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ICUI ICU Medical

Filed: 6 Nov 20, 3:27pm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: September 30, 2020
 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from:              to
 
Commission File No.: 001-34634
 ICU MEDICAL, INC.
(Exact name of registrant as specified in its charter)
 
Delaware 33-0022692
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
951 Calle Amanecer,San Clemente,California92673
(Address of principal executive offices)(Zip Code)
 (949) 366-2183
(Registrant’s telephone number including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filerx 
Accelerated filer o
Non-accelerated filer o
 Smaller reporting company
 Emerging growth company
 If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):  Yes  No x

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common stock, par value $0.10 per shareICUIThe Nasdaq Stock Market LLC
(Global Select Market)
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
Class Outstanding at October 31, 2020
Common 20,981,128




ICU MEDICAL, INC. AND SUBSIDIARIES
Form 10-Q
September 30, 2020

Table of Contents
PART I.Financial Information Page Number
   
Item 1.Financial Statements (Unaudited)  
   
Condensed Consolidated Balance Sheets, at September 30, 2020 and December 31, 2019 
   
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019 
   
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2020 and 2019 
Condensed Consolidated Statements of Stockholders' Equity for the Three and Nine Months Ended September 30, 2020 and 2019
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 
   
 
   
Item 2. 
   
Item 3. 
   
Item 4. 
   
PART II.  
Item 1. 
   
Item1A. 
   
Item 2. 
   
Item 6. 
   
 
2


PART I - FINANCIAL INFORMATION
Item1.Financial Statements (Unaudited)

ICU MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value data) 
 September 30,
2020
December 31,
2019
 (Unaudited)(1)
ASSETS  
CURRENT ASSETS:  
Cash and cash equivalents$350,993 $268,670 
Short-term investment securities12,544 23,967 
TOTAL CASH, CASH EQUIVALENTS AND INVESTMENT SECURITIES363,537 292,637 
Accounts receivable, net of allowance for doubtful accounts of $22,299 at September 30, 2020 and $20,219 at December 31, 2019164,538 202,219 
Inventories321,961 337,640 
Prepaid income tax8,032 15,720 
Prepaid expenses and other current assets42,071 33,981 
TOTAL CURRENT ASSETS900,139 882,197 
PROPERTY AND EQUIPMENT, net456,348 456,085 
OPERATING LEASE RIGHT-OF-USE ASSETS47,802 34,465 
GOODWILL32,651 31,245 
INTANGIBLE ASSETS, net200,428 211,408 
DEFERRED INCOME TAXES36,373 27,998 
OTHER ASSETS55,795 48,984 
TOTAL ASSETS$1,729,536 $1,692,382 
LIABILITIES AND STOCKHOLDERS’ EQUITY  
CURRENT LIABILITIES:  
Accounts payable$81,027 $128,629 
Accrued liabilities103,397 117,776 
Income tax liability935 2,063 
TOTAL CURRENT LIABILITIES185,359 248,468 
CONTINGENT EARN-OUT LIABILITY24,300 17,300 
OTHER LONG-TERM LIABILITIES48,750 32,820 
DEFERRED INCOME TAXES2,091 2,091 
INCOME TAX LIABILITY16,816 14,459 
COMMITMENTS AND CONTINGENCIES (Note 18)
STOCKHOLDERS’ EQUITY:  
Convertible preferred stock, $1.00 par value Authorized—500 shares; Issued and outstanding 0 none
Common stock, $0.10 par value — Authorized, 80,000 shares; Issued — 20,969 shares at September 30, 2020 and 20,743 shares at December 31, 2019 and outstanding — 20,968 shares at September 30, 2020 and 20,742 shares at December 31, 20192,097 2,074 
Additional paid-in capital683,326 668,947 
Treasury stock, at cost(180)(157)
Retained earnings782,510 721,782 
Accumulated other comprehensive loss(15,533)(15,402)
TOTAL STOCKHOLDERS' EQUITY1,452,220 1,377,244 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$1,729,536 $1,692,382 
______________________________________________________
(1) December 31, 2019 balances were derived from audited consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
3

ICU MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
 
 Three months ended
September 30,
Nine months ended
September 30,
 2020201920202019
TOTAL REVENUES$318,567 $307,471 $950,553 $950,685 
COST OF GOODS SOLD204,643 188,919 608,930 592,961 
GROSS PROFIT113,924 118,552 341,623 357,724 
OPERATING EXPENSES:  
Selling, general and administrative70,854 65,876 210,401 206,333 
Research and development10,126 12,002 31,151 36,024 
Restructuring, strategic transaction and integration4,114 7,975 22,903 69,408 
Change in fair value of contingent earn-out4,300 (200)7,000 (47,400)
Contract settlement(1,000)(975)3,822 
TOTAL OPERATING EXPENSES88,394 85,653 270,480 268,187 
INCOME FROM OPERATIONS25,530 32,899 71,143 89,537 
INTEREST EXPENSE(616)(139)(1,583)(411)
OTHER INCOME (EXPENSE), net1,252 (10)(2,175)4,660 
INCOME BEFORE INCOME TAXES26,166 32,750 67,385 93,786 
PROVISION FOR INCOME TAXES(1,180)(6,187)(6,657)(13,392)
NET INCOME$24,986 $26,563 $60,728 $80,394 
NET INCOME PER SHARE  
Basic$1.19 $1.29 $2.91 $3.90 
Diluted$1.16 $1.24 $2.82 $3.73 
WEIGHTED AVERAGE NUMBER OF SHARES  
Basic20,948 20,666 20,870 20,607 
Diluted21,556 21,487 21,561 21,556 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
4

ICU MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands)
 
 Three months ended
September 30,
Nine months ended
September 30,
 2020201920202019
NET INCOME$24,986 $26,563 $60,728 $80,394 
Other comprehensive income (loss), net of tax:
Cash flow hedge adjustments, net of taxes of ($321) and $118 for the three months ended September 30, 2020 and 2019, respectively, and $256 and ($204) for the nine months ended September 30, 2020 and 2019, respectively1,016 (375)(810)644 
Foreign currency translation adjustment, net of taxes of $0 for all periods6,626 (7,533)754 (6,287)
Other adjustments, net of taxes of $0 for all periods(75)
Other comprehensive income (loss), net of taxes7,645 (7,908)(131)(5,637)
TOTAL COMPREHENSIVE INCOME$32,631 $18,655 $60,597 $74,757 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

5

ICU MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
(Amounts in thousands)


 Common Stock   Accumulated 
  Additional  Other 
SharesAmountPaid-In
Capital
Treasury
Stock
Retained
Earnings
Comprehensive
Loss
Total
Balance, January 1, 202020,742 $2,074 $668,947 $(157)$721,782 $(15,402)$1,377,244 
Issuance of restricted stock and exercise of stock options155 (10,207)10,758 — — 560 
Tax withholding payments related to net share settlement of equity awards(64)— — (12,174)— — (12,174)
Stock compensation— — 6,939 — — — 6,939 
Other comprehensive loss, net of tax— — — — — (13,510)(13,510)
Net income— — — — 16,834 — 16,834 
Balance, March 31, 202020,833 $2,083 $665,679 $(1,573)$738,616 $(28,912)$1,375,893 
Issuance of restricted stock and exercise of stock options106 11 4,408 1,820 — — 6,239 
Tax withholding payments related to net share settlement of equity awards(2)— — (387)— — (387)
Stock compensation— — 5,410 — — — 5,410 
Other comprehensive income, net of tax— — — — — 5,734 5,734 
Net income— — — — 18,908 — 18,908 
Balance, June 30, 202020,937 $2,094 $675,497 $(140)$757,524 $(23,178)$1,411,797 
Issuance of restricted stock and exercise of stock options33 1,564 220 — — 1,787 
Tax withholding payments related to net share settlement of equity awards(1)— — (260)— — (260)
Stock compensation— — 6,265 — — — 6,265 
Other comprehensive income, net of tax— — — — — 7,645 7,645 
Net income— — — — 24,986 — 24,986 
Balance, September 30, 202020,969 $2,097 $683,326 $(180)$782,510 $(15,533)$1,452,220 













6

ICU MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) - CONTINUED
(Amounts in thousands)

 Common Stock   Accumulated 
  Additional  Other 
SharesAmountPaid-In
Capital
Treasury
Stock
Retained
Earnings
Comprehensive
Loss
Total
Balance, January 1, 201920,492 $2,049 $657,899 $(95)$620,747 $(16,945)$1,263,655 
Issuance of restricted stock and exercise of stock options254 18 (4,289)5,196 — — 925 
Tax withholding payments related to net share settlement of equity awards(78)— — (18,157)— — (18,157)
Stock compensation— — 6,209 — — — 6,209 
Other comprehensive loss, net of tax— — — — — (936)(936)
Net income— — — — 30,998 — 30,998 
Balance, March 31, 201920,668 $2,067 $659,819 $(13,056)$651,745 $(17,881)$1,282,694 
Issuance of restricted stock and exercise of stock options(8,505)11,514 — — 3,009 
Tax withholding payments related to net share settlement of equity awards— — (108)— — (108)
Stock compensation— — 6,229 — — — 6,229 
Other comprehensive income, net of tax— — — — — 3,207 3,207 
Net income— — — — 22,833 — 22,833 
Balance, June 30, 201920,668 $2,067 $657,543 $(1,650)$674,578 $(14,674)$1,317,864 
Issuance of restricted stock and exercise of stock options(1,556)1,863 — — 307 
Tax withholding payments related to net share settlement of equity awards(1)— — (213)— — (213)
Stock compensation— — 3,722 — — — 3,722 
Other comprehensive loss, net of tax— — — — — (7,908)(7,908)
Net income— — — — 26,563 — 26,563 
Balance, September 30, 201920,671 $2,067 $659,709 $0 $701,141 $(22,582)$1,340,335 
7

ICU MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands) 
 Nine months ended
September 30,
 20202019
CASH FLOWS FROM OPERATING ACTIVITIES:  
Net income$60,728 $80,394 
Adjustments to reconcile net income to net cash provided by operating activities: 
Depreciation and amortization64,037 57,025 
Amortization of right-of-use assets6,859 6,149 
Provision for doubtful accounts2,785 7,839 
Provision for warranty and returns(1,296)1,277 
Stock compensation18,614 16,161 
Loss on disposal of property and equipment and other assets1,673 13,350 
Bond premium amortization126 103 
Debt issuance costs amortization216 216 
Change in fair value of contingent earn-out7,000 (47,400)
Product-related charges2,626 
Usage of spare parts8,391 20,044 
Other2,523 1,757 
Changes in operating assets and liabilities: 
Accounts receivable38,933 (32,484)
Inventories8,859 (30,924)
Prepaid expenses and other assets(6,535)8,815 
Other assets(12,121)(29,494)
Accounts payable(38,032)(3,038)
Accrued liabilities(20,417)(23,214)
Income taxes, including excess tax benefits and deferred income taxes(743)6,478 
Net cash provided by operating activities144,226 53,054 
CASH FLOWS FROM INVESTING ACTIVITIES:  
Purchases of property and equipment(62,362)(73,253)
Proceeds from sale of asset154 19 
Business acquisitions, net of cash acquired(4,600)
Intangible asset additions(6,325)(6,461)
Purchases of investment securities(9,603)(17,994)
Proceeds from sale of investment securities20,900 36,400 
Net cash used in investing activities(57,236)(65,889)
CASH FLOWS FROM FINANCING ACTIVITIES:  
Proceeds from short-term debt150,000 
Repayment of short-term debt(150,000)
Proceeds from exercise of stock options8,586 4,240 
Payments on finance leases(231)
Tax withholding payments related to net share settlement of equity awards(12,821)(18,478)
Net cash used in financing activities(4,466)(14,238)
Effect of exchange rate changes on cash(201)(1,759)
NET INCREASE (DECREASE) CASH AND CASH EQUIVALENTS82,323 (28,832)
CASH AND CASH EQUIVALENTS, beginning of period268,670 344,781 
CASH AND CASH EQUIVALENTS, end of period$350,993 $315,949 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


8

ICU MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - CONTINUED
(In thousands)
Nine months ended
September 30,
20202019
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
  Accounts payable for property and equipment$3,633 $11,365 

The accompanying notes are an integral part of these condensed consolidated financial statements.
9

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note 1:Basis of Presentation
 
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S.") and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and reflect all adjustments, consisting of only normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the consolidated results for the interim periods presented. Results for the interim period are not necessarily indicative of results for the full year. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K of ICU Medical, Inc., ("ICU") a Delaware corporation, filed with the SEC for the year ended December 31, 2019.
 
We are engaged in the development, manufacturing and sale of innovative medical products used in vascular therapy and critical care applications.  We sell the majority of our products through our direct sales force and through independent distributors throughout the U.S. and internationally.  Additionally, we sell our products on an original equipment manufacturer basis to other medical device manufacturers. All subsidiaries are wholly owned and are included in the condensed consolidated financial statements.  All intercompany balances and transactions have been eliminated.

Note 2:    New Accounting Pronouncements

Recently Adopted Accounting Standards

    In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Topic 350): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal use software license. Costs to develop or obtain internal-use software that cannot be capitalized under subtopic 350-40, such as training costs and certain data conversion costs, also cannot be capitalized for a hosting arrangement that is a service contract. Therefore, an entity in a hosting arrangement that is a service contract determines which project stage (that is, preliminary project stage, application development stage, or post-implementation stage) an implementation activity relates to. Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. The amendments in this update require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We adopted this ASU effective January 1, 2020. This ASU did not have a material impact on our condensed consolidated financial statements or related disclosures.

    In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements in Topic 820. The amendments remove from disclosure: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The amendments also made the following disclosure modifications: for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The amendments also added the following disclosure requirements: the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The amendments in ASU 2018-02 are effective for fiscal years
10

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
beginning after December 15, 2019. Early adoption is permitted. We adopted this ASU effective January 1, 2020. This ASU did not have a material impact on our condensed consolidated financial statements or related disclosures.

    In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update amends the FASB's guidance on the impairment of financial instruments by requiring timelier recording of credit losses on loans and other financial instruments. The ASU adds an impairment model that is based on expected losses rather than incurred losses. The ASU also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. In April 2019, the FASB issued ASU No. 2019-04 - Codification Improvements to Topic 326, Financial Instruments - Credit Losses and in May 2019, the FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses to Topic 326, Financial Instruments - Targeted Transition Relief. ASU 2019-04 clarifies and corrects certain areas of the Codification and ASU 2019-05 provides entities with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments—Overall, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326. The amendments in these updates will be effective for fiscal years beginning after December 15, 2019. Early adoption is permitted as of the fiscal years beginning after December 15, 2018. The updated guidance requires a modified retrospective adoption. We adopted this ASU effective January 1, 2020. This ASU did not have a material impact on our condensed consolidated financial statements or related disclosures.

Recently Issued Accounting Standards

    In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional guidance for a limited period of time to ease the potential burden for reference rate reform on financial reporting. Due to concerns about structural risks of interbank offered rates and, particularly, the risk of cessation of the London Interbank Offered Rate ("LIBOR"), regulators around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued as a result of reference rate reform. Optional expedients may be applied to contracts that are modified as a result of the reference rate reform. Modifications of contracts within the scope of Topic 470, Debt, should be accounted for by prospectively adjusting the effective interest rate. Modifications of contracts within the scope of ASC 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate (incremental borrowing rate). Exceptions to Topic 815, Derivatives and Hedging, results in not having a dedesignation of a hedging relationship if certain criteria are met. The amendments in this ASU are effective for all entities as of March 12, 2020 through December 31, 2022. We are currently reviewing the impact of this ASU on our contracts.        

Note 3: Restructuring, Strategic Transaction and Integration

    Restructuring, strategic transaction and integration expenses were $4.1 million and $22.9 million for the three and nine months ended September 30, 2020, respectively, as compared to $8.0 million and $69.4 million for the three and nine months ended September 30, 2019, respectively.

Restructuring

    During the three and nine months ended September 30, 2020, restructuring charges were $0.0 million and $8.1 million, respectively. During the three and nine months ended September 30, 2019, restructuring charges were $0.8 million and $8.4 million, respectively. Restructuring charges for the nine months ended September 30, 2020 were primarily related to severance and costs related to office and other facility closures. Restructuring charges for the three and nine months ended September 30, 2019 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. Restructuring charges are included in the restructuring, strategic transaction and integration line item in our condensed consolidated statement of operations.

    During the year ended December 31, 2015, we incurred restructuring charges related to an agreement with Dr. Lopez, a member of our Board of Directors and a former employee in our research and development department, pursuant to which we bought out Dr. Lopez's right to employment under his then-existing employment agreement. The buy-out, including payroll taxes, is paid in equal monthly installments until December 2020.
    
    The following table summarizes the details of changes in our restructuring-related accrual for the period ended September 30, 2020 (in thousands):
11

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accrued Balance January 1, 2020Charges
Incurred
PaymentsCurrency
Translation
Accrued Balance
September 30, 2020
Severance pay and benefits$3,878 $3,706 $(5,215)$(43)$2,326 
Employment agreement buyout460 (370)90 
Facility closure expenses1,211 4,402 (4,299)230 1,544 
$5,549 $8,108 $(9,884)$187 $3,960 

Strategic transaction and integration expenses

    We incurred and expensed $4.1 million and $14.8 million in strategic transaction and integration expenses during the three and nine months ended September 30, 2020, respectively, as compared to $7.2 million and $61.0 million during the three and nine months ended September 30, 2019, respectively. The strategic transaction and integration expenses during the three and nine months ended September 30, 2020 and 2019, were primarily related to the integration of the Hospira Infusion Systems ("HIS") business acquired in 2017 from Pfizer, which for the nine months ended September 30, 2020, included expenses for the migration of IT systems at our Austin facility. The strategic transaction and integration expenses during the nine months ended September 30, 2019, included a one-time strategic supply chain restructuring charge of $22.1 million, which reduced our contracted commitments to our third party manufacturer. The nine months ended September 30, 2019 also included a $12.7 million non-cash write-off of assets related to our final Pfizer separation costs.

Note 4: Revenue

    Our primary product lines are Infusion Consumables, Infusion Systems, IV Solutions and Critical Care. The vast majority of our sales of these products are made on a stand-alone basis to hospitals and distributors. Revenue is typically recognized upon transfer of control of the products, which we deem to be at point of shipment.

    Payment is typically due in full within 30 days of delivery or the start of the contract term. Revenue is recorded in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We offer certain volume-based rebates to our distribution customers, which we record as variable consideration when calculating the transaction price. Rebates are offered on both a fixed and tiered/variable basis. In both cases, we use information available at the time and our historical experience with each customer to estimate the most likely rebate amount. We also provide chargebacks to distributors that sell to end-customers at prices determined under a contract between us and the end-customer. We use information available at the time and our historical experience to estimate and record provisions for chargebacks.

    We also warrant products against defects and have a policy permitting the return of defective products, for which we accrue and expense at the time of sale using information available at that time and our historical experience. We also provide for extended service-type warranties, which we consider to be separate performance obligations. We allocate a portion of the transaction price to the extended service-type warranty based on its estimated relative selling price, and recognize revenue over the period the warranty service is provided.

Revenue disaggregated
    
    The following table represents our revenues disaggregated by geography (in thousands):
For the three months
ended September 30,
For the nine months
ended September 30,
Geography2020201920202019
Europe, the Middle East and Africa$32,596 $31,474 $99,107 $96,830 
Other Foreign48,525 53,398 175,618 156,353 
Total Foreign81,121 84,872 274,725 253,183 
United States237,446 222,599 675,828 697,502 
Total Revenues$318,567 $307,471 $950,553 $950,685 
    
    
    The following table represents our revenues disaggregated by product (in thousands):
12

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the three months ended
September 30,
For the nine months ended
September 30,
Product line2020201920202019
Infusion Consumables$116,054 $119,745 $350,554 $357,994 
Infusion Systems88,388 78,932 267,856 244,523 
IV Solutions101,900 98,159 295,369 313,976 
Critical Care12,225 10,635 36,774 34,192 
Total Revenues$318,567 $307,471 $950,553 $950,685 

Contract balances

    The following table presents our changes in the contract balances for the nine months ended September 30, 2020 and 2019 (in thousands):
Contract Liabilities
Beginning balance, January 1, 2020$(4,855)
Equipment revenue recognized9,920 
Equipment revenue deferred due to implementation(13,679)
Software revenue recognized4,715 
Software revenue deferred due to implementation(5,033)
Ending balance, September 30, 2020$(8,932)
Beginning balance, January 1, 2019$(4,282)
Equipment revenue recognized3,619 
Equipment revenue deferred due to implementation(6,869)
Software revenue recognized2,955 
Software revenue deferred due to implementation(3,115)
Ending balance, September 30, 2019$(7,692)
    
    As of September 30, 2020, revenue from remaining performance obligations related to implementation of software and equipment is $7.6 million. We expect to recognize substantially all of this revenue within the next three to six months dependent on implementation restrictions due to the novel coronavirus ("COVID-19"). Revenue from remaining performance obligations related to annual software licenses is $1.3 million. We expect to recognize substantially all of this revenue over the next twelve months.

Note 5: Leases
    
Leases

    We determine if an arrangement is a lease at inception. Our operating lease assets are separately stated in operating lease right-of-use ("ROU") assets and our financing lease assets are included in other assets on our condensed consolidated balance sheets. Our lease liabilities are included in accrued liabilities, and other long-term liabilities on our condensed consolidated balance sheets. We have elected not to recognize an ROU asset and lease liability for leases with terms of twelve months or less.

    Lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Most of our leases do not provide an implicit rate, therefore we use our incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term based on the information available at commencement date. Our lease ROU assets exclude lease incentives and initial direct costs incurred. Our lease terms include options to extend when it is reasonably certain that we will exercise that option. All of our leases have stated lease payments, which may include fixed rental increases. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
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ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
    
    Our leases are for corporate offices, sales and support offices, a distribution facility, device service centers and certain equipment. Our leases have original lease terms of one year to fifteen years, some of which include options to extend the leases for up to an additional five years. For all of our leases, we do not include optional periods of extension in our current lease terms for the exercise of options to extend is not reasonably certain.

    The following table presents the components of our lease cost (in thousands):
For the three months
ended September 30,
For the nine months
ended September 30,
2020201920202019
Operating lease cost$2,861 $2,996 $8,428 $7,528 
Finance lease cost - interest29 62 
Finance lease cost - amortization of ROU asset125 252 
Short-term lease cost74 49 200 229 
Total lease cost$3,089 $3,045 $8,942 $7,757 
    
Interest expense on our finance leases is included in other income (expense), net in our condensed consolidated statement of operations. The amortization of the operating and finance ROU asset is included in selling, general and administrative expenses in our condensed consolidated statement of operations.    

The following table presents the supplemental cash flow information related to our leases (in thousands):
For the nine months ended September 30,
20202019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$7,303 $7,161 
Operating cash flows from finance leases$62 $
Right-of-use assets obtained in exchange for lease obligations:
Operating leases$20,264 $2,495 
Finance leases$2,870 $
    
    
14

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
    The following table presents the supplemental balance sheet information related to our operating leases (in thousands, except lease term and discount rate):
As of
September 30, 2020
As of
December 31, 2019
Operating leases
Operating lease right-of-use assets$47,802 $34,465 
Accrued liabilities$8,456 $7,362 
Other long-term liabilities42,512 28,896 
Total operating lease liabilities$50,968 $36,258 
Weighted Average Remaining Lease Term
Operating leases6.8 years6.0 years
Weighted Average Discount Rate
Operating leases5.03 %5.57 %
    
The following table presents the supplemental balance sheet information related to our finance leases (in thousands, except lease term and discount rate):
As of
September 30, 2020
Financing leases
Financing lease right-of-use assets$2,729 
Accrued liabilities$473 
Other long-term liabilities2,274 
Total financing lease liabilities$2,747 
Weighted Average Remaining Lease Term
Financing leases7.0 years
Weighted Average Discount Rate
Financing leases4.27 %
        
    As of September 30, 2020, the maturities of our operating and financing lease liabilities for each of the next five years is approximately (in thousands):
Operating LeasesFinance Leases
Remainder of 2020$2,789 $145 
202110,571 578 
20229,639 578 
20238,685 578 
20248,235 283 
20254,958 189 
Thereafter15,113 804 
Total Lease Payments59,990 3,155 
Less imputed interest(9,022)(408)
Total$50,968 $2,747 
15

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6:     Net Income Per Share
 
Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period plus dilutive securities. Dilutive securities include outstanding common stock options and unvested restricted stock units, less the number of shares that could have been purchased with the proceeds from the exercise of the options, using the treasury stock method. Options and restricted stock units that are anti-dilutive are not included in the treasury stock method calculation. There were 14,017 and 20,116 anti-dilutive securities for the three months ended September 30, 2020 and 2019, respectively. There were 12,182 and 9,375 anti-dilutive securities for the nine months ended September 30, 2020 and 2019, respectively.

    The following table presents the calculation of net earnings per common share (“EPS”) — basic and diluted (in thousands, except per share data): 
 Three months ended
September 30,
Nine months ended
September 30,
 2020201920202019
Net income$24,986 $26,563 $60,728 $80,394 
Weighted-average number of common shares outstanding (for basic calculation)20,948 20,666 20,870 20,607 
Dilutive securities608 821 691 949 
Weighted-average common and common equivalent shares outstanding (for diluted calculation)21,556 21,487 21,561 21,556 
EPS — basic$1.19 $1.29 $2.91 $3.90 
EPS — diluted$1.16 $1.24 $2.82 $3.73 

Note 7:    Derivatives and Hedging Activities

Hedge Accounting and Hedging Program

    The purpose of our hedging program is to manage the foreign currency exchange rate risk on forecasted expenses denominated in currencies other than the functional currency of the operating unit. We do not issue derivatives for trading or speculative purposes.

    To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. The par forward contract is designated and qualifies as a cash flow hedge. Our derivative instruments are recorded at fair value on the condensed consolidated balance sheets and are classified based on the instrument's maturity date. We record changes in the intrinsic value of the effective portion of the gain or loss on the derivative instrument as a component of Other Comprehensive Income and we reclassify that gain or loss into earnings in the same line item associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings.

    In March 2020, we entered into a one-year cross-currency par forward contract that extends our current hedge of a portion of our Mexico forecasted expenses denominated in Pesos ("MXN"). The total notional amount of this outstanding derivative as of September 30, 2020 was approximately 473.2 million MXN. The term of the one-year contract is November 3, 2020 to December 1, 2021. The derivative instrument matures in equal monthly amounts at a fixed forward rate of 24.26 MXN/USD.

    In November 2018, we entered into a one-year cross-currency par forward contract that hedges of a portion of our Mexico forecasted expenses denominated in MXN. The total notional amount of this outstanding derivative as of September 30, 2020 was approximately 66.3 million MXN. The term of the one-year hedge is November 1, 2019 to November 3, 2020. The derivative instrument matures in equal monthly amounts at a fixed forward rate of 22.109 MXN/USD.

    The following table presents the fair values of our derivative instruments included within the Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 (in thousands):
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ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivatives
Condensed Consolidated Balance Sheet
Location
September 30, 2020December 31,
2019
Derivatives designated as cash flow hedging instruments
Foreign exchange forward contract:
Prepaid expenses and other current assets$1,090 $2,366 
Other assets216 
Accrued liabilities(6)
Total derivatives designated as cash flow hedging instruments$1,300 $2,366 
    
    The following table presents the amounts affecting the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 (in thousands):
Line Item in the
Condensed Consolidated Statements of Operations
Three months ended
September 30,
Nine months ended
September 30,
2020201920202019
Derivatives designated as cash flow hedging instruments
Foreign exchange forward contractsCost of goods sold$(49)$229 $423 $573 
    
    We recognized the following gains (losses) on our foreign exchange contracts designated as a cash flow hedge (in thousands):
Amount of Gain Recognized in Other Comprehensive Income on DerivativesAmount of (Loss) Gain Reclassified From Accumulated Other Comprehensive Income into Income
Three months ended
September 30,
Three months ended
September 30,
20202019Location of (Loss) Gain Reclassified From Accumulated Other Comprehensive Income into Income20202019
Derivatives designated as cash flow hedges:
Foreign exchange forward contract$1,287 $(264)Cost of goods sold$(49)$229 
Total derivatives designated as cash flow hedging instruments$1,287 $(264)$(49)$229 
    
Amount of (Loss) Gain Recognized in Other Comprehensive Income on DerivativesAmount of Gain Reclassified From Accumulated Other Comprehensive Income into Income
Nine months ended
September 30,
Nine months ended
September 30,
20202019Location of Gain Reclassified From Accumulated Other Comprehensive Income into Income20202019
Derivatives designated as cash flow hedges:
Foreign exchange forward contract$(642)$1,421 Cost of goods sold$423 $573 
Total derivatives designated as cash flow hedging instruments$(642)$1,421 $423 $573 
17

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of September 30, 2020, we expect approximately $1.1 million of the deferred gains on the outstanding derivatives in accumulated other comprehensive income to be reclassified to net income during the next twelve months concurrent with the underlying hedged transactions also being reported in net income.    

Note 8:    Fair Value Measurement
 
    Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There are three levels of inputs that may be used to measure fair value:

Level 1: quoted prices in active markets for identical assets or liabilities;
Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or
Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities.

Earn-out Liability

    In 2017, we recognized an earn-out liability upon the acquisition of HIS from Pfizer. Pfizer was entitled up to $225 million in cash if certain performance targets for the combined company for the three years ending December 31, 2019 were achieved. The initial fair value of the earn-out was determined by employing a Monte Carlo simulation in a risk neutral framework. The underlying simulated variable was adjusted EBITDA. The adjusted EBITDA volatility estimate was based on a study of historical asset volatility for a set of comparable public companies. The model included other assumptions including the market price of risk, which was calculated as the weighted average cost of capital ("WACC") less the long term risk free rate. The initial value assigned to the contingent consideration was a result of forecasted product demand of our HIS business. At each reporting date subsequent to the acquisition we remeasured the earn-out using the same methodology above and recognized any changes in value. As of December 31, 2019, we determined that we did not meet the necessary performance targets that would require payout of any of the HIS earn-out liability. As of the date of this filing, Pfizer has disputed our determination that the performance targets requiring payout of the HIS earn-out liability were not met. If we do not reach agreement on this issue with Pfizer, the dispute will be resolved by binding arbitration, that will likely be concluded within the next three to six months.

In the fourth quarter of 2019, we recognized an earn-out liability related to the acquisition of Pursuit Vascular, Inc. ("Pursuit"). Pursuit's former equity holders are entitled up to $50.0 million in additional cash consideration contingent upon the achievement of certain sales and gross profit targets for specific customers. The earn-out will be calculated as a percentage of gross profit achieved during the earn-out period against a pre-determined target gross profit, not to exceed $50.0 million. We used a Monte Carlo simulation model to determine the fair value of the earn-out liability. The Monte Carlo simulation model utilizes multiple input variables to determine the value of the earn-out liability including historical volatility, a risk free interest rate, counter party credit risk and projected future gross profit, see below simulation input table related to Pursuit. The historical volatility was based on the median of ICU and a certain peer group. The risk-free interest rate is equal to the yield, as of the valuation date, of the zero-coupon U.S. Treasury bill that is commensurate with the term of the earn-out. The counter party credit risk is based on a synthetic credit rating of B1. If the probabilities in the model significantly change from what we initially and subsequently anticipate, the change could have a significant impact on our financial statements in the period recognized. Our contingent earn-out liability is separately stated in our condensed consolidated balance sheets.

The following tables provide a reconciliation of the Level 3 earn-out liabilities measured at estimated fair value (in thousands):
18

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pursuit
Earn-out Liability
Accrued balance, January 1, 2020$17,300 
Change in fair value of earn-out (included in income from operations as a separate line item)
Accrued balance, March 31, 2020$17,300 
Change in fair value of earn-out (included in income from operations as a separate line item)2,700 
Accrued balance, June 30, 2020$20,000 
Change in fair value of earn-out (included in income from operations as a separate line item)4,300 
Accrued balance, September 30, 2020$24,300 

HIS
Earn-out Liability
Accrued balance, January 1, 2019$47,400 
Change in fair value of earn-out (included in income from operations as a separate line item)(7,700)
Accrued balance, March 31, 2019$39,700 
Change in fair value of earn-out (included in income from operations as a separate line item)(39,500)
Accrued balance, June 30, 2019$200 
Change in fair value of earn-out (included in income from operations as a separate line item)(200)
Accrued balance, September 30, 2019$
    
The fair value of the Pursuit earn-out increased at September 30, 2020 from the fair value calculated at December 31, 2019 primarily due to changes in the probabilities within the valuation model.

    The following tables provide quantitative information about Level 3 inputs for fair value measurement of our earn-out liabilities:

Pursuit Earn-out
Simulation InputAs of
September 30, 2020
At Acquisition November 2, 2019
Revenue/Gross Profit Volatility35.00 %20.00 %
Discount Rate12.50 %15.00 %
Risk Free Rate0.12 %1.55 %
Counter Party Risk4.50 %6.00 %

HIS Earn-out
Simulation InputAs of
December 31, 2018
Adjusted EBITDA Volatility30.00 %
WACC8.25 %
20-year risk free rate2.87 %
Market price of risk5.24 %
Cost of debt5.25 %
19

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Investments and Foreign Currency Contracts    

    The fair value of our investments is estimated using observable market-based inputs such as quoted prices, interest rates and yield curves or Level 2 inputs, which consisted of corporate bonds.     

    The fair value of our Level 2 forward currency contracts are estimated using observable market inputs such as known notional value amounts, spot and forward exchange rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative.

Our assets and liabilities measured at fair value on a recurring basis consisted of the following (Level 1, 2 and 3 inputs as defined above) (in thousands):
 Fair value measurements at September 30, 2020
 Total carrying
value
Quoted prices
in active
markets for
identical
assets (level 1)
Significant
other
observable
inputs (level 2)
Significant
unobservable
inputs (level 3)
Assets:
Available for sale securities:
Short-term$12,544 $$12,544 $
Foreign exchange forwards:
Prepaid expenses and other current assets1,090 — 1,090 — 
Other assets216 216 
Total Assets$13,850 $$13,850 $
Liabilities:
Earn-out liability$24,300 $$$24,300 
Foreign exchange forwards:
Accrued liabilities
Total Liabilities$24,306 $$$24,300 
 Fair value measurements at December 31, 2019
 Total carrying
value
Quoted prices
in active
markets for
identical
assets (level 1)
Significant
other
observable
inputs (level 2)
Significant
unobservable
inputs (level 3)
Assets:
Available for sale securities:
Short-term$23,967 $$23,967 $
Foreign exchange forwards:
Prepaid expenses and other current assets2,366 2,366 
Total Assets$26,333 $$26,333 $
Liabilities:
Earn-out liability$17,300 $$$17,300 
Total Liabilities$17,300 $$$17,300 
    
Note 9: Investment Securities

    Our investment securities currently consist of short-term corporate bonds. Our investment securities are considered available-for-sale and are “investment grade” and carried at fair value. Available-for-sale securities are recorded at fair value, and unrealized holding gains and losses are recorded, net of tax, as a component of accumulated other comprehensive income. Unrealized losses on available-for-sale securities are charged against net earnings when a decline in fair value is determined to
20

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
be other than temporary. Our management reviews several factors to determine whether a loss is other than temporary, such as the length and extent of the fair value decline, the financial condition and near term prospects of the issuer, and for equity investments, our intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. The amortized cost of the debt securities are adjusted for the amortization of premiums computed under the effective interest method. Such amortization is included in investment income in other income (expense), net on our condensed consolidated statements of operations. There have been 0 realized gains or losses on their disposal. Realized gains and losses are accounted for on the specific identification method. The scheduled maturities of the debt securities are between 2020 and 2021. All short-term investment securities are callable within one year.
    
    Our short investment securities consisted of the following (in thousands):
As of September 30, 2020
Amortized CostUnrealized Holding Gains (Losses)Fair Value
Short-term corporate bonds$12,544 $$12,544 
As of December 31, 2019
Amortized CostUnrealized Holding Gains (Losses)Fair Value
Short-term corporate bonds$23,967 $$23,967 
    
Note 10:     Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following (in thousands): 
 September 30, 2020December 31, 2019
Other prepaid expenses and receivables17,384 13,778 
Deferred costs11,047 3,332 
Prepaid insurance and property taxes1,034 5,450 
VAT/GST receivable3,982 4,422 
Deferred tax charge4,769 1,266 
Deposits1,334 1,375 
Other2,521 4,358 
 $42,071 $33,981 

Note 11: Inventories
 
    Inventories are stated at the lower of cost or net realizable value with cost determined using the first-in, first-out method. Inventory costs consist of those costs directly attributable to products prior to sale including among other things raw material, labor and overhead. Inventories consisted of the following (in thousands): 
 September 30, 2020December 31, 2019
Raw materials$126,475 $119,709 
Work in process30,151 39,515 
Finished goods165,335 178,416 
Total inventories$321,961 $337,640 
     
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ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12:     Property and Equipment

Property and equipment consisted of the following (in thousands): 
 September 30, 2020December 31, 2019
Machinery and equipment$258,083 $219,057 
Land, building and building improvements234,368 230,454 
Molds60,379 60,155 
Computer equipment and software96,990 83,217 
Furniture and fixtures7,602 7,498 
Instruments placed with customers(1)
83,844 74,434 
Construction in progress78,557 101,425 
Total property and equipment, cost819,823 776,240 
Accumulated depreciation(363,475)(320,155)
Property and equipment, net$456,348 $456,085 
______________________________
(1) Instruments placed with customers consist of drug-delivery and monitoring systems placed with customers under operating leases.

    Depreciation expense was $15.6 million and $46.7 million for the three and nine months ended September 30, 2020, respectively, as compared to $14.8 million and $44.6 million for the three and nine months ended September 30, 2019, respectively.
    
Note 13: Goodwill and Intangible Assets, Net

Goodwill

    The following table presents the changes in the carrying amount of our goodwill (in thousands):
Total
Balance as of January 1, 2020$31,245 
Other (1)
1,346 
Currency translation60 
Balance as of September 30, 2020$32,651 
_______________________________________________
(1) Other relates to a measurement period adjustment to deferred taxes related to our 2019 acquisition of Pursuit.

Intangible Assets, Net

    Intangible assets, carried at cost less accumulated amortization and amortized on a straight-lined basis, were as follows (in thousands):
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ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Weighted
Average
September 30, 2020
 Amortization
Life in Years
CostAccumulated
Amortization
Net
Patents10$24,260 $14,654 $9,606 
Customer contracts1210,251 5,758 4,493 
Non-contractual customer relationships957,261 24,722 32,539 
Trademarks4425 425 
Trade name1518,258 3,183 15,075 
Developed technology13152,893 33,752 119,141 
Non-compete32,500 764 1,736 
Total amortized intangible assets $265,848 $83,258 $182,590 
Internally developed software*$17,838 $17,838 
Total intangible assets$283,686 $83,258 $200,428 
______________________________
* Internally developed software will be amortized when the projects are complete and the assets are ready for their intended use.
 Weighted
Average
December 31, 2019
 Amortization
Life in Years
CostAccumulated
Amortization
Net
Patents10$22,322 $13,519 $8,803 
Customer contracts1210,122 5,506 4,616 
Non-contractual customer relationships957,296 19,787 37,509 
Trademarks4425 425 
Trade name1518,256 2,254 16,002 
Developed technology13152,354 24,228 128,126 
Non-compete32,500 139 2,361 
Total amortized intangible assets $263,275 $65,858 $197,417 
Internally developed software*$13,991 $13,991 
Total intangible assets$277,266 $65,858 $211,408 
______________________________
* Internally developed software will be amortized when the projects are complete and the assets are ready for their intended use.

Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives. During the three and nine months ended September 30, 2020, intangible asset amortization expense was $5.8 million and $17.4 million, respectively, as compared to $4.4 million and $12.4 million for the three and nine months ended September 30, 2019, respectively.

As of September 30, 2020 estimated annual amortization for our intangible assets for each of the next five years is approximately (in thousands):
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ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Remainder of 2020$6,363 
202123,148 
202222,506 
202321,663 
202421,573 
202516,666 
Thereafter70,671 
Total$182,590 

Note 14:     Accrued Liabilities and Other Long-Term Liabilities

    Accrued liabilities consist of the following (in thousands): 
 September 30, 2020December 31, 2019
Salaries and benefits$26,536 $21,116 
Incentive compensation20,030 15,221 
Accrued supply chain restructuring costs753 23,119 
Operating lease liability-ST8,456 7,362 
Accrued product field action334 2,096 
Accrued sales taxes2,160 2,615 
Restructuring accrual3,960 5,459 
Deferred revenue8,425 4,761 
Accrued other taxes3,738 4,054 
Accrued professional fees2,128 4,782 
Legal accrual700 826 
Distribution fees7,153 3,942 
Warranties and returns1,067 782 
Accrued freight10,065 11,238 
Contract liabilities-ST1,935 
Contract settlement417 1,667 
Other7,475 6,801 
 $103,397 $117,776 

Other long-term liabilities consist of the following (in thousands): 
 September 30, 2020December 31, 2019
Operating lease liability-LT$42,512 $28,896 
Benefits1,064 1,131 
Accrued rent1,445 1,642 
Contract liabilities-LT371 472 
Financing lease liability-LT2,274 
Other1,084 679 
 $48,750 $32,820 
24

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 15:     Income Taxes
 
Income taxes were accrued at an estimated effective tax rate of 5% and 10% for the three and nine months ended September 30, 2020, respectively, as compared to 19% and 14% for the three and nine months ended September 30, 2019, respectively.

    The effective tax rate for the three and nine months ended September 30, 2020 differs from the federal statutory rate of 21% principally because of the effect of the mix of U.S. and foreign incomes, state income taxes, global intangible low-taxed income ("GILTI"), foreign-derived intangible income ("FDII"), tax credits and the following discrete tax items recognized during the interim periods:

Excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the three and nine months ended September 30, 2020 of $0.1 million and $3.6 million, respectively.
The revaluation of the contingent consideration during the three and nine months ended September 30, 2020, which resulted in a tax benefit of $0.7 million and $1.1 million, respectively.
U.S. federal and state return-to-provision adjustments net of related reserve changes for the year ended December 31, 2019 resulted in a tax benefit of $3.8 million primarily due to changes in estimates for GILTI, FDII, and related foreign tax credits.

    The effective tax rate for the three and nine months ended September 30, 2019 differs from the federal statutory rate of 21% principally because of the effect of the mix of U.S. and foreign incomes, state income taxes, GILTI and tax credits and the following discrete tax items recognized during the interim periods:

Excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the three and nine months ended September 30, 2019 of $0.3 million and $7.7 million, respectively.
The revaluation of the contingent consideration during the nine months ended September 30, 2019 resulted in a tax expense of $11.4 million.
The repatriation of certain intellectual property and assets from one of our foreign subsidiaries to the U.S. parent resulted in a net tax benefit of $3.8 million.
A return-to-provision adjustment for the year ended December 31, 2018 included a tax expense of $2.2 million primarily due to changes in estimates for GILTI.

Note 16:     Long-Term Obligations

Five-year Senior Secured Revolving Credit Facility ("Credit Facility")

    On November 8, 2017, we entered into a Credit Facility with various lenders for $150.0 million, with Wells Fargo Bank, N.A. as the administrative agent, swingline lender and issuing lender. During March 2020, as a result of market uncertainty caused by COVID-19, we preemptively borrowed $150.0 million on our Credit Facility as a conservative measure to manage any potential short-term liquidity risk. In September 2020, we fully repaid the borrowings under our Credit Facility.

    As of September 30, 2020, we had 0 borrowings and $150.0 million of availability under the Credit Facility. Principal payments on the revolving Credit Facility are made at our discretion with the unpaid amount due at maturity. The Credit Facility matures on November 8, 2022. Interest on borrowings under the Credit Facility, at our option, is based on the Base Rate plus applicable margin or the London Interbank Offered Rate ("LIBOR") plus applicable margin, see further details in Part II, Item 8, of our 2019 Annual Report on Form 10-K.

Debt Covenants

    The Credit Facility contains certain financial covenants pertaining to Consolidated Fixed Charge Coverage and Consolidated Total Leverage Ratios. 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.

25

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
    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 September 30, 2020.     

Note 17: Stockholders' Equity

Treasury Stock

    In August 2019, our Board of Directors approved a new share purchase plan to purchase up to $100.0 million of our common stock. This plan replaced our existing plan and has no expiration date. During the nine months ended September 30, 2020, we did not purchase any shares of our common stock under our stock purchase plans. As of September 30, 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 16: Long-Term Obligations).

    For the nine months ended September 30, 2020, we withheld 66,749 shares of our common stock from employee vested restricted stock units in consideration for $12.8 million in payments made on the employee's behalf for their minimum statutory income tax withholding obligations. For the nine months ended September 30, 2019, we withheld 79,313 shares of our common stock from employee vested restricted stock units in consideration for $18.5 million in payments made on the employee's behalf for their minimum statutory income tax withholding obligations. Treasury stock is used to issue shares for stock option exercises, restricted stock grants and employee stock purchase plan stock purchases.

Accumulated Other Comprehensive (Loss) Income

    The components of accumulated other comprehensive (loss) income ("AOCI"), net of tax, were as follows (in thousands):
Foreign Currency Translation AdjustmentsUnrealized Gains on Cash Flow HedgesOther AdjustmentsTotal
Balance as of January 1, 2020$(17,310)$1,880 $28 $(15,402)
Other comprehensive loss before
reclassifications
(10,477)(2,426)(81)(12,984)
Amounts reclassified from AOCI(526)(526)
Other comprehensive loss(10,477)(2,952)(81)(13,510)
Balance as of March 31, 2020$(27,787)$(1,072)$(53)$(28,912)
Other comprehensive income before reclassifications4,604 960 5,568 
Amounts reclassified from AOCI166 166 
Other comprehensive income4,604 1,126 5,734 
Balance as of June 30, 2020$(23,183)$54 $(49)$(23,178)
Other comprehensive income before reclassifications6,626 978 7,607 
Amounts reclassified from AOCI38 38 
Other comprehensive income6,626 1,016 7,645 
Balance as of September 30, 2020$(16,557)$1,070 $(46)$(15,533)
26

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Foreign Currency Translation AdjustmentsUnrealized Gains on Cash Flow HedgesOther AdjustmentsTotal
Balance as of January 1, 2019$(17,682)$638 $99 $(16,945)
Other comprehensive (loss) income before reclassifications(1,592)768 (818)
Amounts reclassified from AOCI(118)(118)
Other comprehensive (loss) income(1,592)650 (936)
Balance as of March 31, 2019$(19,274)$1,288 $105 $(17,881)
Other comprehensive income before reclassifications2,838 513 3,351 
Amounts reclassified from AOCI(144)(144)
Other comprehensive income2,838 369 3,207 
Balance as of June 30, 2019$(16,436)$1,657 $105 $(14,674)
Other comprehensive income before reclassifications(7,533)(201)(7,734)
Amounts reclassified from AOCI(174)(174)
Other comprehensive income(7,533)(375)(7,908)
Balance as of September 30, 2019$(23,969)$1,282 $105 $(22,582)
 
Note 18: Commitments and Contingencies

Legal Proceedings

From time to time, we are involved in various legal proceedings, most of which are routine litigation, in the normal course of business.  Our management does not believe that the resolution of the unsettled legal proceedings that we are involved with will have a material adverse impact on our financial position or results of operations.

Off-Balance Sheet Arrangements
 
    In the normal course of business, we have agreed to indemnify our officers and directors to the maximum extent permitted under Delaware law and to indemnify customers as to certain intellectual property matters or other 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 material liability for indemnification.

Contingencies

    During November 2019, we acquired Pursuit. Total consideration for the acquisition includes a potential contractual earn-out of up to $50.0 million, to be paid to former Pursuit equity holders, calculated based upon the achievement of certain performance targets during the earn-out period (see Note 8: Fair Value Measurement).

We had a contractual obligation in connection with our 2017 acquisition of HIS, which as of December 31, 2019 we determined did not meet the necessary performance targets that would require payout of any of the HIS earn-out liability. As of the date of this filing, Pfizer has disputed our determination that the performance targets requiring payout of the HIS earn-out liability were not met. If we do not reach agreement on this issue with Pfizer, the dispute will be resolved by binding arbitration (see Note 8, Fair Value Measurements).

Commitments

    We have non-cancellable operating lease agreements where we are contractually obligated to pay certain lease payment amounts (see Note 5: Leases).

27

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 19:     Collaborative and Other Arrangements
    
    On February 3, 2017, we entered into two Manufacturing and Supply Agreements ("MSAs"), (i) whereby Pfizer will manufacture and supply us with certain agreed upon products for an initial five-year term with a one-time two-year option to extend and (ii) whereby we will manufacture and supply Pfizer certain agreed upon products for a term of five or ten years depending on the product, also with a one-time two-year option to extend. The MSAs provide each party with mutually beneficial interests and both of the MSAs are to be jointly managed by both Pfizer and ICU. The initial supply price, which will be annually updated, is in full consideration for all costs associated with the manufacture, documentation, packaging and certification of the products.  
    
Note 20:     COVID-19 Pandemic

    In late 2019, a novel 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 spread of COVID-19 around the world in 2020 has caused significant volatility in U.S. and international markets. During the first nine months of 2020, our operations have been impacted globally by lower admission rates and procedural volumes at our hospital customers. Specifically, since the beginning of the second quarter we have generally seen decreased demand for products within our Infusion Consumables and IV Solutions businesses along with the dedicated infusion sets within Infusion Systems. This decline has been partially offset by increased demand for infusion pump hardware within Infusion Systems. We have also incurred increased expenses as a result of COVID-19 for additional compensation paid to our manufacturing and distribution facility workers along with personal protection equipment and other items. At the same time, we have seen some expense decreases due to reductions in travel and other discretionary spending. We have also incurred foreign exchange losses related to fluctuations in certain foreign currencies as a result of deteriorating economic conditions. However, the impacts of COVID-19 and the measures taken to limit its spread may increase in severity and may result in a material adverse impact on our financial position, results of operations and cash flows in the future. In addition to the effects discussed above, possible impact may include, but is not limited to: lost revenue or additional costs associated with a disruption to our production or distribution facilities; customers may experience financial difficulties and may be unable to pay within payment terms for the products they purchased; reduced revenue due to restricted access to healthcare customers; lower revenue and income due to foreign currency fluctuations; lower travel and entertainment costs due to travel restrictions; and lower income due to a delay in cost savings projects. While our operations have been designated as essential activities by certain state and city jurisdictions, COVID-19 is likely to negatively impact our operating results and financial position, the extent and duration cannot be reasonably estimated at this time.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
    The following information should be read in conjunction with the condensed consolidated financial statements and accompanying notes in this Form 10-Q, as well as the audited consolidated financial statements and related notes for the fiscal year ended December 31, 2019 included in our Annual Report on Form 10-K.
    
    When used in this report, the terms “we,” “us,” and “our” refer to ICU Medical, Inc ("ICU") and its subsidiaries included in our condensed consolidated financial statements unless context requires otherwise.

Business Overview

    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 non-dedicated IV sets and needlefree connectors designed to help meet clinical, safety and workflow goals. In addition, we manufacture automated pharmacy IV compounding systems with workflow technology, closed systems transfer devices for preparing and administering hazardous IV drugs, and cardiac monitoring systems for critically ill patients.

Our primary customers are acute care hospitals, wholesalers, ambulatory clinics and alternate site facilities, such as clinics, home health care providers and long-term care facilities. We sell our products in more than 90 countries throughout the world.

    We categorize our products into four main product lines: Infusion Consumables, Infusion Systems, IV Solutions and Critical Care. We have presented our financial results in accordance with these product lines, with our primary products in each line listed below.

Operations Overview
28


COVID-19 Update

    In late 2019, a novel 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 outbreak has spread globally and has led governments and other authorities around the world, including federal, state and local authorities in the United States and elsewhere, 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, 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.

    As a result of the COVID-19 pandemic, our non-essential offices and facilities, including our corporate headquarters remain closed to non-essential employees. With a large number of employees now working remotely there is a potential loss of productivity, which could negatively impact our future results.

    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 March 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 Credit Facility. As we now have a greater insight into how we are able to operate during COVID-19, we decided to fully repay the $150.0 million borrowed during the first quarter under our Credit Facility.    

During the third quarter ended September 30, 2020, our results of operations were impacted by an increase in the demand for our infusion pump hardware that was partially offset by a decline in the demand for certain products in our Infusion Consumables product portfolio.

    The effect of the 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 cannot 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 following:

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 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 revenue and income due to foreign currency fluctuations;
lower travel and entertainment costs due to global travel restrictions;
29

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 recent reductions in interest rates along with higher interest expense from borrowings under our $150.0 million Credit Facility if necessary to maintain adequate liquidity.

    See Risk Factors for further information regarding the actual and potential future impacts of the COVID-19 pandemic on us, our operations and our business.

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 Infusion Consumable products are:

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;

TegoTM hemodialysis connector used to cap and protect hemodialysis central venous catheter hubs;

NovaCathand SuperCath™ peripheral IV catheters (PIV); and

ClearGuard HD antimicrobial barrier caps for hemodialysis catheters.

    Closed System Transfer Devices ("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 on the healthcare worker and environment. Our products are:

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.

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

30

    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:

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

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.

    IV Mediation Safety Software:

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.

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;
TriOxTM venous oximetry catheters;
Transpac™ blood pressure transducers; and
SafeSet™ closed blood sampling and conservation system.
31

    
    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):
Three months ended
September 30,
Nine months ended
September 30,
2020201920202019
$% of Revenue$% of Revenue$% of Revenue$% of Revenue
Domestic$237.4 75 %$222.6 72 %$675.8 71 %$697.5 73 %
International81.2 25 %84.9 28 %274.8 29 %253.2 27 %
Total Revenue$318.6 100 %$307.5 100 %$950.6 100 %$950.7 100 %
The following table sets forth, for the periods indicated, total revenue by product line as a percentage of total revenue: 
Three months ended
September 30,
Nine months ended
September 30,
Product line2020201920202019
Infusion Consumables36 %39 %37 %38 %
Infusion Systems28 %26 %28 %26 %
IV Solutions32 %32 %31 %33 %
Critical Care%%%%
 100 %100 %100 %100 %
    
We manage our product distribution in the U.S. through a network of three 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 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 the 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 may 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, rather than 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.

Consolidated Results of Operations

32

    We present income statement data in Part I, Item 1 - Financial Statements. The following table shows, for the three and nine months ended September 30, 2020 and 2019, the percentages of each income statement caption in relation to total revenue: 
Three months ended
September 30,
Nine months ended
September 30,
 2020201920202019
Total revenue100 %100 %100 %100 %
Gross margin36 %39 %36 %38 %
Selling, general and administrative expenses22 %21 %22 %22 %
Research and development expenses%%%%
Restructuring and strategic transaction%%%%
Change in fair value of contingent earn-out%— %%(5)%
Contract settlement— %— %— %— %
Total operating expenses27 %28 %28 %28 %
Income from operations%11 %%10 %
Interest expense— %— %— %— %
Other income (expense), net— %— %— %— %
Income before income taxes%11 %%10 %
Provision for income taxes— %(2)%(1)%(1)%
Net income%%%%
    
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):
Three months ended
September 30,
Nine months ended
September 30,
20202019$ Change% Change20202019$ Change% Change
Infusion Consumables$116.1 $119.8 $(3.7)(3.1)%$350.6 $358.0 $(7.4)(2.1)%
    
Infusion Consumables revenue decreased for the three and nine months ended September 30, 2020, as compared to the same periods in the prior year. For the three months ended September 30, 2020, the revenue decrease was driven primarily by the impact of lower demand from hospital customers due to COVID-19, particularly in international markets, offset partially by sales of our ClearGuard HD product, which we acquired in our fourth quarter 2019 acquisition of Pursuit Vascular, Inc ("Pursuit"). For the nine months ended September 30, 2020, the revenue decrease was driven primarily by the impact of lower demand from hospital customers globally due to COVID-19, offset by Oncology growth internationally and sales of our ClearGuard HD product. On a constant currency basis, Infusion Consumables revenue would have been $115.3 million for the three months ended September 30, 2020, a decrease of $4.5 million or 3.8%, as compared to the same period in the prior year. On a constant currency basis, Infusion Consumables revenue would have been $352.5 million for the nine months ended September 30, 2020, a decrease of $5.5 million or 1.5%, as compared to the same period in the prior year.

Infusion Systems

    The following table summarizes our total Infusion Systems revenue (in millions):
33

Three months ended
September 30,
Nine months ended
September 30,
20202019$ Change% Change20202019$ Change% Change
Infusion Systems$88.4 $78.9 $9.5 12.0 %$267.9 $244.5 $23.4 9.6 %
    
Infusion Systems revenue increased for the three and nine months ended September 30, 2020, as compared to the same periods in the prior year due to higher demand for our infusion pump hardware, offset somewhat by lower demand for our dedicated infusion sets during the global COVID-19 pandemic. On a constant currency basis Infusion Systems revenue would have been $88.9 million for the three months ended September 30, 2020, an increase of $10.0 million or 12.7%, as compared to the same period in the prior year. On a constant currency basis Infusion Systems revenue would have been $273.0 million for the nine months ended September 30, 2020, an increase of $28.5 million or 11.7%, as compared to the same period in the prior year.

IV Solutions

    The following table summarizes our total IV Solutions revenue (in millions):
Three months ended
September 30,
Nine months ended
September 30,
20202019$ Change% Change20202019$ Change% Change
IV Solutions$101.9 $98.2 $3.7 3.8 %$295.4 $314.0 $(18.6)(5.9)%
    
IV Solutions sales increased for the three months ended September 30, 2020, as compared to the same period in the prior year, primarily due to an increase in sales to new customers. IV Solutions sales decreased for the nine months ended September 30, 2020, as compared to the same period in the prior year, primarily due to lower contract manufacturing sales to Pfizer, lower demand from hospital customers due to the COVID-19 pandemic and higher sales in the first quarter of 2019 to non-contracted customers.

Critical Care

    The following table summarizes our total Critical Care revenue (in millions):
Three months ended
September 30,
Nine months ended
September 30,
20202019$ Change% Change20202019$ Change% Change
Critical Care$12.2 $10.6 $1.6 15.1 %$36.7 $34.2 $2.5 7.3 %
    
Critical Care revenue increased for the three and nine months ended September 30, 2020, as compared to the same periods in the prior year, primarily as a result of growth in the Asia region.

Gross Margins

    For the three and nine months ended September 30, 2020, gross margins were 35.8% and 35.9%, respectively. For the three and nine months ended September 30, 2019, gross margins were 38.6% and 37.6%, respectively. The decrease in gross margin for the three and nine months ended September 30, 2020, as compared to the same periods in the prior year was primarily due to lower IV Solutions manufacturing volumes, unfavorable product mix, and increased product quality costs.

Selling, General and Administrative (“SG&A”) Expenses

    The following table summarizes our total SG&A Expenses (in millions):
34

Three months ended
September 30,
Nine months ended
September 30,
20202019$ Change% Change20202019$ Change% Change
SG&A$70.9 $65.9 $5.0 7.6 %$210.4 $206.3 $4.1 2.0 %
    
SG&A expenses in total increased for the three and nine months ended September 30, 2020, as compared to the same periods in the prior year. For the three months ended September 30, 2020 as compared to the same period in the prior year, dealer fees increased $4.3 million, stock compensation increased $2.7 million, and depreciation and amortization expense increased $1.9 million. Offsetting these expense increases was a decrease of $1.7 million in travel expenses, and a decrease of $1.2 million in consulting expenses. Dealer fees increased due to an increase in revenue from distributors. Stock compensation increased in the current period due to a change in the number of performance shares estimated to vest on one of our non-executive performance awards. Depreciation and amortization expense increased primarily as a result of the increase in amortization base due to the November 2019 acquisition of Pursuit. Travel expenses decreased in the current period, as compared to the same prior year period, due to travel restrictions in response to COVID-19. Consulting expense was higher in the prior year due to charges incurred related to tax compliance and IT infrastructure expenses.

For the nine months ended September 30, 2020 as compared to the same period in the prior year, dealer fees increased $8.7 million, depreciation and amortization expense increased $6.0 million, compensation expense increased $2.7 million, and stock compensation increased $2.4 million. Offsetting these expense increases was a $5.2 decrease in bad debt expense, a $4.6 million decrease in travel expenses, a $3.9 million decrease in consulting expenses, and a $2.6 million decrease in sales and marketing expenses. See the above explanations for the three months ended September 30, 2020, which also apply to the nine months ended September 30, 2020. Compensation expense increased as a result of lower incentive compensation recognized in the prior year due to forecasted results trending below performance targets. 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. Sales and marketing expenses decreased due to the impact of COVID-19 on trade shows, conferences, and related expenses.

Research and Development (“R&D”) Expenses

    The following table summarizes our total R&D Expenses (in millions):
Three months ended
September 30,
Nine months ended
September 30,
20202019$ Change% Change20202019$ Change% Change
R&D$10.1 $12.0 $(1.9)(15.8)%$31.2 $36.0 $(4.8)(13.3)%
    
R&D expenses decreased for the three and nine months ended September 30, 2020, as compared to the same periods in the prior year. R&D expense primarily relates to compensation and related benefit expenses on current R&D projects.

Restructuring and Strategic Transaction and Integration Expenses

    Restructuring and strategic transaction and integration expenses were $4.1 million and $22.9 million for the three and nine months ended September 30, 2020, respectively, as compared to $8.0 million and $69.4 million for the three and nine months ended September 30, 2019, respectively.

Restructuring charges

    Restructuring charges were $0.0 million and $8.1 million for the three and nine months ended September 30, 2020, respectively, as compared to $0.8 million and $8.4 million for the three and nine months ended September 30, 2019, respectively. Restructuring charges for the nine months ended September 30, 2020, were primarily related to severance and other costs related to office and facility closures. For the three and nine months ended September 30, 2019, the restructuring 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 our unpaid restructuring charges as of September 30, 2020 by the end of the year.

Strategic transaction and integration expenses
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    Strategic transaction and integration expenses were $4.1 million and $14.8 million for the three and nine months ended September 30, 2020, respectively, as compared to $7.2 million and $61.0 million for the three and nine months ended September 30, 2019, respectively. The strategic transaction and integration expenses during the three and nine months ended September 30, 2020 were primarily related to the integration of HIS, which for the nine months ended September 30, 2020 included the migration of IT systems at our Austin facility. The strategic transaction and integration expenses during the nine months ended September 30, 2019 included a one-time strategic supply chain restructuring charge of $22.1 million, which reduced our contracted commitments to our third party manufacturer. The nine months ended September 30, 2019, also included charges related to our final Pfizer separation costs, which included a $12.7 million non-cash write-off of related assets.

Change in Fair Value of Contingent Earn-out

    For the three and nine months ended September 30, 2020, the fair value revaluation of our Pursuit earn-out liability resulted in an increase in value of $4.3 million and $7.0 million, respectively. For the three and nine months ended September 30, 2019, the fair value revaluation of our HIS contingent earn-out liability resulted in a decrease of value of $0.2 million and $47.4 million, respectively.

Contract Settlement

    For the three and nine months ended September 30, 2020, we recorded $1.0 million in contract settlement income related to the resolution of a dispute with one of our suppliers. For the nine months ended September 30, 2019, we incurred a contract settlement expense of $3.8 million, related to the resolution of a dispute with a product partner, which resulted in a redefinition of our contractual arrangement and in the rights and remedies determined under such arrangement.

Interest Expense

    Interest expense was $0.6 million and $1.6 million for the three and nine months ended September 30, 2020, respectively, and $0.1 million and $0.4 million for the three and nine months ended September 30, 2019, respectively. The three and nine months ended September 30, 2020 primarily includes interest expense incurred on borrowings under the Credit Facility and the amortization of financing costs that were incurred in 2017 in connection with entering into the Credit Facility. The three and nine months ended September 30, 2019 includes the amortization of financing costs and interest expense related to the per annum commitment fee charged on the unused portion of the revolver under our Credit Facility (see Note 16: Long-Term Obligations in our accompanying condensed consolidated financial statements for additional information).

Other Income (Expense), net

    Other income (expense) netted to $1.3 million and ($2.2) million for the three and nine months ended September 30, 2020, respectively, as compared to $0.0 million and $4.7 million for the three and nine months ended September 30, 2019, respectively. For the three months ended September 30, 2020, the other income, net was related to $2.5 million of miscellaneous income and $0.8 million of interest income, partially offset by $1.4 million in foreign exchange losses and $0.6 million of loss from disposed assets. For the nine months ended September 30, 2020, the other expense, net was primarily related to $6.0 million in foreign exchange losses and $1.7 million of loss from disposed assets, partially offset by $2.5 million in miscellaneous income and $3.0 million in interest income. The foreign exchange losses are primarily as a result of the strengthening of the U.S. dollar from the impact of COVID-19. For the three months ended September 30, 2019, the other income, netted out as interest income was mostly offset by foreign exchange losses For the nine months ended September 30, 2020, the other income, net was primarily related to interest income, partially offset by foreign exchange losses.

Income Taxes

    For the three and nine months ended September 30, 2020, income taxes were accrued at an estimated effective tax rate of 5% and 10%, respectively, as compared to 19% and 14%, for the three and nine months ended September 30, 2019, respectively.

    The effective tax rate for the three and nine months ended September 30, 2020 differs from the federal statutory rate of 21% principally because of the effect of the mix of U.S. and foreign incomes, state income taxes, global intangible low-taxed income ("GILTI"), foreign-derived intangible income ("FDII") and tax credits. The effective tax rate during the three and nine months ended September 30, 2020 included a tax benefit of $0.1 million and $3.6 million, respectively, related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the periods. The effective tax rate
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for the three and nine months ended September 30, 2020 also included U.S. federal and state return-to-provision adjustments net of related reserve changes for the year ended December 31, 2019 of $3.8 million tax benefit primarily due to changes in estimates for GILTI, FDII, and related foreign tax credits.

    The effective tax rate for the three and nine months ended September 30, 2019 differs from the federal statutory rate of 21% principally because of the effect of the mix of U.S. and foreign incomes, state income taxes, GILTI and tax credits. The effective tax rate during the three and nine months ended September 30, 2019 included a tax benefit of $0.3 million and $7.7 million, respectively, related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the periods. The effective tax rate for the three and nine months ended September 30, 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 the three and nine months ended September 30, 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.

Liquidity and Capital Resources
 
During the first nine months of 2020, our cash, cash equivalents and short-term investments increased by $70.9 million from $292.6 million at December 31, 2019 to $363.5 million at September 30, 2020.

We are continuously assessing our liquidity and anticipated capital requirements due to the uncertainty created by COVID-19. We are currently closely monitoring and managing our receivable and payable balances.

Cash Flows from Operating Activities

Our net cash provided by operations for the nine months ended September 30, 2020 was $144.2 million. Net income plus adjustments for non-cash net expenses contributed $174.3 million. Net cash used in operations as a result of changes in operating assets and liabilities was $30.1 million. The changes in operating assets and liabilities included a $38.0 million decrease in accounts payable, a $20.4 million decrease in accrued liabilities, a $12.1 million increase in other assets, a $6.5 million increase in prepaid expenses, and $0.7 million in net changes in income taxes, including excess tax benefits and deferred income taxes. Offsetting these amounts was a $38.9 million decrease in accounts receivables, and a $8.9 million decrease in inventories. The decrease in accounts payable was due to the timing of payments. The decrease in accrued liabilities was due to the payment of accrued supply chain reorganization costs. The increase in other assets was due to the purchase of spare parts. The increase in prepaid expenses and other current assets was primarily due to an increase in deferred costs. The net changes in income taxes was a result of the timing of payments. The decrease in inventory was primarily due to improved inventory management and increased demand for certain products driven by the global COVID-19 pandemic. The decrease in accounts receivable is primarily due to collection efforts. The net changes in income taxes was a result of the timing of payments.

Our net cash provided by operations for the nine months ended September 30, 2019 was $53.1 million. Net income plus adjustments for non-cash net expenses contributed $156.9 million. Net cash used in operations as a result of changes in operating assets and liabilities was $103.9 million. The changes in operating assets and liabilities included a $30.9 million increase in inventories, a $29.5 million increase in other assets, a $32.5 million increase in accounts receivable, a $23.2 million decrease in accrued liabilities, and a $3.0 million decrease in accounts payable. Offsetting these amounts was a $8.8 million decrease in prepaid expenses and other current assets and $6.5 million in net changes in income taxes, including excess tax benefits and deferred income taxes. The increase in inventory was primarily due to an increase in our finished goods safety stock. The increase in other assets was primarily related to the purchase of spare parts. 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 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 decrease in accounts payable was due to the timing of payments. The decrease in prepaid expenses and other current assets was primarily due to the collection of receivable amounts owed from Pfizer. The net changes in income taxes was a result of the timing of payments.

Cash Flows from Investing Activities

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    The following table summarizes the changes in our investing cash flows (in thousands):
Nine months ended
September 30,
20202019Change
Investing Cash Flows:
Purchases of property and equipment$(62,362)$(73,253)$10,891 (1)
Proceeds from sale of assets154 19 135 
Business acquisitions, net of cash acquired— (4,600)4,600 (2)
Intangible asset additions(6,325)(6,461)136 
Purchases of investment securities(9,603)(17,994)8,391 (3)
Proceeds from sale of investment securities20,900 36,400 (15,500)(4)
Net cash used in investing activities$(57,236)$(65,889)$8,653 
______________________________
(1) Our purchases of property and equipment will vary from period to period based on additional investments needed to support new and existing products and expansion of our manufacturing facilities.
(2) Our business acquisitions will vary from period to period based upon our current growth strategy and our ability to execute on desirable target companies.
(3)    Our purchases of investment securities will vary from period to period based on current cash needs, planning for known future transactions and due to changes in our investment strategy.
(4) Proceeds from the sale or maturity of our investment securities will vary from period to period based on the maturity dates of the investments we currently hold.

    While we can provide no assurances, we estimate that our capital expenditures in 2020 will be approximately $85.0 million to $90.0 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, in infusion devices that are placed with customers outside the U.S., and in IT to benefit world-wide operations. Amounts of spending are estimates and actual spending may substantially differ from those amounts.
    
Cash Flows from Financing Activities
 
    The following table summarizes the changes in our financing cash flows (in thousands):    
Nine months ended
September 30,
20202019Change
Financing Cash Flows:
Proceeds from short-term debt$150,000 $— $150,000 (1)
Repayment of short-term debt(150,000)— (150,000)(1)
Proceeds from exercise of stock options8,586 4,240 4,346 (2)
Payments on finance leases(231)— (231)
Tax withholding payments related to net share settlement of equity awards(12,821)(18,478)5,657 (3)
Net cash provided by (used in) financing activities$(4,466)$(14,238)$9,772 
______________________________
(1) During March 2020, as a result of market uncertainty caused by COVID-19, we borrowed $150.0 million under our revolving Credit Facility. We fully repaid the amounts borrowed under our revolving Credit Facility in September 2020.
(2)    Proceeds from the exercise of stock options will vary from period to period based on the volume of options exercised and the exercise price of the specific options exercised.
(3) During the nine months ended September 30, 2020, our employees surrendered 66,749 shares of our common stock from vested restricted stock awards as consideration for approximately $12.8 million in minimum statutory withholding obligations paid on their behalf. During the nine months ended September 30, 2019, our employees surrendered 79,313
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shares of our common stock from vested restricted stock awards as consideration for approximately $18.5 million in minimum statutory withholding obligations paid on their behalf.

In August 2019, our Board of Directors approved a share purchase plan to purchase up to $100.0 million of our common stock. This plan replaced our existing plan and has no expiration date. As of September 30, 2020, all of the $100 million available for purchase was remaining under the plan.

We have a substantial cash and investment security position generated from operations. We maintain this position to address any operational challenges related to COVID-19, fund our growth, meet increasing working capital requirements, fund capital expenditures and to take advantage of acquisition opportunities that may arise. Our primary investment goal is capital preservation.

Access to Capital
 
We believe that our existing cash and 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. In the event that we experience downturns, cyclical fluctuations in our business that are more severe or longer than anticipated, fail to achieve anticipated revenue and expense levels, or have significant unplanned cash expenditures, we may need to obtain or seek alternative sources of capital or financing, and we can provide no assurances that the terms of such capital or financing will be available to us on favorable terms, if at all. Our ability to generate cash flows from operations, issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers, deterioration in our key financial ratios or credit ratings or other significantly unfavorable changes in conditions.

Credit Facility    

    We have a five-year Credit Facility with various lenders for $150.0 million, with Wells Fargo Bank, N.A. as the administrative agent (see Note 16: Long-Term Obligations). The Credit Facility has an accordion feature that would enable us to increase the borrowing capacity of the Credit Facility by the greater of (i) $100.0 million and (ii) 2.00x Total Leverage. Under the terms of the Credit Facility, we will be subject to certain financial covenants pertaining to leverage and fixed charge coverage ratios. Borrowings under the Credit Facility will bear interest at LIBOR plus an applicable margin tied to the leverage ratio in effect. Any unused portion of the Credit Facility will be subject to a per annum commitment fee which is also calculated using the leverage ratio in effect. The Credit Facility matures in 2022. During March 2020, as a precautionary measure in response to market uncertainty driven by the COVID-19 pandemic, we preemptively increased our liquidity by borrowing $150.0 million under our Credit Facility. In September 2020, we fully repaid the borrowings under our Credit Facility.

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 September 30, 2020.

Off-Balance Sheet Arrangements
 
In the normal course of business, we have agreed to indemnify our officers and directors to the maximum extent permitted under Delaware law and to indemnify customers as to certain intellectual property matters related to sales of our
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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 material liability for indemnification. 

Contractual Obligations

    During 2019, we signed ten-year lease for a 610,806 square foot warehouse, which commenced during the first quarter of 2020. Over the ten-year lease term, lease payment will be approximately $21.9 million. There have been no other material changes to our contractual obligations disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 ("Annual Report").

Critical Accounting Policies

In our Annual Report, we identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements, there have been no material changes to our critical accounting policies from those previously disclosed in our Annual Report.

New Accounting Pronouncements
 
See Note 2 to Part I, Item 1.  Financial Statements.
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Forward Looking Statements
 
Various portions of this Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and documents referenced herein, describe trends in our business and finances that we perceive and state some of our expectations and beliefs about our future. These statements about the future are “forward looking statements,” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and we may identify them by using words such as "anticipate," "believe," "expect," "estimate," "intend," "plan," "will," "continue," "could," "may," and by similar expressions and statements about aims, goals and plans. The forward looking statements are based on the best information currently available to us and assumptions that we believe are reasonable, but we do not intend the statements to be representations as to future results. They include, without limitation, statements about:

future growth; future operating results and various elements of operating results, including future expenditures and effects with respect to sales and marketing and product development and acquisition efforts; future sales and unit volumes of products; expected increases and decreases in sales; deferred revenue; accruals for restructuring charges, future license, royalty and revenue share income; production costs; gross margins; litigation expense; future SG&A and R&D expenses; manufacturing expenses; future costs of expanding our business; income; losses; cash flow; amortization; source of funds for capital purchases and operations; future tax rates; alternative sources of capital or financing; changes in working capital items such as receivables and inventory; selling prices; and income taxes;

factors affecting operating results, such as shipments to specific customers; reduced dependence on current proprietary products; loss of a strategic relationship; change in demand; domestic and international sales; expansion in international markets, selling prices; future increases or decreases in sales of certain products and in certain markets and distribution channels; maintaining strategic relationships and securing long-term and multi-product contracts with large healthcare providers and major buying organizations; increases in systems capabilities; introduction, development and sales of new products, acquisition and integration of businesses and product lines; benefits of our products over competing systems; qualification of our new products for the expedited Section 510(k) clearance procedure; possibility of lengthier clearance process for new products; planned increases in marketing; warranty claims; rebates; product returns; bad debt expense; amortization expense; inventory requirements; lives of property and equipment; manufacturing efficiencies and cost savings; unit manufacturing costs; establishment or expansion of production facilities inside or outside of the United States; planned new orders for semi-automated or fully automated assembly machines for new products; adequacy of production capacity; results of R&D; our plans to repurchase shares of our common stock; asset impairment losses; relocation of manufacturing facilities and personnel; effect of expansion of manufacturing facilities on production efficiencies and resolution of production inefficiencies; the effect of costs to customers and delivery times; business seasonality and fluctuations in quarterly results; customer ordering patterns and the effects of new accounting pronouncements; and

new or extended contracts with manufacturers and buying organizations; dependence on a small number of customers; loss of larger distributors and the ability to locate other distributors; growth of our Clave products in future years; design features of Clave products; the outcome of our strategic initiatives; regulatory approvals and compliance; outcome of litigation; patent protection and intellectual property landscape; patent infringement claims and the impact of newly issued patents on other medical devices; competitive and market factors, including continuing development of competing products by other manufacturers; improved production processes and higher volume production; innovation requirements; consolidation of the healthcare provider market and downward pressure on selling prices; distribution or financial capabilities of competitors; healthcare reform legislation; use of treasury stock; working capital requirements; liquidity and realizable value of our investment securities; future investment alternatives; foreign currency denominated financial instruments; foreign exchange risk; commodity price risk; our expectations regarding liquidity and capital resources over the next twelve months; capital expenditures; plans to convert existing space; acquisitions of other businesses or product lines, indemnification liabilities and contractual liabilities.

 Forward-looking statements involve certain risks and uncertainties, which may cause actual results to differ materially from those discussed in each such statement.  First, one should consider the factors and risks described in the statements themselves or otherwise discussed herein. Those factors are uncertain, and if one or more of them turn out differently than we currently expect, our operating results may differ materially from our current expectations.
 
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Second, investors should read the forward looking statements in conjunction with the Risk Factors discussed in Part I, Item 1A of our Annual Report on Form 10-K with the SEC for the year ended December 31, 2019, Part II, Item 1A of this Quarterly Report on Form 10-Q and our other reports filed with the SEC.  Also, actual future operating results are subject to other important factors and risks that we cannot predict or control, including without limitation, the following:

the impacts of the COVID-19 pandemic on us, our business and on domestic and global economies generally;
general economic and business conditions, both in the U.S. and internationally;
unexpected changes in our arrangements with Pfizer or our other large customers;
outcome of litigation;
fluctuations in foreign exchange rates and other risks of doing business internationally;
increases in labor costs or competition for skilled workers;
increases in costs or availability of the raw materials need to manufacture our products;
the effect of price and safety considerations on the healthcare industry;
competitive factors, such as product innovation, new technologies, marketing and distribution strength and price erosion;
the successful development and marketing of new products;
unanticipated market shifts and trends;
the impact of legislation affecting government reimbursement of healthcare costs;
changes by our major customers and independent distributors in their strategies that might affect their efforts to market our products;
the effects of additional governmental regulations;
unanticipated production problems;
the availability of patent protection and the cost of enforcing and of defending patent claims; and
natural disasters and outbreak of disease or illness.
The forward-looking statements in this report are subject to additional risks and uncertainties, including those detailed from time to time in our other filings with the Securities and Exchange Commission. These forward-looking statements are made only as of the date hereof and, except as required by law, we undertake no obligation to update or revise any of them, whether as a result of new information, future events or otherwise.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk    

    If we were to incur borrowings under our Credit Facility, we would face market risk stemming from changes in interest rates.

Foreign Exchange Risk    

    We have foreign currency exchange risk related to foreign-denominated cash, accounts receivable and accounts payable and accrued liabilities.

    In our European operations, our net Euro asset position at September 30, 2020 was approximately €51.2 million. A 10% change in the conversion of the Euro to the U.S. dollar for our cash, accounts receivable, accounts payable and accrued liabilities from the September 30, 2020 spot rate would impact our consolidated amounts on these balance sheet items by approximately $6.0 million, or 0.8% of these consolidated net assets. We expect that in the future, with the growth of our European distribution operations, net Euro denominated instruments will continue to increase. We currently do not hedge our Euro foreign currency exposures.

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    We have manufacturing facilities and conduct business transactions denominated in the Mexican Peso. We hedge a portion of our manufacturing spend, which reduces our exposure to the foreign currency exchange risk related to the Mexican Peso (see Note 7: Derivatives and Hedging to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q).

Item 4.Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Our principal executive officer and principal financial officer have concluded, based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the period covered by this Report, that our disclosure controls and procedures are effective to ensure that the information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and that such information is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.

There was no change in our internal control over financial reporting during the quarter ended September 30, 2020 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.Legal Proceedings
 
    Certain legal proceedings in which we are involved are discussed in Part I, Item 1. "Financial Statements" of this Form 10-Q in Note 18. Commitments and Contingencies to the Condensed Consolidated Financial Statements, and is incorporated herein by reference.
    
Item 1A.Risk Factors

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.

    In late 2019, a novel 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 outbreak has spread globally and has led governments and other authorities around the world, including federal, state and local authorities in the United States and elsewhere, 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, 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 and as a result, during the second and third quarter of 2020, 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. With a large number of employees now working remotely there is a potential loss of productivity, which could negatively impact our future results.

    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;
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implemented COVID-19 temperature screening for employees and visitors 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.

     During the first nine months of 2020, our operations have been impacted globally by lower admission rates and procedural volumes at our hospital customers. We have also incurred increased expenses as a result of COVID-19 for additional compensation paid to our manufacturing and distribution facility workers along with personal protection equipment and other items. At the same time, we have seen some expense decreases due to reductions in travel and other discretionary spending. The total impact of the COVID-19 pandemic on our business will not be fully reflected in our results of operations and overall financial performance until future periods. 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. A continued decline in the global economy could delay or significantly decrease purchases of our products in the future. Adverse economic and market conditions could also harm the parties with whom we do business, including our customers, distributors and suppliers. 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;
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 revenue and income due to foreign currency fluctuations;
lower travel and entertainment costs due to global travel restrictions;
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 recent 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 Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 and many of the risks described under the caption ‘‘Risk Factors’’ and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2019, 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.

Our ability to manufacture products may be materially adversely impacted by COVID-19.

    We manufacture out of four main facilities, Austin, Texas, Salt Lake City, Utah, Costa Rica and Mexico. If the manufacturing capabilities of any of these sites are impacted as a result of COVID-19, we may not be able to timely manufacture our products at the required levels or at all. A disruption at any of our manufacturing facilities could have a material, adverse effect on our business, results of operations, financial condition and cash flows. For example, the COVID-19 pandemic could have a substantial impact on our employees’ attendance and productivity due to a variety of factors, such as
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shelter-in-place orders, quarantines and short and long term illness, all of which could interrupt and delay the manufacture of our products.

    Our suppliers may experience financial difficulties or business disruptions that could negatively affect their operations and their ability to supply us with the raw materials and components required for our products. Any delay or shortages of raw materials or components from our suppliers could interrupt and delay the manufacturing of our products.


Our sales may be materially adversely impacted by COVID-19.

    Our non-essential offices and facilities remain closed to our non-essential employees, including our corporate headquarters, and a large number of employees continue to work remotely. In addition to this potentially hindering productivity, our sales force typically operates by meeting in person with customers to discuss our products. As many hospitals are currently restricting access to their facilities to essential personnel, this 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 the second and third quarters of 2020, we have experienced lower demand from hospital customers for our products other than our infusion pump hardware due to COVID-19. Additionally, the COVID-19 pandemic will potentially adversely affect our distributors as they may not be able to maintain the current levels of sales. As such, the impacts of COVID-19 on our sales force and our distributors could have a material adverse effect on our business, results of operations, financial condition and cash flows.

The COVID-19 pandemic has resulted in significant financial market and foreign currency volatility, which could adversely affect our earnings and cash flows.

    The COVID-19 pandemic has led to periods of significant volatility in financial markets and foreign currency exchange rates. Given that our financial results are reported in U.S. dollars, but our operations are conducted internationally, currency exchange rate changes can have a significant impact on our financial results. During the nine months ended September 30, 2020, we recognized $6.0 million in net foreign exchange losses in our results of operations.

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. A breach of any of these covenants could result in a default under the credit agreement, which could cause all of the outstanding indebtedness under our Credit Facility to become immediately due and payable. 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.
 
    In evaluating an investment in our common stock, investors should consider carefully, among other things, the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2019, including the risks resulting from our foreign currency exchange rates, as well as the information contained in this Quarterly Report and our other reports and registration statements filed with the SEC.


Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Purchase of Equity Securities

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    The following is a summary of our stock repurchasing activity during the third quarter of 2020:
PeriodTotal number of shares
purchased
Average
price paid
per share
Total number of shares
purchased as
part of a
publicly
announced
program
Approximate
dollar value that
may yet be
purchased under
the program(1)
07/01/2020 — 07/31/2020— $— — $100,000,000 
08/01/2020 — 08/31/2020— $— — $100,000,000 
09/01/2020 — 09/30/2020— $— — $100,000,000 
Third quarter of 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. Exhibits

    See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.





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Signature
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
ICU Medical, Inc.
 
(Registrant) 
  
/s/ Brian M. BonnellDate:November 6, 2020
Brian M. Bonnell 
Chief Financial Officer 
(Principal Financial Officer) 
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Exhibit Index
 
Exhibit 31.1
 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2
 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 101.INS XBRL Instance Document - this instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Exhibit 101.SCH XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


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