ICU MEDICAL INC/DE 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following information should be read in conjunction with the condensed consolidated financial statements and accompanying notes in this Form 10-Q, as well as the audited consolidated financial statements and related notes for the fiscal year ended December 31, 2021 included in our Annual Report on Form 10-K. When used in this report, the terms “we,” “us,” and “our” refer to ICU Medical, Inc ("ICU") and its subsidiaries included in our condensed consolidated financial statements unless context requires otherwise. Business Overview Recent Developments On January 6, 2022 we completed the acquisition of Smiths Medical 2020 Limited ("Smiths Medical"), the holding company of Smiths Group plc's global medical device business. See "Acquisitions" in the remainder of this item for additional detail regarding the acquisition transaction. Smiths Medical is engaged in the development, manufacture and sale of syringe and ambulatory infusion devices, vascular access, and vital care products used in hospital, emergency, home and alternative care settings. Our acquisition of Smiths Medical was strategic and increases our focus and scale in infusion therapy globally which we believe will enhance our competitive position as a leader within the industry. The combination of ICU and Smiths Medical brings together two highly complementary product portfolios to create a comprehensive range of offerings utilized in the infusion therapy care continuum. Our existing product portfolio includes IV solutions, IV smart pumps with pain management and safety software technology, dedicated and non-dedicated IV sets and needlefree connectors designed to help meet clinical, safety and workflow goals. In addition, we manufacture automated pharmacy IV compounding systems with workflow technology, closed systems transfer devices for preparing and administering hazardous IV drugs, and cardiac monitoring systems for critically ill patients. The acquisition of Smiths Medical broadened our product portfolio to include syringe and ambulatory pumps, peripheral IV catheters, fluid warming and respiratory devices, silicone and PVC tracheotomy tubes, among other products. Following the Smiths Medical acquisition, we are initially presenting the following product lines in addition to our legacy product lines: Infusion Systems-Smiths Medical, Vascular Access-Smiths Medical and Vital Care-Smiths Medical. See "Products" in the remainder of this item for a list of our primary products included in each line. Our primary customers are acute care hospitals, wholesalers, ambulatory clinics and alternate site facilities, such as clinics, home health care providers and long-term care facilities. With the addition of Smiths Medical we sell our products in more than 90 countries throughout the world. The following information is additional to and not a substitute for the Business section under Part I, Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2021 and should be read in conjunction with that filing: Manufacturing Changes With the acquisition of the Smiths Medical business, we now operate additional manufacturing facilities including five facilities in the United States ("U.S."), two facilities in Mexico and two in the UK, and one facility in the Czech Republic, Italy and China. Service Centers With the acquisition of the Smiths Medical business, we now operate additional service and repair facilities in the U.S., Canada, two locations in Europe and four locations in Asia. Distribution Changes Following the Smiths Medical acquisition, we operate two additional main distribution centers, one in the U.S. supporting the Americas and International and one in the Netherlands mainly supporting EMEA. We have a further eleven smaller distribution centers globally three of which are in the U.S., two centers in EMEA and China, and one center in Canada, the U.K., Japan and India. 38 Table of Contents Competition Changes The Infusion Systems product line of Smiths Medical competes with many of the same competitors as those referenced in Part I, Item 1. "Business" of our 2021 Annual Report on Form 10-K as well as additional competitors such as Moog Medical and QCOR. The Vascular Access product line of Smith Medicals competes with many of the same competitors as those referenced in Part I, Item 1. "Business" of our 2021 Annual Report on Form 10-K as well as additional competitors such Angio Dynamics, Greiner Bio-One, and Teleflex Incorporated. Our ability to remain competitive in this market will depend on our ability to focus on demonstrable patient outcomes by differentiating our products by improving device functionality and by providing successful customer training programs on the use and maintenance of our products. The Vital Care product line of Smith Medical competes with numerous competitors due its wide range of business. Those include multinational competitors such as Medtronic and Philips Healthcare as well as smaller more focused competitors such as Belmont and Intersurgical plc. Our ability to compete in this market will depend on our ability to continue to make technological advances to our products, thereby increasing customer efficiency and by providing product support that improves clinical decision-making that ultimately enhances patient safety. Products As of March 31, 2022, our primary product offerings by product line are listed below. We have presented our financial results in accordance with these product lines: Infusion Consumables Infusion therapy sets, used in hospitals and ambulatory clinics, consist of a tube running from a bottle or plastic bag containing a solution to a catheter inserted in a patient’s vein, that may or may not be used with an IV pump. Our primary Infusion Consumable products are: • Clave™ needlefree products , including the MicroClave, MicroClave Clear, and NanoClave™ brand of connectors, accessories, extension and administration sets used for the administration of IV fluids and medications and the Neutron catheter patency device, used to help maintain patency of central venous catheters; • SwabCap and SwabTip disinfecting caps, used to protect and disinfect any needlefree connector, including competitive brands of connectors, and male luers; • ClearGuard HD antimicrobial barrier caps for hemodialysis catheters; and • Tego TM hemodialysis connector used to cap and protect hemodialysis central venous catheter hubs. Closed System Transfer Devices ("CSTD") and hazardous drug compounding systems are used to prepare and deliver hazardous IV medications such as those used in chemotherapy, which, if released, can have harmful effects on the healthcare worker and environment. Our