What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-25 compared with 2021-02-26 · 201 added, 177 removed, 367 unchanged (51% of the section changed)

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In addition, we manufacture automated pharmacy IV compounding systems with workflow technology, closed system transfer devices for preparing and administering hazardous IV drugs and cardiac monitoring systems for critically ill patients.

COVID-19 Pandemic

As a result of the COVID-19 pandemic, our non-essential offices and facilities, including our corporate headquarters are closed to non-essential employees.

Our manufacturing, distribution, and pump service facilities are operating under our business continuity plan due to the need for our critical healthcare products, however, we have taken certain precautionary measures including the following to maximize the safety of our employees and to mitigate disruption to our operations:

• implemented physical distancing measures;

• enhanced hygiene protocols and increased frequency of cleaning procedures;

• acquired additional personal protective equipment;

• developed contingency plans and protocols to assess employee illness;

• helped employees with childcare issues due to school and daycare closures;

• implemented COVID-19 temperature screening for employees entering our manufacturing and distribution facilities;

• initiated a visitor pre-entry questionnaire to limit potential exposure in our facilities.

During the first quarter in 2020, as a precautionary measure in response to market uncertainty driven by COVID-19, we preemptively increased our liquidity by borrowing $150.0 million under our Senior Secured Revolving Credit Facility ("Credit Facility").

As 2020 progressed, financial institutions demonstrated adequate liquidity in meeting the funding needs of the market and our internal operations remained stable, as such, we fully repaid the $150.0 million borrowed under our Credit Facility during the third quarter.

During 2020, due to the COVID-19 pandemic, we saw a meaningful decline in demand for our Infusion Consumables non-dedicated sets, a decline in demand for our Infusion Systems dedicated sets and an increase in demand for our Infusion Systems hardware.

During 2020, most notably in the first quarter, we also experienced foreign exchange losses related to the strengthening of the U.S.

dollar relative to certain foreign currencies as general economic conditions declined in response to COVID-19.

The effect of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance 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 future results of operations

and overall financial performance remain uncertain and cannot as yet be quantified.

However, our future results could be impacted by the following:

• lost revenue or additional costs associated with either disruptions at our production and distribution facilities or interruptions in our supply chain;

• fluctuations in demand from customers as a result of an increase in COVID-19 patient admissions in hospitals offset by the decline in non-COVID-19 patient admissions;

• healthcare customers that defer the more profitable elective procedures may experience financial difficulties and may be unable to pay within payment terms for the products they purchased;

• potential lower demand in future periods due to over-purchasing of our products due to the COVID-19 pandemic;

• reduced revenue due to delays in implementation of our infusion systems and oncology products at hospital locations due to restricted access;

• higher operating costs related to additional compensation paid to our manufacturing and distribution facility workers;

• volatility in cash flow, revenue and income due to foreign currency fluctuations and volatility;

• lower travel and entertainment costs due to global travel restrictions;

• lower income due to a delay in cost savings projects as a result of the travel and social distancing requirements of COVID-19;

• lower interest income on cash balances due to reductions in interest rates along with higher interest expense from borrowings under our $150.0 million Credit Facility, if necessary, to maintain adequate liquidity.

Acquisition of Smiths Medical 2020 Limited

During September 2021, we entered into a definitive agreement to acquire Smiths Medical 2020 Limited ("Smiths Medical"), the holding company of Smiths Group plc's global medical device business and, on January 6, 2022, the acquisition closed for a purchase price of $1.9 billion in cash, 2.5 million of fully paid and non-assessable shares of our common stock, par value $0.10 per share and a potential contingent earn-out payment of $100.0 million in cash, based on our common stock performance and other considerations.

Results of operations of acquired companies are included in our consolidated financial results from the date of acquisition;

accordingly, Smiths Medical will be consolidated beginning in the first quarter of 2022.

To partially finance the acquisition, on January 6, 2022 we entered into a credit agreement with Wells Fargo Bank, National Association and other lenders.

The credit agreement provides for $2.2 billion of Senior Secured Credit Facilities, including a term loan A facility of $850.0 million, a term loan B facility of $850.0 million and a revolving credit facility of $500.0 million.

See "Liquidity and Capital Resources" in the remainder of this item and Note 17 in our accompanying consolidated financial statements for additional information.

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 to mitigate disruption to our business remain in effect.

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.

Risk Factors” for discussion of the risks and uncertainties associated with the COVID-19 pandemic.

Consolidated Results of Operations

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100 % 100 % 100 %

We manage our product distribution in the U.S.

through a network of two owned and one leased distribution facilities, as well as, through direct channels, which include independent distributors and the end users of our products, and as original equipment manufacturer suppliers.

Most of our independent distributors handle the full line of our products.

As of December 31, 2021, 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.

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There are no significant seasonal aspects to our business.

We can 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, and less by seasonality.

We can experience fluctuations in net sales as a result of variations in the ordering patterns of our largest customers, which may be driven more by COVID-19 pandemic surges and its impact on hospital admissions and procedure volumes along with production scheduling and customer inventory levels, and less 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.

We present summarized income statement data in Item 6.

Selected Financial Data.

We present income statement data in Item 8.

Financial Statements and Supplementary Data.

