What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-07 compared with 2022-08-09 · 133 added, 107 removed, 437 unchanged (35% of the section changed)

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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" below for additional detail regarding the acquisition transaction.

See "Acquisitions" below for additional detail regarding the 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.

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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

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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.

We have eleven additional smaller distribution centers globally three of which are in the U.S., two in each of EMEA and China, and one in each of Canada, the U.K., Japan and India.

Competition Changes

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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.

As of June 30, 2022, our primary product offerings by product line are listed below.

As of September 30, 2022, our primary product offerings by product line are listed below.

We have presented our financial results in accordance with these product lines:

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• 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;

• SwabCap a nd 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;

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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.

These products participate in adjacent categories to the legacy ICU Medical Infusion Systems product line.

The primary Infusion Systems-Smith Medical products are:

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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 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.

COVID-19 Pandemic and other Macroeconomic and Global Geopolitical Events

Our business operations have been, and we expect will continue to be, impacted by the novel coronavirus and its variants ("COVID-19") and by the continuing conflict between Russia and Ukraine.

These events have resulted in global economic challenges, such as rising inflation, especially with respect to freight costs driven by the higher fuel prices, global supply chain disruption, and foreign currency exchange rate impact as a result of the strengthening of the U.S.

All of these factors have negatively impacted our gross profit margin during 2022.

While we continually monitor the ongoing and evolving impacts of the pandemic, macroeconomic conditions and geopolitical events on our operations the extent of such impacts are based on factors that cannot be fully predicted at this time.

Accordingly, the impact on our overall financial performance remains uncertain and cannot as yet be quantified.

For a discussion of the risks and uncertainties we face as a result of the COVID-19 pandemic and other market and external factors, see Part I, Item 1A.

"Risk Factors" of our 2021 Annual Report on Form 10-K.

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We present income statement data in Part I, Item 1.

"Financial Statements." The following table shows, for the three and six months ended June 30, 2022 and 2021, the percentages of each income statement caption in relation to total revenue:

"Financial Statements." The following table shows, for the three and nine months ended September 30, 2022 and 2021, the percentages of each income statement caption in relation to total revenue:

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2022 2021 2022 2021

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2022 2021 $ Change % Change 2022 2021 $ Change % Change

Infusion Consumables $ 141.1 $ 144.9 $ (3.8) (2.6) % $ 426.1 $ 407.5 $ 18.6 4.6 %

Infusion Consumables revenue increased for the three and six months ended June 30, 2022, as compared to the same periods in the prior year, due to increased customer demand in our global core infusion, global oncology and renal products.

On a constant currency basis, Infusion Consumables revenue would have been $148.6 million, an increase of $12.4 million or 9.1% and $291.1 million, an increase of $28.5 million or 10.9%, for the three and six months ended June 30, 2022, respectively, as compared to the same periods in the prior year.

Infusion Consumables revenue decreased for the three months ended September 30, 2022, as compared to the same period in the prior year, primarily due to the impact of foreign exchange.

Infusion Consumables revenue increased for the nine months ended September 30, 2022, as compared to the same period in the prior year, due to increased customer demand in our global core infusion, global oncology and renal products partially offset by the impact of foreign exchange.

On a constant currency basis, Infusion Consumables revenue would have been $146.1 million, an increase of $1.2 million or 0.8% and $437.3 million, an increase of $29.8 million or 7.3%, for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in the prior year.

Infusion Systems

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2022 2021 $ Change % Change 2022 2021 $ Change % Change

Infusion Systems $ 87.8 $ 90.7 $ (2.9) (3.2) % $ 262.1 $ 259.7 $ 2.4 0.9 %

Infusion Systems revenue increased for the three and six months ended June 30, 2022, as compared to the same periods 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 $90.0 million, an increase of $5.3 million or 6.3%, and $178.7 million, an increase of $9.7 million or 5.7%, for the three and six months ended June 30, 2022, respectively, as compared to the same periods in the prior year.

Infusion Systems revenue decreased for the three months ended September 30, 2022, as compared to the same period in the prior year, primarily due to the impact of foreign exchange.