products are: • ChemoLock TM CSTD, which utilizes a proprietary needlefree connection method, is used for the preparation and administration of hazardous drugs. ChemoLock is used to limit the escape of hazardous drug or vapor concentrations, block the transfer of environmental contaminants into the system, and eliminates the risk of needlestick injury; • ChemoClave TM , an ISO Connection standard and universally compatible CSTD used for the preparation and administration of hazardous drugs. ChemoClave utilizes standard ISO luer locking connections, making it compatible with all brands of needlefree connectors and pump delivery systems. ChemoClave also is used to limit the escape of hazardous drug or vapor concentrations, block the transfer of environmental contaminants into the system, and eliminate the risk of needlestick injury; and 39 Table of Contents • Diana TM hazardous drug compounding system, an automated sterile compounding system that incorporates ChemoClave and ChemoLock CSTD consumables and IV workflow technology for the accurate, safe, and efficient preparation of hazardous drugs. It is a user-controlled automated system that provides repeatable accuracy of drug mixes and minimizes clinician exposure to hazardous drugs while helping to maintain the sterility of the drugs being mixed. The preparation of hazardous drugs typically takes place in a pharmacy where drugs are removed from vials and prepared for delivery to a patient. Those prepared drugs are then transferred to a nursing unit where the chemotherapy is administered via an infusion pump set to a patient. Components of the ChemoClave and ChemoLock product lines are used both in pharmacies and on the nursing floors for the preparation and administration of hazardous drugs. Infusion Systems We offer a wide range of infusion pumps, dedicated IV sets, software and professional services. Our primary Infusion System products are dedicated IV sets and the following: Infusion Pump Hardware: • Plum 360™ : The Plum 360™ infusion pump is an ICU Medical MedNet™ ready large volume infusion pump with an extensive drug library and wireless capability. Plum 360 was named the 2018, 2019 and 2020 Best in KLAS winner as top-performing IV smart pump and was the first medical device to be awarded UL Cybersecurity Assurance Program Certification. Also, in 2021 and 2022, the Plum 360 won the award as the top-performing Smart Pump EMR-Integrated; and • LifeCare PCA™ : The LifeCare PCA infusion pump is an ICU Medical MedNet™ ready patient-controlled analgesia pump ("PCA"), providing complete IV Electronic Health Record ("IV-EHR") interoperability since 2016. IV Medication Safety Software: • ICU Medical MedNet ™: ICU Medical MedNet is an enterprise-class medication management platform for any sized healthcare system that can help reduce medication errors, improve quality of care, streamline workflows and maximize revenue capture. ICU Medical MedNet connects our industry-leading smart pumps to a hospital’s EHR, asset tracking systems, and alarm notification platforms with the largest array of integration partners. Professional Services: • In addition to the products above, our teams of clinical, information technology, and professional services experts work with customers to develop and deliver safe and efficient infusion systems, providing customized and personalized configuration, implementation, and data analytics services to complement our infusion hardware and software. IV Solutions We provide a broad portfolio of IV solutions to meet our customers’ clinical needs, providing a consistent supply of IV solutions, irrigation, and nutritionals to help provide safe and effective patient care. Our primary IV Solutions products are: IV Therapy and Diluents: • Including Sodium Chloride, Dextrose, Balanced Electrolyte Solutions, Lactated Ringer's, Ringer's, Mannitol, Sodium Chloride/Dextrose and Sterile Water. Irrigation: 40 Table of Contents • Including Sodium Chloride Irrigation, Sterile Water Irrigation, Physiologic Solutions, Ringer's Irrigation, Acetic Acid Irrigation, Glycine Irrigation, Sorbitol-Mannitol Irrigation, Flexible Containers and Pour Bottle Options. Critical Care Our Critical Care products help clinicians get accurate real-time access to patients’ hemodynamic and cardiac status with an extensive portfolio of monitoring systems and advanced sensors & catheters. Measurements provided by our systems help clinicians determine how well the heart is pumping blood and how efficiently oxygen from the blood is being used by the tissues. Our primary Critical Care products are: • Cogent™ 2-in-1 hemodynamic monitoring system; • CardioFlo™ hemodynamic monitoring system; • TDQ™ and OptiQ™ cardiac output monitoring catheters; • TriOx TM venous oximetry catheters; • Transpac™ blood pressure transducers; and • SafeSet™ closed blood sampling and conservation system. Infusion Systems-Smiths Medical We offer a wide range of infusion pumps, disposables and safety software for use in both hospital and home settings. These products participate in adjacent categories to the legacy ICU Medical Infusion Systems segment. The primary Infusion Systems-Smith Medical products are: Ambulatory Infusion Hardware: • CADD ® ambulatory infusion pumps and disposables, including administration sets and medication cassette reservoirs, support a variety of IV pain management therapies across clinical care areas from hospital to outpatient treatment. Syringe Infusion Hardware: • Medfusion TM syringe infusion pumps are designed for the administration of fluids and medication requiring precisely controlled infusion rates from a variety of syringe sizes in acute care settings. Infusion Software: • PharmGuard ® Medication Safety Software for Medfusion TM 4000 syringe and CADD™ Solis pumps allows for customized drug libraries to support the standardization of protocols for medication administration throughout the facility. Vascular Access-Smiths Medical Our Vascular Access-Smiths Medical products allow clinicians to safely access the patients' bloodstream to deliver fluids and medication or to obtain blood samples. Vascular Access products are often used in conjunction with Consumables and Infusion Systems devices. Our primary Vascular Access products are: • Jelco ® safety and conventional peripheral IV catheters, sharps safety devices for hypodermic injection, and venipuncture blood collection and peripheral IV catheters designed to help prevent needlestick injury and to reduce the risks associated with blood exposure and contamination while reducing patients' risk of infection; • DELTEC ® implantable ports and GRIPPER ® non-coring needles for portal access; • Portex ® arterial blood sampling syringes, anesthesia trays and kits for pain management; • Powerwand ® midline catheters; and • MEDEX ® LogiCal ® Pressure Monitoring System and components. 41 Table of Contents Vital Care-Smiths Medical We offer a range of devices and systems to maintain patients' airways and maintain body temperature before, during and after surgery. Our primary Vital Care products are: • Level 1 ® temperature management systems used in perioperative and critical care settings to help monitor and regulate patient temperature through rapid infusion, routine blood and fluid warming, irrigation warming and convective warming. • Portex ® acapella ® bronchial hygiene products used to mobilize pulmonary secretions to facilitate the opening of airways in patients with chronic respiratory diseases such as chronic obstructive pulmonary disease, or COPD, asthma and cystic fibrosis. • Portex ® Bivona ® tracheostomy tubes in PVC and silicone construction that provide a secure airway for both surgical and percutaneous procedures. Our silicone tracheostomy tubes are customizable to accommodate unique patient requirements. In the U.S. a substantial amount of our products are sold to group purchasing organization member hospitals. We believe that as healthcare providers continue to either consolidate or join major buying organizations, the success of our products will depend, in part, on our ability, either independently or through strategic relationships to secure long-term contracts with large healthcare providers and major buying organizations. Although we believe that we are not dependent on any single distributor, large healthcare provider or major buying organization for distribution of our products, the loss of a strategic relationship with any one of these organizations or a decline in the demand for our products could have a material adverse effect on our operating results. We believe that achievement of our growth objectives worldwide will require increased efforts by us in sales and marketing and product acquisition and development; however, there is no assurance that we will be successful in implementing our growth strategy. Product development or acquisition efforts may not succeed, and even if we do develop or acquire additional products, there is no assurance that we will achieve profitable sales of such products. Increased expenditures for sales and marketing and product acquisition and development may not yield desired results when expected, or at all. While we have taken steps to control these risks, there are certain risks that may be outside of our control, and there is no assurance that steps we have taken will succeed. Seasonality/Quarterly Results There are no significant seasonal aspects to our business. We can experience fluctuations in net sales as a result of variations in the ordering patterns of our largest customers, which may be driven more by the novel coronavirus and its variants (“COVID-19”) pandemic surges and its impact on hospital admissions and procedure volumes along with production scheduling and customer inventory levels, and less by seasonality. Our expenses often do not fluctuate in the same manner as net sales, which may cause fluctuations in operating income that are disproportionate to fluctuations in our revenue. Acquisition On January 6, 2022, we acquired 100% of the equity interests in Smiths Medical from Smiths Group International Holdings Limited (“Smiths”) for cash consideration of $1.9 billion and the issuance of 2.5 million shares of our common stock valued at $576.0 million. We funded the cash portion of the consideration paid with a combination of proceeds from a Credit Agreement dated January 6, 2022 (the "Credit Agreement") and our cash and cash equivalents. The fair value of the common shares issued to Smiths was determined based on the closing market price of our common stock on the acquisition date. Smiths may be entitled to a potential contingent earn-out payment of $100.0 million based on our common stock achieving certain price targets on or prior to the third or fourth anniversary of closing. See Note 3, Acquisitions in our accompanying condensed consolidated financial statements for further details on the acquisition. See "Liquidity and Capital Resources" in the remainder of this item and Note 17 in our accompanying condensed consolidated financial statements for additional information regarding the Credit Agreement. COVID-19 42 Table of Contents COVID-19 continues to have an impact on our business operations. Our manufacturing, distribution and pump service facilities continue to operate under our business continuity plan and our precautionary safety measures implemented to maximize the safety of our employees and mitigate disruption to our business remain in effect. While we continually monitor the ongoing and evolving impact of the effect of the COVID-19 pandemic on our operations the overall impact will not be fully reflected in our results of operations until future periods. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be fully predicted at this time, as such, the impact of the pandemic on our overall financial performance remain uncertain and cannot as yet be quantified. For discussion of the risks and uncertainties we face associated with the COVID-19 pandemic, see Part I, Item 1A. "Risk Factors" of our 2021 Annual Report on Form 10-K. Consolidated Results of Operations We present income statement data in Part I, Item 1. "Financial Statements." The following table shows, for the three months ended March 31, 2022 and 2021, the percentages of each income statement caption in relation to total revenue: Three months ended March 31, 2022 2021 Total revenues 100 % 100 % Gross profit 31 % 35 % Selling, general and administrative expenses 28 % 23 % Research and development expenses 4 % 3 % Restructuring, strategic transaction and integration expenses 6 % 1 % Contract settlement — % — % Total operating expenses 38 % 27 % (Loss) income from operations (7) % 8 % Interest expense (3) % — % Other income, net — % — % (Loss) income before income taxes (10) % 8 % Benefit (provision) for income taxes 3 % (1) % Net (loss) income (7) % 7 % In addition to comparing changes in revenue on a U.S. GAAP basis, we also compare the changes in revenue from one period to another using constant currency. We provide constant currency information to enhance the visibility of underlying business trends, excluding the effects of changes in foreign currency translation rates. To calculate our constant currency results, we apply the average exchange rate for revenues from the prior year to the current year results. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with GAAP. Infusion Consumables The following table summarizes our total Infusion Consumables revenue (in millions): Three months ended March 31, 2022 2021 $ Change % Change Infusion Consumables $ 140.5 $ 126.4 $ 14.1 11.2 % 43 Table of Contents Infusion Consumables revenue increased for the three months ended March 31, 2022, as compared to the same period in the prior year, due to growth in our global core infusion, global oncology, renal and specialty products. On a constant currency basis, Infusion Consumables revenue would have been $142.5 million for the three months ended March 31, 2022, an increase of $16.1 million or 12.7%, as compared to the same period in the prior year. Infusion Systems The following table summarizes our total Infusion Systems revenue (in millions): Three months ended March 31, 2022 2021 $ Change % Change Infusion Systems $ 87.0 $ 84.3 $ 2.7 3.2 % Infusion Systems revenue increased for the three months ended March 31, 2022, as compared to the same period in the prior year, due to higher large volume pump ("LVP") dedicated set sales driven by larger install base of LVPs, offset partially by lower sales related to our non-LVP products. On a constant currency basis, Infusion Systems revenue would have been $88.7 million for the three months ended March 31, 2022, an increase of $4.4 million or 5.2%, as compared to the same period in the prior year. IV Solutions The following table summarizes our total IV Solutions revenue (in millions): Three months ended March 31, 2022 2021 $ Change % Change IV Solutions $ 88.5 $ 94.2 $ (5.7) (6.1) % IV Solutions revenue decreased for the three months ended March 31, 2022, as compared to the same period in the prior year, primarily due to lower contract manufacturing sales to Pfizer. Critical Care The following table summarizes our total Critical Care revenue (in millions): Three months ended March 31, 2022 2021 $ Change % Change Critical Care $ 12.2 $ 13.1 $ (0.9) (6.9) % Critical Care revenue slightly decreased for the three months ended March 31, 2022, as compared to the same period in the prior year. Infusion Systems-Smiths Medical The following table summarizes our total Infusion Systems-Smiths Medical revenue (in millions): Three months ended March 31, 2022 2021 $ Change % Change Infusion Systems-Smiths Medical $ 66.3 $ — $ 66.3 nm The Infusion Systems-Smiths Medical revenue is a result of the acquisition of Smiths Medical. The amount in the table above represents approximately three months of revenue from the closing date of the transaction to the end of the quarter. 44 Table of Contents Vascular Access-Smiths Medical The following table summarizes our total Vascular Access revenue (in millions): Three months ended March 31, 2022 2021 $ Change % Change Vascular Access-Smiths Medical $ 79.0 $ — $ 79.0 nm The Vascular Access-Smiths Medical revenue is a result of the acquisition of Smiths Medical. The amount in the table above represents approximately three months of revenue from the closing date of the transaction to the end of the quarter. Vital Care-Smiths Medical Three months ended March 31, 2022 2021 $ Change % Change Vital Care-Smiths Medical $ 69.6 $ — $ 69.6 nm The Vital Care-Smiths Medical revenue is a result of the acquisition of Smiths Medical. The amount in the table above represents approximately three months of revenue from the closing date of the transaction to the end of the quarter. Gross Margins For the three months ended March 31, 2022 and 2021, gross margins were 31.1% and 35.4%, respectively. The decrease in gross margins for the three months ended March 31, 2022, as compared to the same period in the prior year, was primarily due to the acquisition of Smiths Medical. Smiths Medical gross margins are lower than historical ICU margins for the quarter due to: $13.2 million spending on quality systems and product-related remediation costs; lower manufacturing absorption due to supply chain disruptions; and the impact of inflation and higher freight expediting costs. Legacy ICU gross margins for the quarter were generally consistent with prior year and reflected improvement due to increased sales of higher margin consumables, offset by lower absorption in our Austin manufacturing plant from lower volumes and inflation. Selling, General and Administrative (“SG&A”) Expenses The following table summarizes our total SG&A Expenses (in millions): Three months ended March 31, 2022 2021 $ Change % Change SG&A $ 153.2 $ 72.4 $ 80.8 111.6 % SG&A expenses increased for the three months ended March 31, 2022, as compared to the same period in the prior year, primarily due to a $72.7 million impact from the acquisition of Smiths Medical, which consisted primarily of $28.0 million of salaries and benefits, $25.1 million of depreciation and amortization expense. Expenses that increased aside from the Smiths Medical acquisition included $5.9 million in stock based compensation. Stock based compensation increased due to a change in the probability of shares expected to be earned. Research and Development (“R&D”) Expenses The following table summarizes our total R&D Expenses (in millions): Three months ended March 31, 2022 2021 $ Change % Change R&D $ 23.9 $ 10.7 $ 13.2 123.4 % 45 Table of Contents R&D expenses increased for the three months ended March 31, 2022, as compared to the same period in the prior year primarily due to the acquisition of Smiths Medical. The increase included $11.8 million related to Smiths Medical R&D expenses. R&D expenses during both periods primarily relate to compensation and related benefit expenses on current R&D projects. Restructuring, Strategic Transaction and Integration Expenses Restructuring, strategic transaction and integration expenses were $33.9 million and $2.9 million for the three months ended March 31, 2022 and 2021, respectively. Restructuring charges Restructuring charges were $3.2 million for the three months ended March 31, 2022 related to severance costs. We expect to pay unpaid restructuring charges as of March 31, 2022 by the end of 2022. There were no restructuring charges for the three months ended March 31, 2021. Strategic transaction and integration expenses Strategic transaction and integration expenses were $30.7 million and $2.9 million for the three months ended March 31, 2022 and 2021, respectively. The strategic transaction and integration expenses during the three months ended March 31, 2022 were primarily related to our acquisition of Smiths Medical which primarily included legal expenses, bank fees, a United Kingdom stamp tax and employee costs. The strategic transaction and integration expenses during the three months ended March 31, 2021 were primarily related to integration costs associated with previous acquisitions, the Hospira Infusion Systems ("HIS") earn-out dispute with