The following table shows, for the three most recent years, the percentages of each income statement caption in relation to total revenues:

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Gross profit 37 % 36 % 37 %

Selling, general and administrative 22 % 22 % 23 %

Research and development 3 % 4 % 4 %

Restructuring, strategic transaction and integration 2 % 6 % 8 %

Selling, general and administrative expenses 23 % 22 % 22 %

Research and development expenses 4 % 3 % 4 %

Restructuring, strategic transaction and integration expenses 1 % 2 % 6 %

Change in fair value of contingent earn-out — % 1 % (4) %

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Interest expense — % — % — %

Other income (expense), net — % 1 % — %

Other income, net — % — % 1 %

Income before income taxes 9 % 8 % 10 %

Provision (benefit) for income taxes 1 % 1 % — %

Provision for income taxes 1 % 1 % 1 %

Net income 8 % 7 % 9 %

Total revenues for 2020, 2019 and 2018 were $1.3 billion, $1.3 billion and $1.4 billion, respectively.

Total revenues were $1.3 billion, $1.3 billion and $1.3 billion for 2021, 2020 and 2019, respectively.

In addition to comparing changes in revenue on a U.S.

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Infusion Consumables $ 555.2 $ 473.7 $ 477.6 $ 81.5 17.2 % $ (3.9) (0.8) %

Infusion Consumables revenue increased in 2021, as compared to 2020.

The increase was 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.

On a constant currency basis, Infusion Consumables revenue would have been $546.3 million, an increase of $72.6 million or 15.3%, as compared to 2020.

Infusion Consumables revenue decreased in 2020, as compared to 2019.

The decrease was mostly driven by overall lower demand for our products due to the COVID-19 pandemic, partially offset by sales from new customers and sales of our ClearGuard HD product, which we acquired in our fourth quarter 2019 acquisition of Pursuit.

On a constant currency basis,

Infusion Consumables revenue was comparable at $474.0 million for 2020, as the full year impact of foreign currency was negligible.

Infusion Consumables revenue decreased in 2019, as compared to 2018.

The decrease was mostly driven by foreign exchange rates.

On a constant currency basis, Infusion Consumables revenue would have been $485.8 million for 2019, an increase of $2.8 million or 0.6%, as compared to 2018.

On a constant currency basis, Infusion Consumables revenue was comparable at $474.0 million for 2020, as the full year impact of foreign currency was negligible.

Infusion Systems

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Infusion Systems $ 352.3 $ 359.7 $ 328.3 $ (7.4) (2.1)% $ 31.4 9.6%

Infusion Systems revenue decreased in 2021, as compared to 2020.

The decrease was primarily 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 sales of 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 and larger install base of large volume pump from new customer installations.

On a constant currency basis, Infusion Systems revenue in 2021 would have been $351.4 million, a decrease of $8.3 million or 2.3%, as compared to 2020.

Infusion Systems revenue increased in 2020, as compared to 2019.

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On a constant currency basis Infusion Systems revenue in 2020 would have been $364.7 million, an increase of $36.4 million or 11.1%, as compared to 2019.

Infusion Systems revenue decreased in 2019, as compared to 2018.

The decrease in revenue was primarily due to the impact of exchange rates and losses of our non-core ambulatory and patient controlled analgesia pumps business.

On a constant currency basis Infusion Systems revenue in 2019 would have been $338.6 million, a decrease of $16.9 million or 4.8%, as compared to 2018.

The following table summarizes our total IV Solutions revenue (in millions, except percentages):

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IV Solutions $ 359.5 $ 389.0 $ 415.0 $ (29.5) (7.6)% $ (26.0) (6.3)%

IV Solutions sales decreased in 2021, as compared to 2020, primarily due to lower contract manufacturing sales to Pfizer and lower production volumes due to supply constraints in the market.

IV Solutions sales decreased in 2020, as compared to 2019, due to lower contract manufacturing sales to Pfizer and higher sales in the first quarter of 2019 to non-contracted customers.

IV Solutions sales decreased in 2019, as compared to 2018.

Supply constraints at our competitors beginning in the second quarter of 2017 and continuing through 2018 caused some temporary customer purchases and stock-up of IV Solutions in 2018.

These market shortages temporarily drove up the demand for our product during the latter part of 2017, in 2018 and during the first part of 2019.

The temporary increase in IV Solutions sales that we had as a result of competitor supply constraints normalized in mid-2019 as customers returned to their original contract supplier.

Critical Care

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Critical Care $ 49.3 $ 48.6 $ 45.3 $ 0.7 1.4 % $ 3.3 7.3 %

Critical Care revenue increased for 2021, as compared to 2020 due primarily to higher U.S.

hospital census as a result of the COVID-19 pandemic.

Critical Care revenue increased in 2020, as compared to 2019, primarily as a result of growth in the Asia region and improved manufacturing capacity.

Critical Care revenue decreased in 2019, as compared to 2018, primarily due to manufacturing constraints.

Gross Profits

Gross profits for 2020, 2019 and 2018 were 36.3%, 37.3%, and 40.7%, respectively.

The decrease in gross profit in 2020, as compared to 2019 was primarily due to lower IV Solutions manufacturing volumes and unfavorable product mix as a result of lower demand for our consumables products during the COVID-19 pandemic.

The decrease in gross profit in 2019, as compared to 2018 was primarily due to the slowdown in manufacturing of IV Solutions and additional supply chain costs related to higher than optimal inventory levels.

