ICU MEDICAL INC/DE 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE Page No. Report of Independent Registered Public Accounting Firm 58 Consolidated Balance Sheets as of December 31, 2021 and 2020 60 Consolidated Statements of Operations for the Years Ended December 31, 2021, 2020 and 2019 61 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2021, 2020 and 2019 62 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2021, 2020 and 2019 63 Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019 64 Notes to Consolidated Financial Statements 66 Schedule II-Valuation and Qualifying Accounts 107 57 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of ICU Medical, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of ICU Medical, Inc. and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue Recognition – Chargeback Reserve — Refer to Notes 1 and 4 to the financial statements Critical Audit Matter Description The Company recognizes revenue for product sales net of a reserve for estimated chargebacks. Chargebacks are the difference between prices the Company charges distribution customers and contracted prices the Company has with the end-customer which are processed as credits to the distribution customers. Chargebacks are accounted for as variable consideration when determining the transaction price for purposes of recognizing revenue. The Company estimates and reserves for chargebacks as a reduction of revenue at the time of sale to its distribution customers using information available at that time, including historical experience. Accounts receivable as of December 31, 2021 of $106 million and total revenues for the year ended December 31, 2021 of $1,316 million are recorded net of estimated chargebacks. Given the subjectivity and complexity of evaluating management’s assumptions used in the determination of the chargeback reserve, including the chargeback amount related to monthly sales to distribution customers and the time to settle chargeback obligations, auditing the chargeback reserve requires a high degree of auditor judgment and an increased extent of effort. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the chargeback reserve included the following, among others: • We tested the effectiveness of controls related to management’s assessment of assumptions related to estimating the provision for chargeback reserves, the provisioning, processing, and monitoring of chargeback transactions, and the reconciliation of chargeback reserves. • We tested chargeback estimates for purposes of determining whether revenues recognized at the time of sale were recorded in the proper period. • We evaluated the methods and assumptions used by management to estimate the chargeback reserve by: 58 – Analyzing trends in the chargeback provision as a percent of revenues and the chargeback reserve as a percent of revenues. – Testing the underlying data, including historical sales to distribution customers and chargeback settlements with distribution customers, that are utilized as the basis for the chargeback reserve, to test whether the inputs to the estimate were reasonable. – Developing an expectation of the chargeback reserve based on monthly sales to distribution customers, historical experience, and the time to settle chargeback obligations, and comparing our expectation to the amount recorded by management. – Performing retrospective reviews comparing management’s estimates of expected chargeback reserves to actual amounts incurred subsequent to the dates of estimation, to assess management’s ability to reasonably estimate these obligations and to identify potential bias in management’s assessment of the reserve. /s/ DELOITTE & TOUCHE LLP Costa Mesa, California February 25, 2022 We have served as the Company's auditor since 2008 59 ICU MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except par value data) December 31, 2021 2020 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 552,827 $ 396,097 Short-term investment securities 14,420 14,687 TOTAL CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENT SECURITIES 567,247 410,784 Accounts receivable, net of allowance for doubtful accounts of $ 7,038 and $ 21,490 at December 31, 2021 and 2020, respectively 105,894 124,093 Inventories 290,235 314,928 Prepaid income taxes 19,586 29,480 Prepaid expenses and other current assets 46,847 41,492 TOTAL CURRENT ASSETS 1,029,809 920,777 PROPERTY, PLANT AND EQUIPMENT, net 468,365 466,628 OPERATING LEASE RIGHT-OF-USE ASSETS 39,847 46,571 LONG-TERM INVESTMENT SECURITIES 4,620 12,974 GOODWILL 43,439 33,001 INTANGIBLE ASSETS, net 188,311 197,231 DEFERRED INCOME TAXES 42,604 31,034 OTHER ASSETS 63,743 55,475 TOTAL ASSETS $ 1,880,738 $ 1,763,691 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 81,128 $ 71,864 Accrued liabilities 118,195 97,021 Income tax payable 1,454 303 Contingent earn-out liability — 26,300 TOTAL CURRENT LIABILITIES 200,777 195,488 CONTINGENT EARN-OUT LIABILITY 2,589 — OTHER LONG-TERM LIABILITIES 41,830 47,835 DEFERRED INCOME TAXES 1,490 1,663 INCOME TAX LIABILITY 18,021 16,440 COMMITMENTS AND CONTINGENCIES (Note 15) — — STOCKHOLDERS’ EQUITY: Convertible preferred stock, $ 1.00 par value; Authorized— 500 shares; Issued and outstanding— none — — Common stock, $ 0.10 par value; Authorized— 80,000 shares; Issued—21,280 and 21,058 shares at December 31, 2021 and 2020, respectively, and outstanding— 21,280 and 21,058 shares at December 31, 2021 and 2020, respectively 2,128 2,106 Additional paid-in capital 721,412 693,068 Treasury stock, at cost ( 119 and 209 shares, respectively) ( 27 ) ( 39 ) Retained earnings 911,787 808,652 Accumulated other comprehensive loss ( 19,269 ) ( 1,522 ) TOTAL STOCKHOLDERS' EQUITY 1,616,031 1,502,265 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,880,738 $ 1,763,691 The accompanying notes are an integral part of these consolidated financial statements. 60 ICU MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data) Year ended December 31, 2021 2020 2019 TOTAL REVENUES $ 1,316,308 $ 1,271,004 $ 1,266,208 COST OF GOODS SOLD 824,818 809,507 794,344 GROSS PROFIT 491,490 461,497 471,864 OPERATING EXPENSES: Selling, general and administrative 302,583 283,953 276,982 Research and development 47,498 42,948 48,611 Restructuring, strategic transaction and integration 18,037 28,409 80,574 Change in fair value of contingent earn-out — 9,000 ( 47,400 ) Contract settlement 127 ( 975 ) 5,737 TOTAL OPERATING EXPENSES 368,245 363,335 364,504 INCOME FROM OPERATIONS 123,245 98,162 107,360 INTEREST EXPENSE ( 858 ) ( 1,753 ) ( 549 ) OTHER INCOME, NET 799 1,085 7,896 INCOME BEFORE INCOME TAXES 123,186 97,494 114,707 PROVISION FOR INCOME TAXES ( 20,051 ) ( 10,624 ) ( 13,672 ) NET INCOME $ 103,135 $ 86,870 $ 101,035 NET INCOME PER SHARE Basic $ 4.86 $ 4.16 $ 4.90 Diluted $ 4.74 $ 4.02 $ 4.69 WEIGHTED AVERAGE NUMBER OF SHARES Basic 21,206 20,907 20,629 Diluted 21,781 21,591 21,545 The accompanying notes are an integral part of these consolidated financial statements. 61 ICU MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands) Year ended December 31, 2021 2020 2019 NET INCOME $ 103,135 $ 86,870 $ 101,035 Other comprehensive (loss) income, net of tax: Cash flow hedge adjustments, net of tax of $( 954 ), $ 285 and $ 392 for the years ended December 31, 2021, 2020 and 2019, respectively ( 3,021 ) 904 1,242 Foreign currency translation adjustment, net of tax of $ 0 for all periods ( 14,664 ) 12,929 372 Other adjustments, net of tax of $ 0 for all periods ( 62 ) 47 ( 71 ) Other comprehensive (loss) income, net of tax ( 17,747 ) 13,880 1,543 COMPREHENSIVE INCOME $ 85,388 $ 100,750 $ 102,578 The accompanying notes are an integral part of these consolidated financial statements. 62 ICU MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Amounts in thousands) Common Stock Additional Paid-In Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive (Loss) Income Total Shares Amount Balance, January 1, 2019 20,491 $ 2,049 $ 657,899 $ ( 95 ) $ 620,747 $ ( 16,945 ) $ 1,263,655 Issuance of restricted stock and exercise of stock options 331 25 ( 10,870 ) 18,577 — — 7,732 Tax withholding payments related to net share settlement of equity awards ( 80 ) — — ( 18,639 ) — — ( 18,639 ) Stock compensation — — 21,918 — — — 21,918 Other comprehensive income, net of tax — — — — — 1,543 1,543 Net income — — — — 101,035 — 101,035 Balance, December 31, 2019 20,742 2,074 668,947 ( 157 ) 721,782 ( 15,402 ) 1,377,244 Issuance of restricted stock and exercise of stock options 383 32 167 12,994 — — 13,193 Tax withholding payments related to net share settlement of equity awards ( 67 ) — — ( 12,876 ) — — ( 12,876 ) Stock compensation — — 23,954 — — — 23,954 Other comprehensive income, net of tax — — — — — 13,880 13,880 Net income — — — — 86,870 — 86,870 Balance, December 31, 2020 21,058 2,106 693,068 ( 39 ) 808,652 ( 1,522 ) 1,502,265 Issuance of restricted stock and exercise of stock options 262 22 1,003 8,347 — — 9,372 Tax withholding payments related to net share settlement of equity awards ( 40 ) — — ( 8,335 ) — — ( 8,335 ) Stock compensation — — 27,341 — — — 27,341 Other comprehensive loss, net of tax — — — — — ( 17,747 ) ( 17,747 ) Net income — — — — 103,135 — 103,135 Balance, December 31, 2021 21,280 $ 2,128 $ 721,412 $ ( 27 ) $ 911,787 $ ( 19,269 ) $ 1,616,031 The accompanying notes are an integral part of these consolidated financial statements. 63 ICU MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year ended December 31, 2021 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 103,135 $ 86,870 $ 101,035 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 89,698 85,631 76,916 Noncash lease expense 9,594 9,216 8,294 Provision for doubtful accounts 345 7,137 14,882 Provision for warranty and returns 831 ( 1,576 ) ( 134 ) Stock compensation 27,341 23,954 21,918 Loss (gain) on disposal or write-off of property, plant and equipment 1,652 ( 1,789 ) 12,872 Bond premium amortization 655 231 135 Debt issuance cost amortization 240 288 288 Change in fair value of contingent earn-out — 9,000 ( 47,400 ) Product-related charges 3,380 2,626 — Usage of spare parts 13,046 11,191 24,301 Other 2,582 6,939 447 Changes in operating assets and liabilities, net of amounts acquired: Accounts receivable 13,755 78,049 ( 23,684 ) Inventories 20,815 19,196 ( 24,997 ) Prepaid expenses and other current assets ( 7,973 ) ( 4,311 ) 8,588 Other assets ( 21,038 ) ( 16,069 ) ( 29,837 ) Accounts payable 2,347 ( 46,415 ) ( 2,697 ) Accrued liabilities 6,259 ( 29,379 ) ( 43,689 ) Income taxes, including excess tax benefits and deferred income taxes 874 ( 18,037 ) 4,680 Net cash provided by operating activities 267,538 222,752 101,918 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment ( 68,542 ) ( 92,005 ) ( 97,312 ) Proceeds from sale of assets 218 6,176 33 Intangible asset additions ( 12,627 ) ( 8,385 ) ( 8,728 ) Business acquisitions, net of cash acquired ( 14,452 ) — ( 76,133 ) Investments in non-marketable equity securities ( 3,250 ) — — Purchases of investment securities ( 10,034 ) ( 32,825 ) ( 26,040 ) Proceeds from sale of investment securities 18,000 28,900 41,292 Net cash used in investing activities ( 90,687 ) ( 98,139 ) ( 166,888 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term debt — 150,000 — Repayment of short-term debt — ( 150,000 ) — Proceeds from exercise of stock options 9,372 13,193 7,732 Payments on finance leases ( 607 ) ( 357 ) — Payment of contingent earn-out ( 17,300 ) — — Tax withholding payments related to net share settlement of equity awards ( 8,335 ) ( 12,876 ) ( 18,639 ) Net cash used in financing activities ( 16,870 ) ( 40 ) ( 10,907 ) Effect of exchange rate changes on cash ( 3,251 ) 2,854 ( 234 ) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 156,730 127,427 ( 76,111 ) CASH AND CASH EQUIVALENTS, beginning of period 396,097 268,670 344,781 CASH AND CASH EQUIVALENTS, end of period $ 552,827 $ 396,097 $ 268,670 The accompanying notes are an integral part of these consolidated financial statements. 64 ICU MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Amounts in thousands) Year ended December 31, 2021 2020 2019 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for income taxes $ 19,562 $ 31,628 $ 9,675 Cash paid during the year for interest $ 858 $ 1,753 $ 549 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES: Accounts payable for property, plant and equipment $ 9,338 $ 2,211 $ 13,912 Non-compete agreement with associated contingent earn-out liability $ 2,589 $ — $ — Detail of assets acquired and liabilities assumed in acquisitions: Fair value of assets acquired $ 4,592 $ 91,019 Cash paid for acquisitions, net of cash acquired ( 14,452 ) ( 76,133 ) Contingent consideration — ( 17,300 ) Goodwill, acquired during period 10,626 20,026 Liabilities assumed/Adjustments to liabilities assumed $ 766 $ ( 17,612 ) The accompanying notes are an integral part of these consolidated financial statements. 