Pfizer and one-time costs incurred to comply with regulatory initiatives. Contract Settlement We did not incur contract settlement expense for the three months ended March 31, 2022. For the three months ended March 31, 2021, we recorded $0.1 million in contract settlement expense. Interest Expense Interest expense was $13.6 million and $0.2 million for the three months ended March 31, 2022 and 2021, respectively. Interest expense for the three months ended March 31, 2022 includes the contractual interest incurred on borrowings under the Credit Agreement, the per annum commitment fee charged on the available amount of the revolving credit facility contained in the Credit Agreement and the amortization of debt issuance costs incurred in connection with entering into the Credit Agreement (see Note 17: Long-Term Debt in our accompanying condensed consolidated financial statements for additional information). Interest expense for the three months ended March 31, 2021 includes the per annum commitment fee charged on the unused portion of the revolver under our 2017 Credit Facility (the "Prior Credit Facility") and the amortization of financing costs that were incurred in 2017 in connection with entering into the Prior Credit Facility. The Prior Credit Facility was terminated in connection with entering into the Credit Agreement. Other Income, net Other income netted to $1.0 million and $0.7 million for the three months ended March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022, other income, net was related to $0.6 million of interest income, $0.5 million of miscellaneous income and $0.2 million in foreign exchange gains, partially offset by $0.3 million of loss from disposed assets. For the three months ended March 31, 2021, other income, net was related to $0.7 million of interest income, $0.5 million in foreign exchange gains and $0.2 million of miscellaneous income, partially offset by $0.7 million of loss from disposed assets. Income Taxes 46 Table of Contents For the three months ended March 31, 2022 and 2021, income taxes were accrued at an estimated effective tax rate of 31% and 12%, respectively. The effective tax rate for the three months ended March 31, 2022 differs from the federal statutory rate of 21% principally because of the effect of the mix of U.S. and foreign incomes, state income taxes, section 162(m) excess compensation, foreign-derived intangible income ("FDII") and tax credits. The effective tax rate during the three months ended March 31, 2022 included the following: • Excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period of $2.6 million. The effective tax rate for the three months ended March 31, 2021 differs from the federal statutory rate of 21% principally because of the effect of the mix of U.S. and foreign incomes, state income taxes, GILTI, FDII and tax credits. The effective tax rate during the three months ended March 31, 2021 included a tax benefit of $1.8 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period. Liquidity and Capital Resources We regularly evaluate our liquidity and capital resources, including our access to external capital, to ensure we can adequately meet our principal cash requirements, which include working capital requirements, planned capital investments in our business, commitments, acquisition restructuring and integration expenses, investments in quality systems and quality compliance objectives, payment of interest expense, repayment of outstanding borrowings, income tax obligations and acquisition opportunities in accordance with our growth strategy. Sources of Liquidity Our primary sources of liquidity are cash and cash equivalents, our short-term investment portfolio, cash flows from our operations and access to borrowing arrangements. Funds generated from operations are held in cash and cash equivalents and investment securities. During the three months ended March 31, 2022, our cash and cash equivalents and short-term investment securities decreased by $223.0 million from $567.2 million at December 31, 2021 to $344.3 million at March 31, 2022, which was primarily due to our use of existing cash balances to partially fund the Smiths Medical acquisition in January 2022. Our short-term investment portfolio consists of investment-grade corporate bonds and is primarily intended to facilitate capital preservation. 2022 Credit Agreement and Access to Capital We entered into the Credit Agreement with various lenders on January 6, 2022 in connection with the closing of the Smiths Medical acquisition. The Credit Agreement provides for a five-year term loan A facility of $850.0 million (the "Term Loan A"), a seven-year term loan B facility of $850.0 million (the "Term Loan B") and a five-year revolving credit facility of $500.0 million (the "Revolving Credit Facility") (collectively, the "Senior Secured Credit Facilities"). The proceeds from the term loans were used to finance a portion of the cash consideration for the Smiths Medical acquisition. The outstanding aggregate principal amount of the term loans is $1.7 billion as of March 31, 2022, which includes the Term Loan A that will mature in January 2027 and the Term Loan B that will mature in January 2029. The proceeds of future borrowings under the Revolving Credit Facility, which expires in January 2027, may be used as a source of liquidity to support our ongoing working capital requirements and other general corporate purposes. There are no outstanding borrowings under the Revolving Credit Facility as of March 31, 2022. As part of entering into the Senior Secured Credit Facilities, we were assigned issuer and Term Loan B credit ratings. At the date of issuance of this report, our issuer and Term Loan B credit ratings assigned and outlook were as follows: Issuer/Term Loan B Credit Ratings Outlook Moody's Ba3 Stable Fitch BB/BBB- Stable Standard & Poor's BB/BB Stable 47 Table of Contents The Credit Agreement contains financial covenants that pertain to the Term Loan A and the Revolving Credit Facility. Specifically, we are required to maintain a Senior Secured Leverage Ratio of no more than 4.50 to 1.00 until June 30, 2024, with stepdowns to 4.00 to 1.00 thereafter, and an Interest Coverage Ratio of no less than 3.00 to 1.00 (defined and discussed in greater detail in Note 17: Long-Term Debt to our accompanying condensed consolidated financial statements). We were in compliance with these financial covenants as of March 31, 2022. 2017 Credit Facility On November 8, 2017, we entered into a five-year revolving credit facility with various lenders for $150.0 million (the "Prior Credit Facility"). The Prior Credit Facility, which was set to expire in November 2022, was terminated upon entering into the new Senior Secured Credit Facilities. There were no outstanding borrowings under the Prior Credit Facility at the time of its termination. We believe that our existing cash and cash equivalents along with cash flows expected to be generated from future operations and the funds received and accessible under the Senior Secured Credit Facilities will provide us with sufficient liquidity to finance our cash requirements for the next twelve months. In the event that we experience downturns, cyclical fluctuations in our business that are more severe or longer than anticipated, fail to achieve anticipated revenue and expense levels, or have significant unplanned cash expenditures, we may need to obtain or seek alternative sources of capital or financing, and we can provide no assurances that the terms of such capital or financing will be available to us on favorable terms, if at all. Our ability to generate cash flows from operations, issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers, deterioration in our key financial ratios or credit ratings or other significantly unfavorable changes in conditions. See Part I. Item 1A. "Risk Factors” in our 2021 Annual Report on Form 10-K for discussion of the risks and uncertainties associated with our debt financing. Uses of Liquidity Capital Expenditures At March 31, 2022, there have been no material changes to our estimate for 2022 planned capital expenditures, as previously disclosed in our 2021 Annual Report on Form 10-K. Contractual Obligations Our principal commitments at March 31, 2022 include both short and long-term future obligations. Operating Leases We have non-cancelable operating lease agreements where we are contractually obligated for certain lease payment amounts. We assumed additional operating leases as a result of our acquisition of Smiths Medical. For more information regarding our operating lease obligations, (see Note 6: Leases to our accompanying condensed consolidated financial statements). Long-term Debt As discussed above, in January 2022, we incurred borrowings under Senior Secured Credit Facilities. The principal repayment obligations and estimated interest payments on the term loans and estimated commitment fee payments on the revolver are estimated in the table below. Interest payments on the term loans were estimated using an Adjusted Term SOFR rate and an initial applicable margin of 1.75% for Term Loan A and 2.50% for Term Loan B and the revolver commitment fees were estimated using the initial rate of 0.25%. The applicable margin rate and commitment fee rate will change from time to time in accordance with a preset pricing grid based on the leverage ratio (see Note 17: Long-Term Debt to our accompanying condensed consolidated financial statements for pricing grids related to the Senior Secured Credit Facilities). We expect to fund these obligations with our existing cash and cash equivalents and cash generated from our future operations. 48 Table of Contents (in millions) Remainder of 2022 2023 2024 2025 2026 2027 Thereafter Term Loan A Principal Payments $ — $ 21.2 $ 42.5 $ 42.5 $ 63.8 $ 664.0 $ — Term Loan A Interest Payments 25.3 39.0 34.6 29.8 26.7 0.3 — Term Loan B Principal Payments 6.4 8.5 8.5 8.5 8.5 8.5 801.1 Term Loan B Interest Payments 32.5 44.9 43.4 40.8 39.0 38.4 41.1 Revolver Commitment Fee 0.9 1.2 1.0 0.8 0.8 0.2 — $ 65.1 $ 114.8 $ 130.0 $ 122.4 $ 138.8 $ 711.4 $ 842.2 Minimum Purchase Obligations On February 1, 2022, effective as of January 1, 2022, upon our request, Pfizer executed a Product Addendum (the "Product Addendum") to our Manufacturing and Supply Agreements to supply us with additional product subject to certain time and pricing terms and conditions (see Note 20: Collaborative and Other Arrangements to our accompanying condensed consolidated financial statements for additional information). As of March 31, 2022, we had satisfied the minimum purchase obligations under the Product Addendum. The Product Addendum expires on November 30, 2022. Other Future Capital Investments At March 31, 2022, there have been no material changes to our estimate for restructuring and integration expenses along with spending to support quality systems and quality compliance objectives, as previously disclosed in our 2021 Annual Report on Form 10-K. Indemnifications In the normal course of business, we have agreed to indemnify our officers and directors to the maximum extent permitted under Delaware law and to indemnify customers as to certain intellectual property matters related to sales of our products. There is no maximum limit on the indemnification that may be required under these agreements. Although we can provide no assurances, we have never incurred, nor do we expect to incur, any liability for indemnification. Historical Cash Flows Cash Flows from Operating Activities Our net cash used in operations for the three months ended March 31, 2022 was $1.3 million. Net income plus adjustments for non-cash net expenses contributed $49.9 million. Net cash used in operations as a result of changes in operating assets and liabilities was $51.3 million. The changes in operating assets and liabilities included a $36.2 million increase in inventories, a $14.4 million increase in other assets, a $19.2 million decrease in accrued liabilities and $26.1 million in net changes in income taxes, including excess tax benefits and deferred income taxes. Offsetting these amounts was a $22.5 million decrease in accounts receivable, a $2.6 million decrease in prepaid expenses and other current assets and a $19.5 million increase in accounts payable. The increase in inventory was primarily due to the increase in safety stock. The increase in other assets was due to the purchase of spare parts and the capitalization of debt issuance costs allocated to the revolving credit facility. The decrease in accrued liabilities was primarily due to the payout of annual bonuses. The net changes in income taxes was a result of the timing of payments. The decrease in accounts receivable is primarily due to collection efforts and the timing of revenue. The net decrease in prepaid expenses and other current assets was primarily due to a decrease in deferred costs mostly offset by capitalized debt issuance costs allocated to the revolving credit facility. The increase in accounts payable was due to the timing of payments. Our net cash provided by operations for the three months ended March 31, 2021 was $51.3 million. Net income plus adjustments for non-cash net expenses contributed $56.9 million. Net cash used in operations as a result of changes in operating assets and liabilities was $5.6 million. The changes in operating assets and liabilities included a $20.0 million decrease in accrued liabilities, a $3.5 million increase in other assets and a $0.7 million increase in prepaid expenses and other assets. Offsetting these amounts was a $13.2 million decrease in inventories, a $2.4 million increase in accounts payable, a $1.5 49 Table of Contents million decrease in accounts receivable and $1.4 million in net changes in income taxes, including excess tax benefits and deferred income taxes. The decrease in accrued liabilities was primarily due to the payment of annual bonuses. The net increase in prepaid expenses and other current assets was primarily due to the payment of annual software renewals, offset by the amortization of prepaid insurance and property taxes. The increase in other assets was due to the purchase of spare parts. The decrease in inventory was primarily due to the timing of production and customer purchases combined with the reduction in capitalized manufacturing variances. The increase in accounts payable was due to the timing of payments. The decrease in accounts receivable is primarily due to collection efforts. The net changes in income taxes was a result of the timing of payments. Cash Flows from Investing Activities The following table summarizes the changes in our investing cash flows (in thousands): Three months ended March 31, 2022 2021 Change Investing Cash Flows: Purchases of property, plant and equipment $ (23,606) $ (14,028) $ (9,578) (1) Proceeds from sale of assets 900 55 845 Business acquisitions, net of cash acquired (1,844,164) — (1,844,164) (2) Intangible asset additions (2,387) (1,874) (513) Purchases of investment securities (1,993) (10,034) 8,041 (3) Proceeds from sale of investment securities 3,500 7,000 (3,500) (4) Net cash used in investing activities $ (1,867,750) $ (18,881) $ (1,848,869) _______________________________ (1) Our purchases of property, plant and equipment increased during the quarter due to the acquisition of Smiths Medical and will also vary from period to period based on additional investments needed to support new and existing products and expansion of our manufacturing facilities. (2) Our business acquisitions will vary from period to period based upon our current growth strategy and our ability to execute on desirable target companies. On January 6, 2022, we completed the acquisition of Smiths Medical. The cash consideration for the transaction was $1.9 billion, which was financed with existing cash balances and borrowings under the Credit Agreement. Acquired cash was $78.8 million. (3) Our purchases of investment securities will vary from period to period based on current cash needs, planning for known future transactions and changes in our investment strategy. (4) Proceeds from the sale of our investment securities will vary from period to period based on the maturity dates of the investments. Cash Flows from Financing Activities The following table summarizes the changes in our financing cash flows (in thousands): 50 Table of Contents Three months ended March 31, 2022 2021 Change Financing Cash Flows: Proceeds from issuance of long-term debt, net of lender debt issuance costs $ 1,672,698 $ — $ 1,672,698 (1) Principal payments on long-term debt (16,000) — (16,000) (2) Payment of third-party debt issuance costs (1,852) — (1,852) (2) Proceeds from exercise of stock options 2,974 4,864 (1,890) (3) Payments on finance leases (160) (141) (19) Tax withholding payments related to net share settlement of equity awards (8,743) (7,723) (1,020) (4) Net cash provided by (used in) financing activities $ 1,648,917 $ (3,000) $ 1,651,917 _______________________________ (1) In January 2022, we borrowed an aggregate of $1.7 billion under Senior Secured Credit Facilities contained in the Credit Agreement to partially finance our acquisition of Smiths Medical (see Note 17: Long-Term Debt to our accompanying condensed consolidated financial statements for additional information). The proceeds are net of $27.3 million in payments of lender debt issuance costs. (2) Payment of $16.0 million of principal payments on the Senior Secured Credit Facilities and $1.9 million in third-party debt issuance costs. (3) Proceeds from the exercise of stock options will vary from period to period based on the volume of options exercised and the exercise price of the specific options exercised. (4) During the three months ended March 31, 2022, our employees surrendered 37,279 shares of our common stock from vested restricted stock awards as consideration for approximately $8.7 million in minimum statutory withholding obligations paid on their behalf. During the three months ended March 31, 2021, our employees surrendered 37,423 shares of our common stock from vested restricted stock awards as consideration for approximately $7.7 million in minimum statutory withholding obligations paid on their behalf. Our common stock purchase plan, which authorized the repurchase of up to $100.0 million of our common stock, was approved by our Board of Directors in August 2019. This plan has no expiration date. As of March 31, 2022, all of the $100.0 million available for purchase was remaining under the plan. Critical Accounting Policies In our 2021 Annual Report on Form 10-K, we identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements. There have been no material changes to our critical accounting policies from those previously disclosed in our 2021 Annual Report on Form 10-K. New Accounting Pronouncements See Note 2: New Accounting Pronouncements in Part I, Item 1. "Financial Statements." 51 Forward-Looking Statements Various portions of this Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and documents referenced herein, describe trends in our business and finances that we perceive and state some of our expectations and beliefs about our future. These statements about the future are “forward-looking statements,” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and we may identify them by using words such as "anticipate," "believe," "expect," "estimate," "intend," "plan," "will," "continue," "could," "may," and by similar expressions and statements about aims, goals and plans. The forward-looking statements are based on the best information currently available to us and assumptions that we believe are reasonable, but we do not intend the statements to be representations as to future results. They include, without limitation, statements about: • future growth; future operating results and various elements of operating results, including future expenditures and effects with respect to sales and marketing and product development and acquisition efforts; future sales and unit volumes of products; expected increases and decreases in sales; deferred revenue; accruals for restructuring charges, future license, royalty and revenue share income; production costs; gross margins; litigation expense; future SG&A and R&D expenses; manufacturing expenses; future costs of expanding our business; income; losses; cash flow; amortization; source of funds for capital purchases and operations; future tax rates; alternative sources of capital or financing; changes in working capital items such as receivables and inventory; selling prices; and income taxes; • factors affecting operating results, such as shipments to specific customers; reduced dependence on current proprietary products; loss of a strategic relationship; change in demand; domestic and international sales; expansion in international markets, selling prices; future increases or decreases in sales of certain products and in certain markets and distribution channels; maintaining strategic relationships and securing long-term and multi-product contracts with large healthcare providers and major buying organizations; increases in systems capabilities; introduction, development and sales of new products, acquisition and integration of businesses and product lines (including Smiths Medical); benefits of our products over competing systems; qualification of our new products for the expedited Section 510(k) clearance procedure; possibility of lengthier clearance process for new products; planned increases in marketing; warranty claims; rebates; product returns; bad debt expense; amortization expense; inventory requirements; lives of property and equipment; manufacturing efficiencies and cost savings; unit manufacturing costs; establishment or expansion of production facilities inside or outside of the United States; planned new orders for semi-automated or fully automated assembly machines for new products; adequacy of production capacity; results of R&D; our plans to repurchase shares of our common stock; asset impairment losses; relocation of manufacturing facilities and personnel; effect of expansion of manufacturing facilities on production efficiencies and resolution of production inefficiencies; the effect of costs to customers and delivery times; business seasonality and fluctuations in quarterly results; customer ordering patterns and the effects of new accounting pronouncements; and • new or extended contracts with manufacturers and buying organizations; dependence on a small number of customers; loss of larger distributors and the ability to locate other distributors; impact of our recently completed acquisition of the Smiths Medical business; the outcome of our strategic initiatives; regulatory approvals and compliance; including the work necessary to achieve regulatory clearance with respect to the Smiths Medical Warning Letter; outcome of litigation; patent protection and intellectual property landscape; patent infringement claims and the impact of newly issued patents on other medical devices; competitive and market factors, including continuing development of competing products by other manufacturers; improved production processes and higher volume production; innovation requirements; consolidation of the healthcare provider market and downward pressure on selling prices; distribution or financial capabilities of competitors; healthcare reform legislation; use of treasury stock; working capital requirements; liquidity and realizable value of our investment securities; future investment alternatives; foreign currency denominated financial instruments; foreign exchange risk; commodity price risk; our expectations regarding liquidity and capital resources over the next twelve months; capital expenditures; plans to convert existing space; acquisitions of other businesses or product lines, indemnification liabilities and contractual liabilities. Forward-looking statements involve certain risks and uncertainties, which may cause actual results to differ materially from those discussed in each such statement. First, one should consider the factors and risks described in the statements themselves or otherwise discussed herein. Those factors are uncertain, and if one or more of them turn out differently than we currently expect, our operating results may differ materially from our current expectations. 52 Second, investors should read the forward-looking statements in conjunction with the Risk Factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021, Part II, Item 1A of this Quarterly Report on Form 10-Q and our other reports filed with the Securities and Exchange Commission ("SEC"). Also, actual future operating results are subject to other important factors and risks that we cannot predict or control, including without limitation, the following: • the impacts of the COVID-19 pandemic on us, our business and on domestic and global economies generally; • the integration of Smiths Medical being more difficult, time-consuming or costly than expected; • general economic and business conditions, both in the U.S. and internationally; • unexpected changes in our arrangements with Pfizer or our other large customers; • outcome of litigation; • fluctuations in foreign exchange rates and other risks of doing business internationally; • increased competition for skilled workers; • decreases in availability of the raw materials needed to manufacture our products; • the effect of price and safety considerations on the healthcare industry; • competitive factors, such as product innovation, new technologies, marketing and distribution strength and price erosion; • the successful development and marketing of new products; • unanticipated market shifts and trends; • the impact of legislation affecting government reimbursement of healthcare costs; • changes by our major customers and independent distributors in their strategies that might affect their efforts to market our products; • the effects of additional governmental regulations; • unanticipated production problems; • acquisition and integration expenses (including as it relates to the Smiths Medical acquisition); • the availability of patent protection and the cost of enforcing and of defending patent claims; • natural disasters and outbreak of disease or illness; • supply chain constraints or disruptions; • impact of inflation on raw materials, freight charges and labor, especially in the U.S.; and • interest rate increases. The forward-looking statements in this report are subject to additional risks and uncertainties, including those detailed from time to time in our other filings with the SEC. These forward-looking statements are made only as of the date hereof and, except as required by law, we undertake no obligation to update or revise any of them, whether as a result of new information, future events or otherwise. 53