In 2019, we also recorded a one-time supply chain inventory optimization charge of $16.3 million for the initial ramp down of IV Solution production to align supply to market demand.

Gross Margins

Gross margins were 37.3%, 36.3% and 37.3% for 2021, 2020 and 2019, respectively.

The increase in gross margin in 2021, as compared to 2020 was primarily due to product mix and increased plant volumes, partially offset by increased costs for raw materials, direct labor and freight.

The decrease in gross margin in 2020, as compared to 2019 was primarily due to lower IV Solutions manufacturing volumes and unfavorable product mix as a result of lower demand for our consumables products during the COVID-19 pandemic.

Selling, General and Administrative ("SG&A") Expenses

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Consolidated SG&A expenses increased in 2021, as compared to 2020.

Compensation expense increased $7.9 million, dealer fees increased $5.7 million, stock compensation increased $2.9 million, legal expenses increased $2.3 million and computer expenses increased $1.5 million.

Offsetting these increases was a $2.3 million decrease in bad debt expense and $1.6 million decrease in commissions.

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.

Stock compensation increased due to a change during the current year in the number of performance shares expected to vest.

Legal fees increased due to additional services performed in the current year related to various legal matters.

Computer expenses increased due to increased maintenance costs as well as increased hardware, software and software subscriptions based on operational needs.

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.

Commissions decreased due to the commission plan structure in the prior year, which included certain guaranteed payments.

Consolidated SG&A expenses increased in 2020, as compared to 2019.

Dealer fees increased $9.3 million, depreciation and amortization expense increased $7.1 million, compensation expense increased $5.5 million, and stock compensation increased $2.0 million.

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Sales and marketing expenses decreased due to the impact of COVID-19 on trade shows, conferences, and related expenses.

Consolidated SG&A expenses decreased in 2019, as compared to 2018.

Consulting expenses decreased $33.9 million, compensation expense decreased $17.9 million, legal expense decreased $3.8 million, marketing expenses decreased $3.4 million, information technology decreased $3.3 million, stock based compensation decreased $3.2 million and travel expenses decreased $2.8 million.

Partially offsetting these decreases was a $10.6 million increase in depreciation and amortization and a $7.9 million increase in bad debt and warranty expense.

Consulting expenses decreased as our transitional services agreement with Pfizer ended in the fourth quarter of 2018.

Compensation expense decreased in the current period as incentive bonuses were higher in the prior year due to company performance.

Legal expenses were higher in the prior year due to expenses incurred related to the contract settlement, discussed below.

Marketing expenses decreased in the current period as the prior period included additional expenses related to post-acquisition branding efforts.

Information technology expenses decreased as software maintenance costs decreased in the current period.

Stock based compensation decreased due to an adjustment for changes in the number of performance shares estimated to vest.

Depreciation expense increased due to an increase in the depreciable asset base related to the HIS integration.

Bad debt expense increased as a result of the quarterly assessment of our reserves related to our accounts receivable.

Research and Development ("R&D") Expenses

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R&D $ 47.5 $ 42.9 $ 48.6 $ 4.6 10.7 % $ (5.7) (11.7) %

R&D expenses decreased in 2020, as compared to 2019, and decreased in 2019, as compared to 2018.

R&D expenses are primarily related to compensation and benefit expenses incurred on our R&D projects in progress during each year.

R&D expenses increased in 2021, as compared to 2020, and decreased in 2020, as compared to 2019.

Fluctuations in our R&D expenses are due to the timing and nature of various R&D projects.

R&D expenses are primarily related to compensation and benefit expenses, consulting fees, production supplies, samples, travel costs, utilities and other miscellaneous administrative costs incurred on our R&D projects in progress during each year.

Restructuring, Strategic Transaction and Integration Expenses

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Restructuring Charges

In 2021, we adjusted certain facility restructuring liabilities by $2.0 million to reflect actual amounts owed resulting in annual net restructuring credits of $(1.8) million.

In 2020, restructuring charges were $7.9 million.

These charges were primarily related to severance and costs related to office and other facility closures.

We expect to pay unpaid restructuring charges as of December 31, 2020, in 2021.

In 2019, restructuring charges were $8.4 million.

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pump service depot to our existing Salt Lake City facility and other plant restructuring.

In 2018, restructuring charges were $4.5 million.

These charges were related to severance costs from the reduction in our workforce as a result of the continued integration of HIS.

Strategic Transaction and Integration Expenses

In 2021, we incurred $19.8 million in strategic transaction and integration expenses 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 transaction expenses incurred in connection with entering into the definitive agreement to acquire Smiths Medical.

In 2020, we incurred $20.5 million in strategic transaction and integration expenses primarily related to the integration of HIS, which included the migration of IT systems at our Austin facility.

In 2019, we incurred $72.2 million in strategic transaction and integration expenses primarily related to the integration of the HIS business.

Integration expenses included a one-time strategic supply chain restructuring charge of $22.1 million, which reduces our contracted commitments to our third party manufacturer and we incurred charges related to our final Pfizer separation costs and clean-up, which included a $12.7 million non-cash write-off of related assets.

In 2018, we incurred $100.9 million in strategic transaction and integration expenses primarily related to our continued integration of the HIS business and IT systems.

Integration expenses included a one-time strategic supply chain restructuring charge of $22.1 million, which reduced our contracted commitments to our third party manufacturer and we incurred charges related to our final Pfizer separation costs and clean-up, which included a $12.7 million non-cash write-off of related assets.