Infusion Systems revenue increased for the nine months ended September 30, 2022, as compared to the same period in the prior year, primarily due to higher large volume pump ("LVP") software and service sales, offset partially by lower sales related to our non-LVP products and the impact of foreign exchange.

On a constant currency basis, Infusion Systems revenue would have been $91.8 million, an increase of $1.1 million or 1.2%, and $270.5 million, an increase of $10.8 million or 4.2%, for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in the prior year.

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

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2022 2021 $ Change % Change 2022 2021 $ Change % Change

IV Solutions $ 96.4 $ 89.2 $ 7.2 8.1 % $ 279.0 $ 271.8 $ 7.2 2.6 %

IV Solutions revenue increased for the three months ended June 30, 2022, as compared to the same period in the prior year, primarily due to an increase in contract manufacturing sales to Pfizer.

For the six months ended June 30, 2022, IV Solutions revenue was flat as compared to the same period in the prior year.

IV Solutions revenue increased for the three and nine months ended September 30, 2022, as compared to the same periods in the prior year, primarily due to an increase in contract manufacturing sales to Pfizer.

Critical Care

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2022 2021 $ Change % Change 2022 2021 $ Change % Change

Critical Care $ 10.8 $ 11.3 $ (0.5) (4.4) % $ 35.3 $ 36.8 $ (1.5) (4.1) %

Critical Care revenue decreased slightly for the three and six months ended June 30, 2022, as compared to the same periods in the prior year.

Critical Care revenue decreased slightly for the three and nine months ended September 30, 2022, as compared to the same periods in the prior year.

Infusion Systems-Smiths Medical

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The Infusion Systems-Smiths Medical revenue is a result of the acquisition of Smiths Medical.

The year-to-date amount in the table above represents approximately six months of revenue from the closing date of the transaction to the end of the current quarter ended June 30, 2022.

Revenues in the current periods are lower than historical results due to operational challenges caused by supply chain and fulfillment constraints.

The year-to-date amount in the table above represents approximately nine months of revenue from the closing date of the transaction to the end of the current quarter ended September 30, 2022.

Revenues in the current periods are lower than historical results due to operational challenges caused by supply chain and fulfillment constraints and due to the impact of changes in foreign currency exchange rates.

Vascular Access-Smiths Medical

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2022 2021 $ Change % Change 2022 2021 $ Change % Change

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The Vascular Access-Smiths Medical revenue is a result of the acquisition of Smiths Medical.

The year-to-date amount in the table above represents approximately six months of revenue from the closing date of the transaction to the end of the current quarter.

Revenues in the current periods are lower than historical results due to operational challenges caused by supply chain and fulfillment constraints.

The year-to-date amount in the table above represents approximately nine months of revenue from the closing date of the transaction to the end of the current quarter ended September 30, 2022.

Vital Care-Smiths Medical

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The Vital Care-Smiths Medical revenue is a result of the acquisition of Smiths Medical.

The year-to-date amount in the table above represents approximately six months of revenue from the closing date of the transaction to the end of the current quarter.

Revenues in the current periods are lower than historical results due to operational challenges caused by supply chain and fulfillment constraints.

The year-to-date amount in the table above represents approximately nine months of revenue from the closing date of the transaction to the end of the current quarter ended September 30, 2022.

Gross Margins

For the three months ended June 30, 2022 and 2021, gross margins were 29.9% and 38.4%, respectively.

For the six months ended June 30, 2022 and 2021, gross margins were 30.5% and 36.9%, respectively.

The decrease in gross margins for the three and six months ended June 30, 2022, as compared to the same period in the prior year, was driven by the acquisition of Smiths Medical, inflationary cost increases in our supply chain, and lower manufacturing absorption due to supply chain disruptions.

Smiths Medical gross margins are lower than historical ICU margins for the current quarter and year-to-date period due primarily to spending on quality systems and product-related remediation, the cost recognition of the purchase accounting write-up of inventory and freight costs.

The inflationary cost increases during 2022 notably impacted our freight rates as well as, labor and materials costs.

Partially offsetting the decreases to gross margins in the current periods was the impact from increased sales of higher margin consumables.

For the three months ended September 30, 2022 and 2021, gross margins were 31.2% and 38.0%, respectively.

For the nine months ended September 30, 2022 and 2021, gross margins were 30.7% and 37.3%, respectively.

The decrease in gross margins for the three and nine months ended September 30, 2022, as compared to the same periods in the prior year, was driven by the acquisition of Smiths Medical, changes in foreign currency exchange rates due to the strengthening US dollar, inflationary cost increases in our supply chain, and lower manufacturing absorption due to supply chain disruptions.

Inflationary cost increases during 2022 notably impacted our logistics expenses, as well as labor and raw materials costs.

Selling, General and Administrative (“SG&A”) Expenses

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2022 2021 $ Change % Change 2022 2021 $ Change % Change

SG&A $ 153.5 $ 74.8 $ 78.7 105.2 % $ 465.4 $ 221.1 $ 244.3 110.5 %

SG&A expenses increased for the three and six months ended June 30, 2022, as compared to the same periods in the prior year.

For the three and six months ended June 30, 2022, increases of $83.5 million and $156.3 million, respectively, was due to the impact of the Smiths Medical acquisition.

Expense increases related to Smiths Medical included, $28.1 million of salaries and benefits and $33.6 million of depreciation and amortization expense for the three months ended June 30, 2022 and

$56.2 million of salaries and benefits and $58.8 million of depreciation and amortization expense for the six months ended June 30, 2022.

SG&A expenses increased for the three and nine months ended September 30, 2022, as compared to the same periods in the prior year.

For the three and nine months ended September 30, 2022, increases of $77.1 million and $233.4 million, respectively, were due to the impact of the Smiths Medical acquisition.

For the three months ended September 30, 2022, expense increases related to Smiths Medical included $27.6 million of salaries and benefits, $33.3 million of depreciation and amortization expense and $4.9 million of IT and business support services and for the nine months ended September 30, 2022 Smiths Medical SG&A expenses included $83.8 million of salaries and benefits, $92.1 million of depreciation and amortization expense and $15.6 million of IT and business support services.

In addition to the Smiths Medical SG&A increases, for the nine months ended September 30, 2022 stock based compensation increased $8.2 million primarily due to a change in the probability of the number of shares estimated to be earned for certain equity awards based on performance criteria, an increase in the value of equity granted during the current year period compared to the prior year period as well as an increase in the number of employees receiving equity during the current year period as compared to prior year period as a result of the Smiths Medical acquisition.

Research and Development (“R&D”) Expenses

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R&D $ 23.1 $ 12.2 $ 10.9 89.3 % $ 69.5 $ 34.3 $ 35.2 102.6 %

R&D expenses increased for the three and six months ended June 30, 2022, as compared to the same periods in the prior year primarily due to the acquisition of Smiths Medical.

For the three and six months ended June 30, 2022, the increase included $9.3 million and $21.1 million, respectively, 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.

R&D expenses increased for the three and nine months ended September 30, 2022, as compared to the same periods in the prior year primarily due to the acquisition of Smiths Medical.

For the three and nine months ended September 30, 2022, the increase included $9.9 million and $31.0 million, respectively, related to Smiths Medical R&D expenses.

R&D expenses during both periods primarily relate to headcount and employment expense in support of ongoing R&D projects.

Restructuring, Strategic Transaction and Integration Expenses

Restructuring, strategic transaction and integration expenses were $13.5 million and $47.4 million for the three and six months ended June 30, 2022, respectively, as compared to $3.8 million and $6.6 million for the three and six months ended June 30, 2021, respectively.

Restructuring, strategic transaction and integration expenses were $14.4 million and $61.8 million for the three and nine months ended September 30, 2022, respectively, as compared to $2.4 million and $9.0 million for the three and nine months ended September 30, 2021, respectively.

Restructuring charges

Restructuring charges were $1.7 million and $4.9 million for the three and six months ended June 30 2022, respectively, and were related to severance costs.

We expect to pay unpaid restructuring charges as of June 30, 2022 by the end of 2022.

Restructuring charges were $0.1 million for both the three and six months ended June 30, 2021.

Restructuring charges were $2.4 million and $7.3 million for the three and nine months ended September 30, 2022, respectively, and were related to severance costs.

We expect to pay unpaid restructuring charges as of September 30, 2022 by the end of 2023.

During the third quarter of 2021 we adjusted certain facility restructuring liabilities by $2.0 million to reflect actual amounts owed resulting in net restructuring credits of $(1.9) million and $(1.8) million for the three and nine months ended September 30, 2021, respectively.

Strategic transaction and integration expenses

Strategic transaction and integration expenses were $11.8 million and $42.5 million for the three and six months ended June 30, 2022, respectively, as compared to $3.7 million and $6.5 million for the three and six months ended June 30, 2021, respectively.

The strategic transaction and integration expenses during the three and six months ended June 30, 2022 were primarily related to our acquisition of Smiths Medical which primarily included legal expenses, bank fees and employee costs.The strategic transaction and integration expenses during the six months ended June 30, 2022 also included a United Kingdom stamp tax.

The strategic transaction and integration expenses during the three and six months ended June 30, 2021 were primarily related to integration costs associated with acquisitions, the Hospira Infusion Systems ("HIS") earn-out dispute with Pfizer and one-time costs incurred to comply with regulatory initiatives.

Strategic transaction and integration expenses were $12.0 million and $54.5 million for the three and nine months ended September 30, 2022, respectively, as compared to $4.3 million and $10.8 million for the three and nine months ended September 30, 2021, respectively.

The strategic transaction and integration expenses during the three and nine months ended September 30, 2022 were primarily related to our acquisition of Smiths Medical which primarily included legal expenses, bank fees and employee costs.

The strategic transaction and integration expenses during the nine months ended September 30, 2022 also included a United Kingdom stamp tax.

The strategic transaction and integration expenses during the three months ended September 30, 2021 were primarily related to transaction expenses incurred related to entering into a definitive agreement to acquire Smiths.

The strategic transaction and integration expenses for the nine months ended September 30, 2021 were

primarily related to integration costs associated with acquisitions, the Hospira Infusion Systems ("HIS") earn-out dispute with Pfizer, one-time costs incurred to comply with regulatory initiatives and the transaction costs related to the Smiths transaction.

Change in Fair Value of Contingent Earn-out

For the three and nine months ended September 30, 2022 there was a gain of $4.1 million and $31.3 million, respectively, primarily related to the change in fair value of contingent earn-out related to the Smiths Medical acquisition.

Contract Settlement

We did not incur contract settlement expense for the three and six months ended June 30, 2022.

For the three and six months ended June 30, 2021, we recorded $0.1 million in contract settlement expense.

We did not incur contract settlement expense for the three and nine months ended September 30, 2022.

For the three and nine months ended September 30, 2021, we recorded $0.1 million in contract settlement expense.

Interest Expense

Interest expense was $16.3 million and $0.2 million for the three months ended June 30, 2022 and 2021, respectively.

Interest expense was $29.9 million and $0.3 million for the six months ended June 30, 2022 and 2021, respectively.

Interest expense for the three and six months ended June 30, 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:

Interest expense was $21.2 million and $0.2 million for the three months ended September 30, 2022 and 2021, respectively.

Interest expense was $51.1 million and $0.5 million for the nine months ended September 30, 2022 and 2021, respectively.

Interest expense for the three and nine months ended September 30, 2022 primarily 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 and six months ended June 30, 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.

Interest expense for the three and nine months ended September 30, 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 (expense) income netted to $(0.5) million and $0.5 million for the three and six months ended June 30, 2022, respectively, as compared to $0.5 million and $1.2 million for the three and six months ended June 30, 2021, respectively.

