively, as compared to $ 15.6 million and $ 46.7 million for the three and nine months ended September 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 ( 241 ) Balance as of September 30, 2021 $ 32,760 Intangible Assets, Net Intangible assets, carried at cost less accumulated amortization and amortized on a straight-lined basis, were as follows (in thousands): 22 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Weighted Average September 30, 2021 Amortization Life in Years Cost Accumulated Amortization Net Patents 10 $ 26,751 $ 16,322 $ 10,429 Customer contracts 12 10,395 6,109 4,286 Non-contractual customer relationships 9 57,403 31,407 25,996 Trademarks 4 425 425 — Trade name 15 18,259 4,421 13,838 Developed technology 13 152,893 46,291 106,602 Non-compete 3 9,600 1,597 8,003 Total amortized intangible assets $ 275,726 $ 106,572 $ 169,154 Internally developed software* $ 23,624 $ 23,624 Total intangible assets $ 299,350 $ 106,572 $ 192,778 ______________________________ * 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 nine months ended September 30, 2021, respectively, intangible asset amortization expense was $ 5.8 million and $ 17.4 million, respectively, as compared to $ 5.8 million and $ 17.4 million for the three and nine months ended September 30, 2020, respectively. As of September 30, 2021 estimated annual amortization for our intangible assets for each of the next five years is approximately (in thousands): 23 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Remainder of 2021 $ 6,858 2022 25,311 2023 24,289 2024 23,607 2025 16,025 2026 15,255 Thereafter 57,809 Total $ 169,154 Note 14: Accrued Liabilities and Other Long-Term Liabilities Accrued liabilities consist of the following (in thousands): September 30, 2021 December 31, 2020 Salaries and benefits $ 26,514 $ 25,786 Incentive compensation 23,651 27,023 Operating lease liability-ST 8,669 8,740 Accrued sales taxes 2,704 2,146 Restructuring accrual 763 3,421 Deferred revenue 5,539 5,566 Accrued other taxes 3,627 3,540 Accrued professional fees 676 1,273 Legal accrual 1,362 900 Distribution fees 5,555 5,300 Warranties and returns 407 1,027 Accrued freight 8,384 6,784 Other 6,282 5,515 $ 94,133 $ 97,021 Other long-term liabilities consist of the following (in thousands): September 30, 2021 December 31, 2020 Operating lease liability-LT $ 35,478 $ 41,019 Benefits 1,109 1,183 Accrued rent 1,312 1,462 Contract liabilities-LT 236 337 Financing lease liability-LT 2,122 2,388 Other 596 1,446 $ 40,853 $ 47,835 Note 15: Income Taxes Income taxes were accrued at an estimated effective tax rate of 18 % and 17 % for the three and nine months ended September 30, 2021, respectively, as compared to 5 % and 10 % for the three and nine months ended September 30, 2020, respectively. The effective tax rate for the three and nine months ended September 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 and the following discrete items recognized during the interim period: 24 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) • Excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the three and nine months ended September 30, 2021 of $ 1.1 million and $ 3.3 million, respectively. • U.S. federal return-to-provision adjustments for the year ended December 31, 2020 primarily due to changes in estimates for GILTI, FDII, subpart F, and related foreign tax credits along with other prior period adjustments resulted in a tax provision of $1.1 million. The effective tax rate for the three and nine months ended September 30, 2020 differs from the federal statutory rate of 21 % principally because of the effect of the mix of U.S. and foreign incomes, state income taxes, GILTI, FDII, tax credits and the following discrete items recognized during the interim periods: • Excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the three and nine months ended September 30, 2020 of $ 0.1 million and $ 3.6 million, respectively. • The revaluation of the contingent consideration during the three and nine months ended September 30, 2020, which resulted in a tax benefit of $0.7 million and $1.1 million, respectively. • U.S. federal and state return-to-provision adjustments net of related reserve changes for the year ended December 31, 2019 resulted in a tax benefit of $3.8 million primarily due to changes in estimates for GILTI, FDII, and related foreign tax credits. Note 16: Long-Term Obligations Five-year Senior Secured Revolving Credit Facility ("Credit Facility") On November 8, 2017, we entered into a Credit Facility with various lenders for $ 150.0 million, with Wells Fargo Bank, N.A. as the administrative agent, swingline lender and issuing lender. During March 2020, as a result of market uncertainty caused by COVID-19, we preemptively borrowed $ 150.0 million on our Credit Facility as a conservative measure to manage any potential short-term liquidity risk. In September 2020, we fully repaid the borrowings under our Credit Facility. As of September 30, 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. We expect to refinance our Credit Facility in full in connection with the consummation of the Smiths acquisition which is expected to close in early 2022. We expect to enter into senior secured credit facilities totaling approximately $ 2.2 billion at or near the closing of the Smiths acquisition which we anticipate will include a new revolving credit facility of $ 500.0 million (see Note 20: Acquisitions). 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. 25 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) We were in compliance with all financial covenants as of September 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 nine months ended September 30, 2021, we did not purchase any shares of our common stock under our stock purchase plans. As of September 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 nine months ended September 30, 2021, we withheld 39,371 shares of our common stock from employee vested restricted stock units in consideration for $ 8.1 million in payments made on the employee's behalf for their minimum statutory income tax withholding obligations. For the nine months ended September 30, 2020, we withheld 66,749 shares of our common stock from employee vested restricted stock units in consideration for $ 12.8 million in payments made on the employee's behalf for their minimum statutory income tax withholding obligations. 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 ) Other comprehensive income before reclassifications ( 5,360 ) ( 83 ) 12 ( 5,431 ) Amounts reclassified from AOCI — ( 736 ) — ( 736 ) Other comprehensive income ( 5,360 ) ( 819 ) 12 ( 6,167 ) Balance as of September 30, 2021 $ ( 15,897 ) $ 668 $ 111 $ ( 15,118 ) 26 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Foreign Currency Translation Adjustments Unrealized Gains on Cash Flow Hedges Other Adjustments Total Balance as of January 1, 2020 $ ( 17,310 ) $ 1,880 $ 28 $ ( 15,402 ) Other comprehensive loss before reclassifications ( 10,477 ) ( 2,426 ) ( 81 ) ( 12,984 ) Amounts reclassified from AOCI — ( 526 ) — ( 526 ) Other comprehensive loss ( 10,477 ) ( 2,952 ) ( 81 ) ( 13,510 ) Balance as of March 31, 2020 $ ( 27,787 ) $ ( 1,072 ) $ ( 53 ) $ ( 28,912 ) Other comprehensive income before reclassifications 4,604 960 4 5,568 Amounts reclassified from AOCI — 166 — 166 Other comprehensive income 4,604 1,126 4 5,734 Balance as of June 30, 2020 $ ( 23,183 ) $ 54 $ ( 49 ) $ ( 23,178 ) Other comprehensive income before reclassifications 6,626 978 3 7,607 Amounts reclassified from AOCI — 38 — 38 Other comprehensive income 6,626 1,016 3 7,645 Balance as of September 30, 2020 $ ( 16,557 ) $ 1,070 $ ( 46 ) $ ( 15,533 ) 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 In August 2021, we entered into an agreement with one of our international distributors whereby that distributor would not compete with us in a specific territory for a three-year period that will end in September 2024. The terms of the agreement include a contingent earn-out payment. The contingent earn-out shall not exceed $ 6.0 million, which will be earned based on certain revenue targets over a twelve-month measurement period determined by the highest four consecutive quarters commencing over a two-year period starting on the closing date of the agreement and provided that the distributor is in compliance with its obligations under the agreement. As of September 30, 2021, the fair value of the contingent earn-out is estimated at $ 3.1 million. During November 2019, we acquired Pursuit. Total consideration for the acquisition included 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 had 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. In October 2021, the $26.3 million earn-out was finalized and paid to the former Pursuit equity holders (see Note 8: Fair Value Measurement). 27 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. As of December 31, 2019 we determined 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 entered into binding arbitration. In August 2021, the arbitrator concluded that the necessary performance targets that would require payout of the HIS earn-out were not met, and as a result Pfizer is not entitled to any payments in connection with the HIS earn-out liability. 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. Note 20: Acquisitions Definitive Agreement to Purchase Smiths Medical 2020 Limited During September 2021, we entered into a definitive agreement to acquire Smiths Medical 2020 Limited ("Smiths"), the holding company of Smiths Group plc's global medical device business ("Smiths Group"). In accordance with the Share Sale and Purchase Agreement (the "Purchase Agreement") we will purchase the entire issued share capital of Smiths for approximately $ 1.9 billion in cash, the issuance of 2.5 million fully paid and non-assessable shares of our common stock, par value $0.10 per share and a potential contingent earn-out of $ 100.0 million in cash, which is to be based upon our common stock achieving a certain volume weighted average price for certain periods from closing to the third or fourth anniversary of closing. The transaction is anticipated to close in early 2022, however closing under the Purchase Agreement is conditional upon the approval of the shareholders of Smiths Group plc, certain antitrust conditions and foreign direct investment conditions, and the termination in accordance with its terms of the sale and purchase agreement between Smiths Group plc and Trulli Bidco Limited. In connection with entering into the Purchase Agreement, in September 2021, we entered into a debt commitment letter with Wells Fargo Bank, National Association, Wells Fargo Securities, LLC and Barclays Bank PLC (the “Committed Parties”), pursuant to which, among other things, the Committed Parties will provide to us, at or near closing of the transaction, with senior secured credit facilities of up to $ 2.0 billion consisting of a term loan A facility of $ 850.0 million, a term loan B facility of $ 850 million and a revolving credit facility of $ 300.0 million. In October 2021, the debt commitment related to the term loan A and revolving credit facility was syndicated to a broader group of Committed Parties. As part of the syndication process, the size of the revolving credit facility was increased from $ 300.0 million to $ 500.0 million. In connection with the issuance of the stock consideration to Smiths, we will at closing enter into a Shareholders Agreement (the “Shareholders Agreement”). The Shareholders Agreement will impose certain restrictions on Smiths including prohibiting certain transfers of the shares of our Stock issued (i) for 6 months following the closing of the transactions contemplated by the Purchase Agreement and (ii) to certain of our competitors and certain other parties, as well as customary standstill limitations. Under the Shareholders Agreement, Smiths will have the right to designate one individual for election to our board of directors so long as Smiths beneficially owns at least 5% of the total outstanding shares of our common stock. 28 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)