Change in fair value of contingent earn-out

At the end of the second quarter of 2021, the measurement period related to the Pursuit earn-out liability ended and in October 2021 the $26.3 million earn-out was finalized and paid to Pursuit's former shareholders.

There were no changes in the fair value of our earn-outs during 2021.

In 2020, the fair value revaluation of our Pursuit contingent earn-out liability resulted in an increase in value of $9.0 million.

In 2019, the fair value revaluation of our HIS contingent earn-out liability resulted in a change in value of $47.4 million reducing the liability balance to zero.

The earn-out period ended on December 31, 2019.

As of the date of this filing, Pfizer has disputed our determination that the performance targets requiring payout of the HIS earn-out liability were not met.

We expect the dispute will be resolved by binding arbitration unless both parties are able to come to an agreement on this issue.

In 2018, the fair value revaluation of our HIS contingent earn-out liability resulted in a change in fair value of $20.4 million.

The earn-out period ended on December 31, 2019 and as of that date 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, and 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.

Contract Settlement

In 2021, we recorded $0.1 million in contract settlement expense.

In 2020, we recorded $1.0 million in contract settlement income related to the resolution of a dispute with one of our suppliers.

In 2019 and 2018, we incurred a $5.7 million and $41.6 million charge, respectively, related to the resolution of a dispute with a product partner, which resulted in a redefinition of our contractual arrangement and in the rights and remedies determined under such arrangement.

In 2019, we incurred a $5.7 million charge related to the resolution of a dispute with a product partner, which resulted in a redefinition of our contractual arrangement and in the rights and remedies determined under such arrangement.

Interest Expense

Interest expense was $0.9 million, $1.8 million and $0.5 million in 2021, 2020 and 2019, respectively.

In 2020, interest expense was primarily related to borrowings under our five-year Revolving Credit Facility ("Credit Facility") and the amortization of financing costs that were incurred in 2017 in connection with entering into the Credit Facility.

In 2019 and 2018, the interest expense includes the amortization of financing costs and a per annum commitment fee charged on the unused portion of the revolver under such Credit Facility.

Borrowing under the Credit Facility bears interest, at our option, based on the Base Rate (as defined in Note 11 in our accompanying consolidated financial statements) plus applicable margin or the London Interbank Offered Rate plus applicable margin.

The per annum commitment fee is based on consolidated total leverage ratio in effect and can range between 0.15% to 0.30% on the unused portion of the Credit Facility (see Note 11, Long-Term Obligations in our accompanying consolidated financial statements for additional information).

Other Income (Expense), net

Other income (expense), net was $1.1 million, $7.9 million and $(6.7) million in 2020, 2019 and 2018, respectively.

In 2020, the other income, net was primarily related to interest income of $3.7 million, miscellaneous income, net of $2.8 million and gain from the disposal of property, plant and equipment of $1.8 million, which was mostly offset by $7.2 million in foreign exchange losses incurred as a result of the strengthening of the U.S.

In 2021 and 2019, interest expense primarily includes the per annum commitment fee charged on the unused portion of the revolver under our five-year Revolving Credit Facility ("Credit Facility") and the amortization of financing costs that were incurred in 2017 in connection with entering into the Credit Facility.

The per annum commitment fee was based on the consolidated total leverage ratio in effect and ranged between 0.15% to 0.30% on the unused portion of the Credit Facility (see Note 11:

Long-Term Obligations in our accompanying consolidated financial statements for additional information).

In 2020, interest expense was primarily related to borrowings under our Credit Facility and the amortization of financing costs.

Borrowing under the Credit Facility bore interest, at our option, based on the Base Rate (as defined in Note 11 in our accompanying consolidated financial statements) plus applicable margin or the London Interbank Offered Rate plus applicable margin (see Note 11:

Long-Term Obligations in our accompanying consolidated financial statements for additional information).

In January 2022, we entered into senior secured credit facilities that refinanced our existing Credit Facility in full, see "Liquidity and Capital Resources" in the remainder of this item for additional information and the estimated impact to future interest expense.

Other Income, net

Other income, net was $0.8 million, $1.1 million and $7.9 million in 2021, 2020 and 2019, respectively.

In 2021, other income, net was primarily related to $2.8 million of interest income and $0.7 million of miscellaneous income partially offset by $1.7 million of loss from disposed assets and $1.0 million in foreign exchange losses.

In 2020, other income, net was primarily related to interest income of $3.7 million, miscellaneous income, net of $2.8 million and gain from the disposal of property, plant and equipment of $1.8 million, which was mostly offset by $7.2 million in foreign exchange losses incurred as a result of the strengthening of the U.S.

dollar from the impact of COVID-19 during the first half of the year.

In 2019, other income, net was primarily due to interest income of $6.8 million related to our banking and investment accounts.

In 2018, other expense, net included $8.1 million of foreign exchange losses and a $3.9 million loss on disposal of or write-off of property, plant and equipment offset by $5.4 million of interest income.

Income taxes were accrued at an estimated annual effective tax rate of 16%, 11% and 12% in 2021, 2020 and 2019, respectively.

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The effective tax rate for 2021 also included U.S.

federal and state return-to-provision adjustments net of related reserve changes for the year ended December 31, 2020 of $0.9 million tax provision primarily due to changes in estimates for GILTI, FDII, subpart F, and related foreign tax credits along with other prior period adjustments.