For the three months ended June 30, 2022, other expense, net was related to $2.7 million in foreign exchange losses and $0.6 million of loss from disposed assets, mostly offset by $2.0 million of miscellaneous income and $0.8 million of interest income.

For the six months ended June 30, 2022, other income, net was related to $2.6 million of miscellaneous income and $1.4 million of interest income, partially offset by $2.5 million in foreign exchange losses and $1.0 million of loss from disposed assets.

For the three months ended June 30, 2021, the other income, net was related to $0.7 million of interest income and $0.2 million of miscellaneous income, partially offset by $0.2 million in foreign exchange losses and $0.2 million of loss from disposed assets.

For the six months ended June 30, 2021, the other income, net was related to $1.4 million of interest income, $0.4 million of miscellaneous income and $0.3 million in foreign exchange gains, partially offset by $0.8 million of loss from disposed assets.

For the three months ended June 30, 2020, the other income, net was primarily related to $1.5 million in foreign exchange gains.

For the three months ended June 30, 2022 and 2021, income taxes were accrued at an estimated effective tax rate of 56% and 18%, respectively.

For the six months ended June 30, 2022 and 2021, income taxes were accrued at an estimated effective tax rate of 36% and 16%, respectively.

The effective tax rate for the three and six months ended June 30, 2022 differs from the federal statutory rate of 21% principally because of the effect of the mix of U.S.

Other income netted to $0.3 million and $0.8 million for the three and nine months ended September 30, 2022, respectively, as compared to $(0.3) million and $0.9 million for the three and nine months ended September 30, 2021, respectively.

For the three months ended September 30, 2022, other income (expense), net was related to $3.3 million in interest income and $0.4 million of miscellaneous income, net, mostly offset by $2.1 million of foreign exchange losses and $1.4 million of loss from disposal of assets.

For the nine months ended September 30, 2022, other income (expense), net was related to $4.8 million in interest income and $2.9 million of miscellaneous income, net, mostly offset by $4.6 million of foreign exchange losses and $2.3 million of loss from disposal of assets.

For the three months ended September 30, 2021, the other expense, net was related to $0.9 million in foreign exchange losses and $0.3 million of loss from disposed assets offset by $0.7 million of interest income and $0.2 million of miscellaneous income.

For the nine months ended September 30, 2021, the other income, net was related to $2.1 million of interest income and $0.5 million of miscellaneous income partially offset by $1.1 million of loss from disposed assets and $0.6 million in foreign exchange losses.

For the three months ended September 30, 2022 and 2021, income taxes were accrued at an estimated effective tax rate of 38% and 18%, respectively.

For the nine months ended September 30, 2022 and 2021, income taxes were accrued at an estimated effective tax rate of 37% and 17%, respectively.

The effective tax rate for the three and nine months ended September 30, 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 and six months ended June 30, 2022 included a tax benefit of $0.0 million and $2.6 million, respectively, related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period.

The effective tax rate for the three and six months ended June 30, 2022 also included a nil tax impact of the revaluation of contingent consideration.

The effective tax rate for the three and six months ended June 30, 2021 differs from the federal statutory rate of 21% principally because of the effect of the mix of U.S.

The effective tax rate during the three and nine months ended September 30, 2022 included a tax benefit of 1.5 million and $4.1 million, respectively, related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period.

The effective tax rate

for the three and nine months ended September 30, 2022 also included a nil tax impact related to the revaluation of contingent consideration of $4.1 million and $31.3 million, respectively.

The effective tax rate for the three and nine months ended September 30, 2021 differs from the federal statutory rate of 21% principally because of the effect of the mix of U.S.

and foreign incomes, state income taxes, GILTI, FDII and tax credits.

The effective tax rate during the three and six months ended June 30, 2021, respectively, included a tax benefit of $0.4 million and $2.2 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the periods.

The effective tax rate during the three and nine months ended September 30, 2021 included a tax benefit of $1.1 million and $3.3 million, respectively, related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the periods and a tax provision of $1.1 million related to U.S.

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

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.

We regularly evaluate our liquidity and capital resources, including our access to external capital, to assess our ability to 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

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

During the six months ended June 30, 2022, our cash and cash equivalents and short-term investment securities decreased by $298.4 million from $567.2 million at December 31, 2021 to $268.9 million at June 30, 2022, which was primarily due to our use of existing

cash balances to partially fund the Smiths Medical acquisition in January 2022 and due to building inventory safety stock levels to respond to supply chain constraints.

Our short-term investment portfolio consists of investment-grade corporate bonds and U.S.

During the nine months ended September 30, 2022, our cash and cash equivalents and short-term investment securities decreased by $320.4 million from $567.2 million at December 31, 2021 to $246.8 million at September 30, 2022.

This decrease was primarily due to our use of existing cash balances to partially fund the Smiths Medical acquisition in January 2022, to replenish finished goods inventory levels for legacy Smiths Medical, increase safety stock of raw materials across the combined company and to respond to supply chain constraints.

Our short-term investment portfolio consists of investment-grade corporate and federal bonds and U.S.

treasury securities and is primarily intended to facilitate capital preservation.

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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 June 30, 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 outstanding aggregate principal amount of the term loans is $1.7 billion as of September 30, 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 June 30, 2022.

There are no outstanding borrowings under the Revolving Credit Facility as of September 30, 2022.

As part of entering into the Senior Secured Credit Facilities, we were assigned issuer and Term Loan B credit ratings.

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Credit Ratings Outlook

Moody's Ba3 Stable

Fitch BB/BBB- Stable

Moody's Ba3/Ba3 Stable

Fitch BB/BBB- Negative

Standard & Poor's BB-/BB- Stable

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:

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 June 30, 2022.

We were in compliance with these financial covenants as of September 30, 2022.

2017 Credit Facility

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In the event that we experience downturns, cyclical fluctuations in our business that are more severe or longer than anticipated, fail to achieve anticipated revenue and expense levels, or have significant unplanned cash expenditures, we may need to obtain or seek alternative sources of capital or financing, and we can provide no assurances that the terms of such capital or financing will be available to us on favorable terms, if at all.

Our ability to generate cash flows from operations, issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers, deterioration in our key financial ratios or credit ratings or other significantly unfavorable changes in conditions.

"Risk Factors” in our 2021 Annual Report on Form 10-K for discussion of the risks and uncertainties associated with our debt financing.

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Capital Expenditures

At June 30, 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.

At September 30, 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 June 30, 2022 include both short and long-term future obligations.

Our principal commitments at September 30, 2022 include both short and long-term future obligations.

Operating Leases

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Collaborative and Other Arrangements to our accompanying condensed consolidated financial statements for additional information).

As of June 30, 2022, we had satisfied the minimum purchase obligations under the Product Addendum.

As of September 30, 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 June 30, 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.

At September 30, 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

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Cash Flows from Operating Activities

Our net cash used in operations for the six months ended June 30, 2022 was $62.7 million.

Our net cash used in operations for the nine months ended September 30, 2022 was $60.4 million.

Net income plus adjustments for non-cash net expenses contributed $173.6 million.

Net cash used in operations as a result of changes in operating assets and liabilities was $234.0 million.

The changes in operating assets and liabilities included a $100.0 million increase in inventories, a $17.3 million increase in other assets, a $33.5 million decrease in accrued liabilities and $45.8 million in net changes in income taxes, including excess tax benefits and deferred income taxes and a $1.1 million increase in accounts receivable.

The changes in operating assets and liabilities included a $151.8 million increase in inventories, a $22.6 million increase in other assets, a $38.1 million decrease in accrued liabilities, $63.0 million in net changes in income taxes, including excess tax benefits and deferred income taxes and a $9.0 million increase in accounts receivable.

Offsetting these amounts was a $20.1 million decrease in prepaid expenses and other current assets and a $30.4 million increase in accounts payable.

The increase in inventory was primarily due to the increase in safety stock.

The increase in inventory was primarily to build inventory safety stock levels.

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.

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The net changes in income taxes was a result of recording the current deferred provision and the timing of payments.