65 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Preparation ICU Medical, Inc. ("ICU" or "we"), a Delaware corporation, operates in one business segment engaged in the development, manufacturing and sale of innovative medical devices used in infusion therapy and critical care applications. We are one of the world's leading pure-play infusion therapy companies with 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. We sell the majority of our products through our direct sales force and through independent distributors throughout the U.S. and internationally. Additionally, we sell our products on an original equipment manufacturer basis to other medical device manufacturers. The manufacturing for all product groups occurs in Salt Lake City, Utah, Austin, Texas, Mexico and Costa Rica. All subsidiaries are wholly owned and are included in the consolidated financial statements. All intercompany accounts and transactions have been eliminated. Results of operations of companies purchased are included from the dates of acquisition. The consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. These consolidated financial statements were prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP"). Preparing financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash, Cash Equivalents Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less from the date of purchase. Accounts Receivable Accounts receivable are stated at net realizable value. An allowance is provided for estimated collection losses based on an assessment of various factors. We consider prior payment trends, the age of the accounts receivable balances, financial status and other factors to estimate the cash which ultimately will be received. Such amounts cannot be known with certainty at the financial statement date. We regularly review individual past due balances for collectability. Inventories Inventories are stated at the lower of cost or net realizable value with cost determined using the first-in, first-out method. Inventory costs include material, labor and overhead related to the manufacturing of our products. Inventories consist of the following (in thousands): As of December 31, 2021 2020 Raw materials $ 135,528 $ 126,499 Work in process 36,490 33,053 Finished goods 118,217 155,376 Total $ 290,235 $ 314,928 66 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Property, Plant and Equipment Property, plant and equipment consists of the following (in thousands): As of December 31, 2021 2020 Machinery and equipment $ 321,078 $ 291,331 Land, building and building improvements 243,377 241,199 Molds 60,463 60,381 Computer equipment and software 102,979 98,311 Furniture and fixtures 7,670 7,767 Instruments placed with customers (1) 97,384 90,383 Construction in progress 72,153 53,724 Total property, plant and equipment, cost 905,104 843,096 Accumulated depreciation ( 436,739 ) ( 376,468 ) Property, plant and equipment, net $ 468,365 $ 466,628 _______________________________ (1) Instruments placed with customers consist of drug-delivery and monitoring systems placed with customers under operating leases. All property, plant and equipment are stated at cost. We use the straight-line method for depreciating property, plant and equipment over their estimated useful lives. Estimated useful lives are: Buildings 15 - 30 years Building improvements 15 - 30 years Machinery, equipment and molds 2 - 15 years Furniture, fixtures and office equipment 2 - 5 years Computer equipment and software 3 - 5 years Instruments placed with customers 3 - 10 years We capitalize expenditures that materially increase the life of the related assets; maintenance and repairs are expensed as incurred. The costs and related accumulated depreciation applicable to property, plant and equipment sold or retired are removed from the accounts and any gain or loss is reflected in the statements of operations at the time of disposal. Depreciation expense was $ 65.9 million, $ 62.4 million and $ 59.3 million in 2021, 2020 and 2019, respectively. Goodwill We test goodwill for impairment on an annual basis in the month of November, or more frequently if an event occurs or circumstances change that would indicate that impairment may exist. Generally, we first perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If, based on an assessment of relevant qualitative factors, we determine that this is not the case, then the quantitative impairment test is not required to be performed. Conversely, if we determine based on the qualitative assessment that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, we will perform the quantitative impairment test. For the quantitative impairment test, we calculate the estimated fair value of the reporting unit. If the estimated fair value of the reporting unit is less than its carrying amount, the goodwill of the reporting unit is determined to be impaired. An impairment charge is recorded in an amount equal to the excess of the carrying amount over its estimated fair value, limited to the total amount of goodwill allocated to the reporting unit. For our annual impairment test for the year ended December 31, 2021, we performed a qualitative assessment and concluded that it was more likely than not that the fair value of our reporting unit exceeded its carrying amount, and therefore, no further impairment testing was required. There were no accumulated impairment losses as of December 31, 2021, 2020 and 2019. 67 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table presents the changes in the carrying amount of our goodwill for 2021, 2020 and 2019 (in thousands): Total Balance as of January 1, 2019 $ 11,195 Goodwill acquired (1) 20,026 Other 24 Balance as of December 31, 2019 $ 31,245 Other (2) 1,756 Balance as of December 31, 2020 33,001 Goodwill (3) 10,626 Currency translation ( 188 ) Balance as of December 31, 2021 $ 43,439 _______________________________ (1) In 2019, we acquired Pursuit Vascular, Inc. ("Pursuit"), which resulted in $ 19.1 million of goodwill. We also acquired a small foreign distributor, which resulted in $ 0.9 million of goodwill. (2) In 2020, "Other" relates to a $ 1.3 million measurement period adjustment to deferred taxes related to the Pursuit acquisition and foreign currency translation. (3) In 2021, we acquired a small foreign infusion systems supplier, which resulted in $ 10.6 million of goodwill. Intangible Assets Intangible assets, carried at cost less accumulated amortization and amortized on a straight-lined basis , were as follows (in thousands): Weighted-Average Amortization Life in Years December 31, 2021 Cost Accumulated Amortization Net Patents 10 $ 27,429 $ 16,764 $ 10,665 Customer contracts 12 10,412 6,196 4,216 Non-contractual customer relationships 9 57,316 33,004 24,312 Trademarks 4 425 425 — Trade name 15 18,260 4,731 13,529 Developed technology 13 152,893 49,406 103,487 Non-compete 3 9,100 2,356 6,744 Total amortized intangible assets $ 275,835 $ 112,882 $ 162,953 Internally developed software* $ 25,358 $ 25,358 Total intangible assets $ 301,193 $ 112,882 $ 188,311 _______________________________ * Internally developed software will be amortized when the projects are complete and the assets are ready for their intended use. 68 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Weighted-Average Amortization Life in Years December 31, 2020 Cost Accumulated Amortization Net Patents 10 $ 24,797 $ 15,056 $ 9,741 Customer contracts 12 10,365 5,852 4,513 Non-contractual customer relationships 9 58,061 26,711 31,350 Trademarks 4 425 425 — Trade name 15 18,270 3,500 14,770 Developed technology 13 152,893 36,927 115,966 Non-compete 3 2,500 972 1,528 Total amortized intangible assets $ 267,311 $ 89,443 $ 177,868 Internally developed software* $ 19,363 $ 19,363 Total intangible assets $ 286,674 $ 89,443 $ 197,231 _______________________________ * Internally developed software will be amortized when the projects are complete and the assets are ready for their intended use. Amortization expense was $ 23.8 million, $ 23.2 million and $ 17.7 million in 2021, 2020 and 2019, respectively. As of December 31, 2021, estimated annual amortization for our intangible assets for each of the next five years is approximately (in thousands): 2022 $ 25,668 2023 24,191 2024 23,551 2025 16,057 2026 15,324 Thereafter 58,162 Total $ 162,953 Our intangible assets that are not subject to amortization are reviewed annually for impairment or more often if there are indications of possible impairment. We perform our annual intangible assets impairment test in November of each year. We did not have any intangible asset impairments in 2021, 2020 or 2019. Long-Lived Assets We periodically evaluate the recoverability of long-lived assets whenever events and changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. When indicators of impairment are present, the carrying values of the assets are evaluated in relation to the operating performance and future undiscounted cash flows of the underlying business. The net book value of the underlying asset is adjusted to fair value if the sum of the expected discounted cash flows is less than book value. Fair values are based on estimates of market prices and assumptions concerning the amount and timing of estimated future cash flows and discount rates, reflecting varying degrees of perceived risk. We did not have any long-lived asset impairments in 2021, 2020 or 2019. Investment Securities Short-term investments, exclusive of cash equivalents, are marketable securities intended to be sold within one year and may include trading securities, available-for-sale securities, and held-to-maturity securities (if maturing within one year at 69 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) the time of acquisition). Long-term investments are marketable securities intended to be sold after one year and may include trading securities, available-for-sale securities, and held-to-maturity securities. Investments in Available-for-sale Securities Our investment securities are considered available-for-sale and currently consist of short-term and long-term corporate bonds. These securities are considered “investment grade” and are carried at fair value. We assess our investment in available-for-sale debt securities for impairment each reporting period. If an unrealized loss exists, we determine whether any portion of the decline in fair value below the carrying value is credit-related by reviewing several factors, including, but not limited to, the extent of the fair value decline and changes in the financial condition of the issuer. We record an impairment for credit-related losses through an allowance, limited to the amount of the unrealized loss. If we either intend to sell or it is more likely than not we will be required to sell the debt security before its anticipated recovery, any allowance is written off and the amortized cost basis is written down to fair value through a charge against net earnings. Unrealized gains and non-credit-related unrealized losses are recorded, net of tax, in other comprehensive income (loss). We did not have any investments in available-for-sale debt securities in unrealized loss positions as of December 31, 2021 or 2020. The amortized cost of the debt securities is adjusted for the amortization of premiums computed under the effective interest method. Such amortization is included in other income, net in the consolidated statements of operations. Realized gains and losses are accounted for on the specific identification method. There have been no realized gains or losses on the disposal of these investments. The scheduled maturities of the debt securities are between 2022 and 2024. All short-term investment securities are callable within one year. Our short-term and long-term investments in available-for-sale securities consist of the following (in thousands): As of December 31, 2021 Amortized Cost Unrealized Holding Gains (Losses) Fair Value Short-term corporate bonds $ 14,420 $ — $ 14,420 Long-term corporate bonds 4,620 — 4,620 Total investment securities $ 19,040 $ — $ 19,040 As of December 31, 2020 Amortized Cost Unrealized Holding Gains (Losses) Fair Value Short-term corporate bonds $ 14,687 $ — $ 14,687 Long-term corporate bonds 12,974 — 12,974 Total investment securities $ 27,661 $ — $ 27,661 Investments in Non-Marketable Equity Securities In the third quarter of 2021, we acquired approximately a 20.0 % non-marketable equity interest in a nonpublic company and entered into a three-year distribution agreement where we have the exclusive rights to market, sell and distribute the company's products in exchange for a cash payment of $ 3.3 million. In addition, we were granted an exclusive license for all of the seller's intellectual property. At the expiration of the distribution agreement we have the right but not the obligation to acquire the remaining interest in the business. We apply the equity method of accounting for investments when we determine we have a significant influence, but not a controlling interest in the investee. We determine whether we have significant influence by considering key factors such as ownership interest, representation on the board of directors, participation in policy making decisions, business relationship and material intra-entity transactions, among other factors. Our equity method investment is reported at cost and adjusted each period for our share of the investee's income or (loss) and dividend paid, if any. We eliminate any intra-entity profits to the extent of our beneficial interest. We record our share of the investee's income or (loss) on a one quarter lag. We report our 70 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) proportionate share of the investee's income or (loss) resulting from this investment in other income, net in our consolidated statements of operations. The carrying value of our equity method investment is reported in other assets on the consolidated balance sheets. We assess our equity method investments for impairment on an annual basis or whenever events or circumstances indicate that the carrying value of the investment may not be recoverable. During 2021, there were no indications that our non-marketable equity method investment was impaired. Our recorded share of the investee's loss was not material for the year ended December 31, 2021. We did not receive any dividend distributions from this investment during 2021. Our non-marketable equity method investment consists of the following (in thousands): As of December 31, 2021 2020 Equity method investment $ 3,238 $ — Income Taxes Deferred taxes are determined based on the differences between the financial statements and the tax bases using rates as enacted in the laws. A valuation allowance is established if it is “more likely than not” that all or a portion of the deferred tax assets will not be realized. We recognize interest and penalties related to unrecognized tax benefits in the tax provision. We recognize liabilities for uncertain tax positions when it is more likely than not that a tax position will not be sustained upon examination and settlement with various taxing authorities. Liabilities for uncertain tax positions are measured based upon the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. We have not recorded any material interest or penalties during any of the years presented. Foreign Currency Generally, the functional currency of our international subsidiaries is the local currency. Generally, we translate the financial statements of these subsidiaries to U.S. dollars at the exchange rate in effect at the balance sheet date and revenues and expenses are translated at the average monthly exchange rates during the year. Certain of our international subsidiaries consolidate first with another subsidiary that utilizes a functional currency other than U.S. dollars. In those cases, we follow a step by step translation process utilizing the same sequence as the consolidation process. Translation adjustments are recorded as a component of accumulated other comprehensive loss, a separate component of stockholders' equity on our consolidated balance sheets and the effect of exchange rate changes on cash and cash equivalents are reflected on our consolidated statements of cash flows. Gains and losses for transactions denominated in a currency other than the functional currency of the entity are included in our consolidated statements of operations in other income, net. Foreign currency transaction losses (gains), net were $ 1.0 million, $ 7.2 million and $( 0.7 ) million in 2021, 2020 and 2019, respectively. Revenue Recognition We recognize revenues when we transfer control of promised goods to our customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods. We offer certain volume-based rebates to our distribution customers, which we consider variable consideration when calculating the transaction price. Rebates are offered on both a fixed and tiered/variable basis. In both cases, we use information available at the time and our historical experience with each customer to estimate the most likely rebate amount. We also provide chargebacks to distributors that sell to end customers at prices determined under a contract between us and the end customer. Chargebacks are the difference between prices we charge our distribution customers and contracted prices we have with the end customer which are processed as credits to our distribution customers. In estimating the expected value of chargeback amounts for use in determining the transaction price, we use information available at the time, including our historical experience. We also warrant products against defects and have a policy permitting the return of defective products, for which we accrue and expense at the time of sale using information available and our historical experience. Our revenues are recorded at the net sales price, which includes an estimate for variable consideration related to rebates, chargebacks and product returns. 71 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The vast majority of our sales of Infusion Consumables, Infusion Systems, IV Solutions and Critical Care products are sold on a standalone basis and control of these products transfers to the customer upon shipment. Our software license renewals are considered to be transferred to a customer at a point in time at the start of each renewal period, therefore revenue is recognized at that time. Arrangements with Multiple Deliverables In certain circumstances, we enter into arrangements in which we provide multiple deliverables to our customers. These bundled arrangements typically consist of the sale of infusion systems equipment, along with annual software licenses and related software implementation services, as well as infusion consumables, IV solutions and extended warranties. Our most significant judgments related to these arrangements are (i) identifying the various performance obligations and (ii) estimating the relative standalone selling price of each performance obligation, typically using a directly observable method or calculated on a cost plus margin basis method. Revenue related to the bundled equipment, software and software implementation services are typically combined into a single performance obligation and recognized upon implementation. As annual software licenses are renewed, we recognize revenue for the license at a point in time, at the start of each annual renewal period. The transaction price allocated to the extended service-type warranty is recognized as revenue over the period the warranty service is provided. Consumables and solutions are separate performance obligations, recognized at a point in time. Shipping Costs Costs to ship finished goods to our customers are included in cost of goods sold on the consolidated statements of operations. Advertising Expenses Advertising expenses are expensed as incurred and reflected in selling, general and administrative expenses in our consolidated statements of operations and were $ 0.2 million, $ 0.2 million and $ 0.1 million in 2021, 2020 and 2019, respectively. Post-retirement and Post-employment Benefits We sponsor a Section 401(k) retirement plan ("plan") for employees. Our contributions to our 401(k) plan were approximately $ 11.0 million, $ 10.7 million and $ 11.4 million in 2021, 2020 and 2019, respectively. We also have post-retirement and post-employment obligations related to employees located in certain international countries. These obligations are immaterial to our financial statements taken as a whole. Research and Development The majority of our research and development costs are expensed as incurred. In certain circumstances when an asset will have an alternative future use we capitalize the costs related to those assets. Research and development costs include salaries and related benefits, consulting fees, production supplies, samples, travel costs, utilities and other miscellaneous administrative costs. Net Income Per Share Net income per share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted net income per share is computed by dividing net income by the weighted-average number of common shares outstanding plus dilutive securities. Dilutive securities include outstanding common stock options and unvested restricted stock units, less the number of shares that could have been purchased with the proceeds from the exercise of the options, using the treasury stock method. Options that are anti-dilutive, where their exercise price exceeds the average market price of the common stock, are not included in the treasury stock method calculation. Restricted stock units that are anti-dilutive are not included in the treasury stock method. There were 12,354 , 12,083 and 10,760 anti-dilutive shares in 2021, 2020 and 2019, respectively. 72 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table presents the calculation of net earnings per common share (“EPS”) — basic and diluted (in thousands, except per share data): Year ended December 31, 2021 2020 2019 Net income $ 103,135 $ 86,870 $ 101,035 Weighted-average number of common shares outstanding (basic) 21,206 20,907 20,629 Dilutive securities 575 684 916 Weighted-average common and common equivalent shares outstanding (diluted) 21,781 21,591 21,545 EPS — basic $ 4.86 $ 4.16 $ 4.90 EPS — diluted $ 4.74 $ 4.02 $ 4.69 New Accounting Pronouncements Recently Issued Accounting Standards In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional guidance for a limited period of time to ease the potential burden for reference rate reform on financial reporting. Due to concerns about structural risks of interbank offered rates and, particularly, the risk of cessation of the London Interbank Offered Rate ("LIBOR"), regulators around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued as a result of reference rate reform. Optional expedients may be applied to contracts that are modified as a result of the reference rate reform. Modifications of contracts within the scope of Topic 470, Debt, should be accounted for by prospectively adjusting the effective interest rate. Modifications of contracts within the scope of ASC 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate (incremental borrowing rate). Exceptions to Topic 815, Derivatives and Hedging, results in not having a dedesignation of a hedging relationship if certain criteria are met. The amendments in this ASU are effective for all entities as of March 12, 2020 through December 31, 2022. In November 2021, we entered into two forward-starting swaps whereby the variable leg of the swap references LIBOR, these swaps will be amended in early 2022 to transition to an alternative reference rate (see Note 7: Derivatives and Hedging Activities). The amendments in this ASU allow for certain expedients that will allow us to assume that our hedged interest payments are probable of occurring regardless of any expected modification in their terms related to reference rate reform and will allow us to continue hedge accounting for a cash flow hedge for which the hedged interest rate risk changes if the hedge is highly effective under ASC 815, Derivatives and Hedging or the optional expedient under this ASU is elected. The impact of this ASU on our contracts has not been and is not expected to be material. NOTE 2. ACQUISITIONS 2019 Acquisitions On November 2, 2019, we acquired 100 % interest in Pursuit for cash consideration of approximately $ 75.0 million. Additionally, Pursuit's equity holders were potentially entitled up to $ 50.0 million in additional cash consideration contingent upon the achievement of certain sales and gross profit targets for specific customers. The earn-out paid was calculated as a percentage of gross profit achieved during the earn-out period against a pre-determined target gross profit, not to exceed $ 50.0 million. As of June 30, 2021, the earn-out measurement period ended and based on the actual sales and gross profit achieved during the measurement period, we calculated the actual earn-out amount to be $ 26.3 million. The $ 26.3 million earn-out calculation was finalized and accepted by Pursuit's former equity holders and was paid out in during the fourth quarter of 2021. The acquisition of Pursuit and their ClearGuard HD is a natural extension of our needlefree IV connector and other infection control technologies, which together provides us the best of breed solutions. 73 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Final Purchase Price The following table summarizes the final purchase price and the final allocation of the purchase price related to the assets and liabilities purchased (in thousands): Cash consideration for acquired assets, net $ 71,533 Fair value of contingent consideration 17,300 Total Consideration $ 88,833 Final Purchase Price Allocation: Trade receivables $ 973 Inventories 2,464 Prepaid expenses and other current assets 74 Property, plant and equipment 609 Intangible assets (1) 82,300 Accounts payable ( 215 ) Accrued liabilities ( 2,065 ) Total identifiable net assets acquired $ 84,140 Goodwill - not tax deductible 20,462 Deferred tax liability ( 15,769 ) Purchase Consideration $ 88,833 _______________________________________________ (1) Identifiable intangible assets included $ 69.0 million of developed technology, $ 10.8 million of trade name and $ 2.5 million of non-compete agreement. The weighted-average amortization periods for the identifiable intangible assets are as follows: approximately fifteen years for developed technology, fifteen years for trade name and three years for the non-compete agreement. The identifiable intangible assets acquired have been valued as Level 3 assets at fair market value. The estimated fair value of identifiable intangible assets were developed using the income approach and are based on critical estimates, judgments and assumptions derived from: analysis of market conditions; discount rate; discounted cash flows; royalty rates; and estimated useful lives. Fixed assets were valued with the consideration of remaining economic lives. The raw materials inventory was valued at historical cost and adjusted for any obsolescence and finished goods inventory was valued at estimated sales proceeds less a nominal profit and costs to sell. The trade receivables, prepaid expenses and other current assets and assumed liabilities were recorded at their carrying values as of the date of the acquisition, as their carrying values approximated their fair values due to their short-term nature. During 2019, we also acquired a small foreign distributor for approximately $ 4.6 million in cash. 2021 Acquisitions During November 2021, we acquired a small foreign infusion systems supplier and paid an initial gross cash payment of approximately $ 15.4 million. The total consideration and purchase price allocation is preliminary pending the finalization of the valuation. In addition to the initial cash consideration, total consideration for the acquisition includes an additional holdback of $ 0.5 million, to be paid two years from the completion date of the acquisition, and also a potential earn-out payment of up to $ 2.5 million, consisting of (i) a cash payment of $ 1.0 million contingent on the achievement of certain revenue targets for the annual period ending December 31, 2022 and, separately, (ii) a cash payment of $ 1.5 million contingent on certain product-related regulatory certifications obtained by May 26, 2024. 