ICU Medical, Inc.
PART I
ITEM 1. BUSINESS
First person pronouns used in this Report, such as “we,” “us,” and “our,” refer to ICU Medical, Inc. ("ICU") and its subsidiaries unless context requires otherwise.
Company Background and Overview of Business
ICU is one of the world's leading pure-play infusion therapy companies with global operations and a wide-ranging product portfolio that includes IV solutions, IV smart pumps with pain management and safety software technology, dedicated and nondedicated IV sets and needlefree connectors along with pain management and safety software technology designed to help meet clinical, safety and workflow goals. In addition, ICU manufactures automated pharmacy IV compounding systems with workflow technology, closed system transfer devices for preparing and administering hazardous IV drugs and cardiac monitoring systems to optimize patient fluid levels.for critically ill patients.
Headquartered in San Clemente, California, ICU was founded in 1984. In 1992, we had our initial public offering and reincorporated under Delaware law. Our primary customers are acute care hospitals, wholesalers, ambulatory clinics and alternate site facilities, such as outpatient clinics, home health care providers, and long-term care facilities. Since our inception we have grown organically and through acquisition, and we currently serve customers in more than 90 countries around the world.
In October 2015, we acquired Excelsior Medical Corporation’s SwabCap® disinfecting cap for needlefree IV connectors to enhance our direct and OEM infusion therapy product offerings and to open new customer opportunities globally.
In February 2017, we acquired Pfizer Inc.'s ("Pfizer") Hospira Infusion Systems ("HIS") business. The HIS acquisition complemented our legacy non-dedicated infusion sets and oncology business by expanding our product portfolio to include a complete intravenous infusion therapy product-line from IV solutions to IV pumps to non-dedicated infusion sets.
In November 2019, we acquired Pursuit Vascular, Inc. ("Pursuit"). Pursuit was a privately-held medical device company with a primary focus on innovative catheter disinfecting products and technologies to reduce costly bloodstream infections and lower healthcare costs. Pursuit’s primary product is the ClearGuard® HD cap, which is used for the maintenance of hemodialysis catheters.
Products
Our primary product offerings are listed below, which we present in four product lines as follows:
Infusion Consumables
Infusion therapy sets, used in hospitals and ambulatory clinics, consist of a tube running from a bottle or plastic bag containing a solution to a catheter inserted in a patient’s vein, that may or may not be used with an IV pump. Our primary IV Consumable products are:
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• | Clave™ needlefree products, including the MicroClave, MicroClave Clear, and NanoClave™ brand of connectors, accessories, extension and administration sets used for the administration of IV fluids and medications and the Neutron catheter patency device, used to help maintain patency of central venous catheters;
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• | SwabCap disinfecting cap, used to protect and disinfect any needlefree connector, including competitive brands of connectors;
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• | TegoTM hemodialysis connector used to cap and protect hemodialysis central venous catheter hubs;
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• | NovaCath™ and SuperCath™ peripheral IV catheters(PIV); and
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• | ClearGuard HD antimicrobial barrier caps for hemodialysis catheters.
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•Clave™ needlefree products, including the MicroClave, MicroClave Clear, and NanoClave™ brand of connectors, accessories, extension and administration sets used for the administration of IV fluids and medications and the Neutron catheter patency device, used to help maintain patency of central venous catheters;
•SwabCap disinfecting cap, used to protect and disinfect any needlefree connector, including competitive brands of connectors;
•ClearGuard HD antimicrobial barrier caps for hemodialysis catheters; and
•TegoTM hemodialysis connector used to cap and protect hemodialysis central venous catheter hubs.
Closed System Transfer Devices (CSTD)("CSTD") and hazardous drug compounding systems are used to prepare and deliver hazardous IV medications such as those used in chemotherapy, which, if released, can have harmful effects to the healthcare worker and environment. Our products are:
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• | •ChemoLockTM CSTD which utilizes a proprietary needlefree connection method, is used for the preparation and administration of hazardous drugs. ChemoLock is used to limit the escape of hazardous drug or vapor
concentrations, block the transfer of environmental contaminants into the system, and eliminates the risk of needlestick injury;
•ChemoClaveTM, an ISO Connection standard and universally compatible CSTD used for the preparation and administration of hazardous drugs. ChemoClave utilizes standard ISO luer locking connections, making it compatible with all brands of needlefree connectors and pump delivery systems. ChemoClave also is used to limit the escape of hazardous drug or vapor concentrations, block the transfer of environmental contaminants into the system, and eliminate the risk of needlestick injury; and
•DianaTM hazardous drug compounding system, an automated sterile compounding system that incorporates ChemoClave and ChemoLock CSTD consumables and IV workflow technology for the accurate, safe, and efficient preparation of hazardous drugs. It is a user-controlled automated system that provides repeatable accuracy of drug mixes and minimizes clinician exposure to hazardous drugs while helping to maintain the sterility of the drugs being mixed.
TM CSTD which utilizes a proprietary needlefree connection method, is used for the preparation and administration of hazardous drugs. ChemoLock is used to limit the escape of hazardous drug or vapor concentrations, block the transfer of environmental contaminants into the system, and eliminates the risk of needlestick injury;
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• | ChemoClaveTM, an ISO Connection standard and universally compatible CSTD used for the preparation and administration of hazardous drugs. ChemoClave utilizes standard ISO luer locking connections, making it compatible with all brands of needlefree connectors and pump delivery systems. ChemoClave also is used to limit the escape of hazardous drug or vapor concentrations, block the transfer of environmental contaminants into the system, and eliminate the risk of needlestick injury; and
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• | DianaTM hazardous drug compounding system, an automated sterile compounding system that incorporates ChemoClave and ChemoLock CSTD consumables and IV workflow technology for the accurate, safe, and efficient preparation of hazardous drugs. It is a user-controlled automated system that provides repeatable accuracy of drug mixes and minimizes clinician exposure to hazardous drugs while helping to maintain the sterility of the drugs being mixed.
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The preparation of hazardous drugs typically takes place in a pharmacy where drugs are removed from vials and prepared for delivery to a patient. Those prepared drugs are then transferred to a nursing unit where the chemotherapy is administered via an infusion pump set to a patient. Components of the ChemoClave and ChemoLock product lines are used both in pharmacies and on the nursing floors for the preparation and administration of hazardous drugs.
Infusion Systems
We offer a wide range of infusion pumps, dedicated IV sets and software. Our primary Infusion System products are dedicated IV sets and the following:
Infusion Pump Hardware:
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• | Plum 360™:The Plum 360™ infusion pump is an ICU Medical MedNet™ ready large volume infusion pump with an extensive drug library and wireless capability. Plum 360 was named the 2018, 2019 and 2020 Best in KLAS winner as top-performing IV smart pump and is the first medical device to be awarded UL Cybersecurity Assurance Program Certification; and
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• | LifeCare PCA™: The LifeCare PCA infusion pump is an ICU Medical MedNet™ ready patient-controlled analgesia pump ("PCA"), providing complete IV-EHR interoperability since 2016.
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◦Plum 360™:The Plum 360™ infusion pump is an ICU Medical MedNet™ ready large volume infusion pump with an extensive drug library and wireless capability. Plum 360 was named the 2018, 2019 and 2020 Best in KLAS winner as top-performing IV smart pump and was the first medical device to be awarded UL Cybersecurity Assurance Program Certification. Also, in 2021, the Plum 360 won the first ever award as the top-performing Smart Pump EMR-Integrated; and
◦LifeCare PCA™: The LifeCare PCA infusion pump is an ICU Medical MedNet™ ready patient-controlled analgesia pump ("PCA").
IV Mediation Safety Software:
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• | •ICU Medical MedNet™: ICU Medical MedNet is an enterprise-class medication management platform for any sized healthcare system that can help reduce medication errors, improve quality of care, streamline workflows and maximize revenue capture. ICU Medical MedNet connects our industry-leading smart pumps to a hospital’s Electronic Health Records ("EHR"), asset tracking systems, and alarm notification platforms with the largest array of integration partners.
™: ICU Medical MedNet is an enterprise-class medication management platform for any sized healthcare system that can help reduce medication errors, improve quality of care, streamline workflows and maximize revenue capture. ICU Medical MedNet connects our industry-leading smart pumps to a hospital’s Electronic Health Records ("EHR"), asset tracking systems, and alarm notification platforms with the largest array of integration partners.
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Professional Services:
•In addition to the products above, our teams of clinical, information technology, and professional services experts work with customers to develop and deliver safe and efficient infusion systems, providing customized and personalized configuration, implementation, and data analytics services to complement our infusion hardware and software.
IV Solutions
We provide a broad portfolio of IV solutions to meet our customers’ clinical needs, providing a consistent supply of IV solutions, irrigation, and nutritionals to help provide safe and effective patient care. Our primary IV Solutions products are:
IV Therapy and Diluents:
•Including Sodium Chloride, Dextrose, Balanced Electrolyte Solutions, Lactated Ringer's, Ringer's, Mannitol, Sodium Chloride/Dextrose, and Sterile Water.
Irrigation:
•Including Sodium Chloride Irrigation, Sterile Water Irrigation, Physiologic Solutions, Ringer's Irrigation, Acetic Acid Irrigation, Glycine Irrigation, Sorbitol-Mannitol Irrigation, Flexible Containers and Pour Bottle Options.
Critical Care
Our critical care products help clinicians get accurate real-time access to patients’ hemodynamic and cardiac status with an extensive portfolio of monitoring systems and advanced sensors & catheters. Measurements provided by our systems help clinicians determine how well the heart is pumping blood and how efficiently oxygen from the blood is being used by the tissues. Our primary Critical Care products are:
•Cogent™ 2-in-1 hemodynamic monitoring system;
•CardioFlo™ hemodynamic monitoring system;
•TDQ™ and OptiQ™ cardiac output monitoring catheters;
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• | •TriOxTMvenous oximetry catheters; •TMvenous oximetry catheters; |
Transpac™ blood pressure transducers; and
•SafeSet™ closed blood sampling and conservation system.
Financial information relating to our reporting segment and primary product lines is set forth in Part I, Item 6. "Selected Financial Data" and Item 7. "Management Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report on Form 10-K, and is incorporated herein by reference.
Manufacturing
As of December 31, 2019,2020, we operate four primary manufacturing facilities globally, which are discussed in Part I, Item 2 of this report. We operate four main service centers globally. We also rely on certain outside manufacturers for certain product lines in Infusion Systems and IV Solutions.
Our four primary manufacturing sites are:
•La Aurora de Heredia, Costa Rica, which manufactures most of our infusion pumps and dedicated disposables, as well as a portion of our non-dedicated infusion consumables products;
•Ensenada, Mexico, which manufactures infusion consumables products;
•Salt Lake City, Utah, which produces primarily our proprietary brands of connector and CSTD components, and sends those products to Costa Rica or Mexico for finished goods assembly; and
•Austin, Texas, which produces our IV Solutions products.
Additionally, we leverage a long-term supply agreement with Pfizer (described below) to provide additional IV Solution products to us.
We also assemble compounders in our leased facility in Ludenscheid, Germany and Salt Lake City, Utah.
We have fivefour main regional device service centers in San Jose, California; Sligo, Ireland; San Laurent, Quebec, Canada; Taipei, Taiwan and Rydalmere, Australia.
In 2017, we entered into two Manufacturing and Supply Agreements ("MSAs") with Pfizer under which, (i) Pfizer manufactures and supplies us with certain agreed upon products for an initial five-year term with a one-time two-year option to extend and (ii) we manufacture and supply Pfizer certain agreed upon products for a term of five or ten years depending on the product, with a one-time two-year option to extend. The initial supply price will be annually updated and is in full consideration for all costs associated with the manufacture, documentation, packaging and certification of the products.
We purchase many of the components and raw materials used in manufacturing our products from numerous suppliers in various countries. Certain components and raw materials are available only from a sole supplier. We work closely with our
suppliers to ensure continuity of supply while maintaining high quality and reliability. We have generally been able to obtain adequate supplies of such raw materials and components.
Sales, Marketing and Administration
We ship around the world with the majority of our sales denominated in U.S. dollars, Euro and Canadian dollars. We are not dependent on any single customer and no single customer accounted for 10% or more of our net sales in 2019.customer.
Distribution
Our products are marketed to medical product manufacturers, independent distributors and directly to end users.
The U.S. distribution of solutions, IV sets and accessories is supported by a network of threetwo owned and one leased distribution centers, acquired in the HIS business acquisition, which include King of Prussia, Pennsylvania; Los Angeles, California; and Dallas, Texas. We also acquired the contracts toutilize a number of public warehouses as part of the HIS acquisition.our supply chain.
Internationally, we manage distribution by utilizing international regional hubs and through independent distributors.
Government Regulation
Our products and operations are subject to extensive and rigorous regulation by the Food and Drug Administration ("FDA") and other federal, state and local authorities, as well as foreign regulatory authorities. The FDA regulates, among other things, the research, development, testing, manufacturing, approval, labeling, storage, recordkeeping, advertising, promotion and marketing, distribution, post approval monitoring and reporting and import and export of medical devices and combination drug/device products in the U.S. to assure the safety and effectiveness of medical products for their intended use. The Federal Trade Commission also regulates the advertising of our products. Further, we are subject to laws directed at preventing fraud and abuse, which subject our sales and marketing, training and other practices to government scrutiny.
U.S. Device Classification and Clearance
Unless an exemption applies, each new or significantly modified medical device we seek to commercially distribute in the U.S. will require either a premarket notification to the FDA requesting permission for commercial distribution under Section 510(k) of the Federal Food, Drug and Cosmetic Act ("FDC Act") also referred to as a 510(k) clearance, or approval from the FDA of a pre-market approval ("PMA") application.
Under the 510(k) process, applicants must demonstrate to the FDA that the device is as safe and effective as, or substantially equivalent to, a legally marketed device, the “predicate” device. Applicants must submit performance data to establish substantial equivalence. In some instances, data from human clinical trials must also be submitted in support of a 510(k) premarket notification. If so, these data must be collected in a manner that conforms to the applicable Investigational Device Exemption ("IDE") regulations. The FDA must issue a decision finding substantial equivalence before commercial distribution can occur. Changes to cleared devices that could not significantly affect the safety or effectiveness of the device can generally be made without additional 510(k) premarket notifications; otherwise, a new 510(k) is required.
In the PMA application process, the applicant must demonstrate to the satisfaction of the FDA that the device is safe and effective for its intended use. This approval process applies to most Class III devices, and generally requires clinical data to support the safety and effectiveness of the device, obtained in adherence with IDE requirements. The FDA will approve the PMA application if it finds that there is a reasonable assurance that the device is safe and effective for its intended purpose, and
that the proposed manufacturing is in compliance with the Quality System Regulation ("QSR"). For novel technologies, the FDA will generally seek input from an advisory panel of medical experts and seek their views on the safety, effectiveness and benefit-risk of the device. The PMA process is generally more detailed, lengthier and more expensive than the 510(k) process, though both the 510(k) clearance and PMA processes can be expensive, and lengthy, and require payment of significant user fees, unless an exemption is available.
Drug Regulation in the U.S.
In the U.S., IV solutions are considered pharmaceutical products and subject to the same extensive pre- and post-market regulations by the FDA, as indicated above.
The pre-market approval process is a time-intensive multi-phased process. When successfully completed an application may be submitted to the FDA that includes detailed information relating to the product’s chemistry, manufacture, controls and proposed labeling, among other things. This application process may be subject to substantial fees.
FDA approval is typically required before any new drug can be marketed. A New Drug Application ("NDA"), or an Abbreviated New Drug Application ("ANDA"), is typically required to be submitted to the FDA to obtain approval of pharmaceutical products.
Before approval, the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with current Good Manufacturing Practices ("cGMP") requirements and are adequate to assure consistent production of the product within required specifications. Additionally, the FDA may inspect one or more clinical trial sites to assure compliance with Good Clinical Practice, or GCP, requirements.
Post-Approval Regulation
After the FDA permits a drug or device to enter commercial distribution, numerous regulatory requirements continue to apply. The FDA actively monitors regulations through review and inspection of design and manufacturing practices, recordkeeping, reporting of adverse events, labeling and promotional practices. The FDA can ban certain medical devices; detain or seize adulterated or misbranded medical devices; order repair, replacement or refund of these devices; and require notification of health professionals and others with regard to medical devices that present unreasonable risks of substantial harm to the public health. The FDA can take action against a company that promotes "off-label" uses. The FDA may also enjoin and restrain a company for certain violations of the FDC Act and regulations pertaining to medical devices, or initiate action for criminal prosecution of such violations. Any adverse regulatory action, depending on its magnitude, may restrict a company from effectively marketing and selling its products, may limit a company's ability to obtain future premarket clearances or approvals, and could results in a substantial modification to the company's business practices and operations.
Manufacturing Regulation
We must also comply with FDA, International Organization for Standardization (“ISO”) and European Community ("EC") Directives and regulations such as the Council Directive 93/42/EEC (the "Medical Device Directive") and Regulation 2017/745 (the "Medical Device Regulation") governing medical device manufacturing practices. The FDA, state, foreign agencies and ISO require manufacturers to register and subject manufacturers to periodic FDA, state, foreign agencies and ISO inspections of their manufacturing facilities. We are a FDA and ISO registered medical device manufacturer, and must demonstrate that we and our contract manufacturers comply with the FDA’s QSR and cGMPs. The FDA and regulatory agencies outside the U.S. monitor compliance with these requirements through inspections of manufacturing facilities. If an inspector observes conditions that might be violative, the manufacturer must correct those conditions or explain them satisfactorily, or face potential regulatory action that might include physical removal of the product from the marketplace.
We believe that our products and procedures are in compliance with all applicable FDA and international regulations. There is no assurance, however, that other products we are developing or products that we may develop in the future will be cleared by the FDA and classified as Class II products, or that additional regulations restricting the sale of our present or proposed products will not be promulgated by the FDA. In addition, changes in FDA, ISO or other federal or state health, environmental or safety regulations or their applications could adversely affect our business.
To market our products in the EC, we must conform to additional requirements of the EC and demonstrate conformance to established quality standards and applicable directives. As a manufacturer that designs, manufactures and
markets its own devices, we must comply with the quality management standards of EN ISO 13485. Those quality standards are similar to the QSR regulations.
To market our products in the EC, manufacturers of medical devices must also conform to EC Directives and regulations such as the Medical Device Directive and the Medical Device Regulation and their applicable annexes. Those regulations assure that medical devices are both safe and effective and meet all applicable established standards prior to being marketed in the EC. Once a manufacturer and its devices are in conformance with the Medical Device Directive, the “CE” Mark may be affixed to its devices. The CE Mark gives devices unobstructed entry to all the member countries of the EC.
We have demonstrated conformity to the regulation of EN ISO 13485 and the Medical Device Directive and we affix the CE Mark to our device labeling for product sold in member countries of the EC.
We believe our products and systems are in compliance with all EC requirements. There can be no assurance, however, that other products we are developing or products that we may develop in the future will conform or that additional regulations restricting the sale of our present or proposed products will not be promulgated by the EC.
Other Healthcare Laws
We are subject to additional healthcare regulation and enforcement by the federal government and by authorities in the states and foreign jurisdictions in which we conduct our business. These laws include:
•the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs, such as the Medicare and Medicaid programs. A person or entity does not need to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it to have committed a violation;
•federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other federal third-party payors that are false or fraudulent. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act;
•the federal Civil Monetary Penalties Law, which prohibits, among other things, offering or transferring remuneration to a federal healthcare beneficiary that a person knows or should know is likely to influence the beneficiary’s decision to order or receive items or services reimbursable by the government from a particular provider or supplier;
•federal criminal laws that prohibit executing a scheme to defraud any federal healthcare benefit program or making false statements relating to healthcare matters;
•the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information;
•the federal Physician Payment Sunshine Act, which requires manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the Centers for Medicare & Medicaid Services (“CMS”) information related to payments or other “transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), certain health care professionals beginning in 2022, and teaching hospitals and ownership and investment interests held by the physicians described above and their immediate family members, and payments or other “transfers of value” to such physician owners; and
•analogous state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers; state laws that require pharmaceutical and device companies to comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require device manufacturers to track and report information related to payments and other “transfers of value” to physicians and other healthcare
providers or pricing, marketing expenditures and information; and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.
Violations of any of the laws described above include civil and criminal penalties, damages, fines, the curtailment or restructuring of an entity’s operations, the debarment, suspension or exclusion from federal and state healthcare programs and/or imprisonment.
Coverage and Reimbursement
Our profitability and operations are subject to changes in legislative, regulatory and reimbursement policies and decisions as well as changes in private payer reimbursement coverage and payment decisions and policies. Our products are purchased by hospitals, physicians and other healthcare providers that typically bill various third-party payors, such as
governmental programs, private insurance plans and managed care plans, for the healthcare services and products provided to their patients. The ability of our customers to obtain appropriate coverage and reimbursement for healthcare services and products from third-party payors is critical because it affects which products customer purchase and the prices they are willing to pay since our products are not separately reimbursed by any third-party payor. Third-party payors are increasingly reducing coverage and reimbursement for certain healthcare services and products and challenging prices charged for healthcare services and products.
Health Care Reform
In the U.S., there have been, and we expect that there will continue to be, a number of federal and state proposals to limit payments by governmental payors for medical devices, and the procedures in which medical devices are used. For example, in March 2010, comprehensive healthcare reform legislation was enacted through the passage of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education and Reconciliation Act (the “Affordable Care Act”), which, among other things, imposed, among other things, provided incentives to programs that increase the federal government’s comparative effectiveness research, and implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models.
Since its enactment, there have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, and we expect there will be additional challenges and amendments to the Affordable Care Act in the future. For example, the Tax Cuts and Jobs Act, among other things, removes penalties for not complying with the Affordable Care Act’s individual mandate to carry health insurance. On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas, or the Texas District Court Judge, ruled that the individual mandate is a critical and inseverable feature of the Affordable Care Act, and therefore, because it was repealed as part of the Tax Cuts and Jobs Act, the remaining provisions of the Affordable Care Act are invalid as well. On December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the district court’s decision that the individual mandate was unconstitutional but remanded the case back to the District Court to determine whether the remaining provisions of the Affordable Care Act are invalid as well. The U.S. Supreme Court is currently reviewing the case, although it remains unclear when or how the Supreme Court will rule. It is also unclear how these decisions, subsequent appeals, if any, and other efforts to challenge, repeal or replace the Affordable Care Act will impact the Affordable Care Act.Act or our business.
In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. On August 2, 2011, the Budget Control Act of 2011 was signed into law, which, among other things, included reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013, and will stay in effect through 20292030, with the exception of a temporary suspension from May 1, 2020 through March 31, 2021 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012, was signed into law, which, among other things, further reduced Medicare payments to several providers, including hospitals. We cannot predict whether future healthcare initiatives will be implemented at the federal or state level or internationally, or the effect any future legislation or regulation will have on us. Such legislation and regulation of healthcare costs may, however, result in decreased lower reimbursements by governmental and private payors to our customers, which may adversely affect our business, financial condition and results of operations.
