ICU MEDICAL INC/DE (ICUI) FY 2022 MD&A

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Part I, Item 1A. “Risk Factors” or in other sections of this Annual Report on Form 10-K.

Business Overview and Highlights

We develop, manufacture, and sell infusion systems, infusion consumables and high-value critical care products used in hospital, alternate site and home care settings. Our team is focused on providing quality, innovation and value to our clinical customers worldwide. Our product portfolio includes IV solutions, IV smart pumps with pain management and safety software technology, dedicated and nondedicated IV sets and needlefree connectors designed to help meet clinical, safety and workflow goals. In addition, we manufacture automated pharmacy IV compounding systems with workflow technology, closed system

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transfer devices for preparing and administering hazardous IV drugs and cardiac monitoring systems for critically ill patients. With the recent acquisition of Smiths Medical, our product portfolio expanded to include, among other products, syringe and ambulatory pumps, peripheral IV catheters, fluid warming and respiratory devices and silicone and PVC tracheotomy tubes.

Acquisition of Smiths Medical 2020 Limited

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

To partially finance the acquisition, we entered into the Credit Agreement, dated as of January 6, 2022 (the "Credit Agreement") with Wells Fargo Bank and other financial institutions as lenders. The Credit Agreement provides for $2.2 billion of senior secured credit facilities, including a five-year term loan A facility of $850.0 million, a seven-year term loan B facility of $850.0 million and a five-year revolving credit facility of $500.0 million collectively (the "Senior Secured Credit Facilities"). See "Liquidity and Capital Resources" in the remainder of this item and Note 11 in our accompanying consolidated financial statements for additional information.

COVID-19 Pandemic and other Global Geopolitical Events

Our business operations have been, and we expect will continue to be, impacted by the novel coronavirus and its variants ("COVID-19"), which has caused lower hospital admissions and medical procedure volumes and by the continuing conflict between Russia and Ukraine. These events have resulted in global economic challenges, and impacts to us and our business, such as rising inflation, especially with respect to freight costs driven by the higher fuel prices, increased cost of raw materials as well as shortages, and supply chain disruptions which have negatively impacted our gross profit margin during 2022. The rising interest rates and foreign currency impact due to the strengthening of the U.S. dollar have also impacted our results of operations during 2022.

While we continually monitor the ongoing and evolving impact of the above events on our operations the overall impact remains uncertain and may not be fully reflected until future periods. The overall impact to our results of operations will depend on factors such as the duration and extent of the impact from the COVID-19 pandemic, the conflict in the Ukraine and the related global economic challenges, none of which can be fully predicted at this time. See “Part I. Item 1A. Risk Factors” for a discussion of risks and uncertainties.

Consolidated Results of Operations

We present our consolidated statements of operations for each of the three years ended December 31, 2022, 2021 and 2020 in Item 8. Financial Statements and Supplementary Data. The following table shows, for each of the three most recent years, the respective percentages of items in our statements of operations in relation to total revenues:

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Total revenues were $2.3 billion, $1.3 billion and $1.3 billion for 2022, 2021 and 2020, respectively.

The following table sets forth, for the periods indicated, total revenue by product line as a percentage of total revenue:

We manage our product distribution through a network of owned and leased distribution facilities in combination with independent distributors and third-party fulfillment and logistics providers. Our end customers, which include healthcare providers and original equipment manufacturer suppliers, may order and receive our products directly from us or through an independent full-line distributor.

In the U.S. a substantial amount of our products are sold to group purchasing organization ("GPO") member hospitals. We believe that as healthcare providers continue to either consolidate or join major buying organizations, the success of our products will depend, in part, on our ability, either independently or through strategic relationships to secure long-term contracts with large healthcare providers and major buying organizations.

Seasonality/Quarterly Results

There are no significant seasonal aspects to our business.  We can experience fluctuations in net sales as a result of variations in the ordering patterns of our largest customers, which may be driven more by COVID-19 pandemic surges and its impact on hospital admissions and procedure volumes along with production scheduling and customer inventory levels, and less by seasonality. Our expenses often do not fluctuate in the same manner as net sales, which may cause fluctuations in operating income that are disproportionate to fluctuations in our revenue.

Non-GAAP Measures

In addition to comparing changes in revenue on a U.S. GAAP basis, we also compare the changes in revenue from one period to another using constant currency. The presentation of revenues on a constant currency basis is a non-GAAP financial

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measure that excludes the impact of fluctuations in foreign currency exchange rates that occurred between the comparative periods. We provide constant currency information to enhance the visibility of underlying business trends, excluding the effects of changes in foreign currency translation rates. We believe this information is useful to investors to facilitate comparisons and better identify trends in our business. Our constant currency revenues reflect current year local currency revenues at prior year's average exchange rates. We consistently apply this approach to revenues for all currencies where the functional currency is not the U.S. dollar. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Revenues on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with GAAP.

Infusion Consumables

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

Infusion Consumables revenue increased in 2022, as compared to 2021, due to increased customer demand in our global core infusion, global oncology and renal products. On a constant currency basis, Infusion Consumables revenue would have been $582.1 million, an increase of $26.9 million or 4.9% as compared to 2021.

Infusion Consumables revenue increased in 2021, as compared to 2020. The increase was due to lower hospital census in 2020 driven by the onset of the COVID-19 pandemic, growth in our global oncology, U.S. core infusion and renal products and the impact from foreign exchange. On a constant currency basis, Infusion Consumables revenue would have been $546.3 million, an increase of $72.6 million or 15.3%, as compared to 2020.

Infusion Systems

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

Infusion Systems revenue decreased in 2022, as compared to 2021, due to the impact of foreign currency. On a constant currency basis, Infusion Systems revenue would have been $363.7 million, an increase of $11.4 million or 3.2%, as compared to 2021 driven by higher large volume pump ("LVP") dedicated set sales from the larger install base of LVPs and software sales.

Infusion Systems revenue decreased in 2021, as compared to 2020. The decrease was primarily due to large volume pump sales driven by higher COVID-19-related purchases during the second and third quarters of 2020 and a decline in sales of our non-large volume pump business, which has been partially offset by higher dedicated set sales in 2021 as a result of higher hospital census and larger install base of large volume pump from new customer installations. On a constant currency basis, Infusion Systems revenue in 2021 would have been $351.4 million, a decrease of $8.3 million or 2.3%, as compared to 2020.

IV Solutions

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

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

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

Critical Care

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

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

Critical Care revenue increased for 2021, as compared to 2020 due primarily to higher U.S. hospital census as a result of the COVID-19 pandemic.

Infusion Systems-Smiths Medical

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

The Infusion Systems-Smiths Medical revenue is a result of the acquisition of Smiths Medical. The year-to-date amount in the table above represents approximately twelve months of revenue from the closing date of the transaction to the end of the year ended December 31, 2022. Revenues in the current period is lower than historical results due to lower demand and operational challenges caused by supply chain and fulfillment constraints.

Vascular Access-Smiths Medical

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

The Vascular Access-Smiths Medical revenue is a result of the acquisition of Smiths Medical. The year-to-date amount in the table above represents approximately twelve months of revenue from the closing date of the transaction to the end of the year ended December 31, 2022. Revenues in the current period is lower than historical results due to lower demand and operational challenges caused by supply chain and fulfillment constraints.

Vital Care-Smiths Medical

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

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The Vital Care-Smiths Medical revenue is a result of the acquisition of Smiths Medical. The year-to-date amount in the table above represents approximately twelve months of revenue from the closing date of the transaction to the end of the current year ended December 31, 2022. Revenues in the current period is lower than historical results due to lower demand and operational challenges caused by supply chain and fulfillment constraints.

Gross Margins

Gross margins were 30.6%, 37.3% and 36.3% for 2022, 2021 and 2020, respectively.

The decrease in gross margin in 2022, as compared to 2021 was primarily driven by the acquisition of Smiths Medical, inflationary cost increases in our supply chain, and lower manufacturing absorption due to supply chain disruptions. Smiths Medical gross margins are lower than historical ICU margins for the current year primarily due to spending on quality systems and product-related remediation, the cost recognition of the purchase accounting write-up of inventory and freight costs. The inflationary cost increases during 2022 caused by COVID-19 and the war in the Ukraine notably impacted our freight rates as well as, labor and materials costs. Partially offsetting the decrease to gross margin in the current period was the impact from increased sales of higher margin consumables products.

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

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

The following table summarizes our SG&A expenses (in millions, except percentages):

Consolidated SG&A expenses increased in 2022, as compared to 2021. In 2022, SG&A increased $296.6 million due to the impact of the Smiths Medical acquisition, which included $103.8 million of salaries and benefits, $116.8 million of depreciation and amortization expense and $19.7 million of IT and business support services. The remainder of the increase in SG&A was attributable mostly due to higher selling expense due to revenue growth and the impact of inflation.

Consolidated SG&A expenses increased in 2021, as compared to 2020. Compensation expense increased $7.9 million, dealer fees increased $5.7 million, stock compensation increased $2.9 million, legal expenses increased $2.3 million and computer expenses increased $1.5 million. Offsetting these increases was a $2.3 million decrease in bad debt expense and $1.6 million decrease in commissions. Compensation expense increased primarily due to increased headcount and annual compensation merit increases. Dealer fees increased due to an increase in revenue from U.S. distributors in the current year. Stock compensation increased due to a change during the current year in the number of performance shares expected to vest. Legal fees increased due to additional services performed in the current year related to various legal matters. Computer expenses increased due to increased maintenance costs as well as increased hardware, software and software subscriptions based on operational needs. Bad debt expense is adjusted quarterly, if deemed necessary, based on an assessment of our accounts receivables and our expectations regarding the collectability of those accounts. Commissions decreased due to the commission plan structure in the prior year, which included certain guaranteed payments.

Research and Development ("R&D") Expenses

The following table summarizes our total R&D expenses (in millions, except percentages):

R&D expenses increased in 2022, as compared to 2021, due to the acquisition of Smiths Medical. R&D expenses are primarily related to headcount and employment expenses in support of ongoing R&D projects

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R&D expenses increased in 2021, as compared to 2020. Fluctuations in our R&D expenses are related to headcount and employment expenses due to the timing and nature of various R&D projects.

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

Restructuring, Strategic Transaction and Integration Expenses

Restructuring, strategic transaction and integration expenses were $71.4 million, $18.0 million and $28.4 million in 2022, 2021 and 2020, respectively.

Restructuring Charges

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

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

In 2020, restructuring charges were $7.9 million. These charges were primarily related to severance and costs related to office and other facility closures.

Strategic Transaction and Integration Expenses

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

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

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

Change in fair value of contingent earn-out

In 2022, the fair value revaluation of our contingent earn-outs resulted in a decrease in value of $32.1 million. This decrease was primarily related to the fair value revaluation of our Smiths Medical contingent earn-out liability.

At the end of the second quarter of 2021, the measurement period related to the Pursuit earn-out liability ended and in October 2021 the $26.3 million earn-out was finalized and paid to Pursuit's former shareholders. There were no changes in the fair value of our earn-outs during 2021.

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

Contract Settlement

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

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

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

Interest (expense) income, net

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

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

In January 2022, we entered into senior secured credit facilities that refinanced our Prior Credit Facility in full, see "Liquidity and Capital Resources" in the remainder of this item for additional information and the estimated impact to future interest expense. In 2022, interest expense primarily includes the contractual interest incurred on borrowings under the Credit Agreement, the per annum commitment fee charged on the available amount of the revolving credit facility contained in the Credit Agreement and the amortization of debt issuance costs incurred in connection with entering into the Credit Agreement (see Note 11 Long-Term Debt in our accompanying consolidated financial statements for additional information).

In 2021, interest expense primarily includes the per annum commitment fee charged on the unused portion of the revolver under our then five-year revolving credit facility and the amortization of financing costs that were incurred in 2017 in connection with entering into the then existing credit facility. The per annum commitment fee was based on the consolidated total leverage ratio in effect and ranged between 0.15% to 0.30% on the unused portion of the credit facility (see Note 11: Long-Term Obligations in our accompanying consolidated financial statements for additional information).

In 2020, interest expense was primarily related to borrowings under our then existing credit facility and the amortization of financing costs. Borrowing under the credit facility bore interest, at our option, based on the Base Rate (as defined in Note 11 in our accompanying consolidated financial statements) plus applicable margin or the London Interbank Offered Rate plus applicable margin (see Note 11: Long-Term Obligations in our accompanying consolidated financial statements for additional information).

Interest income was $4.4 million, $2.8 million and $3.7 million in 2022, 2021 and 2020, respectively. Interest income is primarily related to interest earned on our investment securities.

Other (expense) income, net

Other (expense) income, net was $(5.1) million, $(2.0) million and $(2.6) million in 2022, 2021 and 2020, respectively. In 2022, other expense, net was related to $5.8 million of foreign exchange losses and $2.6 million of loss from disposed assets partially offset by $3.2 million of miscellaneous income. In 2021, other expense, net was primarily related to $1.7 million of loss from disposed assets and $1.0 million of foreign exchange losses partially offset by miscellaneous income of $0.6 million. In 2020, other expense, net was primarily related to $7.2 million of foreign exchange losses incurred as a result of the strengthening of the U.S. dollar during the first half of the year, partially offset by $2.8 million of miscellaneous income and $1.8 million of gain on disposition of assets.

Income taxes

Income taxes were accrued at an estimated annual effective tax rate of 35%, 16% and 11% in 2022, 2021 and 2020, respectively.

The effective tax rate in 2022 differs from the federal statutory rate of 21% principally because of the effect of the mix of U.S. and foreign incomes, state income taxes, section 162(m) excess compensation, foreign-derived intangible income ("FDII"), global intangible low-taxed income ("GILTI") and tax credits. The effective tax rate during 2022 included a tax benefit of $4.2 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period. The effective tax rate during 2022 also included a $0.0 million tax impact of the revaluation of contingent consideration of $6.8 million.

The effective tax rate in 2021 differs from the federal statutory rate of 21% principally because of the effect of the mix of U.S. and foreign incomes, state income taxes, global intangible low-taxed income (“GILTI”),FDII and tax credits. The effective tax rate in 2021 included a tax benefit of $4.9 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period. The effective tax rate for 2021 also included U.S. federal and state return-to-provision adjustments net of related reserve changes for the year ended December 31, 2020 of $0.9 million tax provision primarily due to changes in estimates for GILTI, FDII, subpart F, and related foreign tax credits along with other prior period adjustments.

The effective tax rate in 2020 differs from the federal statutory rate of 21% principally because of the effect of the mix of U.S. and foreign incomes, state income taxes, GILTI, FDII and tax credits. The effective tax rate in 2020 included a tax benefit of $5.3 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period. The effective tax rate for 2020 also included U.S. federal and state return-to-provision adjustments net

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

Liquidity and Capital Resources

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

Sources of Liquidity

Our primary sources of liquidity are cash and cash equivalents, our short-term investment portfolio, cash flows from our operations and access to borrowing arrangements.

Funds generated from operations are held in cash and cash equivalents and investment securities. During 2022, our cash and cash equivalents and short-term investment securities decreased by $354.2 million from $567.2 million at December 31, 2021 to $213.0 million at December 31, 2022. Our short-term investment portfolio consists of investment-grade corporate and government bonds and U.S treasury securities and is primarily intended to facilitate capital preservation.

2022 Credit Facilities and Access to Capital

We entered into the Credit Agreement with various lenders on January 6, 2022 in connection with the closing of the Smiths Medical acquisition. The Credit Agreement provides for a five-year term loan A facility of $850.0 million (the "Term Loan A"), a seven-year term loan B facility of $850.0 million (the "Term Loan B") and a five-year revolving credit facility of $500.0 million (the "Revolving Credit Facility") (collectively, the "Senior Secured Credit Facilities"). The proceeds from the term loans were used to finance a portion of the cash consideration for the Smiths Medical acquisition. The outstanding aggregate principal amount of the term loans is $1.7 billion as of December 31, 2022, which includes the Term Loan A that will mature in January 2027 and the Term Loan B that will mature in January 2029. The proceeds of future borrowings under the Revolving Credit Facility, which expires in January 2027, may be used as a source of liquidity to support our ongoing working capital requirements and other general corporate purposes. There are no outstanding borrowings under the Revolving Credit Facility as of December 31, 2022. As part of entering into the Senior Secured Credit Facilities, we were assigned issuer and Term Loan B credit ratings. At the date of issuance of this report, our issuer and Term Loan B credit ratings assigned and outlook were as follows:

The Credit Agreement contains financial covenants that pertain to the Term Loan A and the Revolving Credit Facility. Specifically, we are required to maintain a Senior Secured Leverage Ratio of no more than 4.50 to 1.00 until June 30, 2024, with step-downs to 4.00 to 1.00 thereafter, and an Interest Coverage Ratio of no less than 3.00 to 1.00 (defined and discussed in greater detail in Note 11: Long-Term Debt to our accompanying consolidated financial statements). We were in compliance with these financial covenants as of December 31, 2022.

2017 Credit Facility

In November 2017, we entered into a five-year revolving credit facility with various lenders for $150.0 million (the "Prior Credit Facility"). The Prior Credit Facility, which was set to expire in November 2022, was terminated upon entering into the new Senior Secured Credit Facilities. There were no outstanding borrowings under the Prior Credit Facility at the time of its termination.

We believe that our existing cash and cash equivalents along with cash flows expected to be generated from future operations, cash received from our uncommitted trade accounts receivable purchase facility (see Note 17: Subsequent Events in our accompanying consolidated financial statements for additional information) and the funds received and accessible under the

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Senior Secured Credit Facilities will provide us with sufficient liquidity to finance our cash requirements for the next twelve months. In the event that we experience downturns, cyclical fluctuations in our business that are more severe or longer than anticipated, fail to achieve anticipated revenue and expense levels, or have significant unplanned cash expenditures, we may need to obtain or seek alternative sources of capital or financing, and we can provide no assurances that the terms of such capital or financing will be available to us on favorable terms, if at all. 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 economic conditions. See Part I. Item 1A. Risk Factors” for discussion of the risks and uncertainties associated with our debt financing.

Uses of Liquidity

Capital Expenditures

Our capital expenditures relate to the expansion and maintenance of our business. While we can provide no assurances, we estimate that our capital expenditures in 2023 will be in the range of $100 million to $120 million. We anticipate making additional investments in machinery and equipment in our manufacturing operations in Costa Rica, Europe, Mexico and the U.S. to support new and existing products and in infusion pumps that get placed with customers outside the U.S. We expect to use our cash and cash equivalents to fund our capital expenditures. Amounts of spending are estimates and actual spending may substantially differ from those amounts.

2022 Acquisitions

On January 6, 2022, we acquired Smiths Medical. We financed the $1.9 billion cash portion of the purchase price at closing with a combination of proceeds from the Senior Secured Credit Facilities and our cash and cash equivalents. See Note 2: Acquisitions and Note 11: Long-Term Debt in our accompanying consolidated financial statements for additional information.

Contractual Obligations

Our principal commitments at December 31, 2022 include both short and long-term future obligations.

Operating Leases

We have non-cancelable operating lease agreements where we are contractually obligated for certain lease payment amounts. For more information regarding our operating lease obligations, (see Note 5: Leases in our accompanying consolidated financial statements).

Long-term Debt Obligations

As discussed above, in January 2022, we incurred borrowings under Senior Secured Credit Facilities. The principal repayment obligations and estimated interest payments on the term loans and estimated commitment fee payments on the revolver are estimated in the below table. Interest payments on the term loans were estimated using an Adjusted Term SOFR rate and an applicable margin on of 2.00% for term loan A and 2.50% for term loan B and the revolver commitment fees were estimated using a rate of 0.30%. The applicable margin rate and commitment fee rate will change from time to time in accordance with a preset pricing grid based on the leverage ratio (see Note 11: Long-Term Debt in our accompanying consolidated financial statements for pricing grids related to the Senior Secured Credit Facilities). We expect to fund these obligations with our existing cash and cash equivalents and cash generated from our future operations.

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Minimum Purchase Obligations

On February 1, 2022, effective as of January 1, 2022, upon our request, Pfizer executed a Product Addendum to our MSA agreement, see under Part I Item 1 Business Section above for further detail. The Product Addendum included a minimum purchase obligation of $29.6 million, which we satisfied during 2022. The Product Addendum expired on November 30, 2022.

Other Future Capital Investments

In connection with the January 2022 acquisition of Smiths Medical we estimate the investment needed in 2023 for restructuring and integration expenses along with spending to support quality systems and quality compliance objectives to be in the range of $75 million to $125 million, which includes acquired accrued field action liabilities. We expect to fund these obligations with our cash and cash equivalents and cash generated from our operations.

Historical Cash Flows

Cash Flows from Operating Activities

Our cash used in operations was $(62.1) million in 2022. Net income plus adjustments for non-cash net expenses contributed $241.6 million to cash provided by operations. Net cash used in operations as a result of changes in operating assets and liabilities was $303.7 million. The changes in operating assets and liabilities included a $201.1 million increase in inventories, a $21.3 million increase in other assets, a $55.8 million decrease in accrued liabilities, $66.7 million in net changes in income taxes, including excess tax benefits and deferred income taxes and a $19.2 million increase in accounts receivable. Offsetting these amounts was a $22.9 million decrease in prepaid expenses and other current assets and a $37.5 million increase in accounts payable. The increase in inventory was primarily to build inventory safety stock levels. The increase in other assets was due to the purchase of spare parts. The primary drivers for the net decrease in accrued liabilities was primarily due to the payout of annual bonuses and decrease in deferred revenue. The net changes in income taxes was a result of recording the current deferred provision and the timing of payments. The increase in accounts receivable was primarily due to the net impact of collection efforts and the timing of revenue. The net decrease in prepaid expenses and other current assets was primarily due to a decrease in deferred costs mostly offset by capitalized debt issuance costs allocated to the revolving credit facility. The increase in accounts payable was due to the timing of payments.

Our cash provided by operations was $267.5 million in 2021. Net income plus adjustments for non-cash net expenses contributed $252.5 million to cash provided by operations. Net cash used in operations as a result of changes in operating assets and liabilities was $15.0 million. The changes in operating assets and liabilities included a $20.8 million decrease in inventories, a $13.8 million decrease in accounts receivable, a $6.3 million increase in accrued liabilities, a $2.3 million increase in accounts payable, and $0.9 million in net changes in income taxes, including excess tax benefits and deferred income taxes. Offsetting these amounts was a $21.0 million increase in other assets and a $8.0 million increase in prepaid expenses and other current assets. The decrease in inventory was primarily due to the timing of production and customer purchases. The decrease in accounts receivable is primarily due to collection efforts. The increase in accrued liabilities was primarily due to the accrual of incentive bonuses, deferred revenue collected on certain arrangements and accruals related to the Smiths Medical transaction. The increase in accounts payable was primarily due to the timing of payments. The net changes in income taxes was a result of the timing of payments. The increase in other assets was primarily due to the purchase of spare parts. The net increase in prepaid expenses and other current assets was primarily due to an increase in deferred costs.

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Our cash provided by operations was $222.8 million in 2020. Net income plus adjustments for non-cash net expenses contributed $239.7 million to cash provided by operations. Net cash used in operations as a result of changes in operating assets and liabilities was $17.0 million. The changes in operating assets and liabilities included a $46.4 million decrease in accounts payable, a $29.4 million decrease in accrued liabilities, $18.0 million in net changes in income taxes, including excess tax benefits and deferred income taxes, a $16.1 million increase in other assets, and a $4.3 million increase in prepaid expenses and other current assets. Offsetting these amounts was a $78.0 million decrease in accounts receivable and a $19.2 million decrease in inventories. The decrease in accounts payable was due to the payment of integration-related expenses with extended payment terms and the timing of other payments. The decrease in accrued liabilities was due to the payment of one-time accrued supply chain reorganization costs. The increase in other assets was due to the purchase of spare parts. The net changes in income taxes was a result of the timing of payments. The increase in prepaid expenses and other current assets was primarily due to an increase in deferred costs. The decrease in accounts receivable is primarily due to collection efforts. The decrease in inventory was primarily due to improved inventory management and increased demand for certain products driven by the COVID-19 pandemic at the end of the year.

Cash Flows from Investing Activities

The following table summarizes the changes in our investing cash flows (in thousands):

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

(2)    In 2020, we sold our Farmers Branch, Texas, U.S. distribution facility for $6.0 million.

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

(4)    Our business acquisitions will vary from period to period based upon our current growth strategy and our ability to execute on desirable target companies. In 2022, we acquired Smiths Medical. The cash consideration for the transaction was $1.9 billion, which was financed with existing cash balances and borrowings under the Credit Agreement. Acquired cash was $78.8 million. In 2021, we acquired a small foreign infusion systems supplier for approximately $15.4 million.

(5)    In 2021, we paid $3.3 million to acquire approximately a 20% non-marketable equity interest in a non-public company.

(6)    Our purchases of investment securities will vary from period to period based on current cash needs, planning for known future transactions and changes in our investment strategy. Our investment policy allows for the purchase of securities with final maturities in excess of one year. If cash is not needed for known future transactions our investment strategy takes advantage of the long-term securities with higher yields. Typically, our longer term securities have maturities up to three years.

(7)    Proceeds from the sale of our investment securities will vary based on the maturity dates of the investments. In 2022, proceeds from sale of investment securities includes $19.0 million received from a promissory note related to an acquired investment as part of the Smiths Medical acquisition.

Cash Flows from Financing Activities

The following table summarizes the changes in our financing cash flows (in thousands):

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(1)     During 2022, we borrowed an aggregate of $1.7 billion under the Senior Secured Credit Facilities contained in the Credit Agreement to partially finance our acquisition of Smiths Medical (see Note 11: Long-Term Debt to our accompanying consolidated financial statements for additional information). The proceeds are net of $37.8 million in payments of lender debt issuance costs.

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

(3)    During 2020, as a result of market uncertainty caused by COVID-19, we borrowed $150.0 million under our then revolving credit facility as a precautionary measure to increase liquidity. We had fully repaid all amounts borrowed as of December 31, 2020.

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

(5)    During 2021, we paid $26.3 million in cash related to the settlement of the Pursuit contingent earn-out. Of the $26.3 million, the amount recorded as the acquisition date fair value, which is considered financing cash flows, was $17.3 million (see Note 8: Fair Value Measurements).

(6)    In 2022, our employees surrendered 47,664 shares of our common stock from vested restricted stock awards as consideration for approximately $10.9 million in minimum statutory withholding obligations paid on their behalf. In 2021, our employees surrendered 40,350 shares of our common stock from vested restricted stock awards as consideration for approximately $8.3 million in minimum statutory withholding obligations paid on their behalf. In 2020, our employees surrendered 67,041 shares of our common stock from vested restricted stock awards as consideration for approximately $12.9 million in minimum statutory withholding obligations paid on their behalf.

Our common stock purchase plan, which authorized the repurchase of up to $100.0 million of our common stock, was approved by our Board of Directors in August 2019. This plan has no expiration date. As of December 31, 2022, all of the $100.0 million available for purchase was remaining under the plan. We are limited on share purchases in accordance with the terms and conditions of our Credit Agreement (see Note 11: Long-Term Obligations in our accompanying consolidated financial statements).

New Accounting Pronouncements

See Note 1: Basis of Presentation and Summary of Significant Accounting Policies to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Critical Accounting Policies and Estimates

Our significant accounting policies are summarized in Note 1 to the Consolidated Financial Statements. In preparing our consolidated financial statements in accordance with GAAP and pursuant to the rules and regulations of the SEC, we make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base our estimates, assumptions and judgments on historical experience and

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other factors that we believe are reasonable. We evaluate our estimates, assumptions and judgments on a regular basis and apply our accounting policies on a consistent basis. We believe that the estimates, assumptions and judgments involved in the accounting for revenue recognition, accounts receivable and business combinations have the most potential impact on our consolidated financial statements. Historically, our estimates, assumptions and judgments relative to our critical accounting policies have not differed materially from actual results.

Revenue recognition

We recognize revenues when we transfer control of promised goods to our customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods. We offer certain volume-based rebates to our distribution customers, which we consider variable consideration when calculating the transaction price. Rebates are offered on both a fixed and tiered/variable basis. In both cases, we use information available at the time and our historical experience with each customer to estimate the most likely rebate amount. We also provide chargebacks to distributors that sell to end customers at prices determined under a contract between us and the end customer. Chargebacks are the difference between prices we charge our distribution customers and contracted prices we have with the end customer which are processed as credits to our distribution customers. In estimating the expected value of chargeback amounts for use in determining the transaction price, we use information available at the time, including our historical experience. We also warrant products against defects and have a policy permitting the return of defective products, for which we accrue and expense at the time of sale using information available and our historical experience. Our revenues are recorded at the net sales price, which includes an estimate for variable consideration related to rebates, chargebacks and product returns.

The vast majority of our sales of Infusion Consumables, Infusion Systems, IV Solutions, Critical Care, Infusion Systems-Smiths Medical, Vascular Access-Smiths Medical and Vital Care-Smiths Medical products are sold on a standalone basis and revenue is recognized upon the transfer of control which we deem to be at point of shipment.

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

Arrangements with Multiple Deliverables

In certain circumstances, we enter into arrangements in which we provide multiple deliverables to our customers. These bundled arrangements typically consist of the sale of infusion systems equipment, along with annual software licenses and related software implementation services, as well as infusion consumables, IV solutions and extended warranties.

Our most significant judgments related to these arrangements are (i) identifying the various performance obligations and (ii) estimating the relative standalone selling price of each performance obligation, typically using a directly observable method or calculated on a cost plus margin basis method. Revenue related to the bundled equipment, software and software implementation services is recognized upon implementation. The transaction price allocated to the extended service-type warranty is recognized as revenue over the period the warranty service is provided.

Accounts receivable

Accounts receivable are stated at net realizable value. An allowance is provided for estimated collection losses based on an analysis of the age of the receivable, on specific past due accounts for which we consider collection to be doubtful and based on current receivables where known economic conditions specific to individual significant customers may indicate collection is doubtful. We rely on prior payment trends, financial status and other factors to estimate the cash which ultimately will be received. Such amounts cannot be known with certainty at the financial statement date. We regularly review individual past due balances for collectability. We also have credit exposure with international customers for whom normal payment terms are long in comparison to those of our other customers and with domestic distributors. If actual collection losses exceed expectations, we could be required to accrue additional bad debt expense, which could have an adverse effect on our operating results in the period in which the accrual occurs.

Business Combinations

The application of the acquisition method of accounting for business combinations requires the use of significant estimates, assumptions and judgments in the determination of the estimated fair value of assets acquired and liabilities assumed in order to properly allocate the purchase price at the acquisition date.

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Although we believe the estimates, assumptions and judgments we have made are reasonable, they are based in part on historical experience, industry data, information obtained from the management of the acquired companies and assistance from independent third-party appraisal/valuation firms, and are inherently uncertain.

Examples of critical estimates in valuing certain of the tangible and intangible assets we have acquired, and certain liabilities assumed include but are not limited to:

•Inventories - we used the comparative sales method, which estimates the selling price of finished goods and work-in-progress inventory, reduced by estimated costs expected to be incurred in selling the inventory and a profit on those costs. The fair value of inventory is recognized in our statements of operations as the inventory is sold. Based on internal forecasts and estimates of inventory turnover, acquisition date inventory is sold and recognized in cost of goods sold over an estimated period of six months after the acquisition date.

•Property, Plant and Equipment - the fair value estimate of acquired property, plant and equipment is determined based upon the nature of the asset using either the cost approach, the sales comparison approach or the income capitalization approach. The cost approach measures the value of an asset by estimating the cost to acquire or reproduce comparable assets. The sales comparison approach measures the value of an asset through an analysis of comparable property sales. The income approach values the asset based on its earnings potential. The fair value of land was estimated using a sales comparison approach. Land and building improvements were valued using the cost approach. Personal property assets, such as, leasehold improvements, tooling, laboratory equipment, furniture and fixtures, and equipment, computer hardware, computer software, dies and molds were all valued using the cost approach. Transportation equipment and major manufacturing and equipment were valued using the sales comparison method. Construction-in-progress assets were valued based on the cost approach less adjustments for the nature of the assets. The fair value of property, plant and equipment will be recognized in our statements of operations over the expected useful life of the individual depreciable assets.

•Identifiable Intangible Assets - The fair value of the significant acquired identifiable intangible assets generally is determined using varying methods under the income approach. This method starts with a forecast of all of the expected future net cash flows associated with the asset and then adjusts the forecast to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Other critical estimates used to estimate the fair value are derived from royalty rates, customer retention rates and/or estimated useful lives.

•Earn-out Liability - The fair value of the earn-out liabilities were valued using a Monte Carlo simulation and a probability-weighted cash flow model, as appropriate (see Note 8: Fair Value Measurements to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for details).

Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.

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