ICU MEDICAL INC/DE 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following information should be read in conjunction with the condensed consolidated financial statements and accompanying notes in this Form 10-Q, as well as the audited consolidated financial statements and related notes for the fiscal year ended December 31, 2020 included in our Annual Report on Form 10-K. When used in this report, the terms “we,” “us,” and “our” refer to ICU Medical, Inc ("ICU") and its subsidiaries included in our condensed consolidated financial statements unless context requires otherwise. Business Overview We are one of the world's leading pure-play infusion therapy companies with global operations and a wide-ranging product portfolio that includes IV solutions, IV smart pumps with pain management and safety software technology, dedicated and non-dedicated IV sets and needlefree connectors designed to help meet clinical, safety and workflow goals. In addition, we manufacture automated pharmacy IV compounding systems with workflow technology, closed systems transfer devices for preparing and administering hazardous IV drugs, and cardiac monitoring systems for critically ill patients. Our primary customers are acute care hospitals, wholesalers, ambulatory clinics and alternate site facilities, such as clinics, home health care providers and long-term care facilities. We sell our products in more than 90 countries throughout the world. We categorize our products into four main product lines: Infusion Consumables, Infusion Systems, IV Solutions and Critical Care. We have presented our financial results in accordance with these product lines, with our primary products in each line listed below. Definitive Agreement to Purchase Smiths Medical 2020 Limited In September 2021, we entered into a Share Sale and Purchase Agreement (the "Purchase Agreement") with Smiths Medical 2020 Limited ("Smiths"), the holding company of Smiths Group plc's global medical device business. We will purchase the entire issued share capital of Smiths Medical 2020 Limited for approximately $1.9 billion in cash, a potential contingent earn-out of $100.0 million and the issuance of 2.5 million fully paid and non-assessable shares of our common stock, par value $0.10 per share. 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 $850.0 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. Operations Overview COVID-19 The novel coronavirus and its variants (“COVID-19”) continues to have an impact on our business operations. Our manufacturing, distribution and pump service facilities continue to operate under our business continuity plan and our precautionary safety measures implemented to maximize the safety of our employees and mitigate disruption of our business are still in effect. For greater detail on the above mentioned safety measures and a discussion of how future results may potentially be impacted by COVID-19 see Part II, Item 7, of our 2020 Annual Report on Form 10-K. While we continually monitor the ongoing and evolving impact of the effect of the COVID-19 pandemic on our operations the overall impact will not be fully reflected in our results of operations until future periods. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be fully predicted at this time, as such, the impact of the pandemic on our overall financial performance remain uncertain and cannot as yet be quantified. Infusion Consumables 29 Table of Contents Infusion therapy sets, used in hospitals and ambulatory clinics, consist of a tube running from a bottle or plastic bag containing a solution to a catheter inserted in a patient’s vein, that may or may not be used with an IV pump. Our primary Infusion Consumable products are: • Clave™ needlefree products , including the MicroClave, MicroClave Clear, and NanoClave™ brand of connectors, accessories, extension and administration sets used for the administration of IV fluids and medications and the Neutron catheter patency device, used to help maintain patency of central venous catheters; • SwabCap disinfecting cap, used to protect and disinfect any needlefree connector, including competitive brands of connectors; • ClearGuard HD antimicrobial barrier caps for hemodialysis catheters; and • Tego TM hemodialysis connector used to cap and protect hemodialysis central venous catheter hubs; Closed System Transfer Devices ("CSTD") and hazardous drug compounding systems are used to prepare and deliver hazardous IV medications such as those used in chemotherapy, which, if released, can have harmful effects on the healthcare worker and environment. Our products are: • ChemoLock TM CSTD which utilizes a proprietary needlefree connection method, is used for the preparation and administration of hazardous drugs. ChemoLock is used to limit the escape of hazardous drug or vapor concentrations, block the transfer of environmental contaminants into the system, and eliminates the risk of needlestick injury; • ChemoClave TM , an ISO Connection standard and universally compatible CSTD used for the preparation and administration of hazardous drugs. ChemoClave utilizes standard ISO luer locking connections, making it compatible with all brands of needlefree connectors and pump delivery systems. ChemoClave also is used to limit the escape of hazardous drug or vapor concentrations, block the transfer of environmental contaminants into the system, and eliminate the risk of needlestick injury; and • Diana TM hazardous drug compounding system, an automated sterile compounding system that incorporates ChemoClave and ChemoLock CSTD consumables and IV workflow technology for the accurate, safe, and efficient preparation of hazardous drugs. It is a user-controlled automated system that provides repeatable accuracy of drug mixes and minimizes