Data Privacy and Security
Medical device companies may be subject to U.S. federal and state and foreign health information privacy, security and data breach notification laws, which may govern the collection, use, disclosure and protection of health-related and other personal information. In the U.S., HIPAA imposes privacy, security and breach reporting obligations with respect to individually identifiable health information upon “covered entities” (health plans, health care clearinghouses and certain health
care providers), and their respective business associates, individuals or entities that create, received, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity. HIPAA mandates the reporting of certain breaches of health information to HHS, affected individuals and if the breach is large enough, the media. Entities that are found to be in violation of HIPAA as the result of a breach of unsecured protected health information, a complaint about privacy practices or an audit by HHS, may be subject to significant civil, criminal and administrative fines and penalties and/or additional reporting and oversight obligations if required to enter into a resolution agreement and corrective action plan with HHS to settle allegations of HIPAA non-compliance. Even when HIPAA does not apply, according to the Federal Trade Commission or the FTC, failing to take appropriate steps to keep consumers’ personal information secure constitutes unfair acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act, or the FTCA, 15 U.S.C § 45(a). The FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities. Individually identifiable health information is considered sensitive data that
merits stronger safeguards. The FTC’s guidance for appropriately securing consumers’ personal information is similar to what is required by the HIPAA Security Rule.
In addition, certain state laws govern the privacy and security of health information in certain circumstances, some of which are more stringent than HIPAA and many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. Failure to comply with these laws, where applicable, can result in the imposition of significant civil and/or criminal penalties and private litigation. For example, California recently enacted legislation, the California Consumer Privacy Act (the “CCPA”), which went into effect January 1, 2020. The CCPA among other things, creates new data privacy obligations for covered companies and provides new privacyapplies to certain businesses that collect personal information from California residents, whether directly or indirectly. The CCPA gives California residents expanded rights to California residents, including the right toaccess and delete their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used by requiring covered companies to provide new disclosures to California consumers (as that term is broadly defined) and provide such consumers new ways to opt-out of theircertain sales of personal information. The CCPA also createsprovides for civil penalties for violations, as well as a private right of action with statutory damagesfor data breaches that is expected to increase data breach litigation. Although there are limited exemptions for health-related information, including PHI maintained by covered entities and business associates, the CCPA may increase our compliance costs and potential liability.
Further, the California Privacy Rights Act (“CPRA”) recently passed in California. The CPRA will impose additional data protection obligations on covered businesses, including additional consumer rights processes, limitations on data uses, new audit requirements for higher risk data, and opt outs for certain uses of sensitive data. It will also create a new California data breaches, thereby potentially increasing risks associatedprotection agency authorized to issue substantive regulations and could result in increased privacy and information security enforcement. The majority of the provisions will go into effect on January 1, 2023, and additional compliance investment and potential business process changes may be required. In addition, the CCPA has prompted a number of proposals for new federal and state privacy legislation that, if passed, could increase our potential liability, increase our compliance costs and adversely affect our business. If we fail to comply with a data breach. Although the law includes limited exceptions,applicable laws and regulations we could be subject to penalties or sanctions, including for “protectedcriminal penalties if we knowingly obtain or disclose individually identifiable health information” maintained byinformation from a covered entity in a manner that is not authorized or business associate, it may regulatepermitted by HIPAA or impact our processing of personal information depending on the context.applicable state laws.
In Europe, the General Data Protection Regulation, or GDPR, went into effect in May 2018 and imposes stringent data protection requirements for controllers and processors of personal data of persons within the EU. The GDPR applies to any company established in the EU as well as to those outside the EU if they collect and use personal data in connection with the offering of goods or services to individuals in the EU or the monitoring of their behavior. Companies that must comply with the GDPR face increased compliance obligations and risk, including more robust regulatory enforcement of data protection requirements and potential fines for noncompliance of up to €20 million or 4% of the annual global revenues of the noncompliant company, whichever is greater. Data privacy laws in the EU and the EEA are developing rapidly and, in July 2020, the Court of Justice of the European Union limited how organizations could lawfully transfer personal data from the EEA to the United States by invalidating the Privacy Shield. In addition, the United Kingdom leaving the EU could also lead to further legislative and regulatory changes. It remains unclear how the United Kingdom data protection laws or regulations will develop in the medium to longer term and how data transfer to the United Kingdom from the EU will be regulated, especially following the United Kingdom's departure from the EU on January 31, 2020 without a deal. However, the United Kingdom has transposed the GDPR into domestic law with the Data Protection Act 2018, which remains in force following the United Kingdom's departure from the EU.
Competition
Our industry is highly competitive. We believe our ability to effectively compete in this industry will be determined by our ability to provide a wide breadth of cost-effective, high quality products. We believe the added breadth of our HIS businessacquired product portfolio hasportfolios have increased our competitiveness as we can now provide a one-stop shop for customers and offer more flexible competitive pricing. We also believe theour acquired infusion pump product offering will also enable us to pull through a larger volume of higher margin infusion consumables. In addition,consumables, and we nowbelieve we have a wider customer reach through our unified distribution channels after the HIS acquisition.channels.
Infusion Consumables
We believe that our ability to effectively compete in the Infusion Consumables market depends upon our ability to differentiate our products based on continued innovation, safety, quality, convenience, reliability, patent protection, ease of use and the pricing of our products, in addition to access to distribution channels. We encounter significant competition in this market both from global, large, established medical device manufacturers and from smaller companies. We compete with products and systems marketed by Becton Dickinson ("BD"), Baxter International ("Baxter"), and B. Braun Medical, Inc. ("B. Braun"). There is no assurance that we will be able to compete successfully with these larger competitors. Our CSTD used for the preparation and safe handling of oncology drugs, compete with similar products from BD, and
B. Braun. We believe that our current CSTD product offering provides benefits over these competing systems in several areas related to safety, ease of use, quality, and cost; however, ongoing innovation in this market space will be required, and there is no assurance that these innovations will be able to sustain continued growth.required.
Infusion Systems
We face strong global competitors in the Infusion Systems market. In the United States ("U.S.") our competitors include BD, Baxter, and to a lesser extent B. Braun. Outside of the U.S., our primary competitors are BD, B. Braun, Fresenius Kabi, a division of Fresenius Group and a large number of local market pump manufacturers. These competitors benefit from greater financial, research and development and marketing resources than we have. The smart pump market in recent years has been troubled with security concerns, and product recalls. We believe our ability to effectively compete in this market segment will be determined by our ability to build our brand strength using the development of technological advancements aimed at increasing the quality, reliability and safety of our pumps while at the same time focusing on manufacturing efficiency and cost-effectiveness, which are operationally challenging with evolving product lines.
IV Solutions
We participate in the IV solutions market only in the U.S. and Canada. Our primary competitors in the U.S. include Baxter, and B. Braun. Demand for IV solutions is typically high and raw materials required to produce IV solutions are readily available. Our ability to compete will depend on our ability to maximize production, develop innovations in our product line, focus on cost-effectiveness and our ability to maintain the appropriate quality infrastructure.
Critical Care
Our primary competitor in Critical Care is Edwards Lifesciences.
Patents
We have U.S. and/or certain foreign patents relating to the technologies found in the Clave / MicroClave Connector, MicroClave Clear Connector, Neutron Connector, CLC2000 Connector, Tego Connector, ChemoClave Technologies, ChemoLock Technologies, Click Lock Technology, SwabCap, Custom Set Design and Manufacturing Methods, Diana Hazardous Drug Compounding System and ClearGuard. We have applications pending for additional U.S. and/or foreign patents on MicroClave Connector, Neutron Connector, Tego Connector, Y-Clave Connector with Integral Check Valve, ChemoClave Technologies, ChemoLock Technologies, Swabcaps, Diana Hazardous Drug Compounding System and ClearGuard.
With the acquisition of HIS, we acquired rights, title and interest to a substantial number of patents and patent applications and related provisionals, divisionals, continuations, continuations-in-part, reissues, reexaminations, extensions, and substitutions of any of the foregoing (“Patent Rights”), that were primarily used or held for use by Pfizer in the HIS business. There is however, no single patent or group of patents that we acquired that we believe is material in relation to our business as a whole.
Our success may depend in part on our ability to obtain patent protection for our products and to operate without infringing the proprietary rights of third parties. While we have obtained certain patents and applied for additional U.S. and foreign patents covering certain of our products, there is no assurance that any additional patents will be issued, that the scope of any patent protection will prevent competitors from introducing similar devices or that any of our patents will be held valid if subsequently challenged. Our patents are important in preventing others from introducing competing products that are as effective as our products. The loss of patent protection on the Clave/MicroClave, Neutron, Tego Connector, Swabcap, Clearguard, ChemoClave and ChemoLock technologies, could adversely affect our ability to exclude other manufacturers from producing effective competitive products and could have an adverse impact on our financial results.
The fact that a patent is issued to us does not eliminate the possibility that patents owned by others may contain claims that are infringed by our products.
There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry. Litigation, which would result in substantial cost to us and in diversion of our resources, may be necessary to defend us against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. Adverse determinations in such litigation could subject us to significant liabilities to third parties or could require us to seek licenses from third parties and could prevent us from manufacturing, selling or using our products, any of which could have a material adverse effect on our business. In addition, we have initiated litigation, and may continue to initiate litigation in
the future, to enforce our intellectual property rights against those we believe to be infringing on our patents. Such litigation could result in substantial cost and diversion of resources.
Seasonality/Quarterly Results
There are no significant seasonal aspects to our business. We can experience fluctuations in net sales as a result of variations in the ordering patterns of our largest customers, which may be driven more by production scheduling and their inventory levels, and less by seasonality. Our expenses often do not fluctuate in the same manner as net sales, which may cause fluctuations in operating income that are disproportionate to fluctuations in our revenue.
Research and Development
Our research and development costs include personnel costs and expenses related to the development of new products. Research and development costs were $48.6$42.9 million in 2019, $52.92020, $48.6 million in 20182019 and $51.3$52.9 million in 2017.2018.
Employees
Human Capital Management
We believe our employees are the foundation of our business and are key to executing our strategy globally. The knowledge, skills and abilities of our diverse workforce is paramount in upholding our mission of connecting patients and caregivers through safe, life-saving, life enhancing IV therapy products, systems, and services.
We believe the health and well-being of our employees are cornerstones for our successful operations. Whether you are a machine operator in one of our four manufacturing locations, a material handler in a distribution center, a service technician supporting our products in the field, or a clinician training the use of our products in a hospital, we strive to prioritize the safety of our team members. This includes designing our work environments with a safety first mindset, providing personal protective equipment, and safety training beginning day one.
Our ability to attract and retain talented individuals globally begins with our commitment to offer a career that gives people a unique opportunity to work in an exhilarating, fast-paced, inspiring, and collaborative environment where what they do makes a difference. We offer competitive salaries and participation to all employees in incentive plans based on individual and company performance.
We believe the development of our workforce is critical for personal growth and the success of our company as well. We reinforce this with challenging, yet rewarding assignments, continued learning and training programs through our global iLearning platform, and support continued education globally through tuition reimbursement programs. Our team believes in diversity, collaboration, and removing barriers to communication—all to create an environment where innovation and creativity can flourish. This is principal for us in attracting, developing, retaining and rewarding talent on a global scale.
Finally, our leadership team, with its broad, and deep category knowledge and averaging approximately 17 years of experience in IV therapy has the necessary experience to effectively lead the execution of our strategy.
At December 31, 2019,2020, we had approximately 8,000 employees.7,900 employees located in over 20 countries.
Geographic Data
Information regarding financial data by geography is set forth in Part II, Item 8. "Financial Statements and Supplementary Data" of this Form 10-K in Note 4 and 13 to the Consolidated Financial Statements, and is incorporated herein by reference.
COVID-19 Pandemic
In late 2019, a novel strain of coronavirus ("COVID-19") was first reported in Wuhan, China and on March 11, 2020, the World Health Organization characterized COVID-19 as a global pandemic. The COVID-19 pandemic has spread globally and has led governments and other authorities around the world to impose measures intended to control its spread, including restrictions on freedom of movement and business operations such as travel restrictions, border closings, business closures, quarantines and shelter-in-place orders. Additionally, the COVID-19 pandemic and the measures taken to limit its spread have negatively impacted the economy across many industries. As such, the COVID-19 pandemic may pose significant risks to our business. We operate globally and the COVID-19 pandemic and its adverse effects have impacted most of the locations where we, our customers and our suppliers conduct business. We expect COVID-19 will continue to have an impact on our financial
condition and results of operations in the near term and may have a material impact on our financial condition, liquidity, and results of operations in future periods. See “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for discussion regarding the impact of the COVID-19 pandemic on our financial results. Also, see “Part I. Item 1A. Risk Factors” for discussion of the risks and uncertainties associated with the COVID-19 pandemic.
Available Information
Our website address is http://www.icumed.com. We make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to those reports free of charge on our website as soon as reasonably practicable after filing them with the Securities and Exchange Commission ("SEC"). We also have our code of ethics posted on our website (http://www.icumed.com). The information on our website is not incorporated into this Annual Report.
The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC on its website (http://www.sec.gov).
ITEM 1A. RISK FACTORS
In evaluating an investment in our common stock, investors should consider carefully, among other things, the following risk factors, as well as the other information contained in this Annual Report and our other reports and registration statements filed with the SEC. Any of the following risks, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations or financial condition.
Risks RelatedRisk Factors Summary
Our business is subject to a number of risks and uncertainties, detail below. These risks include, among others, the following:
•The COVID-19 pandemic has had a material impact on the global economy and has disrupted our Strategic Transactions
We have mayoperations and could continue to acquire businesses, form strategic alliances or make investments in businesses or technologies thathave an adverse impact on our employees, suppliers and customers, which could adversely and materially impact our business, financial condition and our operating results and such transactions could resultof operations.
•We operate in unforeseen operating difficulties, expenditures and require significant management resources, charges or write-downs.
We have and may continue to seek to supplement our internal growth through acquisitions of complementary businesses, technologies, services, or products, as well as investments and strategic alliances. We compete for those opportunities with others including our competitors, some of which have greater financial or operational resources than we do. We may not be able to identify suitable acquisition candidates or strategic partners, we may have inadequate access to information or insufficient time to complete due diligence, and we may not be able to complete such transactions on favorable terms, if at all. Such transactions are inherently risky, and the integration of any newly-acquired business requires significant effort and management attention that otherwise would be available for ongoing development of our other businesses.
The success of any acquisition, investment or alliance may be affected by a number of factors, includinghighly competitive industry, our ability to properly assesscompete effectively to maintain or gain market share depends upon numerous factors, such as product innovation, the quality, convenience and value the potential business opportunity or to successfully integrate any business we may acquire into our existing business. Difficulties in assimilating acquired businesses include a number of special risks in addition to the difficulty of integrating cultures and operations and the diversion of management’s attention, including adverse short-term effects on our reported operating results, dependence on retention, hiring and training of key personnel, risks associated with unanticipated
problems or legal liabilities and amortization of acquired intangible assets, some or all of which could materially and adversely affect our operations and financial performance. Integration of an acquired business also may disrupt our ongoing operations and require management resources that we would otherwise focus on developing our existing business. For example, we acquired the HIS business in February 2017, which includes IV pumps, solutions, and devices in order to create a leading pure-play infusion therapy company, but we continue to make significant integration efforts in order to achieve the anticipated benefits of the transaction. In addition, in connection with the HIS business acquisition, we also entered into two manufacturing and supply agreements (the “MSAs”) with Pfizer under which, (i) Pfizer manufactures and supplies us with certain agreed upon products for an initial five-year term with a one-time two-year option to extend and (ii) we manufacture and supply Pfizer certain agreed upon products for a term of five or ten years depending on the product, with a one-time two-year option to extend. Our facility in Austin, Texas manufactures and supplies these products to Pfizer under the MSAs, which, for certain products, could expire as early as 2022. The expiration of these MSAs may adversely impact our production capacity utilizationreliability of our Austin facility, which could result in unforeseen operating difficultiesproducts, access to distribution channels and may impact our profitability.
In addition, any acquisition could result in the incurrence of debt, contingent liabilities or future write-offs of intangible assets or goodwill, any of which could have a material adverse effect on our financial condition, results of operationspatent protection and cash flows. We may also experience losses related to investments in other companies, which could have an adverse effect on our results of operations and financial condition. As such, there can be no assurance that any past or future transactions will be successful.
If we are unable to effectively manage our internal growth or growth through acquisitions of companies, assets or products, our financial performance may be adversely affected.
We intend to continue to expand our marketing and distribution capability, which may include external expansion through acquisitions both in the U.S. and foreign markets. We may also consider expanding our product offerings through acquisitions of companies or product lines.pricing. We can providegive no assurance that we will be able to identify, acquire, develop or profitably manage additional companies or operations or successfully integrate such companies or operations into our existing operations without substantial costs, delays or other problems.
We have additional production facilities outside the U.S. to reduce labor costs. The expansionsuccessful in implementing any of our marketing, distributioncompetitive strategies.
•We are dependent on certain key suppliers; any supply interruptions could materially harm our business, financial condition and product offerings both internallyresults of operations.
•Damage to our manufacturing facilities or any other supply chain restrictions could materially impact our business, financial condition and through acquisitionsresults of operations.
•Changes in or by contractfailure to comply with certain federal, state, foreign, legal and health regulations may place substantial burdens onharm our management resourcesbusiness and financial controls. Decentralizationcondition.
•We depend on the leadership of assemblyour executive management team and manufacturingother key personnel; the loss of one or more of our key employees could place further burdens on management to manage those operations and maintain efficiencies and quality control.disrupt our business.
The increasing burdens on our management resources and financial controls resulting from internal growth and acquisitions could adversely affect our operating results. Failure to manage this growth could adverse effect our operations through higher manufacturing costs, declining product quality, slower responses to competitive challenges, among other things. A failure in any one of these areas could make it difficult for us to meet market expectations for our products, and could damage our reputation and our financial performance•Our stock price may be adversely affected.volatile and you may be unable to sell your shares at or above your purchase price.
Business and Operating Risks
The COVID-19 pandemic has disrupted how we, our suppliers and our customers operate and the duration and extent to which this will impact our business, future results of operations, liquidity and overall financial performance remains uncertain.
The COVID-19 pandemic has created significant volatility, uncertainty, and economic disruption. The global spread of COVID-19 led governments and other authorities around the world to impose measures intended to control its spread, including restrictions on freedom of movement and business operations such as travel restrictions, border closings, business closures,
quarantines and shelter-in-place orders. The COVID-19 pandemic and the measures taken to limit its spread have negatively impacted the global economy across many industries. As such, the COVID-19 pandemic may continue to pose significant risks to our business. We operate globally and the COVID-19 pandemic and its adverse effects have impacted most of the locations where we, our customers and our suppliers conduct business and, as a result, we have experienced some disruption to our operations, most notably due to reduced demand for our disposable product portfolio.
As a result of the COVID-19 pandemic, our non-essential offices and facilities, including our corporate headquarters remain closed to non-essential employees. Similarly, many hospitals are restricting access to their facilities to essential personnel, which may negatively affect demand for our products by limiting the ability of our sales personnel to negotiate new and maintain existing contracts with customers. We may also experience significant reductions in demand for certain products as our health care customers re-prioritize the treatment of patients, delay elective procedures and shift resources and operations to fight COVID-19 and the complications it causes. For example, during 2020, we have experienced lower demand from hospital customers for our Infusion Consumables non-dedicated sets and lower demand for our Infusion Systems dedicated sets. Additionally, the COVID-19 pandemic could potentially adversely affect our distributors if they are not able to maintain their historical levels of sales.
Our manufacturing, distribution and pump service facilities are operating under our business continuity plan due to the need for our critical healthcare products, however, we have taken certain precautionary measures including the following to maximize the safety of our employees and to mitigate disruption to our operations:
•implemented physical distancing measures;
•enhanced hygiene protocols and increased frequency of cleaning procedures;
•acquired additional personal protective equipment;
•developed contingency plans and protocols to assess employee illness;
•helped employees with childcare issues due to school and daycare closures;
•implemented COVID-19 temperature screening for employees entering our manufacturing and distribution facilities; and
•initiated a visitor pre-entry questionnaire to limit potential exposure in our facilities.
While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and we may elect to take additional measures as the information available to us continues to develop. These actions, and any future actions we may take in response to the COVID-19 pandemic, could negatively impact our business, financial condition and results of operations.
The duration and extent of the impact on our business from the COVID-19 pandemic depends on future developments that cannot be fully predicted at this time, as such, the impact of the COVID-19 pandemic on our future results of operations and overall financial performance remain uncertain and cannot as yet be quantified. Additional factors that have contributed or may contribute to the adverse impact of the COVID-19 pandemic on our business, results of operations, financial condition and liquidity include, without limitation, the following:
•lost revenue or additional costs associated with either disruptions at our production and distribution facilities or interruptions in our supply chain, including shortages of raw materials or components for our products;
•fluctuations in demand from customers as a result of an increase in COVID-19 patient admissions in hospitals offset by the decline in non-COVID-19 patient admissions;
•healthcare customers that defer the more profitable elective procedures may experience financial difficulties and may be unable to pay within payment terms for the products they purchased;
•potential lower demand in future periods due to over-purchasing of our products due to the COVID-19 pandemic;
•reduced revenue due to delays in implementation of our infusion systems and oncology products at hospital locations due to restricted access;
•higher operating costs related to additional compensation paid to our manufacturing and distribution facility workers;
•volatility in cash flow, revenue and income due to foreign currency fluctuations and volatility;
•lower income due to a delay in cost savings projects as a result of the travel and social distancing requirements of COVID-19; and
•lower interest income on cash balances due to reductions in interest rates along with higher interest expense from borrowing under our Credit Facility, if necessary, to maintain adequate liquidity.
To the extent the COVID-19 pandemic and related containment measures continue to adversely affect regional, national and global economic conditions and financial markets, as well as the business, results of operations, financial conditions and liquidity of us, our suppliers and our customers, it may also have the effect of heightening many of the risks
described in this ‘‘Risk Factors’’ section and elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2020, including the risks resulting from our dependency on key personnel; impairment of our supply chain or manufacturing facilities; and the impact of negative economic conditions. In addition, in light of the COVID-19 pandemic and the measures taken to limit its spread, our historical information regarding our business, results of operations, financial condition or liquidity may not be representative of the future results of operations, financial condition, liquidity or other financial or operating results of us or our business.
We are dependent on single and limited source third-party suppliers, which subjects our business and results of operations to risks of supplier business interruptions, and a loss or degradation in performance in our suppliers could have an adverse effect on our business and financial condition.
Although we have risk mitigation plans in place with key suppliers, we have materials (such as resins) that are critical to our ability to manufacture our products, the supply of which is currently from a sole supplier. We cannot be certain that our current suppliers will continue to provide us with the quantities of materials that we require or satisfy our anticipated specifications and quality requirements on a timely basis or at all. Any supply interruption in limited or sole sourced raw materials could materially harm our ability to manufacture our products until a new source of supply, if any, could be identified and qualified. Although we believe there are other suppliers of these raw materials, we may be unable to find a sufficient alternative supply channel in a reasonable time or on commercially reasonable terms. Furthermore, our contract manufacturers could require us to move to another one of their production facilities. An interruption in our commercial operations could occur if we encounter delays or difficulties in securing these components, materials or services and if we cannot then obtain an acceptable substitute. Additionally, we are subject to FDA regulations, which could further delay our ability to obtain a qualified alternative supplier. Any performance failure on the part of our suppliers could delay the development and manufacture of our products, which could have a material adverse effect on our business. Due to the highly competitive nature of the healthcare industry and the cost controls of our customers and third party payors, we may be unable to pass along cost increases for any key components or raw materials increases through higher prices to our customers. If the cost of key
components or raw materials increases and we are unable to fully to recover those increased costs through price increases or offset these increases through other cost reductions, we could experience an adverse effect on our financial condition.
Damage to any of our manufacturing facilities or supply chain network could impair our ability to produce our products.
A severe weather event, other natural or man-made disaster, or any other significant disruption, such as outbreak of disease (including the recent coronavirus outbreak)COVID-19 pandemic), affecting our manufacturing facilities or our suppliers and logistics partners could materially and adversely impact our business, financial condition and results of operations. CertainThe COVID-19 pandemic has caused us to temporarily shut down some of our key product components are manufactured in China and the extentfacilities, to whichdate these shut downs have not had a material impact on our ability to produce products is affected by the coronavirus will largely depend on future developments, which are highly uncertain and cannot be accurately predicted.business.
We have a single manufacturing facility for our Clave products located in Salt Lake City, Utah. Our Salt Lake City facility also produces other components on which our manufacturing operations in Mexico and Costa Rica rely. Our IV Solutions are manufactured at our manufacturing facility in Austin, Texas and by a third party manufacturer, Pfizer, in Rocky Mount, North Carolina or our suppliers’ facilities. If our facilities are inoperable, for even a short period of time, it could adversely affect our ability to manufacture and distribute our products in a timely or cost-effective manner, and our ability to make product sales. Furthermore, our facilities and the equipment we use to perform our manufacturing processes could be unavailable or costly and time-consuming to repair or replace.
Damage to any of our facilities could render us unable to manufacture our products or require us to reduce the output of products at the damaged facility. Two of our manufacturing facilities are located near known earthquake fault zones and are vulnerable to damage from earthquakes. We carry insurance for damage to our property and disruption of our business, but this insurance may not cover all of the risks associated with damage or disruption to our facilities and business, may not provide coverage in amounts sufficient to cover our potential losses and may not continue to be available to us on acceptable terms, if at all.
Expansion of our manufacturing facilities may result in inefficiencies that could have an adverse effect on our operations and financial results.
In the fourth quarter of 2006, we experienced significant production inefficiencies following a large increase in production volume in Mexico and the transfer of San Clemente production to Salt Lake City. In 2007, we expanded our Mexico facility and, anticipating further increases in volume at that facility, increased the workforce. An additional expansion of our Mexico facility was completed in January 2011. Turnover among new employees was unusually high in Mexico, and the additional time spent in classroom training and on the job training could create production inefficiencies in Mexico in the
future. The addition of new products will require additional molding in Salt Lake City and manual assembly work in Mexico. Expansions of our production capacity will require significant management attention to avoid inefficiencies of the type experienced in 2006, and the effect of any inefficiencies can be particularly expensive in Salt Lake City because of the high fixed costs in this highly automated facility.
We may be unable to realize any benefit from our cost reduction and restructuring efforts and our profitability may be hurt or our business otherwise might be adversely affected.
We have engaged in restructuring activities in the past and may engage in other restructuring activities in the future. These types of cost reduction and restructuring activities are complex. If we do not successfully manage our current restructuring activities, or any other restructuring activities that we may take in the future, any expected efficiencies and benefits might be delayed or not realized, and our operations and business could be disrupted. In addition, the costs associated with implementing restructuring activities might exceed expectations, which could result in additional future charges.
We are subject to risks associated with debt financing.
The credit agreement governing our Credit Facility contains, among other things, certain customary restrictive covenants that limit our ability to incur additional indebtedness and liens, merge with other companies or consummate certain changes of control, acquire other companies, make certain investments, pay dividends, enter into certain transactions with affiliates, and transfer or dispose of assets as well as financial covenants requiring us to maintain a specified consolidated total leverage ratio and a specified consolidated fixed charge coverage ratio. While we have not previously breached and are not currently in breach of these or any other covenants contained in our credit agreement, there can be no guarantee that we will not breach these covenants in the future.
Additionally, our ability to comply with these covenants may be affected by events beyond our control, including the COVID-19 pandemic. These covenants could also limit our ability to seek capital through the incurrence of new indebtedness or, if we are unable to meet our obligations, require us to repay any outstanding amounts with sources of capital we may otherwise use to fund our business. As such, these restrictive covenants contained in our Credit Facility may restrict our ability to pursue our business strategies.
Market and Other External Risks
If we are unable to compete successfully with our competitors, we may be unable to maintain market share, in which case our sales may not grow and our profitability may be adversely affected.
The consumable medical device segment of the health care industry and in particular the infusion products market is intensely competitive and is experiencing both horizontal and vertical consolidation. We believe that our ability to compete depends upon numerous factors including, among other things, continued product innovation, the quality, convenience and reliability of our products, access to distribution channels, patent protection and pricing. The ability to compete effectively depends on our ability to differentiate our products based on these factors, as well as our ability to perceive and respond to changing customer needs. We encounter significant competition in our markets both from large established medical device manufacturers and from smaller companies. Many of these companies have introduced competitive products with features not
provided by the conventional products and methods they are intended to replace. Most of our current and prospective competitors have economic and other resources substantially greater than ours and are well established in the healthcare industry. Several large, established competitors offer broad product lines and have been successful in obtaining full-line contracts with a significant number of hospitals and group purchasing organizations to supply all of their infusion product requirements. Due to the highly competitive nature of the group purchasing organizations (“GPOs”) or integrated delivery networks (“IDNs”) contracting processes, we may not be able to obtain or maintain contract positions with major GPOs and IDNs across our products portfolio. Furthermore, the increasing leverage of organizing buy-inorganized buying groups may reduce market prices for our products thereby affecting our profitability. While having a contract with a GPO or IDN can facilitate sales to members of that GPO or IDN, it is no assurance that the sales volume of those products will be maintained. The members of such groups may choose to purchase from our competitors due to the price or quality offered by such competitors, which could result in a decline in our sales and profitability. In addition, distributors of our products may begin to negotiate terms of sale more aggressively in an effort to increase their profitability. Failure to negotiate distribution arrangements having advantageous pricing or other terms of sale could adversely affect our results of operations and financial condition. In addition, if we fail to implement distribution arrangements successfully, it could cause us to lose market share to our competitors. Moreover, there is no assurance that our competitors will not substantially increase resources devoted to the development, manufacture and
marketing of products competitive with our products. The successful implementation of such a strategy by one or more of our competitors could materially and adversely affect us.
If we do not successfully develop and commercialize enhanced or new products that remain competitive with new products or alternative technologies developed by others, we could lose revenue opportunities and customers, and our ability to grow our business would be impaired.
The medical device industry is characterized by rapid product development and technological advances, which places our products at risk of obsolescence. Our long-term success and profit margins depend upon the development and successful commercialization of new products, new or improved technologies and additional applications of our technology. The research and development process is time-consuming and costly, and may not result in products or applications that we can successfully commercialize. We can give no assurance that any such new products will be successful or that they will be accepted in the marketplace.
Product development requires substantial investment that may be difficult for us to fund and may be challenging to
recover through commercial product sales.
Innovations generally require a substantial investment in product development before we can determine their commercial viability, and we may not have the financial resources necessary to fund these innovations. Even if we succeed in creating new product candidates from these innovations, those innovations still may fail to result in commercially successful products. The success of new product offerings for device products depends on several factors, including our ability to anticipate and meet customers' or patients’ needs, obtain timely regulatory approvals or clearances, and manufacture quality products in an economic and timely manner. Even if we are able to develop successfullysuccessful new products or enhancements, we may not produce sales exceeding the costs of development, and we may not avoid infringing the proprietary rights of third parties. Further, those new or enhanced products may be quickly rendered obsolete by changing customer preferences or the introduction by competitors of products embodying new technologies or features. Moreover, innovations may not be successful due to difficulties encountered in achieving positive clinical outcomes, meeting safety, efficacy or other regulatory requirements of government agencies, or obtaining favorable pricing on those products. Finally, innovations may not be accepted quickly in the marketplace because of, among other things, entrenched patterns of clinical practice and uncertainty over third-party reimbursement.
If demand for our products were to decline significantly, we might not be able to recover the cost of our expensive automated molding and assembly equipment and tooling, which could have an adverse effect on our results of operations.
Our production tooling is relatively expensive, with each “module,” which consists of an automated assembly machine and the molds and molding machines that mold the components, costing several million dollars. Most of the modules are for the Clave product family. If the demand for these products changes significantly, which could happen with the loss of a customer or a change in product mix, it may be necessary for us to recognize an impairment charge for the value of the production tooling because its cost may not be recovered through production of saleable product, which could adversely affect our financial condition.
We have been and will be ordering production molds and equipment for our new products. We expect to order semi-automated or fully automated assembly machines for other new Infusion Consumables products in 2020.2021. We also are adding additional IV Solutions capacity atas we transition certain product lines to our IV SolutionsAustin manufacturing facility.facility from Rocky Mount. If we do not achieve significant sales of these new
new/transitioned products, it might be necessary for us to recognize an impairment charge for the value of the production tooling because its costs may not be recovered through production of saleable product, which could adversely affect our financial condition.
Our operating results may be adversely affected by unfavorable economic conditions that affect our customers’ ability to buy our products and could affect our relationships with our suppliers.
Disruptions in financial markets worldwide and other worldwide macro-economic challenges may cause our customers and suppliers to experience cash flow concerns. If job losses and the resulting loss of health insurance and personal savings cause individuals to forgo or postpone treatment, the resulting decreased hospital use could affect the demand for our products. As a result, customers may modify, delay or cancel plans to purchase our products and suppliers may increase their prices, reduce their output or change terms of sales. Additionally, if customers’ or suppliers’ operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain credit, customers may not be able to pay, or may delay payment of, accounts receivable owed to us and suppliers may impose different payment terms. Any inability of current and/or potential customers to pay us for our products or any demands by suppliers for different payment terms may adversely affect our earnings and cash flow.
Continuing pressures to reduce healthcare costs and inadequate coverage and reimbursement may adversely affect our prices. If we cannot reduce manufacturing costs of existing and new products, our sales may not grow and our profitability may decline.
Increasing awareness of healthcare costs, public interest in healthcare reform and continuing pressure from Medicare, Medicaid, group purchasing organizations and other payers,payors, both domestic and international, to reduce costs in the healthcare industry, as well as increasing competition from other protective products, could make it more difficult for us to sell our products at current prices. Our products are purchased by hospitals, physicians and other healthcare providers that typically bill various third-party payors, such as governmental programs, private insurance plans and managed care plans, for the healthcare services and products provided to their patients. The ability of our customers to obtain appropriate coverage and reimbursement for healthcare services and products from third-party payors is critical because it affects which products customers purchase and the prices they are willing to pay. Because there is often no separate reimbursement for supplies used in surgical procedures, the additional cost associated with the use of our products can affect the profit margin of the hospital or surgery center where the
procedure is performed. Some of our target customers may be unwilling to adopt our products in light of the additional associated cost. Further, any decline in the amount payors are willing to reimburse our customers could make it difficult for existing customers to continue using or to adopt our products and could create additional pricing pressure for us. If we are forced to lower the price we charge for our products, our gross margins will decrease, which could have a material adverse effect on our business, financial condition and results of operations and impair our ability to grow our business.
Third-party payors whether foreign or domestic, or governmental or commercial, are developing increasingly
sophisticated methods of controlling healthcare costs. In addition, no uniform policy of coverage and reimbursement
for procedures using our products exists among third-party payors. Therefore, coverage and reimbursement for procedures using our products can differ significantly from payor to payor. Payors continually review new and existing technologies for possible coverage and can, without notice, deny or reverse coverage for new or existing products and procedures. There can be no assurance that third-party payor policies will provide coverage for procedures in which our products are used. If we are not successful in reversing existing non-coverage policies, or if third-party payors that currently cover or reimburse our products and related procedures reverse or limit their coverage in the future, or if other third-party payors issue similar policies, this could have a material adverse effect on our business.
Further, we believe that future coverage and reimbursement may be subject to increased restrictions, such as
additional prior authorization requirements, both in the U.S. and in international markets.requirements. Third-party coverage and reimbursement for procedures using our products or any of our products in development for which we may receive regulatory approval may not be available or adequate, in either the U.S. or international markets, which could have an adverse effect on our business, financial condition and results of operations and impair our ability to grow our business.
Implementation of further legislative or administrative reforms in the reimbursement system in the U.S. and abroad or adverse decisions relating to coverage or reimbursement could have an impact on acceptance of and demand for our products and the prices that our customers are willing to pay for them. In the event that the market will not accept current prices for our products, our sales and profits could be adversely affected. We believe that our ability to increase our market share and operate profitably in the long term may depend in part on our ability to reduce manufacturing costs on a per unit basis through high volume production using highly automated molding and assembly systems. If we are unable to reduce unit manufacturing costs, we may be unable to increase our market share for Claveour products or may lose market share to alternative products, including competitors’ products. Similarly, if we cannot reduce unit manufacturing costs of new products as production volumes increase,
we may not be able to sell new products profitably or gain any meaningful market share. Any of these results would adversely affect our future results of operations.
We are subject to foreign, federal, and state data privacy and security laws, and failureFailure to protect our information systems against security breaches, service interruptions, or misappropriation of data could disrupt operations, compromise sensitive data, and expose us to liability, possibly causing our business and reputation to suffer.
We depend heavily on information technology infrastructure and systems to achieve our business objectives. Any incident that impairs or compromises this infrastructure, including security breaches, malicious attacks or more general service interruptions, could impede our ability to process orders, manufacture and ship product in a timely manner, protect sensitive data and otherwise carry on business in the normal course. Any such events could result in the loss of customers, revenue, or both, and could require us to incur significant expense to remediate, including legal claims or proceedings. Further, as cyber security related incidents continue to evolve, and regulatory focus on these issues continues to expand, additional investment in protective measures, and vulnerability remediation, may be required.
We are also subject to various federal, state and foreign laws that protect the confidentiality of certain patient health information, including patient medical records, and restrict the use and disclosure of patient health information by healthcare providers, such as the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”), in the U.S. HIPAA established uniform standards governing the conduct of certain electronic healthcare transactions and requires certain entities, called covered entities, to comply with standards that include the privacy and security of protected health information ("PHI"). HIPAA also requires business associates, such as independent contractors or agents of covered entities that have access to PHI in connection with providing a service to or on behalf of a covered entity, of covered entities to enter into business associate agreements with the covered entity and to safeguard the covered entity’s PHI against improper use and disclosure.
The HIPAA privacy regulations cover the use and disclosure of PHI by covered entities as well as business associates, which are defined to include subcontractors that create, receive, maintain, or transmit PHI on behalf of a business associate. They also set forth certain rights that an individual has with respect to his or her PHI maintained by a covered entity, including the right to access or amend certain records containing PHI, or to request restrictions on the use or disclosure of PHI. The security regulations establish requirements for safeguarding the confidentiality, integrity, and availability of PHI that is electronically transmitted or electronically stored. HITECH, among other things, established certain health information security breach notification requirements. A covered entity must notify any individual whose PHI is breached according to the specifications set forth in the breach notification rule. The HIPAA privacy and security regulations establish a uniform federal “floor” and do not supersede state laws that are more stringent or provide individuals with greater rights with respect to the privacy or security of, and access to, their records containing PHI or insofar as such state laws apply to personal information that is broader in scope than PHI as defined under HIPAA. Similarly, we may be subject to additional federal privacy laws such as Section 5 of the Federal Trade Commission Act.
HIPAA requires the notification of patients, and other compliance actions, in the event of a breach of unsecured PHI. If notification to patients of a breach is required, such notification must be provided without unreasonable delay and in no event later than 60 calendar days after discovery of the breach. In addition, if the PHI of 500 or more individuals is improperly used or disclosed, we would be required to report the improper use or disclosure to the U.S. Department of Health and Human Services ("HHS") which would post the violation on its website, and to the media.
HIPAA authorizes state attorneys general to file suit on behalf of their residents for violations. Courts are able to award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to file suit against us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care cases in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI. In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA covered entities, and their business associates for compliance with the HIPAA privacy and security standards. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the civil monetary penalty paid by the violator.
In Europe the General Data Protection Regulation ("GDPR") became applicable on May 25, 2018, replacing the prior data protection laws issued by each EU member state based on the Directive 95/46/EC. Unlike the Directive (which needed to be transposed at national level), the GDPR text is directly applicable in each EU member state, resulting in a more uniform application of data privacy laws across the EU. The GDPR imposes onerous accountability obligations requiring data controllers and processors to maintain a record of their data processing and policies. It requires data controllers to be transparent and disclose to data subjects (in a concise, intelligible and easily accessible form) how their personal information is
to be used, imposes limitations on retention of information, increases requirements pertaining to pseudonymized (i.e., key-coded) data, introduces mandatory data breach notification requirements and sets higher standards for data controllers to demonstrate that they have obtained valid consent for certain data processing activities. Fines for non-compliance with the GDPR are significant-the greater of EUR 20 million or 4% of global turnover. The GDPR provides that EU member states may introduce further conditions, including limitations, to the processing of genetic, biometric or health data, which could limit our ability to collect, use and share personal data, or could cause our compliance costs to increase, ultimately having an adverse impact on our business. We are subject to the supervision of local data protection authorities in those jurisdictions where we are established or otherwise subject to applicable law. In addition, the United Kingdom leaving the EU could also lead to further legislative and regulatory changes. It remains unclear how the United Kingdom data protection laws or regulations will develop in the medium to longer term and how data transfer to the United Kingdom from the EU will be regulated, especially following the United Kingdom's departure from the EU on January 31, 2020 without a deal. However, the United Kingdom has transposed the GDPR into domestic law with the Data Protection Act 2018, which remains in force following the United Kingdom's departure from the EU.
The California legislature passed the California Consumer Privacy Act of 2018 (the "CCPA") on June 28, 2018, which went into effect on January 1, 2020. The CCPA applies to certain businesses that collect personal information from California residents, whether directly or indirectly. The CCPA establishes several consumer rights including a right to know what personal information is being collected about them and whether and to whom it is sold, a right to access their personal information and have it deleted, a right to opt out of the sale of their personal information, and a right to equal service and price regardless of exercise of these rights. Violation of the CCPA can result in civil penalties through enforcement by the California Attorney General (effective July 1, 2020) or a private right of action by consumers following a data breach (effective January 1, 2020). The law includes specific exemptions for entities and information covered by HIPAA or the Confidentiality of Medical Information Act (CMIA). However, not all personal information maintained by entities covered by HIPAA or CMIA is exempt from the CCPA. The U.S. Congress may also pass a law to pre-empt all or part of the CCPA. As passed, the effects of the CCPA potentially are significant, however, and may require us to modify our data collection or processing practices and policies and to incur substantial costs and expenses in an effort to comply. Implementing regulations from the Attorney General that may clarify the CCPA are not due until July 1, 2020 and additional amendments to the CCPA may be signed into law before then.
Our ability to execute our business strategy depends, in part, on the continued and uninterrupted performance of our information technology systems, which support our operations. Despite the implementation of security measures, our internal computer systems, andthose of third parties on which we rely, are vulnerable to damage from, among others, computer viruses, malware, natural disasters, terrorism, war, telecommunication and electrical failures, cyber-attacks or cyber-intrusions over the Internet, attachments to emails, persons inside our organization, or persons with access to systems inside our organization or similar disruptive problems. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not foreseeable or recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, public perception of the effectiveness of our security measures and brand could be harmed and our results of operations could be negatively affected. Data security breaches and other incidents may also result from non-technical means (e.g., actions by employees or contractors).Any such security breach may compromise information stored on our networks and may result in significant data losses or theft of personally identifiable information. Any compromise of our security could result in a violation of applicable security, privacy
or data protection, consumer and other laws, regulatory or other governmental investigations, enforcement actions, and legal and financial exposure, including potential contractual liability. A number of proposed and enacted federal, state and international laws and regulations obligate companies to notify individuals of security breaches involving particular personally identifiable information, which could result from breaches experienced by us or by third parties, including collaborators, vendors, contractors or other organizations with which we expect to form strategic relationships. Any such compromise could also result in damage to our reputation and a loss of confidence in our security and privacy or data protection measures. In addition, a cybersecurity attack could result in other negative consequences, including disruption of our internal operations, increased cyber security protection costs, lost revenue, regulatory actions or litigations. Any of these effects could materially and adversely affect our business, financial condition and results of operations.
FailureChanges in and failures to comply with anyforeign, federal, and state data privacy and security laws, regulations and standards may adversely affect our business, operations and financial performance.
We are subject to various federal, state and foreign laws that govern the collection, use, disclosure, retention and security of these lawspersonal information, including patient health information. The global data protection landscape is rapidly evolving, and implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future. This evolution may create uncertainty in our business, affect our or our collaborators’, service providers’ and contractors’ ability to operate in certain jurisdictions or to protectcollect, store, transfer use and share personal information, necessitate the acceptance of more onerous obligations in our contracts, result in liability or impose additional costs on us. In the United States, numerous federal and state laws and regulations could apply to our operations or the operations of our partners, including state data breach notification laws, state health information systemsprivacy laws, and federal and state consumer protection laws and regulations (e.g. Section 5 of the FTC Act), that govern the collection, use, disclosure, and protection of health-related and other personal information. For example, the privacy, security and breach notification rules promulgated under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”) establish a set of national privacy and security standards for the protection of protected health information (“PHI”) by health plans, health care clearinghouses and certain health care providers, called covered entities, and the business associates with whom such covered entities contract for services that involve creating, receiving, maintaining or transmitting PHI. HIPAA also requires covered entities to provide individuals with certain rights with respect to their PHI, and requires covered entities to enter into a written business associate contract or other arrangement with the business associate that establishes specifically what the business associate has been engaged to do and requires the business associate to comply with the requirements of HIPAA.
HIPAA requires the notification of patients, and other compliance actions, in the event of a breach of unsecured PHI. If notification to patients of a breach is required, such notification must be provided without unreasonable delay and in no event later than 60 calendar days after discovery of the breach. In addition, if the PHI of 500 or more individuals is improperly used or disclosed, we would be required to report the improper use or disclosure to the U.S. Department of Health and Human Services ("HHS") which would post the violation on its website, and to the media.
Penalties for failure to comply with a requirement of HIPAA vary significantly depending on the nature of violation and could include civil monetary or criminal penalties.HIPAA authorizes state attorneys general to file suit on behalf of their residents for violations. Courts are able to award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to file suit against us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care cases in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI.
Certain states have also adopted privacy and security laws and regulations, some of which may be more stringent than HIPAA. Such laws and regulations will be subject to interpretation by various courts and other governmental authorities, thus creating potentially complex compliance issues for us and our future customers and strategic partners.For example, California enacted the California Consumer Privacy Act of 2018 (the "CCPA") went into effect on January 1, 2020. The CCPA applies to certain businesses that collect personal information from California residents, whether directly or indirectly. The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used by requiring covered companies to provide new disclosures to California consumers (as that term is broadly defined) and provide such consumers new ways to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches service interruptions,that is expected to increase data breach litigation. Although there are limited exemptions for health-related information, including PHI maintained by covered entities and business associates, the CCPA may increase our compliance costs and potential liability. Further, the California Privacy Rights Act (“CPRA”) recently passed in California. The CPRA will impose additional data protection obligations on covered businesses, including additional consumer rights processes, limitations on data uses, new audit requirements for higher risk data, and opt outs for certain uses of sensitive data. It
will also create a new California data protection agency authorized to issue substantive regulations and could result in increased privacy and information security enforcement. The majority of the provisions will go into effect on January 1, 2023, and additional compliance investment and potential business process changes may be required. In addition, the CCPA has prompted a number of proposals for new federal and state privacy legislation that, if passed, could increase our potential liability, increase our compliance costs and adversely affect our business. If we fail to comply with applicable laws and regulations we could be subject to penalties or misappropriationsanctions, including criminal penalties if we knowingly obtain or disclose individually identifiable health information from a covered entity in a manner that is not authorized or permitted by HIPAA or applicable state laws.
Foreign data protection laws, including the EU General Data Protection Regulation (the “GDPR”), which became effective in May 2018, and EU and EEA member state data protection legislation, may also apply to health-related and other personal data obtained outside of the United States. The GDPR imposes strict requirements for processing the personal data of individuals within the EEA. The GDPR has and will continue to increase compliance burdens on us, including by mandating potentially burdensome documentation requirements and granting certain rights to individuals to control how we collect, use, disclose, retain and process data about them. Fines for non-compliance with the GDPR are significant-the greater of €20 million or 4% of global turnover. The GDPR provides that EU and EEA member states may impose further obligations relating to the processing of genetic, biometric or health data, which could limit our ability to collect, use and share personal data, or could cause our compliance costs to increase, ultimately having an adverse impact on our business. Data privacy laws in the EU and the EEA are developing rapidly and, in July 2020, the Court of Justice of the European Union limited how organizations could lawfully transfer personal data from the EEA to the United States by invalidating the Privacy Shield. Further, following the United Kingdom’s withdrawal from the EEA and the EU, and the expiry of the transition period, companies have to comply with the GDPR and the GDPR as incorporated into United Kingdom national law, the latter regime having the ability to separately fine up to the greater of £17.5 million or 4% of global turnover. The relationship between the United Kingdom and the European Union in relation to certain aspects of data could disrupt operations, compromise sensitiveprotection law remains unclear, for example around how data andcan lawfully be transferred between each jurisdiction, which may expose us to fines, penalties, other liability, and reputational harm, any of which could adversely affect our ability to operate our business and our financial results.further compliance risk.
If we cannot obtain additional custom tooling and equipment on a timely basis to enable us to meet demand for our products, we might be unable to increase our sales or might lose customers, in which case our sales could decline.
We expanded our manufacturing capacity substantially in recent years, and we expect that continued expansion may be necessary. Molds and automated assembly machines generally have a long lead-time with vendors, often nine months or longer. Inability to secure such tooling in a timely manner, or unexpected increases in production demands, could cause us to be unable to meet customer orders. Such inability could cause customers to seek alternatives to our products.
Cost volatility or loss of supply of our raw materials could have an adverse effect on our profitability.
Most of the materials used in our products are resins, plastics and other material that depend upon oil or natural gas as their raw material. Crude oil markets are affected by political uncertainty in the Middle East, and there is no assurance that crude oil supplies will not be interrupted in the future. New laws or regulations adopted in response to climate change could also increase energy costs as well as the costs of certain raw materials and components. Any such regulations or interruptions could have an adverse effect on our ability to produce, or the cost to produce, our products. Also, crude oil and natural gas prices have been volatile in recent years. Our suppliers have historically passed some of their cost increases on to us, and if such prices are sustained or increase further, our suppliers may pass further cost increases on to us. In addition to the effect on resin prices, transportation costs have increased because of the effect of higher crude oil prices, and we believe most of these costs have been passed on to us. Our ability to recover these increased costs may depend upon our ability to raise prices on our products. In the past, we have rarely raised prices and it is uncertain that we would be able to raise them to recover higher prices from our suppliers. Our inability to raise prices in those circumstances, or to otherwise recover these costs, could have an adverse effect on our profitability.
Our business could suffer if we lose the services of key personnel.
We are dependent upon the management and leadership of our executive team, as well as other members of our senior management team. If one or more of these individuals were unable or unwilling to continue in his or her present position, our business would be disrupted and we might not be able to find replacements on a timely basis or with the same level of skill and experience, which could have an adverse effect on our business. We do not have "key person" life insurance policies on any of our employees.
The price of our common stock has been and may continue to be highly volatile due to many factors.
The market for small and mid-market capitalization companies can be highly volatile, and we have experienced significant volatility in the price of our common stock in the past. From January 20172018 through December 2019,2020, our trading price ranged from a high of $321.70 per share to a low of $127.00$148.89 per share. We believe that factors such as quarter-to-quarter fluctuations in financial results, differences between stock analysts’ expectations and actual quarterly and annual results, new product introductions by us or our competitors, acquisitions or divestitures, changing regulatory environments, litigation, changes in healthcare reimbursement policies, sales or the perception in the market of possible sales of common stock by insiders, market rumors, general economic trends (including the COVID-19 pandemic) and substantial product orders could contribute to the volatility in the price of our common stock. General economic trends unrelated to our performance such as recessionary cycles, changing interest and tax rates may also adversely affect the market price of our common stock; the recent macroeconomic downturn could depress our stock price for some time.
Most of our common stock is held by, or included in accounts managed by, institutional investors or managers. Several of those institutions own or manage a significant percentage of our outstanding shares, with the ten largest interests accounting for approximately 59%58% of our outstanding shares at the end of 2019.2020. If one or more of the institutions or if our other large stockholders should decide to reduce or eliminate their position in our common stock, it could cause a significant decrease in the price of our common stock.
Changes in funding forDisruptions at the FDA and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire and retain key leadership and other personnel, or otherwise prevent new products and services from being developed or commercialized in a timely manner, which could negatively impact our business.
The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.
Disruptions at the FDA and other agencies may also slow the time necessary for new productsdrugs to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business.
Separately, in response to the COVID-19 pandemic, on March 10, 2020, the FDA announced its intention to postpone most foreign inspections of manufacturing facilities and products through April 2020, and subsequently, on March 18, 2020, the FDA temporarily postponed routine surveillance inspections of domestic manufacturing facilities. Subsequently, on July 10, 2020 the FDA announced its intention to resume certain on-site inspections of domestic manufacturing facilities subject to a risk-based prioritization system. The FDA intends to use this risk-based assessment system to identify the categories of regulatory activity that can occur within a given geographic area, ranging from mission critical inspections to resumption of all regulatory activities. Regulatory authorities outside the United States may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process our regulatory submissions, which could have a material adverse effect on our business.
Legal, Compliance, and Regulatory Risks
We are subject to certain federal, state and foreign fraud and abuse and transparency laws, which, if violated, could subject us to substantial penalties. Additionally, any challenge to or investigation into our practices under these laws could cause adverse publicity and be costly to respond to, and thus could harm our business.
There are numerous U.S. federal and state, as well as foreign, laws pertaining to healthcare fraud and abuse, including anti-kickback, false claims and physician transparency laws. Our business practices and relationships with providers are subject to scrutiny under these laws. The healthcare laws and regulations that may affect our ability to operate include, but are not limited to:
•the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce either the referral of an individual or furnishing or arranging for a good or service, for which payment may be made, in whole or in part, under federal healthcare programs, such as Medicare and Medicaid. A person or entity does not need
to have actual knowledge of the statute or specific intent to violate it to have committed a violation. The U.S. government has interpreted this law broadly to apply to the marketing and sales activities of manufacturers. Moreover, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Violations of the federal Anti-Kickback Statute may result in significant civil monetary penalties, plus up to three times the remuneration involved. Civil penalties for such conduct can further be assessed under the federal False Claims Act. Violations can also result in criminal penalties, including additional fines and/or imprisonment of up to 10 years. Similarly, violations can result in exclusion from participation in government healthcare programs, including Medicare and Medicaid;manufacturers;
•the federal civil and criminal false claims laws, including the federal civil False Claims Act, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other federal healthcare programs that are false or fraudulent. These laws can apply to manufacturers who provide information on coverage, coding, and reimbursement of their products to persons who bill third-party payers.payors. Private individuals can bring False Claims Act “qui tam” actions, on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in amounts paid by the entity to the government in fines or settlement. When an entity is determined to have violatedMoreover, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act, the government may impose civil fines and penalties for each false claim, plus treble damages, and exclude the entity from participation in Medicare, Medicaid and other federal healthcare programs;Act;
•the federal Civil Monetary Penalties Law, which prohibits, among other things, offering or transferring remuneration to a federal healthcare beneficiary that a person knows or should know is likely to influence the beneficiary’s decision to order or receive items or services reimbursable by the government from a particular provider or supplier;
•the federal Physician Sunshine Act under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively referred to as the Affordable Care Act, which require certain applicable manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program ("CHIP") to report annually to the US Department of Health and Human Services Centers for Medicare and Medicaid Services ("CMS") information related to payments and other transfers of value to physicians, certain other healthcare providers beginning in 2022, and teaching hospitals, and applicable manufacturers and group purchasing organizations, to report annually ownership and investment interests held by physicians and their immediate family members. Applicable manufacturers are required to submit annual reports to CMS. Failure to submit required information may result in significant civil monetary penalties for any payments, transfers of value or ownership or investment interests that are not timely, accurately, and completely reported in an annual submission, and may result in liability under other federal laws or regulations;CMS;
•HIPAA, which created additional federal criminal statutes that prohibit, among other things, executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation; and
•analogous state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers or patients; state laws that require device companies to comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm customers; and state laws related to insurance fraud in the case of claims involving private insurers.
These laws and regulations, among other things, constrain our business, marketing and other promotional activities by limiting the kinds of financial arrangements, including sales programs, we may have with hospitals, physicians or other potential purchasers of our products. Due to the breadth of these laws, the narrowness of statutory exceptions and regulatory safe harbors available, and the range of interpretations to which they are subject, it is possible that some of our current or future practices might be challenged under one or more of these laws.
To enforce compliance with the healthcare regulatory laws, certain enforcement bodies have recently increased their scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Responding to investigations can be time-and resource-consuming and can divert management’s attention from the business. Additionally, as a result of these investigations, healthcare providers and entities may have to agree to additional compliance and reporting requirements as part of a consent decree or corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business. Even an unsuccessful challenge or investigation into our practices could cause adverse publicity, and be costly to respond to. If our operations are found to be in violation of any of the healthcare laws or regulations described above or any other healthcare regulations that apply to us, we may be subject to penalties, including administrative, civil and criminal penalties, damages, fines, exclusion from participation in government healthcare programs, such as Medicare and Medicaid, imprisonment, contractual damages, reputational harm, disgorgement and the curtailment or restructuring of our operations.
Healthcare regulation and reform measures could adversely affect our revenue and financial condition.
Our profitability and operations are subject to risks relating to changes in government and private reimbursement programs and policies and changes in legal requirements in the U.S. and in the world. There have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcare system that could affect our future revenues and profitability in the U.S. and abroad. Federal and state lawmakers regularly propose and, at times, enact legislation that
results in significant changes to the healthcare system, some of which are intended to contain or reduce the costs of medical products and services. For example, in 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (“Affordable Care Act”) were signed into law introducing comprehensive health insurance and healthcare reforms in the U.S. Among the provisions of such legislation that may have an adverse impact on us was a 2.3% excise tax imposed on medical device manufacturers for the sale of certain medical devices to U.S. customers, which, due to subsequent legislative amendments, was suspended, effective January 1, 2016, and subsequently repealed altogether, effective January 1, 2020. The Affordable Care Act, alsoamong other things, provided incentives to programs that increase the federal government’s comparative effectiveness research, and implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models. Additionally, the Affordable Care Act has expanded eligibility criteria for Medicaid programs and created a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.
Since its enactment, there have been efforts to challenge, repeal or replace the Affordable Care Act. For example, the Tax Cuts and Jobs Acts was enacted, which, among other things, removes penalties for not complying with the individual mandate to carry health insurance, beginning in 2019. On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas, ruled that the Affordable Care Act’s individual mandate to carry insurance coverage is a critical and inseverable feature of the Affordable Care Act, and therefore, because it was repealed as part of the Tax Cuts and Jobs Act, the remaining provisions of the Affordable Care Act are invalid as well. On December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the district court’s decision that the individual mandate was unconstitutional but remanded the case back to the District Court to determine whether the remaining provisions of the Affordable Care Act are invalid as well. The U.S. Supreme Court is currently reviewing the case, although it remains unclear when or how the Supreme Court will rule. It is also unclear how these decisions, subsequent appeals, if any, and other efforts to challenge, repeal or replace the Affordable Care Act will impact the Affordable Care Act andor our business.
In addition, other legislative changes have been proposed and adopted in the U.S. since the Affordable Care Act was enacted that reduced payments to Medicare providers. On August 2, 2011, the Budget Control Act of 2011 was signed into law, which, among other things, reduced Medicare payments to providers by 2% per fiscal year, effective on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 20292030, with the exception of a temporary suspension from May 1, 2020 through March 31, 2021, unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.
We anticipate there will continue to be proposals by legislators at both the federal and state levels, regulators and commercial payerspayors to reduce costs while expanding individual healthcare benefits. The ultimate implementation of any healthcare reform legislation and any new laws and regulations, and its impact on us, is impossible to predict.predict, particularly in light of the new presidential administration. Any significant reforms made to the healthcare system in the U.S., or in other jurisdictions, may have an adverse effect on our financial condition and results of operations.
Our business could be materially and adversely affected if we fail to defend and enforce our patents or other proprietary rights, if our products are found to infringe patents or other proprietary rights owned by others or if the cost to protect our patent or other proprietary rights becomes excessive or as our patents expire.
We rely on a combination of patents, trademarks, copyrights, trade secrets, business methods, software and nondisclosure agreements to protect our proprietary intellectual property. Our efforts to protect our intellectual proprietary and proprietary rights may not be sufficient. Further, there is no assurance that patents pending will issue or that the protection from patents which have issued or may issue in the future will be broad enough to prevent competitors from introducing similar devices, that such patents, if challenged, will be upheld by the courts or that we will be able to prove infringement and damages in litigation.
We generally have multiple patents covering various features of a product, and as each patent expires, the protection afforded by that patent is no longer available to us, even though protection of features that are covered by other unexpired patents may continue to be available to us. The loss of patent protection on certain features of our products may make it possible for others to manufacture and sell products with features identical or similar to ours, which could adversely affect our business.
As a result of this possible increase in competition, we may need to reduce our prices to maintain sales of our products, which would make them less profitable. If we fail to develop and successfully launch new products prior to the expiration of patents for our existing products, our sales and profits with respect to those products could decline significantly. We may not be able to develop and successfully launch more advanced replacement products before these and other patents expire.
In addition, our ability to enforce and protect our intellectual property rights may be limited in certain countries outside of the U.S., which could make it easier for competitors to obtain market position in such countries by utilizing technologies that are similar to those developed by us.
If others choose to manufacture and sell products similar to or substantially the same as our products, it could have a material adverse effect on our business through loss of unit volume or price erosion, or both, and could adversely affect our ability to secure new business.
In the past, we have faced patent infringement claims related to our Clave products, the CLC2000 Connector and Tego Connector. We believe these claims had no merit, and all have been settled or dismissed. We may also face claims in the future. Any adverse determination on these claims relatedAdditionally, there has been substantial litigation regarding patent and other intellectual property rights in the medical device industry. Patent infringement litigation, which may be necessary to enforce patents issued to us or to defend ourselves against claimed infringement of the rights of others, can be expensive and may involve a substantial commitment of our resources which may divert resources from other uses. Adverse determinations in litigation or settlements could subject us to significant liabilities to third parties, could require us to seek licenses from third parties, could prevent us from manufacturing and selling our products if any,or could have a material adverse effect onfail to prevent competitors from manufacturing products similar to ours. Any of these results could materially and adversely affect our business.
From time to time we become aware of newly issued patents on medical devices, which we review to evaluate any infringement risk. We are aware of a number of patents for infusion connection systems that have been issued to others. While we believe these patents will not affect our ability to market our products, there is no assurance that these or other issued or pending patents might not interfere with our right or ability to manufacture and sell our products.
There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry. Patent infringement litigation, which may be necessary to enforce patents issued to us or to defend ourselves against claimed infringement of the rights of others, can be expensive and may involve a substantial commitment of our resources which may divert resources from other uses. Adverse determinations in litigation or settlements could subject us to significant
liabilities to third parties, could require us to seek licenses from third parties, could prevent us from manufacturing and selling our products or could fail to prevent competitors from manufacturing products similar to ours. Any of these results could materially and adversely affect our business.
Our ability to market our products in the U.S. and other countries may be adversely affected if our products fail to comply with the applicable standardsrequirements of the FDA and regulatory agencies in other countries.
We and our products are subject to extensive regulation in the United States and elsewhere, including by the FDA and its foreign counterparts. The FDA and foreign regulatory agencies regulate, among other things, with respect to medical devices: design, development and manufacturing; testing, labeling, content and language of instructions for use and storage; clinical trials; product safety; establishment registration and device listing; marketing, sales and distribution; premarket clearance and approval; record keeping procedures; advertising and promotion; recalls and field safety corrective actions; post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or serious injury; post-market approval studies; and product import and export.
In the U.S., our device products are subject to clearance or approval by the U.S. FDA under the Food, Drug and Cosmetics Act ("FDC Act"). Before we can market a new medical device, or a new use of, new claim for, or significant modification to, an existing product, we must first receive either clearance under Section 510(k) of the FDC Act or approval of a premarket approval, or PMA, application from the FDA, unless an exemption applies. Under the 510(k) process, the manufacturer must submit to the FDA a premarket notification, demonstrating that the device is "substantially equivalent," as defined in the statute, to a legally marketed predicate device. To be "substantially equivalent," the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. If the manufacturer is unable to demonstrate substantial equivalence to FDA’s satisfaction, or if there is no available predicate device, then the manufacturer may be required to seek approval through the PMA application process, which is generally more costly and time consuming than the 510(k) process. Through the PMA application process, the applicant must submit data and information demonstrating reasonable assurance of the safety and effectiveness of the device for its intended use to the FDA's satisfaction. Accordingly, a PMA application typically includes, but is not limited to, extensive technical information regarding device design and development, pre-clinical and clinical trial data, manufacturing information, labeling and financial disclosure information for the clinical investigators in device studies.
Each of our current products has qualified, and we anticipate that any new products we are likely to market will qualify for clearance under the FDA’s expedited pre-market notification procedure pursuant to Section 510(k) of the FDC Act. However, certain of our new products may require a longer time for clearance than we have experienced in the past and there can be no assurance that a PMA application will not be required. Further, there is no assurance that other new products developed by us or any manufacturers that we might acquire will qualify for expedited clearance rather than a more time consuming pre-market approval procedure or that, in any case, they will receive clearance from the FDA. FDA regulatory processes are time consuming and expensive. Uncertainties as to the time required to obtain FDA clearances or approvals could adversely affect the timing and expense of new product introductions.
The regulations to which we are subject are complex and have tended to become more stringent over time. Regulatory changes could result in restrictions on our ability to continue or expand our operations, higher than anticipated costs, or lower than anticipated sales. The FDA enforces these regulatory requirements through periodic unannounced inspections. We do not know whether we will pass any future FDA inspections. Even after we have obtained the proper regulatory clearance or approval to market a product, we have ongoing responsibilities under FDA regulations and applicable foreign laws and regulations. The FDA, state and foreign regulatory authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA, state or foreign regulatory authorities which may include any of the following sanctions:
•untitled letters or warning letters;
•fines, injunctions, consent decrees and civil penalties;
•recalls, termination of distribution, administrative detention, or seizure of our products;
•customer notifications or repair, replacement or refunds;
•operating restrictions or partial suspension or total shutdown of production;
•delays in or refusal to grant our requests for future 510(k) clearances, PMA approvals or foreign regulatory approvals of new products, new intended uses, or modifications to existing products;
•withdrawals or suspensions of current 510(k) clearances or PMAs or foreign regulatory approvals, resulting in prohibitions on sales of our products;
•FDA refusal to issue certificates to foreign governments needed to export products for sale in other countries; and
•criminal prosecution.
The FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the U.S. or abroad. For example, certain policiesthe results of the Trump Administration2020 Presidential election may impact our business and industry. Namely, the Trump Administration has taken several executive actions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise materially delay, FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. It is difficult to predict whether or how these requirement will be implemented, and the extent to whichor whether they will be rescinded or replaced under a Biden Administration. The policies and priorities of an incoming administration are unknown and could materially impact the FDA’s ability to exercise its regulatory authority. If these executive actions impose constraints on FDA’s ability to engage in oversight and implementation activities in the normal course,regulation governing our business may be negatively impacted.products.
In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions which may prevent or delay approval or clearance of our future products under development. For example, in November 2018, FDA officials announced forthcoming steps thatMay 2019, the FDA intends to take to modernize the premarket notification pathway under Section 510(k) of the FDC Act. Among other things, the FDA announced that itsolicited public feedback on its plans to develop proposals to drive manufacturers usingutilizing the 510(k) pathway toward the use of newer predicates. These proposals include plans to potentially sunset certain older devices that were used as predicates, underincluding whether the 510(k) clearance pathway, and to potentiallyFDA should publish a list of devices that have been cleared on the basis of demonstrated substantial equivalence to predicate devices that are more than 10 years old.The FDA also announcedrequested public feedback on whether it should consider certain actions that it intendsmight require new authority, such as whether to finalize guidance to establish a premarket review pathway for “manufacturers ofsunset certain well-understood device types”older devices that were used as an alternative topredicates under the 510(k) clearance pathway and that such premarket review pathway would allow manufacturers to rely on objective safety and performance criteria recognized by the FDA to demonstrate substantial equivalence, obviating the need for manufacturers to compare the safety and performance of their medical devices to specific predicate devices in the clearance process.pathway. These proposals have not yet been finalized or adopted, and the FDA announced that it would seek public feedback prior to publication of any such proposals, and may work with Congress to implement such proposals through legislation. Accordingly, it is unclear the extent to which any proposals, if adopted, could impose additional regulatory requirements on us that could delay our ability to obtain new 510(k) clearances, increase the costs of compliance, or restrict our ability to maintain our current clearances, or otherwise create competition that may negatively affect our business.
ModificationsMore recently, in September 2019, the FDA finalized the aforementioned guidance to describe an optional “safety and performance based” premarket review pathway for manufacturers of “certain, well-understood device types” to demonstrate substantial equivalence under the 510(k) clearance pathway, by demonstrating that such device meets objective safety and performance criteria established by the FDA, obviating the need for manufacturers to compare the safety and performance of their medical devices to specific predicate devices in the clearance process. The FDA intends to maintain a list of device types appropriate for the “safety and performance based pathway” and develop product-specific guidance documents that identify the performance criteria for each such device type, as well as the testing methods recommended in the guidance, where feasible. The FDA may establish performance criteria for classes of devices for which we or our products may require uscompetitors seek or currently have received clearance, and it is unclear the extent to which such performance standards, if established, could impact our ability to obtain new 510(k) clearances or approvals,otherwise create competition that may negatively affect our business.
In addition, FDA regulations and if we market modifiedguidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new statutes, regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of any future products without obtaining necessary clearances or approvals, we may be requiredmake it more difficult to cease marketing or recall the modified products until required approvals are obtained.obtain
Certain modifications to a cleared or approved device may require a new clearance or approval for, manufacture, market or alternatively a notificationdistribute our products. We cannot determine what effect changes in regulations, statutes, legal interpretation or other submission to FDA. The FDApolicies, when and if promulgated, enacted or adopted may not agree withhave on our decisions regarding whether a new regulatory submission is necessary. We may make modifications to our approved devicesbusiness in the future that we believe do not require a newfuture. Such changes could, among other things, require: additional testing prior to obtaining clearance or approval. If the FDA disagrees withapproval; changes to manufacturing methods; recall, replacement or discontinuance of our determination and requires us to submit a new submission for modifications to our previously approved products, we may be required to cease marketingproducts; or to recall the modified product until we obtain approval, and we may be subject to significant regulatory fines or penalties. In addition, the FDA may not clear or approve our products for the indications that are necessary or desirable for successful commercialization, or could require clinical trials to support any modifications. Any delay or failure in obtaining required approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth.additional record keeping.
If we or our component manufacturers fail to comply with the FDA's Quality System Regulation or Good Manufacturing Practice regulations or other requirements, our manufacturing operations could be interrupted, and our product sales and operating results could suffer.
We and some of our component manufacturers are required to comply with regulatory requirements known as the FDA's Quality System Regulation, or QSR, a complex regulatory scheme which covers the procedures and documentation of the design, testing, production, control, quality assurance, inspection, complaint handling, recordkeeping, management review, labeling, packaging, sterilization, storage and shipping of our device products. The FDA's current Good Manufacturing Practices, or cGMPs apply to the manufacture of medical device components and finished medical devices. The FDA audits compliance with these regulatory requirements through periodic announced and unannounced inspections of manufacturing and other facilities. The FDA may conduct inspections or audits at any time, and we and some of our component suppliers are subject to such inspections. Although we believe our manufacturing facilities and those of our critical component suppliers are in compliance with the QSR requirements, and with applicable cGMPs for our products, we cannot provide assurance that any future inspection will not result in adverse findings. If our manufacturing facilities or those of any of our component suppliers
are found to be in violation of applicable laws and regulations, or we or our suppliers have significant noncompliance issues or fail to timely and adequately respond to any adverse inspectional observations or product safety issues, or if any corrective action plan that we or our suppliers propose in response to observed deficiencies is not sufficient, the FDA could take enforcement action, including any of the following sanctions:
•untitled letters or warning letters;
•fines, injunctions, consent decrees and civil penalties;
•customer notifications or repair, replacement, refunds, recall, detention or seizure of our products;
•operating restrictions or partial suspension or total shutdown of production;
•refusing or delaying our requests for clearance or approval of new products or modified products;
•withdrawing clearances or approvals that have already been granted;
•refusal to grant export approval for our products; or
•criminal prosecution.
Any of these sanctions could adversely affect our business, financial conditions and operating results.
To market our products in the European Community (“EC”), we must conform to additional requirements of the EC and demonstrate conformance to established quality standards and applicable directives. As a manufacturer that designs, manufactures and markets its own devices, we must comply with the quality management standards of ISO 13485 (2012). Those quality standards are similar to the FDA’s Quality System Regulations. Manufacturers of medical devices must also be in conformance with EC Directives such as Council Directive 93/42/EEC (“Medical Device Directive”) and their applicable annexes. Those regulations assure that medical devices are both safe and effective and meet all applicable established standards prior to being marketed in the EC. Once a manufacturer and its devices are in conformance with the Medical Device Directive, the “CE” Mark maybe affixed to its devices. The CE Mark gives devices an unobstructed entry to all the member countries of the EC. There is no assurance that we will continue to meet the requirements for distribution of our products in Europe.
In May 2017, the Medical Device Regulation (Regulation 2017/745) entered into force to replace the Medical Device Directive, as amended. Unlike directives, which must be implemented into the national laws of the European Economic Area member States (the “EEA member States”), the regulations would be directly applicable, i.e., without the need for adoption of EEA member State laws implementing them, in all EEA member States and are intended to eliminate current differences in the regulation of medical devices among EEA member States. The Medical Devices Regulation willbecame effective May 26, 2020. The Medical Devices Regulation among other things does the following. The Medical Devices Regulation was meant to become applicable three years after publication (in May 2020). However, on April 23, 2020, to take the pressure off EEA national authorities, notified bodies, manufacturers and other parties so they can focus fully on urgent priorities related to the COVID-19 pandemic, the European Council and Parliament adopted Regulation 2020/561, postponing the date of application of the Medical Devices Regulation by one year (to May 2021). Once applicable, the Medical Devices Regulation will among other things:
•strengthen the rules on placing devices on the market and reinforce surveillance once they are available;
•establish explicit provisions on manufacturers’ responsibilities for the follow-up of the quality, performance, and safety of devices placed on the market;
•improve the traceability of medical devices throughout the supply chain to the end-user or patient through a unique identification number;
•set up a central database to provide patients, healthcare professionals, and the public with comprehensive information on products available in the EU;
•strengthened rules for the assessment of certain high-risk devices, such as implants, which may have to undergo an additional check by experts before they are placed on the market.
As a result of these new requirements, we may be subject to risks associated with additional testing, modification, certification, or amendment of our existing market authorizations, or we may be required to modify products already installed at our customers’ facilities to comply with the official interpretations of these revised regulations.
Distribution of our products in other countries may be subject to regulation in those countries, and there is no assurance that we will obtain necessary approvals in countries in which we want to introduce our products.
The misuse or off-label use of our products may harm our reputation in the marketplace, result in injuries that lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business.
Our products have been cleared or approved by the FDA for specific indications. We train our marketing personnel and direct sales force to not promote our products for uses outside of the FDA-cleared or approved indications for use, known as “off-label uses.” We cannot, however, prevent a physician from using our products off-label, when in the physician’s independent professional medical judgment he or she deems it appropriate. There may be increased risk of injury to patients if
physicians attempt to use our products off-label. Furthermore, the use of our products for indications other than those cleared or approved by the FDA or approved by any foreign regulatory body may not effectively treat such conditions, which could harm our reputation in the marketplace among physicians and patients.
If the FDA or any foreign regulatory body determines that our promotional materials or training constitute promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance or imposition of an untitled letter, which is used for violators that do not necessitate a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action under other regulatory authority, such as false claims laws, if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment of our operations.
In addition, physicians may misuse our products or use improper techniques if they are not adequately trained, potentially leading to injury and an increased risk of product liability. If our products are misused or used with improper technique, we may become subject to costly litigation by our customers or their patients. As described above,
Litigation, product liability claims could divert management’s attention from our core business, be expensive to defend and result in sizeable damage awards against us that may not be covered by insurance.
Product liability claimsor product recalls could be costly to defend and could expose us to loss.
The use of our products exposes us to an inherent risk of product liability. TheFurther, the medical device industry has historically been subject to extensive litigation over product liability claims, and we cannot offer any assurance that we will not face product liability suits.or other suits in the future. Patients, healthcare workers, healthcare providers or others who claim that our products have resulted in injury could initiate product liability litigation seeking large damage awards against us. Costs of the defense of such litigation, even if successful, could be substantial. We maintain insurance against product liability and defense costs in the amount of $40,000,000 per occurrence. There is no assuranceHowever, legal proceedings are inherently unpredictable, and the outcome can result in judgments that affect how we will successfully defendoperate our business, or we may enter into settlements of claims for monetary damages that exceed our insurance coverage, if any arising with respect to products or that the insurance we carry will be sufficient.is available. A successful claim against us in excess of insurance coverage could materially and adversely affect us, and result in substantial liabilities and reputational harm. Furthermore, there is no assurance thatharm including product liability insurance will continue to be available to us on acceptable terms.
In addition, regardlessrecalls or withdrawals from the market, withdrawal of merit or eventual outcome, product liability claims may result in:
costs of litigation;
distraction of management’s attention from our primary business;
clinical trial participants, the inability to commercialize our existing or new products;
products, distraction of management’s attention from our primary business or decreased demand for our products or, if cleared or approved, products in development;development.
damage to our business reputation;
product recalls or withdrawals from the market;
withdrawal of clinical trial participants;
substantial monetary awards to patients or other claimants; or
loss of revenue.
While we may attempt to manage our product liability exposure by proactively recalling or withdrawing from the market any defective products, any recall or market withdrawal of our products may delay the supply of those products to our
customers and may impact our reputation. We can provide no assurance that we will be successful in initiating appropriate market recall or market withdrawal efforts that may be required in the future or that these efforts will have the intended effect of preventing product malfunctions and the accompanying product liability that may result. Such recalls and withdrawals may also be used by our competitors to harm our reputation for safety or be perceived by patients as a safety risk when considering the use of our products, either of which could have a material adverse effect on our business, financial condition and results of operations.
Additionally, we generally offer a limited warranty for product returns which are due to defects in quality and workmanship. We attempt to estimate our potential liability for future product returns and establish reserves on our financial statements in amounts that we believe will be sufficient to address our warranty obligations; however, our actual liability for product returns may incur costssignificantly exceed the amount of our reserves. If we underestimate our potential liability for future product returns, or losses relating to other litigation.
We may from time to time be involved in litigation. Legal proceedings are inherently unpredictable, and the outcome canif unanticipated events result in judgments that affect how we operate our business, or we may enter into settlements of claims for monetary damagesreturns that exceed our insurance coverage, if any is available. Any such proceedings, regardless of merits, may result in substantial costs, the diversion of management's attention from other business concerns and additional restrictions on our business, which could disrupt our business and have an adverse effect onhistorical experience, our financial condition.condition and operating results could be materially and adversely affected.
Our products may cause or contribute to adverse medical events or be subject to failures or malfunctions that we are required to report to the FDA, and if we fail to do so, we would be subject to sanctions that could harm our reputation, business, financial condition and results of operations. The discovery of serious safety issues with our products, or a recall of our products either voluntarily or at the direction of the FDA or another governmental authority, could have a negative impact on us.
We are subject to the FDA’s medical device reporting regulations and similar foreign regulations, which require us to report to the FDA when we receive or become aware of information that reasonably suggests that one or more of our products may have caused or contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur, it could cause or contribute to a death or serious injury. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of the product. If we fail to comply with our reporting obligations, the FDA could take action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device clearances or approvals, seizure of our products or delay in clearance or approval of future products.
The FDA and foreign regulatory bodies have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture of a product or in the event that a product poses an unacceptable risk to health. The FDA’s authority to require a recall must be based on a finding that there is reasonable probability that the device could cause serious injury or death. We may also choose to voluntarily recall a product if any material deficiency is found. A government-mandated or voluntary recall by us could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing defects, labeling or design deficiencies, packaging defects or other deficiencies or failures to comply with applicable regulations. Product defects or other errors may occur in the future.
Depending on the corrective action we take to redress a product’s deficiencies or defects, the FDA may require, or we may decide, that we will need to obtain new clearances or approvals for the device before we may market or distribute the corrected device. Seeking such clearances or approvals may delay our ability to replace the recalled devices in a timely manner. Moreover, if we do not adequately address problems associated with our devices, we may face additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties or civil or criminal fines.
Companies are required to maintain certain records of recalls and corrections, even if they are not reportable to the FDA. We may initiate voluntary withdrawals or corrections for our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, it could require us to report those actions as recalls and we may be subject to enforcement action. A future recall announcement could harm our reputation with customers, potentially lead to product liability claims against us and negatively affect our sales. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business and may harm our reputation and financial results.
We may be required to implement a costly product recall.
In the event that any of our products proves to be defective, we can voluntarily recall, or the FDA or other regulatory agencies could require us to redesign or implement a recall of, any of our products. We believe that any recall could result in significant costs to us and significant adverse publicity, which could harm our ability to market our products in the future. Though it may not be possible to quantify the economic impact of a recall, it could have a material adverse effect on our business, financial condition and results of operations.
We generally offer a limited warranty for product returns which are due to defects in quality and workmanship. We attempt to estimate our potential liability for future product returns and establish reserves on our financial statements in amounts that we believe will be sufficient to address our warranty obligations; however, our actual liability for product returns may significantly exceed the amount of our reserves. If we underestimate our potential liability for future product returns, or if unanticipated events result in returns that exceed our historical experience, our financial condition and operating results could be materially and adversely affected.
Geographic Risks
We are subject to risks associated with doing business outside of the U.S.
We operate in a global market and global operations are subject to a number of risks. Sales to customers outside of the U.S. made up approximately 27% of our revenue in 2019 and as our operations and sales located in Europe and other areas outside the U.S. increase, we may face new challenges and uncertainties, although we can give no assurance that such operations and sales will increase. Additionally, following a national referendum and enactment of legislation by the government of the United Kingdom, the United Kingdom formally withdrew from the EU on January 31, 2020 and entered into a transition period during which it will continue its ongoing and complex negotiations with the EU relating to the future trading relationship between the parties. Significant political and economic uncertainty remains about whether the terms of the relationship will differ materially from the terms before withdrawal, as well as about the possibility that a so-called “no deal” separation will occur if negotiations are not completed by the end of the transition period. These developments, or the perception that any of them could occur, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity, restrict the ability of key market participants to operate in certain financial markets or restrict our access to capital. In addition, the withdrawal could, among other things, affect the legal and regulatory environments to which our businesses are subject, impact trade between the United Kingdom and the EU and other parties and create economic and political uncertainty in the region.
The risks associated with our operations outside the U.S. also include:
healthcare reform legislation;
changes in medical reimbursement policies and programs;
changes in non-U.S. government programs;
multiple non-U.S. regulatory requirements that are subject to change and that could restrict our ability to manufacture and sell our products;
possible failure to comply with anti-bribery laws such as the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions;
different local medical practices, product preferences and product requirements;
possible failure to comply with trade protection and restriction measures and import or export licensing requirements;
difficulty in establishing, staffing and managing non-U.S. operations;
different labor regulations or work stoppages or strikes;
changes in environmental, health and safety laws;
potentially negative consequences from changes in or interpretations of tax laws, including changes regarding taxation of income earned outside the U.S.;
political instability and actual or anticipated military or political conflicts;
economic instability, including the European financial crisis or other economic instability in other parts of the world and the impact on interest rates, inflation and the credit worthiness of our customers;
uncertainties regarding judicial systems and procedures;
minimal or diminished protection of intellectual property in some countries;
natural disasters or outbreak of diseases;
imposition of government controls; and
regulatory changes that may place our products at a disadvantage.
These risks, individually or in the aggregate, could have an adverse effect on our results of operations and financial condition. The occurrence or allegation of these types of risks may adversely affect our business, performance, prospects, value, financial condition, and results of operations.
Any significant changes in U.S. trade, tax or other policies that restrict imports or increase import tariffs could have a material adverse effect on our results of operations.
A significant amount of our products are manufactured outside of the U.S. The U.S. government has recently initiated substantial changes in U.S. trade policy and U.S. trade agreements, including the initiation of tariffs on certain foreign goods. In response to these tariffs, certain foreign governments, including China, have instituted or are considering imposing tariffs on certain U.S. goods. For example, in 2018, the U.S. imposed tariffs on steel and aluminum as well as on goods imported from China and certain other countries, which has resulted in retaliatory tariffs by China and other countries. Additional tariffs imposed by the U.S. on a broader range of imports, or further retaliatory trade measures taken by other countries in response, could prevent or make it difficult for us to obtain the components needed for new products which would affect our sales. Increased tariffs would require us to increase our prices which likely would decrease customer and consumer demand for our
products. Additionally, we are subject to income taxes in the United States and numerous foreign jurisdictions. Any significant changes in current U.S. trade, tax or other policies could have a material adverse effect upon our results of operations.
International sales pose additional risks related to competition with larger international companies and established local companies and our possibly higher cost structure.
We have undertaken an initiative to increase our international sales, and have distribution arrangements in all the principal countries in Western Europe, the Pacific Rim, Middle East, Latin America, Canada and South Africa. We plan to sell in most other areas of the world. We export most of our products sold internationally from the U.S. and Mexico. Our principal competitors in international markets consist of much larger companies as well as smaller companies already established in the countries into which we sell our products. Our cost structure is often higher than that of our competitors because of the relatively high cost of transporting product to some local markets as well as our competitors’ lower local labor costs in some markets.
Our international sales are subject to higher credit risks than sales in the U.S. Many of our distributors are small and may not be well capitalized. Payment terms are relatively long. The European hospitals tend to be significantly slower in payment which has resulted in an increase to our days sales outstanding from previous years. Our prices to our international distributors, outside of Europe, for product shipped to the customers from the U.S., Costa Rica or Mexico are generally denominated in U.S. dollars, but their resale prices are set in their local currency. A decline in the value of the local currency in relation to the U.S. dollar may adversely affect their ability to profitably sell in their market the products they buy from us, and may adversely affect their ability to make payment to us for the products they purchase. Legal recourse for non-payment of indebtedness may be uncertain. These factors all contribute to a potential for credit losses.
We are dependent on manufacturing in Mexico, and could be adversely affected by increased labor costs and any economic, social or political disruptions.
Most of the material we use in manufacturing is imported into Mexico, and substantially all of the products we manufacture in Mexico are exported. Business activity in the Ensenada area has expanded significantly, providing increased employment opportunities. This could have an adverse effect on our ability to hire or retain necessary personnel and result in an increase in labor rates. We continue to take steps to compete for labor through attractive employment conditions and benefits, but there is no assurance that these steps will continue to be successful or that we will not face increasing labor costs in the future.
Any political or economic disruption in Mexico or a change in the local economies could have an adverse effect on our operations. We depend on our ability to move goods across borders quickly, and any disruption in the free flow of goods across national borders could have an adverse effect on our business. Additionally, political and social instability resulting from violence in certain areas of Mexico has raised concerns about the safety of our personnel. These concerns may hinder our ability to send domestic personnel abroad and to hire and retain local personnel. Such concerns may require us to conduct more operations from the U.S. rather than Mexico, which may negatively impact our operations and result in higher costs and inefficiencies.
Our operations may be adversely impacted by our exposure to risks related to foreign currency exchange rates.
We market our products in certain foreign markets through our subsidiaries and other international distributors. The related sales agreements may provide for payments in a foreign currency. Accordingly, our operating results are subject to fluctuations in foreign currency exchange rates. When the U.S. dollar weakens against these currencies, the dollar value of foreign-currency denominated revenue and expense increases, and when the dollar strengthens against these currencies, the dollar value of foreign-currency denominated revenue and expense decreases. We are exposed to foreign currency risk on outstanding foreign currency denominated receivables and payables. Changes in exchange rates may adversely affect our results of operations. Our primary foreign currency exchange rate exposures are currently with the Euro, Mexican Peso, Costa Rican
Colón, and the Canadian Dollar against the U.S. dollar. Disruptions in the financial markets, including the impact of the United Kingdom’s withdrawal from the EU, could also, among other things, create volatility in currency exchange rates.
We currently do not hedge against our foreign currency exchange rate risks, other than certain exposures related to the Mexican Peso and therefore believe our exposure to these risks may be higher than if we entered into hedging transactions, including forward exchange contracts or similar instruments. If we decide in the future to enter into forward foreign exchange contracts to attempt to reduce the risk related to foreign currency exchange rates, these contracts may not mitigate the potential adverse impact on our financial results due to the limitations and difficulty forecasting future activity. In addition, these types of contracts may themselves cause financial harm to us and have inherent levels of counter-party risk over which we would have no control. During 2020, primarily during the first quarter, we recorded $7.2 million in foreign exchange losses due to the volatility of foreign exchange rates as a result of declining economic conditions caused by the COVID-19 pandemic.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and other worldwide anti-bribery laws.
The Foreign Corrupt Practices Act and anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business or other commercial advantage. Our policies mandate compliance with these anti-bribery laws, which often carry substantial penalties, including criminal and civil fines, potential loss of export licenses, possible suspension of the ability to do business with the federal government, denial of government reimbursement for products and exclusion from participation in government healthcare programs. We operate in jurisdictions that have experienced governmental and private sector corruption to some degree, and, in certain circumstances, strict compliance with anti-bribery laws may conflict with certain local customs and practices. We cannot assure that our internal control policies and procedures always will protect us from reckless or other inappropriate acts committed by our affiliates, employees, distributors or other agents. Violations of these laws, or allegations of such violations, could have a material adverse effect on our business, financial position and results of operations.
Risks Related to our Strategic Transactions
We have and may continue to acquire businesses, form strategic alliances or make investments in businesses or technologies that could adversely impact our business and our operating results and such transactions could result in unforeseen operating difficulties, expenditures and require significant management resources, charges or write-downs.
We have and may continue to seek to supplement our internal growth through acquisitions of complementary businesses, technologies, services, or products, as well as investments and strategic alliances. We compete for those opportunities with others including our competitors, some of which have greater financial or operational resources than we do. We may not be able to identify suitable acquisition candidates or strategic partners, we may have inadequate access to information or insufficient time to complete due diligence, and we may not be able to complete such transactions on favorable terms, if at all. Such transactions are inherently risky, and the integration of any newly-acquired business requires significant effort and management attention that otherwise would be available for ongoing development of our other businesses.
The success of any acquisition, investment or alliance may be affected by a number of factors, including our ability to properly assess and value the potential business opportunity or to successfully integrate any business we may acquire into our existing business. Difficulties in assimilating acquired businesses include a number of special risks in addition to the difficulty of integrating cultures and operations and the diversion of management’s attention, including adverse short-term effects on our reported operating results, dependence on retention, hiring and training of key personnel, risks associated with unanticipated problems or legal liabilities and amortization of acquired intangible assets, some or all of which could materially and adversely affect our operations and financial performance. Integration of an acquired business also may disrupt our ongoing operations and require management resources that we would otherwise focus on developing our existing business. For example, we acquired the HIS business in February 2017, which includes IV pumps, solutions, and devices in order to create a leading pure-play infusion therapy company. We invested significant time and resources into the HIS integration in order to achieve the anticipated benefits of the transaction. In addition, in connection with the HIS business acquisition, we also entered into two manufacturing and supply agreements (the “MSAs”) with Pfizer under which, (i) Pfizer manufactures and supplies us with certain agreed upon products for an initial five-year term with a one-time two-year option to extend and (ii) we manufacture and supply Pfizer certain agreed upon products for a term of five or ten years depending on the product, with a one-time two-year option to extend. Our facility in Austin, Texas manufactures and supplies these products to Pfizer under the MSAs, which, for certain products, could expire as early as 2022. The expiration of these MSAs may adversely impact our production capacity utilization of our Austin facility, which could result in unforeseen operating difficulties and may impact our profitability.
In addition, any acquisition could result in the incurrence of debt, contingent liabilities or future write-offs of intangible assets or goodwill, any of which could have a material adverse effect on our financial condition, results of operations
and cash flows. We may also experience losses related to investments in other companies, which could have an adverse effect on our results of operations and financial condition. As such, there can be no assurance that any past or future transactions will be successful.
If we are unable to effectively manage our internal growth or growth through acquisitions of companies, assets or products, our financial performance may be adversely affected.
We intend to continue to expand our marketing and distribution capability, which may include external expansion through acquisitions of companies or product lines both in the U.S. and foreign markets. We can provide no assurance that we will be able to identify, acquire, develop or profitably manage additional companies or operations or successfully integrate such companies or operations into our existing operations without substantial costs, delays or other problems.
We have additional production facilities outside the U.S. to reduce labor costs. The expansion of our marketing, distribution and product offerings both internally and through acquisitions or by contract may place substantial burdens on our management resources and financial controls. Decentralization of assembly and manufacturing could place further burdens on management to manage those operations and maintain efficiencies and quality control.
The increasing burdens on our management resources and financial controls resulting from internal growth and acquisitions could adversely affect our operating results. Failure to manage this growth could adversely effect our operations through higher manufacturing costs, declining product quality, slower responses to competitive challenges, among other things. A failure in any one of these areas could make it difficult for us to meet market expectations for our products, and could damage our reputation and our financial performance may be adversely affected.
General Risk Factors
We are subject to risks associated with doing business outside of the U.S.
We operate in a global market and global operations are subject to a number of risks. Sales to customers outside of the U.S. made up approximately 28% of our revenue in 2020 and as our operations and sales located in Europe and other areas outside the U.S. increase, we may face new challenges and uncertainties, although we can give no assurance that such operations and sales will increase.
The risks associated with our operations outside the U.S. also include:
•economic and political uncertainty in the United Kingdom and the EU following the United Kingdom’s withdrawal from the EU on January 31, 2020;
•changes in non-U.S. government programs;
•multiple non-U.S. regulatory requirements that are subject to change and that could restrict our ability to manufacture and sell our products;
•different local medical practices, product preferences and product requirements;
•possible failure to comply with trade protection and restriction measures and import or export licensing requirements;
•difficulty in establishing, staffing and managing non-U.S. operations;
•different labor regulations or work stoppages or strikes;
•political instability and actual or anticipated military or political conflicts;
•economic instability, including the European financial crisis or other economic instability in other parts of the world and the impact on interest rates, inflation and the credit worthiness of our customers;
•uncertainties regarding judicial systems and procedures;
•minimal or diminished protection of intellectual property in some countries;
•natural disasters or outbreak of diseases (including COVID-19); and
•imposition of government controls.
These risks, individually or in the aggregate, could have an adverse effect on our results of operations and financial condition. The occurrence or allegation of these types of risks may adversely affect our business, performance, prospects, value, financial condition, and results of operations.
Our operating results may be adversely affected by unfavorable economic conditions that affect our customers’ ability to buy our products and could affect our relationships with our suppliers.
Disruptions in financial markets worldwide and other worldwide macro-economic challenges may cause our customers and suppliers to experience cash flow concerns. If job losses and the resulting loss of health insurance and personal savings cause individuals to forego or postpone treatment, the resulting decreased hospital use could affect the demand for our products. As a result, customers may modify, delay or cancel plans to purchase our products and suppliers may increase their prices, reduce their output or change terms of sales. Additionally, if customers’ or suppliers’ operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain credit, customers may not be able to pay, or may delay payment of, accounts receivable owed to us and suppliers may impose different payment terms. Any inability of current and/or potential customers to pay us for our products or any demands by suppliers for different payment terms may adversely affect our earnings and cash flow.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
Our material properties used by us in connection with our corporate headquartersadministrative operations, manufacturing, distribution, research and the locationsdevelopment and uses of our principal manufacturing and other propertiesservice centers as of December 31, 2019,2020, are as follows:
| | | | | | | | | | | | | | | | | | | | |
Location | | Approximate Square Footage | | Primary Use | | Owned/Leased |
San Clemente, California, U.S. | | 39,000 | | Corporate Headquarters and R&D | | Owned |
San Clemente, California, U.S. | | 28,108 | | Corporate Headquarters | | Leased |
San Diego, California, U.S. | | 44,779 | | Corporate Offices and R&D | | Leased |
Lake Forest, Illinois, U.S. | | 137,498 | | Corporate Offices | | Leased |
Houten, Netherlands | | 7,341 | | Corporate Offices | | Leased |
Montreal, Canada | | 16,414 | | Corporate Offices/Device service center | | Leased |
Chennai, India | | 36,879 | | R&D | | Leased |
Rydalmere, NSW Australia | | 14,735 | | Corporate Offices/Device service center | | Leased |
| | | | | | |
Location | | Approximate Square Footage | | Primary Use | | Owned/Leased |
San Clemente, California, U.S. | | 39,000 | | Corporate Headquarters and R&D | | Owned |
San Clemente, California, U.S. | | 28,108 | | Corporate Headquarters | | Leased |
San Diego, California, U.S. | | 44,779 | | Corporate Offices and R&D | | Leased |
Lake Forest, Illinois, U.S. | | 137,498 | | Corporate Offices | | Leased |
Montreal, Canada | | 16,414 | | Corporate Offices | | Leased |
Chennai, India | | 36,879 | | R&D | | Leased |
Rydalmere, NSW Australia | | 14,735 | | Corporate Offices/Device service center | | Leased |
| | | | | | |
Austin, Texas, U.S. | | 594,602 | | Manufacturing | | Owned |
Ensenada, Baja California, Mexico | | 265,021 | | Manufacturing | | Owned |
La Aurora, Costa Rica | | 626,869 | | Manufacturing | | Owned |
Salt Lake City, Utah, U.S. | | 450,000 | | Manufacturing | | Owned |
| | | | | | |
Round Rock, Texas, U.S. | | 71,960 | | Warehouse/Manufacturing | | Owned |
| | | | | | |
Farmers Branch,Dallas, Texas, U.S. | | 66,060610,806 | | Distribution Warehouse | | OwnedLeased |
King of Prussia, Pennsylvania, U.S. | | 105,571 | | Distribution Warehouse | | Owned |
Santa Fe Springs, California, U.S. | | 76,794 | | Distribution Warehouse | | Owned |
| | | | | | |
San Jose, California, U.S.Sligo, Ireland | | 78,11926,000 | | Device service center | | Leased |
Sligo, Ireland | | 26,000 | | Device service center | | Leased |
In addition to the above, we own and lease additional office and building space, research and development, and sales and support offices primarily in North America, Europe, South America, and Asia. We believe our existing facilities, both owned and leased, are in good condition and suitable for the conduct of our business.
ITEM 3. LEGAL PROCEEDINGS
Certain legal proceedings in which we are involved are discussed in Part II, Item 8. "Financial Statements and Supplementary Data" of this Form 10-K in Note 15. Commitments and Contingencies to the Consolidated Financial Statements, and is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information for Common Stock
Our common stock has been traded on the NASDAQ Global Select Market under the symbol “ICUI” since our initial public offering on March 31, 1992.
Dividends
We have never paid dividends and do not anticipate paying dividends in the foreseeable future as the Board of Directors intends to retain future earnings for use in our business or to purchase our shares. Any future determination as to payment of dividends or purchase of our shares will depend upon our financial condition, results of operations and such other factors as the Board of Directors deems relevant.
Stockholders
As of January 31, 2020,2021, we had 54 stockholders of record. This does not include persons whose stock is in nominee or “street name” accounts through brokers.
Securities authorized for issuance under equity compensation plans are discussed in Part III, Item 12 of this Annual Report on Form 10-K.
Issuer Repurchase of Equity Securities
The following is a summary of our stock repurchasing activity during the fourth quarter of 2019:2020: |
| | | | | | | | | | | | | | |
Period | | Shares purchased | | Average price paid per share | | Shares purchased as part of a publicly announced program | | Approximate dollar value that may yet be purchased under the program(1) |
10/01/2019 - 10/31/2019 | | — |
| | $ | — |
| | — |
| | $ | 100,000,000 |
|
11/01/2019 - 11/30/2019 | | — |
| | $ | — |
| | — |
| | $ | 100,000,000 |
|
12/01/2019 - 12/31/2019 | | — |
| | $ | — |
| | — |
| | $ | 100,000,000 |
|
Fourth quarter 2019 total | | — |
| | $ | — |
| | — |
| | $ | 100,000,000 |
|
____________________________
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Shares purchased | | Average price paid per share | | Shares purchased as part of a publicly announced program | | Approximate dollar value that may yet be purchased under the program(1) |
Our common stock purchase plan, which authorized the repurchase of up to $100.0 million of our common stock, was authorized by our Board of Directors and publicly announced in August, 2019. This plan has no expiration date. We are not obligated to make any purchases under our stock purchase program. Subject to applicable state and federal corporate and securities laws, purchases under a stock purchase program may be made at such times and in such amounts as we deem appropriate. Purchases made under our stock purchase program can be discontinued at any time we feel additional purchases are not warranted.10/01/2020 - 10/31/2020 | | — | | | $ | — | | | — | | | $ | 100,000,000 | |
11/01/2020 - 11/30/2020 | | — | | | $ | — | | | — | | | $ | 100,000,000 | |
12/01/2020 - 12/31/2020 | | — | | | $ | — | | | — | | | $ | 100,000,000 | |
Fourth quarter 2020 total | | — | | | $ | — | | | — | | | $ | 100,000,000 | |
____________________________ (1)Our common stock purchase plan, which authorized the repurchase of up to $100.0 million of our common stock, was authorized by our Board of Directors and publicly announced in August 2019. This plan has no expiration date. We are not obligated to make any purchases under our stock purchase program. Subject to applicable state and federal corporate and securities laws, purchases under a stock purchase program may be made at such times and in such amounts as we deem appropriate. Purchases made under our stock purchase program can be discontinued at any time we feel additional purchases are not warranted.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data (presented in thousands, except per share amounts) is derived from our Consolidated Financial Statements. DuringBeginning in 2017, we acquired HIS (see Note 2 to the consolidated financial statements in Part II, Item 8our results reflect our acquisition of this Form 10-K).HIS. During 2018, we adopted Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. The adoption of this standard did not have a material impact on our consolidated financial statements. Our historical operating results are not necessarily indicative of future operating results and should be read in conjunction with the Consolidated Financial Statements and notes thereto, and with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | (in thousands, except per share data) |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
INCOME DATA: | | | | | | | | | | |
REVENUE | | | | | | | | | | |
Net sales | | $ | 1,271,004 | | | $ | 1,266,208 | | | $ | 1,400,040 | | | $ | 1,292,166 | | | $ | 379,339 | |
Other | | — | | | — | | | — | | | 447 | | | 33 | |
TOTAL REVENUE | | 1,271,004 | | | 1,266,208 | | | 1,400,040 | | | 1,292,613 | | | 379,372 | |
COST OF GOODS SOLD | | 809,507 | | | 794,344 | | | 830,012 | | | 866,518 | | | 177,974 | |
GROSS PROFIT | | 461,497 | | | 471,864 | | | 570,028 | | | 426,095 | | | 201,398 | |
Selling, general and administrative expenses | | 283,953 | | | 276,982 | | | 320,002 | | | 302,169 | | | 89,426 | |
Research and development expenses | | 42,948 | | | 48,611 | | | 52,867 | | | 51,253 | | | 12,955 | |
Restructuring, strategic transaction and integration | | 28,409 | | | 80,574 | | | 105,390 | | | 77,967 | | | 15,348 | |
Contract settlement | | (975) | | | 5,737 | | | 41,613 | | | — | | | — | |
Change in fair value of contingent earn-out | | 9,000 | | | (47,400) | | | 20,400 | | | 8,000 | | | — | |
| | | | | | | | | | |
| | | | | | | | | | |
Impairment of assets held for sale | | — | | | — | | | — | | | — | | | 728 | |
TOTAL OPERATING EXPENSES | | 363,335 | | | 364,504 | | | 540,272 | | | 439,389 | | | 118,457 | |
INCOME (LOSS) FROM OPERATIONS | | 98,162 | | | 107,360 | | | 29,756 | | | (13,294) | | | 82,941 | |
BARGAIN PURCHASE GAIN | | — | | | — | | | — | | | 70,890 | | | 1,456 | |
INTEREST EXPENSE | | (1,753) | | | (549) | | | (709) | | | (2,047) | | | (118) | |
OTHER INCOME (EXPENSE), net | | 1,085 | | | 7,896 | | | (6,673) | | | (4,266) | | | 885 | |
INCOME BEFORE INCOME TAXES | | 97,494 | | | 114,707 | | | 22,374 | | | 51,283 | | | 85,164 | |
(PROVISION) BENEFIT FOR INCOME TAXES | | (10,624) | | | (13,672) | | | 6,419 | | | 17,361 | | | (22,080) | |
NET INCOME | | $ | 86,870 | | | $ | 101,035 | | | $ | 28,793 | | | $ | 68,644 | | | $ | 63,084 | |
NET INCOME PER SHARE | | | | | | | | | | |
Basic | | $ | 4.16 | | | $ | 4.90 | | | $ | 1.41 | | | $ | 3.50 | | | $ | 3.90 | |
Diluted | | $ | 4.02 | | | $ | 4.69 | | | $ | 1.33 | | | $ | 3.29 | | | $ | 3.66 | |
WEIGHTED AVERAGE NUMBER OF SHARES | | | | | | | | | | |
Basic | | 20,907 | | | 20,629 | | | 20,394 | | | 19,614 | | | 16,168 | |
Diluted | | 21,591 | | | 21,545 | | | 21,601 | | | 20,858 | | | 17,254 | |
Cash dividends per share | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
CASH FLOW DATA: | | | | | | | | | | |
Total cash flows from operations | | $ | 222,752 | | | $ | 101,918 | | | $ | 160,215 | | | $ | 154,423 | | | $ | 89,941 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | (in thousands, except per share data) |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
INCOME DATA: | | |
| | |
| | |
| | |
| | |
|
REVENUE | | |
| | |
| | |
| | |
| | |
|
Net sales | | $ | 1,266,208 |
| | $ | 1,400,040 |
| | $ | 1,292,166 |
| | $ | 379,339 |
| | $ | 341,254 |
|
Other | | — |
| | — |
| | 447 |
| | 33 |
| | 414 |
|
TOTAL REVENUE | | 1,266,208 |
| | 1,400,040 |
| | 1,292,613 |
| | 379,372 |
| | 341,668 |
|
COST OF GOODS SOLD | | 794,344 |
| | 830,012 |
| | 866,518 |
| | 177,974 |
| | 160,871 |
|
GROSS PROFIT | | 471,864 |
| | 570,028 |
| | 426,095 |
| | 201,398 |
| | 180,797 |
|
Selling, general and administrative expenses(1) | | 276,982 |
| | 320,002 |
| | 302,169 |
| | 89,426 |
| | 83,216 |
|
Research and development expenses | | 48,611 |
| | 52,867 |
| | 51,253 |
| | 12,955 |
| | 15,714 |
|
Restructuring and strategic transaction | | 80,574 |
| | 105,390 |
| | 77,967 |
| | 15,348 |
| | 8,451 |
|
Contract settlement | | 5,737 |
| | 41,613 |
| | — |
| | — |
| | — |
|
Change in fair value of contingent earn-out | | (47,400 | ) | | 20,400 |
| | 8,000 |
| | — |
| | — |
|
Gain on sale of assets | | — |
| | — |
| | — |
| | — |
| | (1,086 | ) |
Legal settlements | | — |
| | — |
| | — |
| | — |
| | 1,798 |
|
Impairment of assets held for sale | | — |
| | — |
| | — |
| | 728 |
| | 4,139 |
|
TOTAL OPERATING EXPENSES | | 364,504 |
| | 540,272 |
| | 439,389 |
| | 118,457 |
| | 112,232 |
|
INCOME (LOSS) FROM OPERATIONS | | 107,360 |
| | 29,756 |
| | (13,294 | ) | | 82,941 |
| | 68,565 |
|
BARGAIN PURCHASE GAIN | | — |
| | — |
| | 70,890 |
| | 1,456 |
| | — |
|
INTEREST EXPENSE | | (549 | ) | | (709 | ) | | (2,047 | ) | | (118 | ) | | (39 | ) |
OTHER INCOME (EXPENSE), net(1) | | 7,896 |
| | (6,673 | ) | | (4,266 | ) | | 885 |
| | 1,173 |
|
INCOME BEFORE INCOME TAXES | | 114,707 |
| | 22,374 |
| | 51,283 |
| | 85,164 |
| | 69,699 |
|
(PROVISION) BENEFIT FOR INCOME TAXES | | (13,672 | ) | | 6,419 |
| | 17,361 |
| | (22,080 | ) | | (24,714 | ) |
NET INCOME | | $ | 101,035 |
| | $ | 28,793 |
| | $ | 68,644 |
| | $ | 63,084 |
| | $ | 44,985 |
|
NET INCOME PER SHARE | | |
| | |
| | |
| | |
| | |
|
Basic | | $ | 4.90 |
| | $ | 1.41 |
| | $ | 3.50 |
| | $ | 3.90 |
| | $ | 2.84 |
|
Diluted | | $ | 4.69 |
| | $ | 1.33 |
| | $ | 3.29 |
| | $ | 3.66 |
| | $ | 2.73 |
|
WEIGHTED AVERAGE NUMBER OF SHARES | | |
| | |
| | |
| | |
| | |
|
Basic | | 20,629 |
| | 20,394 |
| | 19,614 |
| | 16,168 |
| | 15,848 |
|
Diluted | | 21,545 |
| | 21,601 |
| | 20,858 |
| | 17,254 |
| | 16,496 |
|
Cash dividends per share | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
CASH FLOW DATA: | | |
| | |
| | |
| | |
| | |
|
Total cash flows from operations | | $ | 101,918 |
| | $ | 160,215 |
| | $ | 154,423 |
| | $ | 89,941 |
| | $ | 64,195 |
|
__________________________ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | (in thousands) |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
BALANCE SHEET DATA: | | | | | | | | | | |
Cash, cash equivalents and short-term investment securities | | $ | 410,784 | | | $ | 292,637 | | | $ | 382,110 | | | $ | 300,133 | | | $ | 445,082 | |
Working capital | | $ | 725,289 | | | $ | 633,729 | | | $ | 677,747 | | | $ | 654,370 | | | $ | 528,560 | |
Total assets | | $ | 1,763,691 | | | $ | 1,692,382 | | | $ | 1,585,391 | | | $ | 1,496,951 | | | $ | 704,688 | |
Stockholders’ equity | | $ | 1,502,265 | | | $ | 1,377,244 | | | $ | 1,263,655 | | | $ | 1,198,254 | | | $ | 660,155 | |
(1) For the years 2018 and 2017, we reclassified foreign currency losses out of selling, general and administrative in to other income (expense), net to be comparative to the current year presentation.
|
| | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | (in thousands) |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
BALANCE SHEET DATA: | | |
| | |
| | |
| | |
| | |
|
Cash, cash equivalents and short-term investment securities | | $ | 292,637 |
| | $ | 382,110 |
| | $ | 300,133 |
| | $ | 445,082 |
| | $ | 377,397 |
|
Working capital | | $ | 633,729 |
| | $ | 677,747 |
| | $ | 654,370 |
| | $ | 528,560 |
| | $ | 462,389 |
|
Total assets | | $ | 1,692,382 |
| | $ | 1,585,391 |
| | $ | 1,496,951 |
| | $ | 704,688 |
| | $ | 626,825 |
|
Stockholders’ equity | | $ | 1,377,244 |
| | $ | 1,263,655 |
| | $ | 1,198,254 |
| | $ | 660,155 |
| | $ | 579,871 |
|
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes thereto.
Business Overview and Highlights
We are one of the world's leading pure-play infusion therapy companies with global operations and a wide-ranging product portfolio that includes IV solutions, IV smart pumps with pain management and safety software technology, dedicated and nondedicated IV sets and needlefree connectors along with pain management and safety software technology designed to help meet clinical, safety and workflow goals. In addition, we manufacture automated pharmacy IV compounding systems with workflow technology, closed system transfer devices for preparing and administering hazardous IV drugs and cardiac monitoring systems to optimize patient fluid levels.for critically ill patients.
COVID-19 Pandemic
As a result of the COVID-19 pandemic, our non-essential offices and facilities, including our corporate headquarters are closed to non-essential employees.
Our manufacturing, distribution, and pump service facilities are operating under our business continuity plan due to the need for our critical healthcare products, however, we have taken certain precautionary measures including the following to maximize the safety of our employees and to mitigate disruption to our operations:
•implemented physical distancing measures;
•enhanced hygiene protocols and increased frequency of cleaning procedures;
•acquired additional personal protective equipment;
•developed contingency plans and protocols to assess employee illness;
•helped employees with childcare issues due to school and daycare closures;
•implemented COVID-19 temperature screening for employees entering our manufacturing and distribution facilities; and
•initiated a visitor pre-entry questionnaire to limit potential exposure in our facilities.
During the first quarter in 2020, as a precautionary measure in response to market uncertainty driven by COVID-19, we preemptively increased our liquidity by borrowing $150.0 million under our Senior Secured Revolving Credit Facility ("Credit Facility"). As 2020 progressed, financial institutions demonstrated adequate liquidity in meeting the funding needs of the market and our internal operations remained stable, as such, we fully repaid the $150.0 million borrowed under our Credit Facility during the third quarter.
During 2020, due to the COVID-19 pandemic, we saw a meaningful decline in demand for our Infusion Consumables non-dedicated sets, a decline in demand for our Infusion Systems dedicated sets and an increase in demand for our Infusion Systems hardware. During 2020, most notably in the first quarter, we also experienced foreign exchange losses related to the strengthening of the U.S. dollar relative to certain foreign currencies as general economic conditions declined in response to COVID-19.
The system integrationeffect of Pfizer's HIS businessthe COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that was primarily completedcannot be fully predicted at this time, as such, the impact of the pandemic on our future results of operations
and overall financial performance remain uncertain and cannot as yet be quantified. However, our future results could be impacted by the endfollowing:
•lost revenue or additional costs associated with either disruptions at our production and distribution facilities or interruptions in our supply chain;
•fluctuations in demand from customers as a result of 2018 resultedan increase in COVID-19 patient admissions in hospitals offset by the decline in non-COVID-19 patient admissions;
•healthcare customers that defer the more profitable elective procedures may experience financial difficulties and may be unable to pay within payment terms for the products they purchased;
•potential lower demand in future periods due to over-purchasing of our products due to the COVID-19 pandemic;
•reduced revenue due to delays in implementation of our infusion systems and oncology products at hospital locations due to restricted access;
•higher operating costs related to additional compensation paid to our manufacturing and distribution facility workers;
•volatility in cash flow, revenue and income due to foreign currency fluctuations and volatility;
•lower travel and entertainment costs due to global travel restrictions;
•lower income due to a delay in cost improvementssavings projects as a result of the travel and operating efficiencies during 2019. These cost improvementssocial distancing requirements of COVID-19; and operating efficiencies partially offset the revenue decrease for the current period as compared
•lower interest income on cash balances due to the prior year, which was drivenreductions in part byinterest rates along with higher interest expense from borrowings under our competitive commercial environment, primarily in our IV Solutions product line.$150.0 million Credit Facility, if necessary, to maintain adequate liquidity.
Consolidated Results of Operations
The following table summarizes our total worldwide revenue by domestic and international markets by amount and as a percentage of total revenue (in millions, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| $ | | % of Revenue | | $ | | % of Revenue | | $ | | % of Revenue |
Domestic | $ | 910.6 | | | 72 | % | | $ | 923.3 | | | 73 | % | | $ | 1,054.7 | | | 75 | % |
International | 360.4 | | | 28 | % | | 342.9 | | | 27 | % | | 345.3 | | | 25 | % |
Total Revenue | $ | 1,271.0 | | | 100 | % | | $ | 1,266.2 | | | 100 | % | | $ | 1,400.0 | | | 100 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| $ | | % of Revenue | | $ | | % of Revenue | | $ | | % of Revenue |
Domestic | $ | 923.3 |
| | 73 | % | | $ | 1,054.7 |
| | 75 | % | | $ | 980.0 |
| | 76 | % |
International | 342.9 |
| | 27 | % | | 345.3 |
| | 25 | % | | 312.6 |
| | 24 | % |
Total Revenue | $ | 1,266.2 |
| | 100 | % | | $ | 1,400.0 |
| | 100 | % | | $ | 1,292.6 |
| | 100 | % |
The following table sets forth, for the periods indicated, total revenue by product line as a percentage of total revenue:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
Product line | | 2020 | | 2019 | | 2018 |
Infusion Consumables | | 37 | % | | 37 | % | | 35 | % |
Infusion Systems | | 28 | % | | 26 | % | | 25 | % |
IV Solutions | | 31 | % | | 33 | % | | 36 | % |
Critical Care | | 4 | % | | 4 | % | | 4 | % |
| | | | | | |
| | 100 | % | | 100 | % | | 100 | % |
|
| | | | | | | | | |
Product line | | 2019 | | 2018 | | 2017 |
Infusion Consumables | | 37 | % | | 35 | % | | 28 | % |
Infusion Systems | | 26 | % | | 25 | % | | 23 | % |
IV Solutions | | 33 | % | | 36 | % | | 40 | % |
Critical Care | | 4 | % | | 4 | % | | 4 | % |
Other | | — | % | | — | % | | 5 | % |
| | 100 | % | | 100 | % | | 100 | % |
We manage our product distribution in the U.S. through a network of threetwo owned and one leased distribution facilities, as well as, through direct channels, which include independent distributors and the end users of our products, and as original equipment manufacturer suppliers. Most of our independent distributors handle the full line of our products. Internationally, we manage distribution utilizing international regional hubs and through independent distributors.
In the U.S. a substantial amount of our products are sold to group purchasing organization ("GPO") member hospitals. We believe that as healthcare providers continue to either consolidate or join major buying organizations, the success of our products will depend, in part, on our ability, either independently or through strategic relationships to secure long-term contracts with large healthcare providers and major buying organizations. Although we believe that we are not dependent on any single distributor, large healthcare provider or major buying organization for distribution of our products, the loss of a strategic relationship with any one of these organizations or a decline in demand for our products could have a material adverse effect on our operating results.
We believe that achievement of our growth objectives worldwide will require increased efforts by us in sales and marketing and product acquisition and development; however, there is no assurance that we will be successful in implementing our growth strategy. Product development or acquisition efforts may not succeed, and even if we do develop or acquire additional products, there is no assurance that we will achieve profitable sales of such products. Increased expenditures for sales and marketing and product acquisition and development may not yield desired results when expected, or at all. While we have taken steps to control these risks, there are certain risks that may be outside of our control, and there is no assurance that steps we have taken will succeed.
Seasonality/Quarterly Results
There are no significant seasonal aspects to our business. We can experience fluctuations in net sales as a result of variations in the ordering patterns of our largest customers, which may be driven more by production scheduling and their inventory levels, and less by seasonality. Our expenses often do not fluctuate in the same manner as net sales, which may cause fluctuations in operating income that are disproportionate to fluctuations in our revenue.
Acquisitions
On November 2, 2019, we acquired 100% interest in Pursuit for total consideration of approximately $75.0 million in cash and a potential contingent earn-out of up to $50.0 million payable in 2021. See Note 2 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further details of our acquisitions.
We present summarized income statement data in Item 6. Selected Financial Data. The following table shows, for the three most recent years, the percentages of each income statement caption in relation to total revenues.
|
| | | | | | | | | |
| | Percentage of Revenues |
| | 2019 | | 2018 | | 2017 |
Revenue | | |
| | |
| | |
|
Net sales | | 100 | % | | 100 | % | | 100 | % |
Other | | — | % | | — | % | | — | % |
Total revenues | | 100 | % | | 100 | % | | 100 | % |
Gross margin | | 37 | % | | 41 | % | | 33 | % |
Selling, general and administrative expenses | | 22 | % | | 23 | % | | 24 | % |
Research and development expenses | | 4 | % | | 4 | % | | 4 | % |
Restructuring and transaction expense | | 6 | % | | 8 | % | | 6 | % |
Change in fair value of contingent earn-out | | (4 | )% | | 1 | % | | 1 | % |
Contract settlement | | — | % | | 3 | % | | — | % |
Total operating expenses | | 28 | % | | 39 | % | | 35 | % |
Income (loss) from operations | | 9 | % | | 2 | % | | (2 | )% |
Bargain Purchase Gain | | — | % | | — | % | | 5 | % |
Interest expense | | — | % | | — | % | | — | % |
Other income (expense), net | | 1 | % | | — | % | | — | % |
Income before income taxes | | 10 | % | | 2 | % | | 3 | % |
Provision (Benefit) For Income taxes | | 1 | % | | — | % | | (1 | )% |
Net income | | 9 | % | | 2 | % | | 4 | % |
| | | | | | | | | | | | | | | | | | | | |
| | Percentage of Revenues |
| | 2020 | | 2019 | | 2018 |
Total revenues | | 100 | % | | 100 | % | | 100 | % |
| | | | | | |
| | | | | | |
Gross profit | | 36 | % | | 37 | % | | 41 | % |
Selling, general and administrative | | 22 | % | | 22 | % | | 23 | % |
Research and development | | 3 | % | | 4 | % | | 4 | % |
Restructuring, strategic transaction and integration | | 2 | % | | 6 | % | | 8 | % |
Change in fair value of contingent earn-out | | 1 | % | | (4) | % | | 1 | % |
Contract settlement | | — | % | | — | % | | 3 | % |
| | | | | | |
| | | | | | |
| | | | | | |
Total operating expenses | | 28 | % | | 28 | % | | 39 | % |
Income from operations | | 8 | % | | 9 | % | | 2 | % |
| | | | | | |
Interest expense | | — | % | | — | % | | — | % |
Other income (expense), net | | — | % | | 1 | % | | — | % |
Income before income taxes | | 8 | % | | 10 | % | | 2 | % |
Provision (benefit) for income taxes | | 1 | % | | 1 | % | | — | % |
Net income | | 7 | % | | 9 | % | | 2 | % |
Total revenues for 2020, 2019 2018 and 20172018 were $1.3 billion, $1.4$1.3 billion and $1.3$1.4 billion, respectively.
In addition to comparing changes in revenue on a U.S. GAAP basis, we also compare the changes in revenue from one period to another using constant currency. We provide constant currency information to enhance the visibility of underlying business trends, excluding the effects of changes in foreign currency translation rates. To calculate our constant currency results, we apply the average exchange rate for revenues from the prior year to the current year results. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with GAAP.
Infusion Consumables
The following table summarizes our total Infusion Consumables revenue (in millions, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | $ change | | % change | | $ change | | % change |
| 2020 | | 2019 | | 2018 | | 2020 over 2019 | | 2019 over 2018 |
Infusion Consumables | $ | 473.7 | | | $ | 477.6 | | | $ | 483.0 | | | $ | (3.9) | | | (0.8) | % | | $ | (5.4) | | | (1.1) | % |
Infusion Consumables revenue decreased in 2020, as compared to 2019. The decrease was mostly driven by overall lower demand for our products due to the COVID-19 pandemic, partially offset by sales from new customers and sales of our ClearGuard HD product, which we acquired in our fourth quarter 2019 acquisition of Pursuit. On a constant currency basis,
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| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | $ change | | % change | | $ change | | % change |
| 2019 | | 2018 | | 2017 | | 2019 over 2018 | | 2018 over 2017 |
Infusion Consumables | $ | 477.6 |
| | $ | 483.0 |
| | $ | 365.6 |
| | $ | (5.4 | ) | | (1.1 | )% | | $ | 117.4 |
| | 32.1 | % |
Infusion Consumables revenue was comparable at $474.0 million for 2020, as the full year impact of foreign currency was negligible.
Infusion Consumables revenue decreased in 2019, as compared to 2018. The decrease was mostly driven by foreign exchange rates. On a constant currency basis, Infusion Consumables revenue would have been $485.8 million for 2019, an increase of $2.8 million or 0.6%, as compared to 2018.
The increase in Infusion Consumables revenue in 2018, as compared to 2017 was primarily driven by three factors, (i) the classification of revenue related to certain foreign jurisdiction HIS entities with deferred closes during 2017 as "Other Revenue" for 2017, due to the fact that we were unable to allocate the revenue to a specific product line, (ii) the addition of new customers in Infusion for IV therapy and oncology products in 2018, and (iii) the completion of acquisitions in 2018. In addition, 2017 includes approximately eleven months of revenue from the point of closing of the HIS transaction to the end of the year.
Infusion Systems
The following table summarizes our total Infusion Systems revenue (in millions, except percentages): |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | $ change | | % change | | $ change | | % change |
| 2019 | | 2018 | | 2017 | | 2019 over 2018 | | 2018 over 2017 |
Infusion Systems | $ | 328.3 |
| | $ | 355.5 |
| | $ | 290.2 |
| | $ | (27.2 | ) | | (7.7)% | | $ | 65.3 |
| | 22.5% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | $ change | | % change | | $ change | | % change |
| 2020 | | 2019 | | 2018 | | 2020 over 2019 | | 2019 over 2018 |
Infusion Systems | $ | 359.7 | | | $ | 328.3 | | | $ | 355.5 | | | $ | 31.4 | | | 9.6% | | $ | (27.2) | | | (7.7)% |
Infusion Systems revenue increased in 2020, as compared to 2019. The increase in revenue was primarily due to high demand for our infusion pumps during the COVID-19 pandemic, offset partially by lower demand for our dedicated infusion sets and losses of our non-core ambulatory pump business. On a constant currency basis Infusion Systems revenue in 2020 would have been $364.7 million, an increase of $36.4 million or 11.1%, as compared to 2019.
Infusion Systems revenue decreased in 2019, as compared to 2018. The decrease in revenue was primarily due to the impact of exchange rates and losses of our non-core ambulatory and patient controlled analgesia pumps business. On a constant currency basis Infusion Systems revenue in 2019 would have been $338.6 million, a decrease of $16.9 million or 4.8%, as compared to 2018.
Infusion Systems revenue increased in 2018, as compared to 2017, primarily due to the revenue related to certain foreign jurisdiction HIS entities that had deferred closes during 2017. The revenue related to these deferred close entities in 2017 was included in "Other Revenue", as we were unable to allocate the revenue to a specific product line. In addition, 2017 includes approximately eleven months of revenue from the point of closing of the HIS transaction to the end of the year.
IV Solutions
The following table summarizes our total IV Solutions revenue (in millions, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | $ change | | % change | | $ change | | % change |
| 2020 | | 2019 | | 2018 | | 2020 over 2019 | | 2019 over 2018 |
IV Solutions | $ | 389.0 | | | $ | 415.0 | | | $ | 508.0 | | | $ | (26.0) | | | (6.3)% | | $ | (93.0) | | | (18.3)% |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | $ change | | % change | | $ change | | % change |
| 2019 | | 2018 | | 2017 | | 2019 over 2018 | | 2018 over 2017 |
IV Solutions | $ | 415.0 |
| | $ | 508.0 |
| | $ | 522.0 |
| | $ | (93.0 | ) | | (18.3)% | | $ | (14.0 | ) | | (2.7)% |
IV Solutions sales decreased in 2020, as compared to 2019, due to lower contract manufacturing sales to Pfizer and higher sales in the first quarter of 2019 to non-contracted customers.
IV Solutions sales decreased in 2019, as compared to 2018. Supply constraints at our competitors beginning in the second quarter of 2017 and continuing through 2018 caused some temporary customer purchases and stock-up of IV Solutions in 2018. These market shortages temporarily drove up the demand for our product during the latter part of 2017, in 2018 and during the first part of 2019. In addition, theThe temporary increase in IV Solutions sales that we had as a result of competitor supply constraints has generally normalized in mid-2019 as customers have returned to their original contract supplier.
IV Solutions sales decreased in 2018, as compared to 2017. In 2017, the supply constraints at our competitors, mentioned above, temporarily drove up the demand for our products. During 2018, supply normalized, which started to normalize customer demand. IV Solutions revenue for 2017 includes approximately eleven months of revenue from the point of closing of the HIS transaction to the end of the year.
Critical Care
The following table summarizes our total Critical Care revenue (in millions, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | $ change | | % change | | $ change | | % change |
| 2020 | | 2019 | | 2018 | | 2020 over 2019 | | 2019 over 2018 |
Critical Care | $ | 48.6 | | | $ | 45.3 | | | $ | 53.5 | | | $ | 3.3 | | | 7.3 | % | | $ | (8.2) | | | (15.3) | % |
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| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | $ change | | % change | | $ change | | % change |
| 2019 | | 2018 | | 2017 | | 2019 over 2018 | | 2018 over 2017 |
Critical Care | $ | 45.3 |
| | $ | 53.5 |
| | $ | 50.0 |
| | $ | (8.2 | ) | | (15.3 | )% | | $ | 3.5 |
| | 7.0 | % |
Critical Care revenue increased in 2020, as compared to 2019, primarily as a result of growth in the Asia region and improved manufacturing capacity.
Critical Care revenue decreased in 2019, as compared to 2018, primarily due to manufacturing constraints.
In
Gross Profits
Gross profits for 2020, 2019 and 2018 Critical Care revenue increased,were 36.3%, 37.3%, and 40.7%, respectively.
The decrease in gross profit in 2020, as compared to 2017,2019 was primarily due to newlower IV Solutions manufacturing volumes and unfavorable product shipmentsmix as a result of lower demand for our consumables products during the Cogent patient monitor and due to timing of orders.
Revenue from Deferred Close Entities
COVID-19 pandemic.
As part of the HIS business acquisition, the closing of certain foreign jurisdictions were deferred, as such, we entered into a Net Economic Benefit agreement with Pfizer (see Note 2 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information). The revenue data related to these deferred closing entities was not available by product line, therefore our revenue by product line for 2017 described above did not include amounts related to these entities. All of the deferred closing entities were effectively closed in 2018, which allowed for allocation of all of the revenue to a specific product line for 2018 and beyond.
The following table summarizes our revenue from our deferred close entities (in millions):
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| | | | | | | | | | | | | | | | |
| Year Ended December 31, | $ change | | % change |
| 2019 | | 2018 | | 2017 | 2018 over 2017 |
Revenue from Deferred Close Entities | $ | — |
| | $ | — |
| | $ | 64.4 |
| $ | (64.4 | ) | | * |
*Not meaningful.
Gross Margins
Gross margins for 2019, 2018 and 2017 were 37.3%, 40.7%, and 33.0%, respectively.
The decrease in gross marginprofit in 2019, as compared to 2018 was primarily due to the slowdown in manufacturing of IV Solutions and additional supply chain costs related to higher than optimal inventory levels. In 2019, we also recorded a one-time supply chain inventory optimization charge of $16.3 million for the initial ramp down of IV Solution production to align supply to market demand.
The increase in gross margin in 2018, as compared to 2017, was primarily due to a change in product mix related to increased Infusion Consumables and increased factory efficiencies. 2017 was negatively impacted by the step-up of inventory from the purchase accounting related to the HIS acquisition.
Selling, General and Administrative ("SG&A") Expenses
The following table summarizes our SG&A expenses (in millions, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | $ change | | % change | | $ change | | % change |
| 2020 | | 2019 | | 2018 | | 2020 over 2019 | | 2019 over 2018 |
SG&A | $ | 284.0 | | | $ | 277.0 | | | $ | 320.0 | | | $ | 7.0 | | | 2.5 | % | | $ | (43.0) | | | (13.4) | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | $ change | | % change | | $ change | | % change |
| 2019 | | 2018 | | 2017 | | 2019 over 2018 | | 2018 over 2017 |
SG&A | $ | 277.0 |
| | $ | 320.0 |
| | $ | 302.2 |
| | $ | (43.0 | ) | | (13.4 | )% | | $ | 17.8 |
| | 5.9 | % |
Consolidated SG&A expenses increased in 2020, as compared to 2019. Dealer fees increased $9.3 million, depreciation and amortization expense increased $7.1 million, compensation expense increased $5.5 million, and stock compensation increased $2.0 million. Offsetting these expense increases was a $6.3 decrease in bad debt expense, a $6.3 million decrease in travel expenses, a $3.7 million decrease in consulting expenses, and a $2.8 million decrease in sales and marketing expenses. Dealer fees increased due to a change to a distribution model from a direct model in Canada and an increase in revenue from distributors. Depreciation and amortization expense increased primarily as a result of the increase in amortization base due to the November 2019 acquisition of Pursuit. Compensation expense increased as a result of lower incentive compensation recognized in the prior year due to results below performance targets. Stock compensation increased in the current year due to a change in the number of performance shares estimated to vest on one of our non-executive performance awards. Bad debt expense is estimated based on an analysis of the expected losses on the accounts receivables at the reporting date, which varies from period-to-period due to the quality of those receivables. Travel expenses decreased in the current year, as compared to prior year, due to travel restrictions in response to COVID-19. Consulting expense was higher in 2019 due to charges incurred related to tax compliance and IT infrastructure expenses. Sales and marketing expenses decreased due to the impact of COVID-19 on trade shows, conferences, and related expenses.
Consolidated SG&A expenses decreased in 2019, as compared to 2018. Consulting expenses decreased $33.9 million, compensation expense decreased $17.9 million, legal expense decreased $3.8 million, marketing expenses decreased $3.4 million, information technology decreased $3.3 million, stock based compensation decreased $3.2 million and travel expenses decreased $2.8 million. Partially offsetting these decreases was a $10.6 million increase in depreciation and amortization and a
$7.9 $7.9 million increase in bad debt and warranty expense. Consulting expenses decreased as our transitional services agreement with Pfizer ended in the fourth quarter of 2018. Compensation expense decreased in the current period as incentive bonuses were higher in the prior year due to company performance. Legal expenses were higher in the prior year due to expenses incurred related to the contract settlement, discussed below. Marketing expenses decreased in the current period as the prior period included additional expenses related to post-acquisition branding efforts. Information technology expenses decreased as software maintenance costs decreased in the current period. Stock based compensation decreased due to an adjustment for changes in the number of performance shares estimated to vest. Depreciation expense increased due to an increase in the depreciable asset base related to the HIS integration. Bad debt expense increased as a result of the quarterly assessment of our reserves related to our accounts receivable.
Consolidated SG&A expense increased in 2018, as compared to 2017, primarily attributable to the impact of the integration of HIS as we incurred duplicative costs as we added resources to stand up the business that will replace the services provided under the transitional services agreement with Pfizer. Compensation expense increased $19.5 million, information technology expense increased $7.7 million, marketing expenses increased $4.5 million, legal expenses increased $3.5 million, travel expenses increased $3.3 million and dealer fees increased $2.2 million. Offsetting these increases was a $23.9 million decrease in consulting expenses and decreases in other miscellaneous expenses. Compensation increased due to an increase in headcount from new employees hired to support the company post-acquisition of HIS. Information technology expense increases were due to the HIS post-acquisition needs to stand up the company. Marketing expenses increased primarily due to the continued integration of HIS and the post-acquisition operational activity. Legal expenses increased due to the continued integration of HIS and legal services needed to support a larger business. Travel expense increased as a result of the operational needs of the company. Dealer fees increased due to the increase in revenue.
We reclassified $8.1 million and $1.8 million of foreign exchange losses for 2018 and 2017, respectively, from SG&A to other income (expense), net to conform to our current year reporting of those gains and losses.
Research and Development ("R&D") Expenses
The following table summarizes our total R&D Expenses (in millions, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | $ change | | % change | | $ change | | % change |
| 2020 | | 2019 | | 2018 | | 2020 over 2019 | | 2019 over 2018 |
R&D | $ | 42.9 | | | $ | 48.6 | | | $ | 52.9 | | | $ | (5.7) | | | (11.7) | % | | $ | (4.3) | | | (8.1) | % |
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| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | $ change | | % change | | $ change | | % change |
| 2019 | | 2018 | | 2017 | | 2019 over 2018 | | 2018 over 2017 |
R&D | $ | 48.6 |
| | $ | 52.9 |
| | $ | 51.3 |
| | $ | (4.3 | ) | | (8.1 | )% | | $ | 1.6 |
| | 3.1 | % |
R&D expenses decreased slightlyin 2020, as compared to 2019, and decreased in 2019, as compared to 2018. The current year expense isR&D expenses are primarily related to compensation and benefit expenses incurred on our current R&D projects.
In 2018, as compared to 2017, R&D expenses increased due to post-acquisition operational activity attributable to a larger business and 2017 includes approximately eleven months of R&D expense from the point of closing of the transaction to the end of theprojects in progress during each year.
Restructuring, Strategic Transaction and Integration Expenses
Restructuring, strategic transaction and integration expenses were $28.4 million, $80.6 million and $105.4 million in 2020, 2019 and $78.0 million in 2019, 2018, and 2017, respectively.
Restructuring Charges
In 2020, restructuring charges were $7.9 million. These charges were primarily related to severance and costs related to office and other facility closures. We expect to pay unpaid restructuring charges as of December 31, 2020, in 2021.
In 2019, restructuring charges were $8.4 million. These charges were primarily related to a one-time charge to move our U.S. pump service depot to our existing Salt Lake City facility and other plant restructuring. We expect to pay unpaid restructuring charges as of December 31, 2019, in 2020.
In 2018, restructuring charges were $4.5 million. These charges were related to (i) severance costs from the reduction in our workforce as a result of the continued integration of HIS. All material charges in regard to these restructuring activities have been paid as of December 31, 2019.
In 2017, restructuring charges were $18.8 million. These charges were related to (i) severance costs from the reduction in our workforce needed to eliminate duplicative positions created as a result of the HIS acquisition and (ii) we
closed our Dominican Republic manufacturing facility and incurred expenses associated with the closure and transfer of assets and production to our Costa Rica and Mexico manufacturing facilities.
Strategic Transaction and Integration Expenses
In 2020, we incurred $20.5 million in strategic transaction and integration expenses primarily related to the integration of HIS, which included the migration of IT systems at our Austin facility.
In 2019, we incurred $72.2 million in strategic transaction and integration expenses primarily related to the integration of the HIS business. Integration expenses included a one-time strategic supply chain restructuring charge of $22.1 million, which reduces our contracted commitments to our third party manufacturer and we incurred charges related to our final Pfizer separation costs and clean-up, which included a $12.7 million non-cash write-off of related assets.
In 2018, we incurred $100.9 million in strategic transaction and integration expenses primarily related to our continued integration of the HIS business and IT systems.
In 2017, we incurred $59.2 million in strategic transaction and integration expenses primarily related to our acquisition of the HIS business.
Change in fair value of contingent earn-out
In 2020, the fair value revaluation of our Pursuit contingent earn-out liability resulted in an increase in value of $9.0 million.
In 2019, the fair value revaluation of our HIS contingent earn-out liability resulted in a change in value of $47.4 million reducing the liability balance to zero. The earn-out period ended on December 31, 2019 and we did not meet2019. As of the requireddate of this filing, Pfizer has disputed our determination that the performance targets in order to pay out anyrequiring payout of the earn-out.HIS earn-out liability were not met. We expect the dispute will be resolved by binding arbitration unless both parties are able to come to an agreement on this issue.
In 2018, the fair value revaluation of our HIS contingent earn-out liability resulted in a change in fair value of $20.4 million.
In 2017, the fair value revaluation of our HIS contingent earn-out liability resulted in a loss of $8.0 million.
Contract Settlement
In 2020, we recorded $1.0 million in contract settlement income related to the resolution of a dispute with one of our suppliers. In2019 and 2018, we incurred a $5.7 million and $41.6 million charge, respectively, related to the resolution of a dispute with a product partner, which resulted in a redefinition of our contractual arrangement and in the rights and remedies determined under such arrangement.
Bargain Purchase GainInterest Expense
Interest expense was $1.8 million, $0.5 million and $0.7 million in 2020, 2019 and 2018, respectively.
In 2020, interest expense was primarily related to borrowings under our five-year Revolving Credit Facility ("Credit Facility") and the amortization of financing costs that were incurred in 2017 in connection with entering into the HIS acquisition, we recognized a bargain purchase gain of $70.9 million. The bargain purchase gain represented the excess of the estimated fair market value of the identifiable tangible and intangible assets acquired and liabilities assumed, net of deferred tax liabilities over the total purchase consideration. We determined that the bargain purchase gain was primarily attributable to expected restructuring costs as well as a reduction to the initially agreed upon transaction price caused primarily by revenue shortfalls across all market segments of the HIS business, negative manufacturing variance due to the drop in revenue and higher operating and required stand up costs, when compared to forecasts of the HIS business at the time that the purchase price was agreed upon.Credit Facility.
Interest Expense
Interest expense was $0.5 million, $0.7 million and $2.0 million in 2019, 2018 and 2017, respectively.
In 2019 and 2018, the interest expense was related toincludes the amortization of the financing cost incurred in 2017 in connection with the five-year Revolving Credit Facility ("Credit Facility")costs and a related per annum commitment fee charged on the unused portion of the revolver under such Credit Facility.
Borrowing under the Credit Facility (seebears interest, at our option, based on the Base Rate (as defined in Note 11 Long-Term Obligations in our accompanying consolidated financial statements for additional information).
In 2017, the interest expense was related to (i) the $75 million seller note from Pfizer as part of the HIS business acquisition and (ii) the per annum commitment fee charged on the unused portion of our revolver under the five-year $150 million Credit Facility.
The three-year interest only seller note bore interest based onstatements) plus applicable margin or the London Interbank Offered Rate ("LIBOR") plus (i) 2.25% per year for the first 12 months, and (ii) 2.50% per annum thereafter. On November 8, 2017, we fully repaid the $75 million in outstanding principal under the senior note payable to Pfizer.
applicable margin. The per annum commitment fee is based on consolidated total leverage ratio in effect and can range between 0.15% to 0.30% on the unused portion of the Credit Facility.Facility (see Note 11, Long-Term Obligations in our accompanying consolidated financial statements for additional information).
Other Income (Expense), net
Other income (expense), net was $1.1 million, $7.9 million and $(6.7) million in 2020, 2019 and $(4.3)2018, respectively. In 2020, the other income, net was primarily related to interest income of $3.7 million, miscellaneous income, net of $2.8 million and gain from the disposal of property, plant and equipment of $1.8 million, which was mostly offset by $7.2 million in 2019, 2018 and 2017, respectively.foreign exchange losses incurred as a result of the strengthening of the U.S. dollar from the impact of COVID-19 during the first half of the year. In 2019, other income, (expense), net was primarily due to interest income of $6.8 million related to our banking and investment accounts. In 2018, other income (expense),expense, net included $5.4$8.1 million of interest income offset byforeign exchange losses and a $3.9 million loss on disposal of or write-off of property, plant and equipment and an $8.1 million reclassification of foreign exchange losses, net from SG&A to conform to the current year's presentation. In 2017, we reclassified $1.8offset by $5.4 million of foreign exchange losses to other income (expense), net from SG&A.interest income.
Income taxes
Income taxes were accrued at an estimated annual effective tax rate of 11%, 12%, and (29%) in 2020, 2019 and (34%) in 2019, 2018, and 2017, respectively.
On December 22, 2017, the Tax Act was enacted into law, which includes a broad range of provisions affecting businesses. The Tax Act significantly revises how companies compute their U.S. corporate tax liability by, among other provisions, reducing the corporateeffective tax rate in 2020 differs from 35%the federal statutory rate of 21% principally because of the effect of the mix of U.S. and foreign incomes, state income taxes, global intangible low-taxed income ("GILTI"), foreign-derived intangible income ("FDII") and tax credits. The effective tax rate in 2020 included a tax benefit of $5.3 million related to 21%the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period. The effective tax rate for tax years beginning after2020 also included U.S. federal and state return-to-provision adjustments net of related reserve changes for the year ended December 31, 2017.2019 of $3.8 million tax benefit primarily due to changes in estimates for GILTI, FDII, and related foreign tax credits.
The effective tax rate in 2019 differs from the federal statutory rate of 21% principally because of the effect of the mix of U.S. and foreign incomes, state income taxes, global intangible low-taxed income ("GILTI")GILTI and tax credits. The effective tax rate for 2019 included a tax benefit of $9.6 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period. The effective tax rate for 2019 was also impacted by the repatriation of certain intellectual property and assets from a liquidation of one of our foreign subsidiaries to the U.S. parent. In accordance with the changes to the accounting for income tax effects of such intra-entity transfers of assets, we recorded a net tax benefit of $3.8 million related to the liquidation. Lastly, the effective tax rate during 2019 included a tax expense of $2.2 million related to return-to-provision adjustments for the year ended December 31, 2018 primarily due to changes in estimates for our U.S. GILTI inclusion.
The effective tax rate in 2018 differs from the federal statutory rate of 21% principally because of the effect of the mix of U.S. and foreign incomes, state income taxes and tax credits. The effective tax rate for 2018 included a tax benefit of $12.6 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period.
The effective tax rate for 2017 differs from the federal statutory rate of 35% because of the effect of the mix of foreign and state incomes, state taxes, tax credits, and impact of the gain on bargain purchase. The tax effect of the gain on bargain purchase is treated as a part of purchase accounting and is not a component of the income tax provision. The effective tax rate during 2017 also included a tax benefit of $20.8 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period. In 2017, after the enactment of the Tax Act, we were able to reasonably estimate certain effects and, therefore, recorded provisional adjustments associated with the toll charge on undistributed foreign earnings and profits and revaluation of deferred taxes related to the Tax Act. In 2017, we recorded income tax expense of $3.1 million as a result of the Tax Act, which is comprised of $1.1 million of income tax expense as a result of the re-measurement of deferred tax assets and liabilities at the new lower statutory tax rate of 21%, and a net tax expense of $2.0 million as a result of the mandatory deemed repatriation on earnings and profits of U.S.-owned foreign subsidiaries.
Liquidity and Capital Resources
Introduction
Our primary sources of cash are cash flows from operating activities, proceeds from the exercise of employee options and available borrowings under our Credit Facility (as defined above). Our primary uses of cash are to meet working capital requirements, finance capital expenditures and acquisitions along with acquisition-related incremental transaction and integration costs.
During 2019,2020, our cash, cash equivalents and short-term investment securities decreasedincreased by $89.5$118.1 million from $382.1 million at December 31, 2018 to $292.6 million at December 31, 2019.2019 to $410.8 million at December 31, 2020. Our cash provided by operations was partially offset primarily
by acquisitions, the purchases of property and equipment and cash taxes paid by us on thebehalf of employees behalf related to net share settlement of their equity awards.
Future Cash Flows
Short-term
Our five-year $150 million Credit Facility provides us with fast, flexible funding for future acquisition and operational needs.
Our short-term investment portfolio is invested in corporate bonds and our primary investment goal is capital preservation.
While we can provide no assurances, we estimate that our capital expenditures in 20202021 will approximate $85$75 million to $90$85 million. We anticipate making additional investments in machinery and equipment in our manufacturing operations in Costa Rica, the U.S. and Mexico to support new and existing products and in infusion devicespumps that get placed with customers outside the U.S., and in IT to benefit world-wide operations. We expect to use our cash and cash equivalents to fund our capital purchases. Amounts of spending are estimates and actual spending may substantially differ from those amounts.
We believe that our existing cash, cash equivalents along with funds expected to be generated from future operations will provide us with sufficient funds to finance our current operations for the next twelve months.
Long-term
Our long-term liquidity needs include capital expenditures related to the expansion and maintenance of our business and potential acquisitions in accordance with our growth strategy.
We are unable to project with certainty whether our long-term cash flow from operations and amounts available to us under our Credit Facility will be sufficient to fund our future capital expenditures and acquisitions as they arise. In the event that we experience illiquidity in our investment securities, downturns or cyclical fluctuations in our business that are more severe or longer than anticipated or if we fail to achieve anticipated revenue and expense levels, we may need to obtain or seek alternative sources of capital or financing, and we can provide no assurances that the terms of such capital or financing will be available to us on favorable terms, if at all.
Credit Facility
On November 8, 2017, we entered into a five year revolving Credit Facility with various lenders which includes
$150 million in borrowing capacity available for revolving credit loans and may also be used to borrow, on same-day notice under a swingline, the lesser of $10 million and the aggregate unused amount of the revolving credit available. During the first quarter in 2020, as a result of market uncertainty caused by COVID-19, we preemptively increased our liquidity as a precautionary measure by borrowing $150.0 million under our revolving Credit Facility. As 2020 progressed, financial institutions demonstrated adequate liquidity in meeting the funding needs of the market and our internal operations remained stable, as such, we fully repaid the $150.0 million borrowed under our Credit Facility during the third quarter. As of December 31, 2019,2020, we had no borrowings and $150 million of availability under the revolving credit facility.Credit Facility.
All of our obligations under the Credit Facility are guaranteed by ICU Medical, Inc. and certain of our existing subsidiaries. The obligations under the Credit Facility are secured by a pledge of 100% of the capital stock of certain subsidiaries owned by us and a security interest in substantially all of our tangible and intangible assets and the tangible and intangible assets of each guarantor.
The Credit Facility contains certain financial covenants pertaining to Consolidated Fixed Charge Coverage and Consolidated Total Leverage ratios, see below under "Financial Covenants". In addition, the Credit Facility has restrictions pertaining to limitations on debt, liens, negative pledges, loans, advances, acquisitions, other investments, dividends, distributions, redemptions, repurchases of equity interests, fundamental changes and asset sales and other dispositions, prepayments, redemptions and purchases of subordinated debt and other junior debt, transactions with affiliates, dividend and payment restrictions affecting subsidiaries, changes in line of business, fiscal year and accounting practices and amendment of organizational documents and junior debt documents.
Financial Covenants
The Credit Facility contains certain negative financial covenants, including, Consolidated Total Leverage and Consolidated Fixed Charge Coverage Ratios.
The Consolidated Leverage Ratio is defined as the ratio of Consolidated Total Funded Indebtedness on such date, to Consolidated Adjusted EBITDA, as defined under the Credit Facility Agreement, for the most recently completed four fiscal quarters. The maximum Consolidated Leverage Ratio is not more than 3.00 to 1.00.
The Consolidated Fixed Charge Coverage Ratio is defined as the ratio of: (a) Consolidated Adjusted EBITDA less the sum of (i) capital expenditures, (ii) federal, state, local and foreign income taxes paid in cash and (iii) cash restricted payments made after the closing date, to (b) Consolidated Fixed Charges for the most recently completed four fiscal quarters, calculated on a pro forma basis. The minimum Consolidated Fixed Charge Coverage Ratio is 2.00 to 1.00.
We were in compliance with all financial covenants as of December 31, 2019.2020.
Historical Cash Flows
Cash Flows from Operating Activities:
Our cash provided by operations was $222.8 million in 2020. Net income plus adjustments for non-cash net expenses contributed $239.7 million to cash provided by operations. Net cash used in operations as a result of changes in operating assets and liabilities was $17.0 million. The changes in operating assets and liabilities included a $46.4 million decrease in accounts payable, a $29.4 million decrease in accrued liabilities, $18.0 million in net changes in income taxes, including excess tax benefits and deferred income taxes, a $16.1 million increase in other assets, and a $4.3 million increase in prepaid expenses and other current assets. Offsetting these amounts was a $78.0 million decrease in accounts receivable and a $19.2 million decrease in inventories. The decrease in accounts payable was due to the payment of integration-related expenses with extended payment terms and the timing of other payments. The decrease in accrued liabilities was due to the payment of one-time accrued supply chain reorganization costs. The increase in other assets was due to the purchase of spare parts. The net changes in income taxes was a result of the timing of payments. The increase in prepaid expenses and other current assets was primarily due to an increase in deferred costs. The decrease in accounts receivable is primarily due to collection efforts. The decrease in inventory was primarily due to improved inventory management and increased demand for certain products driven by the COVID-19 pandemic at the end of the year.
Our cash provided by operations was $101.9 million in 2019. Net income plus adjustments for non-cash net expenses contributed $213.6 million to cash provided by operations. Net cash used in operations as a result of changes in operating assets and liabilities was $111.6 million. The changes in operating assets and liabilities included a $43.7 million decrease in accrued liabilities, a $29.8 million increase in other assets, a $25.0 million increase in inventories, a $23.7 million increase in accounts receivable, and a $2.7 million decrease in accounts payable. Offsetting these amounts was a $8.6 million decrease in prepaid expenses and other current assets and $4.7 million in net changes in income taxes, including excess tax benefits and deferred income taxes. The decrease in accrued liabilities was primarily a result of the payout of accrued compensation, partially offset by an increase in certain accruals including $22.1 million in accrued costs related to the initial ramp down of IV Solution production. The increase in other assets was primarily related to the purchase of spare parts. The increase in inventory was primarily due to an increase in our finished goods safety stock. The increase in accounts receivable is mainly due to the current year reclassification of receivables from Pfizer and the timing of revenue and collections. In the current year, receivables from Pfizer are included in accounts receivable and not in a separate related-party receivable line item as in the prior year. As of December 31, 2018, Pfizer had sold all of its shares of our common stock thereby ending its related-party relationship with us. The decrease in accounts payable was due to the timing of payments. The decrease in prepaid expenses and other current assets was primarily due to the collection of receivable amounts owed from Pfizer. The net changes in income taxes was a result of the timing of payments.
Our cash provided by operations was $160.2 million in 2018. Net income plus adjustments for non-cash net expenses contributed $192.9 million to cash provided by operations. Net cash provided by operations as a result of changes in operating assets and liabilities was $32.7 million. The changes in operating assets and liabilities included a $76.7 million increase in accounts receivable, a $29.6 million decrease in accrued liabilities, a $21.8 million increase in inventories, a $20.0 million in net changes in income taxes, including excess tax benefits and deferred income taxes and a $9.1 million increase in other assets. Offsetting these amounts was a $97.4 million decrease in related party receivables and a $23.3 million increase in accounts payable. The increase in accounts receivable is due to the increase in revenue and timing of collections. The decrease in accrued liabilities was primarily a result of the settlement of contract liabilities. The increase in inventory was primarily due to efforts to build-up the inventory level of certain products. The net changes in income taxes was a result of the timing of payments. The increase in other assets was primarily due to the purchase of spare parts. The decrease in related-party receivables was a result
of the transition services agreement with Pfizer nearing its end. The increase in accounts payable was due to the timing of payments.
Cash Flows from Investing Activities
The following table summarizes the changes in our investing cash flows (in thousands):
| | | | For the Years Ended December 31, | | Variance | | | For the Years Ended December 31, | | Variance | |
| | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | |
Investing Cash Flows: | | | | | | | | | | | | Investing Cash Flows: | | | | | | | | | | | |
Purchases of property, plant and equipment | | $ | (97,312 | ) | | $ | (92,720 | ) | | $ | (74,479 | ) | | $ | (4,592 | ) | | $ | (18,241 | ) | (1) | Purchases of property, plant and equipment | | $ | (92,005) | | | $ | (97,312) | | | $ | (92,720) | | | $ | 5,307 | | | $ | (4,592) | | (1) |
Proceeds from sale of assets | | 33 |
| | 765 |
| | 2 |
| | (732 | ) | | 763 |
| | Proceeds from sale of assets | | 6,176 | | | 33 | | | 765 | | | 6,143 | | | (732) | | (2) |
Proceeds from the disposal of assets held-for-sale, net | | — |
| | 13,000 |
| | — |
| | (13,000 | ) | | 13,000 |
| (2) | Proceeds from the disposal of assets held-for-sale, net | | — | | | — | | | 13,000 | | | — | | | (13,000) | | (3) |
Intangible asset additions | | (8,728 | ) | | (8,059 | ) | | (5,203 | ) | | (669 | ) | | (2,856 | ) | | Intangible asset additions | | (8,385) | | | (8,728) | | | (8,059) | | | 343 | | | (669) | | |
Business acquisitions, net of cash acquired | | (76,133 | ) | | (1,300 | ) | | (162,448 | ) | | (74,833 | ) | | 161,148 |
| (3) | Business acquisitions, net of cash acquired | | — | | | (76,133) | | | (1,300) | | | 76,133 | | | (74,833) | | (4) |
| Purchases of investment securities | | (26,040 | ) | | (30,496 | ) | | (24,743 | ) | | 4,456 |
| | (5,753 | ) | (4) | Purchases of investment securities | | (32,825) | | | (26,040) | | | (30,496) | | | (6,785) | | | 4,456 | | (5) |
Proceeds from sale of investment securities | | 41,292 |
| | 15,440 |
| | — |
| | 25,852 |
| | 15,440 |
| (5) | Proceeds from sale of investment securities | | 28,900 | | | 41,292 | | | 15,440 | | | (12,392) | | | 25,852 | | (6) |
Net cash (used in) provided by investing activities | | $ | (166,888 | ) | | $ | (103,370 | ) | | $ | (266,871 | ) | | $ | (63,518 | ) | | $ | 163,501 |
| | |
Net cash used in investing activities | | Net cash used in investing activities | | $ | (98,139) | | | $ | (166,888) | | | $ | (103,370) | | | $ | 68,749 | | | $ | (63,518) | | |
The following table summarizes the changes in our financing cash flows (in thousands):
Our common stock purchase plan, which authorized the repurchase of up to $100.0 million of our common stock, was authorized by our Board of Directors and publicly announced in August 2019. This plan replaced our existing plan and has no expiration date. As of December 31, 2019,2020, all of the $100.0 million available for purchase was remaining under the plan. We are currently limited on share purchases in accordance with the terms and conditions of our Credit Facility (see Note 11 to the consolidated financial statements in Part II, Item 8 of this Form 10-K).
We do not believe that inflation and changing prices had a significant impact on our results of operations for any periods presented herein.
See Note 1 to the consolidated financial statements in Part II, Item 8 of this Form 10-K.
In the normal course of business, we have agreed to indemnify our officers and directors to the maximum extent permitted under Delaware law and to indemnify customers as to certain intellectual property matters related to sales of our products. There is no maximum limit on the indemnification that may be required under these agreements. Although we can provide no assurances, we have never incurred, nor do we expect to incur, any liability for indemnification.
The accompanying notes are an integral part of these consolidated financial statements.
ICU MEDICAL, INC. AND SUBSIDIARIES