74 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 3. RESTRUCTURING, STRATEGIC TRANSACTION AND INTEGRATION Restructuring, strategic transaction and integration expenses were $ 18.0 million, $ 28.4 million and $ 80.6 million in 2021, 2020 and 2019, respectively. Restructuring Restructuring charges were $( 1.8 ) million, $ 7.9 million and $ 8.4 million in 2021, 2020 and 2019, respectively, and are included in the above restructuring, strategic transaction and integration expenses in our consolidated statement of operations. In 2021, we adjusted certain facility restructuring liabilities by $ 2.0 million, shown in the table below under "Other adjustments," to reflect actual amounts owed which resulted in net restructuring credits of $( 1.8 ) million. In 2020, restructuring charges were primarily related to severance and costs related to office and other facility closures. In 2019, restructuring charges were primarily related to severance and facility closure costs. These charges were primarily related to a one-time charge to move our U.S. pump service depot to our existing Salt Lake City facility and other plant restructuring. In 2015, we incurred restructuring charges related to an agreement with Dr. Lopez, a member of our Board of Directors and a former employee in our research and development department, pursuant to which we bought out Dr. Lopez's right to employment under his then-existing employment agreement. The buy-out, including payroll taxes, was paid in equal monthly installments until December 2020. This has been fully paid as of December 31, 2020. The following table summarizes the activity in our restructuring-related accrual by major type of cost (in thousands): Severance Pay and Benefits Employment Agreement Buyout Retention and Facility Closure Costs Total Accrued balance, January 1, 2020 $ 3,878 $ 460 $ 1,211 $ 5,549 Charges incurred 4,288 — 3,641 7,929 Payments ( 6,331 ) ( 460 ) ( 3,570 ) ( 10,361 ) Currency translation 23 — 281 304 Accrued balance, December 31, 2020 $ 1,858 $ — $ 1,563 $ 3,421 Charges incurred 140 — — 140 Payments ( 969 ) — — ( 969 ) Currency translation ( 2 ) — 31 29 Other adjustments (1) ( 528 ) — ( 1,429 ) ( 1,957 ) Accrued balance, December 31, 2021 $ 499 $ — $ 165 $ 664 _______________________________________________ (1) The estimated liabilities related to a prior year's facility closure restructuring were adjusted to actual amounts owed. 75 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Strategic Transaction and Integration Expenses We incurred $ 19.8 million, $ 20.5 million and $ 72.2 million in strategic transaction and integration expenses in 2021, 2020 and 2019, respectively, which are included in restructuring, strategic transaction and integration expenses in our consolidated statement of operations. The strategic transaction and integration expenses during 2021 were 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 a definitive agreement to acquire Smiths Medical 2020 Limited ("Smiths Medical") (see Note 17: Subsequent Events). The integration expenses during 2020 were related to the integration of HIS and included expenses for the migration of IT systems at our Austin facility. The strategic transaction and integration expenses during 2019 were primarily related to HIS, including a one-time strategic supply chain restructuring charge of $ 22.1 million, which reduced our contracted commitments to our third party manufacturer and charges related to our Pfizer separation costs, which included a $ 12.7 million non-cash write-off of related assets. NOTE 4: REVENUE Revenue Recognition Our primary product lines are Infusion Consumables, Infusion Systems, IV Solutions and Critical Care. The vast majority of our sales of these products are made on a stand-alone basis to hospitals and distributors. Revenue is typically recognized upon transfer of control of the products, which we deem to be at point of shipment. However, for purposes of revenue recognition for our software licenses and renewals, we consider the control of these products to be transferred to a customer at a certain point in time; therefore, we recognize revenue at the start of the applicable license term. Payment is typically due in full within 30 days of delivery or the start of the contract term. Revenue is recorded in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We offer certain volume-based rebates to our distribution customers, which we record as variable consideration when calculating the transaction price. Rebates are offered on both a fixed and tiered/variable basis. In both cases, we use information available at the time and our historical experience with each customer to estimate the most likely rebate amount. We also provide chargebacks to distributors that sell to end customers at prices determined under a contract between us and the end customer. Chargebacks are the difference between the prices we charge our distribution customers and the contracted prices we have with the end customer which are processed as credits to our distribution customers. In estimating the expected value of chargeback amounts in order to determine the transaction price, we use information available at the time, including our historical experience. We also warrant products against defects and have a policy permitting the return of defective products, for which we accrue and expense at the time of sale using information available at that time and our historical experience. We also provide for extended service-type warranties, which we consider to be separate performance obligations. We allocate a portion of the transaction price to the extended service-type warranty based on its estimated relative selling price, and recognize revenue over the period the warranty service is provided. Our revenues are recorded at the net sales price, which includes an estimate for variable consideration related to rebates, chargebacks and product returns. Arrangements with Multiple Performance Obligations We also enter into arrangements which include multiple performance obligations, (see Note 1: Basis of Presentation and Summary of Significant Accounting Policies). The most significant judgments related to these arrangements include: • Identifying the various performance obligations of these arrangements. • Estimating the relative standalone selling price of each performance obligation, typically using a directly observable method or calculated on a cost plus margin basis method. 76 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Revenue disaggregated The following table represents our revenues disaggregated by product line (in thousands) and our disaggregated product line revenue as a percentage of total revenue: Year ended December 31, 2021 2020 2019 Product line Revenue % of Revenue Revenue % of Revenue Revenue % of Revenue Infusion Consumables $ 555,189 42 % $ 473,740 37 % $ 477,611 37 % Infusion Systems 352,321 27 % 359,691 28 % 328,282 26 % IV Solutions 359,477 27 % 388,971 31 % 414,971 33 % Critical Care 49,321 4 % 48,602 4 % 45,344 4 % Total Revenues $ 1,316,308 100 % $ 1,271,004 100 % $ 1,266,208 100 % We report revenue on a "where sold" basis, which reflects the revenue within the country or region in which the ultimate sale is made to our external customer. The following table represents our revenues disaggregated by geography (in thousands): Year ended December 31, Geography 2021 2020 2019 Europe, the Middle East and Africa $ 147,488 $ 132,763 $ 130,530 Other Foreign 227,011 227,614 212,336 Total Foreign 374,499 360,377 342,866 United States 941,809 910,627 923,342 Total Revenues $ 1,316,308 $ 1,271,004 $ 1,266,208 Domestic sales accounted for 72 %, 72 % and 73 % of total revenue in 2021, 2020 and 2019, respectively. International sales accounted for 28 %, 28 % and 27 % of total revenue in 2021, 2020 and 2019, respectively. Contract balances Our contract balances (deferred revenue) are recorded in accrued liabilities and other long-term liabilities in our consolidated balance sheet (see Note 10: Accrued Liabilities and Other Long-term Liabilities). The following table presents the changes in our contract balances for the years ended December 31, 2021 and 2020, (in thousands): Contract Liabilities Beginning balance, January 1, 2020 $ ( 4,855 ) Equipment revenue recognized 14,408 Equipment revenue deferred due to implementation ( 14,341 ) Software revenue recognized 5,721 Software revenue deferred due to implementation ( 7,363 ) Ending balance, December 31, 2020 $ ( 6,430 ) Equipment revenue recognized 10,048 Equipment revenue deferred due to implementation ( 13,725 ) Software revenue recognized 7,261 Software revenue deferred due to implementation ( 4,615 ) Ending balance, December 31, 2021 $ ( 7,461 ) 77 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) During 2021, we recognized $ 5.1 million in revenue that was included in the opening contract balances as of December 31, 2020. As of December 31, 2021, revenue from remaining performance obligations related to implementation of software and equipment is $ 5.6 million. We expect to recognize substantially all of this revenue within the next three to six months dependent on implementation restrictions due to the novel coronavirus and its variants ("COVID-19"). Revenue from remaining performance obligations related to annual software licenses is $ 1.9 million. We expect to recognize substantially all of this revenue over the next twelve months. Costs to Obtain a Contract with a Customer As part of the cost to obtain a contract, we may pay incremental commissions to sales employees upon entering into a sales contract. Under ASC Topic 606, we have elected to expense these costs as incurred as the period of benefit is less than one year. Practical expedients and exemptions In addition to the practical expedient applied to sales commissions, under ASC Topic 606, we elected to apply the practical expedient for shipping and handling costs incurred after the customer has obtained control of a good. We will continue to treat these costs as a fulfillment cost rather than as an additional promised service. NOTE 5. LEASES We determine if an arrangement is a lease at inception. Our operating lease assets are separately stated in operating lease right-of-use ("ROU") assets and our financing lease assets are included in other assets on our consolidated balance sheets. Our lease liabilities are included in accrued liabilities, and other long-term liabilities on our consolidated balance sheets. We have elected not to recognize an ROU asset and lease liability for leases with terms of twelve months or less. Lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Most of our leases do not provide an implicit rate, therefore we use our incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term based on the information available at commencement date. Our lease ROU assets exclude lease incentives and initial direct costs incurred. Our lease terms include options to extend when it is reasonably certain that we will exercise that option. All of our leases have stated lease payments, which may include fixed rental increases. Our leases are for corporate, research and development and sales and support offices, a distribution facility, device service centers and certain equipment. Our leases have original lease terms of one year to fifteen years , some of which include options to extend the leases for up to an additional five years . For all of our leases, we do not include optional periods of extension in our current lease terms for the exercise of options to extend is not reasonably certain. The following table presents the components of our lease cost (in thousands): Year ended December 31, 2021 2020 Operating lease cost $ 11,251 $ 11,284 Finance lease cost — interest 122 91 Finance lease cost — reduction of ROU asset 648 383 Short-term lease cost 14 263 Total lease cost $ 12,035 $ 12,021 Interest expense on our finance leases is included in other income (expense), net in our consolidated statements of operations. The reduction of the operating and finance ROU assets is included as noncash lease expense in selling, general and administrative expenses in our consolidated statements of operations. 78 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table presents the supplemental cash flow information related to our leases (in thousands): Year ended December 31, 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 11,256 $ 10,185 Operating cash flows from finance leases $ 122 $ 91 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 2,589 $ 20,847 Finance leases $ 558 $ 3,062 The following table presents the supplemental balance sheet information related to our operating leases (in thousands, except lease term and discount rate): As of December 31, 2021 2020 Operating leases Operating lease right-of-use assets $ 39,847 $ 46,571 Accrued liabilities $ 9,009 $ 8,740 Other long-term liabilities 33,971 41,019 Total operating lease liabilities $ 42,980 $ 49,759 Weighted-Average Remaining Lease Term Operating leases 5.9 years 6.7 years Weighted-Average Discount Rate Operating leases 4.98 % 5.02 % The following table presents the supplemental balance sheet information related to our finance leases (in thousands, except lease term and discount rate): 79 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of December 31, 2021 2020 Finance leases Finance lease right-of-use assets $ 2,673 $ 2,915 Accrued liabilities $ 643 $ 554 Other long-term liabilities 2,067 2,388 Total finance lease liabilities $ 2,710 $ 2,942 Weighted-Average Remaining Lease Term Finance leases 5.6 years 6.4 years Weighted-Average Discount Rate Finance leases 4.28 % 4.27 % As of December 31, 2021, the maturities of our operating and finance lease liabilities for each of the next five years are approximately (in thousands): Operating Leases Finance Leases 2022 $ 10,887 $ 749 2023 9,453 749 2024 8,488 458 2025 5,129 267 2026 4,842 214 Thereafter 10,577 615 Total Lease Payments 49,376 3,052 Less imputed interest ( 6,396 ) ( 342 ) Total $ 42,980 $ 2,710 NOTE 6. SHARE-BASED AWARDS We have a stock incentive plan for employees and directors and an employee stock purchase plan. Shares to be issued under these plans will be issued either from authorized but unissued shares or from treasury shares. We incur stock compensation expense for stock options, restricted stock units ("RSU"), performance restricted stock units ("PRSU") and in years prior to 2018 stock purchased under our employee stock purchase plan ("ESPP"), which was suspended in 2017. We receive a tax benefit on stock compensation expense and direct tax benefits from the exercise of stock options and vesting of restricted stock units. We also have indirect tax benefits upon exercise of stock options and vesting of restricted stock units related to research and development tax credits which are recorded as a reduction of income tax expense. The table below summarizes compensation costs and related tax benefits (in thousands): 80 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Year ended December 31, (In thousands) 2021 2020 2019 Stock compensation expense $ 27,341 $ 23,954 $ 21,918 Tax benefit from stock-based compensation cost $ 6,391 $ 5,564 $ 4,840 Indirect tax benefit $ 285 $ 1,203 $ 680 As of December 31, 2021, we had $ 31.2 million of unamortized stock compensation cost which we will recognize as an expense over a weighted-average period of approximately 0.9 years. Stock Option Plans Our 2011 Stock Incentive Plan ("2011 Plan") replaced our 2003 Stock Option Plan ("2003 Plan"). Our 2011 Plan initially had 650,000 shares available for issuance, plus the remaining available shares for grant from the 2003 Plan and any shares that were forfeited, terminated or expired that would have otherwise returned to the 2003 Plan. In 2012, 2014 and 2017, our stockholders approved amendments to the 2011 plan that increased the shares available for issuance by 3,275,000 , bringing the initial shares available for issuance to 3,925,000 , plus the remaining 248,700 shares that remained available for grant from the 2003 Plan. As of December 31, 2021, the 2011 Plan has 4,188,300 shares of common stock reserved for issuance to employees, which includes 263,300 shares that transferred from the 2003 Plan. Shares issued as options or stock appreciation rights ("SARs") are charged against the 2011 Plan's share reserve as one share for one share issued. Shares subject to awards other than options and SARs