# ICU MEDICAL INC/DE (ICUI) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ICU MEDICAL INC/DE's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/883984/000088398422000014/icui-20211231.htm
Accession: 0000883984-22-000014
Filing date: 2022-02-25
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ICUI/
All MD&A years: /company/ICUI/mda/
Next year: /company/ICUI/mda/fy2022/ (FY 2022)

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

The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes thereto.

Business Overview and Highlights

We are one of the world's leading pure-play infusion therapy companies with global operations and a wide-ranging product portfolio that includes IV solutions, IV smart pumps with pain management and safety software technology, dedicated and nondedicated IV sets and needlefree connectors designed to help meet clinical, safety and workflow goals. In addition, we manufacture automated pharmacy IV compounding systems with workflow technology, closed system transfer devices for preparing and administering hazardous IV drugs and cardiac monitoring systems for critically ill patients.

Acquisition of Smiths Medical 2020 Limited

During September 2021, we entered into a definitive agreement to acquire Smiths Medical 2020 Limited ("Smiths Medical"), the holding company of Smiths Group plc's global medical device business and, on January 6, 2022, the acquisition closed for a purchase price of $1.9 billion in cash, 2.5 million of fully paid and non-assessable shares of our common stock, par value $0.10 per share and a potential contingent earn-out payment of $100.0 million in cash, based on our common stock performance and other considerations. Results of operations of acquired companies are included in our consolidated financial results from the date of acquisition; accordingly, Smiths Medical will be consolidated beginning in the first quarter of 2022.

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To partially finance the acquisition, on January 6, 2022 we entered into a credit agreement with Wells Fargo Bank, National Association and other lenders. The credit agreement provides for $2.2 billion of Senior Secured Credit Facilities, including a term loan A facility of $850.0 million, a term loan B facility of $850.0 million and a revolving credit facility of $500.0 million. See "Liquidity and Capital Resources" in the remainder of this item and Note 17 in our accompanying consolidated financial statements for additional information.

COVID-19

The novel coronavirus and its variants ("COVID-19") continues to have an impact on our business operations. Our manufacturing, distribution and pump service facilities continue to operate under our business continuity plan and our precautionary safety measures implemented to maximize the safety of our employees and to mitigate disruption to our business remain in effect.

While we continually monitor the ongoing and evolving impact of the effect of the COVID-19 pandemic on our operations the overall impact will not be fully reflected in our results of operations until future periods. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be fully predicted at this time, as such, the impact of the pandemic on our overall financial performance remains uncertain and cannot as yet be quantified. See “Part I. Item 1A. Risk Factors” for discussion of the risks and uncertainties associated with the COVID-19 pandemic.

Consolidated Results of Operations

The following table summarizes our total worldwide revenue by domestic and international markets by amount and as a percentage of total revenue (in millions, except percentages):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","2019"],["","$","","% of Revenue","","$","","% of Revenue","","$","","% of Revenue"],["Domestic","$","941.8","","","72","%","","$","910.6","","","72","%","","$","923.3","","","73","%"],["International","374.5","","","28","%","","360.4","","","28","%","","342.9","","","27","%"],["Total Revenue","$","1,316.3","","","100","%","","$","1,271.0","","","100","%","","$","1,266.2","","","100","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["Product line","","2021","","2020","","2019"],["Infusion Consumables","","42","%","","37","%","","37","%"],["Infusion Systems","","27","%","","28","%","","26","%"],["IV Solutions","","27","%","","31","%","","33","%"],["Critical Care","","4","%","","4","%","","4","%"],["","","100","%","","100","%","","100","%"]]
[[/GREPCENT_TABLE]]

As of December 31, 2021, we manage our product distribution in the U.S. through a network of two owned and one leased distribution facilities in combination with independent distributors and third-party fulfillment and logistics providers. Our end customers, which include healthcare providers and original equipment manufacturer suppliers, may order and receive our products directly from us or through an independent full-line distributor. Internationally, we manage distribution utilizing international regional hubs and through independent distributors.

In the U.S. a substantial amount of our products are sold to group purchasing organization ("GPO") member hospitals. We believe that as healthcare providers continue to either consolidate or join major buying organizations, the success of our products will depend, in part, on our ability, either independently or through strategic relationships to secure long-term contracts with large healthcare providers and major buying organizations.  Although we believe that we are not dependent on any single distributor, large healthcare provider or major buying organization for distribution of our products, the loss of a strategic relationship with any one of these organizations or a decline in demand for our products could have a material adverse effect on our operating results.

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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 COVID-19 pandemic surges and its impact on hospital admissions and procedure volumes along with production scheduling and customer inventory levels, and less by seasonality. Our expenses often do not fluctuate in the same manner as net sales, which may cause fluctuations in operating income that are disproportionate to fluctuations in our revenue. 

We present income statement data in Item 8. Financial Statements and Supplementary Data. The following table shows, for the three most recent years, the percentages of each income statement caption in relation to total revenues: 

[[GREPCENT_TABLE]]
[["","","Percentage of Revenues"],["","","2021","","2020","","2019"],["Total revenues","","100","%","","100","%","","100","%"],["Gross profit","","37","%","","36","%","","37","%"],["Selling, general and administrative expenses","","23","%","","22","%","","22","%"],["Research and development expenses","","4","%","","3","%","","4","%"],["Restructuring, strategic transaction and integration expenses","","1","%","","2","%","","6","%"],["Change in fair value of contingent earn-out","","\u2014","%","","1","%","","(4)","%"],["Contract settlement","","\u2014","%","","\u2014","%","","\u2014","%"],["Total operating expenses","","28","%","","28","%","","28","%"],["Income from operations","","9","%","","8","%","","9","%"],["Interest expense","","\u2014","%","","\u2014","%","","\u2014","%"],["Other income, net","","\u2014","%","","\u2014","%","","1","%"],["Income before income taxes","","9","%","","8","%","","10","%"],["Provision for income taxes","","1","%","","1","%","","1","%"],["Net income","","8","%","","7","%","","9","%"]]
[[/GREPCENT_TABLE]]

Total revenues were $1.3 billion, $1.3 billion and $1.3 billion for 2021, 2020 and 2019, respectively.

In addition to comparing changes in revenue on a U.S. GAAP basis, we also compare the changes in revenue from one period to another using constant currency. We provide constant currency information to enhance the visibility of underlying business trends, excluding the effects of changes in foreign currency translation rates. To calculate our constant currency results, we apply the average exchange rate for revenues from the prior year to the current year results. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with GAAP.

Infusion Consumables

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","$ change","","% change","","$ change","","% change"],["","2021","","2020","","2019","","2021 over 2020","","2020 over 2019"],["Infusion Consumables","$","555.2","","","$","473.7","","","$","477.6","","","$","81.5","","","17.2","%","","$","(3.9)","","","(0.8)","%"]]
[[/GREPCENT_TABLE]]

Infusion Consumables revenue increased in 2021, as compared to 2020. The increase was due to lower hospital census in 2020 driven by the onset of the COVID-19 pandemic, growth in our global oncology, U.S. core infusion and renal products

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and the impact from foreign exchange. On a constant currency basis, Infusion Consumables revenue would have been $546.3 million, an increase of $72.6 million or 15.3%, as compared to 2020.

Infusion Consumables revenue decreased in 2020, as compared to 2019. The decrease was mostly driven by overall lower demand for our products due to the COVID-19 pandemic, partially offset by sales from new customers and sales of our ClearGuard HD product, which we acquired in our fourth quarter 2019 acquisition of Pursuit. On a constant currency basis, Infusion Consumables revenue was comparable at $474.0 million for 2020, as the full year impact of foreign currency was negligible.    

Infusion Systems

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","$ change","","% change","","$ change","","% change"],["","2021","","2020","","2019","","2021 over 2020","","2020 over 2019"],["Infusion Systems","$","352.3","","","$","359.7","","","$","328.3","","","$","(7.4)","","","(2.1)%","","$","31.4","","","9.6%"]]
[[/GREPCENT_TABLE]]

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

Infusion Systems revenue increased in 2020, as compared to 2019. The increase in revenue was primarily due to high demand for our infusion pumps during the COVID-19 pandemic, offset partially by lower demand for our dedicated infusion sets and losses of our non-core ambulatory pump business. On a constant currency basis Infusion Systems revenue in 2020 would have been $364.7 million, an increase of $36.4 million or 11.1%, as compared to 2019.

IV Solutions

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","$ change","","% change","","$ change","","% change"],["","2021","","2020","","2019","","2021 over 2020","","2020 over 2019"],["IV Solutions","$","359.5","","","$","389.0","","","$","415.0","","","$","(29.5)","","","(7.6)%","","$","(26.0)","","","(6.3)%"]]
[[/GREPCENT_TABLE]]

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

IV Solutions sales decreased in 2020, as compared to 2019, due to lower contract manufacturing sales to Pfizer and higher sales in the first quarter of 2019 to non-contracted customers.

Critical Care

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","$ change","","% change","","$ change","","% change"],["","2021","","2020","","2019","","2021 over 2020","","2020 over 2019"],["Critical Care","$","49.3","","","$","48.6","","","$","45.3","","","$","0.7","","","1.4","%","","$","3.3","","","7.3","%"]]
[[/GREPCENT_TABLE]]

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

Critical Care revenue increased in 2020, as compared to 2019, primarily as a result of growth in the Asia region and improved manufacturing capacity.

Gross Margins

Gross margins were 37.3%, 36.3% and 37.3% for 2021, 2020 and 2019, respectively. 

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

The decrease in gross margin in 2020, as compared to 2019 was primarily due to lower IV Solutions manufacturing volumes and unfavorable product mix as a result of lower demand for our consumables products during the COVID-19 pandemic.

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

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","$ change","","% change","","$ change","","% change"],["","2021","","2020","","2019","","2021 over 2020","","2020 over 2019"],["SG&A","$","302.6","","","$","284.0","","","$","277.0","","","$","18.6","","","6.5","%","","$","7.0","","","2.5","%"]]
[[/GREPCENT_TABLE]]

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

Consolidated SG&A expenses increased in 2020, as compared to 2019. Dealer fees increased $9.3 million, depreciation and amortization expense increased $7.1 million, compensation expense increased $5.5 million, and stock compensation increased $2.0 million. Offsetting these expense increases was a $6.3 decrease in bad debt expense, a $6.3 million decrease in travel expenses, a $3.7 million decrease in consulting expenses, and a $2.8 million decrease in sales and marketing expenses. Dealer fees increased due to a change to a distribution model from a direct model in Canada and an increase in revenue from distributors. Depreciation and amortization expense increased primarily as a result of the increase in amortization base due to the November 2019 acquisition of Pursuit. Compensation expense increased as a result of lower incentive compensation recognized in the prior year due to results below performance targets. Stock compensation increased in the current year due to a change in the number of performance shares estimated to vest on one of our non-executive performance awards. Bad debt expense is estimated based on an analysis of the expected losses on the accounts receivables at the reporting date, which varies from period-to-period due to the quality of those receivables. Travel expenses decreased in the current year, as compared to prior year, due to travel restrictions in response to COVID-19. Consulting expense was higher in 2019 due to charges incurred related to tax compliance and IT infrastructure expenses. Sales and marketing expenses decreased due to the impact of COVID-19 on trade shows, conferences, and related expenses.

Research and Development ("R&D") Expenses

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

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[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","$ change","","% change","","$ change","","% change"],["","2021","","2020","","2019","","2021 over 2020","","2020 over 2019"],["R&D","$","47.5","","","$","42.9","","","$","48.6","","","$","4.6","","","10.7","%","","$","(5.7)","","","(11.7)","%"]]
[[/GREPCENT_TABLE]]

R&D expenses increased in 2021, as compared to 2020, and decreased in 2020, as compared to 2019. Fluctuations in our R&D expenses are due to the timing and nature of various R&D projects. R&D expenses are primarily related to compensation and benefit expenses, consulting fees, production supplies, samples, travel costs, utilities and other miscellaneous administrative costs incurred on our R&D projects in progress during each year.

Restructuring, Strategic Transaction and Integration Expenses

Restructuring, strategic transaction and integration expenses were $18.0 million, $28.4 million and $80.6 million in 2021, 2020 and 2019, respectively.

Restructuring Charges

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

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

In 2019, restructuring charges were $8.4 million. These charges were primarily related to a one-time charge to move our U.S. pump service depot to our existing Salt Lake City facility and other plant restructuring.

Strategic Transaction and Integration Expenses

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

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

In 2019, we incurred $72.2 million in strategic transaction and integration expenses primarily related to the integration of the HIS business. Integration expenses included a one-time strategic supply chain restructuring charge of $22.1 million, which reduced our contracted commitments to our third party manufacturer and we incurred charges related to our final Pfizer separation costs and clean-up, which included a $12.7 million non-cash write-off of related assets.

Change in fair value of contingent earn-out

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

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

In 2019, the fair value revaluation of our HIS contingent earn-out liability resulted in a change in value of $47.4 million reducing the liability balance to zero. The earn-out period ended on December 31, 2019 and as of that date we determined we did not meet the necessary performance targets that would require payout of any of the HIS earn-out liability. Pfizer disputed our determination that the performance targets requiring payout of the HIS earn-out liability were not met, and the dispute entered into binding arbitration. In August 2021, the arbitrator concluded that the necessary performance targets that would require payout of the HIS earn-out were not met, and as a result Pfizer is not entitled to any payments in connection with the HIS earn-out liability.

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Contract Settlement

In 2021, we recorded $0.1 million in contract settlement expense. In 2020, we recorded $1.0 million in contract settlement income related to the resolution of a dispute with one of our suppliers. In 2019, we incurred a $5.7 million charge related to the resolution of a dispute with a product partner, which resulted in a redefinition of our contractual arrangement and in the rights and remedies determined under such arrangement.

Interest Expense

Interest expense was $0.9 million, $1.8 million and $0.5 million in 2021, 2020 and 2019, respectively.

In 2021 and 2019, interest expense primarily includes the per annum commitment fee charged on the unused portion of the revolver under our five-year Revolving Credit Facility ("Credit Facility") and the amortization of financing costs that were incurred in 2017 in connection with entering into the Credit Facility. The per annum commitment fee was based on the consolidated total leverage ratio in effect and ranged between 0.15% to 0.30% on the unused portion of the Credit Facility (see Note 11: Long-Term Obligations in our accompanying consolidated financial statements for additional information).

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

In January 2022, we entered into senior secured credit facilities that refinanced our existing Credit Facility in full, see "Liquidity and Capital Resources" in the remainder of this item for additional information and the estimated impact to future interest expense.

Other Income, net

Other income, net was $0.8 million, $1.1 million and $7.9 million in 2021, 2020 and 2019, respectively.  In 2021, other income, net was primarily related to $2.8 million of interest income and $0.7 million of miscellaneous income partially offset by $1.7 million of loss from disposed assets and $1.0 million in foreign exchange losses. In 2020, other income, net was primarily related to interest income of $3.7 million, miscellaneous income, net of $2.8 million and gain from the disposal of property, plant and equipment of $1.8 million, which was mostly offset by $7.2 million in foreign exchange losses incurred as a result of the strengthening of the U.S. dollar from the impact of COVID-19 during the first half of the year. In 2019, other income, net was primarily due to interest income of $6.8 million related to our banking and investment accounts.

Income taxes

Income taxes were accrued at an estimated annual effective tax rate of 16%, 11% and 12% in 2021, 2020 and 2019, respectively.

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

The effective tax rate in 2020 differs from the federal statutory rate of 21% principally because of the effect of the mix of U.S. and foreign incomes, state income taxes, global intangible low-taxed income ("GILTI"), foreign-derived intangible income ("FDII") and tax credits. The effective tax rate in 2020 included a tax benefit of $5.3 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period. The effective tax rate for 2020 also included U.S. federal and state return-to-provision adjustments net of related reserve changes for the year ended December 31, 2019 of $3.8 million tax benefit primarily due to changes in estimates for GILTI, FDII, and related foreign tax credits.

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The effective tax rate in 2019 differs from the federal statutory rate of 21% principally because of the effect of the mix of U.S. and foreign incomes, state income taxes, GILTI and tax credits. The effective tax rate for 2019 included a tax benefit of $9.6 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period. The effective tax rate for 2019 was also impacted by the repatriation of certain intellectual property and assets from a liquidation of one of our foreign subsidiaries to the U.S. parent. In accordance with the changes to the accounting for income tax effects of such intra-entity transfers of assets, we recorded a net tax benefit of $3.8 million related to the liquidation. Lastly, the effective tax rate during 2019 included a tax expense of $2.2 million related to return-to-provision adjustments for the year ended December 31, 2018 primarily due to changes in estimates for our U.S. GILTI inclusion.

Liquidity and Capital Resources

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

Sources of Liquidity

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

Funds generated from operations are held in cash and cash equivalents and investment securities. During 2021, our cash and cash equivalents and short-term investment securities increased by $156.5 million from $410.8 million at December 31, 2020 to $567.2 million at December 31, 2021. Our short-term investment portfolio consists of investment-grade corporate bonds and is primarily intended to facilitate capital preservation.

Credit Facilities and Access to Capital

On November 8, 2017, we entered into a five year revolving Credit Facility with various lenders which includes $150.0 million in borrowing capacity available for revolving credit loans and may also be used to borrow, on same-day notice under a swingline, the lesser of $10.0 million and the aggregate unused amount of the revolving credit available. Our five-year $150.0 million Credit Facility provides us with fast, flexible funding for operational needs. There were no outstanding borrowings under the Credit Facility at December 31, 2021.

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

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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 entered into Senior Secured Credit Facilities in January 2022 which terminated our existing Credit Facility, see below.

2022 Senior Secured Credit Facilities

We entered into a credit agreement with various lenders dated January 6, 2022 in connection with the closing of the Smiths Medical acquisition. The credit agreement provides for senior secured credit facilities, which include a five-year term loan A facility of $850.0 million, a seven-year term loan B facility of $850.0 million and a five-year revolving credit facility of $500.0 million. The proceeds from the term loans were used to finance a portion of the cash consideration for the Smiths Medical acquisition (see Note 17: Subsequent Events in our accompanying consolidated financial statements for additional information). The outstanding aggregate principal amount of the term loans is $1.7 billion as of the issuance of this report, which includes the term loan A that will mature in January 2027 and the term loan B that will mature in January 2029. The proceeds of future borrowings under the $500.0 million revolving credit facility, which expires in January 2027, may be used as a source of liquidity to support our ongoing working capital requirements and other general corporate purposes. There are no outstanding borrowings under the $500.0 million revolving credit facility as of the issuance of this report. Our existing $150.0 million Credit Facility, described above which was set to expire in November 2022, was terminated upon entering into the new Senior Secured Credit Facilities. As part of entering into the Senior Secured Credit Facilities we were assigned issuer and term loan B facility credit ratings. At the time of this report, our issuer and term loan B credit ratings assigned and outlook were as follows:

[[GREPCENT_TABLE]]
[["","","Issuer/Term Loan B Credit Ratings","Outlook"],["Moody's","","Ba3","Stable"],["Fitch","","BB/BBB-","Stable"],["Standard & Poor's","","BB/BB","Stable"]]
[[/GREPCENT_TABLE]]

We believe that our existing cash and cash equivalents along with cash flows expected to be generated from future operations and the funds received under the Senior Secured Credit Facilities will provide us with sufficient liquidity to finance our cash requirements for the next twelve months. In the event that we experience downturns, cyclical fluctuations in our business that are more severe or longer than anticipated, fail to achieve anticipated revenue and expense levels, or have significant unplanned cash expenditures, we may need to obtain or seek alternative sources of capital or financing, and we can provide no assurances that the terms of such capital or financing will be available to us on favorable terms, if at all. Our ability to generate cash flows from operations, issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers, deterioration in our key financial ratios or credit ratings or other significantly unfavorable changes in conditions. See Part I. Item 1A. Risk Factors” for discussion of the risks and uncertainties associated with our debt financing.

Uses of Liquidity

Capital Expenditures

Our capital expenditures relate to the expansion and maintenance of our business. While we can provide no assurances, we estimate that our capital expenditures in 2022 will be in the range of $100 million to $120.0 million. We anticipate making additional investments in machinery and equipment in our manufacturing operations in Costa Rica, Europe, Mexico and the U.S. to support new and existing products and in infusion pumps that get placed with customers outside the U.S. We expect to use our cash and cash equivalents to fund our capital purchases. Amounts of spending are estimates and actual spending may substantially differ from those amounts.

2022 Acquisitions

In September 2021, we entered into a definitive agreement to acquire Smiths Medical and on January 6, 2022 the acquisition was completed. We financed the $1.9 billion cash portion of the purchase price at closing with a combination of proceeds from the Senior Secured Credit Facilities and our cash and cash equivalents. See above and Note 17: Subsequent Events in our accompanying consolidated financial statements for additional information.

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Contractual Obligations

Our principal commitments at December 31, 2021 include both short and long-term future obligations.

Operating Leases

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

Long-term Debt Obligations

As discussed above, in January 2022, we incurred borrowings under Senior Secured Credit Facilities. The principal repayment obligations and estimated interest payments on the term loans and estimated commitment fee payments on the revolver are estimated in the below table. Interest payments on the term loans were estimated using an Adjusted Term SOFR rate and a starting applicable margin on of 1.75% for term loan A and 2.50% for term loan B and the revolver commitment fees were estimated using the initial rate of 0.25%. The applicable margin rate and commitment fee rate will change from time to time in accordance with a preset pricing grid based on the leverage ratio (see Note 17: Subsequent Events in our accompanying consolidated financial statements for pricing grids related to the Senior Secured Credit Facilities). We expect to fund these obligations with our existing cash and cash equivalents and cash generated from our future operations.

[[GREPCENT_TABLE]]
[["","(in millions)"],["","2022","2023","2024","2025","2026","Thereafter"],["Term Loan A Principal Payments","$","15.9","","$","21.3","","$","42.5","","$","42.5","","$","63.8","","$","664.1"],["Term Loan A Interest Payments","20.2","","26.0","","27.8","","28.6","","27.8","","0.4"],["Term Loan B Principal Payments","6.4","","8.5","","8.5","","8.5","","8.5","","809.6"],["Term Loan B Interest Payments","26.6","","31.8","","36.4","","39.6","","40.4","","80.3"],["Revolver Commitment Fee","1.2","","1.1","","0.9","","0.8","","0.8","","\u2014"],["","$","70.3","","$","88.7","","$","116.1","","$","120.0","","$","141.3","","$","1,554.4"]]
[[/GREPCENT_TABLE]]

Minimum Purchase Obligations

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

Other Future Capital Investments

In connection with the January 2022 acquisition of Smiths Medical we estimate the investment needed over the next three years for restructuring and integration expenses along with spending to support quality systems and quality compliance objectives to be in the range of $200.0 million to $300.0 million. We expect to fund these obligations with our cash and cash equivalents and cash generated from our operations.

Indemnifications

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.

Historical Cash Flows

Cash Flows from Operating Activities

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

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

Our cash provided by operations was $101.9 million in 2019. Net income plus adjustments for non-cash net expenses contributed $213.6 million to cash provided by operations. Net cash used in operations as a result of changes in operating assets and liabilities was $111.6 million. The changes in operating assets and liabilities included a $43.7 million decrease in accrued liabilities, a $29.8 million increase in other assets, a $25.0 million increase in inventories, a $23.7 million increase in accounts receivable, and a $2.7 million decrease in accounts payable. Offsetting these amounts was a $8.6 million decrease in prepaid expenses and other current assets and $4.7 million in net changes in income taxes, including excess tax benefits and deferred income taxes. The decrease in accrued liabilities was primarily a result of the payout of accrued compensation, partially offset by an increase in certain accruals including $22.1 million in accrued costs related to the initial ramp down of IV Solution production. The increase in other assets was primarily related to the purchase of spare parts. The increase in inventory was primarily due to an increase in our finished goods safety stock. The increase in accounts receivable was mainly due to the reclassification of receivables from Pfizer and the timing of revenue and collections. Beginning in 2019, receivables from Pfizer were included in accounts receivable and not in a separate related-party receivable line item as in the prior year. As of December 31, 2018, Pfizer had sold all of its shares of our common stock thereby ending its related-party relationship with us. The decrease in accounts payable was due to the timing of payments. The decrease in prepaid expenses and other current assets was primarily due to the collection of receivable amounts owed from Pfizer. The net changes in income taxes was a result of the timing of payments.

Cash Flows from Investing Activities

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

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[[GREPCENT_TABLE]]
[["","","For the Years Ended December 31,","","Variance"],["","","2021","","2020","","2019","","2021","","2020"],["Investing Cash Flows:"],["Purchases of property, plant and equipment","","$","(68,542)","","","$","(92,005)","","","$","(97,312)","","","$","23,463","","","$","5,307","","(1)"],["Proceeds from sale of assets","","218","","","6,176","","","33","","","(5,958)","","","6,143","","(2)"],["Intangible asset additions","","(12,627)","","","(8,385)","","","(8,728)","","","(4,242)","","","343","","(3)"],["Business acquisitions, net of cash acquired","","(14,452)","","","\u2014","","","(76,133)","","","(14,452)","","","76,133","","(4)"],["Investments in non-marketable equity securities","","(3,250)","","","\u2014","","","\u2014","","","(3,250)","","","\u2014","","(5)"],["Purchases of investment securities","","(10,034)","","","(32,825)","","","(26,040)","","","22,791","","","(6,785)","","(6)"],["Proceeds from sale of investment securities","","18,000","","","28,900","","","41,292","","","(10,900)","","","(12,392)","","(7)"],["Net cash used in investing activities","","$","(90,687)","","","$","(98,139)","","","$","(166,888)","","","$","7,452","","","$","68,749"]]
[[/GREPCENT_TABLE]]

__________________________

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

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

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

(4)    Our business acquisitions will vary from period to period based upon our current growth strategy and our ability to execute on desirable target companies. In 2021, we acquired a small foreign infusion systems supplier for approximately $15.4 million. In 2019, we acquired Pursuit for approximately $75.0 million in cash consideration and we acquired a small foreign distributor for approximately $4.6 million.

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

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

(7)    Proceeds from the sale of our investment securities will vary based on the maturity dates of the investments.

Cash Flows from Financing Activities

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

[[GREPCENT_TABLE]]
[["","","For the Years Ended December 31,","","Variance"],["","","2021","","2020","","2019","","2021","","2020"],["Financing Cash Flows:"],["Proceeds from short-term debt","","$","\u2014","","","$","150,000","","","$","\u2014","","","$","(150,000)","","","$","150,000","","(1)"],["Repayment of short-term debt","","\u2014","","","(150,000)","","","\u2014","","","150,000","","","(150,000)","","(1)"],["Proceeds from exercise of stock options","","9,372","","","13,193","","","7,732","","","(3,821)","","","5,461","","(2)"],["Payments on finance leases","","(607)","","","(357)","","","\u2014","","","(250)","","","(357)"],["Payment of contingent earn-out","","(17,300)","","","\u2014","","","\u2014","","","(17,300)","","","\u2014","","(3)"],["Tax withholding payments related to net share settlement of equity awards","","(8,335)","","","(12,876)","","","(18,639)","","","4,541","","","5,763","","(4)"],["Net cash used in financing activities","","$","(16,870)","","","$","(40)","","","$","(10,907)","","","$","(16,830)","","","$","10,867"]]
[[/GREPCENT_TABLE]]

__________________________

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

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

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

(4)    In 2021, our employees surrendered 40,350 shares of our common stock from vested restricted stock awards as consideration for approximately $8.3 million in minimum statutory withholding obligations paid on their behalf. In 2020, our employees surrendered 67,041 shares of our common stock from vested restricted stock awards as consideration for approximately $12.9 million in minimum statutory withholding obligations paid on their behalf. In 2019, our employees surrendered 80,186 shares of our common stock from vested restricted stock awards as consideration for approximately $18.6 million in minimum statutory withholding obligations paid on their behalf.

Our common stock purchase plan, which authorized the repurchase of up to $100.0 million of our common stock, was approved by our Board of Directors in August 2019. This plan has no expiration date. As of December 31, 2021, all of the $100.0 million available for purchase was remaining under the plan. We are limited on share purchases in accordance with the terms and conditions of our Credit Facility (see Note 11: Long-Term Obligations in our accompanying consolidated financial statements).  

New Accounting Pronouncements

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

Critical Accounting Policies and Estimates

Our significant accounting policies are summarized in Note 1 to the Consolidated Financial Statements. In preparing our consolidated financial statements in accordance with GAAP and pursuant to the rules and regulations of the SEC, we make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base our estimates, assumptions and judgments on historical experience and other factors that we believe are reasonable. We evaluate our estimates, assumptions and judgments on a regular basis and apply our accounting policies on a consistent basis. We believe that the estimates, assumptions and judgments involved in the accounting for revenue recognition, accounts receivable and business combinations have the most potential impact on our consolidated financial statements. Historically, our estimates, assumptions and judgments relative to our critical accounting policies have not differed materially from actual results.

Revenue recognition 

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

The vast majority of our sales of Infusion Consumables, Infusion Systems, IV Solutions and Critical Care products are sold on a standalone basis and control of these products transfers to the customer upon shipment.

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

Arrangements with Multiple Deliverables

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

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

Accounts receivable 

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

Business Combinations

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

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:

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

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

•Identifiable Intangible Assets - The fair value of the significant acquired identifiable intangible assets generally is determined using varying methods under the income approach. This method starts with a forecast of all of the expected future net cash flows associated with the asset and then adjusts the forecast to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams.

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

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

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:

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

•factors affecting operating results, such as shipments to specific customers; reduced dependence on current proprietary products; loss of a strategic relationship; change in demand; domestic and international sales; expansion in international markets, selling prices; future increases or decreases in sales of certain products and in certain markets and distribution channels; maintaining strategic relationships and securing long-term and multi-product contracts with large healthcare providers and major buying organizations; increases in systems capabilities; introduction, development and sales of new products, acquisition and integration of businesses and product lines (including the Smiths Medical business); 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

•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 Smiths Medical 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.

55

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:

•the impacts of the COVID-19 pandemic on us, our business and on domestic and global economies generally;

•the integration of Smiths Medical by the Company being more difficult, time-consuming or costly than expected;

•general economic and business conditions, both in the U.S. and internationally;

•unexpected changes in our arrangements with Pfizer or our other large customers;

•outcome of litigation;

•fluctuations in foreign exchange rates and other risks of doing business internationally;

•increased competition for skilled workers;

•decreases in availability of the raw materials need to manufacture our products;

•the effect of price and safety considerations on the healthcare industry;

•competitive factors, such as product innovation, new technologies, marketing and distribution strength and price erosion;

•the successful development and marketing of new products;

•unanticipated market shifts and trends;

•the impact of legislation affecting government reimbursement of healthcare costs;

•changes by our major customers and independent distributors in their strategies that might affect their efforts to market our products;

•the effects of additional governmental regulations;

•unanticipated production problems;

•acquisition and integration expenses (including as it relates to the Smiths Medical acquisition);

•the availability of patent protection and the cost of enforcing and of defending patent claims;

•natural disasters and outbreak of disease or illness;

•labor shortages;

•supply chain constraints or disruptions;

•impact of inflation on raw materials, freight charges and labor, especially in the U.S.; and

•interest rate increases.

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.

56