ICU MEDICAL INC/DE 10-Q

Item1. Financial Statements (Unaudited) ICU MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value data and treasury shares) September 30, 2022 December 31, 2021 (Unaudited) (1) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 243,879 $ 552,827 Short-term investment securities 2,919 14,420 TOTAL CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENT SECURITIES 246,798 567,247 Accounts receivable, net of allowance for doubtful accounts of $ 8,006 at September 30, 2022 and $ 7,038 at December 31, 2021 212,845 105,894 Inventories 625,268 290,235 Prepaid income taxes 20,170 19,586 Prepaid expenses and other current assets 94,283 46,847 TOTAL CURRENT ASSETS 1,199,364 1,029,809 PROPERTY, PLANT AND EQUIPMENT, net 656,383 468,365 OPERATING LEASE RIGHT-OF-USE ASSETS 76,438 39,847 LONG-TERM INVESTMENT SECURITIES 1,831 4,620 GOODWILL 1,369,717 43,439 INTANGIBLE ASSETS, net 1,020,658 188,311 DEFERRED INCOME TAXES 15,482 42,604 OTHER ASSETS 110,604 63,743 TOTAL ASSETS $ 4,450,477 $ 1,880,738 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 205,042 $ 81,128 Accrued liabilities 244,303 118,195 Current portion of long-term debt 24,375 — Income tax payable 15,014 1,454 Contingent earn-out liability 300 — TOTAL CURRENT LIABILITIES 489,034 200,777 CONTINGENT EARN-OUT LIABILITY 25,942 2,589 LONG-TERM DEBT 1,629,849 — OTHER LONG-TERM LIABILITIES 119,251 41,830 DEFERRED INCOME TAXES 153,599 1,490 INCOME TAX LIABILITY 19,997 18,021 COMMITMENTS AND CONTINGENCIES (Note 19) — — STOCKHOLDERS’ EQUITY: Convertible preferred stock, $ 1.00 par value; Authorized — 500 shares; Issued and outstanding — none — — Common stock, $ 0.10 par value; Authorized — 80,000 shares; Issued — 23,980 shares at September 30, 2022 and 21,280 shares at December 31, 2021; and outstanding — 23,979 shares at September 30, 2022 and 21,280 shares at December 31, 2021 2,398 2,128 Additional paid-in capital 1,323,178 721,412 Treasury stock, at cost ( 712 and 119 shares, respectively) ( 126 ) ( 27 ) Retained earnings 853,037 911,787 Accumulated other comprehensive loss ( 165,682 ) ( 19,269 ) TOTAL STOCKHOLDERS' EQUITY 2,012,805 1,616,031 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,450,477 $ 1,880,738 ______________________________________________________ (1) December 31, 2021 balances were derived from audited consolidated financial statements. The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Table of Contents ICU MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data) Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 TOTAL REVENUES $ 597,857 $ 336,060 $ 1,701,983 $ 975,783 COST OF GOODS SOLD 411,461 208,269 1,179,167 611,783 GROSS PROFIT 186,396 127,791 522,816 364,000 OPERATING EXPENSES: Selling, general and administrative 153,452 74,815 465,412 221,127 Research and development 23,105 12,238 69,538 34,332 Restructuring, strategic transaction and integration 14,365 2,358 61,795 8,994 Change in fair value of contingent earn-out ( 4,059 ) — ( 31,253 ) — Contract settlement — — — 127 TOTAL OPERATING EXPENSES 186,863 89,411 565,492 264,580 (LOSS) INCOME FROM OPERATIONS ( 467 ) 38,380 ( 42,676 ) 99,420 INTEREST EXPENSE ( 21,151 ) ( 168 ) ( 51,068 ) ( 492 ) OTHER INCOME (EXPENSE), net 311 ( 287 ) 782 921 (LOSS) INCOME BEFORE INCOME TAXES ( 21,307 ) 37,925 ( 92,962 ) 99,849 BENEFIT (PROVISION) FOR INCOME TAXES 8,099 ( 6,844 ) 34,212 ( 16,639 ) NET (LOSS) INCOME $ ( 13,208 ) $ 31,081 $ ( 58,750 ) $ 83,210 NET (LOSS) INCOME PER SHARE Basic $ ( 0.55 ) $ 1.47 $ ( 2.47 ) $ 3.93 Diluted $ ( 0.55 ) $ 1.43 $ ( 2.47 ) $ 3.83 WEIGHTED AVERAGE NUMBER OF SHARES Basic 23,908 21,214 23,828 21,189 Diluted 23,908 21,730 23,828 21,735 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents ICU MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited) (In thousands) Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 NET (LOSS) INCOME $ ( 13,208 ) $ 31,081 $ ( 58,750 ) $ 83,210 Other comprehensive income (loss), net of tax: Cash flow hedge adjustments, net of tax of $( 3,676 ) and $ 259 for the three months ended September 30, 2022 and 2021, respectively, and $( 15,357 ) and $ 668 for the nine months ended September 30, 2022 and 2021, respectively. 16,915 ( 819 ) 48,631 ( 2,116 ) Foreign currency translation adjustment, net of tax of $ 0 for all periods ( 90,549 ) ( 5,360 ) ( 195,300 ) ( 11,516 ) Other adjustments, net of tax of $ 0 for all periods 227 12 256 36 Other comprehensive loss, net of tax ( 73,407 ) ( 6,167 ) ( 146,413 ) ( 13,596 ) COMPREHENSIVE (LOSS) INCOME $ ( 86,615 ) $ 24,914 $ ( 205,163 ) $ 69,614 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents ICU MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (Amounts in thousands) Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive (Loss) Income Shares Amount Total Balance, January 1, 2022 21,280 $ 2,128 $ 721,412 $ ( 27 ) $ 911,787 $ ( 19,269 ) $ 1,616,031 Issuance of restricted stock and exercise of stock options 154 12 ( 2,965 ) 5,927 — — 2,974 Tax withholding payments related to net share settlement of equity awards ( 37 ) — — ( 8,743 ) — — ( 8,743 ) Issuance of common stock for acquisitions 2,500 250 575,725 — — — 575,975 Stock compensation — — 12,092 — — — 12,092 Other comprehensive income, net of tax — — — — — 18,641 18,641 Net loss — — — — ( 38,068 ) — ( 38,068 ) Balance, March 31, 2022 23,897 $ 2,390 $ 1,306,264 $ ( 2,843 ) $ 873,719 $ ( 628 ) $ 2,178,902 Issuance of restricted stock and exercise of stock options 10 — ( 4,428 ) 4,446 — — 18 Tax withholding payments related to net share settlement of equity awards ( 8 ) — — ( 1,695 ) — — ( 1,695 ) Stock compensation — — 7,762 — — — 7,762 Other comprehensive loss, net of tax — — — — — ( 91,647 ) ( 91,647 ) Net loss — — — — ( 7,474 ) — ( 7,474 ) Balance, June 30, 2022 23,899 $ 2,390 $ 1,309,598 $ ( 92 ) $ 866,245 $ ( 92,275 ) $ 2,085,866 Issuance of restricted stock and exercise of stock options 82 8 4,837 69 — — 4,914 Tax withholding payments related to net share settlement of equity awards ( 2 ) — — ( 103 ) — — ( 103 ) Stock compensation — — 8,743 — — — 8,743 Other comprehensive loss, net of tax — — — — — ( 73,407 ) ( 73,407 ) Net loss — — — — ( 13,208 ) — ( 13,208 ) Balance, September 30, 2022 23,979 $ 2,398 $ 1,323,178 $ ( 126 ) $ 853,037 $ ( 165,682 ) $ 2,012,805 6 Table of Contents ICU MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)(continued) (Amounts in thousands) Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive (Loss) Income Shares Amount Total Balance, January 1, 2021 21,058 $ 2,106 $ 693,068 $ ( 39 ) $ 808,652 $ ( 1,522 ) $ 1,502,265 Issuance of restricted stock and exercise of stock options 198 16 2,496 2,352 — — 4,864 Tax withholding payments related to net share settlement of equity awards ( 37 ) — — ( 7,723 ) — — ( 7,723 ) Stock compensation — — 6,022 — — — 6,022 Other comprehensive loss, net of tax — — — — — ( 8,391 ) ( 8,391 ) Net income — — — — 23,731 — 23,731 Balance, March 31, 2021 21,219 $ 2,122 $ 701,586 $ ( 5,410 ) $ 832,383 $ ( 9,913 ) $ 1,520,768 Issuance of restricted stock and exercise of stock options — — ( 2,685 ) 3,237 — — 552 Tax withholding payments related to net share settlement of equity awards — — — ( 96 ) — — ( 96 ) Stock compensation — — 6,681 — — — 6,681 Other comprehensive income, net of tax — — — — — 962 962 Net income — — — — 28,398 — 28,398 Balance, June 30, 2021 21,219 $ 2,122 $ 705,582 $ ( 2,269 ) $ 860,781 $ ( 8,951 ) $ 1,557,265 Issuance of restricted stock and exercise of stock options 20 2 ( 963 ) 2,511 — — 1,550 Tax withholding payments related to net share settlement of equity awards ( 1 ) — — ( 290 ) — — ( 290 ) Stock compensation — — 6,533 — — — 6,533 Other comprehensive loss, net of tax — — — — — ( 6,167 ) ( 6,167 ) Net income — — — — 31,081 — 31,081 Balance, September 30, 2021 21,238 $ 2,124 $ 711,152 $ ( 48 ) $ 891,862 $ ( 15,118 ) $ 1,589,972 7 Table of Contents ICU MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Nine months ended September 30, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ ( 58,750 ) $ 83,210 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 178,338 66,564 Amortization of inventory step-up 22,676 — Noncash lease expense 17,382 7,165 Provision for doubtful accounts 214 342 Provision for warranty and returns 3,439 752 Stock compensation 28,597 19,236 Loss on disposal of property, plant and equipment and other assets 2,391 1,083 Bond premium amortization 254 514 Debt issuance costs amortization 5,254 216 Change in fair value of contingent earn-out ( 31,253 ) — Product-related charges — 3,380 Usage of spare parts 7,915 9,831 Other ( 2,855 ) 2,908 Changes in operating assets and liabilities, net of amounts acquired: Accounts receivable ( 8,956 ) 3,807 Inventories ( 151,840 ) 16,510 Prepaid expenses and other current assets 20,074 3,557 Other assets ( 22,594 ) ( 13,593 ) Accounts payable 30,413 ( 10,374 ) Accrued liabilities ( 38,070 ) ( 8,317 ) Income taxes, including excess tax benefits and deferred income taxes ( 63,047 ) ( 1,874 ) Net cash (used in) provided by operating activities ( 60,418 ) 184,917 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment ( 68,715 ) ( 46,464 ) Proceeds from sale of assets 933 218 Business acquisitions, net of cash acquired ( 1,844,164 ) — Intangible asset additions ( 6,560 ) ( 10,216 ) Investments in non-marketable equity investments — ( 3,250 ) Purchases of investment securities ( 3,397 ) ( 10,034 ) Proceeds from sale and maturities of investment securities 36,433 12,000 Net cash used in investing activities ( 1,885,470 ) ( 57,746 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt, net of lender debt issuance costs 1,672,631 — Principal repayments of long-term debt ( 20,250 ) — Payment of third-party debt issuance costs ( 1,852 ) — Proceeds from exercise of stock options 7,906 6,966 Payments on finance leases ( 477 ) ( 448 ) Tax withholding payments related to net share settlement of equity awards ( 10,541 ) ( 8,109 ) Net cash provided by (used in) financing activities 1,647,417 ( 1,591 ) Effect of exchange rate changes on cash ( 10,477 ) ( 2,192 ) NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ( 308,948 ) 123,388 CASH AND CASH EQUIVALENTS, beginning of period 552,827 396,097 CASH AND CASH EQUIVALENTS, end of period $ 243,879 $ 519,485 The accompanying notes are an integral part of these condensed consolidated financial statements. 8 Table of Contents ICU MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - CONTINUED (In thousands) Nine months ended September 30, 2022 2021 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES: Accounts payable for property, plant and equipment $ 2,757 $ 2,897 Non-compete agreement with associated contingent earn-out liability $ — $ 3,100 Detail of assets acquired and liabilities assumed in acquisitions*: Fair value of assets acquired $ 1,658,937 Cash paid for acquisitions, net of cash acquired ( 1,844,164 ) Share consideration ( 575,975 ) Contingent consideration ( 55,158 ) Goodwill, acquired during period 1,442,849 Liabilities assumed/Adjustments to liabilities assumed $ ( 626,489 ) *Includes amounts related to the acquisition of Smiths Medical 2020 Limited and measurement period adjustments related to a 2021 acquisition of a small foreign infusion systems supplier. The accompanying notes are an integral part of these condensed consolidated financial statements. 9 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1: Basis of Presentation The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S.") and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and reflect all adjustments, consisting of only normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the consolidated results for the interim periods presented. Results for the interim period are not necessarily indicative of results for the full year. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K of ICU Medical, Inc., ("ICU"), a Delaware corporation, filed with the SEC for the year ended December 31, 2021. Certain reclassifications have been made to the prior year footnote information for revenue disaggregated by geography in Note 5: Revenues to conform to classifications used in the current year. These reclassifications had no impact on net loss, shareholder's equity or cash flows as previously reported. We are engaged in the development, manufacturing and sale of innovative medical products used in infusion therapy and critical care applications. We sell the majority of our products through our direct sales force and through independent distributors throughout the U.S. and internationally. We also sell certain products on an original equipment manufacturer basis to other medical device manufacturers. All subsidiaries are wholly owned and are included in the condensed consolidated financial statements. All intercompany balances and transactions have been eliminated. On January 6, 2022, we acquired Smiths Medical 2020 Limited ("Smiths Medical"), see Note 3: Acquisitions. Our condensed consolidated statement of operations includes the results of operations for Smiths Medical from January 7, 2022 through September 30, 2022. During the third quarter ended September 30, 2022, Smiths Medical changed their reporting period to align with ICU's calendar quarter from their historic 4-4-5 reporting period, this change did not have a material impact on our consolidated financial statements for the three and nine months ended September 30, 2022. Our condensed consolidated statement of operations includes the results of operations for Smiths Medical from June 26, 2022 through September 30, 2022 and January 7, 2022 through September 30, 2022 for the three and nine months ended September 30, 2022, respectively. Note 2: New Accounting Pronouncements Recently Issued Accounting Standards In March 2020, the Financial Accounting Standards Board issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional guidance for a limited period of time to ease the potential burden for reference rate reform on financial reporting. Due to concerns about structural risks of interbank offered rates and, particularly, the risk of cessation of the London Interbank Offered Rate ("LIBOR"), regulators around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued as a result of reference rate reform. Optional expedients may be applied to contracts that are modified as a result of the reference rate reform. Modifications of contracts within the scope of Topic 470, Debt, should be accounted for by prospectively adjusting the effective interest rate. Modifications of contracts within the scope of ASC 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate (incremental borrowing rate). Exceptions to Topic 815, Derivatives and Hedging, results in not having a dedesignation of a hedging relationship if certain criteria are met. The amendments in this ASU are effective for all entities as of March 12, 2020 through December 31, 2022. In November 2021, we entered into two forward-starting swaps whereby the variable leg of the swap referenced LIBOR. These swaps were amended in early 2022 to transition to an alternative reference rate (see Note 8: Derivatives and Hedging Activities). The amendments in this ASU allow for certain expedients that will allow us to assume that our hedged interest payments are probable of occurring regardless of any expected modification in their terms related to reference rate reform and will allow us to continue hedge accounting for a cash flow hedge for which the hedged interest rate risk changes if the hedge is highly effective under ASC 815, Derivatives and Hedging, or the optional expedient under this ASU is elected. The impact of this ASU on our contracts has not been and is not expected to be material. 10 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 3: Acquisitions 2022 Acquisition On January 6, 2022, we acquired 100.0 % of the equity interests in Smiths Medical, the holding company of Smiths Group plc's global medical device business, from Smiths Group International Holdings Limited (“Smiths”). The acquisition of Smiths Medical aligns with our strategic growth plans, enabling us to broaden our product offerings to include syringe and ambulatory infusion devices, vascular access, and vital care products and to strengthen and expand our global market reach. Total cash consideration for the acquisition was $ 1.9 billion, which was financed with existing cash balances and proceeds from the credit agreement entered into on January 6, 2022 (see Note 17: Long-Term Debt). We also issued share consideration to Smiths of 2.5 million shares of our common stock. The fair value of the common shares issued to Smiths was determined based on the opening market price of our common stock on the acquisition date. Smiths may be entitled to an additional $ 100.0 million in cash consideration contingent on our common stock achieving certain price targets for certain periods after closing in accordance with the terms of the Share Sale and Purchase Agreement (the "Purchase Agreement"). In the event that (a) on or prior to the third anniversary of closing the 30-day volume-weighted average price for our common stock, as defined in the Purchase Agreement, equals or exceeds $ 300.00 per share or (b) on or prior to the fourth anniversary of closing the 45-day volume-weighted average price for our common stock, as defined in the Purchase Agreement, equals or exceeds $ 300.00 per share (each a "Price Target"), and provided Smiths beneficially owns at least 50.0 % of the shares of common stock issued at closing at the time the Price Target is achieved, then Smiths will be entitled to receive the additional $ 100.0 million in cash consideration. The fair value of the contingent consideration was determined using an option pricing model, specifically the Monte Carlo Simulation. In the analysis, the determinants of payout are simulated in a risk neutral framework over a large number of simulation paths. The fair value of the contingent consideration is then calculated as the average present value across all simulated paths. Preliminary Purchase Price Allocation The following table summarizes the estimated purchase price and the preliminary allocation of the purchase price related to the assets acquired and liabilities assumed (in thousands): 11 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Estimated cash consideration for acquired assets $ 1,922,955 Preliminary fair value of contingent consideration payable to Smiths 53,520 Issuance of ICU Medical, Inc. common shares: Number of shares issued to Smiths 2,500 Price per share (ICU's opening market price on the acquisition date) $ 230.39 Fair value of ICU shares issued to Smiths $ 575,975 Total estimated consideration to be paid $ 2,552,450 Preliminary Purchase Price Allocation: Cash and cash equivalents $ 78,791 Accounts receivable 118,522 Inventories 226,196 Prepaid expenses and other current assets 53,554 Property, plant and equipment 210,000 Operating lease right-of-use assets 55,161 Intangible assets (1) 975,000 Deferred income taxes 9,303 Other assets 379 Accounts payable ( 105,291 ) Accrued liabilities (2) ( 173,901 ) Income tax payable ( 24,332 ) Other long-term liabilities ( 85,739 ) Deferred income taxes ( 235,170 ) Total identifiable net assets acquired $ 1,102,473 Goodwill - not tax deductible 1,449,977 Estimated Purchase Consideration $ 2,552,450 _______________________________ (1) Estimated identifiable intangible assets include $ 540.0 million of customer relationships, $ 400.0 million of developed technology, $ 30.0 million of internally developed software, and $ 5.0 million of trademark. The estimated weighted-average amortization period for the total identifiable intangible assets is approximately nine years, and, for each identifiable intangible asset is estimated as follows: eight years for customer relationships, ten years for developed technology, five years for internally developed software, and six months for the trade mark. (2) Estimated accrued liabilities includes, among other things, accrued warranty reserves, accrued restructuring initiatives, accrued salaries and related benefits, deferred revenue and accrued sales and use taxes. The above purchase price and purchase price allocation are preliminary and subject to future revision as the acquired assets and liabilities assumed are dependent upon the finalization of the related valuations. The identifiable intangible assets and other long-lived assets acquired have been valued as Level 3 assets at fair value. The estimated fair value of identifiable intangible assets were developed using the income approach and are based on critical estimates, judgments and assumptions derived from: analysis of market conditions; discount rate; discounted cash flows; royalty rates; customer retention rates; and/or estimated useful lives. Certain other intangible assets were valued using a cost to replace method, estimating the labor and non-labor costs required to replace the asset under the premise that it was not part of the transaction. Property, plant and equipment was valued with the consideration of remaining economic lives. The raw materials inventory was valued at historical cost and adjusted for any obsolescence which we estimate to approximate replacement cost, the work in process was valued at estimated sales proceeds less costs to complete and costs to sell, and finished goods inventory was valued at estimated sales proceeds less costs to sell. The prepaid expenses and other current assets and assumed liabilities were recorded at their carrying values as of the date of the acquisition, as their carrying values approximated their fair values due to their short-term nature. 12 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unaudited Pro Forma Information Smiths Medical is included in our consolidated results beginning on January 7, 2022. Total revenues and net loss attributable to Smiths Medical for the period from January 7, 2022 to September 30, 2022 were estimated to be $ 699.1 million and $ 79.0 million, respectively, and for the three months ended September 30, 2022 were estimated to be $ 261.4 million and $ 13.6 million. The following unaudited pro forma financial information presents the combined results of operations of ICU and Smiths Medical as if the acquisition had occurred on January 1, 2021. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on the date indicated or of results that may occur in the future. Three months ended September 30, Nine months ended September 30, (In thousands) 2022 2021 2022 2021 Revenues $ 597,857 $ 641,115 $ 1,722,357 $ 1,862,237 Net Loss $ ( 13,208 ) $ ( 8,874 ) $ ( 54,840 ) $ 22,026 The unaudited pro forma results presented above include the impact of the following adjustments: incremental amortization expense on intangible assets acquired of $ 1.9 million and $ 1.9 million for the nine months ended September 30, 2022 and 2021, respectively, incremental interest expense, including amortization of debt discount and debt issuance costs, on the Senior Secured Credit Facilities (as defined in Note 17: Long-Term Debt) of $ 1.4 million and $ 47.1 million for the nine months ended September 30, 2022 and 2021, respectively; and a $ 27.4 million expense adjustment related to the increase in fair value of inventory to remove the expense for the nine months ended September 30, 2022 and to add the expense for the nine months ended September 30, 2021. In addition, there was a non-recurring adjustment directly attributable to the business combination for acquisition-related costs of $ 11.6 million for the nine months ended September 30, 2021. The unaudited pro forma results include IFRS to U.S. GAAP adjustments for Smiths Medical historical results and adjustments for accounting policy alignment, which were materially similar to the Company. Any differences in accounting policies were adjusted to reflect the accounting policies of the Company in the unaudited pro forma results presented. 2021 Acquisition During November 2021, we acquired a small foreign infusion systems supplier and paid an initial gross cash payment of approximately $ 15.4 million. In addition to the initial cash consideration, total consideration for the acquisition includes an additional holdback of $ 0.5 million, to be paid two years from the completion date of the acquisition, and also a potential earn-out payment of up to $ 2.5 million, consisting of (i) a cash payment of $ 1.0 million contingent on the achievement of certain revenue targets for the annual period ending December 31, 2022 and, separately, (ii) a cash payment of $ 1.5 million contingent on certain product-related regulatory certifications obtained by May 26, 2024. As of September 30, 2022, the total consideration which includes the acquisition date fair value of the contingent consideration was $ 17.1 million. 13 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 4: Restructuring, Strategic Transaction and Integration Restructuring, strategic transaction and integration expenses were $ 14.4 million and $ 2.4 million for the three months ended September 30, 2022 and 2021, respectively, and $ 61.8 million and $ 9.0 million for nine months ended September 30, 2022 and 2021, respectively. Restructuring During the three and nine months ended September 30, 2022, restructuring charges were $ 2.4 million and $ 7.3 million, respectively, and were related to severance costs. During the third quarter 2021 we adjusted certain facility restructuring liabilities by $2.0 million to reflect actual amounts owed which resulted in net restructuring credits of $(1.9) million and $(1.8) million for the three and nine months ended September 30, 2021, respectively. The following table summarizes the activity in our restructuring-related accrual by major type of cost for the period ended September 30, 2022 (in thousands): Severance Pay and Benefits Retention and Facility Closure Costs Total Accrued balance, January 1, 2022 $ 499 $ 165 $ 664 Acquired restructuring liabilities 5,796 1,740 7,536 Charges incurred 3,222 — 3,222 Payments ( 2,030 ) — ( 2,030 ) Currency translation ( 147 ) ( 40 ) ( 187 ) Accrued balance, March 31, 2022 $ 7,340 $ 1,865 $ 9,205 Charges incurred 1,710 — 1,710 Payments ( 3,352 ) ( 212 ) ( 3,564 ) Currency translation ( 256 ) ( 94 ) ( 350 ) Other adjustments ( 38 ) — ( 38 ) Accrued balance, June 30, 2022 $ 5,404 $ 1,559 $ 6,963 Charges incurred 2,428 — 2,428 Payments ( 2,181 ) ( 19 ) ( 2,200 ) Currency translation ( 310 ) ( 114 ) ( 424 ) Accrued balance, September 30, 2022 $ 5,341 $ 1,426 $ 6,767 Strategic Transaction and Integration Expenses We incurred and expensed $ 12.0 million and $ 4.3 million in strategic transaction and integration expenses during the three months ended September 30, 2022 and 2021, respectively, and we incurred and expensed $ 54.5 million and $ 10.8 million in strategic transaction and integration expenses during the nine months ended September 30, 2022 and 2021, respectively, which are included in restructuring, strategic transaction and integration expenses in our condensed consolidated statements of operations. The strategic transaction and integration expenses during the three and nine months ended September 30, 2022 were primarily related to transaction and integration expenses associated with our acquisition of Smiths Medical on January 6, 2022 (see Note 3: Acquisitions) which primarily included legal expenses, bank fees and employee costs. The nine months ended September 30, 2022 also included a United Kingdom stamp tax. The strategic transaction and integration expenses for the three and 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 and one-time costs incurred to comply with regulatory initiatives and transaction costs related to the Smiths Medical transaction. Note 5: Revenue Revenue Recognition 14 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Following our acquisition of Smiths Medical, our primary product lines are Infusion Consumables, Infusion Systems, IV Solutions, Critical Care, Infusion Systems-Smiths Medical, Vascular Access-Smiths Medical and Vital Care-Smiths Medical. The vast majority of our sales of these products are made on a stand-alone basis to hospitals and distributors. Revenue is typically recognized upon transfer of control of the products, which we deem to be at point of shipment. However, for purposes of revenue recognition for our software licenses and renewals, we consider the control of these products to be transferred to a customer at a certain point in time; therefore, we recognize revenue at the start of the applicable license term. Payment is typically due in full within 30 days of delivery or the start of the contract term. Revenue is recorded in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We offer certain volume-based rebates to our distribution customers, which we record as variable consideration when calculating the transaction price. Rebates are offered on both a fixed and tiered/variable basis. In both cases, we use information available at the time and our historical experience with each customer to estimate the most likely rebate amount. We also provide chargebacks to distributors that sell to end customers at prices determined under a contract between us and the end customer. Chargebacks are the difference between the prices we charge our distribution customers and the contracted prices we have with the end customer which are processed as credits to our distribution customers. In estimating the expected value of chargeback amounts in order to determine the transaction price, we use information available at the time, including our historical experience. We also warranty products against defects and have a policy permitting the return of defective products, for which we accrue and expense at the time of sale using information available at that time and our historical experience. We also provide for extended service-type warranties, which we consider to be separate performance obligations. We allocate a portion of the transaction price to the extended service-type warranty based on its estimated relative selling price, and recognize revenue over the period the warranty service is provided. Our revenues are recorded at the net sales price, which includes an estimate for variable consideration related to rebates, chargebacks and product returns. Revenue disaggregated The following table represents our revenues disaggregated by product line (in thousands): Three months ended September 30, Nine months ended September 30, Product line 2022 2021 2022 2021 Infusion Consumables $ 141,073 $ 144,850 $ 426,050 $ 407,419 Infusion Systems 87,846 90,688 262,111 259,683 IV Solutions 96,366 89,237 278,959 271,834 Critical Care 10,877 11,285 35,407 36,847 Infusion Systems-Smiths Medical 96,890 — 240,992 — Vascular Access-Smiths Medical 95,284 — 251,350 — Vital Care-Smiths Medical 69,521 — 207,114 — Total Revenues $ 597,857 $ 336,060 $ 1,701,983 $ 975,783 Infusion Systems-Smiths Medical, Vascular Access-Smiths Medical and Vital Care-Smiths Medical represent our newly integrated product lines following our acquisition of Smiths Medical on January 6, 2022. The following table represents our revenues disaggregated by geography (in thousands): 15 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Three months ended September 30, Nine months ended September 30, Geography 2022 2021 2022 2021 United States $ 376,691 $ 245,298 $ 1,088,348 $ 697,316 Canada 29,129 19,026 86,473 61,560 LATAM 23,599 14,875 59,827 44,191 Americas 429,419 279,199 1,234,648 803,067 Europe, the Middle East and Africa 101,869 36,239 275,488 108,800 APAC 66,569 20,622 191,847 63,916 Total Revenues $ 597,857 $ 336,060 $ 1,701,983 $ 975,783 Contract balances The following table presents the changes in our contract balances for the nine months ended September 30, 2022 and 2021 (in thousands): Contract Liabilities Beginning balance, January 1, 2022 $ ( 7,461 ) Fair value of acquired deferred revenue ( 51,245 ) Equipment revenue recognized 22,757 Equipment revenue deferred due to implementation ( 13,420 ) Software revenue recognized 12,761 Software revenue deferred due to implementation ( 12,978 ) Government grant deferred revenue ( 3,434 ) Government grant recognized 178 Other deferred revenue ( 1,285 ) Other deferred revenue recognized 3,488 Ending balance, September 30, 2022 $ ( 50,639 ) Beginning balance, January 1, 2021 $ ( 6,430 ) Equipment revenue recognized 7,193 Equipment revenue deferred due to implementation ( 8,652 ) Software revenue recognized 6,194 Software revenue deferred due to implementation ( 2,967 ) Ending balance, September 30, 2021 $ ( 4,662 ) As of September 30, 2022, revenue from remaining performance obligations is as follows: Recognition Timing (in millions) < 12 Months > 12 Months Equipment revenue $ ( 17,514 ) $ ( 621 ) Software revenue ( 8,248 ) ( 566 ) Government grant revenue ( 1,524 ) ( 13,735 ) Other revenue* ( 1,490 ) ( 6,941 ) Total $ ( 28,776 ) $ ( 21,863 ) _________________________________ *Other deferred revenue includes pump development programs, purchased training and extended warranty. 16 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 6: Leases We determine if an arrangement is a lease at inception. Our operating lease assets are separately stated in operating lease right-of-use ("ROU") assets and our financing lease assets are included in other assets on our condensed consolidated balance sheets. Our lease liabilities are included in accrued liabilities and other long-term liabilities on our condensed consolidated balance sheets. We have elected not to recognize an ROU asset and lease liability for leases with terms of twelve months or less. Lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Most of our leases do not provide an implicit rate, therefore we use our incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term based on the information available at commencement date. Our lease ROU assets exclude lease incentives and initial direct costs incurred. Our lease terms include options to extend when it is reasonably certain that we will exercise that option. All of our leases have stated lease payments, which may include fixed rental increases. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Our leases are for corporate, research and development and sales and support offices, distribution facilities, device service centers and certain equipment. Our leases have original lease terms of one year to fifteen years , some of which include options to extend the leases for up to an additional five years . For all of our leases, we do not include optional periods of extension in our current lease terms for the exercise of options to extend is not reasonably certain. The following table presents the components of our lease cost (in thousands): Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Operating lease cost $ 5,819 $ 2,798 $ 16,472 $ 8,455 Finance lease cost — interest 25 29 82 92 Finance lease cost — reduction of ROU asset 176 166 516 478 Short-term lease cost 1 4 7 14 Total lease cost $ 6,021 $ 2,997 $ 17,077 $ 9,039 Interest expense on our finance leases is included in other income (expense), net in our condensed consolidated statements of operations. The reduction of the operating and finance ROU assets is included as noncash lease expense in selling, general and administrative expenses in our condensed consolidated statements of operations. The following table presents the supplemental cash flow information related to our leases (in thousands): Nine months ended September 30, 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 18,886 $ 8,461 Operating cash flows from finance leases $ 25 $ 29 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 4,771 $ 1,394 Finance leases $ 266 $ 373 17 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table presents the supplemental balance sheet information related to our operating leases (in thousands, except lease term and discount rate): As of September 30, 2022 December 31, 2021 Operating leases Operating lease right-of-use assets $ 76,438 $ 39,847 Accrued liabilities $ 18,638 $ 9,009 Other long-term liabilities 62,902 33,971 Total operating lease liabilities $ 81,540 $ 42,980 Weighted-Average Remaining Lease Term Operating leases 6.1 years 5.9 years Weighted-Average Discount Rate Operating leases 4.38 % 4.98 % The following table presents the supplemental balance sheet information related to our finance leases (in thousands, except lease term and discount rate): As of September 30, 2022 December 31, 2021 Finance leases Finance lease right-of-use assets $ 2,327 $ 2,673 Accrued liabilities $ 700 $ 643 Other long-term liabilities 1,692 2,067 Total finance lease liabilities $ 2,392 $ 2,710 Weighted-Average Remaining Lease Term Finance leases 4.9 years 5.6 years Weighted-Average Discount Rate Finance leases 4.26 % 4.28 % 18 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of September 30, 2022, the maturities of our operating and finance lease liabilities for each of the next five years are approximately (in thousands): Operating Leases Finance Leases Remainder of 2022 $ 6,129 $ 197 2023 20,915 790 2024 17,157 524 2025 12,233 317 2026 10,980 217 2027 7,638 189 Thereafter 16,600 426 Total Lease Payments 91,652 2,660 Less imputed interest ( 10,112 ) ( 268 ) Total $ 81,540 $ 2,392 Note 7: Net Income Per Share Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period plus dilutive securities. Dilutive securities include outstanding common stock options and unvested restricted stock units, less the number of shares that could have been purchased with the proceeds from the exercise of the options, using the treasury stock method. Options and restricted stock units that are anti-dilutive are not included in the treasury stock method calculation. Due to the net loss for the three and nine months ended September 30, 2022, any potentially dilutive common shares were not included in the computation of diluted earnings per share as they would have had an anti-dilutive effect, therefore basic and diluted net loss per share are equal for the period. There were 12,235 and 12,132 anti-dilutive securities for the three and nine months ended September 30, 2021, respectively. The following table presents the calculation of net earnings per common share (“EPS”) — basic and diluted (in thousands, except per share data): Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Net (loss) income $ ( 13,208 ) $ 31,081 $ ( 58,750 ) $ 83,210 Weighted-average number of common shares outstanding (basic) 23,908 21,214 23,828 21,189 Dilutive securities (1) — 516 — 546 Weighted-average common and common equivalent shares outstanding (diluted) 23,908 21,730 23,828 21,735 EPS — basic $ ( 0.55 ) $ 1.47 $ ( 2.47 ) $ 3.93 EPS — diluted $ ( 0.55 ) $ 1.43 $ ( 2.47 ) $ 3.83 _______________________________ (1) No dilutive effect for the three and nine months ended September 30, 2022; therefore, zero incremental shares included for the period. Note 8: Derivatives and Hedging Activities Hedge Accounting and Hedging Program The purposes of our cash flow hedging programs are to manage the foreign currency exchange rate risk on forecasted revenues and expenses denominated in currencies other than the functional currency of the operating unit, and to manage floating interest rate risk associated with future interest payments on the variable-rate term loans issued in January 2022. We do not issue derivatives for trading or speculative purposes. 19 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. The derivative instruments we utilize, including various foreign exchange contracts and interest rate swaps, are designated and qualify as cash flow hedges. Our derivative instruments are recorded at fair value on the condensed consolidated balance sheets and are classified based on the instrument's maturity date. We record gains or losses from changes in the fair values of the derivative instruments as a component of other comprehensive income (loss) and we reclassify those gains or losses into earnings in the same line item associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. If the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related derivative instrument from accumulated other comprehensive loss into earnings immediately. Foreign Currency Exchange Rate Risk Foreign Exchange Forward Contracts We enter into foreign exchange forward contracts to hedge a portion of our forecasted foreign currency-denominated revenues and expenses to minimize the effect of foreign exchange rate movements on the related cash flows. These contracts are agreements to buy or sell a quantity of a currency at a predetermined future date and at a predetermined exchange rate. Our foreign exchange forward contracts hedge exposures principally denominated in Mexican Pesos ("MXN"), Euros, Czech Koruna ("CZK"), Japanese Yen ("JPY"), U.S. Dollar ("USD"), Chinese Renminbi ("CNH"), Canadian Dollar ("CAD") and Australian Dollar ("AUD") and have varying maturities with an average term of approximately twelve months. The total notional amount of these outstanding derivative contracts as of September 30, 2022 was $ 145.2 million, which included the notional equivalent of $ 31.5 million in MXN, $ 27.9 million in Euros, $ 10.9 million in CZK, $ 12.2 million in JPY, $ 15.0 million in CNH, $ 26.2 million in USD, $ 11.7 million in CAD, $ 6.8 million in AUD and $ 3.1 million in other foreign currencies, with terms currently through July 2023. We did not have such derivative contracts as of December 31, 2021. Cross-currency Par Forward Contracts We enter into cross-currency par forward contracts to hedge a portion of our Mexico forecasted expenses denominated in MXN. These contracts are agreements to exchange cash flows from one currency to another at specified intervals over the contract term with all exchanges occurring at the same predetermined rate. In November 2021, we entered into a one-year cross-currency par forward contract with a term from December 1, 2021 to December 1, 2022. The total notional amount of this outstanding derivative as of September 30, 2022 and December 31, 2021 was approximately 103.8 million MXN and 413.1 million MXN, respectively. The derivative instrument matures in equal monthly amounts at a fixed forward rate of 21.60 MXN/USD. Preceding this contract we had a one-year cross-currency par forward contract with a term from November 3, 2020 to December 1, 2021 that matured in equal monthly amounts at a fixed forward rate of 24.26 MXN/USD. Floating Interest Rate Risk In November 2021, in anticipation of entering into the new senior secured credit facilities in January 2022, which includes a variable-rate term loan A and a variable-rate term loan B (see Note 17: Long-Term Debt), we entered into two forward-starting interest rate swaps. In February 2022, certain terms under the agreements were amended to reflect the transition from LIBOR to the Secured Overnight Financing Rate ("SOFR"), an alternative reference rate. Under the interest rate swap agreements we exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount. Effective March 30, 2022, the term loan A swap, as amended, has an initial notional amount of $ 300.0 million, reducing to $ 150.0 million evenly on a quarterly basis excluding its final maturity on March 30, 2027. We will pay a fixed rate of 1.32 % and will receive the greater of 3-month USD SOFR or ( 0.15 )%. Effective March 30, 2022, the term loan B swap, as amended, has an initial notional amount of $ 750.0 million, reducing to $ 46.9 million evenly on a quarterly basis excluding its final maturity on March 30, 2026. We will pay a fixed rate of 1.17 % and will receive the greater of 3-month USD SOFR or 0.35 %. These swaps effectively convert the relevant portion of the floating-rate term loans to fixed rates. The following table presents the fair values of our derivative instruments included within the Condensed Consolidated Balance Sheets (in thousands): 20 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Derivatives Designated as Cash Flow Hedging Instruments Condensed Consolidated Balance Sheet Location Foreign Exchange Contracts Interest Rate Swaps Gross Derivatives As of September 30, 2022 Prepaid expenses and other current assets $ 11,695 $ 24,924 $ 36,619 Other assets — 33,386 33,386 Total assets $ 11,695 $ 58,310 $ 70,005 Accrued liabilities $ 1,752 $ — $ 1,752 Other long-term liabilities — — — Total liabilities $ 1,752 $ — $ 1,752 As of December 31, 2021 Prepaid expenses and other current assets $ 1,061 $ — $ 1,061 Other assets — — — Total assets $ 1,061 $ — $ 1,061 Accrued liabilities $ — $ — $ — Other long-term liabilities — 1,480 1,480 Total liabilities $ — $ 1,480 $ 1,480 We recognized the following gains on our derivative instruments designated as cash flow hedges (in thousands): Gain (Loss) Recognized in Other Comprehensive Income Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Derivatives designated as cash flow hedging instruments: Foreign exchange contracts $ 3,383 $ ( 109 ) $ 11,720 $ ( 70 ) Interest rate swaps 21,201 — 60,398 — Total derivatives designated as cash flow hedging instruments $ 24,584 $ ( 109 ) $ 72,118 $ ( 70 ) 21 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table presents the effects of our derivative instruments designated as cash flow hedges on the Condensed Consolidated Statements of Operations (in thousands): Gain (Loss) Reclassified From Accumulated Other Comprehensive (Loss) Income into Income Three months ended September 30, Nine months ended September 30, Location of Gain (Loss) Recognized in Income 2022 2021 2022 2021 Derivatives designated as cash flow hedging instruments: Foreign exchange contracts Total revenues $ ( 1,690 ) $ — $ 2,666 $ — Foreign exchange contracts Cost of goods sold 3,090 968 4,140 2,713 Foreign exchange contracts Interest expense (1) 462 — 717 — Interest rate swaps Interest expense 2,133 — 608 — Total derivatives designated as cash flow hedging instruments $ 3,995 $ 968 $ 8,131 $ 2,713 _______________________________ (1) Represents location of gain reclassified from accumulated other comprehensive income into income as a result of a forecasted transaction being no longer probable of occurring. As of September 30, 2022, we expect an estimated $ 9.9 million in deferred gains on the outstanding foreign exchange contracts and an estimated $ 25.6 million in deferred gains on the interest rate swaps will be reclassified from accumulated other comprehensive loss to net income during the next 12 months concurrent with the underlying hedged transactions also being reported in net income. Note 9: Fair Value Measurements Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There are three levels of inputs that may be used to measure fair value: • Level 1: quoted prices in active markets for identical assets or liabilities; • Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or • Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities. Contingent Earn-out Liabilities On January 6, 2022, we acquired Smiths Medical with a combination of cash consideration and share consideration issued at closing. Total consideration for the acquisition includes a potential earn-out payment of $ 100.0 million in cash contingent on our common stock achieving certain Price Targets from the closing date to either the third or fourth anniversary of closing (see Note 3: Acquisitions for additional information) and provided Smiths beneficially owns at least 50.0 % of the shares of common stock issued at closing at the time the Price Target is achieved. The initial estimated fair value of the earn-out was determined to be $ 53.5 million. The initial fair value of the earn-out was determined using a Monte Carlo simulation model. The model utilized several assumptions including volatility and the risk-free interest rate. The assumed volatility is based on the average of the historical volatility of our common stock price and the implied volatility of certain at-the-money traded options. The risk-free interest rate is equal to the yield on U.S. Treasury securities at constant maturity for the period commensurate with the term of the earn-out. At each reporting date subsequent to the acquisition, we will remeasure the earn-out liability and recognize any changes in its fair value in our consolidated statements of operations. If the probability of achieving the Price Targets during their respective measurement periods is significantly greater than initially anticipated, the realization of an additional liability and related expense will have a significant impact on our consolidated financial statements in the period recognized. As of September 30, 2022, the estimated fair value of the contingent earn-out is $ 21.8 million. 