are charged against the 2011 Plan's share reserve as 2.09 shares for 1 share issued. Options may be granted with exercise prices at no less than fair market value at date of grant. Options granted under the 2011 Plan may be "non-statutory stock options" which expire no more than ten years from date of grant or "incentive stock options" as defined in Section 422 of the Internal Revenue Code of 1986, as amended. Time-based Stock Options To date, all options granted under 2011 Plan and 2003 Plan have been non-statutory stock options. The majority of the time-based outstanding employee option grants vested 25% after one year from the grant date and the balance vested ratably on a monthly basis over 36 months. The outstanding employee option grants are all fully vested. The majority of the outstanding options granted to non-employee directors vest one year from the grant date. The options generally expire 10 years from the grant date. The fair value of time-based option grants is calculated using the Black-Scholes option valuation model. The expected term for the option grants was based on historical experience and expected future employee behavior. We estimate the volatility of our common stock at the date of grant based on the historical volatility of our common stock, based on the average expected exercise term. The table below summarizes the total time-based stock options granted, total valuation and the weighted-average assumptions (dollars in thousands, except per option amounts): Year ended December 31, 2021 2020 2019 Number of time-based options granted 7,910 7,190 6,265 Grant-date fair value of options granted (in thousands) $ 528 $ 425 $ 424 Weighted-average assumptions for stock option valuation: Expected term (years) 5.5 5.5 5.5 Expected stock price volatility 35.0 % 35.0 % 28.0 % Risk-free interest rate 0.9 % 0.4 % 2.2 % Expected dividend yield — % — % — % Weighted-average grant-price per option $ 200.07 $ 181.99 $ 225.27 Weighted-average grant-date fair value per option $ 66.78 $ 59.09 $ 67.73 81 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) A summary of our stock option activity as of and for the year ended December 31, 2021 is as follows: Shares Weighted-Average Exercise Price Per Share Weighted-Average Contractual Life (Years) Aggregate Intrinsic Value (in thousands) Outstanding at December 31, 2020 817,800 $ 70.13 Granted 7,910 $ 200.07 Exercised ( 162,612 ) $ 57.64 Forfeited or expired — $ — Outstanding at December 31, 2021 663,098 $ 74.75 2.6 $ 108,003 Exercisable at December 31, 2021 656,483 $ 73.48 2.5 $ 107,761 Vested and expected to vest, December 31, 2021 663,098 $ 74.75 2.6 $ 108,003 The intrinsic values for options exercisable, outstanding and vested or expected to vest at December 31, 2021 are based on our closing stock price of $ 237.34 at December 31, 2021 and are before applicable taxes. The following table presents information regarding stock option activity: Year ended December 31, (In thousands) 2021 2020 2019 Intrinsic value of options exercised $ 27,534 $ 32,915 $ 22,976 Cash received from exercise of stock options $ 9,372 $ 13,193 $ 7,732 Tax benefit from stock option exercises $ 5,092 $ 5,179 $ 9,653 Stock Awards In 2021, we granted PRSUs to our executive officers. For the executive officers other than the Chief Executive Officer ("CEO"), Chief Operations Officer ("COO") and the Chief Financial Officer ("CFO"), the PRSUs will vest subject to a three-year time vesting and further subject to a determination by the Compensation Committee that the officers have met their individual performance goals for the applicable years. For the CEO, COO and the CFO, the performance shares will cliff-vest ending on March 6, 2024 and further be subject to the achievement of minimum three-year cumulative revenue and EPS targets, commencing on January 1, 2021 and ending on December 31, 2023, which when reviewed against a predetermined vesting matrix could result in 0% to 250% of the awarded units that could vest. In 2020, we granted PRSUs to our executive officers. For the executive officers other than the CEO, COO and the CFO, the PRSUs will vest subject to a three-year time vesting and further subject to a determination by the Compensation Committee that the officers have met their individual performance goals for the applicable years. For the CEO, COO and the CFO, the performance shares will cliff-vest ending on March 6, 2023 and further be subject to the achievement of minimum three-year cumulative revenue and EPS targets, which when reviewed against a predetermined vesting matrix could result in 0% to 250% of the awarded units that could vest. On February 15, 2021, the Compensation Committee made the determination that the executive officers other than the CEO, COO and CFO met their individual performance goals for 2021, therefore one-third of their 2020 PRSU shares awarded vested during 2021. Additionally, during February 2021, the Compensation Committee, modified the potential vesting percentages related to the 2020 PRSU awards for the CEO, COO and CFO, as the original potential percentages were established immediately before the onset of the COVID-19 pandemic. The Compensation Committee determined to adjust the CEO, COO and CFO's potential to earn from between 0% and 250% of the award granted, to an increased potential to earn between 50% and 300% of the award granted, subject to the same minimum threshold revenue and EPS targets to be achieved by the Company. The additional compensation expense as a result of modifying the 2020 PRSUs granted to our CEO, COO and CFO totaled $ 2.1 million recognized over the remaining amortization period from the date of modification. In 2019, we granted PRSUs to our executive officers. For the executive officers other than the CEO and the COO, the PRSUs will vest subject to a three-year time vesting and further subject to a determination by the Compensation Committee that 82 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) the officers have met their individual performance goals for the applicable years. For the CEO and the COO, the performance shares will cliff-vest ending on March 6, 2022 and further subject to the achievement of a minimum Cumulative Adjusted EBITDA. If for the three year period ending on December 31, 2021 the Cumulative Adjusted EBITDA has a growth of at least 6% to 8%, 50% of the awarded units will vest. If on the vesting date the Cumulative Adjusted EBITDA has a growth of between 8% to 10%, 100% of the awarded units will vest. If on the vesting date the Cumulative Adjusted EBITDA has a growth of over 10%, 200% of the awarded units will vest. In 2019, we also granted PRSUs to one of our non-executive employees. These PRSUs will vest at the end of a three-year period ending on March 31, 2022, if certain minimum performance goals are met. On February 15, 2021, the Compensation Committee made the determination that the executive officers other than the CEO and COO met their individual performance goals for 2021, therefore one-third of their 2019 PRSU shares awarded vested during 2021. The performance period related to the 2019 CEO and COO PRSUs ended on December 31, 2021 and based on the Cumulative Adjusted EBITDA achieved during the performance period zero payout is expected, subject to Compensation Committee review and determination. In 2018, we granted PRSUs to our executive officers. For the executive officers other than the CEO and the COO, the PRSUs were to vest subject to a three-year time vesting and further subject to a determination by the Compensation Committee that the officers have met their individual performance goals for the applicable year. For the CEO and the COO, the performance shares were to cliff-vest ending on February 15, 2021 and further subject to the achievement of a minimum Cumulative Adjusted EBITDA. If for the three year period ending on December 31, 2020 the Cumulative Adjusted EBITDA has a growth of at least 6% to 8%, 50% of the awarded units will vest. If on the vesting date the Cumulative Adjusted EBITDA has a growth of between 8% to 10%, 100% of the awarded units will vest. If on the vesting date the Cumulative Adjusted EBITDA has a growth of over 10%, 200% of the awarded units will vest. On February 15, 2021, the Compensation Committee made the determination that the executive officers other than the CEO and COO met their individual performance goals for 2021, therefore one-third of their 2018 PRSU shares awarded vested during 2021. Also on February 15, 2021, the Compensation Committee determined that the CEO and COO's 2018 PRSUs were earned at 100% of the awards granted. In 2017, we granted PRSUs to our executive officers. The PRSUs were scheduled to vest, if at all, upon the achievement of a minimum Cumulative Adjusted EBITDA, subject to a three-year cliff vesting ending on December 31, 2019. If at that date, our Cumulative Adjusted EBITDA is at least $600 million but less than $650 million, 100% of the awarded units will vest. If our Cumulative Adjusted EBITDA is at least $650 million but less than $700 million, 200% of the awarded units will vest. If our Cumulative Adjusted EBITDA is at least $700 million, 300% of the awarded units will vest. On January 17, 2020, the Compensation Committee made the determination that the 2017 PRSU shares were earned by our executive officers at the 300% achievement level. In 2016, we granted PRSUs to our executive officers, which vested on December 31, 2018. During the first quarter of 2019, the Compensation Committee determined the award granted vested at 300%, as a minimum specified compound annual growth rate ("CAGR") in adjusted EBITDA per share of greater than 12% was reached for the 3-year performance period January 1, 2016 through December 31, 2018. Restricted stock units are granted annually to our Board of Directors and vest on the first anniversary of the grant date, or the date of our annual meeting, whichever occurs first. In 2021, 2020 and 2019, we granted RSUs to certain employees that vest ratably on the anniversary of the grant over three years. We recognize forfeitures as they occur. The grant-date fair market value of our PRSUs and RSUs is determined by our stock price on the grant date. The table below summarizes our restricted stock award activity (dollars in thousands): 83 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Year ended December 31, (In thousands, except shares and per share amounts) 2021 2020 2019 PRSU Shares granted 53,246 38,633 37,657 Shares earned (a) 32,013 80,654 114,032 Grant-date fair value per share $ 198.16 $ 188.34 $ 231.63 Grant-date fair value $ 10,551 $ 7,276 $ 8,723 Intrinsic value vested $ 6,777 $ 15,627 $ 26,445 RSU Shares granted 84,388 87,830 61,856 Grant-date fair value per share $ 199.13 $ 188.13 $ 227.42 Grant-date fair value $ 16,804 $ 16,523 $ 14,067 Intrinsic value vested $ 13,681 $ 12,314 $ 16,753 _______________________________ (a) PRSU shares earned in 2019 were related to performance awards granted to executives in 2016 and 2018, PRSU shares earned in 2020 were related to performance awards granted to executives in 2017, 2018 and 2019. PRSU shares earned in 2021 were related to performance awards granted to executives in 2018, 2019 and 2020. The table below provides a summary of our PRSU and RSU activity as of and for the year ended December 31, 2021: Number of Units Grant-Date Fair Value Per Share Weighted-Average Contractual Life (Years) Aggregate Intrinsic Value (in thousands) Non-vested at December 31, 2020 220,760 $ 209.77 Change in units due to performance expectations (a) 24,601 $ 209.64 Granted 137,634 $ 198.75 Vested ( 99,363 ) $ 219.77 Forfeited ( 7,871 ) $ 196.01 Non-vested and expected to vest at December 31, 2021 275,761 $ 201.05 1.0 $ 65,449 _______________________________ (a) Relates to 2019-2021 PRSUs granted to a non-executive employee and 2021 and 2020 CEO, COO and CFO PRSUs granted, assumes attainment of an increased payout rate based on performance expectations. ESPP We have an ESPP under which U.S. employees may purchase up to $25,000 annually of common stock at 85% of its fair market value at the beginning or the end of a six-month offering period, whichever is lower. There are 750,000 shares of common stock reserved for issuance under the ESPP, which is subject to an annual increase of the least of 300,000 shares, two percent of the shares outstanding or such a number as determined by the Board. To date, there have been no increases. As of December 31, 2021, there were 133,487 shares available for future issuance. The ESPP is intended to constitute an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code. We suspended our ESPP in 2017. NOTE 7. DERIVATIVES AND HEDGING ACTIVITIES Hedge Accounting and Hedging Program The purposes of our cash flow hedging programs are to manage the foreign currency exchange rate risk on forecasted expenses denominated in currencies other than the functional currency of the operating unit, and to manage floating interest rate risk associated with future interest payments on variable-rate term loans issued in January 2022 subsequent to our fiscal year end. We do not issue derivatives for trading or speculative purposes. 84 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. The par forward contract and forward-starting interest rate swaps are designated and qualify as cash flow hedges. Our derivative instruments are recorded at fair value on the consolidated balance sheets and are classified based on the instrument's maturity date. We record changes in the fair value of the effective portion of the gain or loss on the derivative instrument as a component of other comprehensive income (loss) and we reclassify that gain or loss into earnings in the same line item associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. Foreign Currency Exchange Rate Risk We began hedging a portion of our Mexico forecasted expenses denominated in Pesos ("MXN") in May 2017 by entering into a two-year cross-currency par forward contract. The term of this currency forward contract was May 1, 2017 to May 1, 2019. The derivative instrument had a fixed forward rate of 20.01 MXN/USD over the term of the two-year contract. In January 2018, we entered into a six-month cross-currency par forward contract. The term of this six-month contract was May 1, 2019 to November 1, 2019. The derivative instrument had a fixed forward rate of 20.43 MXN/USD over the term of the six-month contract. In November 2018, we entered into a one-year cross-currency par forward contract. The term of the one-year hedge was November 1, 2019 to November 3, 2020. The derivative instrument matured in equal monthly amounts at a fixed forward rate of 22.11 MXN/USD. In March 2020, we entered into a one-year cross-currency par forward contract. The total notional amount of this outstanding derivative as of December 31, 2020 was approximately 436.8 million MXN. The term of this one-year contract was November 3, 2020 to December 1, 2021. The derivative instrument matured in equal monthly amounts at a fixed forward rate of 24.26 MXN/USD. In November 2021, we entered into a one-year cross-currency par forward contract. The total notional amount of this outstanding derivative as of December 31, 2021 was approximately 413.1 million MXN. The term of this one-year contract is December 1, 2021 to December 1, 2022. The derivative instrument matures in equal monthly amounts at a fixed forward rate of 21.60 MXN/USD. Floating Interest Rate Risk In November 2021, in anticipation of entering into new senior secured credit facilities in January 2022, which includes a variable-rate term loan A and a variable-rate term loan B (see Note 17: Subsequent Events for additional information), we entered into two forward-starting interest rate swaps. Under the interest rate swap agreements we exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount. The term loan A swap has an initial notional amount of $ 300.0 million, reducing to $ 150.0 million evenly on a quarterly basis through its final maturity in April 2027. We will pay a fixed rate of 1.49 % and will receive the greater of 3-month USD LIBOR or 0 %. The term loan B swap has an initial notional amount of $ 750.0 million, reducing to $ 46.9 million evenly on a quarterly basis through its final maturity in April 2026. We will pay a fixed rate of 1.31 % and will receive the greater of 3-month USD LIBOR or 0.50 %. These forward-starting swaps will effectively convert the relevant portion of the floating-rate term loans to fixed rates. The following table presents the fair values of our derivative instruments included within the consolidated balance sheets (in thousands): 85 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Derivatives Designated as Cash Flow Hedging Instruments Consolidated Balance Sheet Location Foreign Exchange Forward Contracts Forward-Starting Interest Rate Swaps Gross Derivatives (In thousands) As of December 31, 2021 Prepaid expenses and other current assets $ 1,061 $ — $ 1,061 Other assets — — — Total assets $ 1,061 $ — $ 1,061 Accrued liabilities $ — $ — $ — Other long-term liabilities — 1,480 1,480 Total liabilities $ — $ 1,480 $ 1,480 As of December 31, 2020 Prepaid expenses and other current assets $ 3,555 $ — $ 3,555 Other assets — — — Total assets $ 3,555 $ — $ 3,555 Accrued liabilities $ — $ — $ — Other long-term liabilities — — — Total liabilities $ — $ — $ — The following table presents the amounts affecting the Consolidated Statements of Operations (in thousands): Location of Gain in the Consolidated Statements of Operations Year Ended December 31, 2021 2020 2019 Derivatives designated as cash flow hedging instruments: Foreign exchange forward contracts Cost of goods sold $ 3,444 $ 790 $ 916 Forward-starting interest rate swaps Interest expense $ — $ — $ — 86 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) We recognized the following gains (losses) on our derivative instruments designated as cash flow hedges (in thousands): Amount of Gain (Loss) Recognized in Other Comprehensive Income Amount of Gain Reclassified From Accumulated Other Comprehensive Income into Income Year Ended December 31, Year Ended December 31, 2021 2020 2019 Location of Gain Reclassified From Accumulated Other Comprehensive Income into Income 2021 2020 2019 Derivatives designated as cash flow hedging instruments: Foreign exchange forward contracts $ 950 $ 1,980 $ 2,550 Cost of goods sold $ 3,444 $ 790 $ 916 Forward-starting interest rate swaps ( 1,480 ) — — Interest expense — — — Total derivatives designated as cash flow hedging instruments $ ( 530 ) $ 1,980 $ 2,550 $ 3,444 $ 790 $ 916 As of December 31, 2021, we expect an estimated $ 1.1 million in deferred gains on the outstanding foreign exchange forward contract and an estimated $ 5.6 million in deferred losses on the forward-starting interest rate swaps will be reclassified from accumulated other comprehensive loss to net income during the next 12 months concurrent with the underlying hedged transactions also being reported in net income. NOTE 8. FAIR VALUE MEASUREMENTS Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement: • Level 1: quoted prices in active markets for identical assets or liabilities; • Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or • Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities. Contingent earn-out liabilities In the fourth quarter of 2019, we recognized an earn-out liability related to the acquisition of Pursuit (see Note 2: Acquisitions). Pursuit's former equity holders were entitled up to $ 50.0 million in additional cash consideration contingent upon the achievement of certain sales and gross profit targets for specific customers. The earn-out was calculated as a percentage of gross profit achieved during the earn-out period against a pre-determined target gross profit, not to exceed $ 50.0 million. During the earn-out period, we used a Monte Carlo simulation model to determine the fair value of the earn-out liability. The Monte Carlo simulation model utilized multiple input variables to determine the value of the earn-out liability including historical volatility, a risk-free interest rate, counter party credit risk and projected future gross profit (see the simulation input table below related to Pursuit). The historical volatility was based on the median of ICU and a certain peer group. The risk-free interest rate was equal to the yield, as of the valuation date, of the zero-coupon U.S. Treasury bill that was commensurate with the term of the earn-out. The counter party credit risk was based on a synthetic credit rating of B1. As of June 30, 2021, the 87 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) earn-out measurement period ended. Based on the actual sales and gross profit achieved during the measurement period, we calculated the actual earn-out amount to be $ 26.3 million. The $ 26.3 million earn-out calculation was finalized and accepted by Pursuit's former equity holders and was paid out in the fourth quarter of 2021. In August 2021, we entered into an agreement with one of our international distributors whereby that distributor would not compete with us in a specific territory for a three-year period that will end in September 2024. The terms of the agreement include a contingent earn-out payment. The contingent earn-out payment shall not exceed $ 6.0 million, which will be earned based on certain revenue targets over a twelve-month measurement period determined by the highest four consecutive quarters commencing over a two-year period starting on the closing date of the agreement and provided that the distributor is in compliance with its obligations under the agreement. As of December 31, 2021, the fair value of the contingent earn-out was estimated at $ 2.6 million. The estimated fair value of the contingent earn-out is calculated using a probability-weighted cash flow model based on historical revenue streams and the likelihood that the revenue targets will be met. During November 2021, we acquired a small foreign infusion systems supplier. Total consideration for the acquisition includes a potential earn-out payment of up to $ 2.5 million, consisting of (i) a cash payment of $ 1.0 million contingent on the achievement of certain revenue targets for the annual period ending December 31, 2022 and, separately, (ii) a cash payment of $ 1.5 million contingent on certain product-related regulatory certifications obtained by May 26, 2024. The initial estimated fair value of the contingent consideration related to this acquisition is immaterial. Our contingent earn-out liabilities are separately stated on our consolidated balance sheets. The following table provides a reconciliation of our Level 3 earn-out liabilities measured at estimated fair value based on an initial valuation and updated quarterly for the years ended December 31, 2021, 2020 and 2019 (in thousands): Earn-out Liability Contingent earn-out liability, January 1, 2019 $ 47,400 Acquisition date fair value estimate of earn-out (1) 17,300 Change in fair value of contingent earn-out (included in income from operations as a separate line item) (2) ( 47,400 ) Contingent earn-out liability, December 31, 2019 $ 17,300 Change in fair value of contingent earn-out (included in income from operations as a separate line item) (3) 9,000 Contingent earn-out liability, December 31, 2020 $ 26,300 Contingent earn-out — non-compete arrangement 2,589 Transfer of Pursuit earn-out liability into Level 2 (4) ( 26,300 ) Contingent earn-out liability, December 31, 2021 $ 2,589 _______________________________ (1) Relates to our acquisition of Pursuit (see Note 2: Acquisitions). (2) The change in the fair value of the HIS earn-out related to our 2017 acquisition of HIS from Pfizer which was based on actual results as compared to the earn-out performance targets. This adjustment reduced the HIS earn-out to zero. (3) The fair value of the Pursuit earn-out increased during 2020 primarily due to changes in the probabilities within the valuation model. (4) The Pursuit earn-out was transferred out of Level 3 and into Level 2 in the third quarter of 2021 when the amount of the actual payment was known, and subsequently settled during the fourth quarter of 2021. 88 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table provides quantitative information about Level 3 inputs for fair value measurement of the Pursuit earn-out liability as of the acquisition date to December 31, 2020: Pursuit Earn-out As of December 31, 2020 At Acquisition November 2, 2019 Simulation Input Revenue/Gross Profit Volatility 25.00 % 20.00 % Discount Rate 12.50 % 15.00 % Risk-free rate 0.09 % 1.55 % Counter Party Risk 3.10 % 6.00 % Investments, Foreign Currency Contracts and Interest Rate Contracts The fair value of our investments, which consist of corporate bonds, is estimated using observable market-based inputs such as quoted prices, interest rates and yield curves or Level 2 inputs. The fair value of our Level 2 forward currency contracts is estimated using observable market inputs such as known notional value amounts, spot and forward exchange rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative. The fair value of our Level 2 forward-starting interest rate swaps is estimated using a pricing model that reflects the terms of the contracts, including the period to maturity, and relies on observable market inputs such as known notional value amounts and USD interest rate curves. Other than the Pursuit earn-out liability described above, there were no transfers between levels in 2021 or 2020. Our assets and liabilities measured at fair value on a recurring basis consisted of the following (Level 1, 2 and 3 inputs as defined above) (in thousands): Fair value measurements as of December 31, 2021 Total carrying value Quoted prices in active markets for identical assets (level 1) Significant other observable inputs (level 2) Significant unobservable inputs (level 3) Assets: Available-for-sale debt securities: Short-term $ 14,420 $ — $ 14,420 $ — Long-term 4,620 — 4,620 — Foreign exchange forwards: Prepaid expenses and other current assets 1,061 — 1,061 — Total Assets $ 20,101 $ — $ 20,101 $ — Liabilities: Contingent earn-out liability - LT $ 2,589 $ — $ — $ 2,589 Forward-starting interest rate swaps: Other long-term liabilities 1,480 — 1,480 — Total Liabilities $ 4,069 $ — $ 1,480 $ 2,589 89 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Fair value measurements as of December 31, 2020 Total carrying value Quoted prices in active markets for identical assets (level 1) Significant other observable inputs (level 2) Significant unobservable inputs (level 3) Assets: Available-for-sale debt securities: Short-term $ 14,687 $ — $ 14,687 $ — Long-term 12,974 — 12,974 — Foreign exchange forwards: Prepaid expenses and other current assets 3,555 — 3,555 — Total Assets $ 31,216 $ — $ 31,216 $ — Liabilities: Earn-out liability $ 26,300 $ — $ — $ 26,300 Total Liabilities $ 26,300 $ — $ — $ 26,300 NOTE 9. PREPAID EXPENSES AND OTHER CURRENT ASSETS AND OTHER ASSETS Prepaid expenses and other current assets consist of the following (in thousands): As of December 31, 2021 2020 Other prepaid expenses and receivables $ 14,763 $ 14,964 Deferred costs 12,746 6,402 Prepaid insurance and property taxes 6,310 6,178 VAT/GST receivable 4,156 3,676 Deferred tax charge 4,241 3,542 Foreign exchange forward contract 1,061 3,555 Deposits 1,343 1,353 Other 2,227 1,822 $ 46,847 $ 41,492 Other assets consist of the following (in thousands): As of December 31, 2021 2020 Pump lease receivables $ 25,941 $ 28,948 Spare parts 28,538 22,725 Equity method investments 3,238 — Deferred debt issuance costs 2,827 — Finance lease right-of-use assets 2,673 2,915 Other 526 887 $ 63,743 $ 55,475 90 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 10. ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES Accrued liabilities consist of the following (in thousands): As of December 31, 2021 2020 Salaries and benefits $ 27,304 $ 25,786 Incentive compensation 33,107 27,023 Operating lease liability-ST 9,009 8,740 Accrued professional fees 773 1,273 Legal accrual 3,897 900 Accrued sales taxes 1,980 2,146 Warranties and returns 532 1,027 Deferred revenue 12,646 5,566 Accrued other taxes 4,337 3,540 Distribution fees 5,645 5,300 Accrued freight 9,194 6,784 Restructuring accrual 664 3,421 Other 9,107 5,515 $ 118,195 $ 97,021 Other long-term liabilities consist of the following (in thousands): As of December 31, 2021 2020 Operating lease liability-LT $ 33,971 $ 41,019 Finance lease liability-LT 2,067 2,388 Contract liabilities (1) 202 337 Forward-starting interest rate swaps 1,480 — Benefits 1,369 1,183 Accrued rent 1,262 1,462 Other 1,479 1,446 $ 41,830 $ 47,835 _______________________________ (1) Consists of contracts with customers and suppliers that were valued at below market at the time of the HIS acquisition. 