The effective tax rate in 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, global intangible low-taxed income ("GILTI"), foreign-derived intangible income ("FDII") and tax credits.

The effective tax rate in 2020 included a tax benefit of $5.3 million 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 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.

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GILTI inclusion.

The effective tax rate in 2018 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 and tax credits.

The effective tax rate for 2018 included a tax benefit of $12.6 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period.

Liquidity and Capital Resources

Our primary sources of cash are cash flows from operating activities, proceeds from the exercise of employee options and borrowings under our Credit Facility (as defined above).

Our primary uses of cash are to meet working capital requirements, finance capital expenditures and acquisitions along with acquisition-related incremental transaction and integration costs.

During 2020, our cash, cash equivalents and short-term investment securities increased by $118.1 million from $292.6 million at December 31, 2019 to $410.8 million at December 31, 2020.

Our cash provided by operations was partially offset by purchases of property and equipment and cash taxes paid by us on behalf of employees related to net share settlement of their equity awards.

Future Cash Flows

Our five-year $150 million Credit Facility provides us with fast, flexible funding for future acquisition and operational needs.

Our short-term investment portfolio is invested in corporate bonds and our primary investment goal is capital preservation.

While we can provide no assurances, we estimate that our capital expenditures in 2021 will approximate $75 million to $85 million.

We anticipate making additional investments in machinery and equipment in our manufacturing operations in Costa Rica, the U.S.

and Mexico to support new and existing products and in infusion pumps that get 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.

We believe that our existing cash, cash equivalents along with funds expected to be generated from future operations will provide us with sufficient funds to finance our current operations for the next twelve months.

Our long-term liquidity needs include capital expenditures related to the expansion and maintenance of our business and potential acquisitions in accordance with our growth strategy.

We are unable to project with certainty whether our long-term cash flow from operations and amounts available to us under our Credit Facility will be sufficient to fund our future capital expenditures and acquisitions as they arise.

In the event that we experience illiquidity in our investment securities, downturns or cyclical fluctuations in our business that are more severe or longer than anticipated or if we fail to achieve anticipated revenue and expense levels, 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.

Credit Facility

On November 8, 2017, we entered into a five year revolving Credit Facility with various lenders which includes

$150 million in borrowing capacity available for revolving credit loans and may also be used to borrow, on same-day notice under a swingline, the lesser of $10 million and the aggregate unused amount of the revolving credit available.

During the first quarter in 2020, as a result of market uncertainty caused by COVID-19, we preemptively increased our liquidity as a precautionary measure by borrowing $150.0 million under our revolving Credit Facility.

As of December 31, 2020, we had $150 million of availability under the revolving Credit Facility.

We regularly evaluate our liquidity and capital resources, including our access to external capital, to ensure we can adequately meet our principal cash requirements, which include working capital requirements, planned capital investments in our business, commitments, acquisition restructuring and integration expenses, investments in quality systems and quality compliance objectives, repayment of outstanding borrowings, income tax obligations and acquisition opportunities in accordance with our growth strategy.

Sources of Liquidity

Our primary sources of liquidity are cash and cash equivalents, our short-term investment portfolio, cash flows from our operations and access to borrowing arrangements.

Funds generated from operations are held in cash and cash equivalents and investment securities.

During 2021, our cash and cash equivalents and short-term investment securities increased by $156.5 million from $410.8 million at December 31, 2020 to $567.2 million at December 31, 2021.

Our short-term investment portfolio consists of investment-grade corporate bonds and is primarily intended to facilitate capital preservation.

Credit Facilities and Access to Capital

On November 8, 2017, we entered into a five year revolving Credit Facility with various lenders which includes $150.0 million in borrowing capacity available for revolving credit loans and may also be used to borrow, on same-day notice under a swingline, the lesser of $10.0 million and the aggregate unused amount of the revolving credit available.

Our five-year $150.0 million Credit Facility provides us with fast, flexible funding for operational needs.

There were no outstanding borrowings under the Credit Facility at December 31, 2021.

All of our obligations under the Credit Facility are guaranteed by ICU Medical, Inc.

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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.

(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 December 31, 2020.

We entered into Senior Secured Credit Facilities in January 2022 which terminated our existing Credit Facility, see below.

2022 Senior Secured Credit Facilities

We entered into a credit agreement with various lenders dated January 6, 2022 in connection with the closing of the Smiths Medical acquisition.

The credit agreement provides for senior secured credit facilities, which include a five-year term loan A facility of $850.0 million, a seven-year term loan B facility of $850.0 million and a five-year revolving credit facility of $500.0 million.

The proceeds from the term loans were used to finance a portion of the cash consideration for the Smiths Medical acquisition (see Note 17:

Subsequent Events in our accompanying consolidated financial statements for additional information).

The outstanding aggregate principal amount of the term loans is $1.7 billion as of the issuance of this report, which includes the term loan A that will mature in January 2027 and the term loan B that will mature in January 2029.

The proceeds of future borrowings under the $500.0 million revolving credit facility, which expires in January 2027, may be used as a source of liquidity to support our ongoing working capital requirements and other general corporate purposes.

There are no outstanding borrowings under the $500.0 million revolving credit facility as of the issuance of this report.

Our existing $150.0 million Credit Facility, described above which was set to expire in November 2022, was terminated upon entering into the new Senior Secured Credit Facilities.