The increase in accounts receivable is primarily due to collection efforts and the timing of revenue.

The increase in accounts receivable was primarily due to the net impact of 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 six months ended June 30, 2021 was $106.1 million.

Our net cash provided by operations for the nine months ended September 30, 2021 was $184.9 million.

Net income plus adjustments for non-cash net expenses contributed $195.2 million.

Net cash used in operations as a result of changes in operating assets and liabilities was $10.3 million.

The changes in operating assets and liabilities included a $17.1 million decrease in accrued liabilities, a $7.6 million increase in other assets, $6.0 million in net changes in income taxes, including excess tax benefits and deferred income taxes and a $1.6 million decrease in accounts payable.

Offsetting these amounts was a $13.4 million decrease in inventories, a $2.1 million decrease in accounts receivables, and a $0.8 million decrease in prepaid expenses and other assets.

The decrease in accrued liabilities was primarily due to the payment of annual bonuses.

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

The changes in operating assets and liabilities included a $13.6 million increase in other assets, a $10.4 million decrease in accounts payable, a $8.3 million decrease in accrued liabilities and $1.9 million in net changes in income taxes, including excess tax benefits and deferred income taxes.

Offsetting these amounts was a

$16.5 million decrease in inventories, a $3.8 million decrease in accounts receivables and a $3.6 million decrease in prepaid expenses and other assets.

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

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

The decrease in accrued liabilities was primarily due to the payment of operating lease liabilities and annual bonuses.

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

The decrease in inventory was primarily due to the timing of production and customer purchases combined with the reduction in capitalized manufacturing variances.

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

The net decrease in prepaid expenses and other current assets was primarily due to a decrease in prepaid insurance, property taxes and deferred costs, offset by an increase in annual software renewals.

The net decrease in prepaid expenses and other current assets was primarily due to a decrease in prepaid insurance and property taxes, decreased sales tax receivables and a decrease in deferred costs, offset partially by an increase in annual software and service contract renewals.

Cash Flows from Investing Activities

The following table summarizes the changes in our investing cash flows (in thousands):

Six months ended

Nine months ended

September 30,

2022 2021 Change

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Intangible asset additions (6,560) (10,216) 3,656 (3)

Investments in non-marketable equity securities — (3,250) 3,250 (4)

Purchases of investment securities (3,397) (10,034) 6,637 (5)

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Acquired cash was $78.8 million.

(3) In September 2021, we recorded a $7.1 million intangible asset related to a three-year non-compete agreement, of which $3.1 million was non-cash offset with a contingent earn-out (see Note 8:

Fair Value Measurements).

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

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

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The following table summarizes the changes in our financing cash flows (in thousands):

Six months ended

Nine months ended

September 30,

2022 2021 Change

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(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 six months ended June 30, 2022, our employees surrendered 44,759 shares of our common stock from vested restricted stock awards as consideration for approximately $10.4 million in minimum statutory withholding obligations paid on their behalf.

During the six months ended June 30, 2021, our employees surrendered 37,882 shares of our common stock from vested restricted stock awards as consideration for approximately $7.8 million in minimum statutory withholding obligations paid on their behalf.

(4) During the nine months ended September 30, 2022, our employees surrendered 45,370 shares of our common stock from vested restricted stock awards as consideration for approximately $10.5 million in minimum statutory withholding obligations paid on their behalf.

During the nine months ended September 30, 2021, our employees surrendered 39,371 shares of our common stock from vested restricted stock awards as consideration for approximately $8.1 million in minimum statutory withholding 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 June 30, 2022, all of the $100.0 million available for purchase was remaining under the plan.

As of September 30, 2022, all of the $100.0 million available for purchase was remaining under the plan.

Critical Accounting Policies

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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.

The forward-looking statements are based on the 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;

• our 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;

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• outcome of litigation;

• fluctuations in foreign exchange rates and other risks of doing business internationally;

• fluctuations in foreign currency exchange rates and other risks of doing business internationally;

• increased competition for skilled workers;

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis