ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes thereto.
Business Overview and Highlights
On February 3, 2017, we completed the acquisition of Pfizer's HIS business. See "Acquisitions" below for additional detail regarding the acquisition. HIS was a leading global provider of IV products to hospitals and alternate site providers, such as clinics, home health care providers and long-term care facilities. Our acquisition of the HIS business was strategic and provides us with an increase in scale and product portfolio that we believe will result in a stronger competitive position within the industry. We believe the HIS business acquisition was the natural evolution for us based on a long-term successful and productive partnership with HIS for over 20 years.
Following the HIS business acquisition, 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.
We have restructured our product lines to integrate the HIS business product portfolio and have presented our financial results in accordance with the following four product lines with our primary products listed:
Infusion Consumables
Infusion Therapy
|
|
◦
|
C
lave® 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.
|
|
|
◦
|
Neutron® Catheter Patency Connector, used to help maintain patency of central venous catheters.
|
|
|
◦
|
SwabCap® Disinfecting Cap, used to protect and disinfect any needlefree connector including, including competitive brands of connectors.
|
|
|
◦
|
Tego® Hemodialysis Connector
|
|
|
◦
|
NovaCath® and SuperCath® Peripheral IV Catheters
|
Closed System Transfer Devices (CSTD)
|
|
◦
|
ChemoLock® Closed System Transfer Device (CSTD), is a pharmacy preferred CSTD used for the preparation and administration of hazardous drugs.
|
|
|
◦
|
ChemoClave® CSTD, is an ISO standard and universally compatible CSTD used for the preparation and administration of hazardous drugs.
|
|
|
◦
|
Diana™ hazardous drug compounding system, used for the preparation of hazardous drugs.
|
IV Solutions
|
|
•
|
Sterile Solutions -
IV solutions, normal saline, Ringers etc., used to replenish fluids and electrolytes by IV infusion.
|
|
|
•
|
Irrigation Solutions -
Used externally on open wounds to hydrate the wound, remove deep debris, assist with visual examination, to prevent infection and improve healing.
|
|
|
•
|
Nutritionals -
Solutions that feed vitamins, minerals and other natural therapeutic substances directly into the blood stream. We are committed to helping our customers deliver more comprehensive patient-care therapies, delivering an extensive source of nutrients for patients who cannot consume a normal diet.
|
Infusion Systems
Infusion Pump Hardware -
Our current pump platform includes four infusion pumps:
|
|
◦
|
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.
|
|
|
◦
|
LifeCare PCA™: The LifeCare PCA™
infusion pump is an ICU Medical MedNet™ ready patient-controlled analgesia pump.
|
|
|
◦
|
SapphirePlus™: The SapphirePlus™
infusion pump is an ICU Medical MedNet™ ready large volume infusion pump with an extensive drug library and wireless capability. The SapphirePlus is designed and manufactured by Q Core.
|
|
|
◦
|
Sapphire™: The Sapphire™
infusion pump is a compact infusion system used in ambulatory and hospital settings. The Sapphire™ infusion pump comes in multi-therapy and epidural-only configurations. The Sapphire is designed and manufactured by Q Core.
|
We offer the ICU Medical MedNet™ safety software system, which is designed for hospitals to customize intravenous drug dosage limits and track drug delivery to help prevent medication errors.
Critical Care
|
|
•
|
Hemodynamic Monitoring Systems.
|
|
|
◦
|
Cogent
®
2-in-1 Hemodynamic Monitoring System
|
|
|
◦
|
LiDCO LX1
TM
Noninvasive Hemodynamic Monitoring System
|
|
|
◦
|
CardioFlo
®
Hemodynamic Monitoring Sensor
|
|
|
◦
|
TriOx
®
PICC Minimally Invasive Venous Oximetry Sensor
|
|
|
•
|
SafeSet
®
Closed Blood Sampling and Conservation System.
|
|
|
•
|
Transpac
®
Consumable Blood Pressure Transducers.
|
|
|
•
|
Q2 Plus™ CCO/SvO
2
(continuous cardiac output/oximetry).
|
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.
The following table summarizes our total worldwide revenue by domestic and international markets by amount and as a percentage of total revenue (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
|
$
|
|
% of Revenue
|
|
$
|
|
% of Revenue
|
|
$
|
|
% of Revenue
|
Domestic
|
$
|
980.0
|
|
|
76
|
%
|
|
$
|
266.0
|
|
|
70
|
%
|
|
$
|
241.9
|
|
|
71
|
%
|
International
|
312.6
|
|
|
24
|
%
|
|
113.4
|
|
|
30
|
%
|
|
99.8
|
|
|
29
|
%
|
Total Revenue
|
$
|
1,292.6
|
|
|
100
|
%
|
|
$
|
379.4
|
|
|
100
|
%
|
|
$
|
341.7
|
|
|
100
|
%
|
The following table sets forth, for the periods indicated, total revenue by product line as a percentage of total revenue:
|
|
|
|
|
|
|
|
|
|
|
Product line
|
|
2017
|
|
2016
|
|
2015
|
Infusion Consumables
|
|
28
|
%
|
|
86
|
%
|
|
84
|
%
|
IV Solutions
|
|
40
|
%
|
|
—
|
%
|
|
—
|
%
|
Infusion Systems
|
|
23
|
%
|
|
—
|
%
|
|
—
|
%
|
Critical Care
|
|
4
|
%
|
|
14
|
%
|
|
16
|
%
|
Other
|
|
5
|
%
|
|
—
|
%
|
|
—
|
%
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
We manage our product distribution in the U.S. through a network of three owned 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 our operations through the Netherlands, which utilizes international regional hubs and we also manage our operations through independent distributors.
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. As a result of this marketing and distribution strategy we derive most of our revenue from a relatively small number of distributors and manufacturers. Although we believe that we are not dependent on any single distributor for distribution of our products, the loss of a strategic relationship with a customer or a decline in demand for our products could have a material adverse effect on our operating results.
We believe that achievement of our growth objectives worldwide will require increased efforts by us in sales and marketing and product acquisition and development; however, there is no assurance that we will be successful in implementing our growth strategy. Product development or acquisition efforts may not succeed, and even if we do develop or acquire additional products, there is no assurance that we will achieve profitable sales of such products. Increased expenditures for sales and marketing and product acquisition and development may not yield desired results when expected, or at all. While we have taken steps to control these risks, there are certain risks that may be outside of our control, and there is no assurance that steps we have taken will succeed.
Seasonality/Quarterly Results
There are no significant seasonal aspects to our business. We can experience fluctuations in net sales as a result of variations in the ordering patterns of our largest customers, which may be driven more by production scheduling and their inventory levels, and less by seasonality. Our expenses often do not fluctuate in the same manner as net sales, which may cause fluctuations in operating income that are disproportionate to fluctuations in our revenue.
Recent Acquisitions
On February 1, 2017, we acquired 100% interest in Fannin (UK) Limited ("Fannin") for total consideration of approximately $1.5 million. Fannin provides infusion therapy consumable products to the healthcare sector in the United Kingdom and Ireland.
On February 3, 2017, we acquired 100% interest in Pfizer's HIS business for total consideration of approximately $260.0 million in cash (net of estimated working capital adjustments paid at closing) and the issuance of 3.2 million shares of our common stock. We partially funded the cash portion of the consideration paid with a $75 million three-year interest-only seller note. The fair value of the common shares issued to Pfizer was determined based on the closing price of our common shares on the issuance date, discounted to reflect a contractual lock-up period whereby Pfizer cannot transfer the shares, subject to certain exceptions, until the earlier of (i) the expiration of Pfizer’s services to us in the related transitional services agreement or (ii) eighteen months. Pfizer also may be entitled up to an additional $225 million in cash contingent consideration based on the achievement of performance targets for the combined company for the three years ending December 31, 2019.
On November 29, 2017, we acquired 100% interest in Medical Australia Limited for total consideration of $9.0 million. Medical Australia Limited manufactures and distributes quality medical devices and equipment for the healthcare industry.
In October 2015, we acquired Excelsior Medical Corporation’s SwabCap disinfecting cap for needlefree IV connectors to enhance our direct and OEM infusion therapy product offerings and to open new customer opportunities globally.
See Note 2 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further details of our acquisitions.
Five-year Revolving Credit Facility ("Credit Facility")
On November 8, 2017, we entered into a five-year Revolving Credit Facility ("Credit Facility") with various lenders for $150 million, with Wells Fargo Bank, N.A. as the administrative agent. 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 million and (ii) 2.00x Total Leverage (as defined in our Credit Facility). Under the terms of the facility we will be subject to certain financial covenants pertaining to leverage and fixed charge coverage ratios, see below under "Liquidity and Capital Resources" for further details. Borrowings under the Credit Facility will bear interest, at our option, based on the Base Rate plus applicable margin or LIBOR plus an applicable margin, both tied to the leverage ratio in effect. The 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 was entered into in order to provide us with flexible funding for future acquisition and operational needs.
In connection with the Credit Facility, for the year ended December 31, 2017, we incurred $1.4 million in financing costs, which will be amortized to interest expense over the remaining term of the Credit Facility.
See Note 12 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information regarding the Credit Facility.
Consolidated Results of Operations
We present summarized income statement data in Item 6. Selected Financial Data. The following table shows, for the three most recent years, the percentages of each income statement caption in relation to total revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Revenues
|
|
|
2017
|
|
2016
|
|
2015
|
Revenue
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Other
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Total revenues
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Gross margin
|
|
33
|
%
|
|
53
|
%
|
|
53
|
%
|
Selling, general and administrative expenses
|
|
24
|
%
|
|
24
|
%
|
|
24
|
%
|
Research and development expenses
|
|
4
|
%
|
|
3
|
%
|
|
5
|
%
|
Restructuring and transaction expense
|
|
6
|
%
|
|
4
|
%
|
|
2
|
%
|
Change in fair value of contingent earn-out
|
|
1
|
%
|
|
—
|
%
|
|
—
|
%
|
Gain on sale of building
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Legal settlements
|
|
—
|
%
|
|
—
|
%
|
|
1
|
%
|
Impairment of assets held for sale
|
|
—
|
%
|
|
—
|
%
|
|
1
|
%
|
Total operating expenses
|
|
35
|
%
|
|
31
|
%
|
|
33
|
%
|
(Loss) Income from operations
|
|
(2
|
)%
|
|
22
|
%
|
|
20
|
%
|
Bargain Purchase Gain
|
|
5
|
%
|
|
—
|
%
|
|
—
|
%
|
Interest expense
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Other (expense) income, net
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Income before income taxes
|
|
3
|
%
|
|
22
|
%
|
|
20
|
%
|
(Benefit) Provision For Income taxes
|
|
(1
|
)%
|
|
6
|
%
|
|
7
|
%
|
Net income
|
|
4
|
%
|
|
16
|
%
|
|
13
|
%
|
Total revenues for
2017
,
2016
and
2015
were
$1.3 billion
,
$379.4 million
and
$341.7 million
, respectively.
Infusion Consumables
The following table summarizes our total Infusion Consumables revenue (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
$ change
|
|
% change
|
|
$ change
|
|
% change
|
|
2017
|
|
2016
|
|
2015
|
|
2017 over 2016
|
|
2016 over 2015
|
Infusion Consumables
|
$
|
365.6
|
|
|
$
|
324.9
|
|
|
$
|
286.2
|
|
|
$
|
40.7
|
|
|
12.5
|
%
|
|
$
|
38.7
|
|
|
13.5
|
%
|
In 2017, our Infusion Consumables revenue included our acquired revenue from the HIS business, which year-to-date includes approximately eleven months of revenue from the point of closing of the transaction to the end of the current year. Additionally, the Infusion Consumables market segment includes our legacy Infusion Therapy and Oncology businesses.
In 2016 and 2015, our Infusion Consumables revenue as presented above consisted of our legacy Infusion Therapy and Oncology businesses. In 2016, as compared to 2015, the increased revenue was primarily related to our Swabcap product-line, which was acquired in the last quarter of 2015, and our Clave, ChemoClave and ChemoLock products as a result of sales to new customers and an increase in sales to existing customers.
IV Solutions
The following table summarizes our total IV Solutions revenue (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
$ change
|
|
% change
|
|
$ change
|
|
% change
|
|
2017
|
|
2016
|
|
2015
|
|
2017 over 2016
|
|
2016 over 2015
|
IV Solutions
|
$
|
522.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
522.0
|
|
|
*
|
|
$
|
—
|
|
|
*
|
______________________________
*
Not Applicable
The IV Solutions revenue is a result of the acquisition of the HIS business and also includes $68.9 million of revenue related to contract manufacturing to Pfizer at cost in accordance with a Manufacturing and Supply Agreement. The year-to-date revenue represents approximately eleven months of revenue from the point of closing of the transaction to the end of the current year.
Infusion Systems
The following table summarizes our total Infusion Systems revenue (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
$ change
|
|
% change
|
|
$ change
|
|
% change
|
|
2017
|
|
2016
|
|
2015
|
|
2017 over 2016
|
|
2016 over 2015
|
Infusion Systems
|
$
|
290.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
290.2
|
|
|
*
|
|
$
|
—
|
|
|
*
|
______________________________
*
Not Applicable
The Infusion Systems revenue is a result of the acquisition of the HIS business. The year-to-date revenue represents approximately eleven months of revenue from the point of closing of the transaction to the end of the current year.
Critical Care
The following table summarizes our total Critical Care revenue (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
$ change
|
|
% change
|
|
$ change
|
|
% change
|
|
2017
|
|
2016
|
|
2015
|
|
2017 over 2016
|
|
2016 over 2015
|
Critical Care
|
$
|
50.0
|
|
|
$
|
53.6
|
|
|
$
|
54.3
|
|
|
$
|
(3.6
|
)
|
|
(6.7
|
)%
|
|
$
|
(0.7
|
)
|
|
(1.3
|
)%
|
In 2017, Critical Care revenue, as compared to 2016, slightly decreased due to timing of orders. In 2016, Critical Care revenue decreased, as compared to 2015, due to temporary production constraints that impacted the first part of 2016.
Revenue from Deferred Close Entities
As part of the HIS business acquisition, the closing of certain foreign jurisdictions were deferred, as such, we entered into a Net Economic Benefit agreement with Pfizer (see Note 2 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information). The revenue data related to these deferred closing entities is not available by product line, therefore our
revenue by product line above does not include amounts related to these entities for the year ended December 31, 2017.
The following table summarizes our revenue from our deferred close entities (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
$ change
|
|
% change
|
|
$ change
|
|
% change
|
|
2017
|
|
2016
|
|
2015
|
|
2017 over 2016
|
|
2016 over 2015
|
Revenue from Deferred Close Entities
|
$
|
64.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
64.4
|
|
|
*
|
|
$
|
—
|
|
|
*
|
______________________________
*
Not meaningful.
Gross Margins
Gross margins for
2017
,
2016
and
2015
were
33.0%
,
53.1%
, and
52.9%
, respectively.
The decrease in gross margin in 2017, as compared to 2016, was primarily due to the integration of HIS, which has historically had lower gross margins than our legacy business. Additionally, there was an impact of approximately five
percentage points related to the step-up of inventory from our purchase accounting and also a temporary negative impact on absorption due to our planned inventory reduction.
The 20 basis point increase in gross margin in 2016, as compared to 2015, was primarily due to favorable foreign exchange rates on our operations expenses due to the decline in the Mexican Peso and favorable product mix partially offset by the impact of certain manufacturing constraints in the earlier part of the year.
Selling, General and Administrative ("SG&A") Expenses
The following table summarizes our SG&A expenses (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
$ change
|
|
% change
|
|
$ change
|
|
% change
|
|
2017
|
|
2016
|
|
2015
|
|
2017 over 2016
|
|
2016 over 2015
|
SG&A
|
$
|
304.0
|
|
|
$
|
89.4
|
|
|
$
|
83.2
|
|
|
$
|
214.6
|
|
|
240.0
|
%
|
|
$
|
6.2
|
|
|
7.5
|
%
|
Consolidated SG&A expense increased $214.6 million in 2017, as compared to 2016, primarily due to the impact of the HIS acquisition. Compensation increased $83.7 million, accounting and information technology fees increased $72.4 million, depreciation expense increased $16.0 million, computer hardware and software increased $11.5 million, travel and related expenses increased $5.8 million and rent expense increased $3.3 million. Compensation increased primarily due to an increase in headcount related to the HIS acquisition, and from new employees hired to support the company post-acquisition. Accounting and information technology fees increased due to the expenses incurred under the transition services agreement with Pfizer. Depreciation expense increased due to the depreciation of the HIS assets acquired. Computer hardware and software increases were due to the post-acquisition needs to stand up the company. Travel and related expenses increased primarily due to the integration of the HIS acquisition and the post-acquisition operational activity. Rent expense increased due to the operating leases assumed on acquired HIS properties.
Consolidated SG&A expense increased in 2016, as compared to 2015, primarily due to an increase of $3.6 million in compensation, $1.5 million in higher dealer fees, $1.3 million in commissions and $0.7 million in depreciation and amortization partially offset by $1.9 million in lower medical device excise taxes and a $0.6 million decrease in legal fees. The increase in compensation was in part due to filling positions that were open during 2015, additional employees retained as part of the acquired SwabCap product line, the general hiring and recruitment of new employees and increases in stock-based compensation issued to attract these employees. The increases in dealer fees and commissions were related to an increase in revenue on which they are calculated. The increase in depreciation and amortization was primarily driven by amortization of acquired intangible assets related to our 2015 acquisition of EXC Holding Corp ("EXC"). The decrease in medical device excise tax expense was due to the elimination of the tax in the current period due to Congress temporarily suspending this tax for the 2016-2017 two-year period and the decrease in legal expenses were a result of fewer litigations.
Research and Development ("R&D") Expenses
The following table summarizes our total R&D Expenses (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
$ change
|
|
% change
|
|
$ change
|
|
% change
|
|
2017
|
|
2016
|
|
2015
|
|
2017 over 2016
|
|
2016 over 2015
|
R&D
|
$
|
51.3
|
|
|
$
|
13.0
|
|
|
$
|
15.7
|
|
|
$
|
38.3
|
|
|
294.6
|
%
|
|
$
|
(2.7
|
)
|
|
(17.2
|
)%
|
In 2017, as compared to 2016, R&D expenses increased due to the acquisition of HIS.
In 2016, as compared to 2015, R&D expenses declined primarily from decreasing R&D project expenses related to the development of our Cogent
TM
2-in-1 hemodynamic monitoring system, which received FDA 510(k) clearance during 2016.
Restructuring and Strategic Transaction Expenses
Restructuring and strategic transaction expenses were
$78.0 million
,
$15.3 million
and
$8.5 million
in
2017
,
2016
and
2015
, respectively.
Restructuring Charges
In 2017, restructuring charges were $18.8 million. These charges were related to (i) severance costs from the reduction in our workforce needed to eliminate duplicative positions created as a result of the HIS acquisition and (ii) we are also in the process of closing our Dominican Republic manufacturing facilities and have incurred expenses associated with the closure and transfer of assets and production to our Costa Rica and Mexico manufacturing facilities. We have $0.9 million in unpaid restructuring charges related to the year-ended December 31, 2017.
In 2016, restructuring charges were $1.0 million. These charges were primarily related to residual expenses for the closure of our Slovakian manufacturing facility and we incurred $0.2 million related to other restructuring activities.
In 2015, restructuring charges were $6.7 million. These charges were related to: (i) 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; (ii) the reorganization of our corporate infrastructure, resulting in one-time employee termination benefits and other associated costs; and (iii) a commitment to a plan to sell our Slovakia manufacturing facility.
Strategic Transaction and Integration Expenses
In 2017, we incurred $59.2 million in strategic transaction and integration expenses primarily related to our acquisition of the HIS business.
In 2016, we incurred $14.3 million in strategic transaction expenses related to our acquisition of the HIS business, our second quarter 2016 acquisition of Tangent and expenses related to our acquisition of EXC.
In 2015, we incurred $1.8 million in strategic transaction expenses related to the acquisition of EXC.
Change in fair value of contingent earn-out
In 2017, the fair value revaluation of our HIS contingent earn-out liability resulted in a loss of $8.0 million.
Gain on sale of building
We recognized a gain of $1.1 million in 2015 from the sale of one of our buildings in San Clemente to Dr. Lopez, a member of our Board of Directors.
Legal Settlements
During 2015, we recorded a net settlement charge of $1.8 million, less than 1% of revenues, due to the following claims:
An arbitrator ruled on a breach of contract claim between us and a service provider, awarding us a gross settlement of $8.8 million. Our legal counsel for this matter represented us under a contingency fee agreement. We recorded a settlement award, net of legal fees and costs, of $5.3 million; and
An arbitrator ruled on a breach of contract claim between us and a customer, Hospira, awarding Hospira a settlement and that we pay 75% of Hospira's legal fees and expenses, resulting in a $7.1 million legal settlement charge.
Impairment of Assets Held-for-Sale
During 2016, we completed the closure of our Slovakia manufacturing facility and sold the land and building held-for-sale for $3.3 million, net of costs to sell, resulting in an additional impairment loss of $0.7 million.
During 2015, our Board of Directors authorized us to close our Vrable, Slovakia manufacturing facility. The closure was to enable for greater efficiency of our Ensenada, Mexico facility. After receiving the Board of Director's authorization, we reclassified the assets related to the Slovakia facility as held-for-sale, and recorded the value of those assets at the lower of their carrying value or their estimated fair value, less costs to sell, which was based on a third party fair market valuation. As the estimated fair value, less cost to sell was lower than the carrying value of the assets held-for-sale we recorded an impairment charge of $4.1 million.
Bargain Purchase Gain
In 2017, in connection with the HIS acquisition, we recognized a bargain purchase gain of $70.9 million. The bargain purchase gain represented the excess of the estimated fair market value of the identifiable tangible and intangible assets acquired and liabilities assumed, net of deferred tax liabilities over the total purchase consideration. We determined that the bargain purchase gain was primarily attributable to expected restructuring costs as well as a reduction to the initially agreed upon transaction price caused primarily by revenue shortfalls across all market segments of the HIS business, negative manufacturing variance due to the drop in revenue and higher operating and required stand up costs, when compared to forecasts of the HIS business at the time that the purchase price was agreed upon.
In 2016, we recognized a bargain purchase gain of $1.5 million in connection with the Tangent acquisition. The bargain purchase gain represented the excess of the estimated fair market value of the identifiable tangible and intangible assets acquired and liabilities assumed, net of deferred tax assets over the total purchase consideration. The bargain purchase was driven by our ability to realize acquired deferred tax assets.
Interest Expense
Interest expense was $2.0 million, $0.1 million and $0.0 million in 2017, 2016 and 2015, respectively. In 2017, the interest expense was related to (i) the $75 million seller note from Pfizer as part of the HIS business acquisition and (ii) the per annum commitment fee charged on the unused portion of our revolver under the new five-year $150 million Credit Facility.
The three-year interest only seller note bore interest based on the London Interbank Offered Rate ("LIBOR") plus (i) 2.25% per year for the first 12 months, and (ii) 2.50% per annum thereafter. On November 8, 2017, we fully repaid the $75 million in outstanding principal under the senior note payable to Pfizer.
The per annum commitment fee is based on consolidated total leverage ratio in effect and can range between 0.15% to 0.30% on the unused portion of the Credit Facility.
Other (Expense) Income
Other (expense) income was
$(2.5) million
,
$0.9 million
and
$1.2 million
in
2017
,
2016
and
2015
, respectively.
Income taxes
Income taxes were accrued at an estimated annual effective tax rate of (
34%
),
26%
and
35%
in
2017
,
2016
and
2015
, respectively.
The effective tax rate for 2017 differs from the federal statutory rate of 35% principally because of the effect of the mix of U.S. and foreign incomes, state income taxes, tax credits and the impact of the gain on bargain purchase. The effective tax rate during 2017 also included a material tax benefit of $20.8 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period.
As of December 31, 2017, we recorded income tax expense of $3.1 million as a result of the Tax Act, which is comprised of $1.1 million of income tax expense as a result of the re-measurement of deferred tax assets and liabilities at the new lower statutory tax rate of 21%, and a net tax expense of $2.0 million as a result of the mandatory deemed repatriation on earnings and profits of U.S.-owned foreign subsidiaries. We elected to record the mandatory repatriation and re-measurement of deferred taxes as a provisional amount for the year ended December 31, 2017, which we believe is a reasonable estimate in accordance with the Tax Act. However, due to the complexity and considerable amount of changes in tax law, we will adjust our estimates and further refine our tax calculations, if necessary, as changes to interpretations and further guidance around the newly enacted provisions are issued by the Internal Revenue Service. We are still evaluating various international provisions included in the Tax Act and have therefore not completed our assessment. These provisions will be effective for us beginning
on January 1, 2018, and may materially impact our effective tax rate in future years. For further discussion, see Note 13 to the consolidated financial statements in Part II, Item 8 of this Form 10-K.
The effective tax rate for 2016 differs from the federal statutory rate principally because of the effect of foreign and state income taxes, tax credits, deductions for domestic production activities, and included material discrete tax benefit of $7.6 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period, which is treated as a discrete item when determining our annual estimated effective tax rate.
Included in the 2015 estimated annual effective tax rate are the effects of foreign and state income taxes, tax credits, deductions for domestic production activities and discrete tax items related to the conclusion of state tax examinations, one-time tax effects related to the acquisition of EXC, and tax impact related to the proposed shut down of our Slovakia plant.
Liquidity and Capital Resources
Introduction
Our primary sources of cash are cash flows from operating activities, proceeds from the exercise of employee options and available borrowings under our Credit Facility (as defined above). Our primary uses of cash are to meet working capital requirements, finance capital expenditures and acquisitions along with acquisition-related incremental transaction and integration costs.
During
2017
, our cash, cash equivalents and short-term investment securities decreased by
$144.9 million
from
$445.1 million
at
December 31, 2016
to
$300.1 million
at
December 31, 2017
. The decrease was due to our 2017 acquisitions and the incremental costs such as transaction and integration costs related to those acquisitions.
As of
December 31, 2017
, we have $153.2 million of cash and cash equivalents held in local currency by our foreign subsidiaries. We expect to permanently reinvest these funds outside of the U.S. and, based on our current plans, we do not presently anticipate a need to repatriate them to fund our U.S. operations.
Future Cash Flows
Short-term
As mentioned above, we entered into a five-year $150 million Credit Facility. The Credit Facility provides us with fast, flexible funding for future acquisition and operational needs.
Our short-term investment portfolio is invested in corporate bonds and our primary investment goal is capital preservation.
While we can provide no assurances, we estimate that our capital expenditures in
2018
will approximate $80 million to $90 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 products that get placed with customers outside the U.S., and in IT to benefit world-wide operations. We expect to use our cash and cash equivalents to fund our capital purchases. Amounts of spending are estimates and actual spending may substantially differ from those amounts.
We believe that our existing cash, cash equivalents along with funds expected to be generated from future operations will provide us with sufficient funds to finance our current operations for the next twelve months.
Long-term
Our long-term liquidity needs include interest/commitment payments on the Credit Facility, capital expenditures related to the expansion of our business and potential acquisitions in accordance with our growth strategy.
We are unable to project with certainty whether our long-term cash flow from operations and amounts available to us under our Credit Facility will be sufficient to fund our future capital expenditures and acquisitions as they arise. In the event that we experience illiquidity in our investment securities, downturns or cyclical fluctuations in our business that are more severe or longer than anticipated or if we fail to achieve anticipated revenue and expense levels, we may need to obtain or seek alternative sources of capital or financing, and we can provide no assurances that the terms of such capital or financing will be available to us on favorable terms, if at all.
Credit Facility
As mentioned above, we entered into a five-year Credit Facility that includes $150 million borrowing capacity available for revolving credit loans and may also be used to borrow, on same-day notice under a swingline, the lesser of $10 million and the aggregate unused amount of the revolving credit available. As of December 31, 2017, we had no borrowings and $150 million of availability under the revolving credit facility.
All of our obligations under the Credit Facility are guaranteed by ICU Medical, Inc. and certain of our existing subsidiaries. The obligations under the Credit Facility are secured by a pledge of 100% of the capital stock of certain subsidiaries owned by us and a security interest in substantially all of our tangible and intangible assets and the tangible and intangible assets of each guarantor.
The Credit Facility contains certain financial covenants pertaining to Consolidated Fixed Charge Coverage and Consolidated Total Leverage ratios, see below under "Financial Covenants". In addition, the Credit Facility has restrictions pertaining to limitations on debt, liens, negative pledges, loans, advances, acquisitions, other investments, dividends, distributions, redemptions, repurchases of equity interests, fundamental changes and asset sales and other dispositions, prepayments, redemptions and purchases of subordinated debt and other junior debt, transactions with affiliates, dividend and payment restrictions affecting subsidiaries, changes in line of business, fiscal year and accounting practices and amendment of organizational documents and junior debt documents.
Financial Covenants
The Credit Facility contains certain negative financial covenants, including, Consolidated Total Leverage and Consolidated Fixed Charge Coverage Ratios.
The Consolidated Leverage Ratio is defined as the ratio of Consolidated Total Funded Indebtedness on such date, to Consolidated Adjusted EBITDA, as defined under the Credit Facility Agreement, for the most recently completed four fiscal quarters. The maximum Consolidated Leverage Ratio is not more than 3.00 to 1.00.
The Consolidated Fixed Charge Coverage Ratio is defined as the ratio of: (a) Consolidated Adjusted EBITDA less the sum of (i) capital expenditures, (ii) federal, state, local and foreign income taxes paid in cash and (iii) cash restricted payments made after the closing date, to (b) Consolidated Fixed Charges for the most recently completed four fiscal quarters, calculated on a pro forma basis. The minimum Consolidated Fixed Charge Coverage Ratio is 2.00 to 1.00.
We were in compliance with all financial covenants as of December 31, 2017.
Historical Cash Flows
Cash Flows from Operating Activities
:
Our cash provided by operations was
$154.4 million
in
2017
. Net income plus adjustments for non-cash net expenses contributed
$98.5 million
to cash provided by operations. Net cash provided by operations as a result of changes in operating assets and liabilities was
$55.9 million
. The changes in operating assets and liabilities included a $181.7 million decrease in inventories, a $46.6 million increase in accounts payable, and a $33.8 million increase in accrued liabilities. Offsetting these cash inflows was a $95.3 million increase in related-party receivables, a $54.5 million increase in accounts receivable, a $31.8 million increase in prepaid expenses and other assets, and a $24.6 million net change in prepaid and deferred income taxes. The decrease in inventory was due to a planned inventory reduction of our acquired inventory to manage working capital needs. The increase in accounts payable was due to the increase in expenses related to the post-acquisition operations. The increase in accrued liabilities was primarily a result of increased salary and benefits due to a larger workforce. The increase in related-party receivables was primarily due to amounts paid for transitional service arrangement fees, working capital adjustments and other HIS-related amounts. The increase in prepaid expenses and other assets was primarily due to HIS post-acquisition operations. The increase in accounts receivable is due to the increase in revenue. The net changes in income taxes was a result of the timing of payments.
Our cash provided by operations was
$89.9 million
in
2016
. Net income plus adjustments for non-cash net expenses contributed
$98.7 million
to cash provided by operations. Net cash used by operations as a result of changes in operating assets and liabilities was
$8.8 million
. The changes in operating assets and liabilities included a
$5.5 million
increase in inventories, a
$3.0 million
increase in prepaid expenses and other assets, a
$1.2 million
decrease in accrued liabilities, and a
$0.5 million
decrease in accounts payable, partially offset by a
$0.7 million
decrease in accounts receivable and a
$0.7 million
net change in
prepaid and deferred income taxes. The increase in inventories was primarily due to building finished good safety stock, to support better customer deliveries, raw materials related to our Slovakia plant closure, and related transfer to our Mexico plant, and inventory associated with the acquired SwabCap product-line. The increase in prepaid expenses and other assets was primarily due to repayment of state aid and interest related to the closure of our Slovakian manufacturing facilities. The decrease in accrued liabilities was primarily due to the payment of accrued restructuring charges related to the closure of our Slovakian manufacturing facility and the payment of acquisition-related accruals from our 2015 EXC acquisition. The decrease in accounts payable was a result of the timing of disbursements. The decrease in accounts receivable was due to collection efforts on our past due accounts. The net changes in income taxes was a result of the timing of payments for cash tax purposes, which includes true-ups for 2015 overpayment and 2016 estimated taxes.
Cash Flows from Investing Activities
The following table summarizes the changes in our investing cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
Variance
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
Investing Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
$
|
(74,479
|
)
|
|
$
|
(23,361
|
)
|
|
$
|
(12,984
|
)
|
|
$
|
(51,118
|
)
|
|
$
|
(10,377
|
)
|
(1)
|
Proceeds from sale of assets
|
|
2
|
|
|
—
|
|
|
3,592
|
|
|
2
|
|
|
(3,592
|
)
|
(2)
|
Proceeds from the disposal of assets held-for-sale, net
|
|
—
|
|
|
3,268
|
|
|
—
|
|
|
(3,268
|
)
|
|
3,268
|
|
(3)
|
Intangible asset additions
|
|
(5,203
|
)
|
|
(1,192
|
)
|
|
(951
|
)
|
|
(4,011
|
)
|
|
(241
|
)
|
|
Business acquisitions, net of cash acquired
|
|
(162,448
|
)
|
|
(2,584
|
)
|
|
(56,786
|
)
|
|
(159,864
|
)
|
|
54,202
|
|
(4)
|
Proceeds from sale of assets acquired in a business combination
|
|
—
|
|
|
—
|
|
|
28,970
|
|
|
—
|
|
|
(28,970
|
)
|
(5)
|
Purchases of investment securities
|
|
(24,743
|
)
|
|
(118,384
|
)
|
|
(56,137
|
)
|
|
93,641
|
|
|
(62,247
|
)
|
(6)
|
Proceeds from sale of investment securities
|
|
—
|
|
|
158,534
|
|
|
83,054
|
|
|
(158,534
|
)
|
|
75,480
|
|
(7)
|
Net cash (used in) provided by investing activities
|
|
$
|
(266,871
|
)
|
|
$
|
16,281
|
|
|
$
|
(11,242
|
)
|
|
$
|
(283,152
|
)
|
|
$
|
27,523
|
|
|
______________________________
(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. The purchases during 2017 primarily related to HIS entities.
(2)
In 2015, we sold an office building for $3.6 million.
(3)
In 2016, we sold our Slovakian manufacturing facilities for $3.3 million, net of costs to sell of $0.1 million.
(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 2017, we acquired HIS for $260 million in cash consideration (net of working capital adjustments), financed with existing cash balances and a three-year interest-only seller note of $75 million and we delivered 3.2 million shares of our common stock to Pfizer and we acquired Fannin for $1.5 million and MLA for $9.0 million in cash consideration. In 2016, we acquired Tangent for $2.6 million in cash. In 2015, we acquired EXC for $56.8 million in cash.
(5)
In 2015, we sold certain assets from the EXC acquisition for $29.0 million in cash to Excelsior Medical, LLC.
(6)
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. In 2016, we amended our investment policy to allow for the purchase of securities with final maturities in excess of one year. Accordingly, we adjusted our investment strategy to take advantage of the higher yields available on these longer term securities. Our longer term securities have maturities up to three years.
(7)
The proceeds from the sale of our investment securities increased significantly during 2016, as compared to the comparable prior year periods, due to the liquidation of all of our short-term and long-term investment securities, which were used to fund the 2017 acquisition of HIS.
Cash Flows from Financing Activities
The following table summarizes the changes in our financing cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
Variance
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
Financing Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of long-term obligations
|
|
$
|
(75,000
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(75,000
|
)
|
|
$
|
—
|
|
(1)
|
Proceeds from exercise of stock options
|
|
32,003
|
|
|
17,346
|
|
|
15,042
|
|
|
14,657
|
|
|
2,304
|
|
(2)
|
Proceeds from employee stock purchase plan
|
|
2,705
|
|
|
2,361
|
|
|
2,162
|
|
|
344
|
|
|
199
|
|
|
Purchase of treasury stock
|
|
(4,057
|
)
|
|
(17,235
|
)
|
|
(1,523
|
)
|
|
13,178
|
|
|
(15,712
|
)
|
(3)
|
Net cash (used in) provided by financing activities
|
|
$
|
(44,349
|
)
|
|
$
|
2,472
|
|
|
$
|
15,681
|
|
|
$
|
(46,821
|
)
|
|
$
|
(13,209
|
)
|
|
______________________________
(1)
The repayment of long-term obligations is related to the repayment of the $75 million seller note from Pfizer.
(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)
In 2017, our employees surrendered
27,636
shares of our common stock from vested restricted stock awards as consideration for approximately
$4.1 million
in minimum statutory withholding obligations paid on their behalf.
In 2016, we purchased 174,885 shares of our common stock under our share purchase plan on the open market for $15.3 million. Additionally in 2016, our employees surrendered 20,261 shares of our common stock from vested restricted stock awards as consideration for approximately $1.9 million in minimum statutory withholding obligations paid on their behalf.
In 2015, our employees surrendered 17,299 shares of our common stock from vested restricted stock awards as consideration for approximately $1.5 million in minimum statutory withholding obligations paid on their behalf.
Our common stock purchase plan, which authorized the repurchase of up to $40.0 million of our common stock, was authorized by our Board of Directors and publicly announced on July 19, 2010. To date, we have purchased a total of $32.8 million of our stock from this plan, leaving a balance of $7.2 million available for future purchases. This plan has no expiration date. We are currently limited on share purchases in accordance with the terms and conditions of our Credit Facility (see Note 12 to the consolidated financial statements in Part II, Item 8 of this Form 10-K).
New Accounting Pronouncements
See Note 1 to the consolidated financial statements in Part II, Item 8 of this Form 10-K.
Off Balance Sheet Arrangements
In the normal course of business, we have agreed to indemnify our officers and directors to the maximum extent permitted under Delaware law and to indemnify customers as to certain intellectual property matters related to sales of our products. There is no maximum limit on the indemnification that may be required under these agreements. Although we can provide no assurances, we have never incurred, nor do we expect to incur, any liability for indemnification.
Contractual Obligations
We have contractual obligations, at
December 31, 2017
, of approximately the amount set forth in the table below. This amount excludes inventory-related purchase orders for goods and services for current delivery and other open orders for purchases that support normal operations. The majority of our inventory purchase orders are blanket purchase orders that represent an estimated forecast of goods and services. We do not have a commitment liability on the blanket purchase orders. Since we do not have the ability to separate out blanket purchase orders from non-blanket purchase orders for inventory-related goods and services for current delivery, amounts related to such purchase orders are excluded from the table below. We have excluded from the table below pursuant to ASC 740-10-25 (formerly FIN 48), an interpretation of ASC 740-10 (formerly SFAS 109), a non-current income tax liability of
$4.6 million
due to the high degree of uncertainty regarding the timing of future cash outflows associated with the liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Contractual Obligations
|
|
Total
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
Commitment fee on Credit Facility
|
|
$
|
1,109
|
|
|
$
|
229
|
|
|
$
|
228
|
|
|
$
|
229
|
|
|
$
|
228
|
|
|
$
|
195
|
|
|
$
|
—
|
|
Operating leases
|
|
31,506
|
|
|
8,775
|
|
|
5,907
|
|
|
4,059
|
|
|
3,214
|
|
|
3,105
|
|
|
6,446
|
|
Warehouse service agreements
|
|
3,687
|
|
|
2,384
|
|
|
1,303
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Purchase obligations
(1)
|
|
92,456
|
|
|
4,477
|
|
|
14,005
|
|
|
34,756
|
|
|
39,218
|
|
|
—
|
|
|
—
|
|
|
|
$
|
128,758
|
|
|
$
|
15,865
|
|
|
$
|
21,443
|
|
|
$
|
39,044
|
|
|
$
|
42,660
|
|
|
$
|
3,300
|
|
|
$
|
6,446
|
|
___________________________________
(1)
Purchase obligations includes agreements to purchase goods that are enforceable and legally binding. These amounts are not accrued as of December 31, 2017. It does not include milestone payments where payments may be refundable unless regulatory approval is obtained.
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 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 investment securities, revenue recognition, accounts receivable, inventories, property, plant and equipment and related depreciation, income taxes 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.
Investment securities
Our investment securities consist of corporate bonds, which are classified as available-for-sale. 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 gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date.
Revenue recognition
We record sales and related costs when ownership of the product transfers to the customer, persuasive evidence of an arrangement exists, collectability is reasonably assured and the sales price is determinable. Under the terms of all our purchase orders, ownership transfers on shipment. If there are significant doubts at the time of shipment as to the collectability of the receivable, we defer recognition of the sale in revenue until the receivable is collected. Our customers are medical product manufacturers, distributors and end-users. Our only post-sale obligations are warranty and certain rebates. We warrant products against defects and have a policy permitting the return of defective products. We accrue for warranty and product returns based on historical experience. We accrue rebates as a reduction in revenue based on agreements and historical experience.
Arrangements with Multiple Deliverables
In certain circumstances, we enter into arrangements in which we provide multiple deliverables to our customers. These bundled arrangements may include infusion pumps, Mednet software, implementation services, extended warranty and consumables. We first separate the deliverables into different units of accounting and then allocate the arrangement consideration to those separate units of accounting based on their relative selling price. When applying the relative selling price method, the selling price for each deliverable shall be determined using the following hierarchy: (i) vendor-specific objective evidence of selling price; (ii) third-party evidence of selling price; or (iii) best estimate of the selling price. We record revenue related to these multiple deliverables as products are delivered and services have been performed.
Accounts receivable
Accounts receivable are stated at net realizable value. An allowance is provided for estimated collection losses based on the age of the receivable or on specific past due accounts for which we consider collection to be 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. Loss exposure is principally with international customers for whom normal payment terms are long in comparison to those of our other customers and, to a lesser extent, domestic distributors. Many of these distributors are relatively small and we are vulnerable to adverse developments in their businesses that can hinder our collection of amounts due. 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.
Inventories
Inventories are stated at the lower of cost (first in, first out) or net realizable value. We need to carry many components to accommodate our rapid product delivery, and if we mis-estimate demand or if customer requirements change, we may have components in inventory that we may not be able to use. Most finished products are made only after we receive orders except for certain standard (non-custom) products which we will carry in inventory in expectation of future orders. For finished products in inventory, we need to estimate what may not be saleable. We regularly review inventory and reserve for slow moving items, and write off all items that we do not expect to use in manufacturing, and finished products that we do not expect to sell. If actual usage of components or sales of finished goods inventory is less than our estimates, we could be required to write off additional inventory, which could have an adverse effect on our operating results in the period in which the write-off occurs.
Property, plant and equipment/depreciation
Property, plant and equipment is carried at cost and depreciated on the straight-line method over the estimated useful lives. The estimates of useful lives are significant judgments in accounting for property, plant and equipment, particularly for molds and automated assembly machines that are custom made for us. We may retire them on an accelerated basis if we replace them with larger or more technologically advanced tooling. The remaining useful lives of all property, plant and equipment are reviewed regularly and lives are adjusted or assets written off based on current estimates of future use. As part of that review, property, plant and equipment is reviewed for other indicators of impairment. An unexpected shortening of useful lives of property, plant and equipment that significantly increases depreciation provisions, or other circumstances causing us to record an impairment loss on such assets, could have an adverse effect on our operating results in the period in which the related charges are recorded.
Income Taxes
We utilize the asset and liability method of accounting for income taxes as set forth in ASC 740. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. In determining the need for valuation allowances we consider projected future taxable income and the availability of tax planning strategies. If in the future we determine that we would not be able to realize our recorded deferred tax assets, an increase in the valuation allowance would be recorded, decreasing earnings in the period in which such determination is made.
We are subject to income taxes throughout the U.S. and in numerous foreign jurisdictions. We recognize the financial statement benefits for uncertain tax positions as set forth in ASC 740 only if it is more-likely-than-not to be sustained in the event of challenges by relevant taxing authorities based on the technical merit of each tax position. The amounts of uncertain
tax positions recognized are the largest benefits that have a greater than 50 percent likelihood of being realized upon settlement with the relevant tax authorities.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation referred to as the Tax Cuts and Jobs Act (the “Tax Act”). Shortly after the Tax Act was enacted, the SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), which provides guidance on accounting for the Tax Act’s impact. SAB 118 provides a measurement period, which should not extend beyond one year from the Tax Act enactment date, during which a company acting in good faith may complete the accounting for the impacts of the Tax Act under ASC Topic 740. In accordance with SAB 118, we must reflect the income tax effects of the Tax Act in the reporting period in which the accounting under ASC Topic 740 is complete.
To the extent that our accounting for certain income tax effects of the Tax Act is incomplete, we can determine a reasonable estimate for those effects and record a provisional estimate in the consolidated financial statements in the first reporting period in which a reasonable estimate can be determined. If we cannot determine a provisional estimate to be included in the consolidated financial statements, we should continue to apply ASC Topic 740 based on the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted. If we are unable to provide a reasonable estimate of the impacts of the Tax Act in a reporting period, a provisional amount must be recorded in the first reporting period in which a reasonable estimate can be determined. For further information, see Note 13 to the consolidated financial statements in Part II, Item 8 of this Form 10-K.
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.
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 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:
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•
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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.
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•
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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.
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•
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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.
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•
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Earnout Liability -
The fair value of the earnout was valued using a Monte Carlo simulation (see Note 9 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for details).
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Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.
Forward Looking Statements
Various portions of this Annual Report on Form 10-K, 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:
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◦
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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;
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◦
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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, including the HIS business, SwabCap (EXC) and Tangent; 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, plant and equipment; manufacturing efficiencies and cost savings; unit manufacturing costs; establishment or expansion of production facilities inside or outside of the U.S.; 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
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◦
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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; the impact of our acquisition of the HIS business; 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.
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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.
Second, investors should read the forward looking statements in conjunction with the Risk Factors discussed in Item 1A of this Annual Report on Form 10-K. Also, actual future operating results are subject to other important factors and risks that we cannot predict or control, including without limitation, the following:
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◦
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general economic and business conditions, both in the U.S. and internationally;
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◦
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unexpected changes in our arrangements with our large customers;
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◦
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fluctuations in foreign exchange rates and other risks of doing business internationally;
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increases in labor costs or competition for skilled workers;
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increases in costs or availability of the raw materials need to manufacture our products;
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◦
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the effect of price and safety considerations on the healthcare industry;
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◦
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competitive factors, such as product innovation, new technologies, marketing and distribution strength and price erosion;
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◦
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the successful development and marketing of new products;
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◦
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unanticipated market shifts and trends;
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◦
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the impact of legislation affecting government reimbursement of healthcare costs;
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◦
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changes by our major customers and independent distributors in their strategies that might affect their efforts to market our products;
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◦
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the effects of additional governmental regulations;
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◦
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unanticipated production problems; and
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◦
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the availability of patent protection and the cost of enforcing and of defending patent claims.
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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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
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Page No.
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Consolidated Statements of Operations for the Years Ended December 31, 2017, 2016 and 2015
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of ICU Medical, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of ICU Medical, Inc. and subsidiaries (the "Company") as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes and the financial statement schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
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/s/ Deloitte & Touche LLP
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Costa Mesa, California
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March 16, 2018
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We have served as the Company's auditor since 2008
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ICU MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value data)
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December 31,
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2017
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|
2016
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ASSETS
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CURRENT ASSETS:
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Cash and cash equivalents
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$
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290,072
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$
|
445,082
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Short-term investment securities
|
10,061
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|
|
—
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TOTAL CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENT SECURITIES
|
300,133
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445,082
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Accounts receivable, net of allowance for doubtful accounts of $3,311 and $1,073 at December 31, 2017 and 2016, respectively
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112,696
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|
56,161
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Inventories
|
288,657
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|
|
49,264
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Prepaid income taxes
|
10,594
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|
11,235
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Prepaid expenses and other current assets
|
41,286
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|
7,355
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Related-party receivable
|
98,807
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|
|
—
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Assets held-for-sale
|
12,489
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|
|
—
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TOTAL CURRENT ASSETS
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864,662
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569,097
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PROPERTY, PLANT AND EQUIPMENT, net
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398,684
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85,696
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LONG-TERM INVESTMENT SECURITIES
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14,579
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—
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GOODWILL
|
12,357
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5,577
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INTANGIBLE ASSETS, net
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143,753
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|
22,383
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DEFERRED INCOME TAXES
|
24,775
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21,935
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OTHER ASSETS
|
38,141
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—
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TOTAL ASSETS
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$
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1,496,951
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$
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704,688
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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CURRENT LIABILITIES:
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Accounts payable
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$
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78,228
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$
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14,641
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Accrued liabilities
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132,064
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25,896
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TOTAL CURRENT LIABILITIES
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210,292
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40,537
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CONTINGENT EARN-OUT LIABILITY
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27,000
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—
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OTHER LONG-TERM LIABILITIES
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55,326
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|
1,107
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DEFERRED INCOME TAXES
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1,487
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|
1,370
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INCOME TAX LIABILITY
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4,592
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1,519
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COMMITMENTS AND CONTINGENCIES
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—
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—
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STOCKHOLDERS’ EQUITY:
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Convertible preferred stock, $1.00 par value Authorized—500 shares; Issued and outstanding— none
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—
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—
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Common stock, $0.10 par value — Authorized—80,000 shares; Issued and outstanding, 20,210 shares at December 31, 2017 and 16,338 shares at December 31, 2016
|
2,021
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|
|
1,633
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Additional paid-in capital
|
625,568
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162,828
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Treasury stock, at cost
|
—
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(14
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)
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Retained earnings
|
585,624
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|
516,980
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Accumulated other comprehensive loss
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(14,959
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)
|
|
(21,272
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)
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TOTAL STOCKHOLDERS' EQUITY
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1,198,254
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|
|
660,155
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
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$
|
1,496,951
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|
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$
|
704,688
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The accompanying notes are an integral part of these consolidated financial statements.
ICU MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
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Year ended December 31,
|
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2017
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2016
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|
2015
|
REVENUES:
|
|
|
|
|
|
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Net sales
|
$
|
1,292,166
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|
|
$
|
379,339
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|
|
$
|
341,254
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Other
|
447
|
|
|
33
|
|
|
414
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TOTAL REVENUE
|
1,292,613
|
|
|
379,372
|
|
|
341,668
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COST OF GOODS SOLD
|
866,518
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|
|
177,974
|
|
|
160,871
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GROSS PROFIT
|
426,095
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|
|
201,398
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|
180,797
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OPERATING EXPENSES:
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|
|
|
|
|
|
Selling, general and administrative
|
303,953
|
|
|
89,426
|
|
|
83,216
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Research and development
|
51,253
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|
|
12,955
|
|
|
15,714
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Restructuring, strategic transaction and integration expense
|
77,967
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|
|
15,348
|
|
|
8,451
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Change in fair value of contingent earn-out
|
8,000
|
|
|
—
|
|
|
—
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|
Gain on sale of building
|
—
|
|
|
—
|
|
|
(1,086
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)
|
Legal settlements, net
|
—
|
|
|
—
|
|
|
1,798
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|
Impairment of assets held for sale
|
—
|
|
|
728
|
|
|
4,139
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|
TOTAL OPERATING EXPENSES
|
441,173
|
|
|
118,457
|
|
|
112,232
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(LOSS) INCOME FROM OPERATIONS
|
(15,078
|
)
|
|
82,941
|
|
|
68,565
|
|
BARGAIN PURCHASE GAIN
|
70,890
|
|
|
1,456
|
|
|
—
|
|
INTEREST EXPENSE
|
(2,047
|
)
|
|
(118
|
)
|
|
(39
|
)
|
OTHER (EXPENSE) INCOME, NET
|
(2,482
|
)
|
|
885
|
|
|
1,173
|
|
INCOME BEFORE INCOME TAXES
|
51,283
|
|
|
85,164
|
|
|
69,699
|
|
BENEFIT (PROVISION) FOR INCOME TAXES
|
17,361
|
|
|
(22,080
|
)
|
|
(24,714
|
)
|
NET INCOME
|
$
|
68,644
|
|
|
$
|
63,084
|
|
|
$
|
44,985
|
|
NET INCOME PER SHARE
|
|
|
|
|
|
|
|
Basic
|
$
|
3.50
|
|
|
$
|
3.90
|
|
|
$
|
2.84
|
|
Diluted
|
$
|
3.29
|
|
|
$
|
3.66
|
|
|
$
|
2.73
|
|
WEIGHTED AVERAGE NUMBER OF SHARES
|
|
|
|
|
|
|
|
Basic
|
19,614
|
|
|
16,168
|
|
|
15,848
|
|
Diluted
|
20,858
|
|
|
17,254
|
|
|
16,496
|
|
The accompanying notes are an integral part of these consolidated financial statements.
ICU MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Net income
|
$
|
68,644
|
|
|
$
|
63,084
|
|
|
$
|
44,985
|
|
Other comprehensive (loss) income, net of tax:
|
|
|
|
|
|
Cash flow hedge adjustments, net of tax of $224 for the year ended December 31, 2017
|
(365
|
)
|
|
—
|
|
|
—
|
|
Foreign currency translation adjustment, net of taxes of $56, $185 and ($2,680) for the years ended December 31, 2017, 2016 and 2015, respectively
|
6,694
|
|
|
(514
|
)
|
|
(11,204
|
)
|
Other adjustments, net of tax of $0 for the year ended December 31, 2017
|
(16
|
)
|
|
—
|
|
|
—
|
|
Other comprehensive income (loss), net of tax
|
6,313
|
|
|
(514
|
)
|
|
(11,204
|
)
|
Comprehensive income
|
$
|
74,957
|
|
|
$
|
62,570
|
|
|
$
|
33,781
|
|
The accompanying notes are an integral part of these consolidated financial statements.
ICU MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
Shares
|
|
Amount
|
|
Paid-In
Capital
|
|
Treasury
Stock
|
|
Retained
Earnings
|
|
Comprehensive
Income (Loss)
|
|
Total
|
Balance, December 31, 2014
|
|
15,595
|
|
|
$
|
1,559
|
|
|
$
|
107,336
|
|
|
$
|
—
|
|
|
$
|
408,911
|
|
|
$
|
(9,554
|
)
|
|
$
|
508,252
|
|
Issuance of restricted stock and exercise of stock options, including excess income tax benefits of $9,330
|
|
475
|
|
|
46
|
|
|
22,715
|
|
|
1,611
|
|
|
—
|
|
|
—
|
|
|
24,372
|
|
Purchase of treasury stock, treasury stock acquired in lieu of cash payment on stock option exercises and income tax withholding obligations
|
|
(18
|
)
|
|
—
|
|
|
88
|
|
|
(1,611
|
)
|
|
|
|
|
|
|
|
(1,523
|
)
|
Proceeds from employee stock purchase plan
|
|
34
|
|
|
3
|
|
|
2,159
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,162
|
|
Stock compensation
|
|
—
|
|
|
—
|
|
|
12,827
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,827
|
|
Foreign currency translation adjustment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,204
|
)
|
|
(11,204
|
)
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
44,985
|
|
|
—
|
|
|
44,985
|
|
Balance, December 31, 2015
|
|
16,086
|
|
|
1,608
|
|
|
145,125
|
|
|
—
|
|
|
453,896
|
|
|
(20,758
|
)
|
|
579,871
|
|
Issuance of restricted stock and exercise of stock options
|
|
416
|
|
|
22
|
|
|
103
|
|
|
17,221
|
|
|
—
|
|
|
—
|
|
|
17,346
|
|
Purchase of treasury stock, treasury stock acquired in lieu of cash payment on stock option exercises and income tax withholding obligations
|
|
(195
|
)
|
|
—
|
|
|
—
|
|
|
(17,235
|
)
|
|
|
|
|
|
|
|
(17,235
|
)
|
Proceeds from employee stock purchase plan
|
|
31
|
|
|
3
|
|
|
2,358
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,361
|
|
Stock compensation
|
|
—
|
|
|
—
|
|
|
15,242
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,242
|
|
Foreign currency translation adjustment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(514
|
)
|
|
(514
|
)
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
63,084
|
|
|
—
|
|
|
63,084
|
|
Balance, December 31, 2016
|
|
16,338
|
|
|
1,633
|
|
|
162,828
|
|
|
(14
|
)
|
|
516,980
|
|
|
(21,272
|
)
|
|
660,155
|
|
Issuance of restricted stock and exercise of stock options
|
|
676
|
|
|
66
|
|
|
27,866
|
|
|
4,071
|
|
|
—
|
|
|
—
|
|
|
32,003
|
|
Purchase of treasury stock, treasury stock acquired in lieu of cash payment on stock option exercises and income tax withholding obligations
|
|
(27
|
)
|
|
—
|
|
|
—
|
|
|
(4,057
|
)
|
|
|
|
|
|
(4,057
|
)
|
Issuance of common stock for acquisitions
|
|
3,200
|
|
|
320
|
|
|
412,819
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
413,139
|
|
Proceeds from employee stock purchase plan
|
|
23
|
|
|
2
|
|
|
2,703
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,705
|
|
Stock compensation
|
|
—
|
|
|
—
|
|
|
19,352
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
19,352
|
|
Other comprehensive income, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,313
|
|
|
6,313
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
68,644
|
|
|
—
|
|
|
68,644
|
|
Balance, December 31, 2017
|
|
20,210
|
|
|
$
|
2,021
|
|
|
$
|
625,568
|
|
|
$
|
—
|
|
|
$
|
585,624
|
|
|
$
|
(14,959
|
)
|
|
$
|
1,198,254
|
|
The accompanying notes are an integral part of these consolidated financial statements.
ICU MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net income
|
$
|
68,644
|
|
|
$
|
63,084
|
|
|
$
|
44,985
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
66,569
|
|
|
19,050
|
|
|
18,073
|
|
Provision for doubtful accounts
|
2,308
|
|
|
—
|
|
|
54
|
|
Provision for warranty and returns
|
845
|
|
|
559
|
|
|
52
|
|
Stock compensation
|
19,352
|
|
|
15,242
|
|
|
12,827
|
|
Loss (gain) on disposal of property, plant and equipment
|
3,778
|
|
|
59
|
|
|
(1,106
|
)
|
Bond premium amortization
|
103
|
|
|
1,355
|
|
|
1,670
|
|
Debt issuance cost amortization
|
48
|
|
|
—
|
|
|
—
|
|
Impairment of assets held-for-sale
|
—
|
|
|
728
|
|
|
4,139
|
|
Bargain purchase gain
|
(70,890
|
)
|
|
(1,456
|
)
|
|
—
|
|
Change in fair value of contingent earn-out
|
8,000
|
|
|
—
|
|
|
—
|
|
Other
|
(220
|
)
|
|
75
|
|
|
—
|
|
Changes in operating assets and liabilities, net of amounts acquired:
|
|
|
|
|
|
|
|
Accounts receivable
|
(54,533
|
)
|
|
744
|
|
|
(20,515
|
)
|
Inventories
|
181,699
|
|
|
(5,501
|
)
|
|
(8,337
|
)
|
Prepaid expenses and other assets
|
(31,807
|
)
|
|
(3,028
|
)
|
|
(1,832
|
)
|
Related-party receivables
|
(95,309
|
)
|
|
—
|
|
|
—
|
|
Accounts payable
|
46,648
|
|
|
(463
|
)
|
|
3,118
|
|
Accrued liabilities
|
33,813
|
|
|
(1,221
|
)
|
|
9,454
|
|
Income taxes, including excess tax benefits and deferred income taxes
|
(24,625
|
)
|
|
714
|
|
|
1,613
|
|
Net cash provided by operating activities
|
154,423
|
|
|
89,941
|
|
|
64,195
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
(74,479
|
)
|
|
(23,361
|
)
|
|
(12,984
|
)
|
Proceeds from sale of assets
|
2
|
|
|
—
|
|
|
3,592
|
|
Proceeds from the disposal of assets held-for-sale, net
|
—
|
|
|
3,268
|
|
|
—
|
|
Intangible asset additions
|
(5,203
|
)
|
|
(1,192
|
)
|
|
(951
|
)
|
Business acquisitions, net of cash acquired
|
(162,448
|
)
|
|
(2,584
|
)
|
|
(56,786
|
)
|
Proceeds from sale of assets acquired in a business acquisition
|
—
|
|
|
—
|
|
|
28,970
|
|
Purchases of investment securities
|
(24,743
|
)
|
|
(118,384
|
)
|
|
(56,137
|
)
|
Proceeds from sale of investment securities
|
—
|
|
|
158,534
|
|
|
83,054
|
|
Net cash (used in) provided by investing activities
|
(266,871
|
)
|
|
16,281
|
|
|
(11,242
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Repayment of long-term obligations
|
(75,000
|
)
|
|
—
|
|
|
—
|
|
Proceeds from exercise of stock options
|
32,003
|
|
|
17,346
|
|
|
15,042
|
|
Proceeds from employee stock purchase plan
|
2,705
|
|
|
2,361
|
|
|
2,162
|
|
Purchase of treasury stock
|
(4,057
|
)
|
|
(17,235
|
)
|
|
(1,523
|
)
|
Net cash (used in) provided by financing activities
|
(44,349
|
)
|
|
2,472
|
|
|
15,681
|
|
Effect of exchange rate changes on cash
|
1,787
|
|
|
224
|
|
|
(8,282
|
)
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
(155,010
|
)
|
|
108,918
|
|
|
60,352
|
|
CASH AND CASH EQUIVALENTS, beginning of period
|
445,082
|
|
|
336,164
|
|
|
275,812
|
|
CASH AND CASH EQUIVALENTS, end of period
|
$
|
290,072
|
|
|
$
|
445,082
|
|
|
$
|
336,164
|
|
The accompanying notes are an integral part of these consolidated financial statements.
ICU MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
Cash paid during the year for income taxes
|
$
|
5,109
|
|
|
$
|
21,101
|
|
|
$
|
22,998
|
|
Cash paid during the year for interest
|
$
|
2,047
|
|
|
$
|
118
|
|
|
$
|
39
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
Accounts payable for property, plant and equipment
|
$
|
5,376
|
|
|
$
|
1,566
|
|
|
$
|
182
|
|
|
|
|
|
|
|
Detail of assets acquired and liabilities assumed in acquisitions:
|
|
|
|
|
|
Fair value of assets acquired
|
$
|
886,569
|
|
|
$
|
3,306
|
|
|
$
|
60,693
|
|
Cash paid for acquisitions, net of cash acquired
|
(162,448
|
)
|
|
(2,584
|
)
|
|
(56,786
|
)
|
Non-cash seller note
|
(75,000
|
)
|
|
—
|
|
|
—
|
|
Estimated working capital adjustment
|
4,253
|
|
|
—
|
|
|
—
|
|
Contingent consideration
|
(19,000
|
)
|
|
—
|
|
|
—
|
|
Issuance of common stock for acquisitions
|
(413,139
|
)
|
|
—
|
|
|
—
|
|
Bargain purchase gain
|
(70,890
|
)
|
|
(1,456
|
)
|
|
—
|
|
Goodwill, acquired during period
|
6,536
|
|
|
—
|
|
|
—
|
|
Liabilities assumed/Adjustments to liabilities assumed
|
$
|
(156,881
|
)
|
|
$
|
734
|
|
|
$
|
(3,907
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Preparation
ICU Medical, Inc. ("ICU"), a Delaware corporation, operates in one business segment engaged in the development, manufacturing and sale of innovative medical devices used in vascular therapy, and critical care applications. ICU's product portfolio includes intravenous smart pumps, sets, connectors, closed transfer devices for hazardous drugs, cardiac monitoring systems, along with pain management and safety software technology. 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. The manufacturing for all product groups occurs in Salt Lake City, Utah, Austin, Texas, Mexico and Costa Rica.
All subsidiaries are wholly owned and are included in the consolidated financial statements. All intercompany accounts and transactions have been eliminated. Results of operations of companies purchased are included from the dates of acquisition.
In our opinion, the consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. These consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Preparing financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash, Cash Equivalents
Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less from the date of purchase as cash equivalents.
Accounts Receivable
Accounts receivable are stated at net realizable value. An allowance is provided for estimated collection losses based on an assessment of various factors. We consider prior payment trends, the age of the accounts receivable balances, 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.
Inventories
Inventories are stated at the lower of cost or net realizable value with cost determined using the first-in, first-out method. Inventory costs include material, labor and overhead related to the manufacturing of medical devices.
Inventories consist of the following at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Raw material
|
$
|
82,397
|
|
|
$
|
28,435
|
|
Work in process
|
42,304
|
|
|
4,415
|
|
Finished goods
|
163,956
|
|
|
16,414
|
|
Total
|
$
|
288,657
|
|
|
$
|
49,264
|
|
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property, Plant and Equipment
Property, plant and equipment consist of the following at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Machinery and equipment
|
$
|
220,999
|
|
|
$
|
96,536
|
|
Land, building and building improvements
|
206,846
|
|
|
63,524
|
|
Molds
|
56,253
|
|
|
39,014
|
|
Computer equipment and software
|
44,408
|
|
|
26,458
|
|
Furniture and fixtures
|
7,361
|
|
|
3,243
|
|
Instruments placed with customers*
|
15,812
|
|
|
—
|
|
Construction in progress
|
57,144
|
|
|
15,180
|
|
Total property, plant and equipment, cost
|
608,823
|
|
|
243,955
|
|
Accumulated depreciation
|
(210,139
|
)
|
|
(158,259
|
)
|
Net property, plant and equipment
|
$
|
398,684
|
|
|
$
|
85,696
|
|
______________________________
*Instruments placed with customers consist of drug-delivery and monitoring systems placed with customer under operating leases.
All property, plant and equipment are stated at cost. We use the straight-line method for depreciating property, plant and equipment over their estimated useful lives. Estimated useful lives are:
|
|
|
Buildings
|
15 - 30 years
|
Building improvements
|
15 years
|
Machinery and equipment
|
2 - 10 years
|
Furniture, fixtures and molds
|
2 - 5 years
|
Computer equipment and software
|
3 - 5 years
|
Instruments placed with customers*
|
3 - 7 years
|
We capitalize expenditures that materially increase the life of the related assets; maintenance and repairs are expensed as incurred. The costs and related accumulated depreciation applicable to property, plant and equipment sold or retired are removed from the accounts and any gain or loss is reflected in the statements of income at the time of disposal. Depreciation expense was
$51.6 million
,
$16.3 million
and
$15.9 million
in the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Goodwill
We test goodwill for impairment on an annual basis in the month of November. If the carrying amount of goodwill exceeds the implied estimated fair value, an impairment charge to current operations is recorded to reduce the carrying value to the implied estimated fair value. There were no accumulated impairment losses as of
December 31, 2017
and
2016
.
The following table presents the changes in the carrying amount of our goodwill for
2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
Total
|
Balance as of December 31, 2015
|
|
$
|
6,463
|
|
Other
(1)
|
|
(886
|
)
|
Balance as of December 31, 2016
|
|
5,577
|
|
Goodwill acquired
(2)
|
|
6,536
|
|
Other
(3)
|
|
244
|
|
Balance as of December 31, 2017
|
|
$
|
12,357
|
|
______________________________
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1)
In 2016, "other" relates to measurement period adjustments on the net assets of our 2015 acquisition of EXC Holding Corp. ("EXC").
(2)
In 2017, our Fannin (UK) Limited ("Fannin") acquisition resulted in
$1.0 million
of goodwill and our Medical Australia Limited ("MLA") acquisition resulted in
$5.5 million
of goodwill. The goodwill related to MLA is preliminary and subject to adjustment.
(3)
In 2017, "other" relates to foreign currency translation.
Intangible Assets
Intangible assets, carried at cost less accumulated amortization and amortized on a straight-lined basis, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
Amortization
Life in Years
|
|
December 31, 2017
|
|
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
Patents
|
|
10
|
|
$
|
17,064
|
|
|
$
|
10,970
|
|
|
$
|
6,094
|
|
Customer contracts
|
|
9
|
|
5,319
|
|
|
4,892
|
|
|
427
|
|
Non-contractual customer relationships
|
|
9
|
|
55,080
|
|
|
6,562
|
|
|
48,518
|
|
Trademarks
|
|
4
|
|
425
|
|
|
425
|
|
|
—
|
|
Trade name
|
|
15
|
|
7,310
|
|
|
1,096
|
|
|
6,214
|
|
Developed technology
|
|
11
|
|
81,846
|
|
|
7,571
|
|
|
74,275
|
|
Total amortized intangible assets
|
|
|
|
$
|
167,044
|
|
|
$
|
31,516
|
|
|
$
|
135,528
|
|
|
|
|
|
|
|
|
|
|
IPR&D
|
|
|
|
$
|
8,225
|
|
|
|
|
$
|
8,225
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
$
|
175,269
|
|
|
$
|
31,516
|
|
|
$
|
143,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
December 31, 2016
|
|
|
Amortization
Life in Years
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
Patents
|
|
10
|
|
$
|
14,423
|
|
|
$
|
9,326
|
|
|
$
|
5,097
|
|
MCDA contract *
|
|
10
|
|
8,571
|
|
|
8,571
|
|
|
—
|
|
Customer contracts
|
|
9
|
|
5,319
|
|
|
4,512
|
|
|
807
|
|
Non-contractual customer relationships
|
|
15
|
|
7,080
|
|
|
590
|
|
|
6,490
|
|
Trademarks
|
|
4
|
|
425
|
|
|
425
|
|
|
—
|
|
Trade name
|
|
15
|
|
7,310
|
|
|
609
|
|
|
6,701
|
|
Developed technology
|
|
10
|
|
3,797
|
|
|
509
|
|
|
3,288
|
|
Total
|
|
|
|
$
|
46,925
|
|
|
$
|
24,542
|
|
|
$
|
22,383
|
|
______________________________
*MCDA contract: Manufacturing, Commercialization and Development Agreement with Hospira, Inc., dated May 1, 2005 (the "MCDA”). The MCDA was terminated in connection with the acquisition of the HIS business on February 3, 2017.
Amortization expense in
2017
,
2016
and
2015
was
$15.0 million
,
$2.8 million
and
$2.2 million
, respectively.
As of December 31, 2017 estimated annual amortization for our intangible assets for each of the next five years is approximately (in thousands):
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
2018
|
|
$
|
15,996
|
|
2019
|
|
15,582
|
|
2020
|
|
15,444
|
|
2021
|
|
15,361
|
|
2022
|
|
15,242
|
|
Thereafter
|
|
57,903
|
|
Total
|
|
$
|
135,528
|
|
Long-Lived Assets
We periodically evaluate the recoverability of long-lived assets whenever events and changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. When indicators of impairment are present, the carrying values of the assets are evaluated in relation to the operating performance and future undiscounted cash flows of the underlying business. The net book value of the underlying asset is adjusted to fair value if the sum of the expected discounted cash flows is less than book value. Fair values are based on estimates of market prices and assumptions concerning the amount and timing of estimated future cash flows and discount rates, reflecting varying degrees of perceived risk.
Investment Securities
Short-term investments, exclusive of cash equivalents, are marketable securities intended to be sold within one year and may include trading securities, available-for-sale securities, and held-to-maturity securities (if maturing within one year). Long-term investments are marketable securities intended to be sold after one year and may include trading securities, available-for-sale securities, and held-to-maturity securities.
Our investment securities are considered available-for-sale and are “investment grade” and carried at fair value. Our investments currently consist of corporate bonds. 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 (loss). Unrealized losses on available-for-sale securities are charged against net earnings when a decline in fair value is determined to 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. For debt securities, management also evaluates whether we have the intent to sell or will likely be required to sell before its anticipated recovery. Realized gains and losses are accounted for on the specific identification method. There have been no realized gains or losses on their disposal. The scheduled maturities of the equity securities are between
2018
and
2020
. All short-term investment securities are all callable within one year.
As of December 31, 2017, our investment securities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Amortized Cost
|
|
Unrealized Holding Gains (Losses)
|
|
Fair Value
|
Short-term corporate bonds
|
$
|
10,061
|
|
|
$
|
—
|
|
|
$
|
10,061
|
|
Long-term corporate bonds
|
14,579
|
|
|
—
|
|
|
14,579
|
|
Total investment securities
|
$
|
24,640
|
|
|
$
|
—
|
|
|
$
|
24,640
|
|
Income Taxes
Deferred taxes are determined based on the differences between the financial statements and the tax bases using rates as enacted in the laws. A valuation allowance is established if it is “more likely than not” that all or a portion of the deferred tax assets will not be realized.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We recognize interest and penalties related to unrecognized tax benefits in the tax provision. We recognize liabilities for uncertain tax positions when it is more likely than not that a tax position will not be sustained upon examination and settlement with various taxing authorities. Liabilities for uncertain tax positions are measured based upon the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. We have not recorded any material interest or penalties during any of the years presented.
Foreign Currency
Generally, the functional currency of our international subsidiaries is the local currency. Generally, we translate the financial statements of these subsidiaries to U.S. dollars at the exchange rate in effect at the balance sheet date and revenues and expenses are translated at the average monthly exchange rates during the year. Certain of our international subsidiaries consolidate first with another subsidiary that utilizes a functional currency other than U.S. dollars. In those cases, we follow a step by step translation process utilizing the same sequence as the consolidation process. Translation adjustments are recorded as a component of accumulated other comprehensive income, a separate component of stockholders' equity on our consolidated balance sheets and the effect of exchange rate changes on cash and cash equivalents are reflected on our consolidated statements of cash flows. Gains and losses for transactions denominated in a currency other than the functional currency of the entity are included in our statements of operations in other (expense) income, net. Foreign currency transaction losses, net were
$1.8 million
in
2017
,
$0.3 million
in
2016
and less than
$0.2 million
in
2015
.
Revenue Recognition
Most of our product sales are free on board shipping point and ownership of the product transfers to the customer on shipment. We record sales and related costs when ownership of the product transfers to the customer, persuasive evidence of an arrangement exists, collectability is reasonably assured and the sales price is determinable. Our customers are distributors, medical product manufacturers and end-users. Our only post-sale obligations are warranty and certain rebates. We warrant products against defects and have a policy permitting the return of defective products. We reserve for warranty and returns based on historical experience. We accrue rebates based on agreements and on historical experience as a reduction in revenue at the time of sale.
Other revenue consists of license, royalty and revenue sharing payments. Payments expected to be received are estimated and recorded in the period earned and adjusted to actual amounts when reports are received from payers; if there is insufficient data to make such estimates, payments are not recorded until reported by the payers.
Arrangements with Multiple Deliverables
In certain circumstances, we enter into arrangements in which we provide multiple deliverables to our customers. These bundled arrangements may include infusion pumps, Mednet software, implementation services, extended warranty and consumables. We first separate the deliverables into different units of accounting and then allocate the arrangement consideration to those separate units of accounting based on their relative selling price. When applying the relative selling price method, the selling price for each deliverable shall be determined using the following hierarchy: (i) vendor-specific objective evidence of selling price; (ii) third-part evidence of selling price; or (iii) best estimate of the selling price. We record revenue related to these multiple deliverables as products are delivered and services have been performed.
Shipping Costs
Costs to ship finished goods to our customers are included in cost of goods sold on the consolidated statements of operations.
Advertising Expenses
Advertising expenses are expensed as incurred and reflected in selling, general and administrative expenses in our consolidated statements of operations and were
$0.2 million
in
2017
,
$0.1 million
in
2016
and
$0.2 million
in
2015
.
Post-retirement and Post-employment Benefits
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We sponsor a Section 401(k) retirement plan ("plan") for employees. Our contributions to our 401(k) plan were approximately
$2.0 million
in
2017
,
$1.5 million
in
2016
and
$1.3 million
in
2015
. As a result of the HIS acquisition, we assumed certain post-retirement and post-employment obligations related to employees located in certain international countries. These obligations are immaterial to our financial statements taken as a whole.
Research and Development
Research and development costs are expensed as incurred. Research and development costs include salaries and related benefits, consulting fees, production supplies, samples, travel costs, utilities and other miscellaneous administrative costs.
Net Income Per Share
Net income per share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per share is computed by dividing net income by the weighted average number of common shares outstanding 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 that are anti-dilutive, where their exercise price exceeds the average market price of the common stock are not included in the treasury stock method calculation. There were
337
anti-dilutive shares in
2017
. There were
no
anti-dilutive shares in 2016 or 2015.
The following table presents the calculation of net earnings per common share (“EPS”) — basic and diluted (in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
(in thousands, except per share data)
|
|
|
2017
|
|
2016
|
|
2015
|
Net income
|
|
$
|
68,644
|
|
|
$
|
63,084
|
|
|
$
|
44,985
|
|
Weighted average number of common shares outstanding (basic)
|
|
19,614
|
|
|
16,168
|
|
|
15,848
|
|
Dilutive securities
(1)
|
|
1,244
|
|
|
1,086
|
|
|
648
|
|
Weighted average common and common equivalent shares outstanding (diluted)
|
|
20,858
|
|
|
17,254
|
|
|
16,496
|
|
EPS - basic
|
|
$
|
3.50
|
|
|
$
|
3.90
|
|
|
$
|
2.84
|
|
EPS - diluted
|
|
$
|
3.29
|
|
|
$
|
3.66
|
|
|
$
|
2.73
|
|
______________________________
(1)
During the second quarter of 2016, we early adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. Under this ASU, the change to the treasury stock method impacted weighted average common and common equivalent shares outstanding by
413,000
shares for the year ended December 31, 2016.
On February 3, 2017, as part of the purchase price for the acquisition of Pfizer Inc.'s ("Pfizer") Hospira Infusion Systems ("HIS") business, we delivered to Pfizer
3.2 million
newly issued common shares (see Note 2: Acquisitions, Strategic Transaction and Integration Expenses).
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
New Accounting Pronouncements
Recently Adopted Accounting Standards
In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2015-11 Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU 2015-11 changes the measurement of inventory within the scope of the ASU (e.g. FIFO or average cost) from lower of cost or market to lower of cost and net realizable value ("NRV"). NRV is defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Prior to the ASU, U.S. generally accepted accounting principles required an entity to measure inventory at the lower of cost or market. Market is measured using replacement cost unless it is above NRV (commonly referred to as “ceiling”) or below NRV less an approximately normal profit margin (commonly referred to as “floor”). For inventory within its scope, the ASU eliminates the notions of replacement cost and NRV less a normal profit margin, which is intended to simplify the accounting for inventory. The amendments are effective prospectively for the fiscal years, and interim reporting periods within those years, beginning on or after December 15, 2016. We adopted this ASU on January 1, 2017. This ASU did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Standards
In August, 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this update change both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results to facilitate financial reporting that more closely reflects an entity's risk management activities. The amendments in this update also make certain targeted improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness. The amendments are effective for the fiscal years, and interim reporting periods within those years, beginning on or after December 15, 2018. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the update. We early-adopted this ASU on January 1, 2018. The adoption of this ASU will not materially impact our first quarter 2018 consolidated financial statements or related footnotes.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Under the ASU, an entity will account for the effects of a modification unless (i) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified, (ii) the vesting conditions of the modified award are the same vesting conditions as the original award immediately before the original award is modified, and (iii) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in this ASU are effective prospectively for annual periods, and interim periods within those annual periods, beginning December 15, 2017. This adoption of this ASU is not expected to have a material impact on our consolidated financial statements or related footnote disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this update remove the second step of the impairment test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The amendments in ASU 2017-04 are effective for the annual or interim impairment test in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. This ASU is not expected to have a material impact on our consolidated financial statements or related footnote disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update provide a screen to determine when a set (integrated set of assets and activities) is not a business. If the screen is not met, it (1) requires that to be considered a business, a set must include, at a minimum, an input and a
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
substantive process that together significantly contribute to the ability to create output and (2) removes the evaluation of whether a market participant could replace the missing elements. The amendments in ASU 2017-01 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The amendments in this ASU should be applied prospectively on or after the effective date. This adoption of this ASU is not expected to have a material impact on our consolidated financial statements or related disclosures.
In October 2016, the FASB issued No. ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. Current generally accepted accounting principles prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until after the asset has been sold to an outside party. The amendments in ASU 2016-16 eliminates this prohibition. Accordingly, an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Amendments in this update are effective for annual reporting periods beginning after December 15, 2017. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements or related disclosures.
In August 2016, the FASB issued No. ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15
provides specific guidance on eight cash flow issues where current guidance is unclear or does not include any specifics on classification. The eight specific cash flow issues are: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with zero coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in ASU 2016-15 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. Early adoption is permitted. If adopted in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. Amendments should be applied using a retrospective transition method to each period presented. The adoption of this ASU is not expected to have a material impact on the consolidated financial statements and related disclosures.
In June 2016, the FASB issued No. ASU 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. The amendments in this update 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 are currently evaluating the impact of this ASU on the consolidated financial statements and related disclosures.
In February 2016, the FASB issued No. ASU 2016-02, Leases (Topic 842). The amendments in this update require an entity to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as finance or operating lease. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements. The amendments in this update will be effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. The updated guidance requires a modified retrospective adoption. We are currently evaluating the impact of this ASU on the consolidated financial statements and related disclosures.
In January 2016, the FASB issued No. ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments. This amendment requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in the consolidation of the investee). The amendments in this update will be effective for fiscal years beginning after December 15, 2017. Early adoption of the amendments is not permitted with the exception of the provision requiring the recognition in other comprehensive income the fair value change from instrument-specific credit risk measured using the fair value option for financial instruments. The adoption of this ASU is not expected to have a material impact on the consolidated financial statements and related disclosures.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 removes inconsistencies and weaknesses in revenue requirements; provides a more robust framework for addressing revenue issues; improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets; provides more useful information to users of financial statements through improved disclosure requirements; and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. This guidance requires that an entity depict the consideration by applying a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. On April 1, 2015, the FASB voted for a one-year deferral of the effective date of the new revenue recognition standard, ASU 2014-09. On July 15, 2015, the FASB affirmed these changes, which requires public entities to apply the amendments in ASU 2014-09 for annual reporting beginning after December 15, 2017. Early adoption is permitted beginning after December 31, 2016, the original effective date in ASU 2014-09. Subsequent to the issuance of this ASU, the FASB issued three amendments: ASU No. 2016-08 which clarifies principal versus agent considerations; ASU 2016-10 which clarifies guidance related to identifying performance obligations and licensing implementation; and ASU 2016-12 which provides narrow-scope improvements and practical expedients. All of the amendments have the same effective dates mentioned above.
We adopted the standard effective January 1, 2018 using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. Results for reporting beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and will continue to be reported in accordance with our historic accounting under ASC 605. Due to the cumulative impact of adopting ASC 606, we will record a net increase of
$9.0 million
to opening retained earnings as of January 1, 2018. The impact is primarily related to our bundled arrangements where we sell software licenses and implementation services, in addition to equipment and other consumables and solutions.
We evaluated the effect ASU 2014-09 on our consolidated financial statements by reviewing each of the significant revenue streams. The following is the result of that evaluation:
|
|
•
|
Bundled arrangements
- The timing of revenue recognition changed under ASC 606 for arrangements that include the sale of equipment, software and related software implementation services, for which revenue is recognized over time, as the related implementation services are delivered. This results in a delay in the recognition of related revenue over the implementation period, and an acceleration of software related revenue when compared to ASC 605.
|
|
|
•
|
Software renewals
- The timing of revenue recognition for software license renewals changed under ASC 606. As functional IP, the license is transferred to the customer at a point in time, at the start of each annual renewal period. As a result, under ASC 606, revenue related to our annual software license renewals is accelerated compared to ASC 605.
|
In addition to the impact as mentioned above, we expect to have enhanced disclosures in our 2018 first quarter report on Form 10-Q.
NOTE 2. ACQUISITIONS, STRATEGIC TRANSACTION AND INTEGRATION EXPENSES
2017 Acquisitions
On February 1, 2017, we acquired
100%
interest in Fannin for total consideration of approximately
$1.5 million
. Fannin provides infusion therapy consumable products to the healthcare sector in the United Kingdom and Ireland.
On February 3, 2017, we acquired
100%
interest in Pfizer's HIS business for total cash consideration of approximately
$260.0 million
(net of estimated working capital adjustments paid at closing), which was financed with existing cash balances and a
$75 million
three-year interest-only seller note. We also issued
3.2 million
shares of our common stock. The fair value of the common shares issued to Pfizer was determined based on the closing price of our common shares on the closing date, discounted to reflect a contractual lock-up period whereby Pfizer cannot transfer the shares, subject to certain exceptions, until the earlier of (i) the expiration of Pfizer’s services to us in the related transitional services agreement or (ii) eighteen months from the closing date. Additionally, Pfizer also may be entitled up to an additional
$225 million
in cash contingent consideration based on the achievement of performance targets for the combined company for the three years ending December 31, 2019 ("Earnout Period"). In the event that the sum of our Adjusted EBITDA as defined in the Amended and Restated Stock
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and Asset Purchase Agreement between us and Pfizer (the “HIS Purchase Agreement”) for the three years in the Earnout Period (the "Cumulative Adjusted EBITDA") is equal to or exceeds approximately
$1 billion
("the "Earnout Target"), then Pfizer will be entitled to receive the full amount of the earnout. In the event that the Cumulative Adjusted EBITDA is equal to or greater than 85% of the Earnout Target (but less than the Earnout Target), Pfizer will be entitled to receive the corresponding percentage of the earnout. In the event that the Cumulative Adjusted EBITDA is less than 85% of the Earnout Target, then no earnout amount will be earned by Pfizer. 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 includes 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. We believe that the acquisition of the HIS business, which includes IV pumps, solutions and consumable devices complements our pre-existing business by creating a company that has a complete infusion therapy product portfolio. We believe that the acquisition significantly enhances our global footprint and platform for continued competitiveness and growth.
With the acquisition of HIS, pre-existing long-term supply and distribution contracts between ICU and HIS were effectively terminated.
Deferred Closings
In the HIS Purchase Agreement, we agreed with Pfizer to defer the local closing of the HIS business in certain foreign jurisdictions (the “Deferred Closing Businesses”) for periods ranging by jurisdiction from 3 to 12 months after the February 3, 2017 closing date (the "Deferred Closing Period"). The net assets in these jurisdictions represent an immaterial portion of the total HIS business net assets.
At the February 3, 2017 HIS business transaction closing, we entered into a Net Economic Benefit Agreement with Pfizer under which we agreed that (i) during the Deferred Closing Period, the economic benefits and burdens of the Deferred Closing Businesses are for our account, and we are to be treated as the beneficial owner of the Deferred Closing Businesses and (ii) Pfizer would continue to operate the Deferred Closing Businesses under our direction.
As of December 31, 2017, all of the deferred closing businesses were effectively closed.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Purchase Price
The following table summarizes the final purchase price and the final allocation of the purchase price related to the assets and liabilities purchased (in thousands, except per share data):
|
|
|
|
|
|
Cash consideration for acquired assets
|
|
$
|
180,785
|
|
Fair value of Seller Note
|
|
75,000
|
|
Fair value of contingent consideration payable to Pfizer (long-term)
|
|
19,000
|
|
|
|
|
Issuance of ICU Medical, Inc. common shares:
|
|
|
Number of shares issued to Pfizer
|
|
3,200
|
|
Price per share (ICU's trading closing share price on the Closing Date)
|
|
$
|
140.75
|
|
Market price of ICU shares issued to Pfizer
|
|
$
|
450,400
|
|
Less: Discount due to lack of marketability of 8.3%
|
|
(37,261
|
)
|
Equity portion of purchase price
|
|
413,139
|
|
Total Consideration
|
|
$
|
687,924
|
|
|
|
|
Purchase Price Allocation:
|
|
|
Cash and cash equivalents
|
|
$
|
31,082
|
|
Trade receivables
|
|
362
|
|
Inventories
|
|
417,622
|
|
Prepaid expenses and other assets
|
|
13,911
|
|
Property, plant and equipment
|
|
288,134
|
|
Intangible assets
(1)
|
|
131,000
|
|
Other assets
|
|
29,270
|
|
Accounts payable
|
|
(12,381
|
)
|
Accrued liabilities
|
|
(47,936
|
)
|
Long-term liabilities
(2)
|
|
(67,170
|
)
|
Total identifiable net assets acquired
|
|
$
|
783,894
|
|
Deferred tax, net
|
|
(25,080
|
)
|
Estimated Gain on Bargain Purchase
|
|
(70,890
|
)
|
Estimated Purchase Consideration
|
|
$
|
687,924
|
|
______________________________
(1)
Identifiable intangible assets includes
$48 million
of customer relationships,
$44 million
of developed technology - pumps and dedicated sets,
$34 million
of developed technology - consumables, and
$5 million
of in-process research and development ("IPR&D"). The weighted amortization period for the total identifiable assets is approximately
nine
years, for customer relationships the weighted amortization period is
eight
years, for the developed technology - pumps and dedicated sets the weighted amortization period is
ten
years and for the developed technology - consumables the weighted amortization period is
twelve
years. The IPR&D is non-amortizing until the associated research and development efforts are complete.
(2)
Long-term liabilities primarily consisted of contract liabilities, product liabilities and long-term employee benefits.
The fair value of the assets acquired and liabilities assumed exceeded the fair value of the consideration to be paid resulting in a bargain purchase gain. Before recognizing a gain on a bargain purchase, we reassessed the methods used in the purchase accounting and verified that we had identified all of the assets acquired and all of the liabilities assumed, and that there were no additional assets or liabilities to be considered. We also reevaluated the fair value of the contingent consideration transferred to determine that it was appropriate. We determined that the bargain purchase gain was primarily attributable to
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
expected restructuring costs as well as a reduction to the initially agreed upon transaction price caused primarily by revenue shortfalls across all market segments of the HIS business, negative manufacturing variance due to the drop in revenue and higher operating and required stand up costs, when compared to forecasts of the HIS business at the time that the purchase price was agreed upon. After the continuing review of the product demand and operations of the HIS Business, including the resulting expected restructuring activities, we forecasted our estimated Adjusted EBITDA from the HIS business in 2017 to be
$35 million
-
$40 million
, which was considerably lower than the forecast contemplated in initial negotiations with Pfizer, which resulted in an estimated fair value of
$19 million
related to the
$225 million
earn out. Restructuring costs, if incurred, will be expensed in future periods (see Note 3: Restructuring Charges). The bargain purchase gain is separately stated below income from operations in the accompanying consolidated statements of operations for the year ended December 31, 2017.
The identifiable intangible assets and other long-lived assets acquired have been valued as Level 3 assets at fair market value. The estimated fair value of identifiable intangible assets were developed using the income approach and are based on critical estimates, judgments and assumptions derived from: analysis of market conditions; discount rate; discounted cash flows; royalty rates; customer retention rates; and estimated useful lives. Fixed assets were valued with the consideration of remaining economic lives. The raw materials inventory was valued at historical cost and adjusted for any obsolescence, the work in process was valued at estimated sales proceeds less costs to complete and costs to sell, and finished goods inventory was valued at estimated sales proceeds less a nominal profit and costs to sell. The prepaid expenses and other current assets and assumed liabilities were recorded at their carrying values as of the date of the acquisition, as their carrying values approximated their fair values due to their short-term nature.
The pro forma financial information in the table below summarizes the combined results of operations for ICU and HIS as though the companies were combined as of the beginning of fiscal 2016. The pro forma financial information for all periods presented also includes the business combination accounting effects resulting from this acquisition including our amortization charges from acquired intangible assets, nonrecurring expense related to the fair value adjustment to acquisition-date inventory, acquisition and integration-related costs, interest expense on the Pfizer seller note and the related tax effects as though the aforementioned companies were combined as of the beginning of fiscal 2016. The pro forma financial information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of fiscal 2016.
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Revenue
|
|
Earnings
|
Actual from 2/3/2017 - 12/31/2017
(3)
|
|
$
|
1,062
|
|
|
*
|
2017 supplemental pro forma from 1/1/2017 - 12/31/2017
(1)(2)
|
|
$
|
1,293
|
|
|
$
|
180
|
|
2016 supplemental pro forma from 1/1/2016 - 12/31/2016
(1)(2)
|
|
$
|
1,418
|
|
|
$
|
22
|
|
______________________________
*
Impracticable to calculate.
(1)
2017 supplemental pro forma earnings were adjusted to exclude
$66.3 million
of nonrecurring expense related to the fair value adjustment to acquisition-date inventory and
$69.5 million
of acquisition and integration-related costs. 2016 supplemental pro forma earnings were adjusted to include these charges.
(2)
Unaudited.
(3)
Amount represents activity of HIS from the date of the acquisition.
On November 29, 2017, we acquired all of the outstanding shares of MLA. Total cash consideration paid was approximately
$9.0 million
. MLA delivers similar consumable Infusion products as our current businesses to Australia and surrounding regions. The purchase price allocation is preliminary and subject to future revision as the acquired assets and liabilities assumed are dependent upon the finalization of the related valuations.
2016 Acquisitions
On April 4, 2016, we acquired all of the outstanding shares of Tangent Medical Technologies, Inc. ("Tangent") for
$2.6 million
in cash. Tangent designs, develops, and commercializes intravenous catheters and associated products for the improvement of infusion therapy. Tangent's products enhance our infusion therapy product offering. For the year ended December 31, 2016, we recognized a
$1.5 million
bargain purchase gain related to the acquisition, which is separately stated in our consolidated statements of income. The bargain purchase gain represents the excess of the estimated fair market value of
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the identifiable tangible and intangible assets acquired, liabilities assumed and deferred tax assets over the total purchase consideration. The bargain purchase was driven by our ability to realize acquired deferred tax assets. The purchase price allocation is final.
2015 Acquisitions
On October 6, 2015, we acquired
100%
of the outstanding shares of EXC, for approximately
$59.5 million
in cash. Immediately following the completion of the acquisition of EXC, we sold certain assets to Excelsior Medical, LLC for a final purchase price including working capital adjustments of
$29.0 million
in cash. We retained all of the assets related to the business of manufacturing and selling the needleless connector disinfection cap. The acquisition of EXC's SwabCap business enhances our infusion therapy product offering across our existing direct and original equipment manufacturer business lines. The goodwill recognized for this acquisition is attributable to the benefits expected to be derived from product line expansion, new customers and operational synergies. The goodwill is nondeductible for income tax purposes. The following table summarizes the final purchase price and the allocation of the purchase price related to the assets and liabilities retained (in thousands):
|
|
|
|
|
Fair Value of Consideration:
|
|
Cash, net of cash acquired
|
$
|
56,786
|
|
|
|
Allocation of the Purchase Price:
|
|
Net assets sold to Excelsior Medical, LLC
|
$
|
28,970
|
|
Prepaid expenses and other current assets
|
254
|
|
Deferred tax asset/liabilities
|
4,426
|
|
Property, plant and equipment
|
3,982
|
|
Identifiable intangible assets
(1)
|
18,076
|
|
Goodwill
|
4,985
|
|
Assumed liabilities
|
(3,907
|
)
|
Net Assets Acquired
|
$
|
56,786
|
|
______________________________
(1)
Identifiable intangible assets included
$7.1 million
of non-contractual customer relationships,
$3.7 million
of developed technology and
$7.3 million
of trade name. The weighted-average amortization period for the total identifiable intangible assets is approximately fourteen years. The weighted-average amortization period for customer relationships and trade name is fifteen years and the weighted-average amortization period for the developed technology is ten years.
The identifiable intangible assets and other long-lived assets acquired have been valued as Level 3 assets at fair market The estimated fair value of identifiable intangible assets was developed using the income approach and is based on critical estimates, judgments and assumptions derived from: analysis of market conditions; discount rate; discounted cash flows; royalty rates; customer retention rates; and estimated useful lives. The prepaid expenses and other current assets and assumed liabilities were recorded at their carrying values as of the date of the acquisition, as their carrying values approximated their fair values due to their short-term nature.
Strategic Transaction and Integration Expenses
In 2017, we incurred
$59.2 million
in transaction and integration costs primarily related to our acquisition of HIS. In 2016, we incurred
$14.3 million
in transaction costs related to our 2017 acquisition of HIS, our acquisition of Tangent and our acquisition of EXC. In 2015, we incurred
$1.8 million
in charges primarily associated with the acquisition of EXC. Transaction expenses are presented on a separate line item on our statements of income and are combined with restructuring charges.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3. RESTRUCTURING CHARGES
In 2017, we incurred restructuring charges related to the acquisition of the HIS business (see Note 2: Acquisitions, Strategic Transaction and Integration Expenses). The restructuring charges were incurred as a result of integrating the acquired operations into our business and include severance costs related to involuntary employee terminations and facility exit costs related to the closure of the Dominican Republic manufacturing facilities acquired from Pfizer. All material charges in regard to these restructuring activities have been paid as of December 31, 2017.
In 2016, we incurred an additional
$0.8 million
related to the closure of the Slovakian manufacturing facility, described below. Additionally, we incurred
$0.2 million
related to a one-time charge unrelated to the events disclosed in the table below.
In 2015, we incurred
$6.7 million
in total restructuring charges related to: (i) a commitment to a plan to sell our Slovakia manufacturing facility, which was sold during 2016. The plan to sell the facility resulted in a pre-tax restructuring charge of
$4.2 million
for employee termination benefits, government incentive repayments and other associated costs; (ii) 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
$1.9 million
buy-out, including payroll taxes, will be paid in equal monthly installments until December 2020 and payments that will exceed one year have been accrued under long-term liabilities in our consolidated balance sheet; and (iii) the reorganization of our corporate infrastructure, resulting in one-time employee termination benefits and other associated costs and corporate restructuring actions resulted in a total charge of
$0.6 million
.
The following table summarizes the activity for the restructuring-related charges discussed above and related accrual (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Balance December 31, 2015
|
|
Charges incurred
|
|
Payments
|
|
Currency Translation
|
|
Other Adjustments
|
|
Accrued Balance December 31, 2016
|
|
Charges incurred
|
|
Payments
|
|
Other Adjustments
|
|
Accrued Balance December 31, 2017
|
Severance pay and benefits
|
$
|
2,505
|
|
|
$
|
25
|
|
|
$
|
(2,683
|
)
|
|
$
|
77
|
|
|
$
|
129
|
|
|
$
|
53
|
|
|
$
|
15,983
|
|
|
$
|
(15,104
|
)
|
|
$
|
(17
|
)
|
|
$
|
915
|
|
Government incentive repayment
|
1,884
|
|
|
—
|
|
|
(1,769
|
)
|
|
57
|
|
|
(172
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Employment agreement buyout
|
1,845
|
|
|
—
|
|
|
(368
|
)
|
|
—
|
|
|
—
|
|
|
1,477
|
|
|
—
|
|
|
(363
|
)
|
|
—
|
|
|
1,114
|
|
Other corporate restructuring
|
305
|
|
|
168
|
|
|
(468
|
)
|
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Retention and facility closure expenses
|
—
|
|
|
581
|
|
|
(581
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,789
|
|
|
(2,789
|
)
|
|
—
|
|
|
—
|
|
|
$
|
6,539
|
|
|
$
|
774
|
|
|
$
|
(5,869
|
)
|
|
$
|
134
|
|
|
$
|
(48
|
)
|
|
$
|
1,530
|
|
|
$
|
18,772
|
|
|
$
|
(18,256
|
)
|
|
$
|
(17
|
)
|
|
$
|
2,029
|
|
NOTE 4. GAIN ON SALE OF BUILDING
During 2015, we sold an office building in our San Clemente location to George A. Lopez, M.D., a member of our Board of Directors. The building was sold for
$3.6 million
, its fair market value as determined by a third party. The net book value of the land and building was
$2.5 million
resulting in a gain on the sale of the land and building of
$1.1 million
.
NOTE 5. LEGAL SETTLEMENTS
During 2015, we recorded a net settlement charge of
$1.8 million
due to the following claims:
An arbitrator ruled on a breach of contract claim between us and a service provider, awarding us a gross settlement of
$8.8 million
. Our legal counsel for this matter represented us under a contingency fee agreement. We recorded a settlement award, net of legal fees and costs, of
$5.3 million
; and
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
An arbitrator ruled on a breach of contract claim between us and a customer, Hospira, Inc., awarding Hospira $8.2 million Canadian dollars (
$6.5 million
U.S. dollars). The arbitrator also ruled that we pay 75% of Hospira's legal fees and expenses, which were
$0.7 million
U.S. dollars. We made a
$7.5 million
U.S. dollars settlement payment during 2015, which includes a foreign exchange transaction adjustment to Canadian dollars at the time of payment.
NOTE 6. IMPAIRMENT OF ASSETS HELD FOR SALE
During 2015, our Board of Directors authorized us to close our Vrable, Slovakia manufacturing facility. The closure was to enable for greater efficiency of our Ensenada, Mexico facility. After receiving the Board of Director's authorization, we reclassified the land and building related to the Slovakia facility as held-for-sale, and recorded the value of those assets at the lower of their carrying value or their estimated fair value less costs to sell, which was based on a third party fair market valuation. As the estimated fair value less cost to sell was lower than the carrying value of the assets held-for-sale, we recorded an impairment charge of
$4.1 million
in 2015.
During 2016, we completed the closure of our Slovakia manufacturing facility and sold the land and building held-for- sale for
$3.3 million
, net of costs to sell, resulting in an additional
$0.7 million
impairment charge on those assets.
The impairment charges are separately stated in our consolidated statements of operations above income from operations.
NOTE 7. SHARE BASED AWARDS
We have a stock incentive plan for employees and directors and an employee stock purchase plan. Shares to be issued under these plans will be issued either from authorized but unissued shares or from treasury shares.
We incur stock compensation expense for stock options, restricted stock units ("RSU"), performance restricted stock units ("PRSU") and stock purchased under our employee stock purchase plan ("ESPP"). We receive a tax benefit on stock compensation expense and direct tax benefits from the exercise of stock options. We also have indirect tax benefits upon exercise of stock options related to research and development tax credits which are recorded as a reduction of income tax expense. The table below summarizes compensation costs and related tax benefits (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(In thousands)
|
|
2017
|
|
2016
|
|
2015
|
Stock compensation expense
|
|
$
|
19,352
|
|
|
$
|
15,242
|
|
|
$
|
12,827
|
|
Tax benefit from stock-based compensation cost
|
|
$
|
7,247
|
|
|
$
|
5,682
|
|
|
$
|
4,922
|
|
Indirect tax benefit
|
|
$
|
1,374
|
|
|
$
|
—
|
|
|
$
|
1,997
|
|
As of
December 31, 2017
, we had
$23.3 million
of unamortized stock compensation cost which we will recognize as an expense over approximately
0.8
years.
Stock Incentive and Stock Option Plans
Our 2011 Stock Incentive Plan ("2011 Plan") replaced our 2003 Stock Option Plan (“2003 Plan”). Our 2011 Plan initially had
650,000
shares available for issuance, plus the remaining available shares for grant from the 2003 Plan. In 2012, 2014 and 2017, our stockholders approved amendments to the 2011 plan that increased the shares available for issuance by
3,275,000
, bringing the initial shares available for issuance to
3,925,000
, plus the remaining
248,700
shares that remained available for grant from the 2003 Plan. In addition, any forfeited, terminated or expired shares that would otherwise return to the 2003 Plan are available under the 2011 Plan. As of
December 31, 2017
, the 2011 Plan has
4,188,300
shares of common stock reserved for issuance to employees, which includes
263,300
shares that transferred from the 2003 Plan. Shares issued as options or stock appreciation rights ("SARs") are charged against the 2011 Plan's share reserve as one share for one share issued. Shares subject to awards other than options and SARs are charged against the 2011 Plan's share reserve as 2.09 shares for 1 share issued. Options may be granted with exercise prices at no less than fair market value at date of grant. Options granted under the 2011 Plan may be “non-statutory stock options” which expire no more than ten years from date of grant or “incentive stock options” as defined in Section 422 of the Internal Revenue Code of 1986, as amended. Upon exercise of non-statutory stock options, we are generally entitled to a tax deduction on the exercise of the option for an amount equal to the
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
excess over the exercise price of the fair market value of the shares at the date of exercise; we are generally not entitled to any tax deduction on the exercise of an incentive stock option. The 2011 Plan includes conditions whereby unvested options are cancelled if employment is terminated.
In 2014, our Compensation Committee of the Board of Directors awarded our then new Chief Executive Officer an employment inducement option to purchase
182,366
shares of our common stock and an employment inducement grant of restricted stock units with respect to
68,039
shares of our common stock. The inducement grants were made out of our 2014 Inducement Incentive Plan ("2014 Plan").
Our 2001 Directors’ Stock Option Plan (the “Directors’ Plan”), initially had
750,000
shares reserved for issuance to members of our Board of Directors, expired in November 2011. Although no new grants may be made under the Director's Plan, grants made under the Director's Plan prior to its expiration continue to remain outstanding. Options not vested terminate if the directorship is terminated.
Time-based Stock Options
To date, all options granted under the 2014 Plan, 2011 Plan, 2003 Plan and Directors' Plan have been non-statutory stock options. The majority of the time-based outstanding employee option grants vest 25% after one year from the grant date and the balance vests ratably on a monthly basis over 36 months. The majority of the outstanding options granted to non-employee directors vest one year from the grant date. The options generally expire 10 years from the grant date.
The fair value of time-based option grants is calculated using the Black-Scholes option valuation model. The expected term for the option grants was based on historical experience and expected future employee behavior. We estimate the volatility of our common stock at the date of grant based on the historical volatility of our common stock, based on the average expected exercise term. The table below summarizes the total time-based stock options granted, total valuation and the weighted average assumptions (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Number of time-based options granted
|
|
8,825
|
|
|
13,405
|
|
|
22,816
|
|
Grant date fair value of options granted (in thousands)
|
|
$
|
375
|
|
|
$
|
413
|
|
|
$
|
590
|
|
Weighted average assumptions for stock option valuation:
|
|
|
|
|
|
|
Expected term (years)
|
|
5.5
|
|
|
5.5
|
|
|
5.6
|
|
Expected stock price volatility
|
|
27.0
|
%
|
|
31.8
|
%
|
|
25.9
|
%
|
Risk-free interest rate
|
|
1.1
|
%
|
|
0.7
|
%
|
|
1.7
|
%
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Weighted average grant price per option
|
|
$
|
158.20
|
|
|
$
|
101.32
|
|
|
$
|
93.30
|
|
Weighted average grant date fair value per option
|
|
$
|
42.51
|
|
|
$
|
30.78
|
|
|
$
|
25.86
|
|
Performance Stock Options
In 2015, we granted performance stock option grants which are exercisable if the common stock price condition and the time-based vesting have been met. The 2015 performance based stock option grants vest ratably at 33% per year over three years. For the 2015 grants, the vested performance stock options became exercisable when the closing price of our common stock was equal to or more than 130% of the exercise price for 30 consecutive trading days during the term of the grant. All of the 2015 performance stock option grant's common stock price conditions have been met.
The fair value of performance option grants is calculated using the Monte Carlo Simulation. The expected term of the performance option grants is based on the expected number of years to achieve the exercisable goal trigger and assumes that the vested option will be immediately exercised or cancelled, if underwater. We estimate the volatility of our common stock at the date of grant based on the historical volatility of our common stock over a 10-year period.
The table below summarizes the performance stock options granted, the total valuation and the weighted average assumptions (dollars in thousands). There were no performance option grants in 2017 or 2016.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Number of performance options granted
|
|
|
|
|
|
244,825
|
|
Number of performance options earned
|
|
|
|
244,825
|
|
|
349,812
|
|
Grant date fair value of options granted (in thousands)
|
|
|
|
|
|
$
|
6,087
|
|
Weighted average assumptions for stock option valuation:
|
|
|
|
|
|
|
Expected term (years)
|
|
|
|
|
|
3.0
|
|
Expected stock price volatility
|
|
|
|
|
|
30.86
|
%
|
Risk-free interest rate
|
|
|
|
|
|
2.3
|
%
|
Expected dividend yield
|
|
|
|
|
|
—
|
%
|
Weighted average grant price per option
|
|
|
|
|
|
$
|
91.88
|
|
Weighted average grant date fair value per option
|
|
|
|
|
|
$
|
24.86
|
|
A summary of our stock option activity as of and for the year ended
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Exercise Price Per Share
|
|
Weighted Average Contractual Life (Years)
|
|
Aggregate Intrinsic Value (in thousands)
|
Outstanding at December 31, 2016
|
|
2,018,290
|
|
|
$
|
58.90
|
|
|
|
|
|
Granted
|
|
8,825
|
|
|
$
|
158.20
|
|
|
|
|
|
Exercised
|
|
(610,316
|
)
|
|
$
|
52.43
|
|
|
|
|
|
Forfeited or expired
|
|
(72
|
)
|
|
$
|
58.79
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
1,416,727
|
|
|
$
|
62.30
|
|
|
5.8
|
|
$
|
217,749
|
|
Exercisable at December 31, 2017
|
|
1,133,734
|
|
|
$
|
60.13
|
|
|
5.6
|
|
$
|
176,721
|
|
Vested and expected to vest, December 31, 2017
|
|
1,416,727
|
|
|
$
|
62.30
|
|
|
5.8
|
|
$
|
217,749
|
|
The intrinsic values for options exercisable, outstanding and vested or expected to vest at
December 31, 2017
is based on our closing stock price of
$216.00
at
December 31, 2017
and are before applicable taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(In thousands)
|
|
2017
|
|
2016
|
|
2015
|
Intrinsic value of options exercised
|
|
$
|
71,283
|
|
|
$
|
25,065
|
|
|
$
|
28,071
|
|
Cash received from exercise of stock options
|
|
$
|
32,003
|
|
|
$
|
17,346
|
|
|
$
|
15,042
|
|
Tax benefit from stock option exercises
|
|
$
|
20,004
|
|
|
$
|
7,556
|
|
|
$
|
9,330
|
|
Stock Awards
In 2017, we granted performance restricted stock units ("PRSU") to our executive officers. The PRSUs will vest, if at all, upon the achievement of a minimum Cumulative Adjusted EBITDA, subject to a three-year cliff vesting ending on December 31, 2019. If at that date, our Cumulative Adjusted EBITDA is at least $600 million but less than $650 million, 100% of the awarded units will vest. If our Cumulative Adjusted EBITDA is at least $650 million but less than $700 million, 200% of the awarded units will vest. If our Cumulative Adjusted EBITDA is at least $700 million, 300% of the awarded units will vest.
In 2016, we granted PRSUs to our executive officers, which will vest, if at all, upon the achievement of a minimum specified compound annual growth rate ("CAGR") in adjusted EBITDA per share, subject to a three-year cliff vesting ending on December 31, 2018. If at that date, our adjusted EBITDA per share CAGR is at least 8% but less than 10%, 100% of the awarded units will vest. If our adjusted EBITDA per share CAGR is at least 10% but less than 12%, 200% of the awarded
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
units will vest. If our adjusted EBITDA per share CAGR is greater than 12%, 300% of the awarded units will vest. As of October 1, 2017 we expect our adjusted EBITDA per share CAGR to be greater than 12% at December 31, 2018.
Restricted stock units ("RSU") are granted annually to our Board of Directors and vest on the first anniversary of the grant date.
In 2017, 2016 and 2015, we granted RSUs to certain employees that vest ratably on the anniversary of the grant over three years. Additionally in 2015, we granted RSUs to certain new hire employees that vest ratably on the anniversary of the grant over two years.
The table below summarizes our restricted stock award activity (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(In thousands except shares and per share amounts)
|
|
2017
|
|
2016
|
|
2015
|
PRSU
|
|
|
|
|
|
|
Shares granted
|
|
20,686
|
|
|
36,370
|
|
|
—
|
|
Shares earned
|
|
—
|
|
|
—
|
|
|
—
|
|
Grant date fair value per share
|
|
$
|
154.75
|
|
|
$
|
86.47
|
|
|
$
|
—
|
|
Grant date fair value
|
|
$
|
3,201
|
|
|
$
|
3,145
|
|
|
$
|
—
|
|
Intrinsic value vested
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
787
|
|
|
|
|
|
|
|
|
RSU
|
|
|
|
|
|
|
Shares granted
|
|
107,678
|
|
|
60,377
|
|
|
67,745
|
|
Grant date fair value per share
|
|
$
|
156.49
|
|
|
$
|
87.47
|
|
|
$
|
93.52
|
|
Grant date fair value
|
|
$
|
16,851
|
|
|
$
|
5,281
|
|
|
$
|
6,336
|
|
Intrinsic value vested
|
|
$
|
9,813
|
|
|
$
|
4,680
|
|
|
$
|
2,754
|
|
The table below provides a summary of our PRSU and RSU activity as of and for the year ended
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Units
|
|
Grant Date Fair Value Per Share
|
|
Weighted Average Contractual Life (Years)
|
|
Aggregate Intrinsic Value
|
Non-vested at December 31, 2016
|
|
159,439
|
|
|
$
|
84.68
|
|
|
|
|
|
Change in units due to performance expectations
(a)
|
|
72,740
|
|
|
$
|
86.47
|
|
|
|
|
|
Granted
|
|
128,364
|
|
|
$
|
156.21
|
|
|
|
|
|
Vested
|
|
(66,278
|
)
|
|
$
|
80.61
|
|
|
|
|
|
Forfeited
|
|
(8,762
|
)
|
|
$
|
148.76
|
|
|
|
|
|
Non-vested and expected to vest at December 31, 2017
|
|
285,503
|
|
|
$
|
116.28
|
|
|
1.0
|
|
$
|
33,197
|
|
(a) Relates to the 2016 PRSUs, assumes attainment of maximum payout rate as set forth in performance criteria.
ESPP
We have an ESPP under which U.S. employees may purchase up to $25,000 annually of common stock at 85% of its fair market value at the beginning or the end of a six-month offering period, whichever is lower. There are
750,000
shares of common stock reserved for issuance under the ESPP, which is subject to an annual increase of the least of
300,000
shares, two percent of the shares outstanding or such a number as determined by the Board. To date, there have been no increases. As of
December 31, 2017
, there were
133,487
shares available for future issuance. The ESPP is intended to constitute an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code. During 2017, we suspended our ESPP.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value of rights to purchase shares under the ESPP is calculated using the Black-Scholes option valuation model. The table below summarizes the number and intrinsic value of ESPP share purchases and the weighted average valuation assumptions for the
2017
,
2016
and
2015
purchase periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
ESPP shares purchased by employees
|
|
23,426
|
|
|
31,227
|
|
|
34,299
|
|
Intrinsic value of ESPP purchases (in thousands)
|
|
$
|
986
|
|
|
$
|
955
|
|
|
$
|
1,382
|
|
Weighted average assumptions for ESPP valuation:
|
|
|
|
|
|
|
Expected term (in years)
|
|
0.5
|
|
|
0.5
|
|
|
0.5
|
|
Expected stock price volatility
|
|
28.1
|
%
|
|
32.5
|
%
|
|
27.0
|
%
|
Risk-free interest rate
|
|
0.6
|
%
|
|
0.3
|
%
|
|
0.6
|
%
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
NOTE 8. DERIVATIVES AND HEDGING ACTIVITIES
Hedge Accounting and Hedging Program
During the second quarter of 2017, we implemented a cash flow 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.
In May 2017, we entered into a two-year cross-currency par forward contract to hedge a portion of our Mexico forecasted expenses denominated in Pesos ("MXN"). 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 instrument is recorded at fair value on the Consolidated Balance Sheets and is 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 (Loss) Income and we reclassify that gain or loss into earnings in the same line item associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. Any gain or loss on the derivative instrument due to ineffectiveness of the hedge will be recognized in the Consolidated Statements of Operations during the current period. The total notional amount of our outstanding derivative as of December 31, 2017 was approximately
510.3 million
MXN. The term of our currency forward contract is May 1, 2017 to May 1, 2019. The derivative instrument matures in equal monthly amounts at a fixed forward rate of
20.01
MXN/USD over the term of the two-year contract.
The following table presents the fair values of our derivative instrument included within the Consolidated Balance Sheet as of December 31, 2017 (in thousands):
|
|
|
|
|
|
|
|
Derivatives
|
|
Consolidated Balance Sheet
Location
|
|
December 31, 2017
|
Derivatives designated as cash flow hedging instruments
|
|
|
|
Foreign exchange forward contract:
|
Accrued liabilities
|
|
$
|
187
|
|
|
Other long-term liabilities
|
|
402
|
|
Total derivatives designated as cash flow hedging instruments
|
|
|
$
|
589
|
|
The following table presents the amounts affecting the Consolidated Statements of Operations for the year ended December 31, 2017 (in thousands):
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
Line Item in the
Consolidated Statements of Operations
|
|
Year Ended
December 31, 2017
|
Derivatives designated as cash flow hedging instruments
|
|
|
|
Foreign exchange forward contracts
|
Cost of goods sold
|
|
$
|
885
|
|
We recognized the following gains on our foreign exchange contract designated as a cash flow hedge (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain Recognized in Other Comprehensive Income on Derivatives
|
|
|
Amount of Gain Reclassified From Accumulated Other Comprehensive Income into Income
|
|
|
Year Ended
December 31, 2017
|
|
|
Location of Gain Reclassified From Accumulated Other Comprehensive Income into Income
|
|
Year Ended
December 31, 2017
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
Foreign exchange forward contract
|
|
$
|
296
|
|
|
|
Cost of goods sold
|
|
$
|
885
|
|
Total derivatives designated as cash flow hedging instruments
|
|
$
|
296
|
|
|
|
|
|
$
|
885
|
|
As of December 31, 2017, we expect approximately
$0.2 million
of the deferred losses on the outstanding derivatives in accumulated other comprehensive income to be reclassified to net income during the next 12 months concurrent with the underlying hedged transactions also being reported in net income.
NOTE 9. FAIR VALUE MEASUREMENTS
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
|
|
•
|
Level 1: quoted prices in active markets for identical assets or liabilities;
|
|
|
•
|
Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or
|
|
|
•
|
Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities.
|
During the first quarter of 2017, we recognized an earn-out liability upon the acquisition of HIS from Pfizer. Pfizer may be entitled up to
$225 million
in cash if certain performance targets for the combined company for the three years ending December 31, 2019 are 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 includes 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, as discussed further in Note 2: Acquisition, Strategic Transaction and Integration Expenses. At each reporting date subsequent to the acquisition we remeasure the earn-out using the same methodology above and recognize any changes in value. If the probability of achieving the performance target significantly changes from what we initially anticipated, 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 consolidated balance sheets.
The following table provides a reconciliation of the Level 3 earn-out liability measured at estimated fair value based on an initial valuation and updated quarterly for the year ended December 31, 2017 (in thousands):
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
Earn-out Liability
|
Contingent earn-out liability, December 31, 2016
|
|
$
|
—
|
|
Acquisition date fair value estimate of earn-out
|
|
19,000
|
|
Change in fair value of contingent earn-out (included in income from operations as a separate line item)
|
|
8,000
|
|
Contingent earn-out liability, December 31, 2017
|
|
$
|
27,000
|
|
The fair value of the earn-out at December 31, 2017 changed from the fair value calculated at acquisition due to a change in the forecast of the underlying target, adjusted EBITDA, and due to changes in other assumptions used in the Monte Carlo simulation, as detailed in the below table.
The following table provides quantitative information about Level 3 inputs for fair value measurement of our earn-out liability as of the acquisition date and December 31, 2017. Significant increases or decreases in these inputs in isolation could result in a significant impact on our fair value measurement:
|
|
|
|
|
|
|
|
Simulation Input
|
|
As of
December 31, 2017
|
|
At Acquisition February 3, 2017
|
Adjusted EBITDA Volatility
|
|
26.00
|
%
|
|
29.00
|
%
|
WACC
|
|
8.75
|
%
|
|
10.00
|
%
|
20-year risk free rate
|
|
2.58
|
%
|
|
2.82
|
%
|
Market price of risk
|
|
5.99
|
%
|
|
6.93
|
%
|
Cost of debt
|
|
4.08
|
%
|
|
4.16
|
%
|
The fair value of our investments, which consisted of corporate bonds, is estimated using observable market based inputs such as quoted prices, interest rates and yield curves or Level 2 inputs.
The fair value of our Level 2 forward currency contract is estimated using observable market inputs such as known notional value amounts, spot and forward exchange rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative.
The assets related to our Dominican Republic manufacturing facilities are classified as assets held-for-sale. These assets are separately stated in our consolidated balance sheet. The fair value of these Level 3 assets was determined as part of the HIS business valuation and was based on a market approach using comparable building and land sales data and the analysis of market conditions.
There were no transfers between levels in 2017.
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):
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at December 31, 2017
|
|
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
|
$
|
10,061
|
|
|
$
|
—
|
|
|
$
|
10,061
|
|
|
$
|
—
|
|
Long-term
|
14,579
|
|
|
—
|
|
|
14,579
|
|
|
—
|
|
Total Assets
|
$
|
24,640
|
|
|
$
|
—
|
|
|
$
|
24,640
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earn-out liability
|
$
|
27,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
27,000
|
|
Foreign exchange forwards:
|
|
|
|
|
|
|
|
Accrued liabilities
|
187
|
|
|
—
|
|
|
187
|
|
|
—
|
|
Other long-term liabilities
|
402
|
|
|
—
|
|
|
402
|
|
|
—
|
|
Total Liabilities
|
$
|
27,589
|
|
|
$
|
—
|
|
|
$
|
589
|
|
|
$
|
27,000
|
|
Our assets measured at fair value on a nonrecurring basis consisted of the following (Level 1, 2 and 3 inputs as defined above (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at December 31, 2017 using
|
|
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:
|
|
|
|
|
|
|
|
Assets held-for-sale
|
$
|
12,489
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,489
|
|
Total Assets
|
$
|
12,489
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,489
|
|
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. PREPAID EXPENSES, OTHER CURRENT ASSETS AND RELATED-PARTY RECEIVABLES
Prepaid expenses and other current assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Deposits
|
|
$
|
21,940
|
|
|
$
|
—
|
|
Other prepaid expenses and receivables
|
|
4,208
|
|
|
2,948
|
|
Prepaid insurance and property taxes
|
|
2,580
|
|
|
1,649
|
|
VAT/GST receivable
|
|
8,097
|
|
|
1,018
|
|
Deferred tax charge
|
|
1,326
|
|
|
—
|
|
Other
|
|
3,135
|
|
|
1,740
|
|
|
|
$
|
41,286
|
|
|
$
|
7,355
|
|
Related-party receivables consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Third-party receivables due from Pfizer
|
|
$
|
36,425
|
|
|
$
|
—
|
|
HIS business acquisition related
|
|
62,382
|
|
|
—
|
|
|
|
$
|
98,807
|
|
|
$
|
—
|
|
Third-party receivables due from Pfizer relates to trade accounts receivable that has already been collected from customers by Pfizer on our behalf. HIS business acquisition related receivables include amounts due from Pfizer related to the manufacturing and supply agreements and deferred close entities and amounts we prepaid to Pfizer for operational expenses under the transition services agreement.
Pfizer became a related party to us when we issued
3.2 million
shares of our common stock as partial consideration for the acquisition of HIS. On February 3, 2017, we entered into a transitional services agreement and two Manufacturing and Supply Agreements ("MSA's") with Pfizer, (see Note 17, Collaborative and Other Arrangements). During 2017, the revenue for goods manufactured for Pfizer was
$72.4 million
and the cost of product manufactured by Pfizer for us was
$70.2 million
.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
Salaries and benefits
|
|
$
|
20,745
|
|
|
$
|
5,702
|
|
Incentive compensation
|
|
40,682
|
|
|
7,912
|
|
Accrued professional fees
|
|
13,319
|
|
|
—
|
|
Accrued product field action
|
|
11,810
|
|
|
—
|
|
Consigned inventory
|
|
5,210
|
|
|
—
|
|
Third-party inventory
|
|
4,284
|
|
|
—
|
|
Legal accrual
|
|
3,538
|
|
|
4,177
|
|
Accrued sales taxes
|
|
6,291
|
|
|
1,472
|
|
Warranties and Returns
|
|
3,360
|
|
|
—
|
|
Deferred revenue
|
|
3,326
|
|
|
18
|
|
Accrued other taxes
|
|
2,771
|
|
|
—
|
|
Outside commissions
|
|
725
|
|
|
1,141
|
|
Accrued freight
|
|
5,696
|
|
|
—
|
|
Restructuring accrual
|
|
1,290
|
|
|
423
|
|
Acquisition-related accrual
|
|
—
|
|
|
2,750
|
|
Other
|
|
9,017
|
|
|
2,301
|
|
|
|
$
|
132,064
|
|
|
$
|
25,896
|
|
Other long-term liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
Contract liabilities
(1)
|
|
$
|
40,148
|
|
|
$
|
—
|
|
Deferred revenue
|
|
7,099
|
|
|
—
|
|
Benefits
|
|
2,104
|
|
|
1,107
|
|
Other
|
|
5,975
|
|
|
—
|
|
|
|
$
|
55,326
|
|
|
$
|
1,107
|
|
__________________________________________
(1)
Consists of multiple contracts with customers and suppliers that were valued at below market at the time of the HIS acquisition.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. LONG-TERM OBLIGATIONS
Five-year Revolving Credit Facility ("Credit Facility")
On November 8, 2017, we entered into a five-year Revolving Credit Facility ("Credit Facility") with various lenders for
$150 million
, with Wells Fargo Bank, N.A. as the administrative agent, swingline lender and issuing lender. As of December 31, 2017, we had no borrowings and
$150 million
of availability under the Credit Facility. The Credit Facility matures on
November 8, 2022
.
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 million
and (ii) 2.00x Total Leverage.
In connection with the Credit Facility, for the year ended December 31, 2017, we incurred
$1.4 million
in financing costs, which were capitalized and are included in prepaid expenses and other current assets and other assets in our consolidated balance sheets, in accordance with the appropriate short-term or long-term classification. These fees will be amortized to interest expense over the remaining term of the Credit Facility.
Principal payments
Principal payments, when drawn on the Credit Facility, are made at our discretion with the entire unpaid amount due at maturity.
Interest rate
In general, borrowing under the Credit Facility (other than Swingline loans) bears interest, at our option, based on the Base Rate plus applicable margin or the London Interbank Offered Rate ("LIBOR") rate plus applicable margin, as defined below:
(A) Base Rate is defined as the highest of: (a) the Prime Rate; (b) the Federal Funds Rate plus 0.50%; and (c) the daily LIBOR (as defined below) for a one month Interest Period plus 1%.
(B) LIBOR Rate, as determined by the Administrative Agent, is defined as the rate per annum obtained by dividing (1) LIBOR by (2) 1.00 - Eurodollar Reserve Percentage.
Swingline loans will bear interest at the Base Rate plus the applicable Interest Margin. The Credit Facility has a per annum commitment fee (see table below) that will accrue on the unused amounts of the commitments under the Credit Facility.
The applicable interest margins and the commitment fee with respect to the Credit Facility shall be based on the Total Leverage Ratio pursuant to the following pricing grid:
|
|
|
|
|
|
Level
|
Consolidated Total
Leverage Ratio
|
Commitment
Fee
|
LIBOR
+
|
Base Rate
+
|
I
|
Less than 1.00 to 1.00
|
0.15%
|
1.25%
|
0.25%
|
II
|
Greater than or equal to 1.00 to 1.00 but less than 2.00 to 1.00
|
0.20%
|
1.50%
|
0.50%
|
III
|
Greater than or equal to 2.00 to 1.00 but less than 2.50 to 1.00
|
0.25%
|
1.75%
|
0.75%
|
IV
|
Greater than or equal to 2.50 to 1.00
|
0.30%
|
2.00%
|
1.00%
|
Guarantors and Collateral
Our obligations under the Credit Facility are unconditionally guaranteed, on a joint and several basis, by ICU Medical, Inc. and certain of our existing subsidiaries.
Our obligations are secured by: (i) 100% of the equity interests of our guarantor subsidiaries; and (ii) all of the tangible and intangible personal property and assets related to us and our guarantor subsidiaries
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(including, without limitation, all accounts, equipment, inventory and other goods, all instruments, intellectual property and other general intangibles, deposit accounts, securities accounts and other investment property and cash), and (iii) all products, profits and proceeds of the foregoing. Notwithstanding the foregoing, the collateral shall not include certain excluded property
.
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.
The Consolidated Leverage Ratio is defined as the ratio of Consolidated Total Funded Indebtedness on such date, to Consolidated Adjusted EBITDA, as defined under the Credit Facility Agreement, for the most recently completed four fiscal quarters. The maximum Consolidated Leverage Ratio is not more than 3.00 to 1.00.
The Consolidated Fixed Charge Coverage Ratio is defined as the ratio of: (a) Consolidated Adjusted EBITDA less the sum of (i) capital expenditures, (ii) federal, state, local and foreign income taxes paid in cash and (iii) cash restricted payments made after the closing date, to (b) Consolidated Fixed Charges for the most recently completed four fiscal quarters, calculated on a pro forma basis. The minimum Consolidated Fixed Charge Coverage Ratio is 2.00 to 1.00.
We were in compliance with all financial covenants as of December 31, 2017.
Three-Year Interest-Only Senior Note
On February 3, 2017, we partially funded the acquisition of the HIS business from Pfizer with a
$75 million
Seller Note issued by Pfizer contemporaneous with the acquisition. We had fully repaid the seller note as of December 31, 2017.
NOTE 13. INCOME TAXES
Income from continuing operations before taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
United States
|
|
$
|
59,872
|
|
|
$
|
80,714
|
|
|
$
|
74,288
|
|
Foreign
|
|
(8,589
|
)
|
|
4,450
|
|
|
(4,589
|
)
|
|
|
$
|
51,283
|
|
|
$
|
85,164
|
|
|
$
|
69,699
|
|
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The (benefit) provision for income taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,774
|
|
|
$
|
21,123
|
|
|
$
|
18,601
|
|
State
|
|
2,263
|
|
|
2,347
|
|
|
745
|
|
Foreign
|
|
3,170
|
|
|
1,118
|
|
|
1,426
|
|
|
|
8,207
|
|
|
24,588
|
|
|
20,772
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(20,878
|
)
|
|
$
|
(2,045
|
)
|
|
$
|
4,524
|
|
State
|
|
(4,619
|
)
|
|
(767
|
)
|
|
(960
|
)
|
Foreign
|
|
(71
|
)
|
|
304
|
|
|
378
|
|
|
|
(25,568
|
)
|
|
(2,508
|
)
|
|
3,942
|
|
|
|
$
|
(17,361
|
)
|
|
$
|
22,080
|
|
|
$
|
24,714
|
|
Current income taxes payable were reduced from the amounts in the above table by
$9.3 million
in 2015, equal to the direct tax benefit that we receive upon exercise of stock options and the vesting of restricted stock units by employees and directors. We have accrued for tax contingencies for potential tax assessments, and in
2017
we recognized a
$3.0 million
net increase, most of which related to various federal and state tax reserves.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into legislation, which includes a broad range of provisions affecting businesses. The Tax Act significantly revises how companies compute their U.S. corporate tax liability by, among other provisions, reducing the corporate tax rate from
35%
to 21% for tax years beginning after December 31, 2017, implementing a territorial tax system, and requiring a mandatory one-time tax on U.S. owned undistributed foreign earnings and profits known as the toll charge or transition tax.
Pursuant to the SEC Staff Accounting Bulletin ("SAB") No. 118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" ("SAB 118"), a company selects between one of three scenarios to reflect the impact of the Tax Act in its financial statements within a measurement period. Those scenarios are (i) a final estimate which effectively closes the measurement period; (ii) a reasonable estimate leaving the measurement period open for future revisions; and (iii) no estimate as the law is still being analyzed in which case a company continues to apply its accounting on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. SAB 118 allows for the reporting provisional amounts for certain income tax effects in scenario (ii) and (iii). The measurement period begins in the reporting period that includes the Act’s enactment date and ends when an entity has obtained, prepared, and analyzed the information that was needed in order to complete the accounting requirements under ASC Topic 740. We were able to provide a reasonable estimate for the revaluation of deferred taxes and the effects of the toll charge on undistributed foreign earnings and profits, with our measurement period open for future revisions. As such, we recorded a provisional tax expense in the amount of
$1.1 million
and a provisional tax expense in the amount of
$2.0 million
related to the revaluation of deferred taxes and the toll charge, respectively. We are still evaluating various international provisions included in the Tax Act and have therefore not completed our assessment. These provisions include, but are not limited to, the anti-base-erosion and anti-abuse tax regime (BEAT), the global intangible low-taxed income (GILTI) provisions, the foreign derived intangible income (FDII) provisions, and the changes to the deductibility of interest. These provisions will be effective for us beginning on January 1, 2018, and may materially impact our effective tax rate in future years.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the provision for income taxes at the statutory rate to our effective tax rate is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
Federal tax at the expected statutory rate
|
|
$
|
17,950
|
|
|
35.0
|
%
|
|
$
|
29,807
|
|
|
35.0
|
%
|
|
$
|
24,395
|
|
|
35.0
|
%
|
State income tax, net of federal effect
|
|
(403
|
)
|
|
(0.8
|
)%
|
|
1,795
|
|
|
2.1
|
%
|
|
2,661
|
|
|
3.9
|
%
|
Tax credits
|
|
(2,783
|
)
|
|
(5.4
|
)%
|
|
(1,014
|
)
|
|
(1.2
|
)%
|
|
(5,861
|
)
|
|
(8.4
|
)%
|
Foreign income tax differential
|
|
3,481
|
|
|
6.8
|
%
|
|
(135
|
)
|
|
(0.1
|
)%
|
|
3,412
|
|
|
4.9
|
%
|
Stock based compensation
|
|
(18,958
|
)
|
|
(37.0
|
)%
|
|
(7,720
|
)
|
|
(9.1
|
)%
|
|
—
|
|
|
—
|
%
|
Impact of the Tax Act
|
|
3,076
|
|
|
6.0
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
IP installment sale
|
|
3,367
|
|
|
6.6
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Bargain purchase gain
|
|
(24,811
|
)
|
|
(48.4
|
)%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Other
|
|
1,720
|
|
|
3.4
|
%
|
|
(653
|
)
|
|
(0.8
|
)%
|
|
107
|
|
|
0.1
|
%
|
|
|
$
|
(17,361
|
)
|
|
(33.8
|
)%
|
|
$
|
22,080
|
|
|
25.9
|
%
|
|
$
|
24,714
|
|
|
35.5
|
%
|
Tax credits in
2017
,
2016
and
2015
consist principally of research and developmental tax credits.
The components of our deferred income tax assets (liabilities) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
Deferred tax asset:
|
|
|
|
|
|
|
Foreign
|
|
$
|
—
|
|
|
$
|
1,223
|
|
Accruals/other
|
|
8,368
|
|
|
857
|
|
Acquired future tax deductions
|
|
10,580
|
|
|
6,473
|
|
Stock-based compensation
|
|
8,633
|
|
|
11,089
|
|
Foreign currency translation adjustments
|
|
3,425
|
|
|
5,175
|
|
Tax credits state
|
|
8,471
|
|
|
6,764
|
|
Foreign tax credits
|
|
2,749
|
|
|
—
|
|
Inventory reserves
|
|
10,658
|
|
|
1,938
|
|
Allowance for doubtful accounts
|
|
636
|
|
|
151
|
|
Valuation allowance
|
|
(7,385
|
)
|
|
—
|
|
|
|
$
|
46,135
|
|
|
$
|
33,670
|
|
Deferred tax liability:
|
|
|
|
|
|
|
State income taxes
|
|
$
|
1,640
|
|
|
$
|
1,708
|
|
Foreign
|
|
202
|
|
|
1,370
|
|
Depreciation and amortization
|
|
21,005
|
|
|
10,027
|
|
|
|
$
|
22,847
|
|
|
$
|
13,105
|
|
|
|
|
|
|
Deferred tax asset, net
|
|
$
|
23,288
|
|
|
$
|
20,565
|
|
Tax Holidays and Carryforwards
Acquired future tax deductions consist of: (a) the net tax benefit of items expensed for financial statement purposes but capitalized and amortized for tax purposes, (b) the total tax benefited portion of the federal net operating loss ("NOL") carry-forwards of
$4.9 million
which will expire at various dates from 2020 to 2035 and (c) the net tax benefited portion of the foreign NOLs of
$1.1 million
, consisting of a NOL of
$6.6 million
with a valuation allowance of
$5.5 million
. Under
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Section 382 of the Internal Revenue Code, certain ownership changes limit the utilization of the NOL carry-forwards, and the amount of federal NOL carry-forwards recorded is the net federal benefit available.
Other carryforwards include research and development (“R&D”) state tax credit carryforwards of
$9.5 million
and
$0.3 million
for California and Utah, respectively, and a foreign tax credit carryforward of
$2.7 million
.
A substantial portion of our manufacturing operations in Costa Rica operate under various tax holidays and tax incentive programs which will expire in whole or in part in 2027. Certain of the holidays and may be extended if specific conditions are met. The net impact of these tax holidays and tax incentives was an increase to our net earnings by
$5.7 million
or
$0.27
per diluted share in 2017.
Foreign currency translation adjustments, and related tax effects, are an element of “other comprehensive income” and are not included in net income other than the revaluation of the associated deferred tax asset due to the Tax Act.
As of December 31, 2017, we had estimated
$24 million
of undistributed foreign earnings and profits. Pursuant to the Tax Act, our undistributed foreign earnings and profits were deemed repatriated as of December 31, 2017. We have not provided deferred tax liabilities for foreign withholding taxes and certain state income taxes on the undistributed earnings and profits from certain non-U.S. subsidiaries that will be permanently reinvested outside the United States.
Upon the distribution of foreign earnings and profits, certain foreign countries impose withholding taxes, subject to certain limitations, for use as credits against our U.S. tax liability, if any. If the foreign earnings and profits were distributed, we would need to accrue an additional income tax liability. However, we may also be allowed a credit against substantially all our U.S. tax liability for the taxes paid in foreign jurisdictions.
We are subject to taxation in the United States and various states and foreign jurisdictions. Our United States federal income tax returns for tax years 2014 and forward are subject to examination by the Internal Revenue Service. Our principal state income tax returns for tax years 2012 and forward are subject to examination by the state tax authorities. The total gross amount of unrecognized tax benefits as of
December 31, 2017
was
$6.5 million
which, if recognized, would impact the effective tax rate. We believe that adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax examinations cannot be predicted with certainty. As of December 31, 2017, it is not possible to estimate the amount of change, if any, in the unrecognized tax benefits that is reasonably possible within the next twelve months. We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. We have not accrued any penalties or interest as of December 31, 2017 or December 31, 2016
The following table summarizes our cumulative gross unrecognized tax benefits (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Beginning balance
|
|
$
|
2,000
|
|
|
$
|
1,772
|
|
|
$
|
4,115
|
|
Increases to prior year tax positions
|
|
77
|
|
|
77
|
|
|
25
|
|
Increases due to acquisitions
|
|
640
|
|
|
—
|
|
|
—
|
|
Increases to current year tax positions
|
|
3,992
|
|
|
345
|
|
|
345
|
|
Decreases to prior year tax positions
|
|
(12
|
)
|
|
(46
|
)
|
|
(2,399
|
)
|
Decrease related to settlements
|
|
—
|
|
|
—
|
|
|
(314
|
)
|
Decrease related to lapse of statute of limitations
|
|
(170
|
)
|
|
(148
|
)
|
|
—
|
|
Ending balance
|
|
$
|
6,527
|
|
|
$
|
2,000
|
|
|
$
|
1,772
|
|
NOTE 14. PRODUCT LINES, GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
Our primary product lines are Infusion Consumables, IV Solutions, Infusion Systems and Critical Care. The following table sets forth for the periods indicated, total revenue by product line as a percentage of total revenue:
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Product line
|
|
2017
|
2016
|
2015
|
Infusion Consumables
|
|
28
|
%
|
86
|
%
|
84
|
%
|
IV Solutions
|
|
40
|
%
|
—
|
%
|
—
|
%
|
Infusion Systems
|
|
23
|
%
|
—
|
%
|
—
|
%
|
Critical Care
|
|
4
|
%
|
14
|
%
|
16
|
%
|
Other
|
|
5
|
%
|
—
|
%
|
—
|
%
|
|
|
100
|
%
|
100
|
%
|
100
|
%
|
We sell products worldwide, on credit terms on an unsecured basis, as an OEM supplier, to independent medical supply distributors and directly to the end customer. The manufacturers and distributors, in turn, sell our products to healthcare providers. For the years ended December 31,
2016
and
2015
, we had worldwide sales to one manufacturer, Pfizer, of
30%
and
36%
, respectively, of consolidated revenue and as of December 31,
2016
, accounts receivable from Pfizer was
23%
of consolidated accounts receivable.
In February 2017, we completed the acquisition of Pfizer's HIS business, which we acquired in part to protect against the significant earnings exposure indicated above (see Note 2: Acquisitions and Strategic Transaction Expenses).
We report revenue on a “where-sold” basis, which reflects the revenue within the country or region in which the ultimate sale is made to our external customer.
The table below presents total company revenues, by major country or region (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
|
2016
|
|
2015
|
Europe
|
$
|
100,423
|
|
|
$
|
50,105
|
|
|
$
|
45,062
|
|
Canada
|
69,753
|
|
|
16,266
|
|
|
12,494
|
|
LATAM
|
57,851
|
|
|
29,920
|
|
|
27,780
|
|
APAC
|
54,465
|
|
|
10,304
|
|
|
7,047
|
|
Other
|
30,184
|
|
|
11,083
|
|
|
10,622
|
|
Total foreign
|
$
|
312,676
|
|
|
$
|
117,678
|
|
|
$
|
103,005
|
|
United States
|
979,937
|
|
|
261,694
|
|
|
238,663
|
|
Worldwide total
|
$
|
1,292,613
|
|
|
$
|
379,372
|
|
|
$
|
341,668
|
|
Domestic sales accounted for
76%
,
70%
and
71%
of total revenue in
2017
,
2016
and
2015
, respectively. International sales accounted for
24%
,
30%
and
29%
of total revenue in
2017
,
2016
and
2015
, respectively.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below presents our gross long-lived assets, consisting of property, plant and equipment, by country or region (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2017
|
|
2016
|
Costa Rica
|
|
$
|
80,956
|
|
|
$
|
—
|
|
Mexico
|
|
61,008
|
|
|
57,971
|
|
Other LATAM
|
|
19,432
|
|
|
—
|
|
Canada
|
|
4,362
|
|
|
—
|
|
Italy
|
|
6,860
|
|
|
4,320
|
|
Spain
|
|
5,601
|
|
|
—
|
|
Other Europe
|
|
2,625
|
|
|
966
|
|
APAC
|
|
5,169
|
|
|
41
|
|
Total foreign
|
|
$
|
186,013
|
|
|
$
|
63,298
|
|
United States
|
|
422,810
|
|
|
180,657
|
|
Worldwide total
|
|
$
|
608,823
|
|
|
$
|
243,955
|
|
NOTE 15. Stockholders' Equity
Treasury Stock
In July 2010, our Board of Directors approved a common stock purchase plan to purchase up to
$40.0 million
of our common stock. This plan has no expiration date and we have
$7.2 million
remaining on this purchase plan. During 2016, we purchased
$15.4 million
of our common stock. We did not purchase any of our common stock under our purchase plan in 2017 or 2015. We used the treasury stock to issue shares for stock option exercises, restricted stock grants and employee stock purchase plan stock purchases. We are currently limited on share purchases in accordance with the terms and conditions of our Credit Facility, (see Note 12: Long-Term Obligations).
In 2017, we withheld
27,636
shares of our common stock from employee vested restricted stock units in consideration for
$4.1 million
in payments for the employee's share award income tax withholding obligations. We have
no
shares remaining in treasury at December 31, 2017.
In 2016, we withheld
20,261
shares of our common stock from employee vested restricted stock units in consideration for
$1.9 million
in payments for the employee's share award income tax withholding obligations. We had
93
shares remaining in treasury at December 31, 2016.
Accumulated Other Comprehensive Income (Loss)
The components of AOCI, net of tax, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Unrealized Gains on Cash Flow Hedges
|
|
Other Adjustments
|
|
Total
|
Balance as of December 31, 2016
|
|
$
|
(21,272
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(21,272
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
6,694
|
|
|
184
|
|
|
(16
|
)
|
|
6,862
|
|
Amounts reclassified from AOCI
|
|
—
|
|
|
(549
|
)
|
|
—
|
|
|
(549
|
)
|
Other comprehensive income (loss)
|
|
6,694
|
|
|
(365
|
)
|
|
(16
|
)
|
|
6,313
|
|
Balance as of December 31, 2017
|
|
$
|
(14,578
|
)
|
|
$
|
(365
|
)
|
|
$
|
(16
|
)
|
|
$
|
(14,959
|
)
|
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. COMMITMENTS AND CONTINGENCIES
Lease Commitments
We have entered into various non-cancellable operating lease agreements for certain of our offices and facilities throughout the world with original lease periods expiring primarily between 2018 and 2024. Some of these agreements have escalating rent payment provisions. We recognize rent expense under such agreements on a straight-line basis.
Our
rent expense under operating leases was
$7.9 million
in
2017
,
$0.6 million
in
2016
and
$0.4 million
in
2015
.
As of December 31, 2017, future minimum lease payments under our non-cancelable operating leases are as follows over each of the next five years and thereafter (in millions):
|
|
|
|
|
|
2018
|
|
$
|
8,775
|
|
2019
|
|
5,907
|
|
2020
|
|
4,059
|
|
2021
|
|
3,214
|
|
2022
|
|
3,105
|
|
Thereafter
|
|
6,446
|
|
Total
|
|
$
|
31,506
|
|
Legal Proceedings
Beginning in November 2016, purported class actions were filed in the U.S. District Court for the Northern District of Illinois against Pfizer subsidiaries, Hospira, Inc., Hospira Worldwide, Inc. and certain other defendants relating to the intravenous saline solutions part of the HIS business. Plaintiffs seek to represent classes consisting of all persons and entities in the U.S. who directly purchased intravenous saline solution sold by any of the defendants from January 1, 2013 until the time the defendants’ allegedly unlawful conduct ceases. Plaintiffs allege that the defendants’ conduct restricts output and artificially fixes, raises, maintains and/or stabilizes the prices of intravenous saline solution sold throughout the U.S. in violation of federal antitrust laws. Plaintiffs seek treble damages (for themselves and on behalf of the putative classes) and an injunction against defendants for alleged price overcharges for intravenous saline solution in the U.S. since January 1, 2013. On February 3, 2017, we completed the acquisition of the HIS business from Pfizer. This litigation is the subject of a claim for indemnification against us by Pfizer and a cross-claim for indemnification against Pfizer by us under the HIS stock and asset purchase agreement ("SAPA").
In addition, in August 2015, the New York Attorney General issued a subpoena to Hospira, Inc. requesting that the company provide information regarding certain business practices in the intravenous solutions part of the HIS business. Separately, in April 2017, we received a grand jury subpoena issued by the United States District Court for the Eastern District of Pennsylvania, in connection with an investigation by the U.S. Department of Justice, Antitrust Division. The subpoena calls for production of documents related to the manufacturing, selling, pricing and shortages of intravenous solutions, including saline, as well as communications among market participants regarding these issues. The Department of Justice investigation is the subject of cross-claims for indemnification by both us and Pfizer under the SAPA. We will coordinate with Pfizer to produce records to the New York Attorney General and the Department of Justice.
We have an ongoing dispute with a product partner that may result in a redefinition of our contractual arrangement or in the rights or remedies determined under such arrangement. We do not expect this dispute to have a material adverse effect on our financial position or results of operations.
In addition to the legal matters described above, we are from time to time involved in various legal proceedings, either as a defendant or plaintiff, most of which are routine litigation in the normal course of business. We believe that the resolution of the legal proceedings in which we are involved will not have a material adverse effect on our financial position or results of operations.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Off Balance Sheet Arrangements
In the normal course of business, we have agreed to indemnify our officers and directors to the maximum extent permitted under Delaware law and to indemnify customers as to certain intellectual property matters related to sales of our products. There is no maximum limit on the indemnification that may be required under these agreements. We have never incurred, nor do we expect to incur, any liability for indemnification.
Contingencies
We have a contractual earn-out arrangement in connection with our acquisition of the HIS business, whereby Pfizer may be entitled up to an additional
$225 million
in cash upon achievement of performance targets for the company for the three years ending December 31, 2019, see (Note 2: Acquisitions and Strategic Transaction Expenses). The amount to be paid cannot be determined until the earn-out period has expired.
NOTE 17. COLLABORATIVE AND OTHER ARRANGEMENTS
On February 3, 2017, we entered into two MSA's, (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 MSA's provide each party with mutually beneficial interests and both of the MSA's 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.
On February 3, 2017, as part of the HIS business acquisition, we entered into an agreement with Pfizer, whereby Pfizer will provide certain transitional services to us for finance, business technology, regulatory, human resources, global operations, procurement, quality and global commercial operation services ("Enabling Function Services"). We pay a monthly service fee for each service provided, and share equally with Pfizer in certain set-up costs and, as applicable, service exit costs. Our share of the set-up costs and service exit costs, in the aggregate, are not to exceed
$22.0 million
. The service fees are subject to a fee cap of (i)
$62.5 million
during the initial twelve month period and (ii)
$31.3 million
during the subsequent six month period. Only the Enabling Function Services are subject to the fee cap, any services provided after expiration of the agreement or services that are not Enabling Function Services may result in service fees outside the fee cap. The service fees are intended to reasonably approximate Pfizer’s cost of providing the Enabling Function Services. We may terminate, in whole only, any particular service and the fee cap would be reduced proportionate to the services terminated. Partial reduction in the provision of any specific service may be made but only with the prior written consent of Pfizer.
On February 3, 2017, as part of the HIS business acquisition, we also entered into a reverse transitional services agreement, where we will provide to Pfizer certain transitional services ranging in term from three to eighteen months. Services include support for real estate, research and development, infrastructure, logistics, quality, site operations, safety, commercial and finance, and regulatory support services.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 18. SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Mar. 31
|
|
Jun. 30
|
|
Sept. 30
|
|
Dec. 31
|
|
|
(in thousands except per share data)
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
247,739
|
|
|
$
|
331,514
|
|
|
$
|
343,236
|
|
|
$
|
370,124
|
|
Gross profit
|
|
$
|
88,945
|
|
|
$
|
88,062
|
|
|
$
|
111,598
|
|
|
$
|
137,490
|
|
Net income (loss)
|
|
$
|
55,863
|
|
|
$
|
(37,060
|
)
|
|
$
|
136
|
|
|
$
|
49,705
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.03
|
|
|
$
|
(1.87
|
)
|
|
$
|
0.01
|
|
|
$
|
2.47
|
|
Diluted
|
|
$
|
2.86
|
|
|
$
|
(1.87
|
)
|
|
$
|
0.01
|
|
|
$
|
2.33
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
89,855
|
|
|
$
|
96,721
|
|
|
$
|
97,108
|
|
|
$
|
95,688
|
|
Gross profit
|
|
$
|
49,233
|
|
|
$
|
50,132
|
|
|
$
|
51,273
|
|
|
$
|
50,760
|
|
Net income
|
|
$
|
18,160
|
|
|
$
|
16,606
|
|
|
$
|
18,806
|
|
|
$
|
9,512
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.13
|
|
|
$
|
1.03
|
|
|
$
|
1.16
|
|
|
$
|
0.58
|
|
Diluted
|
|
$
|
1.08
|
|
|
$
|
0.98
|
|
|
$
|
1.09
|
|
|
$
|
0.54
|
|
______________________________________
On February 3, 2017, we acquired HIS, see Note 2, Acquisitions, Strategic Transaction and Integration Costs.