91 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11. LONG-TERM OBLIGATIONS Five-year Senior Secured Revolving Credit Facility ("Credit Facility") On November 8, 2017, we entered into a five-year Revolving Credit Facility ("Credit Facility") with various lenders for $ 150.0 million, with Wells Fargo Bank, N.A. as the administrative agent, swingline lender and issuing lender. During March 2020, as a result of market uncertainty caused by the COVID-19 pandemic, we preemptively borrowed $ 150.0 million on our Credit Facility as a conservative measure to manage any potential short-term liquidity risk. As of December 31, 2020, we had fully repaid all amounts borrowed. As of December 31, 2021 and 2020, we had no borrowings and $ 150.0 million of availability under the Credit Facility. The Credit Facility matures on November 8, 2022 . 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. In connection with the Credit Facility, during the year ended December 31, 2017, we incurred $ 1.4 million in financing costs, which were capitalized and are included in prepaid expenses and other current assets and other assets on our consolidated balance sheets, in accordance with the appropriate short-term or long-term classification. These fees are being amortized to interest expense over the remaining term of the Credit Facility. On January 6, 2022, we completed the acquisition of Smiths Medical which was partially financed by entering into Senior Secured Credit Facilities 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 $ 500.0 million. Principal payments Principal payments, when drawn on the Credit Facility, are made at our discretion with the entire unpaid amount due at maturity. Interest rate In general, borrowing under the Credit Facility (other than Swingline loans) bears interest, at our option, based on the Base Rate plus applicable margin or the London Interbank Offered Rate ("LIBOR") rate plus applicable margin, as defined below: (A) Base Rate is defined as the highest of: (a) the Prime Rate; (b) the Federal Funds Rate plus 0.50%; and (c) the daily LIBOR (as defined below) for a one month Interest Period plus 1%. (B) LIBOR Rate, as determined by the Administrative Agent, is defined as the rate per annum obtained by dividing (1) LIBOR by (2) 1.00 - Eurodollar Reserve Percentage. Swingline loans will bear interest at the Base Rate plus the applicable Interest Margin. The Credit Facility has a per annum commitment fee (see table below) that will accrue on the unused amounts of the commitments under the Credit Facility. 92 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The applicable interest margins and the commitment fee with respect to the Credit Facility shall be based on the Total Leverage Ratio pursuant to the following pricing grid: Level Consolidated Total Leverage Ratio Commitment Fee LIBOR + Base Rate + I Less than 1.00 to 1.00 0.15 % 1.25 % 0.25 % II Greater than or equal to 1.00 to 1.00 but less than 2.00 to 1.00 0.20 % 1.50 % 0.50 % III Greater than or equal to 2.00 to 1.00 but less than 2.50 to 1.00 0.25 % 1.75 % 0.75 % IV Greater than or equal to 2.50 to 1.00 0.30 % 2.00 % 1.00 % Guarantors and Collateral Our obligations under the Credit Facility are unconditionally guaranteed, on a joint and several basis, by ICU Medical, Inc. and certain of our existing subsidiaries. Our obligations are secured by: (i) 100% of the equity interests of our guarantor subsidiaries; and (ii) all of the tangible and intangible personal property and assets related to us and our guarantor subsidiaries (including, without limitation, all accounts, equipment, inventory and other goods, all instruments, intellectual property and other general intangibles, deposit accounts, securities accounts and other investment property and cash), and (iii) all products, profits and proceeds of the foregoing. Notwithstanding the foregoing, the collateral shall not include certain excluded property. Debt Covenants The Credit Facility contains certain financial covenants pertaining to Consolidated Fixed Charge Coverage and Consolidated Total Leverage Ratios. In addition, the Credit Facility has restrictions pertaining to limitations on debt, liens, negative pledges, loans, advances, acquisitions, other investments, dividends, distributions, redemptions, repurchases of equity interests, fundamental changes and asset sales and other dispositions, prepayments, redemptions and purchases of subordinated debt and other junior debt, transactions with affiliates, dividend and payment restrictions affecting subsidiaries, changes in line of business, fiscal year and accounting practices and amendment of organizational documents and junior debt documents. The Consolidated Leverage Ratio is defined as the ratio of Consolidated Total Funded Indebtedness on such date, to Consolidated Adjusted EBITDA, as defined under the Credit Facility Agreement, for the most recently completed four fiscal quarters. The maximum Consolidated Leverage Ratio is not more than 3.00 to 1.00. The Consolidated Fixed Charge Coverage Ratio is defined as the ratio of: (a) Consolidated Adjusted EBITDA less the sum of (i) capital expenditures, (ii) federal, state, local and foreign income taxes paid in cash and (iii) cash restricted payments made after the closing date, to (b) Consolidated Fixed Charges for the most recently completed four fiscal quarters, calculated on a pro forma basis. The minimum Consolidated Fixed Charge Coverage Ratio is 2.00 to 1.00. We entered into Senior Secured Credit Facilities in January 2022, which terminated our existing Credit Facility (see Note 17: Subsequent Events). NOTE 12. INCOME TAXES Income from continuing operations before taxes consisted of the following (in thousands): Year Ended December 31, 2021 2020 2019 United States $ 81,484 $ 41,194 $ 32,849 Foreign 41,702 56,300 81,858 $ 123,186 $ 97,494 $ 114,707 93 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The provision (benefit) for income taxes consisted of the following (in thousands): Year Ended December 31, 2021 2020 2019 Current: Federal $ 20,646 $ 6,032 $ 6,851 State 3,444 2,422 2,532 Foreign 7,236 7,290 7,994 $ 31,326 $ 15,744 $ 17,377 Deferred: Federal $ ( 8,154 ) $ ( 5,319 ) $ ( 6,720 ) State ( 1,815 ) ( 1,850 ) ( 325 ) Foreign ( 1,306 ) 2,049 3,340 ( 11,275 ) ( 5,120 ) ( 3,705 ) $ 20,051 $ 10,624 $ 13,672 We have accrued for tax contingencies for potential tax assessments, and in 2021 we recognized a $ 3.0 million net increase, most of which related to various federal, state and foreign tax reserves. A reconciliation of the provision for income taxes at the statutory rate to our effective tax rate is as follows (dollars in thousands): Year Ended December 31, 2021 2020 2019 Amount Percent Amount Percent Amount Percent Federal tax at the expected statutory rate $ 25,869 21.0 % $ 20,474 21.0 % $ 24,088 21.0 % State income tax, net of federal effect 2,907 2.4 % 2,099 2.2 % 1,269 1.1 % Tax credits ( 2,443 ) ( 2.0 ) % ( 3,269 ) ( 3.4 ) % ( 2,896 ) ( 2.5 ) % Global intangible low-taxed income 711 0.6 % 163 0.2 % 6,634 5.8 % Foreign income tax differential ( 2,983 ) ( 2.4 ) % ( 3,888 ) ( 4.0 ) % ( 5,939 ) ( 5.2 ) % Stock-based compensation ( 4,263 ) ( 3.5 ) % ( 4,686 ) ( 4.8 ) % ( 8,446 ) ( 7.4 ) % Foreign-derived intangible income ( 3,775 ) ( 3.1 ) % ( 2,718 ) ( 2.8 ) % ( 516 ) ( 0.5 ) % IP installment sale and repatriation — — % — — % ( 2,118 ) ( 1.8 ) % Contingent consideration ( 29 ) — % 1,566 1.6 % — — % Section 162(m) 1,812 1.5 % 1,079 1.1 % 203 0.2 % Other 2,245 1.8 % ( 196 ) ( 0.2 ) % 1,393 1.2 % $ 20,051 16.3 % $ 10,624 10.9 % $ 13,672 11.9 % Tax credits in 2021, 2020 and 2019 consist principally of research and developmental tax credits. Certain intellectual property and assets were repatriated in 2019 from a liquidation of foreign subsidiaries to the U.S. parent. The tax effect of the repatriation is included as IP installment sale and repatriation. 94 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The components of our deferred income tax assets (liabilities) are as follows (in thousands): As of December 31, 2021 2020 Deferred tax asset: Accruals/other $ 6,866 $ 4,406 Acquired future tax deductions 5,440 7,781 Stock-based compensation 7,283 7,138 Foreign currency translation adjustments 3,360 2,406 Tax credits 11,953 12,444 Inventory reserves 8,199 8,493 Allowance for doubtful accounts 926 4,460 Accrued restructuring 131 1,293 Chargebacks, discounts, customer concessions 27,970 22,874 Valuation allowance ( 2,934 ) ( 3,891 ) $ 69,194 $ 67,404 Deferred tax liability: State income taxes $ 2,724 $ 2,398 Foreign — 776 Depreciation and amortization 20,483 25,113 Section 481(a) adjustment - change in accounting method 4,873 9,746 $ 28,080 $ 38,033 Deferred tax asset, net $ 41,114 $ 29,371 Tax Holidays and Carryforwards Net operating loss ("NOL") carryforwards consist of: (a) federal NOL carryforwards of $ 2.5 million which will expire at various dates from 2023 to indefinite carryforward periods, (b) state NOL carryforwards of $ 8.2 million which will expire at various dates from 2022 to indefinite carryforward periods and (c) foreign NOL carryforwards of $ 15.0 million which will expire at various dates from 2022 to indefinite carryforward periods. Under Section 382 of the Internal Revenue Code, certain ownership changes limit the utilization of the NOL carryforwards, and the amount of federal NOL carryforwards recorded is the net federal benefit available. Other carryforwards include state research and development (“R&D”) tax credit carryforwards of $ 16.9 million, which have an indefinite carryforward period. A substantial portion of our manufacturing operations in Costa Rica operate under various tax holiday and tax incentive programs due to expire in whole or in part in 2027. Certain of the holidays may be extended if specific conditions are met. The net impact of these tax holiday and tax incentives was an increase to our net earnings by $ 9.8 million or $ 0.45 per diluted share in 2021 and by $ 8.0 million or $ 0.37 per diluted share in 2020. Foreign currency translation adjustments, and related tax effects, are an element of “other comprehensive income” and are not included in net income other than the revaluation of the associated deferred tax asset due to the Tax Act. As of December 31, 2021, we have estimated $ 98.6 million of undistributed foreign earnings and profits. Such earnings were previously subject to U.S. tax as a result of the Tax Act and much of any future remittances would generally be subject to no U.S. tax as a result of dividends received deductions and/or foreign tax credit relief. We intend to invest substantially all of our foreign subsidiary earnings, as well as our capital in our foreign subsidiaries, indefinitely outside of the U.S. in those jurisdictions in which we incur significant additional costs upon repatriation of such amounts. 95 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) We are subject to taxation in the U.S. and various states and foreign jurisdictions. Our U.S. federal income tax returns for tax years 2018 and forward are subject to examination by the Internal Revenue Service. Our principal state income tax returns for tax years 2012 and forward are subject to examination by the state tax authorities. The total gross amount of unrecognized tax benefits as of December 31, 2021 was $ 21.5 million which, if recognized, would impact the effective tax rate. We believe that adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax examinations cannot be predicted with certainty. As of December 31, 2021, it is not possible to estimate the amount of change, if any, in the unrecognized tax benefits that is reasonably possible within the next twelve months. We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. We have not accrued any penalties or interest as of December 31, 2021 or 2020. The following table summarizes our cumulative gross unrecognized tax benefits (in thousands): Year Ended December 31, 2021 2020 2019 Beginning balance $ 18,443 $ 15,027 $ 10,824 Increases to prior year tax positions 231 502 138 Increases to current year tax positions 3,242 2,987 4,231 Decreases to prior year tax positions — ( 15 ) ( 3 ) Decrease related to lapse of statute of limitations ( 31 ) ( 58 ) ( 163 ) Decrease related to settlements with tax authorities ( 348 ) — — Ending balance $ 21,537 $ 18,443 $ 15,027 NOTE 13. GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS Significant Customers We sell products worldwide, on credit terms on an unsecured basis, as an OEM supplier, to independent medical supply distributors and directly to the end customer. The manufacturers and distributors, in turn, sell our products to healthcare providers. We do not currently derive a significant portion of our revenues from any one customer. Geographic Information The table below presents our gross long-lived assets, consisting of property, plant and equipment, by country or region (in thousands): As of December 31, 2021 2020 Costa Rica $ 115,187 $ 104,015 Mexico 79,567 76,004 Other LATAM 36,907 37,485 Canada 4,716 4,672 Italy 12,435 11,098 Spain 13,295 8,701 Other Europe 4,171 3,795 APAC 20,452 19,836 Total Foreign $ 286,730 $ 265,606 United States 618,374 577,490 Worldwide Total $ 905,104 $ 843,096 96 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 14. STOCKHOLDERS' EQUITY Treasury Stock In August 2019, our Board of Directors approved a common stock purchase plan to purchase up to $ 100.0 million of our common stock. This plan has no expiration date. We have $ 100.0 million remaining on this purchase plan. We did not purchase any of our common stock under our common stock purchase plan in 2021, 2020 or 2019. We are limited on share purchases in accordance with the terms and conditions of our Credit Facility (see Note 11: Long-Term Obligations). In 2021, we withheld 40,350 shares of our common stock from employee vested restricted stock units in consideration for $ 8.3 million in payments for the employees' share award income tax withholding obligations. We had 119 shares remaining in treasury at December 31, 2021. In 2020, we withheld 67,041 shares of our common stock from employee vested restricted stock units in consideration for $ 12.9 million in payments for the employees' share award income tax withholding obligations. We had 209 shares remaining in treasury at December 31, 2020. In 2019, we withheld 80,186 shares of our common stock from employee vested restricted stock units in consideration for $ 18.6 million in payments for the employees' share award income tax withholding obligations. We had 850 shares remaining in treasury at December 31, 2019. We use treasury stock to issue shares for stock option exercises and restricted stock grants. Accumulated Other Comprehensive (Loss) Income ("AOCI") The components of AOCI, net of tax, were as follows (in thousands): Foreign Currency Translation Adjustments Unrealized Gains (Losses) on Cash Flow Hedges Other Adjustments Total Balance as of January 1, 2019 $ ( 17,682 ) $ 638 $ 99 $ ( 16,945 ) Other comprehensive income (loss) before reclassifications 372 1,938 ( 71 ) 2,239 Amounts reclassified from AOCI — ( 696 ) — ( 696 ) Other comprehensive income (loss) 372 1,242 ( 71 ) 1,543 Balance as of December 31, 2019 $ ( 17,310 ) $ 1,880 $ 28 $ ( 15,402 ) Other comprehensive income before reclassifications 12,929 1,505 47 14,481 Amounts reclassified from AOCI — ( 601 ) — ( 601 ) Other comprehensive income 12,929 904 47 13,880 Balance as of December 31, 2020 $ ( 4,381 ) $ 2,784 $ 75 $ ( 1,522 ) Other comprehensive loss before reclassifications ( 14,664 ) ( 403 ) ( 62 ) ( 15,129 ) Amounts reclassified from AOCI — ( 2,618 ) — ( 2,618 ) Other comprehensive loss ( 14,664 ) ( 3,021 ) ( 62 ) ( 17,747 ) Balance as of December 31, 2021 $ ( 19,045 ) $ ( 237 ) $ 13 $ ( 19,269 ) 97 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 15. COMMITMENTS AND CONTINGENCIES Legal Proceedings From time to time, we are involved in various legal proceedings, most of which are routine litigation, in the normal course of business. Our management does not believe that the resolution of the unsettled legal proceedings that we are involved with will have a material adverse impact on our financial position or results of operations. Off Balance Sheet Arrangements In the normal course of business, we have agreed to indemnify our officers and directors to the maximum extent permitted under Delaware law and to indemnify customers as to certain intellectual property matters related to sales of our products. There is no maximum limit on the indemnification that may be required under these agreements. We have never incurred, nor do we expect to incur, any liability for indemnification. Contingencies In 2017, we recognized an earn-out liability in connection with our acquisition of HIS from Pfizer. Pfizer was entitled to receive between $ 191.3 million and $ 225.0 million in additional cash consideration based on the achievement of certain performance targets for the combined company for the three years ending December 31, 2019. As of December 31, 2019, we determined we did not meet the necessary performance targets that would require payout of any of the HIS earn-out liability. Pfizer disputed our determination that the performance targets requiring payout of the HIS earn-out liability were not met, therefore the dispute entered into binding arbitration. In August 2021, the arbitrator concluded that the necessary performance targets that would require payout of the HIS earn-out were not met, and as a result Pfizer is not entitled to any payments in connection with the HIS earn-out liability. During November 2019, we acquired Pursuit (see Note 2: Acquisitions). Total consideration for the acquisition included a potential contractual earn-out of up to $ 50.0 million to be paid to former Pursuit equity holders, calculated based upon the achievement of certain performance targets during the earn-out period. As of June 30, 2021, the earn-out measurement period had ended and based on the actual sales and gross profit achieved during the measurement period we calculated the actual earn-out to be $ 26.3 million. In October 2021, the $ 26.3 million earn-out was finalized and paid to the former Pursuit equity holders (see Note 8: Fair Value Measurements). In August 2021, we entered into an agreement with one of our international distributors whereby that distributor would not compete with us in a specific territory for a three-year period that will end in September 2024. The terms of the agreement include a contingent earn-out payment. The contingent earn-out shall not exceed $ 6.0 million, which will be earned based on certain revenue targets over a twelve-month measurement period determined by the highest four consecutive quarters commencing over a two-year period starting on the closing date of the agreement and provided that the distributor is in compliance with its obligations under the agreement. As of December 31, 2021, the fair value of the contingent earn-out was estimated at $ 2.6 million (see Note 8: Fair Value Measurements). During November 2021, we acquired a small foreign infusion systems supplier. Total consideration for the acquisition includes a potential earn-out payment of up to $ 2.5 million, consisting of (i) a cash payment of $ 1.0 million contingent on the achievement of certain revenue targets for the annual period ending December 31, 2022 and, separately, (ii) a cash payment of $ 1.5 million contingent on certain product-related regulatory certifications obtained by May 26, 2024. The initial estimated fair value of the contingent consideration related to this acquisition is immaterial. Commitments We have non-cancelable operating lease agreements where we are contractually obligated to pay certain lease payment amounts (see Note 5: Leases). 98 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16. COLLABORATIVE AND OTHER ARRANGEMENTS On February 3, 2017, we entered into two Manufacturing and Supply Agreements ("MSAs") whereby (i) Pfizer will manufacture and supply us with certain agreed upon products for an initial five-year term with a one-time two-year option to extend and (ii) we will manufacture and supply Pfizer certain agreed upon products for a term of five or ten years depending on the product, also with a one-time two-year option to extend. The MSAs provide each party with mutually beneficial interests and both of the MSAs are to be jointly managed by both Pfizer and ICU. The initial supply price, which will be annually updated, is in full consideration for all costs associated with the manufacture, documentation, packaging and certification of the products. On January 1, 2021, we amended our MSA with Pfizer, whereby we manufacture and supply certain agreed upon products to Pfizer. The amendments included a change to the term of the agreement to end on December 31, 2024 with Pfizer's unilateral election to extend through December 31, 2025. Other changes to the terms of the MSA included (i) amendments to our level of supply of products to Pfizer, (ii) certain changes to our manufacturing lines, (iii) updates to our supply price with added volume price tiers for annual periods and (iv) certain minimum purchase requirements for certain products. On February 1, 2022, effective as of January 1, 2022, upon our request, Pfizer executed a Product Addendum (the "Product Addendum") to our MSA agreement, whereby Pfizer manufactures and supplies to us certain agreed upon products. The Product Addendum includes the supply of additional product to us subject to certain time and pricing terms and conditions. The Product Addendum includes a minimum purchase obligation of $ 29.6 million. The Product Addendum expires on November 30, 2022. NOTE 17. SUBSEQUENT EVENTS Acquisition of Smiths Medical 2020 Limited On January 6, 2022, we completed the acquisition of Smiths Medical, the holding company of Smiths Group plc's global medical device business, from Smiths Group International Holdings Limited (the “Seller”). In accordance with the Share Sale and Purchase Agreement (the "Purchase Agreement"), we purchased 100 % of the equity interests of Smiths Medical for approximately $ 1.9 billion in cash and issued of 2.5 million of fully paid and non-assessable shares of our common stock, par value $ 0.10 per share. The Purchase Agreement also includes a potential contingent earn-out payment of $ 100.0 million in cash, which is to be based upon our common stock achieving a certain volume-weighted average price for certain periods from closing to the third or fourth anniversary of closing. The acquisition of Smiths Medical adds to and complements our current product portfolio and the combining of both businesses allows us to be a scaled U.S.-based global competitor that increases the stability of the medical supply chain and allows for future growth. At closing, in connection with the issuance of the stock consideration to the Seller, we entered into a Shareholders Agreement (the “Shareholders Agreement”). The Shareholders Agreement imposes certain restrictions on the Seller including prohibiting certain transfers of the shares of our common stock issued (i) for 6 months following the closing of the acquisition transaction and (ii) to certain of our competitors and certain other parties, as well as customary standstill limitations. Under the Shareholders Agreement, the Seller has the right to designate one individual for election to our board of directors so long as the Seller beneficially owns at least 5.0 % of the total outstanding shares of our common stock. We expect to account for the Smiths acquisition as a business combination, however the initial accounting for the business combination is incomplete. We are unable to provide preliminary estimates of asset and liability fair market values as the external valuation of the assets acquired and liabilities assumed is incomplete. We plan to file the required historical financial statements and the required pro forma financial statements of the combined results of ICU and Smiths Medical in a Form 8-K/A to amend the Current Report on Form 8-K filed on January 7, 2022 by March 22, 2022. Issuance of Senior Secured Credit Facilities On January 6, 2022, to partially finance the acquisition of Smiths Medical, we entered into a credit agreement (the "Credit Agreement") with Wells Fargo Bank, National Association, Wells Fargo Securities, LLC, Barclays Bank PLC and certain other financial institutions (the “Lenders”), pursuant to which, among other things, the Lenders provided us with credit facilities in the aggregate amount of $ 2.2 billion consisting of (i) a five-year term loan A of $ 850.0 million, (ii) a seven-year Term Loan B of $ 850.0 million and (iii) a five-year Revolving Credit Facility of $ 500.0 million. Principal Payments 99 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Principal payments on the term loan A and term loan B Facilities are due on the last day of each calendar quarter commencing on June 30, 2022. The term loan A Facility will amortize in an amount equal to 2.50 % of the original principal amount in the first two years, 5.00 % in the third and fourth years and 7.50 % in the fifth year, with a final payment of the outstanding principal balance due on the respective maturity date. The term loan B Facility will mature in twenty-seven consecutive quarterly installments in an amount equal to 0.25 % of the aggregate principal amount of the term loan B outstanding on the Closing Date, with a final payment of the outstanding principal balance due on the respective maturity date. All outstanding revolving loans over the term of the revolver are to be paid by the applicable maturity date. Interest Rate Terms In general, U.S. dollar revolving and term loans under the credit facilities may bear interest, at our option, on either (1) the Base Rate, as defined in the Credit Agreement, plus the applicable margin, as indicated below or (2) Adjusted Term secured overnight financing rate, as defined in the Credit Agreement, plus applicable margin as indicated below. Revolving Credit Facility Commitment Fee The revolving credit facility has a per annum commitment fee at an initial rate of 0.25 % which is applied to the available amount of the revolving credit facility. The commitment fee after the quarter ending June 30, 2022 is calculated based on the leverage ratio as indicated below. Applicable Interest Margins The applicable interest margins with respect to revolving loans and the term loan A Facility shall initially be 1.75 % for RFR Loans, as defined in the Credit Agreement. The following pricing grid for the revolving credit facility and the term loan A Facility will become effective after the quarter ending June 30, 2022 and will be based on changes in the Leverage Ratio as follows: Leverage Ratio Applicable Margin for RFR Loans Applicable Margin for Base Rate Loans Commitment Fee Rate >4.00 to 1.0 2.25 % 1.25 % 0.35 % < 4.00 to 1.0 but >3.00 to 1.0 2.00 % 1.00 % 0.30 % < 3.00 to 1.0 but >2.50 to 1.0 1.75 % 0.75 % 0.25 % < 2.50 to 1.0 but >2.00 to 1.0 1.50 % 0.50 % 0.20 % < 2.00 to 1.0 1.25 % 0.25 % 0.15 % The applicable interest margins for the term loan B Facility shall initially be set at 2.50 % for Eurocurrency Rate Loans. The following pricing grid will become effective on the Adjustment Date and will be based on changes in the Leverage Ratio as follows: Leverage Ratio Applicable Margin for Eurocurrency Rate Loans Applicable Margin for Base Rate Loans >2.75 to 1.0 2.50 % 1.50 % < 2.75 to 1.0 2.25 % 1.25 % The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Loan Parties and the restricted subsidiaries of the Company, including, without limitation, restrictions on liens, indebtedness, investments, fundamental changes, dispositions, restricted payments and prepayment of junior indebtedness. The Credit Agreement contains financial covenants on the revolving credit facility and term loan A Facility that require the Loan Parties and the restricted subsidiaries of the Company to (i) not exceed a maximum secured net leverage ratio initially set at 4.50 to 1.00, with stepdowns to 4.00 to 1.00 on June 30, 2024 and (ii) a minimum interest coverage ratio of 3.00 to 1.00. 100 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Credit Agreement contains customary events of default, including, without limitation, payment defaults, covenant defaults, breaches of certain representations and warranties, cross defaults and cross-acceleration to certain material indebtedness, certain events of bankruptcy and insolvency, impairment of security, certain events under ERISA, material judgments and a change of control. If an event of default occurs and is not cured within any applicable grace period or is not waived, the administrative agent and the lenders are entitled to take various actions, including, without limitation, the acceleration of amounts due thereunder and termination of commitments under the Facilities. 101 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.