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Item 7. Management’s Discussion and Analysis

2023-02-27 compared with 2022-02-25 · 187 added, 290 removed, 278 unchanged (63% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes thereto.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties.

Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Part I, Item 1A.

“Risk Factors” or in other sections of this Annual Report on Form 10-K.

Business Overview and Highlights

We are one of the world's leading pure-play infusion therapy companies with global operations and a wide-ranging product portfolio that includes IV solutions, IV smart pumps with pain management and safety software technology, dedicated and nondedicated IV sets and needlefree connectors designed to help meet clinical, safety and workflow goals.

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

We develop, manufacture, and sell infusion systems, infusion consumables and high-value critical care products used in hospital, alternate site and home care settings.

Our team is focused on providing quality, innovation and value to our clinical customers worldwide.

Our product portfolio includes IV solutions, IV smart pumps with pain management and safety software technology, dedicated and nondedicated IV sets and needlefree connectors designed to help meet clinical, safety and workflow goals.

In addition, we manufacture automated pharmacy IV compounding systems with workflow technology, closed system

transfer devices for preparing and administering hazardous IV drugs and cardiac monitoring systems for critically ill patients.

With the recent acquisition of Smiths Medical, our product portfolio expanded to include, among other products, syringe and ambulatory pumps, peripheral IV catheters, fluid warming and respiratory devices and silicone and PVC tracheotomy tubes.

Acquisition of Smiths Medical 2020 Limited

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

On January 6, 2022, we acquired Smiths Medical, the holding company of Smiths Group plc's global medical device business for a purchase price of $1.9 billion in cash, 2.5 million of fully paid and non-assessable shares of our common stock, par value $0.10 per share and a potential contingent earn-out payment of $100.0 million in cash, based on our common stock performance and other considerations.

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

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

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

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

To partially finance the acquisition, we entered into the Credit Agreement, dated as of January 6, 2022 (the "Credit Agreement") with Wells Fargo Bank and other financial institutions as lenders.

The Credit Agreement provides for $2.2 billion of senior secured credit facilities, including a five-year term loan A facility of $850.0 million, a seven-year term loan B facility of $850.0 million and a five-year revolving credit facility of $500.0 million collectively (the "Senior Secured Credit Facilities").

See "Liquidity and Capital Resources" in the remainder of this item and Note 11 in our accompanying consolidated financial statements for additional information.

The novel coronavirus and its variants ("COVID-19") continues to have an impact on our business operations.

Our manufacturing, distribution and pump service facilities continue to operate under our business continuity plan and our precautionary safety measures implemented to maximize the safety of our employees and to mitigate disruption to our business remain in effect.

While we continually monitor the ongoing and evolving impact of the effect of the COVID-19 pandemic on our operations the overall impact will not be fully reflected in our results of operations until future periods.

The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be fully predicted at this time, as such, the impact of the pandemic on our overall financial performance remains uncertain and cannot as yet be quantified.

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

COVID-19 Pandemic and other Global Geopolitical Events

Our business operations have been, and we expect will continue to be, impacted by the novel coronavirus and its variants ("COVID-19"), which has caused lower hospital admissions and medical procedure volumes and by the continuing conflict between Russia and Ukraine.

These events have resulted in global economic challenges, and impacts to us and our business, such as rising inflation, especially with respect to freight costs driven by the higher fuel prices, increased cost of raw materials as well as shortages, and supply chain disruptions which have negatively impacted our gross profit margin during 2022.

The rising interest rates and foreign currency impact due to the strengthening of the U.S.

dollar have also impacted our results of operations during 2022.

While we continually monitor the ongoing and evolving impact of the above events on our operations the overall impact remains uncertain and may not be fully reflected until future periods.

The overall impact to our results of operations will depend on factors such as the duration and extent of the impact from the COVID-19 pandemic, the conflict in the Ukraine and the related global economic challenges, none of which can be fully predicted at this time.

Risk Factors” for a discussion of risks and uncertainties.

Consolidated Results of Operations

The following table summarizes our total worldwide revenue by domestic and international markets by amount and as a percentage of total revenue (in millions, except percentages):

Year Ended December 31,

We present our consolidated statements of operations for each of the three years ended December 31, 2022, 2021 and 2020 in Item 8.

Financial Statements and Supplementary Data.

The following table shows, for each of the three most recent years, the respective percentages of items in our statements of operations in relation to total revenues:

Percentage of Revenues

2022 2021 2020

$ % of Revenue $ % of Revenue $ % of Revenue

Domestic $ 941.8 72 % $ 910.6 72 % $ 923.3 73 %

International 374.5 28 % 360.4 28 % 342.9 27 %

Total Revenue $ 1,316.3 100 % $ 1,271.0 100 % $ 1,266.2 100 %

Total revenues 100 % 100 % 100 %

Gross profit 31 % 37 % 36 %

Selling, general and administrative expenses 27 % 23 % 22 %

Research and development expenses 4 % 4 % 3 %

Restructuring, strategic transaction and integration expenses 3 % 1 % 2 %

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

Contract settlement — % — % — %

Total operating expenses 33 % 28 % 28 %

Income from operations (2) % 9 % 8 %

Interest expense (3) % — % — %

Other income, net — % — % — %

(Loss) income before income taxes (5) % 9 % 8 %

(Benefit) provision for income taxes (2) % 1 % 1 %

Net (loss) income (3) % 8 % 7 %

Total revenues were $2.3 billion, $1.3 billion and $1.3 billion for 2022, 2021 and 2020, respectively.

The following table sets forth, for the periods indicated, total revenue by product line as a percentage of total revenue:

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Critical Care 2 % 4 % 4 %

Infusion Systems-Smiths Medical 15 % — —

Vascular Access-Smiths Medical 14 % — —

Vital Care-Smiths Medical 13 % — —

100 % 100 % 100 %

As of December 31, 2021, we manage our product distribution in the U.S.

through a network of two owned and one leased distribution facilities in combination with independent distributors and third-party fulfillment and logistics providers.

We manage our product distribution through a network of owned and leased distribution facilities in combination with independent distributors and third-party fulfillment and logistics providers.

Our end customers, which include healthcare providers and original equipment manufacturer suppliers, may order and receive our products directly from us or through an independent full-line distributor.

Internationally, we manage distribution utilizing international regional hubs and through independent distributors.

a substantial amount of our products are sold to group purchasing organization ("GPO") member hospitals.

We believe that as healthcare providers continue to either consolidate or join major buying organizations, the success of our products will depend, in part, on our ability, either independently or through strategic relationships to secure long-term contracts with large healthcare providers and major buying organizations.

Although we believe that we are not dependent on any single distributor, large healthcare provider or major buying organization for distribution of our products, the loss of a strategic relationship with any one of these organizations or a decline in demand for our products could have a material adverse effect on our operating results.

We believe that achievement of our growth objectives worldwide will require increased efforts by us in sales and marketing and product acquisition and development;

however, there is no assurance that we will be successful in implementing our growth strategy.

Product development or acquisition efforts may not succeed, and even if we do develop or acquire additional products, there is no assurance that we will achieve profitable sales of such products.

Increased expenditures for sales and marketing and product acquisition and development may not yield desired results when expected, or at all.

While we have taken steps to control these risks, there are certain risks that may be outside of our control, and there is no assurance that steps we have taken will succeed.

Seasonality/Quarterly Results

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Our expenses often do not fluctuate in the same manner as net sales, which may cause fluctuations in operating income that are disproportionate to fluctuations in our revenue.

We present income statement data in Item 8.

Financial Statements and Supplementary Data.

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

Percentage of Revenues

2021 2020 2019

Total revenues 100 % 100 % 100 %

Gross profit 37 % 36 % 37 %

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

Research and development expenses 4 % 3 % 4 %

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

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

Contract settlement — % — % — %

Total operating expenses 28 % 28 % 28 %

Income from operations 9 % 8 % 9 %

Interest expense — % — % — %

Other income, net — % — % 1 %

Income before income taxes 9 % 8 % 10 %

Provision for income taxes 1 % 1 % 1 %

Net income 8 % 7 % 9 %

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

Non-GAAP Measures

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

GAAP basis, we also compare the changes in revenue from one period to another using constant currency.

The presentation of revenues on a constant currency basis is a non-GAAP financial

measure that excludes the impact of fluctuations in foreign currency exchange rates that occurred between the comparative periods.

We provide constant currency information to enhance the visibility of underlying business trends, excluding the effects of changes in foreign currency translation rates.

To calculate our constant currency results, we apply the average exchange rate for revenues from the prior year to the current year results.

We believe this information is useful to investors to facilitate comparisons and better identify trends in our business.

Our constant currency revenues reflect current year local currency revenues at prior year's average exchange rates.

We consistently apply this approach to revenues for all currencies where the functional currency is not the U.S.

These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP.

Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with GAAP.

Revenues on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with GAAP.

Infusion Consumables

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Infusion Consumables $ 566.6 $ 555.2 $ 473.7 $ 11.4 2.1 % $ 81.5 17.2 %

Infusion Consumables revenue increased in 2022, as compared to 2021, due to increased customer demand in our global core infusion, global oncology and renal products.

On a constant currency basis, Infusion Consumables revenue would have been $582.1 million, an increase of $26.9 million or 4.9% as compared to 2021.

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

The increase was due to lower hospital census in 2020 driven by the onset of the COVID-19 pandemic, growth in our global oncology, U.S.

core infusion and renal products

and the impact from foreign exchange.

core infusion and renal products and the impact from foreign exchange.

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

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

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

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

Infusion Systems

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Infusion Systems $ 351.1 $ 352.3 $ 359.7 $ (1.2) (0.3)% $ (7.4) (2.1)%

Infusion Systems revenue decreased in 2022, as compared to 2021, due to the impact of foreign currency.

On a constant currency basis, Infusion Systems revenue would have been $363.7 million, an increase of $11.4 million or 3.2%, as compared to 2021 driven by higher large volume pump ("LVP") dedicated set sales from the larger install base of LVPs and software sales.

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

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

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

The increase in revenue was primarily due to high demand for our infusion pumps during the COVID-19 pandemic, offset partially by lower demand for our dedicated infusion sets and losses of our non-core ambulatory pump business.

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

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

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IV Solutions $ 363.5 $ 359.5 $ 389.0 $ 4.0 1.1% $ (29.5) (7.6)%

IV Solutions sales increased in 2022, as compared to 2021, primarily due to an increase in contract manufacturing sales to Pfizer.

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

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

Critical Care

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Critical Care $ 47.3 $ 49.3 $ 48.6 $ (2.0) (4.1) % $ 0.7 1.4 %

Critical Care revenue decreased slightly in 2022, as compared to 2021.

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

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

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

Infusion Systems-Smiths Medical

The following table summarizes our total Infusion Systems-Smiths Medical revenue (in millions, except percentages):

Year Ended December 31, $ change % change $ change % change

2022 2021 2020 2022 over 2021 2021 over 2020

Infusion Systems-Smiths Medical $ 340.1 $ — $ — $ 340.1 nm nm nm

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

The year-to-date amount in the table above represents approximately twelve months of revenue from the closing date of the transaction to the end of the year ended December 31, 2022.

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

Vascular Access-Smiths Medical

The following table summarizes our total Vascular Access-Smiths Medical revenue (in millions, except percentages):

Year Ended December 31, $ change % change $ change % change

2022 2021 2020 2022 over 2021 2021 over 2020

Vascular Access-Smiths Medical $ 326.8 $ — $ — $ 326.8 nm nm nm

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

The year-to-date amount in the table above represents approximately twelve months of revenue from the closing date of the transaction to the end of the year ended December 31, 2022.

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

Vital Care-Smiths Medical

The following table summarizes our total Vital Care-Smiths Medical revenue (in millions, except percentages):

Year Ended December 31, $ change % change $ change % change

2022 2021 2020 2022 over 2021 2021 over 2020

Vital Care-Smiths Medical $ 284.6 $ — $ — $ 284.6 nm nm nm

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

The year-to-date amount in the table above represents approximately twelve months of revenue from the closing date of the transaction to the end of the current year ended December 31, 2022.

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

Gross Margins

Gross margins were 30.6%, 37.3% and 36.3% for 2022, 2021 and 2020, respectively.

The decrease in gross margin in 2022, as compared to 2021 was primarily driven by the acquisition of Smiths Medical, inflationary cost increases in our supply chain, and lower manufacturing absorption due to supply chain disruptions.

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

The inflationary cost increases during 2022 caused by COVID-19 and the war in the Ukraine notably impacted our freight rates as well as, labor and materials costs.

Partially offsetting the decrease to gross margin in the current period was the impact from increased sales of higher margin consumables products.

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

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

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

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Consolidated SG&A expenses increased in 2022, as compared to 2021.

In 2022, SG&A increased $296.6 million due to the impact of the Smiths Medical acquisition, which included $103.8 million of salaries and benefits, $116.8 million of depreciation and amortization expense and $19.7 million of IT and business support services.

The remainder of the increase in SG&A was attributable mostly due to higher selling expense due to revenue growth and the impact of inflation.

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

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

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

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

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

Offsetting these expense increases was a $6.3 decrease in bad debt expense, a $6.3 million decrease in travel expenses, a $3.7 million decrease in consulting expenses, and a $2.8 million decrease in sales and marketing expenses.

Dealer fees increased due to a change to a distribution model from a direct model in Canada and an increase in revenue from distributors.

Depreciation and amortization expense increased primarily as a result of the increase in amortization base due to the November 2019 acquisition of Pursuit.

Compensation expense increased as a result of lower incentive compensation recognized in the prior year due to results below performance targets.

Stock compensation increased in the current year due to a change in the number of performance shares estimated to vest on one of our non-executive performance awards.

Bad debt expense is estimated based on an analysis of the expected losses on the accounts receivables at the reporting date, which varies from period-to-period due to the quality of those receivables.

Travel expenses decreased in the current year, as compared to prior year, due to travel restrictions in response to COVID-19.

Consulting expense was higher in 2019 due to charges incurred related to tax compliance and IT infrastructure expenses.

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

Research and Development ("R&D") Expenses

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R&D $ 93.0 $ 47.5 $ 42.9 $ 45.5 95.8 % $ 4.6 10.7 %

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

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

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

R&D expenses increased in 2022, as compared to 2021, due to the acquisition of Smiths Medical.

R&D expenses are primarily related to headcount and employment expenses in support of ongoing R&D projects

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

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

R&D expenses generally include compensation and benefit expenses, consulting fees, production supplies, samples, travel costs, utilities and other miscellaneous administrative costs incurred on our ongoing R&D projects.

Restructuring, Strategic Transaction and Integration Expenses

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Restructuring Charges

In 2022, we incurred restructuring charges of $9.7 million primarily related to severance costs.

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

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

In 2019, restructuring charges were $8.4 million.

These charges were primarily related to a one-time charge to move our U.S.

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

Strategic Transaction and Integration Expenses

In 2022, we incurred $61.7 million in strategic transaction and integration expenses primarily related to our acquisition of Smiths Medical, which included legal expenses, bank fees and employee costs, and a United Kingdom stamp tax.

In 2021, we incurred $19.8 million in strategic transaction and integration expenses primarily related to integration costs associated with acquisitions, the Hospira Infusion Systems ("HIS") earn-out dispute with Pfizer, one-time costs incurred to comply with regulatory initiatives and transaction expenses incurred in connection with entering into the definitive agreement to acquire Smiths Medical.

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

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

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

Change in fair value of contingent earn-out

In 2022, the fair value revaluation of our contingent earn-outs resulted in a decrease in value of $32.1 million.

This decrease was primarily related to the fair value revaluation of our Smiths Medical contingent earn-out liability.

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

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

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

The earn-out period ended on December 31, 2019 and as of that date we determined we did not meet the necessary performance targets that would require payout of any of the HIS earn-out liability.

Pfizer disputed our determination that the performance targets requiring payout of the HIS earn-out liability were not met, and the dispute entered into binding arbitration.

In August 2021, the arbitrator concluded that the necessary performance targets that would require payout of the HIS earn-out were not met, and as a result Pfizer is not entitled to any payments in connection with the HIS earn-out liability.

Contract Settlement

In 2022, we did not incur any contract settlement charges.

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

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

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

Interest Expense

Interest (expense) income, net

Interest (expense) income, net was $(66.4) million, $1.9 million and $1.9 million in 2022, 2021 and 2020, respectively.

Interest expense was $70.8 million, $0.9 million and $1.8 million in 2022, 2021 and 2020, respectively.

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

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

In 2022, interest expense primarily includes the contractual interest incurred on borrowings under the Credit Agreement, the per annum commitment fee charged on the available amount of the revolving credit facility contained in the Credit Agreement and the amortization of debt issuance costs incurred in connection with entering into the Credit Agreement (see Note 11 Long-Term Debt in our accompanying consolidated financial statements for additional information).

In 2021, interest expense primarily includes the per annum commitment fee charged on the unused portion of the revolver under our then five-year revolving credit facility and the amortization of financing costs that were incurred in 2017 in connection with entering into the then existing credit facility.

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

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

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

In 2020, interest expense was primarily related to borrowings under our then existing credit facility and the amortization of financing costs.

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

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

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

Other Income, net

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

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

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

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

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

Interest income was $4.4 million, $2.8 million and $3.7 million in 2022, 2021 and 2020, respectively.

Interest income is primarily related to interest earned on our investment securities.

Other (expense) income, net

Other (expense) income, net was $(5.1) million, $(2.0) million and $(2.6) million in 2022, 2021 and 2020, respectively.

In 2022, other expense, net was related to $5.8 million of foreign exchange losses and $2.6 million of loss from disposed assets partially offset by $3.2 million of miscellaneous income.

In 2021, other expense, net was primarily related to $1.7 million of loss from disposed assets and $1.0 million of foreign exchange losses partially offset by miscellaneous income of $0.6 million.

In 2020, other expense, net was primarily related to $7.2 million of foreign exchange losses incurred as a result of the strengthening of the U.S.

dollar during the first half of the year, partially offset by $2.8 million of miscellaneous income and $1.8 million of gain on disposition of assets.

Income taxes were accrued at an estimated annual effective tax rate of 35%, 16% and 11% in 2022, 2021 and 2020, respectively.

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

and foreign incomes, state income taxes, section 162(m) excess compensation, foreign-derived intangible income ("FDII"), global intangible low-taxed income ("GILTI") and tax credits.

The effective tax rate during 2022 included a tax benefit of $4.2 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period.

The effective tax rate during 2022 also included a $0.0 million tax impact of the revaluation of contingent consideration of $6.8 million.

The effective tax rate in 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 in 2021 included a tax benefit of $4.9 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period.

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The effective tax rate in 2020 differs from the federal statutory rate of 21% principally because of the effect of the mix of U.S.

and foreign incomes, state income taxes, global intangible low-taxed income ("GILTI"), foreign-derived intangible income ("FDII") and tax credits.

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

The effective tax rate in 2020 included a tax benefit of $5.3 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period.

The effective tax rate for 2020 also included U.S.

federal and state return-to-provision adjustments net of related reserve changes for the year ended December 31, 2019 of $3.8 million tax benefit primarily due to changes in estimates for GILTI, FDII, and related foreign tax credits.

The effective tax rate in 2019 differs from the federal statutory rate of 21% principally because of the effect of the mix of U.S.

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

The effective tax rate for 2019 included a tax benefit of $9.6 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period.

The effective tax rate for 2019 was also impacted by the repatriation of certain intellectual property and assets from a liquidation of one of our foreign subsidiaries to the U.S.

In accordance with the changes to the accounting for income tax effects of such intra-entity transfers of assets, we recorded a net tax benefit of $3.8 million related to the liquidation.

Lastly, the effective tax rate during 2019 included a tax expense of $2.2 million related to return-to-provision adjustments for the year ended December 31, 2018 primarily due to changes in estimates for our U.S.

GILTI inclusion.

federal and state return-to-provision adjustments net

of related reserve changes for the year ended December 31, 2019 of $3.8 million tax benefit primarily due to changes in estimates for GILTI, FDII, and related foreign tax credits.

Liquidity and Capital Resources

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

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

Sources of Liquidity

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

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

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

During 2022, our cash and cash equivalents and short-term investment securities decreased by $354.2 million from $567.2 million at December 31, 2021 to $213.0 million at December 31, 2022.

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

2022 Credit Facilities and Access to Capital

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

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

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

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

and certain of our existing subsidiaries.

The obligations under the Credit Facility are secured by a pledge of 100% of the capital stock of certain subsidiaries owned by us and a security interest in substantially all of our tangible and intangible assets and the tangible and intangible assets of each guarantor.

The Credit Facility contains certain financial covenants pertaining to Consolidated Fixed Charge Coverage and Consolidated Total Leverage ratios, see below under "Financial Covenants".

In addition, the Credit Facility has restrictions pertaining to limitations on debt, liens, negative pledges, loans, advances, acquisitions, other investments, dividends, distributions, redemptions, repurchases of equity interests, fundamental changes and asset sales and other dispositions, prepayments, redemptions and purchases of subordinated debt and other junior debt, transactions with affiliates, dividend and payment restrictions affecting subsidiaries, changes in line of business, fiscal year and accounting practices and amendment of organizational documents and junior debt documents.

Financial Covenants

The Credit Facility contains certain negative financial covenants, including, Consolidated Total Leverage and Consolidated Fixed Charge Coverage Ratios.

The Consolidated Leverage Ratio is defined as the ratio of Consolidated Total Funded Indebtedness on such date, to Consolidated Adjusted EBITDA, as defined under the Credit Facility Agreement, for the most recently completed four fiscal quarters.

The maximum Consolidated Leverage Ratio is not more than 3.00 to 1.00.

The Consolidated Fixed Charge Coverage Ratio is defined as the ratio of:

(a) Consolidated Adjusted EBITDA less the sum of (i) capital expenditures, (ii) federal, state, local and foreign income taxes paid in cash and (iii) cash restricted payments

made after the closing date, to (b) Consolidated Fixed Charges for the most recently completed four fiscal quarters, calculated on a pro forma basis.

The minimum Consolidated Fixed Charge Coverage Ratio is 2.00 to 1.00.

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

2022 Senior Secured Credit Facilities

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

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

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

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

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

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

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

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

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

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

We entered into the Credit Agreement with various lenders on January 6, 2022 in connection with the closing of the Smiths Medical acquisition.

The Credit Agreement provides for a five-year term loan A facility of $850.0 million (the "Term Loan A"), a seven-year term loan B facility of $850.0 million (the "Term Loan B") and a five-year revolving credit facility of $500.0 million (the "Revolving Credit Facility") (collectively, the "Senior Secured Credit Facilities").

The proceeds from the term loans were used to finance a portion of the cash consideration for the Smiths Medical acquisition.

The outstanding aggregate principal amount of the term loans is $1.7 billion as of December 31, 2022, which includes the Term Loan A that will mature in January 2027 and the Term Loan B that will mature in January 2029.

The proceeds of future borrowings under the Revolving Credit Facility, which expires in January 2027, may be used as a source of liquidity to support our ongoing working capital requirements and other general corporate purposes.

There are no outstanding borrowings under the Revolving Credit Facility as of December 31, 2022.

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

At the date of issuance of this report, our issuer and Term Loan B credit ratings assigned and outlook were as follows:

Issuer/Term Loan B

Credit Ratings Outlook

Moody's Ba3 Stable

Fitch BB/BBB- Stable

Moody's Ba3/Ba3 Stable

Fitch BB/BBB- Negative

Standard & Poor's BB-/BB- Stable

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

The Credit Agreement contains financial covenants that pertain to the Term Loan A and the Revolving Credit Facility.

Specifically, we are required to maintain a Senior Secured Leverage Ratio of no more than 4.50 to 1.00 until June 30, 2024, with step-downs to 4.00 to 1.00 thereafter, and an Interest Coverage Ratio of no less than 3.00 to 1.00 (defined and discussed in greater detail in Note 11:

Long-Term Debt to our accompanying consolidated financial statements).

We were in compliance with these financial covenants as of December 31, 2022.

2017 Credit Facility

In November 2017, we entered into a five-year revolving credit facility with various lenders for $150.0 million (the "Prior Credit Facility").

The Prior Credit Facility, which was set to expire in November 2022, was terminated upon entering into the new Senior Secured Credit Facilities.

There were no outstanding borrowings under the Prior Credit Facility at the time of its termination.

We believe that our existing cash and cash equivalents along with cash flows expected to be generated from future operations, cash received from our uncommitted trade accounts receivable purchase facility (see Note 17:

Subsequent Events in our accompanying consolidated financial statements for additional information) and the funds received and accessible under the

Senior Secured Credit Facilities will provide us with sufficient liquidity to finance our cash requirements for the next twelve months.

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

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

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

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to support new and existing products and in infusion pumps that get placed with customers outside the U.S.

We expect to use our cash and cash equivalents to fund our capital purchases.

We expect to use our cash and cash equivalents to fund our capital expenditures.

Amounts of spending are estimates and actual spending may substantially differ from those amounts.

2022 Acquisitions

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

On January 6, 2022, we acquired Smiths Medical.

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

See above and Note 17:

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

Acquisitions and Note 11:

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

Contractual Obligations

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

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

Interest payments on the term loans were estimated using an Adjusted Term SOFR rate and an applicable margin on of 2.00% for term loan A and 2.50% for term loan B and the revolver commitment fees were estimated using a rate of 0.30%.

The applicable margin rate and commitment fee rate will change from time to time in accordance with a preset pricing grid based on the leverage ratio (see Note 11:

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

Long-Term Debt in our accompanying consolidated financial statements for pricing grids related to the Senior Secured Credit Facilities).

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

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

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

The Product Addendum expires on November 30, 2022.

The Product Addendum included a minimum purchase obligation of $29.6 million, which we satisfied during 2022.

The Product Addendum expired on November 30, 2022.

Other Future Capital Investments

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

In connection with the January 2022 acquisition of Smiths Medical we estimate the investment needed in 2023 for restructuring and integration expenses along with spending to support quality systems and quality compliance objectives to be in the range of $75 million to $125 million, which includes acquired accrued field action liabilities.

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

Indemnifications

In the normal course of business, we have agreed to indemnify our officers and directors to the maximum extent permitted under Delaware law and to indemnify customers as to certain intellectual property matters related to sales of our products.

There is no maximum limit on the indemnification that may be required under these agreements.

Although we can provide no assurances, we have never incurred, nor do we expect to incur, any liability for indemnification.

Historical Cash Flows

Cash Flows from Operating Activities

Our cash used in operations was $(62.1) million in 2022.

Net income plus adjustments for non-cash net expenses contributed $241.6 million to cash provided by operations.

Net cash used in operations as a result of changes in operating assets and liabilities was $303.7 million.

The changes in operating assets and liabilities included a $201.1 million increase in inventories, a $21.3 million increase in other assets, a $55.8 million decrease in accrued liabilities, $66.7 million in net changes in income taxes, including excess tax benefits and deferred income taxes and a $19.2 million increase in accounts receivable.

Offsetting these amounts was a $22.9 million decrease in prepaid expenses and other current assets and a $37.5 million increase in accounts payable.

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

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

The primary drivers for the net decrease in accrued liabilities was primarily due to the payout of annual bonuses and decrease in deferred revenue.

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

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

The net decrease in prepaid expenses and other current assets was primarily due to a decrease in deferred costs mostly offset by capitalized debt issuance costs allocated to the revolving credit facility.

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

Our cash provided by operations was $267.5 million in 2021.

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

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

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

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

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The decrease in inventory was primarily due to improved inventory management and increased demand for certain products driven by the COVID-19 pandemic at the end of the year.

Our cash provided by operations was $101.9 million in 2019.

Net income plus adjustments for non-cash net expenses contributed $213.6 million to cash provided by operations.

Net cash used in operations as a result of changes in operating assets and liabilities was $111.6 million.

The changes in operating assets and liabilities included a $43.7 million decrease in accrued liabilities, a $29.8 million increase in other assets, a $25.0 million increase in inventories, a $23.7 million increase in accounts receivable, and a $2.7 million decrease in accounts payable.

Offsetting these amounts was a $8.6 million decrease in prepaid expenses and other current assets and $4.7 million in net changes in income taxes, including excess tax benefits and deferred income taxes.

The decrease in accrued liabilities was primarily a result of the payout of accrued compensation, partially offset by an increase in certain accruals including $22.1 million in accrued costs related to the initial ramp down of IV Solution production.

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

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

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

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

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

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

The decrease in prepaid expenses and other current assets was primarily due to the collection of receivable amounts owed from Pfizer.

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

Cash Flows from Investing Activities

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

In 2022, we acquired Smiths Medical.

The cash consideration for the transaction was $1.9 billion, which was financed with existing cash balances and borrowings under the Credit Agreement.

Acquired cash was $78.8 million.

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

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

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

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(7) Proceeds from the sale of our investment securities will vary based on the maturity dates of the investments.

In 2022, proceeds from sale of investment securities includes $19.0 million received from a promissory note related to an acquired investment as part of the Smiths Medical acquisition.

Cash Flows from Financing Activities

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Financing Cash Flows:

Proceeds from issuance of long-term debt, net of lender debt issuance costs $ 1,664,362 — — 1,664,362 — (1)

Principal payments on long-term debt (22,375) — — (22,375) — (2)

Payment of third-party debt issuance costs (2,177) — — (2,177) — (2)

Proceeds from short-term debt — — 150,000 — (150,000) (3)

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__________________________

(1) During 2020, as a result of market uncertainty caused by COVID-19, we borrowed $150.0 million under our revolving Credit Facility as a precautionary measure to increase liquidity.

(1) During 2022, we borrowed an aggregate of $1.7 billion under the Senior Secured Credit Facilities contained in the Credit Agreement to partially finance our acquisition of Smiths Medical (see Note 11:

Long-Term Debt to our accompanying consolidated financial statements for additional information).

The proceeds are net of $37.8 million in payments of lender debt issuance costs.

(2) Payment of $22.4 million of principal payments on the Senior Secured Credit Facilities and $2.2 million in third-party debt issuance costs.

(3) During 2020, as a result of market uncertainty caused by COVID-19, we borrowed $150.0 million under our then revolving credit facility as a precautionary measure to increase liquidity.

We had fully repaid all amounts borrowed as of December 31, 2020.

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As of December 31, 2022, all of the $100.0 million available for purchase was remaining under the plan.

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

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

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

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In preparing our consolidated financial statements in accordance with GAAP and pursuant to the rules and regulations of the SEC, we make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities.

We base our estimates, assumptions and judgments on historical experience and other factors that we believe are reasonable.

We base our estimates, assumptions and judgments on historical experience and

other factors that we believe are reasonable.

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

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Our revenues are recorded at the net sales price, which includes an estimate for variable consideration related to rebates, chargebacks and product returns.

The vast majority of our sales of Infusion Consumables, Infusion Systems, IV Solutions and Critical Care products are sold on a standalone basis and control of these products transfers to the customer upon shipment.

The vast majority of our sales of Infusion Consumables, Infusion Systems, IV Solutions, Critical Care, Infusion Systems-Smiths Medical, Vascular Access-Smiths Medical and Vital Care-Smiths Medical products are sold on a standalone basis and revenue is recognized upon the transfer of control which we deem to be at point of shipment.

Our software license renewals are considered to be transferred to a customer at a point in time at the start of each renewal period, therefore revenue is recognized at that time.

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We regularly review individual past due balances for collectability.

Loss exposure is with international customers for whom normal payment terms are long in comparison to those of our other customers and with domestic distributors.

We also have credit exposure with international customers for whom normal payment terms are long in comparison to those of our other customers and with domestic distributors.

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

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The application of the acquisition method of accounting for business combinations requires the use of significant estimates, assumptions and judgments in the determination of the estimated fair value of assets acquired and liabilities assumed in order to properly allocate the purchase price at the acquisition date.

Although we believe the estimates, assumptions and judgments we have made are reasonable, they are based in part on historical experience, industry data, information obtained from the management of the acquired companies and assistance from independent third-party appraisal firms, and are inherently uncertain.

Examples of critical estimates in valuing certain of the tangible and intangible assets we have acquired, and certain liabilities assumed include but are not limited to:

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

Other critical estimates used to estimate the fair value are derived from royalty rates, customer retention rates and/or estimated useful lives.

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

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

Forward Looking Statements

Various portions of this Annual Report on Form 10-K, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and documents referenced herein, describe trends in our business and finances that we perceive and state some of our expectations and beliefs about our future.

These statements about the future are “forward looking statements,” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and we may identify them by using words such as "anticipate," "believe," "expect," "estimate," "intend," "plan," "will," "continue," "could," "may," and by similar expressions and statements about aims, goals and plans.

The forward looking statements are based on the best information currently available to us and assumptions that we believe are reasonable, but we do not intend the statements to be representations as to future results.

They include, without limitation, statements about:

• future growth;

future operating results and various elements of operating results, including future expenditures and effects with respect to sales and marketing and product development and acquisition efforts;

future sales and unit volumes of products;

expected increases and decreases in sales;

deferred revenue;

accruals for restructuring charges, future license, royalty and revenue share income;

production costs;

gross margins;

litigation expense;

future SG&A and R&D expenses;

manufacturing expenses;

future costs of expanding our business;

amortization;

source of funds for capital purchases and operations;

future tax rates;

alternative sources of capital or financing;

changes in working capital items such as receivables and inventory;

selling prices;

and income taxes;

• factors affecting operating results, such as shipments to specific customers;

reduced dependence on current proprietary products;

loss of a strategic relationship;

change in demand;

domestic and international sales;

expansion in international markets, selling prices;

future increases or decreases in sales of certain products and in certain markets and distribution channels;

maintaining strategic relationships and securing long-term and multi-product contracts with large healthcare providers and major buying organizations;

increases in systems capabilities;

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

benefits of our products over competing systems;

qualification of our new products for the expedited Section 510(k) clearance procedure;

possibility of lengthier clearance process for new products;

planned increases in marketing;

warranty claims;

product returns;

bad debt expense;

amortization expense;

inventory requirements;

lives of property, plant and equipment;

manufacturing efficiencies and cost savings;

unit manufacturing costs;

establishment or expansion of production facilities inside or outside of the U.S.;

planned new orders for semi-automated or fully automated assembly machines for new products;

adequacy of production capacity;

results of R&D;

our plans to repurchase shares of our common stock;

asset impairment losses;

relocation of manufacturing facilities and personnel;

effect of expansion of manufacturing facilities on production efficiencies and resolution of production inefficiencies;

the effect of costs to customers and delivery times;

business seasonality and fluctuations in quarterly results;

customer ordering patterns and the effects of new accounting pronouncements;

• new or extended contracts with manufacturers and buying organizations;

dependence on a small number of customers;

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

the impact of our acquisition of the Smiths Medical business;

growth of our Clave products in future years;

design features of Clave products;

the outcome of our strategic initiatives;

regulatory approvals and compliance;

outcome of litigation;

patent protection and intellectual property landscape;

patent infringement claims and the impact of newly issued patents on other medical devices;

competitive and market factors, including continuing development of competing products by other manufacturers;

improved production processes and higher volume production;

innovation requirements;

consolidation of the healthcare provider market and downward pressure on selling prices;

distribution or financial capabilities of competitors;

healthcare reform legislation;

use of treasury stock;

working capital requirements;

liquidity and realizable value of our investment securities;

future investment alternatives;

foreign currency denominated financial instruments;

foreign exchange risk;

commodity price risk;

our expectations regarding liquidity and capital resources over the next twelve months;

capital expenditures;

plans to convert existing space;

acquisitions of other businesses or product lines, indemnification liabilities and contractual liabilities.

Forward-looking statements involve certain risks and uncertainties, which may cause actual results to differ materially from those discussed in each such statement.

First, one should consider the factors and risks described in the statements themselves or otherwise discussed herein.

Those factors are uncertain, and if one or more of them turn out differently than we currently expect, our operating results may differ materially from our current expectations.

Second, investors should read the forward looking statements in conjunction with the Risk Factors discussed in Item 1A of this Annual Report on Form 10-K.

Also, actual future operating results are subject to other important factors and risks that we cannot predict or control, including without limitation, the following:

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

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

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

and internationally;

• unexpected changes in our arrangements with Pfizer or our other large customers;

• outcome of litigation;

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

• increased competition for skilled workers;

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

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

• competitive factors, such as product innovation, new technologies, marketing and distribution strength and price erosion;

• the successful development and marketing of new products;

• unanticipated market shifts and trends;

• the impact of legislation affecting government reimbursement of healthcare costs;

• changes by our major customers and independent distributors in their strategies that might affect their efforts to market our products;

• the effects of additional governmental regulations;

• unanticipated production problems;

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

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

• natural disasters and outbreak of disease or illness;

• labor shortages;

• supply chain constraints or disruptions;

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

• interest rate increases.

The forward looking statements in this report are subject to additional risks and uncertainties, including those detailed from time to time in our other filings with the Securities and Exchange Commission.

These forward-looking statements are made only as of the date hereof and, except as required by law, we undertake no obligation to update or revise any of them, whether as a result of new information, future events or otherwise.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis