ICU MEDICAL INC/DE 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE Page No. Report s of Independent Registered Public Accounting Firm 57 Consolidated Balance Sheets as of December 31, 202 2 and 202 1 61 Consolidated Statements of Operations for the Years Ended December 31, 202 2 , 20 2 1 and 20 2 0 62 Consolidated Statements of Comprehensive (Loss) Income for the Years Ended December 31, 202 2 , 20 21 and 20 2 0 63 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 202 2 , 20 21 and 20 2 0 64 Consolidated Statements of Cash Flows for the Years Ended December 31, 202 2 , 20 21 and 20 2 0 65 Notes to Consolidated Financial Statements 67 Schedule II-Valuation and Qualifying Accounts 115 56 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of ICU Medical, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of ICU Medical, Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive (loss) income, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. Revenue Recognition – Chargeback Reserve — Refer to Notes 1 and 4 to the financial statements Critical Audit Matter Description The Company recognizes revenue for product sales net of a reserve for estimated chargebacks. Chargebacks are the difference between prices the Company charges distribution customers and contracted prices the Company has with the end-customer which are processed as credits to the distribution customers. Chargebacks are accounted for as variable consideration when determining the transaction price for purposes of recognizing revenue. The Company estimates and reserves for chargebacks as a reduction of revenue at the time of sale to its distribution customers using information available at that time, including historical experience. Accounts receivable as of December 31, 2022 of $222 million and total revenues for the year ended December 31, 2022 of $2,280 million are recorded net of estimated chargebacks. Given the subjectivity and complexity of evaluating management’s assumptions used in the determination of the chargeback reserve, including the chargeback amount related to monthly sales to distribution customers and the time to settle chargeback obligations, auditing the chargeback reserve requires a high degree of auditor judgment and an increased extent of effort. How the Critical Audit Matter Was Addressed in the Audit 57 Our audit procedures related to the chargeback reserve included the following, among others: • We tested the effectiveness of certain controls related to management's assessment of assumptions related to estimating the provision for chargeback reserves, the provisioning, processing, and monitoring of chargeback transactions, and the reconciliation of chargeback reserves. • We tested chargeback estimates for purposes of determining whether revenues recognized at the time of sale were recorded in the proper period. • We evaluated the methods and assumptions used by management to estimate the chargeback reserve by: – Analyzing trends in the chargeback provision as a percent of revenues and the chargeback reserve as a percent of revenues. – Testing the underlying data, including historical sales to distribution customers, chargeback settlements with distribution customers, and inventory days on hand reported from distributors, that are utilized as the basis for the chargeback reserve, to test whether the inputs to the estimate were reasonable. – Developing an expectation of the chargeback reserve based on monthly sales to distribution customers, historical experience, and the time to settle chargeback obligations, and comparing our expectation to the amount recorded by management. – Performing retrospective reviews comparing management's estimates of expected chargeback reserves to actual amounts incurred subsequent to the dates of estimation, to assess management's ability to reasonably estimate these obligations and to identify potential bias in management's assessment of the reserve. Business Combination— Refer to Note 2 of the financial statements Critical Audit Matter Description The Company completed the acquisition of Smiths Medical for $2.552 billion on January 6, 2022. The Company accounted for the acquisition under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including identifiable intangible assets totaling $945 million. Of the identifiable intangible assets acquired, the most significant included Customer Relationships of $510 million and Developed Technology of $400 million. The estimated fair value of identifiable intangible assets were developed using the income approach and are based on critical estimates, judgments and assumptions derived from: analysis of market conditions; discount rate; discounted cash flows; royalty rates; and/or estimated useful lives. We identified the purchase price accounting allocation as a critical audit matter because of the significant estimates and assumptions management makes to determine the fair value of the identifiable intangible assets acquired. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our internal fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s forecasts of future cash flows and the selection of the discount rates for the identifiable intangible assets. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the business combination included the following, among others: • We tested the effectiveness of controls over the valuation of the identifiable intangible assets, including management’s controls over forecasts of future cash flows and selection of the discount rates. • We assessed the reasonableness of management’s forecasts of future cash flows by comparing the projections to historical results and growth rates observed for similar businesses and/or peer companies, and evidence obtained in other areas of the audit. • With the assistance of our fair value specialists, we also performed the following: – We evaluated the reasonableness of the valuation methodologies selected. 58 – We tested the source information underlying the determination of the discount rates and tested the mathematical accuracy of the calculations. /s/ DELOITTE & TOUCHE LLP Costa Mesa, California February 27, 2023 We have served as the Company's auditor since 2008 59 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of ICU Medical, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of ICU Medical, Inc. and subsidiaries (the “Company”) as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2022, of the Company and our report dated February 27, 2023, expressed an unqualified opinion on those financial statements. As described in ‘Management’s Annual Report on Internal Control over Financial Reporting’, management excluded from its assessment the internal control over financial reporting at Smiths Medical, which was acquired on January 6, 2022, and whose financial statements constitute 40% of total assets and 42% of total revenues of the consolidated financial statement amounts as of and for the year ended December 31, 2022. Accordingly, our audit did not include the internal control over financial reporting at Smiths Medical. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying ‘Management’s Annual Report on Internal Control over Financial Reporting’. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ DELOITTE & TOUCHE LLP Costa Mesa, California February 27, 2023 60 ICU MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except par value data and treasury shares) December 31, 2022 2021 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 208,784 $ 552,827 Short-term investment securities 4,224 14,420 TOTAL CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENT SECURITIES 213,008 567,247 Accounts receivable, net of allowance for doubtful accounts of $ 8,530 and $ 7,038 at December 31, 2022 and 2021, respectively 221,719 105,894 Inventories 696,009 290,235 Prepaid income taxes 15,528 19,586 Prepaid expenses and other current assets 88,932 46,847 TOTAL CURRENT ASSETS 1,235,196 1,029,809 PROPERTY, PLANT AND EQUIPMENT, net 636,113 468,365 OPERATING LEASE RIGHT-OF-USE ASSETS 74,864 39,847 LONG-TERM INVESTMENT SECURITIES 516 4,620 GOODWILL 1,449,258 43,439 INTANGIBLE ASSETS, net 982,766 188,311 DEFERRED INCOME TAXES 31,466 42,604 OTHER ASSETS 105,462 63,743 TOTAL ASSETS $ 4,515,641 $ 1,880,738 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 215,902 $ 81,128 Accrued liabilities 242,769 118,195 Current portion of long-term debt 29,688 — Income tax payable 6,200 1,454 TOTAL CURRENT LIABILITIES 494,559 200,777 CONTINGENT EARN-OUT LIABILITY 25,572 2,589 LONG-TERM DEBT 1,623,675 — OTHER LONG-TERM LIABILITIES 114,104 41,830 DEFERRED INCOME TAXES 126,007 1,490 INCOME TAX LIABILITY 41,796 18,021 COMMITMENTS AND CONTINGENCIES (Note 15) — — STOCKHOLDERS’ EQUITY: Convertible preferred stock, $ 1.00 par value; Authorized— 500 shares; Issued and outstanding— none — — Common stock, $ 0.10 par value; Authorized— 80,000 shares; Issued— 23,995 and 21,280 shares at December 31, 2022 and 2021, respectively, and outstanding— 23,993 and 21,280 shares at December 31, 2022 and 2021, respectively 2,399 2,128 Additional paid-in capital 1,331,249 721,412 Treasury stock, at cost ( 1,633 and 119 shares, respectively) ( 243 ) ( 27 ) Retained earnings 837,501 911,787 Accumulated other comprehensive loss ( 80,978 ) ( 19,269 ) TOTAL STOCKHOLDERS' EQUITY 2,089,928 1,616,031 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,515,641 $ 1,880,738 The accompanying notes are an integral part of these consolidated financial statements. 61 ICU MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data) Year ended December 31, 2022 2021 2020 TOTAL REVENUES $ 2,279,997 $ 1,316,308 $ 1,271,004 COST OF GOODS SOLD 1,582,236 824,818 809,507 GROSS PROFIT 697,761 491,490 461,497 OPERATING EXPENSES: Selling, general and administrative 608,345 302,583 283,953 Research and development 92,984 47,498 42,948 Restructuring, strategic transaction and integration 71,421 18,037 28,409 Change in fair value of contingent earn-out ( 32,091 ) — 9,000 Contract settlement — 127 ( 975 ) TOTAL OPERATING EXPENSES 740,659 368,245 363,335 (LOSS) INCOME FROM OPERATIONS ( 42,898 ) 123,245 98,162 INTEREST (EXPENSE) INCOME, NET ( 66,375 ) 1,982 1,924 OTHER EXPENSE, NET ( 5,136 ) ( 2,041 ) ( 2,592 ) (LOSS) INCOME BEFORE INCOME TAXES ( 114,409 ) 123,186 97,494 BENEFIT (PROVISION) FOR INCOME TAXES 40,123 ( 20,051 ) ( 10,624 ) NET (LOSS) INCOME $ ( 74,286 ) $ 103,135 $ 86,870 NET (LOSS) INCOME PER SHARE Basic $ ( 3.11 ) $ 4.86 $ 4.16 Diluted $ ( 3.11 ) $ 4.74 $ 4.02 WEIGHTED AVERAGE NUMBER OF SHARES Basic 23,868 21,206 20,907 Diluted 23,868 21,781 21,591 The accompanying notes are an integral part of these consolidated financial statements. 62 ICU MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Amounts in thousands) Year ended December 31, 2022 2021 2020 NET (LOSS) INCOME $ ( 74,286 ) $ 103,135 $ 86,870 Other comprehensive (loss) income, net of tax: Cash flow hedge adjustments, net of tax of $ 12,941 , $( 954 ) and $ 285 for the years ended December 31, 2022, 2021 and 2020, respectively 41,016 ( 3,021 ) 904 Foreign currency translation adjustment, net of tax of $ 0 for all periods ( 103,928 ) ( 14,664 ) 12,929 Other adjustments, net of tax of $ 0 for all periods 1,203 ( 62 ) 47 Other comprehensive (loss) income, net of tax ( 61,709 ) ( 17,747 ) 13,880 COMPREHENSIVE (LOSS) INCOME $ ( 135,995 ) $ 85,388 $ 100,750 The accompanying notes are an integral part of these consolidated financial statements. 63 ICU MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Amounts in thousands) Common Stock Additional Paid-In Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive (Loss) Income Total Shares Amount Balance, January 1, 2020 20,742 $ 2,074 $ 668,947 $ ( 157 ) $ 721,782 $ ( 15,402 ) $ 1,377,244 Issuance of restricted stock and exercise of stock options 383 32 167 12,994 — — 13,193 Tax withholding payments related to net share settlement of equity awards ( 67 ) — — ( 12,876 ) — — ( 12,876 ) Stock compensation — — 23,954 — — — 23,954 Other comprehensive income, net of tax — — — — — 13,880 13,880 Net income — — — — 86,870 — 86,870 Balance, December 31, 2020 21,058 2,106 693,068 ( 39 ) 808,652 ( 1,522 ) 1,502,265 Issuance of restricted stock and exercise of stock options 262 22 1,003 8,347 — — 9,372 Tax withholding payments related to net share settlement of equity awards ( 40 ) — — ( 8,335 ) — — ( 8,335 ) Stock compensation — — 27,341 — — — 27,341 Other comprehensive loss, net of tax — — — — — ( 17,747 ) ( 17,747 ) Net income — — — — 103,135 — 103,135 Balance, December 31, 2021 21,280 2,128 721,412 ( 27 ) 911,787 ( 19,269 ) 1,616,031 Issuance of restricted stock and exercise of stock options 263 21 ( 1,903 ) 10,667 — — 8,785 Tax withholding payments related to net share settlement of equity awards ( 48 ) — — ( 10,883 ) — — ( 10,883 ) Issuance of common stock for acquisitions 2,500 250 575,725 — — — 575,975 Stock compensation — — 36,025 — — — 36,025 Other comprehensive loss, net of tax — — ( 10 ) — — ( 61,709 ) ( 61,719 ) Net loss — — — — ( 74,286 ) — ( 74,286 ) Balance, December 31, 2022 23,995 $ 2,399 $ 1,331,249 $ ( 243 ) $ 837,501 $ ( 80,978 ) $ 2,089,928 The accompanying notes are an integral part of these consolidated financial statements. 64 ICU MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year ended December 31, 2022 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ ( 74,286 ) $ 103,135 $ 86,870 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 235,151 89,698 85,631 Noncash expense for inventory step-up 26,519 — — Noncash lease expense 23,651 9,594 9,216 Provision for doubtful accounts 1,036 345 7,137 Provision for warranty and returns 4,902 831 ( 1,576 ) Stock compensation 36,025 27,341 23,954 Loss (gain) on disposal or write-off of property, plant and equipment 2,010 1,652 ( 1,789 ) Gain on disposition of assets ( 374 ) — — Bond premium amortization 264 655 231 Debt issuance cost amortization 6,972 240 288 Change in fair value of contingent earn-out ( 32,091 ) — 9,000 Product-related charges — 3,380 2,626 Usage of spare parts 11,924 13,046 11,191 Other ( 103 ) 2,582 6,939 Changes in operating assets and liabilities, net of amounts acquired: Accounts receivable ( 19,151 ) 13,755 78,049 Inventories ( 201,095 ) 20,815 19,196 Prepaid expenses and other current assets 22,903 ( 7,973 ) ( 4,311 ) Other assets ( 21,290 ) ( 21,038 ) ( 16,069 ) Accounts payable 37,472 2,347 ( 46,415 ) Accrued liabilities ( 55,834 ) 6,259 ( 29,379 ) Income taxes, including excess tax benefits and deferred income taxes ( 66,734 ) 874 ( 18,037 ) Net cash (used in) provided by operating activities ( 62,129 ) 267,538 222,752 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment ( 90,311 ) ( 68,542 ) ( 92,005 ) Proceeds from sale of assets 989 218 6,176 Intangible asset additions ( 9,018 ) ( 12,627 ) ( 8,385 ) Business acquisitions, net of cash acquired ( 1,844,164 ) ( 14,452 ) — Investments in non-marketable equity securities — ( 3,250 ) — Purchases of investment securities ( 3,397 ) ( 10,034 ) ( 32,825 ) Proceeds from sale of investment securities 36,433 18,000 28,900 Net cash used in investing activities ( 1,909,468 ) ( 90,687 ) ( 98,139 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt, net of lender debt issuance costs 1,664,362 — — Principal repayments of long-term debt ( 22,375 ) — — Payment of third-party debt issuance costs ( 2,177 ) — — Proceeds from short-term debt — — 150,000 Repayment of short-term debt — — ( 150,000 ) Proceeds from exercise of stock options 8,785 9,372 13,193 Payments on finance leases ( 680 ) ( 607 ) ( 357 ) Payment of contingent earn-out — ( 17,300 ) — Tax withholding payments related to net share settlement of equity awards ( 10,883 ) ( 8,335 ) ( 12,876 ) Net cash provided by (used in) financing activities 1,637,032 ( 16,870 ) ( 40 ) Effect of exchange rate changes on cash ( 9,478 ) ( 3,251 ) 2,854 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ( 344,043 ) 156,730 127,427 CASH AND CASH EQUIVALENTS, beginning of period 552,827 396,097 268,670 CASH AND CASH EQUIVALENTS, end of period $ 208,784 $ 552,827 $ 396,097 The accompanying notes are an integral part of these consolidated financial statements. 65 ICU MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Amounts in thousands) Year ended December 31, 2022 2021 2020 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for income taxes $ 27,504 $ 19,562 $ 31,628 Cash paid during the year for interest $ 63,713 $ 858 $ 1,753 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES: Accounts payable for property, plant and equipment $ 4,854 $ 9,338 $ 2,211 Non-compete agreement with associated contingent earn-out liability $ — $ 2,589 $ — Detail of assets acquired and liabilities assumed in acquisitions: Fair value of assets acquired $ 1,606,300 $ 4,592 Cash paid for acquisitions, net of cash acquired ( 1,844,164 ) ( 14,452 ) Issuance of common stock for acquisitions ( 575,975 ) — Contingent consideration ( 55,158 ) — Goodwill, acquired/adjusted during period 1,462,752 10,626 Liabilities assumed/Adjustments to liabilities assumed $ 593,755 $ 766 The accompanying notes are an integral part of these consolidated financial statements. 66 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Nature of Operations ICU Medical, Inc. ("ICU" or "we"), a Delaware corporation, develops, manufactures and sells infusion systems, infusion consumables and high-value critical care products used in hospital, alternate site and home care settings. Our wide-ranging product portfolio includes IV solutions, IV smart pumps with pain management and safety software technology, dedicated and non-dedicated IV sets and needlefree connectors designed to help meet clinical, safety and workflow goals. We also manufacture automated pharmacy IV compounding systems with workflow technology, closed systems transfer devices for preparing and administering hazardous IV drugs, and cardiac monitoring systems for critically ill patients. Our recent acquisition of Smiths Medical broadened our product portfolio to include, among other products, syringe and ambulatory pumps, peripheral IV catheters, fluid warming and respiratory devices, silicone and PVC tracheotomy tubes. ICU's business activities are interrelated and leverage shared manufacturing, supply chain, IT and other supporting infrastructure. All significant operating decisions are based on analysis of ICU as a single global business, accordingly we operate in one business segment. We sell the majority of our products globally through our direct sales force and through independent distributors. Additionally, we sell our products on an original equipment manufacturer basis to other medical device manufacturers. Basis of Presentation All subsidiaries are wholly owned and are included in the consolidated financial statements. All intercompany accounts and transactions have been eliminated. Results of operations of companies purchased are included from the dates of acquisition. The consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. These consolidated financial statements were prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP"). Certain reclassifications have been made to the prior year financial statements and footnotes to conform to the presentation used in the current year. In the statements of operations we reclassified interest income to interest (expense) income, net from other income (expense), net and in Note 4: Revenues, certain reclassifications were made to revenues disaggregated by geography. These reclassifications had no impact on net (loss) income, shareholder's equity or cash flows as previously reported. On January 6, 2022, we acquired Smiths Medical 2020 Limited ("Smiths Medical"), see Note 2: Acquisitions. Our consolidated statement of operations includes the results of operations for Smiths Medical from January 7, 2022 through December 31, 2022. Use of Estimates Preparing financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less from the date of purchase. Accounts Receivable 67 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Accounts receivable are stated at net realizable value. An allowance is provided for estimated collection losses based on an assessment of various factors. We consider prior payment trends, the age of the accounts receivable balances, the financial status of our customers and other factors to estimate the cash which ultimately will be received. Such amounts cannot be known with certainty at the financial statement date. We regularly review individual past due balances for collectability. Inventories Inventories are stated at the lower of cost or net realizable value with cost determined using the first-in, first-out method. Inventory costs include material, labor and overhead related to the manufacturing of our products. Inventories consist of the following (in thousands): As of December 31, 2022 2021 Raw materials $ 286,964 $ 135,528 Work in process 73,795 36,490 Finished goods 335,250 118,217 Total $ 696,009 $ 290,235 Property, Plant and Equipment Property, plant and equipment consists of the following (in thousands): As of December 31, 2022 2021 Machinery and equipment $ 414,811 $ 321,078 Land, building and building improvements 274,063 243,377 Molds 77,203 60,463 Computer equipment and software 115,214 102,979 Furniture and fixtures 29,876 7,670 Instruments placed with customers (1) 98,481 97,384 Construction in progress 152,909 72,153 Total property, plant and equipment, cost 1,162,557 905,104 Accumulated depreciation ( 526,444 ) ( 436,739 ) Property, plant and equipment, net $ 636,113 $ 468,365 _______________________________ (1) Instruments placed with customers consist of drug-delivery and monitoring systems placed with customers under operating leases. All property, plant and equipment are stated at cost. We use the straight-line method for depreciating property, plant and equipment over their estimated useful lives. Estimated useful lives are: Buildings 15 - 30 years Building improvements 15 - 30 years Machinery and equipment and molds 2 - 15 years Furniture, fixtures and office equipment 2 - 5 years Computer equipment and software 3 - 5 years Instruments placed with customers 3 - 10 years We capitalize expenditures that materially increase the life of the related assets; maintenance and repairs are expensed as incurred. The costs and related accumulated depreciation applicable to property, plant and equipment sold or retired are 68 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) removed from the accounts and any gain or loss is reflected in the statements of operations at the time of disposal. Depreciation expense was $ 95.8 million, $ 65.9 million and $ 62.4 million in 2022, 2021 and 2020, respectively. Goodwill We test goodwill for impairment on an annual basis in the month of November, or more frequently if an event occurs or circumstances change that would indicate that impairment may exist. In 2022, we bypassed a qualitative assessment and performed a quantitative assessment to determine whether an impairment exists. We determine the fair value of our reporting unit using the income approach and market approach to valuation, as well as other generally accepted valuation methodologies. The income approach utilizes a discounted cash flow analysis using management's assumptions. The market approach compares our reporting unit to similar companies with the assumption that companies operating in the same industry will share similar characteristics and that company values will correlate to those characteristics. If the carrying amount of the reporting unit exceeds the reporting unit’s fair value, we recognize an impairment loss equal to the difference between the carrying amount and the estimated fair value of the reporting unit. We concluded that there was no impairment of goodwill during fiscal 2022, 2021, or 2020. The following table presents the changes in the carrying amount of our goodwill for 2022, 2021 and 2020 (in thousands): Total Balance as of January 1, 2020 $ 31,245 Other (1) 1,756 Balance as of December 31, 2020 $ 33,001 Goodwill acquired (2) 10,626 Other ( 188 ) Balance as of December 31, 2021 43,439 Goodwill (3) 1,469,880 Other (4) ( 7,128 ) Disposition (5) ( 650 ) Currency translation ( 56,283 ) Balance as of December 31, 2022 $ 1,449,258 _______________________________ (1) In 2020, "Other" primarily relates to a $ 1.3 million measurement period adjustment to deferred taxes related to the 2019 acquisition of Pursuit Vascular, Inc. and foreign currency translation. (2) In 2021, we acquired a small foreign infusion systems supplier, which resulted in $ 10.6 million of goodwill. (3) Relates to Smiths Medical acquired on January 6, 2022 (see Note 2: Acquisitions). (4) Reflects a measurement period adjustment related to the 2021 acquisition of a small foreign infusion systems supplier. (5) Relates to the sale of a certain line of infusion products in China. Intangible Assets Intangible assets, carried at cost less accumulated amortization and amortized on a straight-lined basis , were as follows (in thousands): 69 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Weighted-Average Amortization Life in Years December 31, 2022 Cost Accumulated Amortization Net Patents 10 $ 29,998 $ 18,610 $ 11,388 Customer contracts 12 10,026 6,443 3,583 Non-contractual customer relationships 8 546,935 101,556 445,379 Trademarks 1 5,425 5,425 — Trade name 15 18,251 5,959 12,292 Developed technology 10 583,176 108,708 474,468 Non-compete 3 9,100 5,250 3,850 Total amortized intangible assets $ 1,202,911 $ 251,951 $ 950,960 Internally developed software* $ 31,806 $ 31,806 Total intangible assets $ 1,234,717 $ 251,951 $ 982,766 _______________________________ * 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. Amortization expense was $ 139.4 million, $ 23.8 million and $ 23.2 million in 2022, 2021 and 2020, respectively. As of December 31, 2022, estimated annual amortization for our intangible assets for each of the next five years is approximately (in thousands): 70 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2023 $ 130,972 2024 130,882 2025 123,223 2026 122,654 2027 114,622 Thereafter 328,607 Total $ 950,960 Our intangible assets that are not subject to amortization are reviewed annually for impairment or more often if there are indications of possible impairment. We perform our annual intangible assets impairment test in November of each year. We did not have any intangible asset impairments in 2022, 2021 or 2020. Long-Lived Assets We periodically evaluate the recoverability of long-lived assets whenever events and changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. When indicators of impairment are present, the carrying values of the assets are evaluated in relation to the operating performance and future undiscounted cash flows of the underlying business. The net book value of the underlying asset is adjusted to fair value if the sum of the expected discounted cash flows is less than book value. Fair values are based on estimates of market prices and assumptions concerning the amount and timing of estimated future cash flows and discount rates, reflecting varying degrees of perceived risk. We did not have any long-lived asset impairments in 2022, 2021 or 2020. Investment Securities Short-term investments, exclusive of cash equivalents, are marketable securities intended to be sold within one year and may include trading securities, available-for-sale securities, and held-to-maturity securities (if maturing within one year at the time of acquisition). Long-term investments are marketable securities intended to be sold after one year and may include trading securities, available-for-sale securities, and held-to-maturity securities. Investments in Available-for-sale Securities Our investment securities are considered available-for-sale and currently consist of short and long-term corporate bonds, short-term U.S. treasury securities and long-term government bonds. These securities are considered “investment grade” and are carried at fair value. We assess our investment in available-for-sale debt securities for impairment each reporting period. If an unrealized loss exists, we determine whether any portion of the decline in fair value below the carrying value is credit-related by reviewing several factors, including, but not limited to, the extent of the fair value decline and changes in the financial condition of the issuer. We record an impairment for credit-related losses through an allowance, limited to the amount of the unrealized loss. If we either intend to sell or it is more likely than not we will be required to sell the debt security before its anticipated recovery, any allowance is written off and the amortized cost basis is written down to fair value through a charge against net earnings. Unrealized gains and non-credit-related unrealized losses are recorded, net of tax, in other comprehensive (loss) income. We did not have any investments in available-for-sale debt securities in unrealized loss positions as of December 31, 2022 or 2021. The amortized cost of the debt securities and U.S treasury securities is adjusted for the amortization of premiums computed under the effective interest method. Such amortization is included in interest (expense) income, net in the consolidated statements of operations. Realized gains and losses are accounted for on the specific identification method. There have been no realized gains or losses on the disposal of these investments. The scheduled maturities of the debt securities are between 2023 and 2024. All short-term investment securities are callable within one year. 71 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Our short-term and long-term investments in available-for-sale securities consist of the following (in thousands): As of December 31, 2022 Amortized Cost Unrealized Holding Gains (Losses) Fair Value Short-term corporate bonds $ 2,314 $ — $ 2,314 Short-term U.S. treasury securities 1,412 — 1,412 Short-term government bonds 498 — 498 Total short-term investment securities 4,224 — 4,224 Long-term corporate bonds 516 — 516 Total investment securities $ 4,740 $ — $ 4,740 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 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 expense, net in our consolidated statements of operations. The carrying value of our equity method investment is reported in other assets on the consolidated balance sheets. We assess our equity method investments for impairment on an annual basis or whenever events or circumstances indicate that the carrying value of the investment may not be recoverable. During 2022 and 2021, there were no indications that our non-marketable equity method investment was impaired. Our recorded share of the investee's loss was not material for the year ended December 31, 2022 and 2021. We did not receive any dividend distributions from this investment during 2022 and 2021. Our non-marketable equity method investment consists of the following (in thousands): As of December 31, 2022 2021 Equity method investment $ 3,178 $ 3,238 Investments in non-marketable debt securities 72 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. Income Taxes Deferred taxes are determined based on the differences between the financial statements and the tax bases using rates as enacted in the laws. A valuation allowance is established if it is “more likely than not” that all or a portion of the deferred tax assets will not be realized. We recognize interest and penalties related to unrecognized tax benefits in the tax provision. We recognize liabilities for uncertain tax positions when it is more likely than not that a tax position will not be sustained upon examination and settlement with various taxing authorities. Liabilities for uncertain tax positions are measured based upon the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. We have not recorded any material interest or penalties during any of the years presented. Foreign Currency Generally, the functional currency of our international subsidiaries is the local currency. Generally, we translate the financial statements of these subsidiaries to U.S. dollars at the exchange rate in effect at the balance sheet date and revenues and expenses are translated at the average monthly exchange rates during the year. Certain of our international subsidiaries consolidate first with another subsidiary that utilizes a functional currency other than U.S. dollars. In those cases, we follow a step by step translation process utilizing the same sequence as the consolidation process. Translation adjustments are recorded as a component of accumulated other comprehensive loss, a separate component of stockholders' equity on our consolidated balance sheets and the effect of exchange rate changes on cash and cash equivalents are reflected on our consolidated statements of cash flows. Gains and losses for transactions denominated in a currency other than the functional currency of the entity are included in our consolidated statements of operations in other expense, net, see below other expense, net table. Foreign currency transaction losses (gains), net were $ 5.8 million, $ 1.0 million and $ 7.2 million in 2022, 2021 and 2020, respectively. Revenue Recognition We recognize revenues when we transfer control of promised goods to our customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods. We offer certain volume-based rebates to our distribution customers, which we consider variable consideration when calculating the transaction price. Rebates are offered on both a fixed and tiered/variable basis. In both cases, we use information available at the time and our historical experience with each customer to estimate the most likely rebate amount. We also provide chargebacks to distributors that sell to end customers at prices determined under a contract between us and the end customer. Chargebacks are the difference between prices we charge our distribution customers and contracted prices we have with the end customer which are processed as credits to our distribution customers. In estimating the expected value of chargeback amounts for use in determining the transaction price, we use information available at the time, including our historical experience. We also warrant products against defects and have a policy permitting the return of defective products, for which we accrue and expense at the time of sale using information available and our historical experience. Our revenues are recorded at the net sales price, which includes an estimate for variable consideration related to rebates, chargebacks and product returns. The vast majority of our sales of Infusion Consumables, Infusion Systems, IV Solutions, Critical Care, Vascular Access and Vital Care products are sold on a standalone basis and control of these products transfers to the customer upon shipment. Our software license renewals are considered to be transferred to a customer at a point in time at the start of each renewal period, therefore revenue is recognized at that time. Arrangements with Multiple Deliverables In certain circumstances, we enter into arrangements in which we provide multiple deliverables to our customers. These bundled arrangements typically consist of the sale of infusion systems equipment, along with annual software licenses 73 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) and related software implementation services, as well as infusion consumables, IV solutions and extended warranties. Our most significant judgments related to these arrangements are (i) identifying the various performance obligations and (ii) estimating the relative standalone selling price of each performance obligation, typically using a directly observable method or calculated on a cost plus margin basis method. Revenue related to the bundled equipment, software and software implementation services are typically combined into a single performance obligation and recognized upon implementation. As annual software licenses are renewed, we recognize revenue for the license at a point in time, at the start of each annual renewal period. The transaction price allocated to the extended service-type warranty is recognized as revenue over the period the warranty service is provided. Consumables and solutions are separate performance obligations, recognized at a point in time. Shipping Costs Costs to ship finished goods to our customers are included in cost of goods sold on the consolidated statements of operations. Post-retirement and Post-employment Benefits We sponsor a Section 401(k) retirement plan ("plan") for employees. Our contributions to our 401(k) plan were approximately $ 14.6 million, $ 11.0 million and $ 10.7 million in 2022, 2021 and 2020, respectively. We also have post-retirement and post-employment obligations related to employees located in certain international countries. These obligations are immaterial to our financial statements taken as a whole. Research and Development The majority of our research and development costs are expensed as incurred. In certain circumstances when an asset will have an alternative future use we capitalize the costs related to those assets. Research and development costs include salaries and related benefits, consulting fees, production supplies, samples, travel costs, utilities and other miscellaneous administrative costs. Interest (expense) income, net The following table presents interest (expense) income, net (in thousands): As of December 31, 2022 2021 2020 Interest expense $ ( 70,805 ) $ ( 858 ) $ ( 1,753 ) Interest income 4,430 2,840 3,677 Interest (expense) income, net $ ( 66,375 ) $ 1,982 $ 1,924 Other expense, net The following table presents other income (expense), net (in thousands): As of December 31, 2022 2021 2020 Foreign exchange losses, net $ ( 5,780 ) $ ( 1,017 ) $ ( 7,177 ) (Loss) gain on disposition of assets ( 2,554 ) ( 1,651 ) 1,773 Other miscellaneous income, net 3,198 627 2,812 Other expense, net $ ( 5,136 ) $ ( 2,041 ) $ ( 2,592 ) Net (Loss) Income Per Share Basic net (loss) earnings per share is computed by dividing net (loss) income by the weighted-average number of common shares outstanding for the period. Diluted net (loss) income per share is computed by dividing net (loss) income by the weighted-average number of common shares outstanding plus any dilutive potential securities. Dilutive potential securities 74 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) include outstanding common stock options and unvested restricted stock units, less the number of shares that could have been purchased with the proceeds from the exercise of the options, using the treasury stock method. Options that are anti-dilutive, where their exercise price exceeds the average market price of the common stock, are not included in the treasury stock method calculation. Restricted stock units that are anti-dilutive are not included in the treasury stock method. Due to the net loss for the year ended December 31, 2022 the inclusion of any potential securities is antidilutive, accordingly, basic and diluted net loss per share is the same for this period. There were 12,354 and 12,083 anti-dilutive shares in 2021 and 2020, respectively. The following table presents the calculation of net earnings per common share (“EPS”) — basic and diluted (in thousands, except per share data): Year ended December 31, 2022 2021 2020 Net (loss) income $ ( 74,286 ) $ 103,135 $ 86,870 Weighted-average number of common shares outstanding (basic) 23,868 21,206 20,907 Dilutive securities — 575 684 Weighted-average common and common equivalent shares outstanding (diluted) 23,868 21,781 21,591 EPS — basic $ ( 3.11 ) $ 4.86 $ 4.16 EPS — diluted $ ( 3.11 ) $ 4.74 $ 4.02 New Accounting Pronouncements Recently Issued Accounting Standards In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional guidance for a limited period of time to ease the potential burden for reference rate reform on financial reporting. Due to concerns about structural risks of interbank offered rates and, particularly, the risk of cessation of the London Interbank Offered Rate ("LIBOR"), regulators around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued as a result of reference rate reform. Optional expedients may be applied to contracts that are modified as a result of the reference rate reform. Modifications of contracts within the scope of Topic 470, Debt, should be accounted for by prospectively adjusting the effective interest rate. Modifications of contracts within the scope of ASC 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate (incremental borrowing rate). Exceptions to Topic 815, Derivatives and Hedging, results in not having a dedesignation of a hedging relationship if certain criteria are met. The amendments in this ASU were effective for all entities as of March 12, 2020 through December 31, 2022. ASU No. 2022-06, Reference Rate Reform: Deferral of the Sunset Date of Topic 848 deferred the sunset date of Topic 848 from December 31, 2022 to December 31, 2024. In November 2021, we entered into two forward-starting swaps whereby the variable leg of the swap references LIBOR, these swaps were amended in early 2022 to transition to an alternative reference rate (see Note 7: Derivatives and Hedging Activities). The amendments in this ASU allow for certain expedients that allowed 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 allowed 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 these ASU's on our contracts has not been and is not expected to be material. NOTE 2. ACQUISITIONS 2022 Acquisitions On January 6, 2022, we acquired 100 % 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 75 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 11: 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. Smiths became a related party to us when we issued 2.5 million shares of our common stock as partial consideration for the acquisition of Smiths Medical. Additionally, we entered in to a transition services agreement ("TSA") with certain members of Smiths Group, plc. The TSA includes certain information technology, human resource and tax support services for an initial term of twelve months with the option to extend up to 24 months. During 2022, we expensed $ 37.6 million for services provided under the TSA. As of December 31, 2022, we have $ 5.1 million in open payables related to the services received under the TSA. Final Price Allocation The following table summarizes the final purchase price and the final allocation of the purchase price related to the assets acquired and liabilities assumed (in thousands): 76 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Cash consideration for acquired assets $ 1,922,955 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 Consideration $ 2,552,450 Purchase Price Allocation Cash and cash equivalents $ 78,791 Accounts receivables 106,132 Inventories 228,919 Prepaid expenses and other current assets 53,554 Property, plant and equipment 206,333 Operating lease right-of-use assets 55,161 Intangible assets (1) 945,000 Other assets 379 Accounts payable ( 105,291 ) Accrued liabilities (2) ( 173,151 ) Income tax payable ( 40,312 ) Other long-term liabilities ( 85,490 ) Deferred income taxes ( 187,455 ) Total identifiable net assets acquired $ 1,082,570 Goodwill - not tax deductible 1,469,880 Purchase Consideration $ 2,552,450 _______________________________________________ (1) Identifiable intangible assets included $ 510.0 million of customer relationships, $ 400.0 million of developed technology, $ 30.0 million of internally developed software, and $ 5.0 million of trade mark. 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) 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 identifiable intangible assets and other long-lived assets acquired have been valued utilizing Level 3 inputs as defined in Note 8: Fair Value Measurements. The fair value of identifiable intangible assets were generally 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 inventory 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. 77 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO 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 December 31, 2022 were $ 950.7 million and $( 74.3 ) million, respectively. The net loss figure is an estimate as the results by company are less identifiable due to integration. 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. Twelve months ended December 31, (In thousands) 2022 2021 Revenues $ 2,300,371 $ 2,509,830 Net (Loss) Income $ ( 70,286 ) $ 37,454 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 $ 24.7 million for the twelve months ended December 31, 2022, and 2021, respectively, incremental interest expense, including amortization of debt discount and debt issuance costs, on the Credit Facilities of $ 1.2 million and $ 73.5 million for the twelve months ended December 31, 2022, and 2021, respectively and a $ 27.4 million expense related to the increase in fair value of inventory for the twelve months ended December 31, 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 Acquisitions 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. The contingent earn-out based on the achievement of certain revenue targets obtained for the annual period ending December 31, 2022 was forfeited at December 31, 2022 as the minimum threshold for earning the earn-out was not met. NOTE 3. RESTRUCTURING, STRATEGIC TRANSACTION AND INTEGRATION Restructuring, strategic transaction and integration expenses were $ 71.4 million, $ 18.0 million and $ 28.4 million in 2022, 2021 and 2020, respectively. Restructuring Restructuring charges were $ 9.7 million, $( 1.8 ) million and $ 7.9 million in 2022, 2021 and 2020, respectively, and are included in the above restructuring, strategic transaction and integration expenses in our consolidated statement of operations. In 2022, we incurred restructuring charges primarily related to severance in connection with the January 6, 2022 acquisition of Smiths Medical, see Note 2: Acquisitions. In 2021, we adjusted certain facility restructuring liabilities by $ 2.0 million, shown in the table below under "Other adjustments," to reflect actual amounts owed which resulted in net restructuring credits of $( 1.8 ) million. In 2020, restructuring charges were primarily related to severance and costs related to office and other facility closures. 78 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table summarizes the activity in our restructuring-related accrual by major type of cost (in thousands): Severance Pay and Benefits Retention and Facility Closure Costs Total Accrued balance, January 1, 2021 $ 1,858 $ 1,563 $ 3,421 Charges incurred 140 — 140 Payments ( 969 ) — ( 969 ) Currency translation ( 2 ) 31 29 Other adjustments (1) ( 528 ) ( 1,429 ) ( 1,957 ) Accrued balance, December 31, 2021 $ 499 $ 165 $ 664 Acquired restructuring charges 5,796 1,740 7,536 Charges incurred 9,667 58 9,725 Payments ( 11,083 ) ( 268 ) ( 11,351 ) Currency translation ( 425 ) ( 188 ) ( 613 ) Other adjustments ( 38 ) — ( 38 ) Accrued balance, December 31, 2022 $ 4,416 $ 1,507 $ 5,923 _______________________________________________ (1) The estimated liabilities related to a prior year's facility closure restructuring were adjusted to actual amounts owed. Strategic Transaction and Integration Expenses We incurred $ 61.7 million, $ 19.8 million and $ 20.5 million in strategic transaction and integration expenses in 2022, 2021 and 2020, respectively, which are included in restructuring, strategic transaction and integration expenses in our consolidated statement of operations. The strategic transaction and integration expenses during 2022 were primarily related to transaction and integration expenses associated with our acquisition of Smiths Medical on January 6, 2022 (see Note 2: Acquisitions) which primarily included legal expenses, bank fees, employee costs and a United Kingdom stamp tax. The strategic transaction and integration expenses during 2021 were related to integration costs associated with acquisitions, the Hospira Infusion Systems ("HIS") earn-out dispute with Pfizer, one-time costs incurred to comply with regulatory initiatives and transaction expenses incurred in connection with entering into a definitive agreement to acquire Smiths Medical. The integration expenses during 2020 were related to the integration of HIS and included expenses for the migration of IT systems at our Austin facility. NOTE 4: REVENUE Revenue Recognition Following the 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 both our distribution and end 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 79 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) amounts in order to determine the transaction price, we use information available at the time, including our historical experience. We also warrant products against defects and have a policy permitting the return of defective products, for which we accrue and expense at the time of sale using information available at that time and our historical experience. We also provide for extended service-type warranties, which we consider to be separate performance obligations. We allocate a portion of the transaction price to the extended service-type warranty based on its estimated relative selling price, and recognize revenue over the period the warranty service is provided. Our revenues are recorded at the net sales price, which includes an estimate for variable consideration related to rebates, chargebacks and product returns. Arrangements with Multiple Performance Obligations We also enter into arrangements which include multiple performance obligations, (see Note 1: Basis of Presentation and Summary of Significant Accounting Policies). The most significant judgments related to these arrangements include: • Identifying the various performance obligations of these arrangements. • Estimating the relative standalone selling price of each performance obligation, typically using a directly observable method or calculated on a cost plus margin basis method. Revenue disaggregated The following table represents our revenues disaggregated by product line (in thousands) and our disaggregated product line revenue as a percentage of total revenue: Year ended December 31, 2022 2021 2020 Product line Revenue % of Revenue Revenue % of Revenue Revenue % of Revenue Infusion Consumables $ 566,617 25 % $ 555,189 42 % $ 473,740 37 % Infusion Systems 351,080 15 % 352,321 27 % 359,691 28 % IV Solutions 363,472 16 % 359,477 27 % 388,971 31 % Critical Care 47,330 2 % 49,321 4 % 48,602 4 % Infusion Systems-Smiths Medical 340,124 15 % — nm — nm Vascular Access-Smiths Medical 326,765 14 % — nm — nm Vital Care-Smiths Medical 284,609 13 % — nm — nm Total Revenues $ 2,279,997 100 % $ 1,316,308 100 % $ 1,271,004 100 % We report revenue on a "where sold" basis, which reflects the revenue within the country or region in which the ultimate sale is made to our external customer. The following table represents our revenues disaggregated by geography (in thousands): 80 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Year ended December 31, Geography 2022 2021 2020 United States $ 1,460,069 $ 941,809 $ 910,627 Europe, the Middle East and Africa 367,411 147,488 132,763 APAC 257,208 85,692 79,610 Other Foreign 195,309 141,319 148,004 Total Revenues $ 2,279,997 $ 1,316,308 $ 1,271,004 Domestic sales accounted for 64 %, 72 % and 72 % of total revenue in 2022, 2021 and 2020, respectively. International sales accounted for 36 %, 28 % and 28 % of total revenue in 2022, 2021 and 2020, respectively. Contract balances Our contract balances (deferred revenue) are recorded in accrued liabilities and other long-term liabilities in our consolidated balance sheet (see Note 10: Accrued Liabilities and Other Long-term Liabilities). The following table presents the changes in our contract balances for the years ended December 31, 2022 and 2021, (in thousands): Contract Liabilities Beginning balance, January 1, 2021 $ ( 6,430 ) Equipment revenue recognized 10,048 Equipment revenue deferred due to implementation ( 13,725 ) Software revenue recognized 7,261 Software revenue deferred due to implementation ( 4,615 ) Ending balance, December 31, 2021 ( 7,461 ) Fair value of acquired deferred revenue ( 51,245 ) Equipment revenue recognized 32,252 Equipment revenue deferred due to implementation ( 20,332 ) Software revenue recognized 16,277 Software revenue deferred due to implementation ( 17,557 ) Government grant deferred revenue ( 3,729 ) Government grant recognized 1,514 Other deferred revenue ( 1,500 ) Other deferred revenue recognized 5,915 Ending balance, December 31, 2022 $ ( 45,866 ) During 2022, we recognized $ 7.5 million in revenue that was included in the opening contract balances as of December 31, 2021. As of December 31, 2022, revenue from remaining performance obligations is as follows: 81 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Recognition Timing (in thousands) <12 Months > 12 Months Equipment revenue $ ( 15,144 ) $ ( 982 ) Software revenue ( 8,277 ) ( 1,026 ) Government grant revenue ( 1,422 ) ( 12,797 ) Other deferred revenue* ( 4,784 ) ( 1,434 ) Total $ ( 29,627 ) $ ( 16,239 ) ____________________________ *Other deferred revenue includes pump development programs, purchased training and extended warranty. Costs to Obtain a Contract with a Customer As part of the cost to obtain a contract, we may pay incremental commissions to sales employees upon entering into a sales contract. Under ASC Topic 606, we have elected to expense these costs as incurred as the period of benefit is less than one year. Practical expedients and exemptions In addition to the practical expedient applied to sales commissions, under ASC Topic 606, we elected to apply the practical expedient for shipping and handling costs incurred after the customer has obtained control of a good. We will continue to treat these costs as a fulfillment cost rather than as an additional promised service. NOTE 5. LEASES We determine if an arrangement is a lease at inception. Our operating lease assets are separately stated in operating lease right-of-use ("ROU") assets and our financing lease assets are included in other assets on our consolidated balance sheets. Our lease liabilities are included in accrued liabilities, and other long-term liabilities on our consolidated balance sheets. We have elected not to recognize an ROU asset and lease liability for leases with terms of twelve months or less. Lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Most of our leases do not provide an implicit rate, therefore we use our incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term based on the information available at commencement date. Our lease ROU assets exclude lease incentives and initial direct costs incurred. Our lease terms include options to extend when it is reasonably certain that we will exercise that option. All of our leases have stated lease payments, which may include fixed rental increases. Our leases are for corporate, research and development and sales and support offices, 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): Year ended December 31, 2022 2021 2020 Operating lease cost $ 22,038 $ 11,251 $ 11,284 Finance lease cost — interest 112 122 91 Finance lease cost — reduction of ROU asset 712 648 383 Short-term lease cost 7 14 263 Total lease cost $ 22,869 $ 12,035 $ 12,021 82 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Interest expense on our finance leases is included in interest expense, net in our consolidated statements of operations. The reduction of the operating and finance ROU assets is included as noncash lease expense in selling, general and administrative expenses in our consolidated statements of operations. The following table presents the supplemental cash flow information related to our leases (in thousands): Year ended December 31, 2022 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases (1) $ 25,225 $ 11,256 $ 10,185 Operating cash flows from finance leases $ 112 $ 122 $ 91 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 5,994 $ 2,589 $ 20,847 Finance leases $ 715 $ 558 $ 3,062 _____________________________ (1) We acquired $ 55.2 million of operating right-of-use assets as part of the Smiths Medical acquisition, see Note 2: Acquisitions. The following table presents the supplemental balance sheet information related to our operating leases (in thousands, except lease term and discount rate): As of December 31, 2022 2021 Operating leases Operating lease right-of-use assets $ 74,864 $ 39,847 Accrued liabilities $ 18,169 $ 9,009 Other long-term liabilities 60,916 33,971 Total operating lease liabilities $ 79,085 $ 42,980 Weighted-Average Remaining Lease Term Operating leases 6.1 years 5.9 years Weighted-Average Discount Rate Operating leases 4.34 % 4.98 % The following table presents the supplemental balance sheet information related to our finance leases (in thousands, except lease term and discount rate): 83 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of December 31, 2022 2021 Finance leases Finance lease right-of-use assets $ 2,598 $ 2,673 Accrued liabilities $ 816 $ 643 Other long-term liabilities 1,855 2,067 Total finance lease liabilities $ 2,671 $ 2,710 Weighted-Average Remaining Lease Term Finance leases 4.8 years 5.6 years Weighted-Average Discount Rate Finance leases 4.23 % 4.28 % As of December 31, 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 2023 $ 21,800 $ 914 2024 17,786 657 2025 12,699 442 2026 11,297 322 2027 7,830 189 Thereafter 17,346 426 Total Lease Payments 88,758 2,950 Less imputed interest ( 9,673 ) ( 279 ) Total $ 79,085 $ 2,671 NOTE 6. SHARE-BASED AWARDS We have a stock incentive plan for employees and directors and an employee stock purchase plan. Shares to be issued under these plans will be issued either from authorized but unissued shares or from treasury shares. We incur stock compensation expense for stock options, restricted stock units ("RSU"), performance restricted stock units ("PRSU") and in years prior to 2018 stock purchased under our employee stock purchase plan ("ESPP"), which was suspended in 2017. We receive a tax benefit on stock compensation expense and direct tax benefits from the exercise of stock options and vesting of restricted stock units. We also have indirect tax benefits upon exercise of stock options and vesting of restricted stock units related to research and development tax credits which are recorded as a reduction of income tax expense. The table below summarizes compensation costs and related tax benefits (in thousands): 84 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Year ended December 31, (In thousands) 2022 2021 2020 Stock compensation expense $ 36,025 $ 27,341 $ 23,954 Tax benefit from stock-based compensation cost $ 4,636 $ 6,391 $ 5,564 Indirect tax benefit $ 749 $ 285 $ 1,203 As of December 31, 2022, we had $ 43.0 million of unamortized stock compensation cost which we will recognize as an expense over a weighted-average period of approximately 0.8 years. Stock Option Plans Our 2011 Stock Incentive Plan ("2011 Plan") replaced our 2003 Stock Option Plan ("2003 Plan"). Our 2011 Plan initially had 650,000 shares available for issuance, plus the remaining available shares for grant from the 2003 Plan and any shares that were forfeited, terminated or expired that would have otherwise returned to the 2003 Plan. In 2012, 2014 and 2017, our stockholders approved amendments to the 2011 plan that increased the shares available for issuance by 3,275,000 , bringing the initial shares available for issuance to 3,925,000 , plus the remaining 248,700 shares that remained available for grant from the 2003 Plan. As of December 31, 2022, the 2011 Plan has 4,188,300 shares of common stock reserved for issuance to employees, which includes 263,300 shares that transferred from the 2003 Plan. Shares issued as options or stock appreciation rights ("SARs") are charged against the 2011 Plan's share reserve as one share for one share issued. Shares subject to awards other than options and SARs are charged against the 2011 Plan's share reserve as 2.09 shares for 1 share issued. Options may be granted with exercise prices at no less than fair market value at date of grant. Options granted under the 2011 Plan may be "non-statutory stock options" which expire no more than ten years from date of grant or "incentive stock options" as defined in Section 422 of the Internal Revenue Code of 1986, as amended. Time-based Stock Options To date, all options granted under 2011 Plan and 2003 Plan have been non-statutory stock options. The majority of the time-based outstanding employee option grants vested 25% after one year from the grant date and the balance vested ratably on a monthly basis over 36 months. The outstanding employee option grants are all fully vested. The majority of the outstanding options granted to non-employee directors vest one year from the grant date. The options generally expire 10 years from the grant date. The fair value of time-based option grants is calculated using the Black-Scholes option valuation model. The expected term for the option grants was based on historical experience and expected future employee behavior. We estimate the volatility of our common stock at the date of grant based on the historical volatility of our common stock, based on the average expected exercise term. The table below summarizes the total time-based stock options granted, total valuation and the weighted-average assumptions (dollars in thousands, except per option amounts): Year ended December 31, 2022 2021 2020 Number of time-based options granted 7,620 7,910 7,190 Grant-date fair value of options granted (in thousands) $ 540 $ 528 $ 425 Weighted-average assumptions for stock option valuation: Expected term (years) 5.5 5.5 5.5 Expected stock price volatility 36.0 % 35.0 % 35.0 % Risk-free interest rate 3.0 % 0.9 % 0.4 % Expected dividend yield — % — % — % Weighted-average grant-price per option $ 185.79 $ 200.07 $ 181.99 Weighted-average grant-date fair value per option $ 70.86 $ 66.78 $ 59.09 85 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) A summary of our stock option activity as of and for the year ended December 31, 2022 is as follows: Shares Weighted-Average Exercise Price Per Share Weighted-Average Contractual Life (Years) Aggregate Intrinsic Value (in thousands) Outstanding at December 31, 2021 663,098 $ 74.75 Granted 7,620 $ 185.79 Exercised ( 142,772 ) $ 61.53 Forfeited or expired ( 485 ) $ 60.01 Outstanding at December 31, 2022 527,461 $ 79.94 2.0 $ 42,708 Exercisable at December 31, 2022 519,841 $ 78.39 2.0 $ 42,708 Vested and expected to vest, December 31, 2022 527,461 $ 79.94 1.9 $ 42,708 The intrinsic values for options exercisable, outstanding and vested or expected to vest at December 31, 2022 are based on our closing stock price of $ 157.48 at December 31, 2022 and are before applicable taxes. The following table presents information regarding stock option activity: Year ended December 31, (In thousands) 2022 2021 2020 Intrinsic value of options exercised $ 17,340 $ 27,534 $ 32,915 Cash received from exercise of stock options $ 8,785 $ 9,372 $ 13,193 Tax benefit from stock option exercises $ 3,637 $ 5,092 $ 5,179 Stock Awards In 2022, we granted our annual PRSUs to our executive officers and certain other non-executive employees. These PRSUs will cliff-vest on March 7, 2024 subject to the achievement of net synergy savings targets related to the Smiths Medical acquisition achieved during the performance period commencing on January 1, 2022 and ending on December 31, 2023, which when reviewed against predetermined targets could result in 0% to 200% of the awarded units that could vest. We also granted certain other one-off PRSU awards to non-executive employees with various performance requirements, whereby the performance shares will be earned if the minimum requirements are met within a specified time period. In 2021, we granted PRSUs to our executive officers. For the executive officers other than the Chief Executive Officer ("CEO"), Chief Operations Officer ("COO") and the Chief Financial Officer ("CFO"), the PRSUs will vest subject to a three-year time vesting and further subject to a determination by the Compensation Committee that the officers have met their individual performance goals for the applicable years. For the CEO, COO and the CFO, the performance shares will cliff-vest ending on March 6, 2024 and further be subject to the achievement of minimum three-year cumulative revenue and EPS targets, commencing on January 1, 2021 and ending on December 31, 2023, which when reviewed against a predetermined vesting matrix could result in 0% to 250% of the awarded units that could vest. In 2020, we granted PRSUs to our executive officers. For the executive officers other than the CEO, COO and the CFO, the PRSUs will vest subject to a three-year time vesting and further subject to a determination by the Compensation Committee that the officers have met their individual performance goals for the applicable years. For the CEO, COO and the CFO, the performance shares will cliff-vest ending on March 6, 2023 and further be subject to the achievement of minimum three-year cumulative revenue and EPS targets, which when reviewed against a predetermined vesting matrix could result in 0% to 250% of the awarded units that could vest. On February 15, 2021, the Compensation Committee made the determination that the executive officers other than the CEO, COO and CFO met their individual performance goals for 2021, therefore one-third of their 2020 PRSU shares awarded vested during 2021. Additionally, during February 2021, the Compensation Committee, modified the potential vesting percentages related to the 2020 PRSU awards for the CEO, COO and CFO, as the original potential percentages were established immediately before the onset of the COVID-19 pandemic. The Compensation Committee determined to adjust the CEO, COO and CFO's potential to earn from between 0% and 250% of the award granted, 86 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) to an increased potential to earn between 50% and 300% of the award granted, subject to the same minimum threshold revenue and EPS targets to be achieved by the Company. The additional compensation expense as a result of modifying the 2020 PRSUs granted to our CEO, COO and CFO totaled $ 2.1 million recognized over the remaining amortization period from the date of modification. In February 2023, the Compensation Committee made the determination that the executive officers other than the CEO, CFO and COO met their individual performance goals for 2022, therefore a third of their 2020 PRSU shares awarded vested during 2023. The performance period related to the 2020 CEO and COO PRSUs ended on December 31, 2022 and is subject to the Compensation Committee review and determination of shares earned based on the Cumulative revenue and EPS results achieved during the performance period. In 2019, we granted PRSUs to our executive officers. For the executive officers other than the CEO and the COO, the PRSUs vested subject to a three-year time vesting and further subject to a determination by the Compensation Committee that the officers had met their individual performance goals for the applicable years. For the CEO and the COO, the performance shares were to cliff-vest on March 6, 2022, subject to the achievement of a minimum Cumulative Adjusted EBITDA and continuous service through that date. If for the three year period ending on December 31, 2021 the Cumulative Adjusted EBITDA had a growth of at least 6% to 8%, 50% of the awarded units would have vested. If on the vesting date the Cumulative Adjusted EBITDA had a growth of between 8% to 10%, 100% of the awarded units would have vested. If on the vesting date the Cumulative Adjusted EBITDA has a growth of over 10%, 200% of the awarded units would have vested. In 2019, we also granted PRSUs to one of our non-executive employees. These PRSUs vested at the end of a three-year period ending on March 31, 2022, based on meeting certain minimum performance goals. In February 2022, the Compensation Committee made the determination that the executive officers other than the CEO and COO met their individual performance goals for 2022, therefore, the final third of their 2019 PRSU shares awarded vested during 2022. The performance period related to the 2019 CEO and COO PRSUs ended on December 31, 2021 and in February 2022 the Compensation Committee determined that zero PRSUs were earned based on the actual Cumulative Adjusted EBITDA achieved during the performance period. In 2018, we granted PRSUs to our executive officers. For the executive officers other than the CEO and the COO, the PRSUs were vested subject to a three-year time vesting and further subject to a determination by the Compensation Committee that the officers have met their individual performance goals for the applicable year. For the CEO and the COO, the performance shares were to cliff-vest ending on February 15, 2021 subject to the achievement of a minimum Cumulative Adjusted EBITDA. If for the three year period ending on December 31, 2020 the Cumulative Adjusted EBITDA had a growth of at least 6% to 8%, 50% of the awarded units would vest. If on the vesting date the Cumulative Adjusted EBITDA had a growth of between 8% to 10%, 100% of the awarded units would vest. If on the vesting date the Cumulative Adjusted EBITDA had a growth of over 10%, 200% of the awarded units would vest. On February 15, 2021, the Compensation Committee made the determination that the executive officers other than the CEO and COO met their individual performance goals for 2021, therefore, one-third of their 2018 PRSU shares awarded vested during 2021. Also on February 15, 2021, the Compensation Committee determined that based on the actual Cumulative Adjusted EBITDA achieved during the performance period the CEO and COO's 2018 PRSUs were earned at 100% of the awards granted. In 2017, we granted PRSUs to our executive officers. The PRSUs were scheduled to vest, if at all, upon the achievement of a minimum Cumulative Adjusted EBITDA, subject to a three-year cliff vesting ending on December 31, 2019. If at that date, our Cumulative Adjusted EBITDA was at least $600 million but less than $650 million, 100% of the awarded units would vest. If our Cumulative Adjusted EBITDA was at least $650 million but less than $700 million, 200% of the awarded units would vest. If our Cumulative Adjusted EBITDA is at least $700 million, 300% of the awarded units would vest. On January 17, 2020, the Compensation Committee determined that based on the actual Cumulative Adjusted EBITDA achieved during the performance period that the 2017 PRSU shares were earned by our executive officers at the 300% achievement level. Restricted stock units are granted annually to our non-employee directors and vest on the first anniversary of the grant date, or the date of our annual meeting, whichever occurs first. In 2022, 2021 and 2020, we granted RSUs to certain employees that vest ratably on the anniversary of the grant over three years. We recognize forfeitures as they occur. The grant-date fair market value of our PRSUs and RSUs is determined by our stock price on the grant date. The table below summarizes our restricted stock award activity (dollars in thousands): 87 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Year ended December 31, (In thousands, except shares and per share amounts) 2022 2021 2020 PRSU Shares granted 60,383 53,246 38,633 Shares earned (a) 46,317 32,013 80,654 Grant-date fair value per share $ 230.31 $ 198.16 $ 188.34 Grant-date fair value $ 13,907 $ 10,551 $ 7,276 Intrinsic value vested $ 10,487 $ 6,777 $ 15,627 RSU Shares granted 116,870 84,388 87,830 Grant-date fair value per share $ 221.65 $ 199.13 $ 188.13 Grant-date fair value $ 25,905 $ 16,804 $ 16,523 Intrinsic value vested $ 16,438 $ 13,681 $ 12,314 _______________________________ (a) PRSU shares earned in 2020 were related to performance awards granted to executives in 2017, 2018 and 2019. PRSU shares earned in 2021 were related to performance awards granted to executives in 2018, 2019 and 2020. PRSU shares earned in 2022 were related to performance awards granted to executives in 2019, 2020 and 2021 and performance awards granted to a non-executive employee in 2019, 2020 and 2021. The table below provides a summary of our PRSU and RSU activity as of and for the year ended December 31, 2022: Number of Units Grant-Date Fair Value Per Share Weighted-Average Contractual Life (Years) Aggregate Intrinsic Value (in thousands) Non-vested at December 31, 2021 275,761 $ 201.05 Change in units due to performance expectations (a) 32,346 $ 239.63 Granted 177,253 $ 224.60 Vested ( 118,321 ) $ 206.40 Forfeited ( 13,035 ) $ 218.24 Non-vested and expected to vest at December 31, 2022 354,004 $ 213.95 1.0 $ 55,749 _______________________________ (a) Relates to net adjustments to 2019, 2020, 2021 and 2022 PRSUs granted to executives and certain non-executive employees. PRSUs granted assumes attainment of an increased payout rate based on performance expectations. ESPP We have an ESPP under which U.S. employees may purchase up to $25,000 annually of common stock at 85% of its fair market value at the beginning or the end of a six-month offering period, whichever is lower. There are 750,000 shares of common stock reserved for issuance under the ESPP, which is subject to an annual increase of the least of 300,000 shares, two percent of the shares outstanding or such a number as determined by the Board. To date, there have been no increases. As of December 31, 2022, there were no shares available for future issuance, all shares unissued under the plan expired during 2022. The ESPP is intended to constitute an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code. We suspended our ESPP in 2017. NOTE 7. DERIVATIVES AND HEDGING ACTIVITIES Hedge Accounting and Hedging Program The purposes of our cash flow hedging programs are to manage the foreign currency exchange rate risk on forecasted expenses denominated in currencies other than the functional currency of the operating unit, and to manage floating interest rate 88 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) risk associated with future interest payments on variable-rate term loans issued in January 2022. We do not issue derivatives for trading or speculative purposes. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. The par forward contract and forward-starting interest rate swaps are designated and qualify as cash flow hedges. Our derivative instruments are recorded at fair value on the consolidated balance sheets and are classified based on the instrument's maturity date. We record changes in the fair value of the effective portion of the gain or loss on the derivative instrument as a component of other comprehensive (loss) income and we reclassify that gain or loss into earnings in the same line item associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. Foreign Currency Exchange Rate Risk Forward 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 December 31, 2022 was $ 206.0 million, which included the notional equivalent of $ 61.3 million in MXN, $ 31.7 million in Euros, $ 13.9 million in CZK, $ 15.3 million in JPY, $ 11.5 million in CNH, $ 43.2 million in USD, $ 11.6 million in CAD, $ 11.9 million in AUD and $ 5.6 million in other foreign currencies, with terms currently through February 2024. Certain contracts were acquired as part of the Smiths Medical acquisition. We did not have such derivative contracts as of December 31, 2021. Cross-currency Par Forward Contracts We entered 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 2018, we hedged a portion of our Mexico forecasted expenses denominated in Pesos ("MXN") by entering into a one-year cross-currency par forward contract. The term of the one-year hedge was November 1, 2019 to November 3, 2020. The derivative instrument matured in equal monthly amounts at a fixed forward rate of 22.11 MXN/USD. In March 2020, we entered into a one-year cross-currency par forward contract. The total notional amount of this outstanding derivative as of December 31, 2020 was approximately 436.8 million MXN. The term of this one-year contract was November 3, 2020 to December 1, 2021. The derivative instrument matured in equal monthly amounts at a fixed forward rate of 24.26 MXN/USD. In November 2021, we entered into a one-year cross-currency par forward contract. The total notional amount of this outstanding derivative as of December 31, 2021 was approximately 413.1 million MXN. The term of this one-year contract is December 1, 2021 to December 1, 2022. The derivative instrument matured in equal monthly amounts at a fixed forward rate of 21.60 MXN/USD. Floating Interest Rate Risk In November 2021, in anticipation of entering into the new senior secured credit facilities in January 2022, which included a variable-rate term loan A and a variable-rate term loan B (see Note 11: 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. The term loan A swap, as amended, has an initial notional amount of 89 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) $ 300.0 million, reducing to $ 150.0 million evenly on a quarterly basis through 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 )%. 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 forward-starting swaps will effectively convert the relevant portion of the floating-rate term loans to fixed rates. The following table presents the fair values of our derivative instruments included within the consolidated balance sheets (in thousands): Derivatives Designated as Cash Flow Hedging Instruments Consolidated Balance Sheet Location Foreign Exchange Forward Contracts Interest Rate Swaps Gross Derivatives (In thousands) As of December 31, 2022 Prepaid expenses and other current assets $ 4,860 $ 28,431 $ 33,291 Other assets 94 26,753 26,847 Total assets $ 4,954 $ 55,184 $ 60,138 Accrued liabilities $ 1,847 $ — $ 1,847 Other long-term liabilities 167 — 167 Total liabilities $ 2,014 $ — $ 2,014 Derivatives Designated as Cash Flow Hedging Instruments As of December 31, 2021 Foreign Exchange Forward Contracts Forward-Starting Interest Rate Swaps Gross Derivatives 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 The following table presents the effects of our derivative instruments designated as cash flow hedges on the Consolidated Statements of Operations (in thousands): Gain Reclassified From Accumulated Other Comprehensive (Loss) Income into Net (Loss) Income Location of Gain in the Consolidated Statements of Operations Year Ended December 31, 2022 2021 2020 Derivatives designated as cash flow hedging instruments: Foreign exchange forward contracts Total revenues $ 3,829 $ — $ — Foreign exchange forward contracts Cost of goods sold 7,751 3,444 790 Foreign exchange forward contracts Interest expense (1) 717 — — Interest rate swaps Interest expense $ 6,122 $ — $ — Total derivatives designated as cash flow hedging instruments $ 18,419 $ 3,444 $ 790 _______________________________ (1) Represents location of gain reclassified from accumulated other comprehensive (loss) income to net (loss) income as a result of a forecasted transaction being no longer probable of occurring. 90 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) We recognized the following gains (losses) on our derivative instruments designated as cash flow hedges in other comprehensive (loss) income before reclassifications to net (loss) income (in thousands): Amount of Gain (Loss) Recognized in Other Comprehensive (Loss) Income Year Ended December 31, 2022 2021 2020 Derivatives designated as cash flow hedging instruments: Foreign exchange forward contracts $ 9,588 $ 950 $ 1,980 Interest rate swaps 62,786 ( 1,480 ) — Total derivatives designated as cash flow hedging instruments $ 72,374 $ ( 530 ) $ 1,980 As of December 31, 2022, we expect an estimated $ 3.0 million in deferred gains on the outstanding foreign exchange forward contract and an estimated $ 29.3 million in deferred gains on the forward-starting interest rate swaps will be reclassified from accumulated other comprehensive loss to net income during the next 12 months concurrent with the underlying hedged transactions also being reported in net income. NOTE 8. FAIR VALUE MEASUREMENTS Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement: • Level 1: quoted prices in active markets for identical assets or liabilities; • Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or • Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities. Contingent earn-out liabilities In the fourth quarter of 2019, we recognized an earn-out liability related to the acquisition of Pursuit (see Note 2: Acquisitions). Pursuit's former equity holders were entitled up to $ 50.0 million in additional cash consideration contingent upon the achievement of certain sales and gross profit targets for specific customers. The earn-out was calculated as a percentage of gross profit achieved during the earn-out period against a pre-determined target gross profit, not to exceed $ 50.0 million. During the earn-out period, we used a Monte Carlo simulation model to determine the fair value of the earn-out liability. The Monte Carlo simulation model utilized multiple input variables to determine the value of the earn-out liability including historical volatility, a risk-free interest rate, counter party credit risk and projected future gross profit (see the simulation input table below related to Pursuit). The historical volatility was based on the median of ICU and a certain peer group. The risk-free interest rate was equal to the yield, as of the valuation date, of the zero-coupon U.S. Treasury bill that was commensurate with the term of the earn-out. The counter party credit risk was based on a synthetic credit rating of B1. As of June 30, 2021, the 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. 91 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In August 2021, we entered into an agreement with one of our international distributors whereby that distributor would not compete with us in a specific territory for a three-year period that will end in September 2024. The terms of the agreement include a contingent earn-out payment. The contingent earn-out payment shall not exceed $ 6.0 million, which will be earned based on certain revenue targets over a twelve-month measurement period determined by the highest four consecutive quarters commencing over a two-year period starting on the closing date of the agreement and provided that the distributor is in compliance with its obligations under the agreement. As of December 31, 2022, the fair value of the contingent earn-out was estimated at $ 2.6 million. The estimated fair value of the contingent earn-out is calculated using a probability-weighted cash flow model based on historical revenue streams and the likelihood that the revenue targets will be met. During November 2021, we acquired a small foreign infusion systems supplier. Total consideration for the acquisition includes a potential earn-out payment of up to $ 2.5 million, consisting of (i) a cash payment of $ 1.0 million contingent on the achievement of certain revenue targets for the annual period ending December 31, 2022 and, separately, (ii) a cash payment of $ 1.5 million contingent on certain product-related regulatory certifications obtained by May 26, 2024. As of December 31, 2022, the estimated fair value for the contingent consideration related to certain product-related regulatory certifications was estimated to be $1.5 million. As of December 31, 2022, the measurement period related to the contingent earn-out based on certain revenue targets ended and based on the actual revenue achieved during the measurement period we determined the fair value of the contingent earn-out was zero as the minimum threshold for earning the earn-out was not met. 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 2: Acquisitions) 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 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 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 December 31, 2022, the estimated fair value of the contingent earn-out is $ 21.0 million. Our contingent earn-out liabilities are separately stated on our consolidated balance sheets. The following table provides a reconciliation of our Level 3 earn-out liabilities measured at estimated fair value based on an initial valuation and updated quarterly for the years ended December 31, 2022, 2021 and 2020 (in thousands): Earn-out Liability Contingent earn-out liability, January 1, 2020 $ 17,300 Change in fair value of contingent earn-out (included in income from operations as a separate line item) (1) 9,000 Contingent earn-out liability, December 31, 2020 26,300 Contingent earn-out con-compete arrangement 2,589 Transfer of Pursuit earn-out liability into Level 2 (2) ( 26,300 ) Contingent earn-out liability, December 31, 2021 2,589 Acquisition date fair value estimate of earn-out (3) 55,158 Change in fair value of contingent earn-out (included in income from operations as a separate line item) (4) ( 32,091 ) Currency translation ( 84 ) Contingent earn-out liability, December 31, 2022 $ 25,572 92 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) _______________________________ (1) The fair value of the Pursuit earn-out increased during 2020 primarily due to changes in the probabilities within the valuation model. (2) The Pursuit earn-out was transferred out of Level 3 and into Level 2 in the third quarter of 2021 when the amount of the actual payment was known, and subsequently settled during the fourth quarter of 2021. (3) $ 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 2: Acquisitions). (4) Includes an adjustment to reduce to zero a contingent earn-out issued as part of the 2021 acquisition of a small foreign infusion systems supplier. The contingent earn-out was not earned based on our determination that the threshold target was not met. 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 As of December 31, 2022 At Acquisition January 6, 2022 Simulation Input Volatility 38.00 % 37.00 % Risk-Free Rate 4.17 % 1.31 % Pursuit Earn-out As of December 31, 2020 At Acquisition November 2, 2019 Simulation Input Revenue/Gross Profit Volatility 25.00 % 20.00 % Discount Rate 12.50 % 15.00 % Risk-free rate 0.09 % 1.55 % Counter Party Risk 3.10 % 6.00 % Investments, Foreign Currency Contracts and Interest Rate Contracts Our investments consist of corporate and government bonds and U.S treasury securities. The fair value of our corporate and government bonds are 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 forward currency contracts is estimated using observable market inputs such as known notional value amounts, spot and forward exchange rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative. The fair value of our Level 2 interest rate swaps is estimated using a pricing model that reflects the terms of the contracts, including the period to maturity, and relies on observable market inputs such as known notional value amounts and USD interest rate curves. Other than the Pursuit earn-out liability described above, there were no transfers between levels in 2022 or 2021. 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): 93 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Fair value measurements as of December 31, 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 $ 2,314 $ — $ 2,314 $ — Short-term U.S. treasury securities 1,412 1,412 — — Short-term government bonds 498 — 498 — Long-term corporate bonds 516 — 516 — Foreign exchange forwards: Prepaid expenses and other current assets 4,860 — — 4,860 Other assets 94 — — 94 Interest rate contracts: Prepaid expenses and other current assets 28,431 — — 28,431 Other assets 26,753 — — 26,753 Total Assets $ 64,878 $ 1,412 $ 3,328 $ 60,138 Liabilities: Contingent earn-out liability - LT $ 25,572 $ — $ — $ 25,572 Foreign exchange contracts: Accrued liabilities 1,847 — — 1,847 Other long-term liabilities 167 — — 167 Total Liabilities $ 27,586 $ — $ — $ 27,586 94 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Fair value measurements as of December 31, 2021 Total carrying value Quoted prices in active markets for identical assets (level 1) Significant other observable inputs (level 2) Significant unobservable inputs (level 3) Assets: Available-for-sale debt securities: Short-term $ 14,420 $ — $ 14,420 $ — Long-term 4,620 — 4,620 — Foreign exchange forwards: Prepaid expenses and other current assets 1,061 — 1,061 — Total Assets $ 20,101 $ — $ 20,101 $ — Liabilities: Contingent earn-out liability - LT $ 2,589 $ — $ — $ 2,589 Forward-starting interest rate swaps Other long-term liabilities 1,480 — 1,480 — Total Liabilities $ 4,069 $ — $ 1,480 $ 2,589 NOTE 9. PREPAID EXPENSES AND OTHER CURRENT ASSETS AND OTHER ASSETS Prepaid expenses and other current assets consist of the following (in thousands): As of December 31, 2022 2021 Other prepaid expenses and receivables $ 21,635 $ 14,763 Prepaid vendor expenses 3,052 — Deferred costs 2,395 12,746 Prepaid insurance and property taxes 16,322 6,310 VAT/GST receivable 3,546 4,156 Deferred tax charge 3,830 4,241 Foreign exchange forward contract 4,860 1,061 Interest rate contracts 28,431 — Deposits 1,329 1,343 Other 3,532 2,227 $ 88,932 $ 46,847 Other assets consist of the following (in thousands): 95 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of December 31, 2022 2021 Pump lease receivables $ 27,086 $ 25,941 Spare parts 38,498 28,538 Equity method investments 3,178 3,238 Interest rate contracts 26,753 — Deferred debt issuance costs 5,156 2,827 Finance lease right-of-use assets 2,598 2,673 Other 2,193 526 $ 105,462 $ 63,743 NOTE 10. ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES Accrued liabilities consist of the following (in thousands): As of December 31, 2022 2021 Salaries and benefits $ 44,304 $ 27,304 Incentive compensation 30,254 33,107 Operating lease liability-ST 18,169 9,009 Accrued professional fees 5,317 773 Field service corrective action (1) 24,517 — Legal accrual 3,137 3,897 Accrued sales taxes 5,844 1,980 Warranties and returns 3,097 532 Deferred revenue 30,838 12,646 Accrued other taxes 5,794 4,337 Distribution fees 17,063 5,645 Accrued freight 17,988 9,194 Restructuring accrual 5,923 664 Foreign exchange contracts 1,847 — Accrued audit fees 6,279 1,008 Defined benefit plan 2,928 — Accrued interest 1,033 — Accrued research and development 3,538 — Other 14,899 8,099 $ 242,769 $ 118,195 _____________________________ (1) Includes 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 15: Commitments and Contingencies for further detail. 96 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other long-term liabilities consist of the following (in thousands): As of December 31, 2022 2021 Operating lease liability-LT $ 60,916 $ 33,971 Finance lease liability-LT 1,855 2,067 Deferred revenue 16,239 — Forward-starting interest rate swaps — 1,480 Benefits 5,314 1,369 Field service corrective action (1) 25,294 — Accrued rent 997 1,262 Other 3,489 1,681 $ 114,104 $ 41,830 _______________________________ (1) Includes 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 15: Commitments and Contingencies for further detail. NOTE 11. LONG-TERM OBLIGATIONS 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, 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 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 $ 8.6 million, which are capitalized and included in prepaid expenses and other current assets and other assets on our 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. 97 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 ended 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 ended 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: 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 ended 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: 98 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 year ended December 31, 2022, including the prepayment, we paid a total of $ 22.4 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 consolidated statements of operations. Guarantors and Collateral 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 99 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 December 31, 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 "Credit Facility"). The 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 Credit Facility at that date or at December 31, 2021. The remaining unamortized deferred debt issuance costs related to the Credit Facility were not material and were expensed in connection with its termination. The carrying values of our long-term debt consist of the following (in thousands): Effective Interest Rate As of December 31, 2022 Senior Secured Credit Facilities: Term Loan A — principal 3.99 % $ 834,000 Term Loan B — principal 4.61 % 843,625 Revolving Credit Facility — principal — % — Less unamortized debt issuance costs (1) ( 24,262 ) Total carrying value of long-term debt 1,653,363 Less current portion of long-term debt 29,688 Long-term debt, net $ 1,623,675 _______________________________ (1) Comprised of $ 12.6 million and $ 11.7 million relating to the Term Loan A and the Term Loan B, respectively. As of December 31 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): 100 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2023 $ 29,688 2024 51,000 2025 51,000 2026 72,250 2027 672,500 Thereafter 801,187 Total $ 1,677,625 The following table presents the total interest expense related to our long-term debt (in thousands): Year Ended December 31, 2022 2021 2020 Contractual interest $ 66,770 $ — $ 1,251 Amortization of debt issuance costs 6,972 240 288 Commitment fee — Revolving Credit Facility 1,290 221 110 Total long-term debt-related interest expense $ 75,032 $ 461 $ 1,649 NOTE 12. INCOME TAXES Income from continuing operations before taxes consisted of the following (in thousands): Year Ended December 31, 2022 2021 2020 United States $ ( 135,646 ) $ 81,484 $ 41,194 Foreign 21,237 41,702 56,300 $ ( 114,409 ) $ 123,186 $ 97,494 The provision (benefit) for income taxes consisted of the following (in thousands): Year Ended December 31, 2022 2021 2020 Current: Federal $ 4,128 $ 20,646 $ 6,032 State 3,799 3,444 2,422 Foreign 12,924 7,236 7,290 $ 20,851 $ 31,326 $ 15,744 Deferred: Federal $ ( 42,012 ) $ ( 8,154 ) $ ( 5,319 ) State ( 11,239 ) ( 1,815 ) ( 1,850 ) Foreign ( 7,723 ) ( 1,306 ) 2,049 ( 60,974 ) ( 11,275 ) ( 5,120 ) $ ( 40,123 ) $ 20,051 $ 10,624 We have accrued for tax contingencies for potential tax assessments, and in 2022 we recognized a $ 2.0 million net increase, most of which related to various federal, state and foreign tax reserves. A reconciliation of the provision for income taxes at the statutory rate to our effective tax rate is as follows (dollars in thousands): 101 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Year Ended December 31, 2022 2021 2020 Amount Percent Amount Percent Amount Percent Federal tax at the expected statutory rate $ ( 24,026 ) 21.0 % $ 25,869 21.0 % $ 20,474 21.0 % State income tax, net of federal effect ( 5,050 ) 4.4 % 2,907 2.4 % 2,099 2.2 % Tax credits ( 3,636 ) 3.2 % ( 2,443 ) ( 2.0 ) % ( 3,269 ) ( 3.4 ) % Global intangible low-taxed income 2,303 ( 2.0 ) % 711 0.6 % 163 0.2 % Foreign income tax differential ( 2,943 ) 2.5 % ( 2,983 ) ( 2.4 ) % ( 3,888 ) ( 4.0 ) % Stock-based compensation ( 3,721 ) 3.2 % ( 4,263 ) ( 3.5 ) % ( 4,686 ) ( 4.8 ) % Foreign-derived intangible income ( 2,269 ) 2.0 % ( 3,775 ) ( 3.1 ) % ( 2,718 ) ( 2.8 ) % Transaction cost 2,299 ( 2.0 ) % — — % — — % Contingent consideration ( 6,830 ) 6.0 % ( 29 ) — % 1,566 1.6 % Section 162(m) 3,942 ( 3.4 ) % 1,812 1.5 % 1,079 1.1 % Other ( 192 ) 0.2 % 2,245 1.8 % ( 196 ) ( 0.2 ) % $ ( 40,123 ) 35.1 % $ 20,051 16.3 % $ 10,624 10.9 % Tax credits in 2022, 2021 and 2020 consist principally of research and developmental tax credits. The components of our deferred income tax assets (liabilities) are as follows (in thousands): As of December 31, 2022 2021 Deferred tax asset: Accruals/other $ 17,351 $ 7,796 Acquired future tax deductions 14,186 5,440 Stock-based compensation 6,240 7,283 Foreign currency translation adjustments — 3,360 Tax credits 12,906 11,953 Inventory reserves 25,100 8,199 Warranty reserve 13,241 127 Section 163(j) 9,166 — Chargebacks, discounts, customer concessions 39,508 27,970 Valuation allowance ( 11,166 ) ( 2,934 ) $ 126,532 $ 69,194 Deferred tax liability: State income taxes $ 1,816 $ 2,724 Depreciation and amortization 209,687 20,483 Section 481(a) adjustment - change in accounting method — 4,873 Foreign currency translation adjustments 9,581 — $ 221,084 $ 28,080 Deferred tax (liability) asset, net $ ( 94,552 ) $ 41,114 Tax Holidays and Carryforwards Net operating loss ("NOL") carryforwards consist of: (a) federal NOL carryforwards of $ 1.9 million which will expire at various dates from 2023 to indefinite carryforward periods, (b) state NOL carryforwards of $ 4.3 million which will expire at various dates from 2026 to indefinite carryforward periods and (c) foreign NOL carryforwards of $ 46.3 million which will expire at various dates from 2023 to indefinite carryforward periods. We believe that it is more likely than not that the benefit 102 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) from certain foreign NOL carryforwards will not be realized. In recognition of this risk, we have provided a valuation allowance of $ 11.5 million on the $ 12.7 million DTAs related to these foreign NOL carryforwards. Under Section 382 of the Internal Revenue Code, certain ownership changes limit the utilization of the NOL carryforwards, and the amount of federal NOL carryforwards recorded is the net federal benefit available. Other carryforwards include state research and development (“R&D”) tax credit carryforwards of $ 18.5 million, which have an indefinite carryforward period. A substantial portion of our manufacturing operations in Costa Rica operate under various tax holiday and tax incentive programs due to expire in whole or in part in 2029. Certain of the holidays may be extended if specific conditions are met. The net impact of these tax holiday and tax incentives was an increase to our net earnings by $ 8.1 million or $ 0.34 per diluted share in 2022 and by $ 9.8 million or $ 0.45 per diluted share in 2021. Foreign currency translation adjustments, and related tax effects, are an element of “other comprehensive income” and are not included in net income other than the revaluation of the associated deferred tax asset due to the Tax Act. As of December 31, 2022, we have estimated $ 209.2 million of undistributed foreign earnings and profits. Such earnings were previously subject to U.S. tax as a result of the Tax Act and much of any future remittances would generally be subject to no U.S. tax as a result of dividends received deductions and/or foreign tax credit relief. We intend to invest substantially all of our foreign subsidiary earnings, as well as our capital in our foreign subsidiaries, indefinitely outside of the U.S. in those jurisdictions in which we incur significant additional costs upon repatriation of such amounts. We are subject to taxation in the U.S. and various states and foreign jurisdictions. Our U.S. federal income tax returns for tax years 2019 and forward are subject to examination by the Internal Revenue Service. Our principal state income tax returns for tax years 2012 and forward are subject to examination by the state tax authorities. The total gross amount of unrecognized tax benefits as of December 31, 2022 was $ 54.1 million which, if recognized, would impact the effective tax rate. We believe that adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax examinations cannot be predicted with certainty. As of December 31, 2022, it is reasonably possible that the expiration of the U.S. federal statute of limitations will cause the gross amount of unrecognized tax benefits to decrease by $7.8 million. It is not possible to estimate any other amount of change, if any, in the unrecognized tax benefits that is reasonably possible within the next twelve months. We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. We have accrued for penalties and interest of $ 2.3 million and $ 2.2 million, respectively as of December 31, 2022. The following table summarizes our cumulative gross unrecognized tax benefits (in thousands): Year Ended December 31, 2022 2021 2020 Beginning balance $ 21,537 $ 18,443 $ 15,027 Increases to prior year tax positions 148 231 502 Increases due to acquisitions 29,606 — — Increases to current year tax positions 4,706 3,242 2,987 Decreases to prior year tax positions ( 222 ) — ( 15 ) Decrease related to lapse of statute of limitations ( 1,722 ) ( 31 ) ( 58 ) Decrease related to settlements with tax authorities — ( 348 ) — Ending balance $ 54,053 $ 21,537 $ 18,443 NOTE 13. GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS Significant Customers 103 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) We sell products worldwide, on credit terms on an unsecured basis, as an OEM supplier, to independent medical supply distributors and directly to the end customer. The manufacturers and distributors, in turn, sell our products to healthcare providers. In 2022, we had worldwide net sales to Medline of 15 % of consolidated net sales. Geographic Information The table below presents our gross long-lived assets, consisting of property, plant and equipment, by country or region (in thousands): As of December 31, 2022 2021 Costa Rica $ 128,179 $ 115,187 Mexico 99,849 79,567 Other LATAM 39,270 36,907 Canada 5,374 4,716 Italy 24,323 12,435 Spain 18,948 13,295 Czech Republic 10,732 — Other Europe 11,375 4,171 APAC 20,930 20,452 Total Foreign $ 358,980 $ 286,730 United States 803,577 618,374 Worldwide Total $ 1,162,557 $ 905,104 NOTE 14. STOCKHOLDERS' EQUITY Treasury Stock In August 2019, our Board of Directors approved a common stock purchase plan to purchase up to $ 100.0 million of our common stock. This plan has no expiration date. We have $ 100.0 million remaining on this purchase plan. We did not purchase any of our common stock under our common stock purchase plan in 2022, 2021 or 2020. We are limited on share purchases in accordance with the terms and conditions of our Senior Secured Credit Facilities (see Note 11: Long-Term Obligations). In 2022, we withheld 47,664 shares of our common stock from employee vested restricted stock units in consideration for $ 10.9 million in payments for the employees' share award income tax withholding obligations. We had 1,633 shares remaining in treasury at December 31, 2022. In 2021, we withheld 40,350 shares of our common stock from employee vested restricted stock units in consideration for $ 8.3 million in payments for the employees' share award income tax withholding obligations. We had 119 shares remaining in treasury at December 31, 2021. In 2020, we withheld 67,041 shares of our common stock from employee vested restricted stock units in consideration for $ 12.9 million in payments for the employees' share award income tax withholding obligations. We had 209 shares remaining in treasury at December 31, 2020. We use treasury stock to issue shares for stock option exercises and restricted stock grants. Accumulated Other Comprehensive (Loss) Income ("AOCI") The components of AOCI, net of tax, were as follows (in thousands): 104 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Foreign Currency Translation Adjustments Unrealized Gains (Losses) on Cash Flow Hedges Other Adjustments Total Balance as of January 1, 2020 $ ( 17,310 ) $ 1,880 $ 28 $ ( 15,402 ) Other comprehensive income before reclassifications 12,929 1,505 47 14,481 Amounts reclassified from AOCI — ( 601 ) — ( 601 ) Other comprehensive income 12,929 904 47 13,880 Balance as of December 31, 2020 $ ( 4,381 ) $ 2,784 $ 75 $ ( 1,522 ) Other comprehensive loss before reclassifications ( 14,664 ) ( 403 ) ( 62 ) ( 15,129 ) Amounts reclassified from AOCI — ( 2,618 ) — ( 2,618 ) Other comprehensive loss ( 14,664 ) ( 3,021 ) ( 62 ) ( 17,747 ) Balance as of December 31, 2021 $ ( 19,045 ) $ ( 237 ) $ 13 $ ( 19,269 ) Other comprehensive loss before reclassifications ( 103,928 ) 54,962 1,203 ( 47,763 ) Amounts reclassified from AOCI — ( 13,946 ) — ( 13,946 ) Other comprehensive loss ( 103,928 ) 41,016 1,203 ( 61,709 ) Balance as of December 31, 2022 $ ( 122,973 ) $ 40,779 $ 1,216 $ ( 80,978 ) NOTE 15. COMMITMENTS AND CONTINGENCIES Legal Proceedings From time to time, we are involved in various legal proceedings, most of which are routine litigation, in the normal course of business. Our management does not believe that the resolution of the unsettled legal proceedings that we are involved with will have a material adverse impact on our financial position or results of operations. Off Balance Sheet Arrangements In the normal course of business, we have agreed to indemnify our officers and directors to the maximum extent permitted under Delaware law and to indemnify customers as to certain intellectual property matters related to sales of our products. There is no maximum limit on the indemnification that may be required under these agreements. We have never incurred, nor do we expect to incur, any liability for indemnification. Contingencies During November 2019, we acquired Pursuit (see Note 2: Acquisitions). Total consideration for the acquisition included a potential contractual earn-out of up to $ 50.0 million to be paid to former Pursuit equity holders, calculated based upon the achievement of certain performance targets during the earn-out period. As of June 30, 2021, the earn-out measurement period had ended and based on the actual sales and gross profit achieved during the measurement period we calculated the actual earn-out to be $ 26.3 million. In October 2021, the $ 26.3 million earn-out was finalized and paid to the former Pursuit equity holders (see Note 8: Fair Value Measurements). In August 2021, we entered into an agreement with one of our international distributors whereby that distributor would not compete with us in a specific territory for a three-year period that will end in September 2024. The terms of the agreement include a contingent earn-out payment. The contingent earn-out shall not exceed $ 6.0 million, which will be earned based on certain revenue targets over a twelve-month measurement period determined by the highest four consecutive quarters commencing over a two-year period starting on the closing date of the agreement and provided that the distributor is in compliance with its obligations under the agreement. As of December 31, 2022, the fair value of the contingent earn-out was estimated at $ 2.6 million (see Note 8: Fair Value Measurements). 105 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 December 31, 2022, the estimated fair value for the contingent consideration related to certain product-related regulatory certifications was estimated to be $ 1.5 million. As of December 31, 2022, the measurement period related to the contingent earn-out based on certain revenue targets ended and based on the actual revenue achieved during the measurement period we determined the fair value of the contingent earn-out was zero as the minimum threshold for earning the earn-out was not met. 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 December 31, 2022, the estimated fair value of the contingent earn-out is $ 21.0 million (see Note 8: 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. 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 December 31, 2022 is $ 49.8 million. Commitments We have non-cancelable operating lease agreements where we are contractually obligated to pay certain lease payment amounts (see Note 5: Leases). NOTE 16. COLLABORATIVE AND OTHER ARRANGEMENTS On February 3, 2017, we entered into two Manufacturing and Supply Agreements ("MSAs") whereby (i) Pfizer will manufacture and supply us with certain agreed upon products for an initial five-year term with a one-time two-year option to extend and (ii) we will manufacture and supply Pfizer certain agreed upon products for a term of five or ten years depending on the product, also with a one-time two-year option to extend. The MSAs provide each party with mutually beneficial interests and both of the MSAs are to be jointly managed by both Pfizer and ICU. The initial supply price, which will be annually updated, is in full consideration for all costs associated with the manufacture, documentation, packaging and certification of the products. On January 1, 2021, we amended our MSA with Pfizer, whereby we manufacture and supply certain agreed upon products to Pfizer. The amendments included a change to the term of the agreement to end on December 31, 2024 with Pfizer's unilateral election to extend through December 31, 2025. Other changes to the terms of the MSA included (i) amendments to our level of supply of products to Pfizer, (ii) certain changes to our manufacturing lines, (iii) updates to our supply price with added volume price tiers for annual periods and (iv) certain minimum purchase requirements for certain products. On February 1, 2022, effective as of January 1, 2022, upon our request, Pfizer executed a Product Addendum (the "Product Addendum") to our MSA agreement, whereby Pfizer manufactures and supplies to us certain agreed upon products. The Product Addendum includes the supply of additional product to us subject to certain time and pricing terms and conditions. The Product Addendum included a minimum purchase obligation of $ 29.6 million. The minimum purchase obligation under the addendum was satisfied during 2022. The Product Addendum expired on November 30, 2022. 106 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17. SUBSEQUENT EVENTS On January 19, 2023, we entered into a revolving $ 150 million uncommitted receivables purchase agreement with Bank of The West ("BOW") which provides for a less expensive form of capital. The discount rate applied to the sold receivables equals, a rate per annum equal to the sum of (i) an applicable margin of 1.75%, plus (ii) Term SOFR for a period equal to the discount period which is calculated with respect to the payment terms of the specific receivable. The accounts receivable to be sold have payment terms ranging between 30 and 60 days, and are related to customer accounts with good credit history. The transfer of the purchased accounts receivable under the agreement is intended to be an absolute and irrevocable transfer constituting a true sale as the transferred receivables have been isolated beyond the reach of the Company and our creditors, even in bankruptcy or other receivership. We will not retain effective control over the sold receivables and BOW will have the right upon purchase to pledge and/or exchange the transferred assets without restrictions. The Company will act as collection agent for BOW, collection services will be undertaken by our accounts receivable personnel in their normal course of business and collected funds will be remitted to BOW. The discount rate has been negotiated net of consideration for the collection services, the cost of collection is expected to be immaterial to the Company. 107 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.