clinician exposure to hazardous drugs while helping to maintain the sterility of the drugs being mixed. The preparation of hazardous drugs typically takes place in a pharmacy where drugs are removed from vials and prepared for delivery to a patient. Those prepared drugs are then transferred to a nursing unit where the chemotherapy is administered via an infusion pump set to a patient. Components of the ChemoClave and ChemoLock product lines are used both in pharmacies and on the nursing floors for the preparation and administration of hazardous drugs. Infusion Systems We offer a wide range of infusion pumps, dedicated IV sets and software. Our primary Infusion System products are dedicated IV sets and the following: Infusion Pump Hardware: ◦ Plum 360™ : The Plum 360™ infusion pump is an ICU Medical MedNet™ ready large volume infusion pump with an extensive drug library and wireless capability. Plum 360 was named the 2018, 2019 and 2020 Best in KLAS winner as top-performing IV smart pump and is the first medical device to be awarded UL Cybersecurity Assurance Program Certification. Also, in 2021, the Plum 360 won the first ever award as the top-performing Smart Pump EMR-Integrated; and ◦ LifeCare PCA™ : The LifeCare PCA infusion pump is an ICU Medical MedNet™ ready patient-controlled analgesia pump ("PCA"), providing complete IV-EHR interoperability since 2016. 30 Table of Contents IV Mediation Safety Software: • ICU Medical MedNet ™: ICU Medical MedNet is an enterprise-class medication management platform for any sized healthcare system that can help reduce medication errors, improve quality of care, streamline workflows and maximize revenue capture. ICU Medical MedNet connects our industry-leading smart pumps to a hospital’s Electronic Health Records ("EHR"), asset tracking systems, and alarm notification platforms with the largest array of integration partners. Professional Services: • In addition to the products above, our teams of clinical, information technology, and professional services experts work with customers to develop and deliver safe and efficient infusion systems, providing customized and personalized configuration, implementation, and data analytics services to complement our infusion hardware and software. IV Solutions We provide a broad portfolio of IV solutions to meet our customers’ clinical needs, providing a consistent supply of IV solutions, irrigation, and nutritionals to help provide safe and effective patient care. Our primary IV Solutions products are: IV Therapy and Diluents: • Including Sodium Chloride, Dextrose, Balanced Electrolyte Solutions, Lactated Ringer's, Ringer's, Mannitol, Sodium Chloride/Dextrose and Sterile Water. Irrigation: • Including Sodium Chloride Irrigation, Sterile Water Irrigation, Physiologic Solutions, Ringer's Irrigation, Acetic Acid Irrigation, Glycine Irrigation, Sorbitol-Mannitol Irrigation, Flexible Containers and Pour Bottle Options. Critical Care Our Critical Care products help clinicians get accurate real-time access to patients’ hemodynamic and cardiac status with an extensive portfolio of monitoring systems and advanced sensors & catheters. Measurements provided by our systems help clinicians determine how well the heart is pumping blood and how efficiently oxygen from the blood is being used by the tissues. Our primary Critical Care products are: • Cogent™ 2-in-1 hemodynamic monitoring system; • CardioFlo™ hemodynamic monitoring system; • TDQ™ and OptiQ™ cardiac output monitoring catheters; • TriOx TM venous oximetry catheters; • Transpac™ blood pressure transducers; and • SafeSet™ closed blood sampling and conservation system. The following table summarizes our total worldwide revenue by domestic and international markets by amount and as a percentage of total revenue (in millions, except percentages): Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 $ % of Revenue $ % of Revenue $ % of Revenue $ % of Revenue Domestic $ 245.3 73 % $ 237.4 75 % $ 697.3 71 % $ 675.8 71 % International 90.8 27 % 81.2 25 % 278.5 29 % 274.8 29 % Total Revenue $ 336.1 100 % $ 318.6 100 % $ 975.8 100 % $ 950.6 100 % 31 Table of Contents The following table sets forth, for the periods indicated, total revenue by product line as a percentage of total revenue: Three months ended September 30, Nine months ended September 30, Product line 2021 2020 2021 2020 Infusion Consumables 43 % 36 % 42 % 37 % Infusion Systems 27 % 28 % 27 % 28 % IV Solutions 27 % 32 % 28 % 31 % Critical Care 3 % 4 % 3 % 4 % 100 % 100 % 100 % 100 % We manage our product distribution in the U.S. through a network of two owned and one leased distribution facilities in combination with independent distributors and third-party fulfillment and logistics providers. Our end customers, which include healthcare providers and original equipment manufacturer suppliers, may order and receive our products directly from us or through an independent full-line distributor. Internationally, we manage distribution utilizing international regional hubs and through independent distributors. In the U.S. a substantial amount of our products are sold to group purchasing organization member hospitals. We believe that as healthcare providers continue to either consolidate or join major buying organizations, the success of our products will depend, in part, on our ability, either independently or through strategic relationships to secure long-term contracts with large healthcare providers and major buying organizations. Although we believe that we are not dependent on any single distributor, large healthcare provider or major buying organization for distribution of our products, the loss of a strategic relationship with any one of these organizations or a decline in the demand for our products could have a material adverse effect on our operating results. We believe that achievement of our growth objectives worldwide will require increased efforts by us in sales and marketing and product acquisition and development; however, there is no assurance that we will be successful in implementing our growth strategy. Product development or acquisition efforts may not succeed, and even if we do develop or acquire additional products, there is no assurance that we will achieve profitable sales of such products. Increased expenditures for sales and marketing and product acquisition and development may not yield desired results when expected, or at all. While we have taken steps to control these risks, there are certain risks that may be outside of our control, and there is no assurance that steps we have taken will succeed. Seasonality/Quarterly Results There are no significant seasonal aspects to our business. We may experience fluctuations in net sales as a result of variations in the ordering patterns of our largest customers, which may be driven more by production scheduling and their inventory levels, rather than by seasonality. Our expenses often do not fluctuate in the same manner as net sales, which may cause fluctuations in operating income that are disproportionate to fluctuations in our revenue. Consolidated Results of Operations We present income statement data in Part I, Item 1 - Financial Statements. The following table shows, for the three and nine months ended September 30, 2021 and 2020, the percentages of each income statement caption in relation to total revenue: 32 Table of Contents Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Total revenue 100 % 100 % 100 % 100 % Gross margin 38 % 36 % 37 % 36 % Selling, general and administrative expenses 22 % 22 % 23 % 22 % Research and development expenses 4 % 3 % 4 % 3 % Restructuring and strategic transaction 1 % 1 % 1 % 2 % Change in fair value of contingent earn-out — % 1 % — % 1 % Contract settlement — % — % — % — % Total operating expenses 27 % 27 % 28 % 28 % Income from operations 11 % 9 % 9 % 8 % Interest expense — % — % — % — % Other income (expense), net — % — % — % — % Income before income taxes 11 % 9 % 9 % 8 % Provision for income taxes (2) % — % (2) % (1) % Net income 9 % 9 % 7 % 7 % In addition to comparing changes in revenue on a U.S. GAAP basis, we also compare the changes in revenue from one period to another using constant currency. We provide constant currency information to enhance the visibility of underlying business trends, excluding the effects of changes in foreign currency translation rates. To calculate our constant currency results, we apply the average exchange rate for revenues from the prior year to the current year results. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with GAAP. Infusion Consumables The following table summarizes our total Infusion Consumables revenue (in millions): Three months ended September 30, Nine months ended September 30, 2021 2020 $ Change % Change 2021 2020 $ Change % Change Infusion Consumables $ 144.9 $ 116.1 $ 28.8 24.8 % $ 407.5 $ 350.6 $ 56.9 16.2 % Infusion Consumables revenue increased for the three and nine months ended September 30, 2021, as compared to the same periods in the prior year due to lower hospital census in 2020 driven by the onset of the COVID-19 pandemic, growth in our global oncology, U.S. core infusion and renal products and the impact from foreign exchange. For the three and nine months ended September 30, 2021, on a constant currency basis, Infusion Consumables revenue would have been $143.5 million and $398.0 million, respectively, an increase of $27.4 million or 23.6% and $47.4 million or 13.5%, respectively, as compared to the same periods in the prior year. Infusion Systems The following table summarizes our total Infusion Systems revenue (in millions): Three months ended September 30, Nine months ended September 30, 2021 2020 $ Change % Change 2021 2020 $ Change % Change Infusion Systems $ 90.7 $ 88.4 $ 2.3 2.6 % $ 259.7 $ 267.9 $ (8.2) (3.1) % 33 Table of Contents Infusion Systems revenue increased for the three months ended September 30, 2021, as compared to the same period in the prior year due to higher dedicated set sales as hospital census recovered from a low level in the third quarter of 2020 driven by the onset of the COVID-19 pandemic, partially offset by lower large volume pump sales during the third quarter of 2021 and a decline in our non-large volume pump business. Infusion Systems revenue decreased for the nine months ended September 30, 2021, as compared to the same period in the prior year due to large volume pump sales driven by higher COVID-19-related purchases during the second and third quarters of 2020 and a decline in our non-large volume pump business, which has been partially offset by higher dedicated set sales in 2021 as a result of higher hospital census. For the three months ended September 30, 2021, on a constant currency basis Infusion Systems revenue would have been $91.0 million, an increase of $2.6 million or 2.9% as compared to the same period in the prior year and for the nine months ended September 30, 2021 on a constant currency basis Infusion Systems revenue would have been $257.5 million, a decrease of $10.4 million or 3.9% as compared to the same period in the prior year. IV Solutions The following table summarizes our total IV Solutions revenue (in millions): Three months ended September 30, Nine months ended September 30, 2021 2020 $ Change % Change 2021 2020 $ Change % Change IV Solutions $ 89.2 $ 101.9 $ (12.7) (12.5) % $ 271.8 $ 295.4 $ (23.6) (8.0) % IV Solutions revenue decreased for the three and nine months ended September 30, 2021, as compared to the same periods in the prior year primarily due to lower contract manufacturing sales to Pfizer. Critical Care The following table summarizes our total Critical Care revenue (in millions): Three months ended September 30, Nine months ended September 30, 2021 2020 $ Change % Change 2021 2020 $ Change % Change Critical Care $ 11.3 $ 12.2 $ (0.9) (7.4) % $ 36.8 $ 36.7 $ 0.1 0.3 % Critical Care revenue slightly decreased for the three months ended September 30, 2021, as compared to the same period in the prior year and was essentially flat for the nine months ended September 30, 2021, as compared to the same period in the prior year. Gross Margins For the three and nine months ended September 30, 2021, gross margins were 38.0% and 37.3%, respectively, as compared to 35.8% and 35.9%, respectively, for the three and nine months ended September 30, 2020. The increase in gross margin for the three months ended September 30, 2021, as compared to the same period in the prior year was primarily due to product mix and increased plant volumes, offset by increased costs for raw materials, direct labor and freight. The increase in gross margin for the nine months ended September 30, 2021, as compared to the same period in the prior year was primarily due to product mix and increased plant volumes, offset by capitalized manufacturing variances from the shutdown of our Austin plant in the fourth quarter of 2020, additional weather-related costs at our Austin plant during the first quarter of 2021 and increased costs for raw materials, direct labor and freight. Selling, General and Administrative (“SG&A”) Expenses The following table summarizes our total SG&A Expenses (in millions): 34 Table of Contents Three months ended September 30, Nine months ended September 30, 2021 2020 $ Change % Change 2021 2020 $ Change % Change SG&A $ 74.8 $ 70.9 $ 3.9 5.5 % $ 221.1 $ 210.4 $ 10.7 5.1 % SG&A expenses increased for the three and nine months ended September 30, 2021, as compared to the same periods in the prior year. For the three months ended September 30, 2021 as compared to the same period in the prior year, the increases were primarily due to compensation expense which increased $3.4 million and commissions which increased $1.4 million. Offsetting these increases was a decrease of $2.6 million in bad debt expense. Compensation expense increased primarily due to increased headcount and annual compensation merit increases. Commissions increased due to an increase in revenue. Bad debt expense is adjusted quarterly, if deemed necessary, based on an assessment of our accounts receivables and our expectations regarding the collectability of those accounts. For the nine months ended September 30, 2021, as compared to the same period in the prior year, the increases were primarily due to compensation expense which increased $6.3 million, dealer fees which increased $2.9 million, and legal expenses which increased $2.0 million. Offsetting these increases was a $2.3 million decrease in bad debt expense. Compensation expense increased primarily due to increased headcount and annual compensation merit increases. Dealer fees increased due to an increase in revenue from U.S. distributors in the current year. Legal fees increased due to additional services performed in the current year related to various legal matters. Bad debt expense is adjusted quarterly, if deemed necessary, based on an assessment of our accounts receivables and our expectations regarding the collectability of those accounts. Research and Development (“R&D”) Expenses The following table summarizes our total R&D Expenses (in millions): Three months ended September 30, Nine months ended September 30, 2021 2020 $ Change % Change 2021 2020 $ Change % Change R&D $ 12.2 $ 10.1 $ 2.1 20.8 % $ 34.3 $ 31.2 $ 3.1 9.9 % R&D expenses increased for the three and nine months ended September 30, 2021, as compared to the same periods in the prior year, due to timing and nature of various R&D projects. R&D expenses during both periods primarily relates to compensation and related benefit expenses on current R&D projects. Restructuring and Strategic Transaction and Integration Expenses Restructuring and 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 charges During the third quarter we adjusted certain facility restructuring liabilities by $2.0 million to reflect actual amounts owed resulting in net restructuring credits of $(2.0) million and $(1.8) million for the three and nine months ended September 30, 2021, respectively. Restructuring charges for the three and nine months ended September 30, 2020 were $0.0 million and $8.1 million, respectively. Restructuring charges for the nine months ended September 30, 2020 were primarily related to severance charges and costs related to office and facility closures. Strategic transaction and integration expenses Strategic transaction and integration expenses were $4.3 million and $10.8 million for the three and nine months ended September 30, 2021, respectively, as compared to $4.1 million and $14.8 million for the three and nine months ended September 30, 2020, respectively. 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. 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- 35 Table of Contents 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. Change in Fair Value of Contingent Earn-out For the three and nine months ended September 30, 2021 there was no change in fair value of the Pursuit earn-out liability for each period. As of June 30, 2021, the Pursuit earn-out measurement period had ended and in October 2021 the $26.3 million earn-out was finalized and paid to Pursuit's former shareholders. For the three and nine months ended September 30, 2020, the fair value revaluation of our Pursuit earn-out liability resulted in an increase in value of $4.3 million and $7.0 million, respectively. Contract Settlement For the nine months ended September 30, 2021, we recorded $0.1 million in contract settlement expense. Interest Expense Interest expense was $0.2 million and $0.5 million for the three and nine months ended September 30, 2021, respectively, as compared to $0.6 million and $1.6 million for the three and nine months ended September 30, 2020, respectively. The three and nine months ended September 30, 2021 primarily includes interest expense related to the per annum commitment fee charged on the unused portion of the revolver under our Credit Facility and the amortization of financing costs that were incurred in 2017 in connection with entering into the Credit Facility. During March 2020, we borrowed $150.0 million under our Credit Facility and, accordingly the interest expense for the three and nine months ended September 30, 2020 also includes interest incurred on borrowings under the Credit Facility (see Note 16: Long-Term Obligations in our accompanying condensed consolidated financial statements for additional information). Other (Expense) Income, net Other (expense) income netted to ($0.3) million and $0.9 million for the three and nine months ended September 30, 2021, respectively, as compared to $1.3 million and ($2.2) million for the three and nine months ended September 30, 2020, respectively. For the three months ended September 30, 2021, the other expense, net was related to $0.9 million in foreign exchange losses and $0.3 million of loss from disposed assets offset by $0.7 million of interest income and $0.2 million of miscellaneous income. For the nine months ended September 30, 2021, the other income, net was related to $2.1 million of interest income and $0.5 million of miscellaneous income partially offset by $1.1 million of loss from disposed assets and $0.6 million in foreign exchange losses. For the three months ended September 30, 2020, the other income, net was related to $2.5 million in miscellaneous income and $0.8 million of interest income, partially offset by $1.4 million in foreign exchange losses and $0.6 million of loss from disposed assets. For the nine months ended September 30, 2020, the other expense, net was primarily related to $6.0 million in foreign exchange losses and $1.7 million of loss from disposed assets, partially offset by $2.5 million in miscellaneous income and $3.0 million in interest income. Income Taxes For the three and nine months ended September 30, 2021, income taxes were accrued at an estimated effective tax rate of 18% and 17%, 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. The effective tax rate during the three and nine months ended September 30, 2021 included the following: • 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. 36 Table of Contents 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 and tax credits. The effective tax rate during the three and nine months ended September 30, 2020 included a tax benefit of $0.1 million and $3.6 million, respectively, related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period. The effective tax rate for the three and nine months ended September 30, 2020 also included U.S. federal and state return-to-provision adjustments net of related reserve changes for the year ended December 31, 2019 of $3.8 million tax benefit primarily due to changes in estimates for GILTI, FDII, and related foreign tax credits. Liquidity and Capital Resources During the first nine months of 2021, our cash, cash equivalents and short and long-term investments increased by $120.9 million from $423.8 million at December 31, 2020 to $544.7 million at September 30, 2021. Cash Flows from Operating Activities Our net cash provided by operations for the nine months ended September 30, 2021 was $184.9 million. Net income plus adjustments for non-cash net expenses contributed $195.2 million. Net cash used in operations as a result of changes in operating assets and liabilities was $10.3 million. The changes in operating assets and liabilities included a $13.6 million increase in other assets, a $10.4 million decrease in accounts payable, a $8.3 million decrease in accrued liabilities and $1.9 million in net changes in income taxes, including excess tax benefits and deferred income taxes. Offsetting these amounts was a $16.5 million decrease in inventories, a $3.8 million decrease in accounts receivables and a $3.6 million decrease in prepaid expenses and other assets. The increase in other assets was due to the purchase of spare parts. The decrease in accounts payable was due to the timing of payments. The decrease in accrued liabilities was primarily due to the payment of operating lease liabilities and annual bonuses. The net changes in income taxes was a result of the timing of payments. The decrease in inventory was primarily due to the timing of production and customer purchases combined with the reduction in capitalized manufacturing variances. The decrease in accounts receivable is primarily due to collection efforts. The net decrease in prepaid expenses and other current assets was primarily due to a decrease in prepaid insurance and property taxes, decreased sales tax receivables and a decrease in deferred costs, offset partially by an increase in annual software and service contract renewals. Our net cash provided by operations for the nine months ended September 30, 2020 was $144.2 million. Net income plus adjustments for non-cash net expenses contributed $174.3 million. Net cash used in operations as a result of changes in operating assets and liabilities was $30.1 million. The changes in operating assets and liabilities included a $38.0 million decrease in accounts payable, a $20.4 million decrease in accrued liabilities, a $12.1 million increase in other assets, a $6.5 million increase in prepaid expenses, and $0.7 million in net changes in income taxes, including excess tax benefits and deferred income taxes. Offsetting these amounts was a $38.9 million decrease in accounts receivables and a $8.9 million decrease in inventories. The decrease in accounts payable was due to the timing of payments. The decrease in accrued liabilities was due to the payment of accrued supply chain reorganization costs. The increase in other assets was due to the purchase of spare parts. The increase in prepaid expenses and other current assets was primarily due to an increase in deferred costs. The net changes in income taxes was a result of the timing of payments. The decrease in inventory was primarily due to improved inventory management. The decrease in accounts receivable is primarily due to collection efforts. The net changes in income taxes was a result of the timing of payments. Cash Flows from Investing Activities The following table summarizes the changes in our investing cash flows (in thousands): 37 Table of Contents Nine months ended September 30, 2021 2020 Change Investing Cash Flows: Purchases of property and equipment $ (46,464) $ (62,362) $ 15,898 (1) Proceeds from sale of assets 218 154 64 Intangible asset additions (10,216) (6,325) (3,891) (2) Investments in non-marketable equity securities (3,250) — (3,250) (3) Purchases of investment securities (10,034) (9,603) (431) (4) Proceeds from sale of investment securities 12,000 20,900 (8,900) (5) Net cash used in investing activities $ (57,746) $ (57,236) $ (510) ______________________________ (1) Our purchases of property and equipment will vary from period to period based on additional investments needed to support new and existing products and expansion of our manufacturing facilities. (2) In September 2021, we recorded a $7.1 million intangible asset related to a three-year non-compete agreement, of which $3.1 million was non-cash offset with a contingent earn-out (see Note 8: Fair Value Measurements). (3) In September 2021, we paid $3.3 million to acquire approximately a 20% non-marketable equity interest in a non public company. (4) Our purchases of investment securities will vary from period to period based on current cash needs, planning for known future transactions and due to changes in our investment strategy. (5) Proceeds from the sale or maturity of our investment securities will vary from period to period based on the maturity dates of the investments we currently hold. While we can provide no assurances, we estimate that our capital expenditures in 2021 will be approximately $70.0 million to $75.0 million. We anticipate making additional investments in machinery and equipment in our manufacturing operations in the U.S., Costa Rica, and Mexico to support new and existing products and in infusion pumps that are placed with customers outside the U.S. We expect to use our cash and cash equivalents to fund our capital purchases. Amounts of spending are estimates and actual spending may substantially differ from those amounts. Cash Flows from Financing Activities The following table summarizes the changes in our financing cash flows (in thousands): Nine months ended September 30, 2021 2020 Change Financing Cash Flows: Proceeds from short-term debt $ — $ 150,000 $ (150,000) (1) Repayment of short-term debt — (150,000) 150,000 (1) Proceeds from exercise of stock options 6,966 8,586 (1,620) (2) Payments on finance leases (448) (231) (217) Tax withholding payments related to net share settlement of equity awards (8,109) (12,821) 4,712 (3) Net cash used in financing activities $ (1,591) $ (4,466) $ 2,875 ______________________________ (1) During March 2020, as a result of market uncertainty caused by COVID-19, we borrowed $150.0 million under our revolving Credit Facility. We fully repaid the amounts borrowed under our revolving Credit Facility in September 2020. (2) Proceeds from the exercise of stock options will vary from period to period based on the volume of options exercised and the exercise price of the specific options exercised. (3) During the nine months ended September 30, 2021, our employees surrendered 39,371 shares of our common stock from vested restricted stock awards as consideration for approximately $8.1 million in minimum statutory withholding 38 Table of Contents obligations paid on their behalf. During the nine months ended September 30, 2020, our employees surrendered 66,749 shares of our common stock from vested restricted stock awards as consideration for approximately $12.8 million in minimum statutory withholding obligations paid on their behalf. In August 2019, our Board of Directors approved a 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. As of September 30, 2021, all of the $100 million available for purchase was remaining under the plan. We have a substantial cash and investment security position generated from operations. We maintain this position to address any operational challenges related to COVID-19, fund our growth, meet increasing working capital requirements, fund capital expenditures and to take advantage of acquisition opportunities that may arise. Our primary investment goal is capital preservation. Definitive Agreement to Purchase Smiths Medical 2020 Limited As mentioned above, we entered into a definitive agreement to acquire Smiths Medical 2020 Limited. The purchase price includes the payment of $1.9 billion in cash, a potential contingent earn-out of $100.0 million and the issuance of 2.5 million fully paid and non-assessable shares of our common stock. During September 2021, we entered into a debt commitment letter pursuant to which we will be provided 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 $850.0 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. The proceeds from the new credit facilities will be used to partially finance the Smiths acquisition. We expect the new credit facilities to be available near or on the closing date of the Smiths acquisition. Access to Capital We believe that our existing cash and cash equivalents along with funds expected to be generated from future operations and the funds received under the Credit Facilities in connection with financing the Smiths acquisition will provide us with sufficient funds to finance our current operations for the next twelve months. In the event that we experience downturns, cyclical fluctuations in our business that are more severe or longer than anticipated, fail to achieve anticipated revenue and expense levels, or have significant unplanned cash expenditures, we may need to obtain or seek alternative sources of capital or financing, and we can provide no assurances that the terms of such capital or financing will be available to us on favorable terms, if at all. Our ability to generate cash flows from operations, issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers, deterioration in our key financial ratios or credit ratings or other significantly unfavorable changes in conditions. Credit Facility We have a five-year Credit Facility with various lenders for $150.0 million, with Wells Fargo Bank, N.A. as the administrative agent (see Note 16: Long-Term Obligations). The Credit Facility has an accordion feature that would enable us to increase the borrowing capacity of the Credit Facility by the greater of (i) $100.0 million and (ii) 2.00x Total Leverage. Under the terms of the Credit Facility, we will be subject to certain financial covenants pertaining to leverage and fixed charge coverage ratios. Borrowings under the Credit Facility will bear interest at LIBOR plus an applicable margin tied to the leverage ratio in effect. Any unused portion of the Credit Facility will be subject to a per annum commitment fee which is also calculated using the leverage ratio in effect. The Credit Facility matures in November 2022. During March 2020, as a precautionary measure in response to market uncertainty driven by the COVID-19 pandemic, we preemptively increased our liquidity by borrowing $150.0 million under our Credit Facility. In September 2020, we fully repaid the borrowings under our Credit Facility. Our current Credit Facility will be refinanced in full with the consummation of the Smiths acquisition. We expect to enter into a new credit facility 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). Financial Covenants 39 Table of Contents The Credit Facility contains certain negative financial covenants, including, Consolidated Total Leverage and Consolidated Fixed Charge Coverage Ratios. 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 September 30, 2021. 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 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. Contractual Obligations There have been no material changes to our contractual obligations disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 ("Annual Report"), except with respect to our purchase obligations in connection with the Smiths transaction. Pursuant to the Purchase Agreement, we expect to purchase the entire share capital of Smiths for $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. We expect to finance this acquisition with senior secured credit facilities of up to $2.2 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 $500.0 million. Critical Accounting Policies In our Annual Report, we identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements, there have been no material changes to our critical accounting policies from those previously disclosed in our Annual Report. New Accounting Pronouncements See Note 2 to Part I, Item 1. Financial Statements. 40 Forward Looking Statements Various portions of this Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and documents referenced herein, describe trends in our business and finances that we perceive and state some of our expectations and beliefs about our future. These statements about the future are “forward looking statements,” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and we may identify them by using words such as "anticipate," "believe," "expect," "estimate," "intend," "plan," "will," "continue," "could," "may," and by similar expressions and statements about aims, goals and plans. The forward looking statements are based on the best information currently available to us and assumptions that we believe are reasonable, but we do not intend the statements to be representations as to future results. They include, without limitation, statements about: • future growth; future operating results and various elements of operating results, including future expenditures and effects with respect to sales and marketing and product development and acquisition efforts; future sales and unit volumes of products; expected increases and decreases in sales; deferred revenue; accruals for restructuring charges, future license, royalty and revenue share income; production costs; gross margins; litigation expense; future SG&A and R&D expenses; manufacturing expenses; future costs of expanding our business; income; losses; cash flow; amortization; source of funds for capital purchases and operations; future tax rates; alternative sources of capital or financing; changes in working capital items such as receivables and inventory; selling prices; and income taxes; • factors affecting operating results, such as shipments to specific customers; reduced dependence on current proprietary products; loss of a strategic relationship; change in demand; domestic and international sales; expansion in international markets, selling prices; future increases or decreases in sales of certain products and in certain markets and distribution channels; maintaining strategic relationships and securing long-term and multi-product contracts with large healthcare providers and major buying organizations; increases in systems capabilities; introduction, development and sales of new products, acquisition and integration of businesses and product lines (including the Smiths business); benefits of our products over competing systems; qualification of our new products for the expedited Section 510(k) clearance procedure; possibility of lengthier clearance process for new products; planned increases in marketing; warranty claims; rebates; product returns; bad debt expense; amortization expense; inventory requirements; lives of property and equipment; manufacturing efficiencies and cost savings; unit manufacturing costs; establishment or expansion of production facilities inside or outside of the United States; planned new orders for semi-automated or fully automated assembly machines for new products; adequacy of production capacity; results of R&D; our plans to repurchase shares of our common stock; asset impairment losses; relocation of manufacturing facilities and personnel; effect of expansion of manufacturing facilities on production efficiencies and resolution of production inefficiencies; the effect of costs to customers and delivery times; business seasonality and fluctuations in quarterly results; customer ordering patterns and the effects of new accounting pronouncements; and • new or extended contracts with manufacturers and buying organizations; dependence on a small number of customers; loss of larger distributors and the ability to locate other distributors; impact of our pending acquisition of the Smiths business; growth of our Clave products in future years; design features of Clave products; the outcome of our strategic initiatives; regulatory approvals and compliance; outcome of litigation; patent protection and intellectual property landscape; patent infringement claims and the impact of newly issued patents on other medical devices; competitive and market factors, including continuing development of competing products by other manufacturers; improved production processes and higher volume production; innovation requirements; consolidation of the healthcare provider market and downward pressure on selling prices; distribution or financial capabilities of competitors; healthcare reform legislation; use of treasury stock; working capital requirements; liquidity and realizable value of our investment securities; future investment alternatives; foreign currency denominated financial instruments; foreign exchange risk; commodity price risk; our expectations regarding liquidity and capital resources over the next twelve months; capital expenditures; plans to convert existing space; acquisitions of other businesses or product lines, indemnification liabilities and contractual liabilities. Forward-looking statements involve certain risks and uncertainties, which may cause actual results to differ materially from those discussed in each such statement. First, one should consider the factors and risks described in the statements themselves or otherwise discussed herein. Those factors are uncertain, and if one or more of them turn out differently than we currently expect, our operating results may differ materially from our current expectations. 41 Second, investors should read the forward looking statements in conjunction with the Risk Factors discussed in Part I, Item 1A of our Annual Report on Form 10-K with the SEC for the year ended December 31, 2020, Part II, Item 1A of this Quarterly Report on Form 10-Q and our other reports filed with the SEC. Also, actual future operating results are subject to other important factors and risks that we cannot predict or control, including without limitation, the following: • the impacts of the COVID-19 pandemic on us, our business and on domestic and global economies generally; • general economic and business conditions, both in the U.S. and internationally; • unexpected changes in our arrangements with Pfizer or our other large customers; • outcome of litigation; • fluctuations in foreign exchange rates and other risks of doing business internationally; • increases in labor costs or competition for skilled workers; • increases in costs or availability of the raw materials need to manufacture our products; • the effect of price and safety considerations on the healthcare industry; • competitive factors, such as product innovation, new technologies, marketing and distribution strength and price erosion; • the successful development and marketing of new products; • unanticipated market shifts and trends; • the impact of legislation affecting government reimbursement of healthcare costs; • changes by our major customers and independent distributors in their strategies that might affect their efforts to market our products; • the effects of additional governmental regulations; • unanticipated production problems; • acquisition and integration expenses (including as it relates to the Smiths acquisition); • the availability of patent protection and the cost of enforcing and of defending patent claims; and • natural disasters and outbreak of disease or illness. The forward-looking statements in this report are subject to additional risks and uncertainties, including those detailed from time to time in our other filings with the Securities and Exchange Commission. These forward-looking statements are made only as of the date hereof and, except as required by law, we undertake no obligation to update or revise any of them, whether as a result of new information, future events or otherwise. 42 Table of Contents