22 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) During November 2021, we acquired a small foreign infusion systems supplier. Total consideration for the acquisition includes a potential earn-out payment of up to $ 2.5 million, consisting of (i) a cash payment of $ 1.0 million contingent on the achievement of certain revenue targets for the annual period ending December 31, 2022 and, separately, (ii) a cash payment of $ 1.5 million contingent on certain product-related regulatory certifications obtained by May 26, 2024. As of September 30, 2022, the estimated fair value of the total contingent earn-out is $ 1.8 million. During August 2021, we entered into an agreement with one of our international distributors whereby that distributor would not compete with us in a specific territory for a three-year period that will end in September 2024. The terms of the agreement include a contingent earn-out payment. The contingent earn-out payment shall not exceed $ 6.0 million, which will be earned based on certain revenue targets over a twelve-month measurement period determined by the highest four consecutive quarters commencing over a two-year period starting on the closing date of the agreement and provided that the distributor is in compliance with its obligations under the agreement. As of both September 30, 2022 and December 31, 2021, the estimated fair value of the contingent earn-out is $ 2.6 million. The estimated fair value of the contingent earn-out is calculated using a probability-weighted cash flow model based on historical revenue streams and the likelihood that the revenue targets will be met. During the fourth quarter of 2019, we recognized an earn-out liability related to the acquisition of Pursuit Vascular, Inc. ("Pursuit"). Pursuit's former equity holders were entitled to up to $ 50.0 million in additional cash consideration contingent upon the achievement of certain sales and gross profit targets for specific customers. The earn-out was calculated as a percentage of gross profit achieved during the earn-out period against a pre-determined target gross profit, not to exceed $ 50.0 million. During the earn-out period, we used a Monte Carlo simulation model to determine the fair value of the earn-out liability. The Monte Carlo simulation model utilized multiple input variables to determine the value of the earn-out liability including historical volatility, a risk-free interest rate, counter party credit risk and projected future gross profit (see the simulation input table below related to Pursuit). The historical volatility was based on the median of ICU and a certain peer group. The risk-free interest rate was equal to the yield, as of the valuation date, of the zero-coupon U.S. Treasury bill that was commensurate with the term of the earn-out. The counter party credit risk was based on a synthetic credit rating of B1. As of June 30, 2021, the earn-out measurement period ended. Based on the actual sales and gross profit achieved during the measurement period, we calculated the actual earn-out amount to be $ 26.3 million. The $ 26.3 million earn-out calculation was finalized and accepted by Pursuit's former equity holders and was paid out in the fourth quarter of 2021. Our contingent earn-out liabilities are separately stated on our condensed consolidated balance sheets. The following tables provide a reconciliation of the Level 3 earn-out liabilities measured at estimated fair value (in thousands): Earn-out Liability Accrued balance, January 1, 2022 $ 2,589 Acquisition date fair value estimate of earn-out (1) 55,158 Currency translation ( 46 ) Accrued balance, March 31, 2022 $ 57,701 Change in fair value of earn-out (included in income from operations as a separate line item) (2) ( 27,194 ) Currency translation ( 98 ) Accrued balance, June 30, 2022 $ 30,409 Change in fair value of earn-out (included in income from operations as a separate line item) (2) ( 4,059 ) Currency translation ( 108 ) Accrued balance, September 30, 2022 $ 26,242 _______________________________ (1) $ 53.5 million relates to our acquisition of Smiths Medical and $ 1.6 million relates to our acquisition of a small foreign infusions systems supplier in the fourth quarter of 2021 (see Note 3: Acquisitions). (2) Primarily relates to the change in fair value of the Smiths Medical earn-out. 23 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Earn-out Liability Accrued balance, January 1, 2021 $ 26,300 Change in fair value of earn-out (included in income from operations as a separate line item) — Accrued balance, March 31, 2021 $ 26,300 Change in fair value of earn-out (included in income from operations as a separate line item) — Accrued balance, June 30, 2021 $ 26,300 Contingent earn-out — non-compete arrangement 3,100 Transfer of Pursuit earn-out liability into Level 2 ( 26,300 ) Accrued balance, September 30, 2021 $ 3,100 The following tables provide quantitative information about Level 3 inputs for fair value measurement of our earn-out liabilities related to Smiths Medical and Pursuit: Smiths Medical Earn-out Simulation Input As of September 30, 2022 At Acquisition January 6, 2022 Volatility 42.00 % 37.00 % Risk-Free Rate 4.18 % 1.31 % Pursuit Earn-out Simulation Input As of June 30, 2021 Revenue/Gross Profit Volatility 25.00 % Discount Rate 12.50 % Risk-Free Rate 0.09 % Counter Party Risk 3.10 % Investments, Foreign Exchange Contracts and Interest Rate Contracts Our investments consist of corporate bonds and U.S treasury securities. The fair value of our corporate bonds is estimated using observable market-based inputs such as quoted prices, interest rates and yield curves or Level 2 inputs. The fair value of our U.S. treasury securities are based on quoted market prices in active markets and are included in the Level 1 fair value hierarchy. The fair value of our Level 2 foreign exchange contracts, including forward contracts and cross-currency par forward contracts, is estimated using observable market inputs such as known notional value amounts, spot and forward exchange rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative. The fair value of our Level 2 interest rate swaps is estimated using a pricing model that reflects the terms of the contracts, including the period to maturity, and relies on observable market inputs such as known notional value amounts and USD interest rate curves. Our assets and liabilities measured at fair value on a recurring basis consisted of the following Level 1, 2 and 3 inputs as defined above (in thousands): 24 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Fair value measurements as of September 30, 2022 Total carrying value Quoted prices in active markets for identical assets (level 1) Significant other observable inputs (level 2) Significant unobservable inputs (level 3) Assets: Available-for-sale debt securities: Short-term corporate bonds $ 1,511 $ — $ 1,511 $ — Short-term U.S. treasury securities 1,408 1,408 — — Long-term corporate bonds 1,333 — 1,333 — Long-term government bonds 498 — 498 — Foreign exchange contracts: Prepaid expenses and other current assets 11,695 — 11,695 — Other assets — — — — Interest rate contracts: Prepaid expenses and other current assets 24,924 — 24,924 — Other assets 33,386 — 33,386 — Total Assets $ 74,755 $ 1,408 $ 73,347 $ — Liabilities: Contingent earn-out liability - ST $ 300 $ — $ — $ 300 Contingent earn-out liability - LT 25,942 — — 25,942 Foreign exchange contracts: Accrued liabilities 1,752 — 1,752 — Total Liabilities $ 27,994 $ — $ 1,752 $ 26,242 Fair value measurements as of December 31, 2021 Total carrying value Quoted prices in active markets for identical assets (level 1) Significant other observable inputs (level 2) Significant unobservable inputs (level 3) Assets: Available-for-sale debt securities: Short-term corporate bonds $ 14,420 $ — $ 14,420 $ — Long-term corporate bonds 4,620 — 4,620 — Cross-currency par forward contract: Prepaid expenses and other current assets 1,061 — 1,061 — Total Assets $ 20,101 $ — $ 20,101 $ — Liabilities: Contingent earn-out liability - LT $ 2,589 $ — $ — $ 2,589 Forward-starting interest rate swaps: Other long-term liabilities 1,480 — 1,480 — Total Liabilities $ 4,069 $ — $ 1,480 $ 2,589 25 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 10: Investment Securities Investments in Available-for-sale Securities Our available-for-sale investment securities currently consist of short-term and long-term corporate bonds, short-term U.S. treasury securities and long-term government bonds and are considered “investment grade” and are carried at fair value. We assess our investment in available-for-sale debt securities for impairment each reporting period. If an unrealized loss exists, we determine whether any portion of the decline in fair value below the amortized cost basis is credit-related by reviewing several factors, including, but not limited to, the extent of the fair value decline and changes in the financial condition of the issuer. We record an impairment for credit-related losses through an allowance, limited to the amount of the unrealized loss. If we either intend to sell or it is more likely than not we will be required to sell the debt security before its anticipated recovery, any allowance is written off and the amortized cost basis is written down to fair value through a charge against net earnings. Unrealized gains and non-credit-related unrealized losses are recorded, net of tax, in other comprehensive income (loss). We did not have any investments in available-for-sale debt securities in unrealized loss positions as of September 30, 2022 or December 31, 2021. The amortized cost of the debt securities are adjusted for the amortization of premiums computed under the effective interest method. Such amortization is included in other income, net in our condensed consolidated statements of operations. Realized gains and losses are accounted for on the specific identification method. There have been no realized gains or losses on the disposal of these investments. The scheduled maturities of the debt securities are between 2022 and 2024. All short-term investment securities are callable within one year. Our short-term and long-term investments in available-for-sale securities consist of the following (in thousands): As of September 30, 2022 Amortized Cost Unrealized Holding Gains (Losses) Fair Value Short-term corporate bonds $ 1,511 $ — $ 1,511 Short-term U.S. treasury securities 1,408 — 1,408 Long-term corporate bonds 1,333 — 1,333 Long-term government bonds 498 — 498 Total investment securities $ 4,750 $ — $ 4,750 As of December 31, 2021 Amortized Cost Unrealized Holding Gains (Losses) Fair Value Short-term corporate bonds $ 14,420 $ — $ 14,420 Long-term corporate bonds 4,620 — 4,620 Total investment securities $ 19,040 $ — $ 19,040 Investments in Non-Marketable Equity Securities During the third quarter of 2021, we acquired approximately a 20.0 % non-marketable equity interest in a nonpublic company and entered into a three-year distribution agreement where we have the exclusive rights to market, sell and distribute the company's products in exchange for a cash payment of $ 3.3 million. In addition, we were granted an exclusive license for all of the seller's intellectual property. At the expiration of the distribution agreement we have the right but not the obligation to acquire the remaining interest in the business. We apply the equity method of accounting for investments when we determine we have a significant influence, but not a controlling interest in the investee. We determine whether we have significant influence by considering key factors such as ownership interest, representation on the board of directors, participation in policy making decisions, business relationship and material intra-entity transactions, among other factors. Our equity method investment is reported at cost and adjusted each period for our share of the investee's income or (loss) and dividend paid, if any. We eliminate any intra-entity profits to the 26 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) extent of our beneficial interest. We record our share of the investee's income or (loss) on a one quarter lag. We report our proportionate share of the investee's income or (loss) resulting from this investment in other income, net in our condensed consolidated statements of operations. The carrying value of our equity method investment is reported in other assets on our condensed consolidated balance sheets (see Note 11: Prepaid Expenses and Other Current Assets and Other Assets). We assess our equity method investments for impairment on an annual basis or whenever events or circumstances indicate that the carrying value of the investment may not be recoverable. Our recorded share of the investee's loss was not material for the three and nine months ended September 30, 2022. We did not receive any dividend distributions from this investment during the three and nine months ended September 30, 2022. Our non-marketable equity method investment consists of the following (in thousands): As of September 30, 2022 December 31, 2021 Equity method investment $ 3,188 $ 3,238 Investments in non-marketable debt securities During the second quarter 2022, we received $ 19.0 million in proceeds from a promissory note related to an acquired investment as part of the Smiths Medical acquisition. 27 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 11: Prepaid Expenses and Other Current Assets and Other Assets Prepaid expenses and other current assets consist of the following (in thousands): As of September 30, 2022 December 31, 2021 Other prepaid expenses and receivables $ 22,738 $ 14,763 Prepaid vendor expenses 2,641 — Deferred costs 3,775 12,746 Prepaid insurance and property taxes 14,019 6,310 VAT/GST receivable 2,946 4,156 Deferred tax charge 4,452 4,241 Foreign exchange contracts 11,695 1,061 Interest rate contracts 24,924 — Interest receivable 2,426 293 Deposits 1,312 1,343 Other 3,355 1,934 $ 94,283 $ 46,847 Other assets consist of the following (in thousands): As of September 30, 2022 December 31, 2021 Pump lease receivables $ 27,024 $ 25,941 Spare parts 36,937 28,538 Equity method investments 3,188 3,238 Deferred debt issuance costs 5,586 2,827 Finance lease right-of-use assets 2,327 2,673 Interest rate contracts 33,386 — Other 2,156 526 $ 110,604 $ 63,743 Note 12: Inventories Inventories are stated at the lower of cost or net realizable value with cost determined using the first-in, first-out method. Inventory costs include material, labor and overhead related to the manufacturing of our products. Inventories consist of the following (in thousands): As of September 30, 2022 December 31, 2021 Raw materials $ 264,518 $ 135,528 Work in process 71,367 36,490 Finished goods 289,383 118,217 Total inventories $ 625,268 $ 290,235 During 2022, inventories increased significantly due to the acquisition of Smiths Medical. All acquired inventory was recorded at fair value on January 6, 2022 in accordance with ASC 805, Business Combinations (see Note 3: Acquisitions). 28 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 13: Property, Plant and Equipment Property, plant and equipment consists of the following (in thousands): As of September 30, 2022 December 31, 2021 Machinery and equipment $ 409,349 $ 321,078 Land, building and building improvements 272,426 243,377 Molds 75,874 60,463 Computer equipment and software 114,378 102,979 Furniture and fixtures 29,110 7,670 Instruments placed with customers (1) 106,245 97,384 Construction in progress 147,099 72,153 Total property, plant and equipment, cost 1,154,481 905,104 Accumulated depreciation ( 498,098 ) ( 436,739 ) Property, plant and equipment, net $ 656,383 $ 468,365 ______________________________ (1) Instruments placed with customers consist of drug-delivery and monitoring systems placed with customers under operating leases. Depreciation expense was $ 23.0 million and $ 69.4 million for the three and nine months ended September 30, 2022, respectively. Depreciation expense was $ 16.4 million and $ 49.1 million for the three and nine months ended September 30, 2021, respectively. During the three and nine months ended September 30, 2022, property, plant and equipment and related depreciation expense increased significantly due to the acquisition of Smiths Medical (see Note 3: Acquisitions). Note 14: Goodwill and Intangible Assets, Net Goodwill The following table presents the changes in the carrying amount of our goodwill (in thousands): Total Balance as of January 1, 2022 $ 43,439 Goodwill acquired (1) 1,449,977 Other (2) ( 7,128 ) Currency translation ( 116,571 ) Balance as of September 30, 2022 $ 1,369,717 _______________________________ (1) Relates to Smiths Medical acquired on January 6, 2022. (2) Other reflects measurement period adjustments related to a 2021 acquisition of a small foreign infusion systems supplier. Intangible Assets, Net Intangible assets, carried at cost less accumulated amortization and amortized on a straight-lined basis, were as follows (in thousands): 29 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Weighted-Average Amortization Life in Years September 30, 2022 Cost Accumulated Amortization Net Patents 10 $ 29,301 $ 18,135 $ 11,166 Customer contracts 12 9,909 6,339 3,570 Non-contractual customer relationships 8 560,691 85,081 475,610 Trademarks 1 5,425 5,425 — Trade name 15 18,244 5,643 12,601 Developed technology 10 576,687 93,490 483,197 Non-compete 3 9,100 4,631 4,469 Total amortized intangible assets $ 1,209,357 $ 218,744 $ 990,613 Internally developed software* $ 30,045 $ 30,045 Total intangible assets $ 1,239,402 $ 218,744 $ 1,020,658 ______________________________ * Internally developed software will be amortized when the projects are complete and the assets are ready for their intended use. Weighted-Average Amortization Life in Years December 31, 2021 Cost Accumulated Amortization Net Patents 10 $ 27,429 $ 16,764 $ 10,665 Customer contracts 12 10,412 6,196 4,216 Non-contractual customer relationships 9 57,316 33,004 24,312 Trademarks 4 425 425 — Trade name 15 18,260 4,731 13,529 Developed technology 13 152,893 49,406 103,487 Non-compete 3 9,100 2,356 6,744 Total amortized intangible assets $ 275,835 $ 112,882 $ 162,953 Internally developed software* $ 25,358 $ 25,358 Total intangible assets $ 301,193 $ 112,882 $ 188,311 ______________________________ * Internally developed software will be amortized when the projects are complete and the assets are ready for their intended use. Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives. During the three months ended September 30, 2022 and 2021, intangible asset amortization expense was $ 35.6 million and $ 5.8 million, respectively. During the nine months ended September 30, 2022 and 2021, intangible asset amortization expense was $ 108.9 million and $ 17.4 million, respectively. During the three and nine months ended September 30, 2022, intangible assets and related amortization expense increased significantly due to the acquisition of Smiths Medical (see Note 3: Acquisitions). As of September 30, 2022 estimated annual amortization for our intangible assets for each of the next five years is approximately (in thousands): 30 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Remainder of 2022 $ 33,624 2023 132,368 2024 131,729 2025 123,901 2026 123,502 2027 115,491 Thereafter 329,998 Total $ 990,613 Note 15: Accrued Liabilities and Other Long-Term Liabilities Accrued liabilities consist of the following (in thousands): As of September 30, 2022 December 31, 2021 Salaries and benefits $ 49,409 $ 27,304 Incentive compensation 24,388 33,107 Operating lease liability-ST 18,638 9,009 Accrued sales taxes 6,507 1,980 Restructuring accrual 6,767 664 Deferred revenue 31,183 12,646 Accrued other taxes 4,415 4,337 Accrued professional fees 8,694 773 Legal accrual 4,240 3,897 Distribution fees 25,326 5,645 Warranties and returns 3,059 532 Field service corrective action (1) 24,857 — Accrued freight 14,234 9,194 Foreign exchange contracts 1,752 — Accrued audit fees 6,095 1,008 Defined benefit plan 2,527 — Accrued interest 2,788 — Other 9,424 8,099 $ 244,303 $ 118,195 ___________________________ (1) Relates to field corrective actions associated with certain products in connection with a 2021 Warning Letter received by Smiths Medical from the FDA following an inspection of Smiths Medical’s Oakdale, Minnesota Facility, see Note 19: Commitments and Contingencies for further detail. 31 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Other long-term liabilities consist of the following (in thousands): As of September 30, 2022 December 31, 2021 Operating lease liability-LT $ 62,902 $ 33,971 Benefits 5,958 1,369 Accrued rent 1,030 1,262 Forward-starting interest rate swaps — 1,480 Finance lease liability-LT 1,692 2,067 Deferred revenue 21,976 — Field service corrective action (1) 22,620 — Other 3,073 1,681 $ 119,251 $ 41,830 ______________________________ (1) Relates to field corrective actions associated with certain products in connection with a 2021 Warning Letter received by Smiths Medical from the FDA following an inspection of Smiths Medical’s Oakdale, Minnesota Facility, see Note 19: Commitments and Contingencies for further detail. Note 16: Income Taxes Income taxes were accrued at an estimated effective tax rate of 38 % and 37 % for the three and nine months ended September 30, 2022, respectively, as compared to 18 % and 17 % for the three and nine months ended September 30, 2021, 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 and the following discrete items recognized during the interim period: • Excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the three and nine months ended September 30, 2022 of $ 1.5 million and $ 4.1 million, respectively. • The revaluation of the contingent consideration during the three and nine months ended September 30, 2022 of $ 4.1 million and $ 31.3 million, respectively, resulted in a tax expense of $ 0.0 million and $ 0.0 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, global intangible low taxed income ("GILTI"), FDII and tax credits. The effective tax rate during the three and nine months ended September 30, 2021 included a discrete tax benefit of $ 1.1 million and $ 3.3 million, respectively, related to excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period. Additionally, 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 resulted in a tax provision of $1.1 million for the three and nine months ended September 30, 2021. Note 17: Long-Term Debt 2022 Credit Agreement On January 6, 2022, in connection with the acquisition of Smiths Medical, we entered into a Credit Agreement (the "Credit Agreement") with Wells Fargo Bank, National Association, Wells Fargo Securities, LLC, Barclays Bank PLC and certain other financial institutions (the “Lenders”) for $ 2.2 billion of senior secured credit facilities. The senior secured credit facilities include (i) a five-year Tranche A term loan of $ 850.0 million (the "Term Loan A"), (ii) a seven-year Tranche B term loan of $ 850.0 million (the "Term Loan B") and (iii) a five-year revolving credit facility of $ 500.0 million (the "Revolving Credit Facility"), with separate sub-limits of $ 50.0 million for letters of credit and swingline loans (collectively, the "Senior Secured Credit Facilities"). We used the proceeds from borrowings under the Term Loan A and the Term Loan B (collectively, 32 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) the "Term Loans") to fund a portion of the cash consideration for the purchase of Smiths Medical and the related fees and expenses incurred in connection with the acquisition. We did not incur borrowings under the Revolving Credit Facility on the closing date of the acquisition. The proceeds from any future borrowings under the Revolving Credit Facility may be used for working capital and other general corporate purposes. In connection with entering into the Credit Agreement, during the period ended March 31, 2022, we incurred $ 37.8 million in debt discount and issuance costs, which were allocated to the Term Loan A, the Term Loan B and the Revolving Credit Facility based on lender commitment amounts relative to each type of fees paid. The lender and third-party discount and issuance costs allocated to the Term Loan A and the Term Loan B were $ 15.8 million and $ 13.4 million, respectively, and are reflected as a direct deduction from the face amount of the corresponding term loans on the condensed consolidated balance sheet. These costs are being amortized to interest expense over the respective terms of the loans using the effective interest method. The issuance costs allocated to the Revolving Credit Facility were $ 8.7 million, which are capitalized and included in prepaid expenses and other current assets and other assets on our condensed consolidated balance sheets. These costs are being amortized to interest expense over the term of the Revolving Credit Facility using the straight-line method. The net funds received from the Term Loan A and the Term Loan B, after deducting debt issuance costs, were $ 834.2 million and $ 836.6 million, respectively. Maturity Dates The maturity date for the Term Loan A and the Revolving Credit Facility is January 6, 2027 , and the maturity date for the Term Loan B is January 6, 2029 . Pursuant to the terms and conditions of the Credit Agreement, the maturity dates of the Term Loans and the Revolving Credit Facility may be extended upon our request, subject to the consent of the Lenders. Interest Rate Terms In general, the Term Loans and borrowings under the Revolving Credit Facility denominated in U.S. dollars bear interest, at our option, on either: (1) the Base Rate, as defined below, plus the applicable margin, as indicated below ("Base Rate Loans") or (2) the Adjusted Term Secured Overnight Financing Rate ("Adjusted Term SOFR"), as defined below, plus the applicable margin, as indicated below ("Term SOFR Loans"). The Base Rate is defined as the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50 % and (c) Adjusted Term SOFR (as defined below) for a one-month period plus, in each case, 1.00 %. Adjusted Term SOFR is the rate per annum equal to (a) the Term SOFR plus (b) the Term SOFR Adjustment. Term SOFR is the forward-looking term rate based on SOFR and is calculated separately for Term SOFR Loans and Base Rate Loans, as specified in the Credit Agreement. The Term SOFR Adjustment is a percentage per annum of 0.10 % for Base Rate Loans and between 0.10 % to 0.25 % for Term SOFR Loans based on the applicable interest period. Revolving Credit Facility Commitment Fee The Revolving Credit Facility has a per annum commitment fee at an initial rate of 0.25 % which is applied to the available amount of the Revolving Credit Facility. Effective on the first Adjustment Date, as defined in the Credit Agreement, occurring subsequent to our quarter ending June 30, 2022, the commitment fee will be determined by reference to the leverage ratio in effect from time to time as set forth in the table below. Applicable Interest Margins The Term Loan A and borrowings under the Revolving Credit Facility have an initial applicable margin of 0.75 % per annum for Base Rate Loans and 1.75 % per annum for Term SOFR Loans. Effective on the first Adjustment Date, as defined in the Credit Agreement, occurring subsequent to our quarter ending June 30, 2022, the applicable margin for the Term Loan A and borrowings under the Revolving Credit Facility will be determined by reference to the leverage ratio in effect from time to time as set forth in the following table: 33 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Leverage Ratio Applicable Margin for Term SOFR Loans Applicable Margin for Base Rate Loans Commitment Fee Rate Greater than 4.00 to 1.0 2.25 % 1.25 % 0.35 % Less than or equal to 4.00 to 1.0 but greater than 3.00 to 1.0 2.00 % 1.00 % 0.30 % Less than or equal to 3.00 to 1.0 but greater than 2.50 to 1.0 1.75 % 0.75 % 0.25 % Less than or equal to 2.50 to 1.0 but greater than 2.00 to 1.0 1.50 % 0.50 % 0.20 % Less than or equal to 2.00 to 1.0 1.25 % 0.25 % 0.15 % The Term Loan B has an initial applicable margin of 1.5 % per annum for Base Rate Loans and 2.5 % per annum for Term SOFR Loans. Effective on the first Adjustment Date, as defined in the Credit Agreement, occurring subsequent to our quarter ending June 30, 2022, the applicable margin for the Term Loan B will be determined by reference to the leverage ratio in effect from time to time as set forth in the following table: Leverage Ratio Applicable Margin for Term SOFR Loans Applicable Margin for Base Rate Loans Greater than 2.75 to 1.0 2.50 % 1.50 % Less than 2.75 to 1.0 2.25 % 1.25 % Principal Payments Principal payments on the Term Loans are due on the last day of each calendar quarter commencing on June 30, 2022. The Term Loan A will amortize in nineteen consecutive quarterly installments in an amount equal to 2.50 % of the original principal amount in each of the first two years, 5.00 % in each of the third and fourth years and 7.50 % in the fifth year, with a final payment of the remaining outstanding principal balance due on the maturity date. The Term Loan B matures in twenty-seven consecutive quarterly installments in an amount equal to 0.25 % of the original principal amount, with a final payment of the remaining outstanding principal balance due on the maturity date. We may borrow, prepay and re-borrow amounts under the Revolving Credit Facility, in accordance with the terms and conditions of the Credit Agreement, with all outstanding amounts due at maturity. During March 2022, we prepaid $ 16.0 million in principal payments on the Term Loan A principal balance. For the nine months ended September 30, 2022, we paid total of $ 20.3 million in principal payments on both Term Loans. Interest Payments Interest payments on Base Rate Loans are payable quarterly in arrears on the last business day of each calendar quarter and the applicable maturity date. Interest periods on Term SOFR Loans will be determined, at our option, as either one, three or six months and will be payable on the last day of each interest period and the applicable maturity date. In the case of any interest periods of more than three months' duration, the interest payment will be payable on each day prior to the last day of such interest period that occurs at three-month intervals. The commitment fee on the Revolving Credit Facility is payable quarterly in arrears on the third business day following the last day of each calendar quarter and at the maturity date. The commitment fee is included in interest expense in our condensed consolidated statements of operations. Guarantors and Collateral 34 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Our obligations under the Credit Agreement are unconditionally guaranteed, on a joint and several basis, by ICU Medical, Inc. and certain of our existing subsidiaries. Debt Covenants The Credit Agreement contains affirmative and negative covenants, including certain financial covenants. The negative covenants include restrictions regarding the incurrence of liens and indebtedness, certain merger and acquisition transactions, asset sales and other dispositions, other investments, dividends, share purchases and payments affecting subsidiaries, changes in nature of business, fiscal year or organizational documents, prepayments and redemptions of subordinated and other junior debt, transactions with affiliates, and other matters. The financial covenants include the Senior Secured Leverage Ratio and the Interest Coverage Ratio, both defined below, and pertain to the Term Loan A and the Revolving Credit Facility. The Senior Secured Leverage Ratio is defined, at any measurement date, as the ratio of: (a) all Funded Debt, as defined in the Credit Agreement, that is secured by a lien on any asset or property minus the lesser of (i) all unrestricted cash and cash equivalents and (ii) $ 500.0 million, to (b) Consolidated EBITDA, as defined in the Credit Agreement, for the most recently completed four fiscal quarters, calculated on a pro forma basis. The maximum Senior Secured Leverage Ratio is 4.50 to 1.00 until June 30, 2024. Thereafter, the maximum Senior Secured Leverage Ratio is 4.00 to 1.00, with limited permitted exception. The Interest Coverage ratio is defined, at any measurement date, as the ratio of Consolidated EBITDA, as defined in the Credit Agreement, to Consolidated Interest Expense, as defined in the Credit Agreement, paid or payable in cash, for the most recently completed four fiscal quarters. The minimum Interest Coverage ratio is 3.00 to 1.00. We were in compliance with all financial covenants as of September 30, 2022. The Credit Agreement contains customary events of default, including, among others: non-payments of principal and interest; breach of representations and warranties; covenant defaults; cross-defaults and cross-acceleration to certain other material indebtedness; the existence of bankruptcy or insolvency proceedings; certain events under ERISA; material judgments; and a change of control. If an event of default occurs and is not cured within any applicable grace period or is not waived, the administrative agent and the Lenders are entitled to take various actions, including, without limitation, the acceleration of all amounts due and the termination of commitments under the Senior Secured Credit Facilities. 2017 Credit Facility On November 8, 2017, we entered into a five-year senior secured revolving credit facility with various lenders for $ 150.0 million, with Wells Fargo Bank, National Association as the administrative agent, swingline lender and issuing lender (the "Prior Credit Facility"). The Prior Credit Facility, which was set to mature on November 8, 2022 , was terminated in connection with entering into the Credit Agreement on January 6, 2022. There were no borrowings outstanding under the Prior Credit Facility at that date or at December 31, 2021. The remaining unamortized deferred debt issuance costs related to the Prior Credit Facility were not material and were expensed in connection with its termination. See further details of the terms of the Prior Credit Facility in Note 11 in Part II, Item 8, of our 2021 Annual Report on Form 10-K. The carrying values of our long-term debt consist of the following (in thousands): 35 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Effective Interest Rate As of September 30, 2022 Senior Secured Credit Facilities: Term Loan A — principal 3.39 % $ 834,000 Term Loan B — principal 3.98 % 845,750 Revolving Credit Facility — principal — % — Less unamortized debt issuance costs (1) ( 25,526 ) Total carrying value of long-term debt 1,654,224 Less current portion of long-term debt 24,375 Long-term debt, net $ 1,629,849 _______________________________ (1) Comprised of $ 13.4 million and $ 12.2 million relating to the Term Loan A and the Term Loan B, respectively. As of September 30, 2022, the aggregate amount of principal repayments of our long-term debt (including any current portion) for each of the next five years is approximately (in thousands): Remainder of 2022 $ 2,125 2023 29,750 2024 51,000 2025 51,000 2026 72,250 2027 672,500 Thereafter 801,125 Total $ 1,679,750 The following table presents the total interest expense related to our long-term debt (in thousands): Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Contractual interest $ 19,228 $ — $ 41,868 $ — Amortization of debt issuance costs 1,758 72 5,200 216 Commitment fee — Revolving Credit Facility 334 58 994 171 Total long-term debt-related interest expense $ 21,320 $ 130 48,062 387 Note 18: Stockholders' Equity Shareholders Agreement At the completion of the Smiths Medical acquisition on January 6, 2022, Smiths owns approximately 10.5 % of the total outstanding shares of our common stock (see Note 3: Acquisitions). At closing, in connection with the issuance of the share consideration, we entered into a Shareholders Agreement (the “Shareholders Agreement”) with Smiths. The Shareholders Agreement imposes certain restrictions on Smiths including prohibiting certain transfers of the shares of our common stock issued (i) for 6 months following the closing of the acquisition and (ii) to certain of our competitors and certain other parties, as well as customary standstill limitations. The Shareholders Agreement also permits Smiths to designate one individual for 36 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) election to our Board of Directors (the "Board") so long as Smiths beneficially owns at least 5.0 % of the total outstanding shares of our common stock. On February 1, 2022, our Board appointed a new director designated by Smiths pursuant to the Shareholders Agreement who was elected to the Board at the 2022 Annual Meeting of Stockholders held in May 2022. This appointment expanded the size of our Board from eight to nine members. See our Current Report on Form 8-K filed on February 1, 2022 for additional information. Treasury Stock In August 2019, our Board approved a share purchase plan to purchase up to $ 100.0 million of our common stock. This plan has no expiration date. During the three months ended September 30, 2022, we did not purchase any shares of our common stock under our share purchase plan. As of September 30, 2022, all of the $ 100.0 million available for purchase was remaining under the plan. We are currently limited on share purchases in accordance with the terms and conditions of our Credit Agreement (see Note 17: Long-Term Debt). For the nine months ended September 30, 2022, we withheld 45,370 shares of our common stock from employee vested restricted stock units in consideration for $ 10.5 million in payments made on the employees' behalf for their minimum statutory income tax withholding obligations. For the nine months ended September 30, 2021, we withheld 39,371 shares of our common stock from employee vested restricted stock units in consideration for $ 8.1 million in payments made on the employees' behalf for their minimum statutory income tax withholding obligations. Treasury stock is used to issue shares for stock option exercises and restricted stock grants. Accumulated Other Comprehensive (Loss) Income ("AOCI") The components of AOCI, net of tax, were as follows (in thousands): Foreign Currency Translation Adjustments Unrealized (Losses) Gains on Cash Flow Hedges Other Adjustments Total Balance as of January 1, 2022 $ ( 19,045 ) $ ( 237 ) $ 13 $ ( 19,269 ) Other comprehensive (loss) income before reclassifications ( 4,946 ) 25,782 15 20,851 Amounts reclassified from AOCI — ( 2,210 ) — ( 2,210 ) Other comprehensive (loss) income ( 4,946 ) 23,572 15 18,641 Balance as of March 31, 2022 $ ( 23,991 ) $ 23,335 $ 28 $ ( 628 ) Other comprehensive (loss) income before reclassifications ( 99,805 ) 10,245 14 ( 89,546 ) Amounts reclassified from AOCI — ( 2,101 ) — ( 2,101 ) Other comprehensive (loss) income ( 99,805 ) 8,144 14 ( 91,647 ) Balance as of June 30, 2022 $ ( 123,796 ) $ 31,479 $ 42 $ ( 92,275 ) Other comprehensive (loss) income before reclassifications ( 90,549 ) 18,784 227 ( 71,538 ) Amounts reclassified from AOCI — ( 1,869 ) — ( 1,869 ) Other comprehensive (loss) income ( 90,549 ) 16,915 227 ( 73,407 ) Balance as of September 30, 2022 $ ( 214,345 ) $ 48,394 $ 269 $ ( 165,682 ) 37 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Foreign Currency Translation Adjustments Unrealized Gains (Losses) on Cash Flow Hedges Other Adjustments Total Balance as of January 1, 2021 $ ( 4,381 ) $ 2,784 $ 75 $ ( 1,522 ) Other comprehensive (loss) income before reclassifications ( 7,458 ) ( 306 ) 12 ( 7,752 ) Amounts reclassified from AOCI — ( 639 ) — ( 639 ) Other comprehensive (loss) income ( 7,458 ) ( 945 ) 12 ( 8,391 ) Balance as of March 31, 2021 $ ( 11,839 ) $ 1,839 $ 87 $ ( 9,913 ) Other comprehensive income before reclassifications 1,302 335 12 1,649 Amounts reclassified from AOCI — ( 687 ) — ( 687 ) Other comprehensive income (loss) 1,302 ( 352 ) 12 962 Balance as of June 30, 2021 $ ( 10,537 ) $ 1,487 $ 99 $ ( 8,951 ) Other comprehensive (loss) income before reclassifications ( 5,360 ) ( 83 ) 12 ( 5,431 ) Amounts reclassified from AOCI — ( 736 ) — ( 736 ) Other comprehensive (loss) income ( 5,360 ) ( 819 ) 12 ( 6,167 ) Balance as of September 30, 2021 $ ( 15,897 ) $ 668 $ 111 $ ( 15,118 ) Note 19: Commitments and Contingencies Legal Proceedings From time to time, we are involved in various legal proceedings, most of which are routine litigation, in the normal course of business. Our management does not believe that the resolution of the unsettled legal proceedings that we are involved with will have a material adverse impact on our financial position or results of operations. Off-Balance Sheet Arrangements In the normal course of business, we have agreed to indemnify our officers and directors to the maximum extent permitted under Delaware law and to indemnify customers as to certain intellectual property matters or other matters related to sales of our products. There is no maximum limit on the indemnification that may be required under these agreements. Although we can provide no assurances, we have never incurred, nor do we expect to incur, any material liability for indemnification. Contingencies On January 6, 2022, we acquired Smiths Medical. Total consideration for the acquisition includes a potential earn-out payment of $ 100.0 million in cash contingent on our common stock achieving a certain volume-weighted average price from the closing date to either the third or fourth anniversary of closing. As of September 30, 2022, the estimated fair value of the contingent earn-out is $ 21.8 million (see Note 9: Fair Value Measurements). Prior to being acquired, during 2021, Smiths Medical received a Warning Letter from the FDA following an inspection of Smiths Medical’s Oakdale, Minnesota Facility. The Warning Letter cited, among other things, failures to comply with FDA's medical device reporting requirements and failures to comply with applicable portions of the Quality System Regulation. A provision for the estimated costs related to the field service corrective action was recorded on the opening acquired balance sheet of Smiths Medical in the amount of $ 55.1 million. The initial estimate recorded was based on a probability-weighted estimate of the costs required to settle the obligation. The actual costs to be incurred are dependent upon the scope of the work necessary to achieve regulatory clearance and could differ from the original estimate. The estimated field service corrective action recorded at September 30, 2022 is $ 47.5 million. 38 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) During November 2021, we acquired a small foreign infusion systems supplier. Total consideration for the acquisition includes a potential earn-out payment of up to $ 2.5 million, consisting of (i) a cash payment of $ 1.0 million contingent on the achievement of certain revenue targets for the annual period ending December 31, 2022 and, separately, (ii) a cash payment of $ 1.5 million contingent on certain product-related regulatory certifications obtained by May 26, 2024. As of September 30, 2022, the estimated fair value of the contingent earn-out is $ 1.8 million (see Note 9: Fair Value Measurements). During August 2021, we entered into an agreement with one of our international distributors whereby that distributor would not compete with us in a specific territory for a three-year period that will end in September 2024. The terms of the agreement include a contingent earn-out payment. The contingent earn-out shall not exceed $ 6.0 million, which will be earned based on certain revenue targets over a twelve-month measurement period determined by the highest four consecutive quarters commencing over a two-year period starting on the closing date of the agreement and provided that the distributor is in compliance with its obligations under the agreement. As of September 30, 2022, the estimated fair value of the contingent earn-out is $ 2.6 million (see Note 9: Fair Value Measurements). Commitments We have non-cancelable operating lease agreements where we are contractually obligated to pay certain lease payment amounts (see Note 6: Leases). Note 20: Collaborative and Other Arrangements On February 3, 2017, we entered into two Manufacturing and Supply Agreements ("MSAs") whereby (i) Pfizer will manufacture and supply us with certain agreed upon products for an initial five-year term with a one-time two-year option to extend and (ii) we will manufacture and supply Pfizer certain agreed upon products for a term of five or ten years depending on the product, also with a one-time two-year option to extend. The MSAs provide each party with mutually beneficial interests and both of the MSAs are to be jointly managed by both Pfizer and ICU. The initial supply price, which is subject to an annual update, is in full consideration for all costs associated with the manufacture, documentation, packaging and certification of the products. On January 1, 2021, we amended our MSA with Pfizer, whereby we manufacture and supply certain agreed upon products to Pfizer. The amendments included a change to the term of the agreement to end on December 31, 2024 with Pfizer's unilateral election to extend through December 31, 2025. Other changes to the terms of the MSA included (i) amendments to our level of supply of products to Pfizer, (ii) certain changes to our manufacturing lines, (iii) updates to our supply price with added volume price tiers for annual periods and (iv) certain minimum purchase requirements for certain products. On February 1, 2022, effective as of January 1, 2022, upon our request, Pfizer executed a Product Addendum (the "Product Addendum") to our MSA, whereby Pfizer manufactures and supplies to us certain agreed upon products. The Product Addendum includes the supply of additional product to us subject to certain time and pricing terms and conditions. The Product Addendum includes a minimum purchase obligation of $ 29.6 million and expires on November 30, 2022. As of March 31, 2022, we had satisfied the minimum purchase obligations under the Product Addendum. 39 Table of Contents