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Item 7. Management’s Discussion and Analysis

2024-02-27 compared with 2023-02-27 · 181 added, 197 removed, 268 unchanged (59% of the section changed)

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Business Overview and Highlights

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

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

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

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

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

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

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

Acquisition of Smiths Medical 2020 Limited

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

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

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

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

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

COVID-19 Pandemic and other Global Geopolitical Events

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

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

Our product portfolio includes ambulatory, syringe, and large volume IV pumps and safety software;

dedicated and non-dedicated IV sets, needlefree IV connectors, peripheral IV

catheters, and sterile IV solutions;

closed system transfer devices and pharmacy compounding systems;

as well as a range of respiratory, anesthesia, patient monitoring, and temperature management products.

As part of the integration of our acquisition of Smiths Medical, we have renamed our business units and reorganized the products thereunder and, as of January 1, 2023, our business unit structure is composed of Consumables, Infusion Systems and Vital Care.

All prior periods herein have been retrospectively conformed to the current presentation.

Supply Constraints, Global Geopolitical Events

We have experienced significant impacts to our business as a result of global economic challenges, resulting from, among other events, the COVID-19 pandemic and the continuing conflict between Russia and Ukraine.

These impacts, which negatively impacted our gross profit margin during 2022 and 2023, include rising inflation, especially with respect to freight costs driven by higher fuel prices, increased cost and shortages of raw materials, and supply chain disruptions.

We expect the pressure on the supply chain to continue and freight costs to remain subject to volatility in the market for the foreseeable future.

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

dollar have also impacted our results of operations during 2022.

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

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

Risk Factors” for a discussion of risks and uncertainties.

dollar and Mexican peso and the devaluation of the Argentine Peso have also impacted our results of operations during 2022 and 2023.

These challenges arising from global economic conditions could worsen as a result of the current armed conflict in the Middle East, which is highly uncertain at this time.

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

The overall impact to our results of operations will depend on a number of factors, many of which are out of our control, such as the duration and extent of the current global economic challenges, including any impact from conflicts in Eastern Europe and the Middle East more generally, and the resurgence of the pandemic or the emergence of a new public health crisis, none of which can be fully predicted at this time.

Risk Factors:

Heightened inflation, higher interest rates and foreign currency rate fluctuations as a result of global macroeconomic and geopolitical conditions have had and could in the future have a material adverse effect on our operations” for a discussion of risks and uncertainties.

Consolidated Results of Operations

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Product line 2023 2022 2021

Infusion Consumables 25 % 42 % 37 %

Consumables 43 % 43 % 42 %

Infusion Systems 28 % 27 % 27 %

IV Solutions 16 % 27 % 31 %

Critical Care 2 % 4 % 4 %

Infusion Systems-Smiths Medical 15 % — —

Vascular Access-Smiths Medical 14 % — —

Vital Care-Smiths Medical 13 % — —

Vital Care 29 % 30 % 31 %

100 % 100 % 100 %

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There are no significant seasonal aspects to our business.

We can experience fluctuations in net sales as a result of variations in the ordering patterns of our largest customers, which may be driven more by COVID-19 pandemic surges and its impact on hospital admissions and procedure volumes along with production scheduling and customer inventory levels, and less by seasonality.

We can experience fluctuations in net sales as a result of variations in the ordering patterns of our largest customers, which may be driven more by production scheduling and customer inventory levels, and less by seasonality.

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

Non-GAAP Measures

Non-GAAP Financial Measures

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

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

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

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

The presentation of revenues on a constant currency basis is a non-GAAP financial measure that excludes the impact of fluctuations in foreign currency exchange rates that occurred between the comparative periods.

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

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

Infusion Consumables

The following table summarizes our total Infusion Consumables revenue (in millions, except percentages):

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

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

2023 2022 2021 2023 over 2022 2022 over 2021

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

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

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

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

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

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

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

Consumables revenue (GAAP) $ 969.1 $ 975.0 $ 555.2 $ (5.9) (0.6) % $ 419.8 75.6 %

Impact of foreign exchange rate changes 4.0

Consumables revenue on a constant currency basis (non-GAAP) $ 973.1

$ Change in constant currency $ (1.9)

% Change in constant currency (0.2) %

Consumables revenue decreased in 2023, as compared to 2022, primarily due to a decrease in our vascular access revenues as a result of lost customers and backorder recovery in the prior year.

The revenue decrease was partially offset by an increase in Infusion Therapy and Oncology revenues.

Consumables revenue increased in 2022, as compared to 2021.

The increase in revenue was primarily due to $408.4 million in acquired revenue from our January 2022 acquisition of Smiths Medical.

In 2022, our legacy operations revenue increased primarily due to customer demand in our global core Infusion, Global Oncology and Renal products.

Infusion Systems

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2023 2022 2021 2023 over 2022 2022 over 2021

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

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

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

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

The decrease was primarily due to large volume pump sales driven by higher COVID-19-related purchases during the second and third quarters of 2020 and a decline in sales of our non-large volume pump business, which has been partially offset by higher dedicated set sales in 2021 as a result of higher hospital census and larger install base of large volume pump from new customer installations.

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

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

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

2022 2021 2020 2022 over 2021 2021 over 2020

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

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

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

Critical Care

The following table summarizes our total Critical Care revenue (in millions, except percentages):

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

2022 2021 2020 2022 over 2021 2021 over 2020

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

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

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

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

Infusion Systems-Smiths Medical

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

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

2022 2021 2020 2022 over 2021 2021 over 2020

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

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

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

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

Vascular Access-Smiths Medical

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

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

2022 2021 2020 2022 over 2021 2021 over 2020

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

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

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

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

Vital Care-Smiths Medical

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

Infusion Systems (GAAP) $ 629.0 $ 617.4 $ 352.3 $ 11.6 1.9% $ 265.1 75.2%

Impact of foreign exchange rate changes 10.5

Infusion Systems on a constant currency basis (non-GAAP) $ 639.5

$ Change in constant currency $ 22.1

% Change in constant currency 3.6 %

Infusion Systems revenue increased in 2023, as compared to 2022, primarily due to higher sales of our syringe pumps and large volume pump ("LVP") dedicated sets.

Infusion Systems revenue increased in 2022, as compared to 2021, primarily due to $266.4 million in acquired revenue from our January 2022 acquisition of Smiths Medical.

Offsetting the acquired revenue increase was a slight decrease in our legacy operations revenue due to the impact of foreign currency which offset increased sales of our LVP dedicated sets and software as a result of growth in our installed base of LVPs.

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

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

2023 2022 2021 2023 over 2022 2022 over 2021

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

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

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

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

Vital Care (GAAP) $ 661.0 $ 687.6 $ 408.8 $ (26.6) (3.9)% $ 278.8 68.2%

Impact of foreign exchange rate changes 4.5

Vital Care on a constant currency basis (non-GAAP) $ 665.5

$ Change in constant currency $ (22.1)

% Change in constant currency (3.2) %

Vital Care revenue decreased in 2023, as compared to 2022, primarily due to lower sales volume of IV Solutions which was impacted by supply disruptions related to finished good products purchased from third party manufacturers and lower sales volume for products acquired from Smiths Group due to backorder recovery in the prior year.

Vital Care revenue increased in 2022, as compared to 2021, primarily due to $276.8 million of acquired revenue from our January 2022 acquisition of Smiths Medical.

In 2022, our legacy operations revenue increased primarily due to an increase in IV Solutions contract manufacturing sales to Pfizer.

Gross Margins

Gross margins were 32.8%, 30.6% and 37.3% for 2023, 2022 and 2021, respectively.

The increase in gross margin in 2023, as compared to 2022, was primarily driven by lower freight costs, lower spend on quality remediation and the cost recognition of a purchase accounting write-up of inventory in 2022, offset by continued inflationary impacts on costs and stronger Mexican peso.

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

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

Smiths Medical gross margins were lower than historical ICU margins primarily due to spending on quality systems and product-related remediation, the cost recognition of the purchase accounting write-up of inventory and lower manufacturing volumes.

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

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

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

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

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SG&A $ 606.7 $ 608.3 $ 302.6 $ (1.6) (0.3) % $ 305.7 101.0 %

Consolidated SG&A expenses decreased slightly in 2023, as compared to 2022, primarily due to decreases of $7.5 million in depreciation and amortization, $4.8 million in dealer fees, $3.9 million of office expenses, and $2.6 million of IT expenses.

The overall decreases were mostly offset by increases of $7.8 million in compensation costs, $5.2 million in commissions, $3.5 million in stock based compensation, and $1.3 million in sales and marketing expenses.

Depreciation and amortization decreased in 2023 as the trademark intangible recognized as part of the January 2022 Smiths Medical acquisition had a useful life of six months and was fully amortized in the prior year.

Dealer fees decreased due to a decrease in revenues to distributors.

Office and IT expenses decreased based on current operating needs.

Compensation costs increased primarily due to an increase in cash incentive compensation and employee benefits.

Commissions increased primarily due to sales performance in the current period measured against preset sales targets as compared to sales performance achieved against targets in the comparable prior year period.

Stock based compensation increased due to an increase in the fair value of amounts awarded in the current year over the fair value of the awards in the prior year.

Sales and marketing expenses increased due to an increase in trade show, conference, and related expenses.

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

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

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

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

Offsetting these increases was a $2.3 million decrease in bad debt expense and $1.6 million decrease in commissions.

Compensation expense increased primarily due to increased headcount and annual compensation merit increases.

Dealer fees increased due to an increase in revenue from U.S.

distributors in the current year.

Stock compensation increased due to a change during the current year in the number of performance shares expected to vest.

Legal fees increased due to additional services performed in the current year related to various legal matters.

Computer expenses increased due to increased maintenance costs as well as increased hardware, software and software subscriptions based on operational needs.

Bad debt expense is adjusted quarterly, if deemed necessary, based on an assessment of our accounts receivables and our expectations regarding the collectability of those accounts.

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

Research and Development ("R&D") Expenses

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R&D $ 85.3 $ 93.0 $ 47.5 $ (7.7) (8.3) % $ 45.5 95.8 %

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

R&D expenses decreased in 2023, as compared to 2022, due to organizational synergies and project reprioritization as a result as a result of the Smiths Medical acquisition.

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

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

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

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

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

Restructuring, Strategic Transaction and Integration Expenses

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Restructuring Charges

In 2023, we incurred restructuring charges net of reversed accruals of $5.7 million primarily related to severance costs.

We reversed approximately $1.0 million in accrued restructuring balances related to severance and facility closure costs that will not be utilized.

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

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

In 2020, restructuring charges were $7.9 million.

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

Strategic Transaction and Integration Expenses

In 2023, we incurred $35.6 million in strategic transaction and integration expenses primarily related to consulting expenses and employee costs incurred to integrate our Smiths Medical business acquired in 2022.

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

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

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

Change in fair value of contingent earn-out

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

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

There were no changes in the fair value of our earn-outs during 2021.

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

The change in fair value of the Smiths Medical contingent earn-out was driven by a decrease in our stock price.

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

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

Contract Settlement

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

In 2023 and 2022, we did not incur any contract settlement charges.

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

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

Interest (expense) income, net

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

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

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

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

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

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

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

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

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

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

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

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

The following table presents interest expense, net (in thousands):

Year ended December 31,

2023 2022 2021

Interest expense $ (102,727) $ (70,805) $ (858)

Interest income $ 7,508 $ 4,430 $ 2,840

Interest (expense) income, net $ (95,219) $ (66,375) $ 1,982

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

In 2023 and 2022, interest expense primarily includes the contractual interest incurred on borrowings under the Credit Agreement, the per annum commitment fee charged on the available amount of the revolving credit facility contained in the Credit Agreement, the amortization of debt issuance costs incurred in connection with entering into the Credit Agreement (see Note 11:

Long-Term Obligations in our accompanying consolidated financial statements) offset by the impact of the interest rate swaps (see Note 7:

Derivatives and Hedging in our accompanying consolidated financial statements).

The interest expense increased in 2023, as compared to 2022, primarily due to increases in the applicable SOFR reference rate.

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

Interest income in all years was related to interest received on our interest-bearing securities.

Other (expense) income, net

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

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

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

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

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

The following table presents other expense, net (in thousands):

Year ended December 31,

2023 2022 2021

Foreign exchange losses, net $ (5,918) $ (5,780) $ (1,017)

Loss on disposition of assets $ (153) $ (2,554) $ (1,651)

Other miscellaneous (expense) income, net $ 166 $ 3,198 $ 627

Other expense, net $ (5,905) $ (5,136) $ (2,041)

The foreign exchange losses in 2023 were primarily related to the devaluation of the Argentine peso during the fourth quarter of 2023.

In 2023, other miscellaneous income, net primarily includes $3.7 million in fees related to our accounts receivable purchase program (see Note 17:

Accounts Receivable Purchase Program) mostly offset by a business interruption gain recognized upon receipt of insurance proceeds.

We received total insurance recoveries for property damage and business interruption of $3.1 million, $2.6 million of which was related to insurance proceeds for business interruption included within other miscellaneous income, net.

In 2022, other miscellaneous income, net primarily related to the sale of certain other assets.

Income taxes were accrued at an estimated annual effective tax rate of 62%, 35% and 16% in 2023, 2022 and 2021, respectively.

The effective tax rate in 2023 differs from the federal statutory rate of 21% principally because of the effect of the mix of U.S.

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

and foreign income, state income taxes, section 162(m) excess compensation, foreign-derived intangible income (“FDII”), and tax credits.

The effective tax rate in 2023 included a tax benefit of $9.6 million primarily related to unrecognized tax benefits released as a result of the expiration of the statute of limitations.

The effective tax rate for 2023 also included a tax benefit of $0.8 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period.

Additionally, the effective tax rate for 2023 included a tax benefit of $6.5 million related to U.S.

federal return-to-provision adjustments net of related tax reserves.

The adjustments related primarily to changes in estimates for the research and development credit and foreign tax credits.

Additionally, the effective tax rate 2023 included the nil tax impact of the revaluation of contingent consideration of $16.2 million.

In December 2022, the European Union agreed to implement Pillar Two, the OECD’s global minimum tax rate of 15% for multinationals that meet a global revenue threshold.

A number of countries have enacted or have announced plans to enact legislation to adopt Pillar Two.

The Pillar Two legislation is effective for our fiscal year beginning January 1, 2024 and for fiscal year 2024 we do not anticipate that it will have a material impact to our tax provision or effective tax rate.

However, the Pillar Two rules continue to evolve and their application may alter our tax obligations in certain countries in which we operate for fiscal periods beyond 2024 as we continue to assess the impact of tax legislation in these jurisdictions.

The effective tax rate in 2022 differs from the federal statutory rate of 21% principally because of the effect of the mix of U.S.

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

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

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The effective tax rate in 2021 differs from the federal statutory rate of 21% principally because of the effect of the mix of U.S.

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

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

The effective tax rate for 2021 also included U.S.

federal and state return-to-provision adjustments net of related reserve changes for the year ended December 31, 2020 of $0.9 million tax provision primarily due to changes in estimates for GILTI, FDII, subpart F, and related foreign tax credits along with other prior period adjustments.

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

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

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

The effective tax rate in 2021 included a tax

benefit of $4.9 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period.

The effective tax rate for 2021 also included U.S.

federal and state return-to-provision adjustments net

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

Liquidity and Capital Resources

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

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

Sources of Liquidity

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

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

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

During 2023, our cash and cash equivalents and short-term investment securities increased by $41.7 million from $213.0 million at December 31, 2022 to $254.7 million at December 31, 2023.

This increase was primarily due to cash generated from operations.

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

2022 Credit Facilities and Access to Capital

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

As discussed in Note 11:

Long-Term Obligations to our accompanying consolidated financial statements, we entered into the Credit Agreement with various lenders on January 6, 2022 in connection with the closing of the Smiths Medical acquisition.

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

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Moody's Ba3/Ba3 Stable

Fitch BB/BBB- Negative

Standard & Poor's BB-/BB- Stable

Fitch BB/BB+ Stable

Standard & Poor's BB-/BB- Negative

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

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

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

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

We were in compliance with these financial covenants as of December 31, 2023.

2017 Credit Facility

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

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

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

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

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

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

In January 2023, we entered into a receivables purchase agreement with Bank of the West, which was subsequently acquired by BMO in February 2023.

This agreement provides for an additional source of capital (see Note 17:

Accounts Receivable Purchase Program).

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

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

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Acquisitions and Note 11:

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

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

Contractual Obligations

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As discussed above, in January 2022, we incurred borrowings under Senior Secured Credit Facilities.

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

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

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

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

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

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

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

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$ 171.4 $ 144.9 $ 158.2 $ 720.5 $ 56.1 $ 792.6

Minimum Purchase Obligations

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

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

The Product Addendum expired on November 30, 2022.

Other Future Capital Investments

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Cash Flows from Operating Activities

Our cash provided by operations was $166.2 million in 2023.

The changes in operating assets and liabilities included a $48.6 million decrease in accounts receivable and a $11.7 million decrease in prepaid expenses and other current assets.

Offsetting these amounts was a $6.1 million increase in inventories, a $68.3 million decrease in accounts payable, a $24.7 million increase in other assets, a $14.5 million decrease in accrued liabilities, and $82.4 million in net changes in income taxes, including excess tax benefits and deferred income taxes .

The decrease in accounts receivable was primarily due to the sale of accounts receivable as part of our accounts receivable purchase program with Bank of the West, which was subsequently acquired by BMO in February 2023 (see Note 17:

Accounts Receivable Purchase Program).

The decrease in prepaid expenses and other current assets was primarily attributable to insurance, property taxes, and prepaid vendor expenses.

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

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

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

The primary drivers for the net decrease in accrued liabilities was primarily due to payments for field corrective actions, operating lease liabilities and distributor rebates as well as a decrease in deferred revenue offset partially by increases in accrued employee costs.

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

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

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

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

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

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

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

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

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

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

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

The increase in other assets was primarily

due to the purchase of spare parts.

The net increase in prepaid expenses and other current assets was primarily due to an increase in deferred costs.

Our cash provided by operations was $222.8 million in 2020.

Net income plus adjustments for non-cash net expenses contributed $239.7 million to cash provided by operations.

Net cash used in operations as a result of changes in operating assets and liabilities was $17.0 million.

The changes in operating assets and liabilities included a $46.4 million decrease in accounts payable, a $29.4 million decrease in accrued liabilities, $18.0 million in net changes in income taxes, including excess tax benefits and deferred income taxes, a $16.1 million increase in other assets, and a $4.3 million increase in prepaid expenses and other current assets.

Offsetting these amounts was a $78.0 million decrease in accounts receivable and a $19.2 million decrease in inventories.

The decrease in accounts payable was due to the payment of integration-related expenses with extended payment terms and the timing of other payments.

The decrease in accrued liabilities was due to the payment of one-time accrued supply chain reorganization costs.

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

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

The increase in prepaid expenses and other current assets was primarily due to an increase in deferred costs.

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

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

Cash Flows from Investing Activities

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(1) Our purchases of property, plant and equipment will vary from period to period based on additional investments needed to support new and existing products and expansion of our manufacturing facilities.

(2) In 2020, we sold our Farmers Branch, Texas, U.S.

distribution facility for $6.0 million.

(2) In 2021, we recorded a $6.6 million intangible asset related to a three-year non-compete agreement with one of our international distributors, of which $2.6 million was non-cash offset with a contingent earn-out.

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Payment of third-party debt issuance costs — (2,177) — 2,177 (2,177) (3)

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

Repayment of short-term debt — — (150,000) — 150,000 (3)

Proceeds from exercise of stock options 4,022 8,785 9,372 (4,763) (587) (4)

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Tax withholding payments related to net share settlement of equity awards (9,350) (10,883) (8,335) 1,533 (2,548) (6)

Net cash used in financing activities $ 1,637,032 $ (16,870) $ (40) $ 1,653,902 $ (16,830)

Net cash (used in) provided by financing activities $ (35,979) $ 1,637,032 $ (16,870) $ (1,673,011) $ 1,653,902

__________________________

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

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

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

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

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

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

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

(2) Relates to scheduled principal payments on the Senior Secured Credit Facilities.

(3) Relates to third-party debt issuance costs in connection with entering into the Senior Secured Credit Facilities.

(4) Proceeds from the exercise of stock options will vary from period to period based on the volume of options exercised and the exercise price of the specific options exercised.

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New Accounting Pronouncements

Basis of Presentation and Summary of Significant Accounting Policies to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Critical Accounting Policies and Estimates

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

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

other factors that we believe are reasonable.

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

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

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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.

We recognize revenues when we transfer control of promised goods to our customers, which for the majority of our sales of products sold on a standalone basis to our distributors and end customers for direct sales, is deemed to be at point of shipment.

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

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 include variable consideration in net sales only to the extent that a significant reversal in revenue is not probable when the uncertainty is resolved.

Our variable consideration includes distributor chargebacks, product returns and end customer rebates, with distributor chargebacks representing the majority and subject to the greatest judgment.

Chargebacks are the difference between the prices we charge our distribution customers at the time they purchase our products and the contracted prices we have with the end customer, most often in the U.S.

When a distributor sells our products to one of our contracted end customers, the distributor typically will claim a refund from us for the chargeback amount which we process as a credit to the distributor.

In estimating the transaction price to present as net revenue for sales to distributors, we must estimate the expected chargeback amount that we will refund to the distributor after they sell our product to a contracted end customer.

Determining the appropriate chargeback reserve requires judgment around the following assumptions:

(i) The estimated chargeback amount (the difference between the price we invoice the distributor and the contractually agreed price with specified end customers);

(ii) The estimated period of time between the sale to the distributor and the receipt of a chargeback claim.

For purposes of estimating the expected chargeback amount, we utilize actual recent historical chargebacks paid to the specific distributor for similar products as determined at either a product or product-family level.

While individual chargeback rates can vary significantly depending on the product and contracted prices with distributors and end customers, our chargeback reserve estimate is not overly sensitive to those individual price changes due to the long-term nature of our distributor and end customer contracts as well as consistency in purchasing patterns.

Additionally, the use of the actual chargeback history to calculate an average chargeback rate has historically resulted in a reasonable estimation of overall current contract rates.

For purposes of estimating the period of time between the sale to the distributor and the receipt of a chargeback claim, we utilize several sources of information including actual inventory quantities of our products on hand at distributors.

This inventory on hand information is received from the distributors or, when specific quantities are not provided, estimated by using the targeted days of inventory on hand for distributors.

Historical experience of actual chargebacks paid has indicated that use of this information has reasonable predictive value of outstanding chargebacks and accounts for the variability of purchasing

patterns and expected timing and volume of sales to end customers.

The value of the chargeback reserve generally represents approximately two months of obligation due to the timing difference between the initial sale to a distributor and the processing of a chargeback claim after the product is sold to the end customer.

The chargeback reserve estimates change from period-to-period primarily based on changes in revenue from/and the inventory levels of distributors.

Our judgments regarding the information used to calculate the chargeback reserve are consistent from period to period;

however, on a regular basis, we evaluate the adequacy of the chargeback reserve to reassess and ensure that the variable consideration is appropriately constrained, and the likelihood of future revenue reversal is not probable.

We use metrics including chargeback provision as a percentage of gross revenue, movements in inventory on hand at distributors,

trends in accrued versus paid chargebacks and impacts from price changes and similar metrics.

The chargeback reserve reflects a reasonable estimate of the amount of consideration using the expected value method and is recorded as a reduction of accounts receivable, net on the consolidated balance sheets.

We also 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 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.

In both cases,

we use information available at the time, including current contractual requirements, our historical experience with each customer and forecasted customer purchasing patterns, to estimate the most likely rebate amount.

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, Infusion Systems-Smiths Medical, Vascular Access-Smiths Medical and Vital Care-Smiths Medical products are sold on a standalone basis and revenue is recognized upon the transfer of control which we deem to be at point of shipment.

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

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 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 is recognized upon implementation.

The transaction price allocated to the extended service-type warranty is recognized as revenue over the period the warranty service is provided.

Accounts receivable

Accounts receivable are stated at net realizable value.

Our accounts receivable are recorded net of reserves including distributor chargebacks, estimated rebates and allowance for doubtful accounts.

See above for significant judgments related to distributor chargebacks and rebates.

An allowance is provided for estimated collection losses based on an analysis of the age of the receivable, on specific past due accounts for which we consider collection to be doubtful and based on current receivables where known economic conditions specific to individual significant customers may indicate collection is doubtful.

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

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

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

Fair Value Measurements to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for details).

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

What changed 10-K

Item 7. Management’s Discussion and Analysis