ICU MEDICAL INC/DE 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE Page No. Reports of Independent Registered Public Accounting Firm 59 Consolidated Balance Sheets as of December 31, 202 3 and 202 2 62 Consolidated Statements of Operations for the Years Ended December 31, 202 3 , 202 2 and 202 1 63 Consolidated Statements of Comprehensive (Loss) Income for the Years Ended December 31, 202 3 , 202 2 and 202 1 64 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 202 3 , 202 2 and 202 1 65 Consolidated Statements of Cash Flows for the Years Ended December 31, 202 3 , 202 2 and 202 1 66 Notes to Consolidated Financial Statements 68 Schedule II-Valuation and Qualifying Accounts 119 58 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, 2023 and 2022, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, 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, 2023, 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, 2024, 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 Matters The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue Recognition – Chargeback Reserve — Refer to Notes 1 and 4 to the financial statements Critical Audit Matter Description The Company recognizes revenue and the related accounts receivable 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. Variable consideration is included in net sales only to the extent that a significant reversal in revenue is not probable when the uncertainty is resolved. The Company estimates and reserves for chargebacks as a reduction of revenue and the related accounts receivable at the time of sale to its distribution customers using information available at that time, including historical experience. 59 Given the subjectivity and complexity of evaluating management’s assumptions used in the determination of the chargeback reserve, including the estimated chargeback amount for 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 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. /s/ DELOITTE & TOUCHE LLP Costa Mesa, California February 27, 2024 We have served as the Company's auditor since 2008 60 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, 2023, 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, 2023, 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, 2023, of the Company and our report dated February 27, 2024, expressed an unqualified opinion on those financial statements. 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, 2024 61 ICU MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except par value data and treasury shares) December 31, 2023 2022 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 254,222 $ 208,784 Short-term investment securities 501 4,224 TOTAL CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENT SECURITIES 254,723 213,008 Accounts receivable, net of allowance for doubtful accounts of $ 11,064 and $ 8,530 at December 31, 2023 and 2022, respectively 161,566 221,719 Inventories 709,360 696,009 Prepaid income taxes 21,983 15,528 Prepaid expenses and other current assets 73,640 88,932 TOTAL CURRENT ASSETS 1,221,272 1,235,196 PROPERTY, PLANT AND EQUIPMENT, net 612,909 636,113 OPERATING LEASE RIGHT-OF-USE ASSETS 69,909 74,864 LONG-TERM INVESTMENT SECURITIES — 516 GOODWILL 1,472,446 1,449,258 INTANGIBLE ASSETS, net 870,588 982,766 DEFERRED INCOME TAXES 37,295 31,466 OTHER ASSETS 94,020 105,462 TOTAL ASSETS $ 4,378,439 $ 4,515,641 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 150,030 $ 215,902 Accrued liabilities 268,215 242,769 Current portion of long-term debt 51,000 29,688 Income tax payable 7,714 6,200 Contingent earn-out liability 4,879 — TOTAL CURRENT LIABILITIES 481,838 494,559 CONTINGENT EARN-OUT LIABILITY 3,991 25,572 LONG-TERM DEBT 1,577,770 1,623,675 OTHER LONG-TERM LIABILITIES 100,497 114,104 DEFERRED INCOME TAXES 55,873 126,007 INCOME TAX LIABILITY 35,060 41,796 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— 24,144 and 23,995 shares at December 31, 2023 and 2022, respectively, and outstanding— 24,141 and 23,993 shares at December 31, 2023 and 2022, respectively 2,414 2,399 Additional paid-in capital 1,366,493 1,331,249 Treasury stock, at cost ( 2,428 and 1,633 shares, respectively) ( 262 ) ( 243 ) Retained earnings 807,846 837,501 Accumulated other comprehensive loss ( 53,081 ) ( 80,978 ) TOTAL STOCKHOLDERS' EQUITY 2,123,410 2,089,928 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,378,439 $ 4,515,641 The accompanying notes are an integral part of these consolidated financial statements. 62 ICU MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data) Year ended December 31, 2023 2022 2021 TOTAL REVENUES $ 2,259,126 $ 2,279,997 $ 1,316,308 COST OF GOODS SOLD 1,519,253 1,582,236 824,818 GROSS PROFIT 739,873 697,761 491,490 OPERATING EXPENSES: Selling, general and administrative 606,693 608,345 302,583 Research and development 85,344 92,984 47,498 Restructuring, strategic transaction and integration 41,258 71,421 18,037 Change in fair value of contingent earn-out ( 16,247 ) ( 32,091 ) — Contract settlement — — 127 TOTAL OPERATING EXPENSES 717,048 740,659 368,245 INCOME (LOSS) FROM OPERATIONS 22,825 ( 42,898 ) 123,245 INTEREST (EXPENSE) INCOME, NET ( 95,219 ) ( 66,375 ) 1,982 OTHER EXPENSE, NET ( 5,905 ) ( 5,136 ) ( 2,041 ) (LOSS) INCOME BEFORE INCOME TAXES ( 78,299 ) ( 114,409 ) 123,186 BENEFIT (PROVISION) FOR INCOME TAXES 48,644 40,123 ( 20,051 ) NET (LOSS) INCOME $ ( 29,655 ) $ ( 74,286 ) $ 103,135 NET (LOSS) INCOME PER SHARE Basic $ ( 1.23 ) $ ( 3.11 ) $ 4.86 Diluted $ ( 1.23 ) $ ( 3.11 ) $ 4.74 WEIGHTED AVERAGE NUMBER OF SHARES Basic 24,091 23,868 21,206 Diluted 24,091 23,868 21,781 The accompanying notes are an integral part of these consolidated financial statements. 63 ICU MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Amounts in thousands) Year ended December 31, 2023 2022 2021 NET (LOSS) INCOME $ ( 29,655 ) $ ( 74,286 ) $ 103,135 Other comprehensive (loss) income, net of tax: Cash flow hedge adjustments, net of tax of $( 5,951 ), $ 12,941 and $( 954 ) for the years ended December 31, 2023, 2022 and 2021, respectively ( 18,895 ) 41,016 ( 3,021 ) Foreign currency translation adjustment, net of tax of $ 0 for all periods 46,189 ( 103,928 ) ( 14,664 ) Other adjustments, net of tax of $ 0 for all periods 603 1,203 ( 62 ) Other comprehensive income (loss), net of tax 27,897 ( 61,709 ) ( 17,747 ) COMPREHENSIVE (LOSS) INCOME $ ( 1,758 ) $ ( 135,995 ) $ 85,388 The accompanying notes are an integral part of these consolidated financial statements. 64 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, 2021 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 Issuance of restricted stock and exercise of stock options 208 15 ( 5,324 ) 9,331 — — 4,022 Tax withholding payments related to net share settlement of equity awards ( 59 ) — — ( 9,350 ) — — ( 9,350 ) Stock compensation — — 40,563 — — — 40,563 Other comprehensive income, net of tax — — 5 — — 27,897 27,902 Net loss — — — — ( 29,655 ) — ( 29,655 ) Balance, December 31, 2023 24,144 $ 2,414 $ 1,366,493 $ ( 262 ) $ 807,846 $ ( 53,081 ) $ 2,123,410 The accompanying notes are an integral part of these consolidated financial statements. 65 ICU MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year ended December 31, 2023 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ ( 29,655 ) $ ( 74,286 ) $ 103,135 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 228,774 235,151 89,698 Noncash expense for inventory step-up — 26,519 — Noncash lease expense 21,910 23,651 9,594 Provision for doubtful accounts 838 1,036 345 Provision for warranty and returns 21,582 4,902 831 Stock compensation 40,563 36,025 27,341 Loss on disposal or write-off of property, plant and equipment 2,109 2,010 1,652 Bond premium amortization 17 264 655 Debt issuance cost amortization 6,814 6,972 240 Change in fair value of contingent earn-out ( 16,247 ) ( 32,091 ) — Product-related charges — — 3,380 Usage of spare parts 17,050 11,924 13,046 Other 8,049 ( 477 ) 2,582 Changes in operating assets and liabilities, net of amounts acquired: Accounts receivable 48,635 ( 19,151 ) 13,755 Inventories ( 6,079 ) ( 201,095 ) 20,815 Prepaid expenses and other current assets 11,672 22,903 ( 7,973 ) Other assets ( 24,695 ) ( 21,290 ) ( 21,038 ) Accounts payable ( 68,301 ) 37,472 2,347 Accrued liabilities ( 14,479 ) ( 55,834 ) 6,259 Income taxes, including excess tax benefits and deferred income taxes ( 82,356 ) ( 66,734 ) 874 Net cash provided by (used in) operating activities 166,201 ( 62,129 ) 267,538 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment ( 83,893 ) ( 90,311 ) ( 68,542 ) Proceeds from sale of assets 1,501 989 218 Intangible asset additions ( 9,777 ) ( 9,018 ) ( 12,627 ) 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 ) Proceeds from sale of investment securities 4,222 36,433 18,000 Net cash used in investing activities ( 87,947 ) ( 1,909,468 ) ( 90,687 ) 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 ( 29,688 ) ( 22,375 ) — Payment of third-party debt issuance costs — ( 2,177 ) — Proceeds from exercise of stock options 4,022 8,785 9,372 Payments on finance leases ( 963 ) ( 680 ) ( 607 ) Payment of contingent earn-out — — ( 17,300 ) Tax withholding payments related to net share settlement of equity awards ( 9,350 ) ( 10,883 ) ( 8,335 ) Net cash (used in) provided by financing activities ( 35,979 ) 1,637,032 ( 16,870 ) Effect of exchange rate changes on cash 3,163 ( 9,478 ) ( 3,251 ) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 45,438 ( 344,043 ) 156,730 CASH AND CASH EQUIVALENTS, beginning of period 208,784 552,827 396,097 CASH AND CASH EQUIVALENTS, end of period $ 254,222 $ 208,784 $ 552,827 The accompanying notes are an integral part of these consolidated financial statements. 66 ICU MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Amounts in thousands) Year ended December 31, 2023 2022 2021 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for income taxes $ 35,809 $ 27,504 $ 19,562 Cash paid during the year for interest $ 95,913 $ 63,713 $ 858 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES: Accounts payable for property, plant and equipment $ 6,570 $ 4,854 $ 9,338 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. 67 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 innovative medical products used in infusion therapy, vascular access, and vital care applications. ICU's 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. 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 throughout the U.S. and internationally. We also sell certain 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 footnotes to conform to the presentation used in the current year. In the statements of operations, we reclassified interest income to interest expense, net from other expense, net and in Note 4: Revenues, certain reclassifications were made to revenues disaggregated by product line and by geography. These reclassifications had no impact on total revenues, net loss, shareholder's equity or cash flows as previously reported. 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 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): 68 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of December 31, 2023 2022 Raw materials $ 296,037 $ 286,964 Work in process 58,906 73,795 Finished goods 354,417 335,250 Total $ 709,360 $ 696,009 Property, Plant and Equipment Property, plant and equipment consists of the following (in thousands): As of December 31, 2023 2022 Machinery and equipment $ 483,382 $ 414,811 Land, building and building improvements 278,251 274,063 Molds 89,573 77,203 Computer equipment and software 122,038 115,214 Furniture and fixtures 30,662 29,876 Instruments placed with customers (1) 115,672 98,481 Construction in progress 117,219 152,909 Total property, plant and equipment, cost 1,236,797 1,162,557 Accumulated depreciation ( 623,888 ) ( 526,444 ) Property, plant and equipment, net $ 612,909 $ 636,113 _______________________________ (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 removed from the accounts and any gain or loss is reflected in the statements of operations at the time of disposal. Depreciation expense was $ 96.7 million, $ 95.8 million and $ 65.9 million in 2023, 2022 and 2021, 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 2023, 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 69 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 2023, 2022, or 2021. The following table presents the changes in the carrying amount of our goodwill for 2023, 2022 and 2021 (in thousands): Total Balance as of January 1, 2021 $ 33,001 Goodwill acquired (1) 10,626 Other ( 188 ) Balance as of December 31, 2021 43,439 Goodwill (2) 1,469,880 Other (3) ( 7,128 ) Disposition (4) ( 650 ) Currency translation ( 56,283 ) Balance as of December 31, 2022 1,449,258 Currency translation 23,188 Balance as of December 31, 2023 $ 1,472,446 _______________________________ (1) In 2021, we acquired a small foreign infusion systems supplier, which resulted in $ 10.6 million of goodwill. (2) Relates to Smiths Medical acquired on January 6, 2022 (see Note 2: Acquisitions). (3) Reflects a measurement period adjustment related to the 2021 acquisition of a small foreign infusion systems supplier. (4) 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): Weighted-Average Amortization Life in Years December 31, 2023 Cost Accumulated Amortization Net Patents 10 $ 33,261 $ 20,637 $ 12,624 Customer contracts 12 10,018 6,755 3,263 Non-contractual customer relationships 8 554,982 171,279 383,703 Trademarks 1 5,425 5,425 — Trade name 15 18,251 7,162 11,089 Developed technology 10 587,852 167,913 419,939 Non-compete 3 9,100 7,450 1,650 Total amortized intangible assets $ 1,218,889 $ 386,621 $ 832,268 Internally developed software* $ 38,320 $ 38,320 Total intangible assets $ 1,257,209 $ 386,621 $ 870,588 _______________________________ * Internally developed software will be amortized when the projects are complete and the assets are ready for their intended use. 70 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. Amortization expense was $ 132.1 million, $ 139.4 million and $ 23.8 million in 2023, 2022 and 2021, respectively. As of December 31, 2023, estimated annual amortization for our intangible assets for each of the next five years is approximately (in thousands): 2024 $ 132,623 2025 125,149 2026 124,396 2027 114,308 2028 113,710 Thereafter 222,082 Total $ 832,268 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 2023, 2022 or 2021. 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 2023, 2022 or 2021. 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 71 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 consist of corporate bonds, U.S. treasury securities, and 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, 2023 or 2022. 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 our current debt securities are in 2024. All short-term investment securities are callable within one year. Our short-term and long-term investments in available-for-sale securities consist of the following (in thousands): As of December 31, 2023 Amortized Cost Unrealized Holding Gains (Losses) Fair Value Short-term corporate bonds $ 501 $ — $ 501 Short-term U.S. treasury securities — — — Short-term government bonds — — — Total short-term investment securities 501 — 501 Long-term corporate bonds — — — Total investment securities $ 501 $ — $ 501 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 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 72 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 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 2023 and 2022, 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 years ended December 31, 2023 and 2022. We did not receive any dividend distributions from this investment during 2023 and 2022. Our non-marketable equity method investment consists of the following (in thousands): As of December 31, 2023 2022 Equity method investment $ 3,120 $ 3,178 Investments in non-marketable debt securities In 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 accrued for interest and penalties of $ 2.9 million and $ 2.0 million, respectively, as of December 31, 2023 and $ 2.2 million and $ 2.3 million, respectively, as of December 31, 2022. 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 Other expense, net table below). Foreign currency transaction losses (gains), net were $ 5.9 million, $ 5.8 million and $ 1.0 million in 2023, 2022 and 2021, respectively. Revenue Recognition 73 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. and Canada. 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); and (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. 74 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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, 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 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. 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, software maintenance services 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 $ 19.2 million, $ 14.6 million and $ 11.0 million in 2023, 2022 and 2021, 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, 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 Other expense, net 75 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table presents other expense, net (in thousands): As of 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 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. 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. 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 relates to sale of certain other assets. 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 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 years ended December 31, 2023 and 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 anti-dilutive shares in 2021. 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, 2023 2022 2021 Net (loss) income $ ( 29,655 ) $ ( 74,286 ) $ 103,135 Weighted-average number of common shares outstanding (basic) 24,091 23,868 21,206 Dilutive securities — — 575 Weighted-average common and common equivalent shares outstanding (diluted) 24,091 23,868 21,781 EPS — basic $ ( 1.23 ) $ ( 3.11 ) $ 4.86 EPS — diluted $ ( 1.23 ) $ ( 3.11 ) $ 4.74 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 76 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements - Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative. The amendments in this update modify the disclosure or presentation requirements of a variety of Topics in the Accounting Standards Codification ("ASC") in response to the SEC’s Release No. 33-10532, Disclosure Update and Simplification Initiative, and align the ASC’s requirements with the SEC’s regulations. For entities within the scope, the guidance will be applied prospectively with the effective date for each amendment to be the date on which the SEC's removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. If the SEC has not removed the related disclosure from its regulations by June 30, 2027, the amendments will be removed from the Codification and will not become effective. We are currently assessing what impact this guidance will have on the Company's consolidated financial statements and related disclosures. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures. The amendments in this update expand disclosures about a public entity’s reportable segments and requires more enhanced information about a reportable segment’s significant expenses, interim segment profit or loss, and a description of how a public entity’s chief operating decision maker uses reported segment profit or loss information in assessing segment performance and allocating resources. The amendments clarify that a single reportable segment entity must apply ASC 280 in its entirety. The update will be effective for annual periods beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. This ASU is applicable to our Annual Report on Form 10-K for the fiscal year ended December 31, 2024, and subsequent interim periods, with early application permitted. We are currently assessing the effect of this update on our consolidated financial statements and related disclosures. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures. The amendments in this update expand disclosures in an entity’s income tax rate reconciliation table and regarding cash taxes paid information. The update will be effective for annual periods beginning after December 15, 2024 and is applicable to our Annual Report on Form 10-K for the fiscal year December 31, 2025, with early application permitted. We are currently assessing the effect of this update on our consolidated financial statements and related disclosures. 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 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 Obligations). 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 77 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. As of December 31, 2023, the estimated fair value of the contingent earn-out was $ 4.0 million. 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. In 2023, we expensed $ 8.3 million for services provided under the TSA and we had no related open payables as of December 31, 2023. In 2022, we expensed $ 37.6 million for services provided under the TSA and we had $ 5.1 million in related open payables as of December 31, 2022. 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): 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 78 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) _______________________________________________ (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. 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 79 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. As of December 31, 2023, the estimated fair value for the contingent earn-out related to certain product-related regulatory certifications was $ 1.5 million. NOTE 3. RESTRUCTURING, STRATEGIC TRANSACTION AND INTEGRATION Restructuring, strategic transaction and integration expenses were $ 41.3 million, $ 71.4 million and $ 18.0 million in 2023, 2022 and 2021, respectively. Restructuring Restructuring charges net of any reversed accruals were $ 5.7 million, $ 9.7 million and $( 1.8 ) million in 2023, 2022 and 2021, respectively, and are included in the above restructuring, strategic transaction and integration expenses in our consolidated statement of operations. In 2023, we incurred restructuring charges primarily related to severance expenses. We adjusted certain facility and severance restructuring accrued balances, shown in the table below under "Other adjustments", to reverse certain accrued balances that will not be utilized. 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. 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, 2022 $ 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 Charges incurred 5,521 1,189 6,710 Payments ( 6,694 ) ( 1,192 ) ( 7,886 ) Other adjustments (1) ( 234 ) ( 785 ) ( 1,019 ) Currency translation ( 198 ) 38 ( 160 ) Accrued balance, December 31, 2023 $ 2,811 $ 757 $ 3,568 _______________________________________________ (1) Relates to accrued restructuring charges for estimated facility closure costs and severance costs that will not be utilized and were reversed during the year. 80 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Strategic Transaction and Integration Expenses We incurred $ 35.6 million, $ 61.7 million and $ 19.8 million in strategic transaction and integration expenses in 2023, 2022 and 2021, respectively, which are included in restructuring, strategic transaction and integration expenses in our consolidated statement of operations. The strategic transaction and integration expenses during 2023 were primarily related to consulting expenses and employee costs incurred to integrate our Smiths Medical business acquired in 2022. 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. NOTE 4: REVENUE Revenue Recognition 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. The vast majority of our sales of these products within these business units 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. 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 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, (see Note 1: Basis of Presentation and Significant Accounting Policies). We also offer certain volume-based rebates to both our distribution and end customers, which is recorded 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, 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. 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. See Note 1. Basis of Presentation and Significant Accounting Policies for further discussion. 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: 81 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Year ended December 31, 2023 2022 2021 Product line Revenue % of Revenue Revenue % of Revenue Revenue % of Revenue Consumables $ 969,129 43 % $ 974,993 43 % $ 555,189 42 % Infusion Systems 629,043 28 % 617,435 27 % 352,321 27 % Vital Care 660,954 29 % 687,569 30 % 408,798 31 % Total Revenues $ 2,259,126 100 % $ 2,279,997 100 % $ 1,316,308 100 % 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): Year ended December 31, Geography 2023 2022 2021 United States $ 1,440,017 $ 1,460,069 $ 941,809 Europe, the Middle East and Africa 373,571 367,411 147,488 Asia-Pacific 241,699 257,208 85,692 Other Foreign 203,839 195,309 141,319 Total Revenues $ 2,259,126 $ 2,279,997 $ 1,316,308 Domestic sales accounted for 64 %, 64 % and 72 % of total revenue in 2023, 2022 and 2021, respectively. International sales accounted for 36 %, 36 % and 28 % of total revenue in 2023, 2022 and 2021, 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, 2023 and 2022, (in thousands): 82 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Contract Liabilities Beginning balance, January 1, 2022 $ ( 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 ) Equipment revenue recognized 34,121 Equipment revenue deferred due to implementation ( 35,868 ) Software revenue recognized 18,526 Software revenue deferred due to implementation ( 19,947 ) Government grant deferred revenue ( 944 ) Government grant recognized 3,684 Other deferred revenue ( 1,924 ) Other deferred revenue recognized 6,041 Ending balance, December 31, 2023 $ ( 42,177 ) During 2023, we recognized $ 29.8 million in revenue that was included in the opening contract balances as of December 31, 2022 As of December 31, 2023, revenue from remaining performance obligations is as follows (in thousands): Recognition Timing <12 Months > 12 Months Equipment revenue $ ( 17,749 ) $ ( 24 ) Software revenue ( 10,062 ) ( 763 ) Government grant revenue (1) ( 2,064 ) ( 9,415 ) Other deferred revenue (2) ( 1,717 ) ( 383 ) Total $ ( 31,592 ) $ ( 10,585 ) ____________________________ (1) The government grant deferred income is amortized over the life of the related depreciable asset as a reduction to depreciation expense. (2) 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 83 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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, manufacturing and 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, 2023 2022 2021 Operating lease cost $ 24,024 $ 22,038 $ 11,251 Finance lease cost — interest 125 112 122 Finance lease cost — reduction of ROU asset 1,035 712 648 Short-term lease cost 29 7 14 Total lease cost $ 25,213 $ 22,869 $ 12,035 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 costs of goods sold and 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, 2023 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases (1) $ 24,604 $ 25,225 $ 11,256 Operating cash flows from finance leases $ 125 $ 112 $ 122 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 15,873 $ 5,994 $ 2,589 Finance leases $ 1,028 $ 715 $ 558 _____________________________ (1) In January 2022, we acquired $ 55.2 million of operating right-of-use assets as part of the Smiths Medical acquisition, see Note 2: Acquisitions. 84 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table presents the supplemental balance sheet information related to our operating leases (in thousands, except lease term and discount rate): As of December 31, 2023 2022 Operating leases Operating lease right-of-use assets $ 69,909 $ 74,864 Accrued liabilities $ 20,161 $ 18,169 Other long-term liabilities 52,972 60,916 Total operating lease liabilities $ 73,133 $ 79,085 Weighted-Average Remaining Lease Term Operating leases 5.6 years 6.1 years Weighted-Average Discount Rate Operating leases 4.31 % 4.34 % The following table presents the supplemental balance sheet information related to our finance leases (in thousands, except lease term and discount rate): As of December 31, 2023 2022 Finance leases Finance lease right-of-use assets $ 2,707 $ 2,598 Accrued liabilities $ 860 $ 816 Other long-term liabilities 1,954 1,855 Total finance lease liabilities $ 2,814 $ 2,671 Weighted-Average Remaining Lease Term Finance leases 4.1 years 4.8 years Weighted-Average Discount Rate Finance leases 4.93 % 4.23 % As of December 31, 2023, the maturities of our operating and finance lease liabilities for each of the next five years are approximately (in thousands): 85 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Operating Leases Finance Leases 2024 $ 22,291 $ 977 2025 16,409 763 2026 14,095 639 2027 10,150 291 2028 5,735 189 Thereafter 13,041 236 Total Lease Payments 81,721 3,095 Less imputed interest ( 8,588 ) ( 281 ) Total $ 73,133 $ 2,814 NOTE 6. SHARE-BASED AWARDS We have a stock incentive plan for employees and directors and an employee stock purchase plan, however, the employee stock purchase plan was suspended in 2017. 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") and performance restricted stock units ("PRSU"). 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): Year ended December 31, 2023 2022 2021 Stock compensation expense $ 40,563 $ 36,025 $ 27,341 Tax benefit from stock-based compensation cost $ 5,379 $ 4,636 $ 6,391 Indirect tax benefit $ — $ 749 $ 285 As of December 31, 2023, we had $ 43.1 million of unamortized stock compensation cost which we will recognize as an expense over a weighted-average period of approximately 0.9 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 years 2012, 2014, 2017 and 2023, our stockholders approved amendments to the 2011 plan that increased the shares available for issuance by a total of 5,461,000 , bringing the initial shares available for issuance to 6,111,000 , plus the remaining 248,700 shares that remained available for grant from the 2003 Plan. As of December 31, 2023, the 2011 Plan has 6,374,300 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. 86 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 and shares in thousands, except per option amounts): Year ended December 31, 2022 2021 Number of time-based options granted 7,620 7,910 Grant-date fair value of options granted $ 540 $ 528 Weighted-average assumptions for stock option valuation: Expected term (years) 5.5 5.5 Expected stock price volatility 36.0 % 35.0 % Risk-free interest rate 3.0 % 0.9 % Expected dividend yield — % — % Weighted-average grant-price per option $ 185.79 $ 200.07 Weighted-average grant-date fair value per option $ 70.86 $ 66.78 There were no stock options granted during the year ended December 31, 2023. A summary of our stock option activity as of and for the year ended December 31, 2023 is as follows: Shares Weighted-Average Exercise Price Per Share Weighted-Average Contractual Life (Years) Aggregate Intrinsic Value (in thousands) Outstanding at December 31, 2022 527,461 $ 79.94 Granted — $ — Exercised ( 67,633 ) $ 59.47 Forfeited or expired — $ — Outstanding at December 31, 2023 459,828 $ 82.95 1.1 $ 11,856 Exercisable at December 31, 2023 459,828 $ 82.95 1.1 $ 11,856 Vested and expected to vest, December 31, 2023 459,828 $ 82.95 1.1 $ 11,856 The intrinsic values for options exercisable, outstanding and vested or expected to vest at December 31, 2023 are based on our closing stock price of $ 99.74 at December 31, 2023 and are before applicable taxes. The following table presents information regarding stock option activity (in thousands): 87 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Year ended December 31, 2023 2022 2021 Intrinsic value of options exercised $ 8,441 $ 17,340 $ 27,534 Cash received from exercise of stock options $ 4,022 $ 8,785 $ 9,372 Tax benefit from stock option exercises $ 1,733 $ 3,637 $ 5,092 Stock Awards In 2023, we granted PRSUs to our executive officers. For the executive officers other than the Chief Executive Officer ("CEO"), Chief Operations Officer ("COO"), the Chief Financial Officer ("CFO") and the Corporate Vice President, General Counsel ("CVP, GC"), the PRSUs will vest as to one-third of the total number of PRSUs underlying the award on the first, second and third anniversaries of the applicable grant date, subject to a determination by the CEO and Compensation Committee that the officers have met their individual performance goals for the applicable year and continued service through such vesting date. For the CEO, COO, the CFO, and the CVP, GC, the PRSUs will cliff-vest on March 15, 2026, subject to continued service through such vesting date and the achievement of minimum three-year adjusted revenue and Adjusted EBITDA compound annual growth rates, commencing on January 1, 2023 and ending on December 31, 2025, which when reviewed against a predetermined vesting matrix could result in the vesting of 0% to 250% of the awarded PRSUs. 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 continued service through such vesting date and 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 the vesting of 0% to 200% of the awarded PRSUs. We also granted certain other one-off PRSU awards to non-executive employees with various performance requirements, whereby the PRSUs will be earned if the minimum requirements are met within a specified time period. The performance period related to the annual 2022 PRSUs ended on December 31, 2023 and is subject to the Compensation Committee review and determination that between 0% and 200% of the PRSUs awarded were earned based on the actual net synergy savings related to the Smiths Medical acquisition achieved during the performance period. In 2021, we granted PRSUs to our executive officers. For the executive officers other than the CEO, COO and the CFO, the PRSUs will vest as to one-third of the total number of PRSUs underlying the award on the first, second and third anniversaries of the applicable grant date, subject to a determination by the CEO and Compensation Committee that the officers have met their individual performance goals for the applicable years and continued service through such vesting date. For the CEO, COO and the CFO, the PRSUs will cliff-vest on March 8, 2024, subject to continued service through such vesting date and the achievement of minimum three-year cumulative adjusted revenue dollar target frowth rate and adjusted EPS dollar target growth rate targets, commencing on January 1, 2021 and ending on December 31, 2023, which when reviewed against a predetermined vesting matrix could result in the vesting of 0% to 250% of the awarded PRSUs. In February 2022, the Compensation Committee made the determination that the executive officers other than the CEO, CFO and COO met their individual performance goals for 2021, therefore one-third of their 2021 PRSUs awarded vested during 2022. 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 one-third of their 2021 PRSUs awarded vested during 2023. The performance period related to the final third of the PRSUs awarded to the executive officers other than the CEO, CFO and COO ended on December 31, 2023 and is subject to the Compensation Committee review and determination that the PRSUs will be earned at 100% of the awarded PRSUs based on whether the officers met their individual performance goals for 2023. The performance period related to the 2021 CEO, COO and CFO PRSUs ended on December 31, 2023 and is subject to the Compensation Committee review and determination that between 0% and 250% of the awarded PRSUs will be earned based on the actual cumulative adjusted revenue dollar target growth rate and adjusted EPS dollar target growth rate achieved during the performance period. In 2020, we granted PRSUs to our executive officers. For the executive officers other than the CEO, COO and the CFO, the PRSUs vested as to one-third of the total number of PRSUs underlying the award on the first, second and third anniversaries of the applicable grant date, subject to a determination by the CEO and Compensation Committee that the officers had met their individual performance goals for the applicable years and continued service through such vesting date. For the CEO, COO and the CFO, the PRSUs cliff-vested on March 6, 2023 and were further subjected to continued service through such vesting date and the achievement of minimum three-year cumulative adjusted revenue dollar target growth rate and 88 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) adjusted EPS dollar target growth rate targets, which when reviewed against a predetermined vesting matrix could have resulted in the vesting 0% to 250% of the awarded PRSUs. In February 2021, the Compensation Committee made the determination that the executive officers other than the CEO, COO and CFO met their individual performance goals for 2020; therefore one-third of their 2020 PRSUs 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 awarded PRSUs, to an increased potential to earn between 50% and 300% of the award granted, subject to the same minimum threshold revenue and EPS targets set forth above 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 2022, the Compensation Committee made the determination that the executive officers other than the CEO, CFO and COO met their individual performance goals for 2021, therefore one-third of their 2020 PRSUs awarded vested during 2022. 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 the final third of their 2020 PRSUs awarded vested during 2023. The performance period related to the 2020 CEO, COO and CFO PRSUs ended on December 31, 2022 and in February 2023 the Compensation Committee determined that 188% of the awarded PRSUs were earned based on the actual cumulative adjusted revenue dollar growth rate and adjusted EPS dollar target growth rate 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 as to one-third of the total number of PRSUs underlying the award on the first, second and third anniversaries of the applicable grant date, subject to a determination by the CEO and Compensation Committee that the officers had met their individual performance goals for the applicable years and continued service through such vesting date. For the CEO and the COO, the PRSUs were to cliff-vest on March 6, 2022, subject to continued service through such vesting date and the achievement of a minimum Cumulative Adjusted EBITDA growth target over the performance period. 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 PRSUs would have vested. If, on the vesting date, the Cumulative Adjusted EBITDA had a growth of between 8% to 10%, 100% of the awarded PRSUs would have vested. If, on the vesting date, the Cumulative Adjusted EBITDA had a growth of over 10%, 200% of the awarded PRSUs 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 2020, the Compensation Committee made the determination that the executive officers other than the CEO and COO met their individual performance goals for 2019, therefore, one-third of their 2019 PRSUs awarded vested during 2020. In February 2021, the Compensation Committee made the determination that the executive officers other than the CEO and COO met their individual performance goals for 2020, therefore, one-third of their 2019 PRSUs awarded vested during 2021. 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 2021, therefore, the final third of their 2019 PRSUs 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 growth 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 as to one-third of the total number of PRSUs underlying the award on the first, second and third anniversaries of the applicable grant date, subject to a determination by the CEO and Compensation Committee that the officers have met their individual performance goals for the applicable year and continued service through such vesting date. For the CEO and the COO, the PRSUs cliff-vested ending on February 15, 2021, subject to continued service through such vesting date and the achievement of a minimum Cumulative Adjusted EBITDA growth target over the performance period. 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 PRSUs would vest. If, on the vesting date, the Cumulative Adjusted EBITDA had a growth of between 8% to 10%, 100% of the awarded PRSUs would vest. If, on the vesting date, the Cumulative Adjusted EBITDA had a growth of over 10%, 200% of the awarded PRSUs would vest. In February 2019, the Compensation Committee made the determination that six of the eight executive officers other than the CEO and COO who received a 2018 PRSU award met their individual performance goals for 2018, therefore, one-third of the 2018 PRSUs awarded for those executives vested during 2019. In February 2020, the Compensation Committee made the determination that the executive officers other than the CEO and COO met their individual performance goals for 2019, therefore, one-third of their 2018 PRSUs awarded vested during 2020. The two executive officers who did not earn one-third of the PRSUs awarded during the 2018 performance period additionally earned those shares in 2019. 89 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In February 2021, the Compensation Committee made the determination that the executive officers other than the CEO and COO met their individual performance goals for 2020, therefore, the final third of their 2018 PRSUs awarded vested during 2021. Also in February 2021, the Compensation Committee determined that based on the actual Cumulative Adjusted EBITDA growth achieved during the performance period, the CEO and COO's 2018 PRSUs were earned at 100% of the PRSUs granted. 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 2023, 2022 and 2021, 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): Year ended December 31, 2023 2022 2021 PRSU Shares granted 78,213 60,383 53,246 Shares earned (1) 49,314 46,317 32,013 Grant-date fair value per share $ 190.02 $ 230.31 $ 198.16 Grant-date fair value $ 14,862 $ 13,907 $ 10,551 Intrinsic value vested $ 8,024 $ 10,487 $ 6,777 RSU Shares granted 156,111 116,870 84,388 Grant-date fair value per share $ 173.10 $ 221.65 $ 199.13 Grant-date fair value $ 27,024 $ 25,905 $ 16,804 Intrinsic value vested $ 14,179 $ 16,438 $ 13,681 _______________________________ (1) PRSU shares earned in 2023 were related to performance awards granted to executives in 2020 and 2021 and performance awards granted to a non-executive employees in 2022. PRSU shares earned in 2022 were related to performance awards granted to executives in 2019, 2020 and 2021 and performance award granted to a non-executive employee in 2019, 2020, and 2021. PRSU shares earned in 2021 were related to performance awards granted to executives in 2018, 2019 and 2020. The table below provides a summary of our PRSU and RSU activity as of and for the year ended December 31, 2023: Number of Units Grant-Date Fair Value Per Share Weighted-Average Contractual Life (Years) Aggregate Intrinsic Value (in thousands) Non-vested at December 31, 2022 354,004 $ 213.95 Change in units due to performance expectations (1) 5,554 $ 188.11 Granted 234,324 $ 178.75 Vested ( 140,091 ) $ 200.66 Forfeited ( 5,190 ) $ 188.98 Non-vested and expected to vest at December 31, 2023 448,601 $ 199.68 0.9 $ 44,743 _______________________________ (1) Relates to adjustments to 2020 PRSUs granted to executives that vested during 2023. 90 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. 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. All shares unissued under the plan expired during 2022. 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 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 derivative instruments we utilize, including various foreign exchange contracts and interest rate swaps, are designated and qualify as cash flow hedges. Our derivative instruments are recorded at fair value on the 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 current foreign exchange forward contracts hedge exposures principally denominated in Mexican Pesos ("MXN"), Euros, Japanese Yen ("JPY"), Chinese Renminbi ("CNH"), Canadian Dollar ("CAD"), U.S. Dollar ("USD") 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, 2023 was $ 172.6 million, which included the notional equivalent of $ 27.1 million in MXN, $ 35.6 million in Euros, $ 17.4 million in JPY, $ 8.1 million in CNH, $ 18.4 million in CAD, $ 14.2 million in AUD, $ 42.6 million in USD and $ 9.2 million in other foreign currencies, with terms currently through November 2025. 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 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 was 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. 91 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 Obligations), 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 $ 300.0 million, reducing to $ 150.0 million evenly on a quarterly basis through its final maturity on March 30, 2027. We pay a fixed rate of 1.32 % and will receive the greater of 3-month USD SOFR or ( 0.15 )%. The total notional amount of this outstanding derivative as of December 31, 2023 was approximately $ 244.7 million. 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 through its final maturity on March 30, 2026. We pay a fixed rate of 1.17 % and receive the greater of 3-month USD SOFR or 0.35 %. The total notional amount of this outstanding derivative as of December 31, 2023 was approximately $ 421.9 million. In June 2023, we entered into an additional interest rate swap that hedges both term loan A and term loan B interest payments. The total notional amount of the swap is $ 300.0 million. The hedge matures on June 30, 2028. We pay a fixed rate of 3.88 % and receive 3-months USD SOFR. These forward-starting swaps effectively convert the relevant portion of the floating-rate term loans to fixed rates. The following table presents the fair values of our derivative instruments included within the 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 As of December 31, 2023 Prepaid expenses and other current assets $ 6,785 $ 23,065 $ 29,850 Other assets 673 4,876 5,549 Total assets $ 7,458 $ 27,941 $ 35,399 Accrued liabilities $ 2,590 $ — $ 2,590 Other long-term liabilities 240 — 240 Total liabilities $ 2,830 $ — $ 2,830 Derivatives Designated as Cash Flow Hedging Instruments As of December 31, 2022 Foreign Exchange Forward Contracts Forward-Starting Interest Rate Swaps Gross Derivatives 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 The following table presents the effects of our derivative instruments designated as cash flow hedges on the Consolidated Statements of Operations (in thousands): 92 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Gain Reclassified From Accumulated Other Comprehensive (Loss) Income into Income Location of Gain in the Consolidated Statements of Operations Year Ended December 31, 2023 2022 2021 Derivatives designated as cash flow hedging instruments: Foreign exchange forward contracts Total revenues $ 296 $ 3,829 $ — Foreign exchange forward contracts Cost of goods sold 7,852 7,751 3,444 Foreign exchange forward contracts Other expense, net (1) 229 — — Foreign exchange forward contracts Interest expense (2) 13 717 — Interest rate swaps Interest expense 32,444 6,122 — Total derivatives designated as cash flow hedging instruments $ 40,834 $ 18,419 $ 3,444 _______________________________ (1) Represents location of gain reclassified from accumulated other comprehensive income (loss) into other expense, net as a result of ineffectiveness. (2) Represents location of gain reclassified from accumulated other comprehensive income (loss) into interest expense as a result of a forecasted transaction being no longer probable of occurring. We recognized the following gains (losses) on our derivative instruments designated as cash flow hedges in other comprehensive income (loss) before reclassifications to income (in thousands): Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) Year Ended December 31, 2023 2022 2021 Derivatives designated as cash flow hedging instruments: Foreign exchange forward contracts $ 10,788 $ 9,588 $ 950 Interest rate swaps 5,200 62,786 ( 1,480 ) Total derivatives designated as cash flow hedging instruments $ 15,988 $ 72,374 $ ( 530 ) As of December 31, 2023, we expect an estimated $ 4.2 million in deferred gains on the outstanding foreign exchange forward contract and an estimated $ 23.9 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 (loss) income. 93 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. 94 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, 2023, the fair value of the contingent earn-out was determined to be $ 3.4 million and was paid out in the first quarter of 2024.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, 2023, 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, 2023, the estimated fair value of the contingent earn-out is $ 4.0 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, 2023, 2022 and 2021 (in thousands): 95 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Earn-out Liability Contingent earn-out liability, January 1, 2021 $ 26,300 Contingent earn-out non-compete arrangement 2,589 Transfer of Pursuit earn-out liability into Level 2 (1) ( 26,300 ) Contingent earn-out liability, December 31, 2021 2,589 Acquisition date fair value estimate of earn-out (2) 55,158 Change in fair value of contingent earn-out (included in income from operations as a separate line item) (3) ( 32,091 ) Currency translation ( 84 ) Contingent earn-out liability, December 31, 2022 25,572 Change in fair value of contingent earn-out (included in income from operations as a separate line item) (4) ( 16,247 ) Other (5) ( 496 ) Transfer of Mediverse earn-out liability into Level 2 (6) ( 3,379 ) Currency translation 41 Contingent earn-out liability, December 31, 2023 $ 5,491 _______________________________ (1) 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. (2) $ 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). (3) Primarily relates to the change in fair value of our Smiths Medical earn-out and 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. (4) Primarily relates to the change in fair value of our Smiths Medical earn-out and the earn-out with one of our international distributors. (5) Primarily relates to the reclassification to accrued liabilities of a holdback liability not subject to unobservable inputs when determining the fair market value. (6) The Mediverse earn-out was transferred out of Level 3 and into Level 2 in the fourth quarter of 2023 when the amount of the actual payment was known, and subsequently settled during first quarter of 2024. The following table provides quantitative information about Level 3 inputs for fair value measurement of our earn-out liabilities related to Smiths Medical: Smiths Medical Earn-out As of December 31, 2023 As of December 31, 2022 Simulation Input Volatility 47.00 % 38.00 % Risk-Free Rate 4.18 % 4.17 % Investments, Foreign Currency Contracts and Interest Rate Contracts Our investments historically consist of corporate, 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. 96 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 Mediverse earn-out liability described above, there were no transfers between levels in 2023 or 2022. 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): Fair value measurements as of December 31, 2023 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 $ 501 $ — $ 501 $ — Foreign exchange forwards: Prepaid expenses and other current assets 6,785 — 6,785 — Other assets 673 — 673 — Interest rate contracts: Prepaid expenses and other current assets 23,065 — 23,065 — Other assets 4,876 — 4,876 — Total Assets $ 35,900 $ — $ 35,900 $ — Liabilities: Contingent earn-out liability-ST $ 4,879 $ — $ 3,379 $ 1,500 Contingent earn-out liability - LT 3,991 — — 3,991 Foreign exchange contracts: Accrued liabilities 2,590 — 2,590 — Other long-term liabilities 240 — 240 — Total Liabilities $ 11,700 $ — $ 6,209 $ 5,491 97 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 (1) 4,860 — 4,860 — Other assets (1) 94 — 94 — Interest rate contracts: Prepaid expenses and other current assets (1) 28,431 — 28,431 — Other assets (1) 26,753 — 26,753 — Total Assets $ 64,878 $ 1,412 $ 63,466 $ — Liabilities: Contingent earn-out liability - LT $ 25,572 $ — $ — $ 25,572 Foreign exchange contracts: Accrued liabilities (1) 1,847 — 1,847 — Other long-term liabilities (1) 167 — 167 — Total Liabilities $ 27,586 $ — $ 2,014 $ 25,572 _______________________________ (1) Subsequent to the issuance of the financial statements as of and for the year ended December 31, 2022, the Company determined that the tabular disclosure of the level for these amounts were incorrectly presented within level 3, and accordingly the Company has corrected these disclosures to present them as level 2 within this table. The Company determined the impact of the adjustments to the table to be immaterial, individually and in the aggregate, based on consideration of quantitative and qualitative factors. NOTE 9. PREPAID EXPENSES AND OTHER CURRENT ASSETS AND OTHER ASSETS Prepaid expenses and other current assets consist of the following (in thousands): 98 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of December 31, 2023 2022 Other prepaid expenses and receivables $ 17,833 $ 21,635 Prepaid vendor expenses 1,309 3,052 Deferred costs 1,668 2,395 Prepaid insurance and property taxes 9,547 16,322 VAT/GST receivable 2,748 3,546 Deferred tax charge 5,822 3,830 Foreign exchange forward contract 6,785 4,860 Interest rate contracts 23,065 28,431 Deposits 1,196 1,329 Other 3,667 3,532 $ 73,640 $ 88,932 Other assets consist of the following (in thousands): As of December 31, 2023 2022 Pump lease receivables $ 30,627 $ 27,086 Spare parts 46,496 38,498 Equity method investments 3,120 3,178 Interest rate contracts 4,876 26,753 Deferred debt issuance costs 3,439 5,156 Finance lease right-of-use assets 2,707 2,598 Other 2,755 2,193 $ 94,020 $ 105,462 NOTE 10. ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES Accrued liabilities consist of the following (in thousands): 99 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2023 2022 Salaries and benefits $ 52,250 $ 44,304 Incentive compensation 37,992 30,254 Operating lease liability-ST 20,161 18,169 Accrued professional fees 2,803 5,317 Field service corrective action (1) 30,281 24,517 Italy medical device payback provision (2) 23,176 7,900 Legal accrual 1,874 3,137 Accrued sales taxes 6,748 5,844 Warranties and returns 3,682 3,097 Deferred revenue 31,640 30,838 Accrued other taxes 3,024 5,794 Distribution fees 13,049 17,063 Accrued freight 17,215 17,988 Restructuring accrual 3,568 5,923 Foreign exchange contracts 2,590 1,847 Accrued audit fees 5,492 6,279 Defined benefit plan 2,575 2,928 Accrued interest 1,431 1,033 Accrued research and development — 3,538 Other 8,664 6,999 $ 268,215 $ 242,769 _____________________________ (1) Primarily 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. (2) As of December 31, 2022, there was an additional $ 12.1 million in payback provision recorded as a reduction to accounts receivable, net. Whereas we recorded the amount for the payback provision to accrued liabilities from accounts receivable in Q3 2023, the payback provision was not reclassified as of December 31, 2022 to conform to the current year presentation. 100 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other long-term liabilities consist of the following (in thousands): As of December 31, 2023 2022 Operating lease liability-LT $ 52,972 $ 60,916 Finance lease liability-LT 1,954 1,855 Deferred revenue 10,585 16,239 Benefits 4,207 5,314 Field service corrective action (1) 26,056 25,294 Accrued rent 841 997 Other 3,882 3,489 $ 100,497 $ 114,104 _______________________________ (1) Related to field corrective actions associated with certain products in connection with a 2021 Warning Letter received by Smiths Medical from the FDA following an inspection of Smiths Medical's Oakdale, Minnesota Facility, see Note 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. Interest Rate Terms 101 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 is 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 is 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 is determined by reference to the leverage ratio in effect from time to time as set forth in the following table: 102 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 amortizes 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, total principal paid on both Term Loans for the year ended December 31, 2022 was $ 22.4 million. For the twelve months ended December 31, 2023, total principal payments on both Term Loans was $ 29.7 million. 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 are 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 are 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 103 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, 2023. 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, 2023 Senior Secured Credit Facilities: Term Loan A — principal 7.67 % $ 812,813 Term Loan B — principal 8.00 % 835,125 Revolving Credit Facility — principal — % — Less unamortized debt issuance costs (1) ( 19,168 ) Total carrying value of long-term debt 1,628,770 Less current portion of long-term debt 51,000 Long-term debt, net $ 1,577,770 _______________________________ (1) Comprised of $ 9.3 million and $ 9.9 million relating to the Term Loan A and the Term Loan B, respectively. As of December 31 2023, 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): 104 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2024 $ 51,000 2025 51,000 2026 72,250 2027 672,563 2028 8,500 Thereafter 792,625 Total $ 1,647,938 The following table presents the total interest expense related to our long-term debt (in thousands): Year Ended December 31, 2023 2022 2021 Contractual interest $ 125,550 $ 66,770 $ — Amortization of debt issuance costs 6,814 6,972 240 Commitment fee — Revolving Credit Facility 1,518 1,290 221 Total long-term debt-related interest expense $ 133,882 $ 75,032 $ 461 NOTE 12. INCOME TAXES Income from continuing operations before taxes consisted of the following (in thousands): Year Ended December 31, 2023 2022 2021 United States $ ( 136,980 ) $ ( 135,646 ) $ 81,484 Foreign 58,681 21,237 41,702 $ ( 78,299 ) $ ( 114,409 ) $ 123,186 The provision (benefit) for income taxes consisted of the following (in thousands): Year Ended December 31, 2023 2022 2021 Current: Federal $ ( 8,235 ) $ 4,128 $ 20,646 State 5,035 3,799 3,444 Foreign 26,035 12,924 7,236 $ 22,835 $ 20,851 $ 31,326 Deferred: Federal $ ( 43,042 ) $ ( 42,012 ) $ ( 8,154 ) State ( 14,657 ) ( 11,239 ) ( 1,815 ) Foreign ( 13,780 ) ( 7,723 ) ( 1,306 ) ( 71,479 ) ( 60,974 ) ( 11,275 ) $ ( 48,644 ) $ ( 40,123 ) $ 20,051 We have accrued for tax contingencies for potential tax assessments, and in 2023 we recognized a $ 24.5 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): 105 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Year Ended December 31, 2023 2022 2021 Amount Percent Amount Percent Amount Percent Federal tax at the expected statutory rate $ ( 16,443 ) 21.0 % $ ( 24,026 ) 21.0 % $ 25,869 21.0 % State income tax, net of federal effect ( 6,057 ) 7.7 % ( 5,050 ) 4.4 % 2,907 2.4 % Tax credits ( 9,824 ) 12.5 % ( 3,636 ) 3.2 % ( 2,443 ) ( 2.0 ) % Global intangible low-taxed income ( 2,658 ) 3.4 % 2,303 ( 2.0 ) % 711 0.6 % Foreign income tax differential ( 2,506 ) 3.2 % ( 2,943 ) 2.5 % ( 2,983 ) ( 2.4 ) % Stock-based compensation ( 289 ) 0.4 % ( 3,721 ) 3.2 % ( 4,263 ) ( 3.5 ) % Foreign-derived intangible income ( 3,299 ) 4.2 % ( 2,269 ) 2.0 % ( 3,775 ) ( 3.1 ) % Transaction cost — — % 2,299 ( 2.0 ) % — — % Contingent consideration ( 3,407 ) 4.4 % ( 6,830 ) 6.0 % ( 29 ) — % Section 162(m) 3,268 ( 4.2 ) % 3,942 ( 3.4 ) % 1,812 1.5 % Tax reserve releases ( 6,884 ) 8.8 % ( 1,834 ) 1.6 % — — % Other ( 545 ) 0.7 % 1,642 ( 1.4 ) % 2,245 1.8 % $ ( 48,644 ) 62.1 % $ ( 40,123 ) 35.1 % $ 20,051 16.3 % Tax credits in 2023, 2022 and 2021 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, 2023 2022 Deferred tax asset: Accruals/other $ 30,190 $ 17,351 Acquired future tax deductions 10,877 14,186 Stock-based compensation 6,987 6,240 Foreign currency translation adjustments — — Tax credits 15,095 12,906 Inventory reserves 25,592 25,100 Warranty reserve 13,788 13,241 Section 163(j) - interest expense limitation 25,467 9,166 Chargebacks, discounts, customer concessions 39,077 39,508 Capitalized research and development 43,313 16,587 Valuation allowance ( 8,452 ) ( 11,166 ) $ 201,934 $ 143,119 Deferred tax liability: State income taxes $ 4,465 $ 1,816 Depreciation and amortization 212,429 226,274 Section 481(a) adjustment - change in accounting method — — Foreign currency translation and derivative instrument adjustments 3,630 9,581 $ 220,524 $ 237,671 Deferred tax (liability) asset, net $ ( 18,590 ) $ ( 94,552 ) Tax Holidays and Carryforwards Net operating loss ("NOL") carryforwards consist of: (a) federal NOL carryforwards of $ 1.4 million which will expire at various dates from 2031 to indefinite carryforward periods, (b) state NOL carryforwards of $ 4.1 million which will expire at 106 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) various dates from 2026 to indefinite carryforward periods and (c) foreign NOL carryforwards of $ 32.6 million which will expire at various dates from 2024 to indefinite carryforward periods. We believe that it is more likely than not that the benefit from certain foreign NOL carryforwards will not be realized. In recognition of this risk, we have provided a valuation allowance of $ 9.0 million on the $ 9.5 million deferred tax assets 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 $ 20.4 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 $ 8.0 million or $ 0.33 per diluted share in 2023 and by $ 8.1 million or $ 0.34 per diluted share in 2022. Foreign currency translation and derivative instrument 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, 2023, we have estimated $ 246.8 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 2020 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, 2023 was $ 78.6 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, 2023, 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 $ 6.7 million within the next twelve months. 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 recognized $ 1.4 million of interest expense and $ 0.2 million of penalties in income tax benefit during 2023 and released $ 0.7 million of interest expense and $ 0.6 million of penalties in 2023. In total, we have accrued for interest and penalties of $ 2.9 million and $ 2.0 million, respectively as of December 31, 2023, and $ 2.2 million and $ 2.3 million, respectively, as of December 31, 2022. The following table summarizes our cumulative gross unrecognized tax benefits (in thousands): Year Ended December 31, 2023 2022 2021 Beginning balance $ 54,053 $ 21,537 $ 18,443 Increases to prior year tax positions 2,347 148 231 Increases due to acquisitions — 29,606 — Increases to current year tax positions 34,607 4,706 3,242 Decreases to prior year tax positions ( 2,455 ) ( 222 ) — Decrease related to lapse of statute of limitations ( 9,591 ) ( 1,722 ) ( 31 ) Decrease related to settlements with tax authorities ( 403 ) — ( 348 ) Ending balance $ 78,558 $ 54,053 $ 21,537 107 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. NOTE 13. GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS Significant Customers 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 2023, we had net sales to Medline of 16 % of consolidated worldwide 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, 2023 2022 Costa Rica $ 143,380 $ 128,179 Mexico 110,124 99,849 Other LATAM 47,564 39,270 Canada 5,694 5,374 Italy 28,201 24,323 Spain 21,921 18,948 Czech Republic 12,256 10,732 Other Europe 11,440 11,375 APAC 22,966 20,930 Total Foreign $ 403,546 $ 358,980 United States 833,251 803,577 Worldwide Total $ 1,236,797 $ 1,162,557 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 2023, 2022 or 2021. 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 2023, we withheld 59,377 shares of our common stock from employee vested restricted stock units in consideration for $ 9.4 million in payments for the employees' share award income tax withholding obligations. We had 2,428 shares remaining in treasury at December 31, 2022. 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, 2021. 108 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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, 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): Foreign Currency Translation Adjustments Unrealized Gains (Losses) on Cash Flow Hedges Other Adjustments Total Balance as of January 1, 2021 $ ( 4,381 ) $ 2,784 $ 75 $ ( 1,522 ) Other comprehensive loss 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 (income) before reclassifications ( 103,928 ) 54,962 1,203 ( 47,763 ) Amounts reclassified from AOCI — ( 13,946 ) — ( 13,946 ) Other comprehensive (loss) income ( 103,928 ) 41,016 1,203 ( 61,709 ) Balance as of December 31, 2022 $ ( 122,973 ) $ 40,779 $ 1,216 $ ( 80,978 ) Other comprehensive income before reclassifications 46,189 12,096 603 58,888 Amounts reclassified from AOCI — ( 30,991 ) — ( 30,991 ) Other comprehensive income (loss) 46,189 ( 18,895 ) 603 27,897 Balance as of December 31, 2023 $ ( 76,784 ) $ 21,884 $ 1,819 $ ( 53,081 ) 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. 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 109 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2023, the fair value of the contingent earn-out was determined to be $ 3.4 million and was paid out in the first quarter of 2024 (see Note 8: Fair Value Measurements). 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, 2023, 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, 2023, the estimated fair value of the contingent earn-out is $ 4.0 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 actions identified as of the closing date of the acquisition 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 related to known field corrective actions. The actual costs to be incurred are dependent upon the scope of the work necessary to achieve regulatory clearance, including potential additional field corrective actions, and could differ from the original estimate. For the years ended December 31, 2023 and 2022, we recorded additional expense of $ 20.3 million and $ 5.3 million, respectively, primarily related to additional field corrective actions identified and initiated during those periods. As of December 31, 2023, approximately $ 53.6 million of the $ 56.3 million of accrued field service corrective action was related to Smiths Medical. Commitments We have non-cancelable operating lease agreements where we are contractually obligated to pay certain lease payment amounts (see Note 5: Leases). 110 ICU MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. We no longer purchase products from Pfizer under the MSA as described in (i) above. The MSA described in (ii) above provides each party with mutually beneficial interests and is 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. NOTE 17: ACCOUNTS RECEIVABLE PURCHASE PROGRAM On January 19, 2023, we entered into a revolving $ 150 million uncommitted receivables purchase agreement with Bank of The West ("BOW"), which was subsequently acquired by BMO in February 2023. This agreement provided 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 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 do not retain effective control over the sold receivables and BOW has the right upon purchase to pledge and/or exchange the transferred assets without restrictions. The Company acts as collection agent for BOW and collection services are undertaken by our accounts receivable personnel in their normal course of business and collected funds are remitted to BOW. We do not have any continuing involvement with the sold receivables other than the collection services which does not provide us with more than a trivial benefit. The discount rate has been negotiated net of consideration for the collection services, the cost of collection is immaterial to the Company; therefore, we did not separately record any related servicing assets or liabilities related to the sold receivables. For the year ended December 31, 2023, the carrying value of trade receivables sold to BOW in connection with the purchase program was $ 629.1 million. In exchange for the sale of trade receivables, we received cash of $ 625.3 million. For the year ended December 31, 2023, the sale of the receivables resulted in a loss of $ 3.7 million, recorded in other expense, net in our consolidated statement of operations. For the year ended December 31, 2023, we have collected and remitted $ 553.2 million in cash to BOW. As of December 31, 2023, cash remaining to be collected on behalf of BOW was $ 75.9 million, which has been removed from our consolidated balance sheet as of December 31, 2023 and is reflected as cash provided by operating activities in the consolidated statement of cash flows. There were no such balances at December 31, 2022. The carrying value of the sold receivables approximated the fair value at December 31, 2023. 111 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.