As part of entering into the Senior Secured Credit Facilities we were assigned issuer and term loan B facility credit ratings.

At the time of this report, our issuer and term loan B credit ratings assigned and outlook were as follows:

Issuer/Term Loan B

Credit Ratings Outlook

Moody's Ba3 Stable

Fitch BB/BBB- Stable

Standard & Poor's BB/BB Stable

We believe that our existing cash and cash equivalents along with cash flows expected to be generated from future operations and the funds received under the Senior Secured Credit Facilities will provide us with sufficient liquidity to finance our cash requirements 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.

Risk Factors” for discussion of the risks and uncertainties associated with our debt financing.

Uses of Liquidity

Capital Expenditures

Our capital expenditures relate to the expansion and maintenance of our business.

While we can provide no assurances, we estimate that our capital expenditures in 2022 will be in the range of $100 million to $120.0 million.

We anticipate making additional investments in machinery and equipment in our manufacturing operations in Costa Rica, Europe, Mexico and the U.S.

to support new and existing products and in infusion pumps that get 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.

2022 Acquisitions

In September 2021, we entered into a definitive agreement to acquire Smiths Medical and on January 6, 2022 the acquisition was completed.

We financed the $1.9 billion cash portion of the purchase price at closing with a combination of proceeds from the Senior Secured Credit Facilities and our cash and cash equivalents.

See above and Note 17:

Subsequent Events in our accompanying consolidated financial statements for additional information.

Contractual Obligations

Our principal commitments at December 31, 2021 include both short and long-term future obligations.

Operating Leases

We have non-cancelable operating lease agreements where we are contractually obligated for certain lease payment amounts.

For more information regarding our operating lease obligations, (see Note 5:

Leases in our accompanying consolidated financial statements).

Long-term Debt Obligations

As discussed above, in January 2022, we incurred borrowings under Senior Secured Credit Facilities.

The principal repayment obligations and estimated interest payments on the term loans and estimated commitment fee payments on the revolver are estimated in the below table.

Interest payments on the term loans were estimated using an Adjusted Term SOFR rate and a starting applicable margin on of 1.75% for term loan A and 2.50% for term loan B and the revolver commitment fees were estimated using the initial rate of 0.25%.

The applicable margin rate and commitment fee rate will change from time to time in accordance with a preset pricing grid based on the leverage ratio (see Note 17:

Subsequent Events in our accompanying consolidated financial statements for pricing grids related to the Senior Secured Credit Facilities).

We expect to fund these obligations with our existing cash and cash equivalents and cash generated from our future operations.

(in millions)

2022 2023 2024 2025 2026 Thereafter

Term Loan A Principal Payments $ 15.9 $ 21.3 $ 42.5 $ 42.5 $ 63.8 $ 664.1

Term Loan A Interest Payments 20.2 26.0 27.8 28.6 27.8 0.4

Term Loan B Principal Payments 6.4 8.5 8.5 8.5 8.5 809.6

Term Loan B Interest Payments 26.6 31.8 36.4 39.6 40.4 80.3

Revolver Commitment Fee 1.2 1.1 0.9 0.8 0.8 —

$ 70.3 $ 88.7 $ 116.1 $ 120.0 $ 141.3 $ 1,554.4

Minimum Purchase Obligations

On February 1, 2022, effective as of January 1, 2022, upon our request, Pfizer executed a Product Addendum to our MSA agreement, see under Part I Item 1 Business Section above for further detail.

The Product Addendum includes a minimum purchase obligation of $29.6 million.

The Product Addendum expires on November 30, 2022.

Other Future Capital Investments

In connection with the January 2022 acquisition of Smiths Medical we estimate the investment needed over the next three years for restructuring and integration expenses along with spending to support quality systems and quality compliance objectives to be in the range of $200.0 million to $300.0 million.

We expect to fund these obligations with our cash and cash equivalents and cash generated from our operations.

Indemnifications

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 liability for indemnification.

Historical Cash Flows

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Net income plus adjustments for non-cash net expenses contributed $252.5 million to cash provided by operations.

Net cash provided by operations as a result of changes in operating assets and liabilities was $15.0 million.

The changes in operating assets and liabilities included a $20.8 million decrease in inventories, a $13.8 million decrease in accounts receivable, a $6.3 million increase in accrued liabilities, a $2.3 million increase in accounts payable, and $0.9 million in net changes in income taxes, including excess tax benefits and deferred income taxes.

Offsetting these amounts was a $21.0 million increase in other assets and a $8.0 million increase in prepaid expenses and other current assets.

The decrease in inventory was primarily due to the timing of production and customer purchases.

The decrease in accounts receivable is primarily due to collection efforts.

The increase in accrued liabilities was primarily due to the accrual of incentive bonuses, deferred revenue collected on certain arrangements and accruals related to the Smiths Medical transaction.

The increase in accounts payable was primarily due to the timing of payments.

The net changes in income taxes was a result of the timing of payments.

The increase in other assets was primarily due to the purchase of spare parts.

The net increase in prepaid expenses and other current assets was primarily due to an increase in deferred costs.

Our cash provided by operations was $222.8 million in 2020.

Net income plus adjustments for non-cash net expenses contributed $239.7 million to cash provided by operations.

Net cash used in operations as a result of changes in operating assets and liabilities was $17.0 million.

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The increase in inventory was primarily due to an increase in our finished goods safety stock.

The increase in accounts receivable is mainly due to the current year reclassification of receivables from Pfizer and the timing of revenue and collections.

In the current year, receivables from Pfizer are included in accounts receivable and not in a separate related-party receivable line item as in the prior year.

The increase in accounts receivable was mainly due to the reclassification of receivables from Pfizer and the timing of revenue and collections.

Beginning in 2019, receivables from Pfizer were included in accounts receivable and not in a separate related-party receivable line item as in the prior year.

As of December 31, 2018, Pfizer had sold all of its shares of our common stock thereby ending its related-party relationship with us.

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The net changes in income taxes was a result of the timing of payments.

Our cash provided by operations was $160.2 million in 2018.

Net income plus adjustments for non-cash net expenses contributed $192.9 million to cash provided by operations.

Net cash provided by operations as a result of changes in operating assets and liabilities was $32.7 million.

The changes in operating assets and liabilities included a $76.7 million increase in accounts receivable, a $29.6 million decrease in accrued liabilities, a $21.8 million increase in inventories, a $20.0 million in net changes in income taxes, including excess tax benefits and deferred income taxes and a $9.1 million increase in other assets.

Offsetting these amounts was a $97.4 million decrease in related party receivables and a $23.3 million increase in accounts payable.

The increase in accounts receivable is due to the increase in revenue and timing of collections.

The decrease in accrued liabilities was primarily a result of the settlement of contract liabilities.

The increase in inventory was primarily due to efforts to build-up the inventory level of certain products.

The net changes in income taxes was a result of the timing of payments.

The increase in other assets was primarily due to the purchase of spare parts.

The decrease in related-party receivables was a result

of the transition services agreement with Pfizer nearing its end.

The increase in accounts payable was due to the timing of payments.

Cash Flows from Investing Activities

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Proceeds from sale of assets 218 6,176 33 (5,958) 6,143 (2)

Proceeds from the disposal of assets held-for-sale, net — — 13,000 — (13,000) (3)

Intangible asset additions (12,627) (8,385) (8,728) (4,242) 343 (3)

Business acquisitions, net of cash acquired (14,452) — (76,133) (14,452) 76,133 (4)

Investments in non-marketable equity securities (3,250) — — (3,250) — (5)

Purchases of investment securities (10,034) (32,825) (26,040) 22,791 (6,785) (6)

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distribution facility for $6.0 million.

(3) In 2018, we sold the land and building related to our Dominican Republic manufacturing facilities acquired as part of the 2017 HIS acquisition.

(3) In 2021, we recorded a $6.6 million intangible asset related to a three-year non-compete agreement with one of our international distributors, of which $2.6 million was non-cash offset with a contingent earn-out.

(4) Our business acquisitions will vary from period to period based upon our current growth strategy and our ability to execute on desirable target companies.

In 2021, we acquired a small foreign infusion systems supplier for approximately $15.4 million.

In 2019, we acquired Pursuit for approximately $75.0 million in cash consideration and we acquired a small foreign distributor for approximately $4.6 million.

(5) In 2021, we paid $3.3 million to acquire approximately a 20% non-marketable equity interest in a non public company.

(6) Our purchases of investment securities will vary from period to period based on current cash needs, planning for known future transactions and changes in our investment strategy.

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Payments on finance leases (607) (357) — (250) (357)

Payment of contingent earn-out (17,300) — — (17,300) — (3)

Tax withholding payments related to net share settlement of equity awards (8,335) (12,876) (18,639) 4,541 5,763 (4)

Net cash (used in) provided by financing activities $ (40) $ (10,907) $ 8,023 $ 10,867 $ (18,930)

Net cash used in financing activities $ (16,870) $ (40) $ (10,907) $ (16,830) $ 10,867

__________________________

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(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 2021, we paid $26.3 million in cash related to the settlement of the Pursuit contingent earn-out.

Of the $26.3 million, the amount recorded as the acquisition date fair value, which is considered financing cash flows, was $17.3 million (see Note 8:

Fair Value Measurements).

(4) In 2021, our employees surrendered 40,350 shares of our common stock from vested restricted stock awards as consideration for approximately $8.3 million in minimum statutory withholding obligations paid on their behalf.

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In 2019, our employees surrendered 80,186 shares of our common stock from vested restricted stock awards as consideration for approximately $18.6 million in minimum statutory withholding obligations paid on their behalf.

Our common stock purchase plan, which authorized the repurchase of up to $100.0 million of our common stock, was authorized by our Board of Directors and publicly announced in August 2019.

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

Our common stock purchase plan, which authorized the repurchase of up to $100.0 million of our common stock, was approved by our Board of Directors in August 2019.

This plan has no expiration date.

As of December 31, 2021, all of the $100.0 million available for purchase was remaining under the plan.

We are currently limited on share purchases in accordance with the terms and conditions of our Credit Facility (see Note 11 to the consolidated financial statements in Part II, Item 8 of this Form 10-K).

Effects of Inflation

We do not believe that inflation and changing prices had a significant impact on our results of operations for any periods presented herein.

We are limited on share purchases in accordance with the terms and conditions of our Credit Facility (see Note 11:

Long-Term Obligations in our accompanying consolidated financial statements).

New Accounting Pronouncements

See Note 1 to the consolidated financial statements in Part II, Item 8 of this Form 10-K.

Off Balance Sheet Arrangements

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 liability for indemnification.

Contractual Obligations

We have contractual obligations, at December 31, 2020, of approximately the amount set forth in the table below.

This amount excludes inventory-related purchase orders for goods and services for current delivery and other open orders for purchases that support normal operations.

The majority of our inventory purchase orders are blanket purchase orders that represent an estimated forecast of goods and services.

We do not have a firm commitment liability on the blanket purchase orders.

We have excluded from the table below pursuant to ASC 740-10-25 (formerly FIN 48), an interpretation of ASC 740-10 (formerly SFAS 109), a non-current income tax liability of $16.4 million due to the high degree of uncertainty regarding the timing of future cash outflows associated with the liabilities.

(in thousands)

Contractual Obligations Total 2021 2022 2023 2024 2025 Thereafter

Operating leases $ 58,274 $ 10,981 $ 9,956 $ 8,767 $ 8,279 $ 5,002 $ 15,289

Commitment fee on Credit Facility 423 228 195 — — — —

Warehouse service agreements 12,026 5,426 3,363 3,117 120 — —

$ 70,723 $ 16,635 $ 13,514 $ 11,884 $ 8,399 $ 5,002 $ 15,289

Basis of Presentation and Summary of Significant Accounting Policies to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Critical Accounting Policies and Estimates

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We evaluate our estimates, assumptions and judgments on a regular basis and apply our accounting policies on a consistent basis.

We believe that the estimates, assumptions and judgments involved in the accounting for revenue recognition, accounts receivable, inventories, property, plant and equipment and related depreciation, and business combinations have the most potential impact on our consolidated financial statements.

We believe that the estimates, assumptions and judgments involved in the accounting for revenue recognition, accounts receivable and business combinations have the most potential impact on our consolidated financial statements.

Historically, our estimates, assumptions and judgments relative to our critical accounting policies have not differed materially from actual results.

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If actual collection losses exceed expectations, we could be required to accrue additional bad debt expense, which could have an adverse effect on our operating results in the period in which the accrual occurs.

Inventories are stated at the lower of cost (first in, first out) or net realizable value.

We need to carry many components to accommodate our rapid product delivery, and if we overestimate demand or if customer requirements change, we may have components in inventory that we may not be able to use.

For finished products in inventory, we need to estimate what may not be saleable.

We regularly review inventory and reserve for slow moving items, and write off all items that we do not expect to use in manufacturing, and finished products that we do not expect to sell.

If actual usage of components or sales of finished goods inventory is less than our estimates, we could be required to write off additional inventory, which could have an adverse effect on our operating results in the period in which the write-off occurs.

If our excess and obsolete reserve changed by 1% our cost of goods sold and gross margin would be impacted by $0.4 million with no meaningful impact to our gross margin percentage.

Property, plant and equipment/depreciation

Property, plant and equipment is carried at cost and depreciated on the straight-line method over the estimated useful lives.

The estimates of useful lives are significant judgments in accounting for property, plant and equipment, particularly for molds and automated assembly machines that are custom made for us.

We may retire them on an accelerated basis if we replace them with larger or more technologically advanced tooling.

The remaining useful lives of all property, plant and equipment are reviewed regularly and lives are adjusted or assets written off based on current estimates of future use.

As part of that review, property, plant and equipment is reviewed for other indicators of impairment.

An unexpected shortening of useful lives of property, plant and equipment that significantly increases depreciation provisions, or other circumstances causing us to record an impairment loss on such assets, could have an adverse effect on our operating results in the period in which the related charges are recorded.

Business Combinations

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This method starts with a forecast of all of the expected future net cash flows associated with the asset and then adjusts the forecast to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams.

• Earn-out Liability - The fair value of the earn-out liabilities were valued using a Monte Carlo simulation (see Note 8 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for details).

• Earn-out Liability - The fair value of the earn-out liabilities were valued using a Monte Carlo simulation and a probability-weighted cash flow model, as appropriate (see Note 8:

Fair Value Measurements to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for details).

Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.

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increases in systems capabilities;

introduction, development and sales of new products, acquisition and integration of businesses and product lines, including the HIS business and Pursuit;

introduction, development and sales of new products, acquisition and integration of businesses and product lines (including the Smiths Medical business);

benefits of our products over competing systems;

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loss of larger distributors and the ability to locate other distributors;

the impact of our acquisition of the HIS business;

the impact of our acquisition of the Smiths Medical business;

growth of our Clave products in future years;

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• the impacts of the COVID-19 pandemic on us, our business and on domestic and global economies generally;

• the integration of Smiths Medical by the Company being more difficult, time-consuming or costly than expected;

• general economic and business conditions, both in the U.S.

and internationally;

• unexpected changes in our arrangements with our large customers;

• 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;

• increased competition for skilled workers;

• decreases in availability of the raw materials need to manufacture our products;

• the effect of price and safety considerations on the healthcare industry;

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• unanticipated production problems;

• acquisition and integration expenses (including as it relates to the Smiths Medical acquisition);

• the availability of patent protection and the cost of enforcing and of defending patent claims;

• natural disasters and outbreak of disease or illness;

• labor shortages;

• supply chain constraints or disruptions;

• impact of inflation on raw materials, freight charges and labor, especially in the U.S.;

• interest rate increases.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis