ICU MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
Cash paid during the year for income taxes
|
$
|
9,675
|
|
|
$
|
12,598
|
|
|
$
|
5,109
|
|
Cash paid during the year for interest
|
$
|
549
|
|
|
$
|
709
|
|
|
$
|
2,047
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
Accounts payable for property, plant and equipment
|
$
|
13,912
|
|
|
$
|
26,522
|
|
|
$
|
5,376
|
|
|
|
|
|
|
|
Detail of assets acquired and liabilities assumed in acquisitions:
|
|
|
|
|
|
Fair value of assets acquired
|
$
|
91,019
|
|
|
|
|
$
|
886,569
|
|
Cash paid for acquisitions, net of cash acquired
|
(76,133
|
)
|
|
|
|
|
(162,448
|
)
|
Non-cash seller note
|
|
|
|
|
|
|
(75,000
|
)
|
Estimated working capital adjustment
|
—
|
|
|
|
|
|
4,253
|
|
Contingent consideration
|
(17,300
|
)
|
|
|
|
|
(19,000
|
)
|
Issuance of common stock for acquisitions
|
—
|
|
|
|
|
|
(413,139
|
)
|
Bargain purchase gain
|
—
|
|
|
|
|
(70,890
|
)
|
Goodwill, acquired during period
|
20,026
|
|
|
|
|
6,536
|
|
Liabilities assumed/Adjustments to liabilities assumed
|
$
|
(17,612
|
)
|
|
|
|
$
|
(156,881
|
)
|
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" or "we"), 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. We are one of the world's leading pure-play infusion therapy companies with 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. 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.
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.
Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year. These reclassifications had no impact on net income, stockholders' equity or cash flows as previously reported. For the years ended December 31, 2018 and 2017, we reported foreign exchange gains and losses in other income (expense), net, and removed them from selling, general and administrative expenses. We reclassified related-party receivables to prepaid expenses and other current assets for the current year's presentation, as Pfizer, Inc. ("Pfizer") had sold all of its shares of our ICU common stock as of December 31, 2018, thereby ending its related-party relationship with us. For the year ended December 31, 2018, we reclassified operating cash flows due to the purchase and usage of spare parts. The operating cash flows due to the usage of spare parts are included as an adjustment to reconcile net income to net cash provided by operating activities and the purchase of spare parts are presented as cash outflows in operating assets and liabilities-other assets.
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.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Inventories consist of the following at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Raw materials
|
$
|
119,709
|
|
|
$
|
104,104
|
|
Work in process
|
39,515
|
|
|
52,909
|
|
Finished goods
|
178,416
|
|
|
154,150
|
|
Total
|
$
|
337,640
|
|
|
$
|
311,163
|
|
Property, Plant and Equipment
Property, plant and equipment consist of the following at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Machinery and equipment
|
$
|
219,057
|
|
|
$
|
203,431
|
|
Land, building and building improvements
|
230,454
|
|
|
212,283
|
|
Molds
|
60,155
|
|
|
59,700
|
|
Computer equipment and software
|
83,217
|
|
|
80,420
|
|
Furniture and fixtures
|
7,498
|
|
|
7,409
|
|
Instruments placed with customers1
|
74,434
|
|
|
60,757
|
|
Construction in progress
|
101,425
|
|
|
70,864
|
|
Total property, plant and equipment, cost
|
776,240
|
|
|
694,864
|
|
Accumulated depreciation
|
(320,155
|
)
|
|
(262,223
|
)
|
Net property, plant and equipment
|
$
|
456,085
|
|
|
$
|
432,641
|
|
______________________________
1Instruments 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 - 30 years
|
Machinery, equipment and molds
|
2 - 15 years
|
Furniture, fixtures and office equipment
|
2 - 5 years
|
Computer equipment and software
|
3 - 5 years
|
Instruments placed with customers
|
3 - 10 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 operations at the time of disposal. Depreciation expense was $59.3 million, $58.1 million and $51.6 million in the years ended December 31, 2019, 2018 and 2017, 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, 2019, 2018 and 2017.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the changes in the carrying amount of our goodwill for 2019, 2018 and 2017 (in thousands):
|
|
|
|
|
|
|
|
Total
|
Balance as of January 1, 2017
|
|
$
|
5,577
|
|
Goodwill acquired(1)
|
|
6,536
|
|
Other
|
|
244
|
|
Balance as of December 31, 2017
|
|
12,357
|
|
Goodwill acquired(2)
|
|
1,300
|
|
Other(3)
|
|
(2,462
|
)
|
Balance as of December 31, 2018
|
|
11,195
|
|
Goodwill acquired(4)
|
|
20,026
|
|
Other
|
|
24
|
|
Balance as of December 31, 2019
|
|
$
|
31,245
|
|
______________________________
(1) In 2017, the goodwill acquired primarily relates to our acquisition of Medical Australia Limited ("MLA").
(2) In 2018, we acquired the consulting arm of a small software company, which resulted in $1.3 million of goodwill.
(3) In 2018, "Other" relates to a $1.9 million measurement period adjustment on our MLA acquisition and foreign currency translation.
(4) In 2019, we acquired Pursuit Vascular, Inc. ("Pursuit"), which resulted in $19.1 million of goodwill. We also acquired a small foreign distributor, which resulted in $0.9 million of goodwill.
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, 2019
|
|
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
Patents
|
|
10
|
|
$
|
22,322
|
|
|
$
|
13,519
|
|
|
$
|
8,803
|
|
Customer contracts
|
|
12
|
|
10,122
|
|
|
5,506
|
|
|
4,616
|
|
Non-contractual customer relationships
|
|
9
|
|
57,296
|
|
|
19,787
|
|
|
37,509
|
|
Trademarks
|
|
4
|
|
425
|
|
|
425
|
|
|
—
|
|
Trade name
|
|
15
|
|
18,256
|
|
|
2,254
|
|
|
16,002
|
|
Developed technology
|
|
13
|
|
152,354
|
|
|
24,228
|
|
|
128,126
|
|
Non-compete
|
|
3
|
|
2,500
|
|
|
139
|
|
|
2,361
|
|
Total amortized intangible assets
|
|
|
|
$
|
263,275
|
|
|
$
|
65,858
|
|
|
$
|
197,417
|
|
|
|
|
|
|
|
|
|
|
Internally developed software*
|
|
|
|
$
|
13,991
|
|
|
|
|
$
|
13,991
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
$
|
277,266
|
|
|
$
|
65,858
|
|
|
$
|
211,408
|
|
____________________________
* Internally developed software will be amortized when the projects are complete and the assets are ready for their intended use.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
December 31, 2018
|
|
|
Amortization
Life in Years
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
Patents
|
|
10
|
|
$
|
19,399
|
|
|
$
|
12,147
|
|
|
$
|
7,252
|
|
Customer contracts
|
|
9
|
|
5,319
|
|
|
5,272
|
|
|
47
|
|
Non-contractual customer relationships
|
|
9
|
|
57,916
|
|
|
13,363
|
|
|
44,553
|
|
Trademarks
|
|
4
|
|
425
|
|
|
425
|
|
|
—
|
|
Trade name
|
|
15
|
|
7,456
|
|
|
1,618
|
|
|
5,838
|
|
Developed technology
|
|
11
|
|
82,857
|
|
|
15,361
|
|
|
67,496
|
|
Total
|
|
|
|
$
|
173,372
|
|
|
$
|
48,186
|
|
|
$
|
125,186
|
|
|
|
|
|
|
|
|
|
|
Internally developed software*
|
|
|
|
$
|
8,235
|
|
|
|
|
$
|
8,235
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
$
|
181,607
|
|
|
$
|
48,186
|
|
|
$
|
133,421
|
|
____________________________
* Internally developed software will be amortized when the projects are complete and the assets are ready for their intended use.
Amortization expense in 2019, 2018 and 2017 was $17.7 million, $16.6 million and $15.0 million, respectively.
As of December 31, 2019 estimated annual amortization for our intangible assets for each of the next five years is approximately (in thousands):
|
|
|
|
|
|
2020
|
|
$
|
21,692
|
|
2021
|
|
22,587
|
|
2022
|
|
22,303
|
|
2023
|
|
21,461
|
|
2024
|
|
21,371
|
|
Thereafter
|
|
88,003
|
|
Total
|
|
$
|
197,417
|
|
Our intangible assets that are not subject to amortization are reviewed annually for impairment or more often if there are indications of possible impairment. We perform our annual intangible assets impairment test in November of each year.
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 at the time of acquisition). 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.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 the disposal of investments. Our investments mature in 2020. All short-term investment securities are all callable within one year.
Our investment securities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Amortized Cost
|
|
Unrealized Holding Gains (Losses)
|
|
Fair Value
|
Short-term corporate bonds
|
23,967
|
|
|
$
|
—
|
|
|
$
|
23,967
|
|
Long-term corporate bonds
|
—
|
|
|
—
|
|
|
—
|
|
Total investment securities
|
$
|
23,967
|
|
|
$
|
—
|
|
|
$
|
23,967
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Amortized Cost
|
|
Unrealized Holding Gains (Losses)
|
|
Fair Value
|
Short-term corporate bonds
|
$
|
37,329
|
|
|
$
|
—
|
|
|
$
|
37,329
|
|
Long-term corporate bonds
|
2,025
|
|
|
—
|
|
|
2,025
|
|
Total investment securities
|
$
|
39,354
|
|
|
$
|
—
|
|
|
$
|
39,354
|
|
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.
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 (loss), 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 income (expense), net. Foreign currency transaction (gains) losses, net were $(0.7) million in 2019, $7.9 million in 2018 and $1.8 million in 2017.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. 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 most likely rebate and chargeback amounts for use in determining the transaction price, we use information available at the time and 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
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 are typically combined into a single performance obligation and recognized upon implementation. As annual software licenses are renewed, we recognize revenue for the license at a point in time, at the start of each annual renewal period. The transaction price allocated to the extended service-type warranty is recognized as revenue over the period the warranty service is provided. Consumables and solutions are separate performance obligations, recognized at a point in time.
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 $0.1 million in 2019, $0.6 million in 2018 and $0.2 million in 2017.
Post-retirement and Post-employment Benefits
We sponsor a Section 401(k) retirement plan ("plan") for employees. Our contributions to our 401(k) plan were approximately $11.4 million in 2019, $11.4 million in 2018 and $10.3 million in 2017. As a result of the Hospira Infusion Systems ("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
The majority of our research and development costs are expensed as incurred. In certain circumstances when an asset will have an alternative future use we capitalize the costs related to those assets. Research and development costs include salaries and related benefits, consulting fees, production supplies, samples, travel costs, utilities and other miscellaneous administrative costs.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 10,760, 5,300 and 337 anti-dilutive shares in 2019, 2018 and 2017, respectively.
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)
|
|
|
2019
|
|
2018
|
|
2017
|
Net income
|
|
$
|
101,035
|
|
|
$
|
28,793
|
|
|
$
|
68,644
|
|
Weighted average number of common shares outstanding (basic)
|
|
20,629
|
|
|
20,394
|
|
|
19,614
|
|
Dilutive securities
|
|
916
|
|
|
1,207
|
|
|
1,244
|
|
Weighted average common and common equivalent shares outstanding (diluted)
|
|
21,545
|
|
|
21,601
|
|
|
20,858
|
|
EPS - basic
|
|
$
|
4.90
|
|
|
$
|
1.41
|
|
|
$
|
3.50
|
|
EPS - diluted
|
|
$
|
4.69
|
|
|
$
|
1.33
|
|
|
$
|
3.29
|
|
New Accounting Pronouncements
Recently Adopted Accounting Standards
In February 2016, the FASB issued Accounting Standard Update ("ASU") No. 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 updated guidance required a modified retrospective adoption. In July 2018, the FASB issued ASU No. 2018-11, Targeted Improvements. The amendments in this update provide entities with an additional (and optional) transition method to adopt the new lease requirements by allowing entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The amendments in this update also provided lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease contract. This expedient is limited to circumstances in which the nonlease components otherwise would be accounted for under the new revenue guidance and both (1) the timing and pattern of transfer are the same for the nonlease components and associated lease component and (2) the lease component, if accounted for separately, would be classified as an operating lease. If the lessor uses this practical expedient they would account for the lease contract in accordance with Topic 606 if the nonlease component is the predominant component otherwise, the lessor should account for the combined component as an operating lease in accordance with Topic 842. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases. This ASU clarifies certain language in ASU 2016-02 and corrects certain references and inconsistencies. We adopted these standards effective January 1, 2019 (see Note 5, Leases for a discussion of the impact and required 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. We early adopted this ASU effective April
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1, 2019, which had no impact on our consolidated financial statements or related footnote disclosures. We adopted this ASU early ahead of our annual impairment test to reduce the complexity of the quantitative test if necessary.
Recently Issued Accounting Standards
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Topic 350): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal use software license. Costs to develop or obtain internal-use software that cannot be capitalized under subtopic 350-40, such as training costs and certain data conversion costs, also cannot be capitalized for a hosting arrangement that is a service contract. Therefore, an entity in a hosting arrangement that is a service contract determines which project stage (that is, preliminary project stage, application development stage, or post-implementation stage) an implementation activity relates to. Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. The amendments in this update require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We adopted this ASU effective January 1, 2020. This ASU will not have a material impact on our consolidated financial statements or related disclosures.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements in Topic 820. The amendments remove from disclosure: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels 3; and the valuation processes for Level 3 fair value measurements. The amendments also made the following disclosure modifications: for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The amendments also added the following disclosure requirements: the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The amendments in ASU 2018-02 are effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. We adopted this ASU effective January 1, 2020. This ASU will not have a material impact on our consolidated financial statements or related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update amends the FASB's guidance on the impairment of financial instruments by requiring timelier recording of credit losses on loans and other financial instruments. The ASU adds an impairment model that is based on expected losses rather than incurred losses. The ASU also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. 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. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses. This update clarifies that receivables arising from operating leases are not within the scope of this guidance, instead, impairment of receivables arising from operating leases should be accounted for in accordance with the lease guidance. In November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses. We adopted these ASUs effective January 1, 2020. These ASUs will not have a material impact on our consolidated financial statements or related disclosures.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. ACQUISITIONS
2019 Acquisitions
On November 2, 2019, we acquired 100% interest in Pursuit for cash consideration of approximately $75.0 million. Additionally, Pursuit's equity holders are potentially entitled up to $50.0 million in additional cash consideration contingent upon the achievement of certain sales and gross profit targets for specific customers. The earn-out paid will be calculated as a percentage of gross profit achieved during the earn-out period against a pre-determined target gross profit. However, the earn-out is not to exceed $50.0 million. The acquisition of Pursuit and their ClearGuard HD is a natural extension of our needlefree IV connector and other infection control technologies, which together provides us the best of breed solutions.
Preliminary Purchase Price
The following table summarizes the preliminary purchase price and the preliminary allocation of the purchase price related to the assets and liabilities purchased (in thousands):
|
|
|
|
|
|
Cash consideration for acquired assets, net
|
|
$
|
71,533
|
|
Fair value of contingent consideration
|
|
17,300
|
|
Total Estimated Consideration
|
|
$
|
88,833
|
|
|
|
|
Preliminary Purchase Price Allocation:
|
|
|
Trade receivables
|
|
$
|
973
|
|
Inventories
|
|
2,464
|
|
Prepaid expenses and other current assets
|
|
74
|
|
Property, plant and equipment
|
|
609
|
|
Intangible assets(1)
|
|
82,300
|
|
Accounts payable
|
|
(215
|
)
|
Accrued liabilities
|
|
(2,065
|
)
|
Total identifiable net assets acquired
|
|
$
|
84,140
|
|
Goodwill - not tax deductible
|
|
19,116
|
|
Deferred tax liability
|
|
(14,423
|
)
|
Estimated Purchase Consideration
|
|
$
|
88,833
|
|
____________________________________________
(1) Identifiable intangible assets includes $69.0 million of developed technology, $10.8 million of trade name and $2.5 million of non-compete agreement. The weighted amortization period for the total identifiable intangible assets is approximately fifteen years for developed technology, and trade name the weighted amortization period is fifteen years, and for the non-compete agreement the weighted amortization period is three years.
The identifiable intangible 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; 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 and finished goods inventory was valued at estimated sales proceeds less a nominal profit and costs to sell. The trade receivables, 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 above purchase price and purchase price allocation are preliminary and subject to finalization.
During 2019, we also acquired a small foreign distributor for approximately $4.6 million in cash.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Significant 2017 Acquisitions
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 was 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"). The Earn-out Period ended on December 31, 2019 and we did not meet the required performance targets in order to pay any of the earn-out. 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 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 Asset Purchase Agreement between us and Pfizer, we agreed 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.
All of the deferred closing businesses were effectively closed in 2017.
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. 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.
Unaudited Pro Forma Information
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 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.
|
|
|
|
|
|
|
|
|
|
(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)
|
|
$
|
1,373
|
|
|
$
|
91
|
|
______________________________
* 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, $59.2 million of acquisition and integration-related costs and $70.9 million in bargain purchase gain.
(2) Unaudited.
(3) Amount represents activity of HIS from the date of the acquisition.
NOTE 3. RESTRUCTURING, STRATEGIC TRANSACTION AND INTEGRATION
Restructuring and strategic transaction and integration expenses were $80.6 million, $105.4 million and $78.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Restructuring
Restructuring charges were $8.4 million, $4.5 million and $18.8 million for the years ended December 31, 2019, 2018 and 2017, respectively, and are included in the above restructuring, strategic transaction and integration amounts on a separate line item in our consolidated statement of operations.
During the year ended December 31, 2019, restructuring charges were primarily related to severance and facility closure costs. 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. The cumulative amount incurred to date in connection with the HIS acquisition is $25.1 million.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In 2018 and 2017, we incurred restructuring charges related to the acquisition of the HIS business (see Note 2, Acquisitions). 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.
In 2015, we incurred restructuring charges related to an agreement with Dr. Lopez, a member of our Board of Directors and a former employee in our research and development department, pursuant to which we bought out Dr. Lopez's right to employment under his then-existing employment agreement, the buy-out, including payroll taxes, will be paid in equal monthly installments until December 2020. The remaining payments owed are included in accrued liabilities in our consolidated balance sheet.
The following table summarizes the activity for the restructuring-related charges discussed above and related accrual (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Balance January 1, 2018
|
|
Charges incurred
|
|
Payments
|
|
Other Adjustments
|
|
Accrued Balance December 31, 2018
|
|
Charges incurred
|
|
Payments
|
|
Other Adjustments
|
|
Accrued Balance December 31, 2019
|
Severance pay and benefits
|
$
|
915
|
|
|
$
|
4,311
|
|
|
$
|
(4,549
|
)
|
|
$
|
—
|
|
|
$
|
677
|
|
|
$
|
5,634
|
|
|
$
|
(2,433
|
)
|
|
$
|
—
|
|
|
$
|
3,878
|
|
Employment agreement buyout
|
1,114
|
|
|
—
|
|
|
(368
|
)
|
|
(7
|
)
|
|
739
|
|
|
—
|
|
|
(279
|
)
|
|
—
|
|
|
460
|
|
Retention and facility closure expenses
|
—
|
|
|
160
|
|
|
(160
|
)
|
|
—
|
|
|
—
|
|
|
2,741
|
|
|
(1,530
|
)
|
|
—
|
|
|
1,211
|
|
|
$
|
2,029
|
|
|
$
|
4,471
|
|
|
$
|
(5,077
|
)
|
|
$
|
(7
|
)
|
|
$
|
1,416
|
|
|
$
|
8,375
|
|
|
$
|
(4,242
|
)
|
|
$
|
—
|
|
|
$
|
5,549
|
|
Strategic Transaction and Integration Expenses
During the years ended December 31, 2019, 2018 and 2017, we incurred $72.2 million, $100.9 million and $59.2 million, respectively, in transaction and integration costs. These costs were primarily related to the acquisition and integration of HIS business, (see Note 2, Acquisitions). The integration expenses for the year ended December 31, 2019, included a one-time strategic supply chain restructuring charge of $22.1 million, which reduces our contracted commitments to our third party manufacturer and charges related to our Pfizer separation costs, which included a $12.7 million non-cash write-off of related assets.
NOTE 4: REVENUE
Adoption of ASC Topic 606, “Revenue from Contracts with Customers”
We adopted ASU No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606), effective January 1, 2018 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting beginning after January 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and will continue to be reported in accordance with our historic accounting under ASC Topic 605, Revenue Recognition.
Due to the cumulative impact, net of tax, of adopting ASC Topic 606, we recorded a net increase of $6.3 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, consumables and solutions. Under ASC Topic 605, revenue for the equipment was recognized upon delivery and software licenses and implementation services were typically recognized over the contract term. Under ASC Topic 606, revenue for the bundled equipment, software and software implementation services are recognized upon implementation. This results in an acceleration of software related revenue, offset by a delay in the recognition of related revenue of the equipment. Under ASC Topic 605, consumables and solutions revenues were typically recognized upon delivery. Under ASC 606, consumables and solutions revenues are recognized as the customer obtains control of the asset, which is at shipping point. This results in an acceleration in the recognition of consumables and solutions revenue.
Additionally, the timing of revenue recognition for software license renewals changed under ASC Topic 606. Under ASC Topic 605, revenue related to software renewals was recognized on a ratable basis over the license period. Under ASC
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Topic 606, the license, which is considered functional IP, is considered to be transferred to the customer at a point in time, specifically, at the start of each annual renewal period. As a result, under ASC Topic 606, revenue related to our annual software license renewals is accelerated when compared to ASC Topic 605.
Revenue Recognition
Our primary product lines are Infusion Consumables, Infusion Systems, IV Solutions and Critical Care. The vast majority of our sales of these products are made on a stand-alone basis to hospitals and distributors. Revenue is typically recognized upon transfer of control of the products, which we deem to be at point of shipment.
Payment is typically due in full within 30 days of delivery or the start of the contract term. Revenue is recorded in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We offer certain volume-based rebates to our distribution customers, which we record as variable consideration when calculating the transaction price. Rebates are offered on both a fixed and tiered/variable basis. In both cases, we use information available at the time and our historical experience with each customer to estimate the most likely rebate amount. We also provide chargebacks to distributors that sell to end-customers at prices determined under a contract between us and the end-customer. We use information available at the time and our historical experience to estimate and record provisions for chargebacks.
We also warrant products against defects and have a policy permitting the return of defective products, for which we accrue and expense at the time of sale using information available at that time and our historical experience. We also provide for extended service-type warranties, which we consider to be separate performance obligations. We allocate a portion of the transaction price to the extended service-type warranty based on its estimated relative selling price, and recognize revenue over the period the warranty service is provided. Our revenues are recorded at the net sales price, which includes an estimate for variable consideration related to rebates, chargebacks and product returns.
Arrangements with Multiple Performance Obligations
We also enter into arrangements which include multiple performance obligations, see Note 1, Basis of Presentation and Summary of Significant Accounting Policies.
The most significant judgments related to these arrangements include:
|
|
•
|
Identifying the various performance obligations of these arrangements.
|
|
|
•
|
Estimating the relative standalone selling price of each performance obligation, typically using directly observable method or calculated on a cost plus margin basis method.
|
Revenue disaggregated
The following table represents our revenues disaggregated by product line (in thousands) and our disaggregated product line revenue as a percentage of total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31,
|
|
2019
|
|
2018
|
|
2017
|
Product line
|
Revenue
|
|
% of Revenue
|
|
Revenue
|
|
% of Revenue
|
|
Revenue
|
|
% of Revenue
|
Infusion Consumables
|
$
|
477,611
|
|
|
37
|
%
|
|
$
|
483,039
|
|
|
35
|
%
|
|
$
|
365,665
|
|
|
28
|
%
|
Infusion Systems
|
328,282
|
|
|
26
|
%
|
|
355,484
|
|
|
25
|
%
|
|
290,207
|
|
|
23
|
%
|
IV Solutions
|
414,971
|
|
|
33
|
%
|
|
507,985
|
|
|
36
|
%
|
|
521,963
|
|
|
40
|
%
|
Critical Care
|
45,344
|
|
|
4
|
%
|
|
53,532
|
|
|
4
|
%
|
|
49,961
|
|
|
4
|
%
|
Other
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
64,817
|
|
|
5
|
%
|
Total Revenues
|
$
|
1,266,208
|
|
|
100
|
%
|
|
$
|
1,400,040
|
|
|
100
|
%
|
|
$
|
1,292,613
|
|
|
100
|
%
|
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 following table represents our revenues disaggregated by geography (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year
ended December 31,
|
Geography
|
2019
|
|
2018
|
|
2017
|
Europe, the Middle East and Africa
|
$
|
130,530
|
|
|
$
|
134,363
|
|
|
$
|
119,934
|
|
Other Foreign
|
212,336
|
|
|
210,996
|
|
|
192,640
|
|
Total Foreign
|
342,866
|
|
|
345,359
|
|
|
312,574
|
|
United States
|
923,342
|
|
|
1,054,681
|
|
|
980,039
|
|
Total Revenues
|
$
|
1,266,208
|
|
|
$
|
1,400,040
|
|
|
$
|
1,292,613
|
|
Domestic sales accounted for 73%, 75% and 76% of total revenue in 2019, 2018 and 2017, respectively. International sales accounted for 27%, 25% and 24% of total revenue in 2019, 2018 and 2017, respectively.
Contract balances
Our contract balances (deferred revenue) are recorded in accrued liabilities and other long-term liabilities in our consolidated balance sheet (see Note 10, Accrued Liabilities and Other Long-term liabilities). The following table presents our changes in the contract balances for the years ended December 31, 2019 and 2018, (in thousands):
|
|
|
|
|
|
Contract Liabilities
|
Beginning balance, January 1, 2018
|
$
|
(7,066
|
)
|
Equipment revenue recognized
|
6,696
|
|
Equipment revenue deferred due to implementation
|
(4,196
|
)
|
Software revenue recognized
|
6,553
|
|
Software revenue deferred due to implementation
|
(6,269
|
)
|
Ending balance, December 31, 2018
|
$
|
(4,282
|
)
|
Equipment revenue recognized
|
8,807
|
|
Equipment revenue deferred due to implementation
|
(8,794
|
)
|
Software revenue recognized
|
3,953
|
|
Software revenue deferred due to implementation
|
(4,539
|
)
|
Ending balance, December 31, 2019
|
$
|
(4,855
|
)
|
During 2019, we recognized $3.8 million in revenue that was included in the opening contract balances for the year ended December 31, 2018. As of December 31, 2019, revenue from remaining performance obligations related to implementation of software and equipment is $3.3 million. We expect to recognize substantially all of this revenue within the next three months. Revenue from remaining performance obligations related to annual software licenses is $1.6 million. We expect to recognize substantially all of this revenue over the next twelve months.
Costs to Obtain a Contract with a Customer
As part of the cost to obtain a contract, we may pay incremental commissions to sales employees upon entering into a sales contract. Under ASC Topic 606, we have elected to expense these costs as incurred as the period of benefit is less than one year.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Practical expedients and exemptions
In addition to the practical expedient applied to sales commissions, under ASC Topic 606, we elected to apply the practical expedient for shipping and handling costs incurred after the customer has obtained control of a good. We will continue to treat these costs as a fulfillment cost rather than as an additional promised service.
NOTE 5. LEASES
Adoption of ASC Topic 842, "Lease Accounting"
We adopted ASU No. 2016-02, Leases (ASC Topic 842), effective January 1, 2019 on a modified retrospective transition method through a cumulative-effect adjustment at the beginning of the first quarter of 2019. We elected the 'package of practical expedients', which permitted us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us. We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we did not recognize right-of-use ("ROU") assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. Furthermore, we elected the practical expedient to not separate lease and non-lease components for all of our leases, non-lease components are primarily common area maintenance charges that we combine with the lease component when applying this ASU.
The impact of adopting this standard was the recognition of ROU assets and lease liabilities for our operating leases of $40.4 million as of January 1, 2019. The adoption of ASC 842 did not have a material impact on our consolidated earnings or on our cash flows.
Leases
We determine if an arrangement is a lease at inception. Our operating leases with a term greater than one year are included in operating lease ROU assets, accrued liabilities, and other long-term liabilities on our consolidated balance sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Most of our leases do not provide an implicit rate, therefore we use our incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term based on the information available at commencement date. The operating lease ROU asset excludes initial direct costs incurred. Our lease terms include options to extend when it is reasonably certain that we will exercise that option. All of our operating leases have stated lease payments, which may include fixed rental increases. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
We have operating leases for corporate, R&D and sales and support offices, device service centers, distribution warehouses and certain equipment. Our leases have original lease terms of one year to fifteen years, some of which include options to extend the leases for up to an additional five years. For all of our leases, we do not include optional periods of extension in our current lease terms for the exercise of options to extend is not reasonably certain.
The following table presents the components of our lease cost (in thousands):
|
|
|
|
|
|
For the year
ended December 31, 2019
|
Operating lease cost
|
$
|
10,011
|
|
|
|
Short-term lease cost
|
322
|
|
|
|
Total lease cost
|
$
|
10,333
|
|
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the supplemental cash flow information related to our leases (in thousands):
|
|
|
|
|
|
For the year
ended December 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows from operating leases
|
$
|
10,344
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
Operating leases
|
$
|
3,230
|
|
The following table presents the supplemental balance sheet information related to our leases (in thousands, except lease term and discount rate):
|
|
|
|
|
|
|
|
As of December 31, 2019
|
Operating leases
|
|
|
Operating lease right-of-use assets
|
|
$
|
34,465
|
|
|
|
|
Accrued liabilities
|
|
$
|
7,362
|
|
Other long-term liabilities
|
|
28,896
|
|
Total operating lease liabilities
|
|
$
|
36,258
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
Operating leases
|
|
6 years
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
Operating leases
|
|
5.57
|
%
|
As of December 31, 2019, the maturities of our lease liabilities for each of the next five years are approximately (in thousands):
|
|
|
|
|
|
Operating Leases
|
2020
|
$
|
8,850
|
|
2021
|
7,412
|
|
2022
|
6,621
|
|
2023
|
6,204
|
|
2024
|
5,896
|
|
Thereafter
|
7,765
|
|
Total Lease Payments
|
42,748
|
|
Less imputed interest
|
(6,490
|
)
|
Total
|
$
|
36,258
|
|
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2018, the maturities of our operating lease liabilities for each of the next five years were approximately (in thousands):
|
|
|
|
|
|
Operating Leases
|
2019
|
$
|
8,326
|
|
2020
|
8,572
|
|
2021
|
6,489
|
|
2022
|
5,914
|
|
2023
|
5,615
|
|
Thereafter
|
13,235
|
|
Total Lease Payments(1)
|
$
|
48,151
|
|
____________________________
(1)The lease payment maturities as of December 31, 2018 are not calculated at present value.
During the third quarter 2019, we signed a ten-year lease for a 610,806 square foot warehouse. The commencement of the lease is not expected until the first quarter of 2020 subject to the completion of landlord build-outs which will make the space available for use. Over the ten-year lease term, we expect the lease payments to total at least $21.8 million.
NOTE 6. 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 in years prior to 2018 stock purchased under our employee stock purchase plan ("ESPP"), which was suspended in 2017. 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)
|
|
2019
|
|
2018
|
|
2017
|
Stock compensation expense
|
|
$
|
21,918
|
|
|
$
|
24,241
|
|
|
$
|
19,352
|
|
Tax benefit from stock-based compensation cost
|
|
$
|
4,840
|
|
|
$
|
5,706
|
|
|
$
|
7,247
|
|
Indirect tax benefit
|
|
$
|
680
|
|
|
$
|
2,199
|
|
|
$
|
1,374
|
|
As of December 31, 2019, we had $23.6 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 and any shares that were forfeited, terminated or expired that would have otherwise returned to 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. As of December 31, 2019, 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
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
“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.
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, except per option amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Number of time-based options granted
|
|
6,265
|
|
|
5,815
|
|
|
8,825
|
|
Grant date fair value of options granted (in thousands)
|
|
$
|
424
|
|
|
$
|
425
|
|
|
$
|
375
|
|
Weighted average assumptions for stock option valuation:
|
|
|
|
|
|
|
Expected term (years)
|
|
5.5
|
|
|
5.5
|
|
|
5.5
|
|
Expected stock price volatility
|
|
28.0
|
%
|
|
24.0
|
%
|
|
27.0
|
%
|
Risk-free interest rate
|
|
2.2
|
%
|
|
2.3
|
%
|
|
1.1
|
%
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Weighted average grant price per option
|
|
$
|
225.27
|
|
|
$
|
269.80
|
|
|
$
|
158.20
|
|
Weighted average grant date fair value per option
|
|
$
|
67.73
|
|
|
$
|
73.14
|
|
|
$
|
42.51
|
|
A summary of our stock option activity as of and for the year ended December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Exercise Price Per Share
|
|
Weighted Average Contractual Life (Years)
|
|
Aggregate Intrinsic Value (in thousands)
|
Outstanding at December 31, 2018
|
|
1,186,928
|
|
|
$
|
63.66
|
|
|
|
|
|
Granted
|
|
6,265
|
|
|
$
|
225.27
|
|
|
|
|
|
Exercised
|
|
(145,339
|
)
|
|
$
|
53.18
|
|
|
|
|
|
Forfeited or expired
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
1,047,854
|
|
|
$
|
66.08
|
|
|
4.1
|
|
$
|
127,556
|
|
Exercisable at December 31, 2019
|
|
1,041,589
|
|
|
$
|
65.12
|
|
|
4.0
|
|
$
|
127,556
|
|
Vested and expected to vest, December 31, 2019
|
|
1,047,854
|
|
|
$
|
66.08
|
|
|
4.1
|
|
$
|
127,556
|
|
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The intrinsic values for options exercisable, outstanding and vested or expected to vest at December 31, 2019 is based on our closing stock price of $187.12 at December 31, 2019 and are before applicable taxes.
The following table presents information regarding stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(In thousands)
|
|
2019
|
|
2018
|
|
2017
|
Intrinsic value of options exercised
|
|
$
|
22,976
|
|
|
$
|
51,105
|
|
|
$
|
71,283
|
|
Cash received from exercise of stock options
|
|
$
|
7,732
|
|
|
$
|
14,275
|
|
|
$
|
32,003
|
|
Tax benefit from stock option exercises
|
|
$
|
9,653
|
|
|
$
|
12,617
|
|
|
$
|
20,004
|
|
Stock Awards
In 2019, we granted performance restricted stock units ("PRSU") to our executive officers. For the executive officers other than the Chief Executive Officer ("CEO") and the Chief Operations Officer ("COO"), the PRSUs will vest subject to a three-year time vesting and further subject to a determination by the Compensation Committee that the officers have met their individual performance goals for the applicable years. For the CEO and the COO, the performance shares will cliff-vest ending on March 6, 2022 and further subject to the achievement of a minimum Cumulative Adjusted EBITDA. If for the three year period ending on December 31, 2021 the Cumulative Adjusted EBITDA has a growth of at least 6% to 8%, 50% of the awarded units will vest. If on the vesting date the Cumulative Adjusted EBITDA has a growth of between 8% to 10%, 100% of the awarded units will vest. If on the vesting date the Cumulative Adjusted EBITDA has a growth of over 10%, 200% of the awarded units will vest. In 2019, we also granted PRSUs to one of our non-executive employees. These PRSUs will vest at the end of a three-year period ending on March 31, 2022, if certain minimum performance goals are met.
In 2018, we granted PRSUs to our executive officers. For the executive officers other than the CEO and the COO, the PRSUs will vest subject to a three-year time vesting and further subject to a determination by the Compensation Committee that the officers have met their individual performance goals for the applicable year. For the CEO and the COO, the performance shares will cliff-vest ending on February 15, 2021 and further subject to the achievement of a minimum Cumulative Adjusted EBITDA. If for the three year period ending on December 31, 2020 the Cumulative Adjusted EBITDA has a growth of at least 6% to 8%, 50% of the awarded units will vest. If on the vesting date the Cumulative Adjusted EBITDA has a growth of between 8% to 10%, 100% of the awarded units will vest. If on the vesting date the Cumulative Adjusted EBITDA has a growth of over 10%, 200% of the awarded units will vest.
In 2017, we granted PRSUs to our executive officers. The PRSUs were scheduled to 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. On January 17, 2020, the Compensation Committee made the determination that the 2017 PRSU shares were earned by our executive officers at the 300% achievement level.
In 2016, we granted PRSUs to our executive officers, which vested on December 31, 2018. During the first quarter of 2019, the Compensation Committee determined the award granted vested at 300%, as a minimum specified compound annual growth rate ("CAGR") in adjusted EBITDA per share of greater than 12% was reached for the 3-year performance period January 1, 2016 through December 31, 2018. The total number of shares of 2016 PRSUs that were earned by our executive officers was 109,110 shares.
Restricted stock units ("RSU") are granted annually to our Board of Directors and vest on the first anniversary of the grant date.
In 2019, 2018 and 2017, we granted RSUs to certain employees that vest ratably on the anniversary of the grant over three years. We recognize forfeitures as they occur.
The grant date fair market value of our PRSUs and RSUs is determined by our stock price on the grant date.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below summarizes our restricted stock award activity (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(In thousands except shares and per share amounts)
|
|
2019
|
|
2018
|
|
2017
|
PRSU
|
|
|
|
|
|
|
Shares granted
|
|
37,657
|
|
|
30,348
|
|
|
20,686
|
|
Shares earned
|
|
114,032
|
|
|
—
|
|
|
—
|
|
Grant date fair value per share
|
|
$
|
231.63
|
|
|
$
|
248.65
|
|
|
$
|
154.75
|
|
Grant date fair value
|
|
$
|
8,723
|
|
|
$
|
7,546
|
|
|
$
|
3,201
|
|
Intrinsic value vested
|
|
$
|
26,445
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
RSU
|
|
|
|
|
|
|
Shares granted
|
|
61,856
|
|
|
63,094
|
|
|
107,678
|
|
Grant date fair value per share
|
|
$
|
227.42
|
|
|
$
|
252.42
|
|
|
$
|
156.49
|
|
Grant date fair value
|
|
$
|
14,067
|
|
|
$
|
15,926
|
|
|
$
|
16,851
|
|
Intrinsic value vested
|
|
$
|
16,753
|
|
|
$
|
17,086
|
|
|
$
|
9,813
|
|
The table below provides a summary of our PRSU and RSU activity as of and for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Units
|
|
Grant Date Fair Value Per Share
|
|
Weighted Average Contractual Life (Years)
|
|
Aggregate Intrinsic Value
|
Non-vested at December 31, 2018
|
|
340,704
|
|
|
$
|
155.27
|
|
|
|
|
|
Change in units due to performance expectations (a)
|
|
(14,444
|
)
|
|
$
|
238.03
|
|
|
|
|
|
Granted
|
|
99,513
|
|
|
$
|
229.01
|
|
|
|
|
|
Vested
|
|
(185,662
|
)
|
|
$
|
122.55
|
|
|
|
|
|
Forfeited
|
|
(7,584
|
)
|
|
$
|
216.29
|
|
|
|
|
|
Non-vested and expected to vest at December 31, 2019
|
|
232,527
|
|
|
$
|
205.82
|
|
|
0.7
|
|
$
|
43,510
|
|
___________________________
(a) Relates to 2018 and 2019 CEO and COO PRSUs, assumes attainment of a reduced payout rate based on performance expectations.
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, 2019, 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. We suspended our ESPP in 2017.
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 purchase period.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
2017
|
ESPP shares purchased by employees
|
23,426
|
|
Intrinsic value of ESPP purchases (in thousands)
|
$
|
986
|
|
Weighted average assumptions for ESPP valuation:
|
|
Expected term (in years)
|
0.5
|
|
Expected stock price volatility
|
28.1
|
%
|
Risk-free interest rate
|
0.6
|
%
|
Expected dividend yield
|
—
|
%
|
NOTE 7. DERIVATIVES AND HEDGING ACTIVITIES
Hedge Accounting and Hedging Program
The purpose of our cash flow 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 fair value of the effective portion of the derivative instrument as a component of Other Comprehensive Income (Loss) 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. The term of this currency forward contract was May 1, 2017 to May 1, 2019. The derivative instrument had a fixed forward rate of 20.01MXN/USD over the term of the two-year contract.
In January 2018, we entered into an additional six-month cross-currency par forward contract that extended our previous hedge of a portion of our Mexico forecasted expenses denominated in MXN. The term of this six-month contract was May 1, 2019 to November 1, 2019. The derivative instrument had a fixed forward rate of 20.43 MXN/USD over the term of the six-month contract.
In November 2018, we entered into a one-year cross-currency par forward contract again extending the hedge of a portion of our Mexico forecasted expenses denominated in MXN. The total notional amount of this outstanding derivative as of December 31, 2019 was approximately 364.8 million MXN. The term of the one-year hedge is November 1, 2019 to November 3, 2020. The derivative instrument matures in equal monthly amounts at a fixed forward rate of 22.109 MXN/USD.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the fair values of our derivative instruments included within the Consolidated Balance Sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
December 31,
|
|
Consolidated Balance Sheet
Location
|
|
2019
|
|
2018
|
Derivatives designated as cash flow hedging instruments
|
|
|
|
|
|
Foreign exchange forward contract:
|
Prepaid expenses and other current assets
|
|
$
|
2,366
|
|
|
$
|
187
|
|
|
Other assets
|
|
—
|
|
|
545
|
|
Total derivatives designated as cash flow hedging instruments
|
|
|
$
|
2,366
|
|
|
$
|
732
|
|
The following table presents the amounts affecting the Consolidated Statements of Operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Line Item in the
Consolidated Statements of Operations
|
|
2019
|
|
2018
|
|
2017
|
Derivatives designated as cash flow hedging instruments
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
Cost of goods sold
|
|
$
|
916
|
|
|
$
|
743
|
|
|
$
|
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,
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Location of Gain Reclassified From Accumulated Other Comprehensive Income into Income
|
|
2019
|
|
2018
|
|
2017
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contract
|
|
$
|
2,550
|
|
|
$
|
2,063
|
|
|
$
|
296
|
|
|
Cost of goods sold
|
|
$
|
916
|
|
|
$
|
743
|
|
|
$
|
885
|
|
Total derivatives designated as cash flow hedging instruments
|
|
$
|
2,550
|
|
|
$
|
2,063
|
|
|
$
|
296
|
|
|
|
|
$
|
916
|
|
|
$
|
743
|
|
|
$
|
885
|
|
As of December 31, 2019, we expect approximately $2.4 million of the deferred gain 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.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. 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.
|
In 2017, we recognized an earn-out liability upon the acquisition of HIS from Pfizer. Pfizer was entitled up to $225 million in cash if certain performance targets for the combined company for the three years ending December 31, 2019 were achieved. The initial fair value of the earn-out was determined by employing a Monte Carlo simulation in a risk neutral framework. The underlying simulated variable was adjusted EBITDA. The adjusted EBITDA volatility estimate was based on a study of historical asset volatility for a set of comparable public companies. The model included other assumptions including the market price of risk, which was calculated as the weighted average cost of capital ("WACC") less the long term risk free rate. The initial value assigned to the contingent consideration was a result of forecasted product demand of our HIS business, as discussed further in Note 2: Acquisitions. At each reporting date subsequent to the acquisition we remeasured the earn-out using the same methodology above and recognize any changes in value. As of December 31, 2019, it was determined that we did not meet the necessary performance targets that would require payout of any of the HIS earn-out liability.
In the fourth quarter of 2019, we recognized an earn-out liability related to the acquisition of Pursuit (see Note 2, Acquisitions). Pursuit's equity holders are potentially entitled up to $50.0 million in additional cash consideration contingent upon the achievement of certain sales and gross profit targets for specific customers.The earn-out paid will be calculated as a percentage of gross profit achieved during the earn-out period against a pre-determined target gross profit, not to exceed $50.0 million. We used a Monte Carlo simulation model to determine the fair value of the earn-out. The Monte Carlo simulation model utilizes multiple input variables to determine the value of the earn-out including historical volatility, a risk free interest rate, counter party credit risk and projected future gross profit, see below simulation input table related to Pursuit. The historical volatility was based on the median of ICU and a certain peer group. The risk-free interest rate is equal to the yield, as of the valuation date, of the zero-coupon U.S. Treasury bill that is commensurate with the term of the earn-out. The counter party credit risk is based on a synthetic credit rating of B1. If the probabilities in the model significantly change from what we initially and subsequently anticipate, the change could have a significant impact on our financial statements in the period recognized. Our contingent earn-out liability is separately stated in our consolidated balance sheets.
The following table provides a reconciliation of our Level 3 earn-out liabilities measured at estimated fair value based on an initial valuation and updated quarterly for the years ended December 31, 2019, 2018 and 2017 (in thousands):
|
|
|
|
|
|
|
|
Earn-out Liability
|
Contingent earn-out liability, January 1, 2017
|
|
$
|
—
|
|
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
|
|
Acquisition date fair value estimate of earn-out
|
|
—
|
|
Change in fair value of contingent earn-out (included in income from operations as a separate line item)
|
|
20,400
|
|
Contingent earn-out liability, December 31, 2018
|
|
47,400
|
|
Acquisition date fair value estimate of earn-out(1)
|
|
17,300
|
|
Change in fair value of contingent earn-out (included in income from operations as a separate line item)
|
|
(47,400
|
)
|
Contingent earn-out liability, December 31, 2019
|
|
$
|
17,300
|
|
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
_________________________
(1) Relates to our acquisition of Pursuit, (see Note 2, Acquisitions).
Changes in the fair value of the HIS earn-out subsequent to the fair value calculated at acquisition are 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 tables provide quantitative information about Level 3 inputs for fair value measurement of our earn-out liabilities as of the acquisition date to December 31, 2019. Significant increases or decreases in these inputs in isolation could result in a significant impact on our fair value measurement.
HIS Earn-out
|
|
|
|
|
|
|
|
|
|
Simulation Input
|
As of
December 31, 2018
|
|
As of
December 31, 2017
|
|
At Acquisition February 3, 2017
|
Adjusted EBITDA Volatility
|
30.00
|
%
|
|
26.00
|
%
|
|
29.00
|
%
|
WACC
|
8.25
|
%
|
|
8.75
|
%
|
|
10.00
|
%
|
20-year risk free rate
|
2.87
|
%
|
|
2.58
|
%
|
|
2.82
|
%
|
Market price of risk
|
5.24
|
%
|
|
5.99
|
%
|
|
6.93
|
%
|
Cost of debt
|
5.25
|
%
|
|
4.08
|
%
|
|
4.16
|
%
|
Pursuit Earn-out
|
|
|
|
|
|
|
Simulation Input
|
As of
December 31, 2019
|
|
At Acquisition November 2, 2019
|
Revenue/Gross Profit Volatility
|
20.00
|
%
|
|
20.00
|
%
|
Discount Rate
|
15.00
|
%
|
|
15.00
|
%
|
Risk free rate
|
1.55
|
%
|
|
1.55
|
%
|
Counter Party Risk
|
6.00
|
%
|
|
6.00
|
%
|
The fair value of our investments, which consists 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.
There were no transfers between levels in 2019 or 2018.
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, 2019
|
|
Total carrying
value
|
|
Quoted prices
in active
markets for
identical
assets (level 1)
|
|
Significant
other
observable
inputs (level 2)
|
|
Significant
unobservable
inputs (level 3)
|
Assets:
|
|
|
|
|
|
|
|
Available for sale debt securities:
|
|
|
|
|
|
|
|
Short-term
|
$
|
23,967
|
|
|
$
|
—
|
|
|
$
|
23,967
|
|
|
$
|
—
|
|
Foreign exchange forwards:
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
2,366
|
|
|
—
|
|
|
2,366
|
|
|
—
|
|
Total Assets
|
$
|
26,333
|
|
|
$
|
—
|
|
|
$
|
26,333
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earn-out liability
|
$
|
17,300
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,300
|
|
Total Liabilities
|
$
|
17,300
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at December 31, 2018
|
|
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 debt securities:
|
|
|
|
|
|
|
|
Short-term
|
$
|
37,329
|
|
|
$
|
—
|
|
|
$
|
37,329
|
|
|
$
|
—
|
|
Long-term
|
2,025
|
|
|
—
|
|
|
2,025
|
|
|
—
|
|
Foreign exchange forwards:
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
187
|
|
|
$
|
—
|
|
|
$
|
187
|
|
|
$
|
—
|
|
Other assets
|
545
|
|
|
$
|
—
|
|
|
$
|
545
|
|
|
$
|
—
|
|
Total Assets
|
$
|
39,354
|
|
|
$
|
—
|
|
|
$
|
39,354
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earn-out liability
|
$
|
47,400
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
47,400
|
|
Total Liabilities
|
$
|
47,400
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
47,400
|
|
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Deposits
|
|
$
|
1,375
|
|
|
$
|
1,087
|
|
Other prepaid expenses and receivables
|
|
13,778
|
|
|
12,476
|
|
Receivables from Pfizer related to HIS business acquisition(1)
|
|
—
|
|
|
20,137
|
|
Deferred costs
|
|
3,332
|
|
|
1,951
|
|
Prepaid insurance and property taxes
|
|
5,450
|
|
|
2,666
|
|
VAT/GST receivable
|
|
4,422
|
|
|
5,072
|
|
Deferred tax charge
|
|
1,266
|
|
|
1,180
|
|
Other
|
|
4,358
|
|
|
1,548
|
|
|
|
$
|
33,981
|
|
|
$
|
46,117
|
|
___________________________________
(1) We reclassified the December 31, 2018 related-party receivable due from Pfizer to prepaid expenses and other current assets for current year presentation purposes. During the years 2018 and 2017, Pfizer was a related party to us as we issued 3.2 million shares of our common stock as partial consideration for the 2017 acquisition of HIS. As of December 31, 2018, Pfizer had sold all of its shares of our common stock. During 2018, in connection with the sale of the 2.5 million of the shares Pfizer held, we incurred a one-time fee payable to Pfizer in the amount of $8.0 million included in restructuring, strategic transaction and integration expense in our consolidated statement of operations.
Related-party revenue for goods manufactured for Pfizer under our Manufacturing and Supply Agreements with Pfizer (see Note 16, Collaborative and Other Arrangements) was $78.2 million and $72.4 million during the years 2018 and 2017, respectively, and the cost of product manufactured by Pfizer for us under those agreements was $81.0 million and $70.2 million during the years 2018 and 2017, respectively.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Salaries and benefits
|
|
$
|
21,116
|
|
|
$
|
20,538
|
|
Incentive compensation
|
|
15,221
|
|
|
42,913
|
|
Accrued supply chain restructuring costs
|
|
23,119
|
|
|
—
|
|
Operating lease liability-ST
|
|
7,362
|
|
|
—
|
|
Accrued professional fees
|
|
4,782
|
|
|
15,996
|
|
Accrued product field action
|
|
2,096
|
|
|
5,316
|
|
Consigned inventory
|
|
—
|
|
|
1,118
|
|
Third-party inventory
|
|
—
|
|
|
1,089
|
|
Legal accrual
|
|
826
|
|
|
1,400
|
|
Accrued sales taxes
|
|
2,615
|
|
|
2,941
|
|
Warranties and returns
|
|
782
|
|
|
1,124
|
|
Deferred revenue
|
|
4,761
|
|
|
3,814
|
|
Accrued other taxes
|
|
4,054
|
|
|
3,213
|
|
Distribution fees
|
|
3,942
|
|
|
3,977
|
|
Accrued freight
|
|
11,238
|
|
|
10,953
|
|
Restructuring accrual
|
|
5,459
|
|
|
1,046
|
|
Contract liabilities-ST
|
|
1,935
|
|
|
—
|
|
Contract settlement
|
|
1,667
|
|
|
2,083
|
|
Accrued research and development
|
|
—
|
|
|
1,451
|
|
Other
|
|
6,801
|
|
|
9,848
|
|
|
|
$
|
117,776
|
|
|
$
|
128,820
|
|
Other long-term liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Operating lease liabilities-LT
|
|
$
|
28,896
|
|
|
$
|
—
|
|
Contract liabilities(1)
|
|
472
|
|
|
14,020
|
|
Deferred revenue
|
|
94
|
|
|
468
|
|
Benefits
|
|
1,131
|
|
|
962
|
|
Accrued rent
|
|
1,642
|
|
|
1,779
|
|
Contract settlement
|
|
—
|
|
|
1,667
|
|
Other
|
|
585
|
|
|
1,696
|
|
|
|
$
|
32,820
|
|
|
$
|
20,592
|
|
__________________________________________
(1) Consists of 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 11. 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, 2019 and 2018, 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 are being 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, 2019.
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 12. INCOME TAXES
Income from continuing operations before taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
United States
|
|
$
|
32,849
|
|
|
$
|
(8,600
|
)
|
|
$
|
59,872
|
|
Foreign
|
|
81,858
|
|
|
30,974
|
|
|
(8,589
|
)
|
|
|
$
|
114,707
|
|
|
$
|
22,374
|
|
|
$
|
51,283
|
|
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,
|
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
6,851
|
|
|
$
|
492
|
|
|
$
|
2,774
|
|
State
|
|
2,532
|
|
|
1,865
|
|
|
2,263
|
|
Foreign
|
|
7,994
|
|
|
9,136
|
|
|
3,170
|
|
|
|
17,377
|
|
|
11,493
|
|
|
8,207
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(6,720
|
)
|
|
$
|
(9,118
|
)
|
|
$
|
(20,878
|
)
|
State
|
|
(325
|
)
|
|
(3,072
|
)
|
|
(4,619
|
)
|
Foreign
|
|
3,340
|
|
|
(5,722
|
)
|
|
(71
|
)
|
|
|
(3,705
|
)
|
|
(17,912
|
)
|
|
(25,568
|
)
|
|
|
$
|
13,672
|
|
|
$
|
(6,419
|
)
|
|
$
|
(17,361
|
)
|
We have accrued for tax contingencies for potential tax assessments, and in 2019 we recognized a $4.2 million net increase, most of which related to various federal, state and foreign tax reserves.
On December 22, 2017, 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. As of December 31, 2018, our accounting for the Tax Act was complete.
The toll charge on undistributed foreign earnings and profits (the “Transition Tax”) is a tax on certain untaxed accumulated and current earnings and profits ("E&P") of our foreign subsidiaries. We were able to reasonably estimate the Transition Tax and recorded a provisional Transition Tax expense of $2.0 million for the year ended December 31, 2017. On the basis of revised E&P computations that were completed during the reporting period, we recognized an additional measurement-period adjustment of $0.6 million to the Transition Tax obligation, with a corresponding adjustment of $0.6 million to income tax expense.
The revaluation of deferred taxes is an adjustment to future tax obligations as a result of the reduction of the corporate tax rate from 35% to 21%. We were able to reasonably estimate the effect of the revaluation of deferred taxes and recorded a provisional tax expense of $1.1 million for the year ended December 31, 2017. The computation of timing differences was completed during the reporting period. We recognized an additional measurement-period adjustment of $0.2 million, with a corresponding adjustment of $0.2 million to income tax expense.
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,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
Federal tax at the expected statutory rate
|
|
$
|
24,088
|
|
|
21.0
|
%
|
|
$
|
4,699
|
|
|
21.0
|
%
|
|
$
|
17,950
|
|
|
35.0
|
%
|
State income tax, net of federal effect
|
|
1,269
|
|
|
1.1
|
%
|
|
927
|
|
|
4.1
|
%
|
|
(403
|
)
|
|
(0.8
|
)%
|
Tax credits
|
|
(2,896
|
)
|
|
(2.5
|
)%
|
|
(4,961
|
)
|
|
(22.2
|
)%
|
|
(2,783
|
)
|
|
(5.4
|
)%
|
Global intangible low-taxed income
|
|
6,118
|
|
|
5.3
|
%
|
|
2,363
|
|
|
10.6
|
%
|
|
—
|
|
|
—
|
%
|
Foreign income tax differential
|
|
(5,939
|
)
|
|
(5.2
|
)%
|
|
(2,944
|
)
|
|
(13.2
|
)%
|
|
3,481
|
|
|
6.8
|
%
|
Stock based compensation
|
|
(8,446
|
)
|
|
(7.4
|
)%
|
|
(11,040
|
)
|
|
(49.3
|
)%
|
|
(18,958
|
)
|
|
(37.0
|
)%
|
Impact of the Tax Act
|
|
—
|
|
|
—
|
%
|
|
826
|
|
|
3.7
|
%
|
|
3,076
|
|
|
6.0
|
%
|
IP installment sale and repatriation
|
|
(2,118
|
)
|
|
(1.8
|
)%
|
|
3,252
|
|
|
14.5
|
%
|
|
3,367
|
|
|
6.6
|
%
|
Bargain purchase gain
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
(24,811
|
)
|
|
(48.4
|
)%
|
Section 162(m)
|
|
203
|
|
|
0.2
|
%
|
|
456
|
|
|
2.0
|
%
|
|
595
|
|
|
1.2
|
%
|
Other
|
|
1,393
|
|
|
1.2
|
%
|
|
3
|
|
|
0.1
|
%
|
|
1,125
|
|
|
2.2
|
%
|
|
|
$
|
13,672
|
|
|
11.9
|
%
|
|
$
|
(6,419
|
)
|
|
(28.7
|
)%
|
|
$
|
(17,361
|
)
|
|
(33.8
|
)%
|
Tax credits in 2019, 2018 and 2017 consist principally of research and developmental tax credits.
The tax effect of the gain on bargain purchase is treated as a part of purchase accounting and is not a component of the income tax provision.
Certain intellectual property and assets were repatriated in 2019 from a liquidation of foreign subsidiaries to the U.S. parent. The tax effect of the repatriation is included as IP repatriation.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of our deferred income tax assets (liabilities) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Deferred tax asset:
|
|
|
|
|
|
|
Accruals/other
|
|
2,632
|
|
|
11,109
|
|
Contingent consideration
|
|
—
|
|
|
12,451
|
|
Net operating loss carryforwards
|
|
—
|
|
|
12,686
|
|
Acquired future tax deductions
|
|
8,711
|
|
|
10,722
|
|
Stock-based compensation
|
|
9,654
|
|
|
10,775
|
|
Foreign currency translation adjustments
|
|
2,716
|
|
|
3,108
|
|
Tax credits
|
|
11,331
|
|
|
14,470
|
|
Inventory reserves
|
|
4,305
|
|
|
5,674
|
|
Allowance for doubtful accounts
|
|
4,242
|
|
|
830
|
|
Accrued restructuring
|
|
7,072
|
|
|
182
|
|
Chargebacks, discounts, customer concessions
|
|
20,975
|
|
|
—
|
|
Valuation allowance
|
|
(3,677
|
)
|
|
(5,436
|
)
|
|
|
$
|
67,961
|
|
|
$
|
76,571
|
|
Deferred tax liability:
|
|
|
|
|
|
|
State income taxes
|
|
$
|
2,600
|
|
|
$
|
2,639
|
|
Foreign
|
|
997
|
|
|
612
|
|
Depreciation and amortization
|
|
23,839
|
|
|
35,387
|
|
Section 481(a) adjustment - change in accounting method
|
|
14,618
|
|
|
—
|
|
|
|
$
|
42,054
|
|
|
$
|
38,638
|
|
|
|
|
|
|
Deferred tax asset, net
|
|
$
|
25,907
|
|
|
$
|
37,933
|
|
Tax Holidays and Carryforwards
Net operating loss ("NOL") carryforwards consist of: (a) federal NOL carryforwards of $14.8 million which will expire at various dates from 2020 to indefinite carryforward periods, (b) state NOL carryforwards of $1.4 million which will expire at various dates from 2029 to indefinite carryforward periods and (c) foreign NOL carryforwards of $18.4 million which will expire at various dates from 2020 to indefinite carryforward periods. Under Section 382 of the Internal Revenue Code, certain ownership changes limit the utilization of the NOL carryforwards, and the amount of federal NOL carryforwards recorded is the net federal benefit available.
Other carryforwards include state research and development (“R&D”) tax credit carryforwards of $14.7 million, which have an indefinite carryforward period.
A substantial portion of our manufacturing operations in Costa Rica operate under various tax holiday and tax incentive programs due to expire in whole or in part in 2027. Certain of the holidays may be extended if specific conditions are met. The net impact of these tax holiday and tax incentives was an increase to our net earnings by $7.8 million or $0.36 per diluted share in 2019 and by $8.8 million or $0.41 per diluted share in 2018.
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, 2019, we have estimated $78.5 million of undistributed foreign earnings and profits. Such earnings were previously subject to U.S. tax as a result of the Tax Act and much of any future remittances would generally be subject to no U.S. tax as a result of dividends received deductions and/or foreign tax credit relief. We intend to invest
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
substantially all of our foreign subsidiary earnings, as well as our capital in our foreign subsidiaries, indefinitely outside of the U.S. in those jurisdictions in which we incur significant additional costs upon repatriation of such amounts.
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 2016 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, 2019 was $15.0 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, 2019, 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, 2019 or December 31, 2018.
The following table summarizes our cumulative gross unrecognized tax benefits (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Beginning balance
|
|
$
|
10,824
|
|
|
$
|
6,527
|
|
|
$
|
2,000
|
|
Increases to prior year tax positions
|
|
138
|
|
|
—
|
|
|
77
|
|
Increases due to acquisitions
|
|
—
|
|
|
—
|
|
|
640
|
|
Increases to current year tax positions
|
|
4,231
|
|
|
4,536
|
|
|
3,992
|
|
Decreases to prior year tax positions
|
|
(3
|
)
|
|
(146
|
)
|
|
(12
|
)
|
Decrease related to lapse of statute of limitations
|
|
(163
|
)
|
|
(93
|
)
|
|
(170
|
)
|
Ending balance
|
|
$
|
15,027
|
|
|
$
|
10,824
|
|
|
$
|
6,527
|
|
NOTE 13. GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
Significant Customers
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. We do not currently derive a significant portion of our revenues from any one customer.
Geographic Information
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,
|
|
|
2019
|
|
2018
|
Costa Rica
|
|
$
|
96,442
|
|
|
$
|
81,920
|
|
Mexico
|
|
69,141
|
|
|
64,242
|
|
Other LATAM
|
|
31,905
|
|
|
22,828
|
|
Canada
|
|
4,769
|
|
|
4,545
|
|
Italy
|
|
7,921
|
|
|
7,819
|
|
Spain
|
|
6,411
|
|
|
6,516
|
|
Other Europe
|
|
3,135
|
|
|
2,427
|
|
APAC
|
|
17,200
|
|
|
15,152
|
|
Total Foreign
|
|
$
|
236,924
|
|
|
$
|
205,449
|
|
United States
|
|
539,316
|
|
|
489,415
|
|
Worldwide Total
|
|
$
|
776,240
|
|
|
$
|
694,864
|
|
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. STOCKHOLDERS' EQUITY
Treasury Stock
In August 2019, our Board of Directors approved a common stock purchase plan to purchase up to $100.0 million of our common stock. This plan replaced our prior plan and has no expiration date. We have $100.0 million remaining on this purchase plan. We did not purchase any of our common stock under our common stock purchase plan in 2019, 2018 or 2017. We are currently limited on share purchases in accordance with the terms and conditions of our Credit Facility, (see Note 11, Long-Term Obligations).
In 2019, we withheld 80,186 shares of our common stock from employee vested restricted stock units in consideration for $18.6 million in payments for the employee's share award income tax withholding obligations. We had 850 shares remaining in treasury at December 31, 2019.
In 2018, we withheld 26,307 shares of our common stock from employee vested restricted stock units in consideration for $6.3 million in payments for the employee's share award income tax withholding obligations. We have 408 shares remaining in treasury at December 31, 2018.
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 had no shares remaining in treasury at December 31, 2017.
We use treasury stock to issue shares for stock option exercises, restricted stock grants.
Accumulated Other Comprehensive (Loss) Income ("AOCI")
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 January 1, 2017
|
|
$
|
(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
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
(3,104
|
)
|
|
1,568
|
|
|
115
|
|
|
(1,421
|
)
|
Amounts reclassified from AOCI
|
|
—
|
|
|
(565
|
)
|
|
—
|
|
|
(565
|
)
|
Other comprehensive (loss) income
|
|
(3,104
|
)
|
|
1,003
|
|
|
115
|
|
|
(1,986
|
)
|
Balance as of December 31, 2018
|
|
$
|
(17,682
|
)
|
|
$
|
638
|
|
|
$
|
99
|
|
|
$
|
(16,945
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
372
|
|
|
1,938
|
|
|
(71
|
)
|
|
2,239
|
|
Amounts reclassified from AOCI
|
|
—
|
|
|
(696
|
)
|
|
—
|
|
|
(696
|
)
|
Other comprehensive income (loss)
|
|
372
|
|
|
1,242
|
|
|
(71
|
)
|
|
1,543
|
|
Balance as of December 31, 2019
|
|
$
|
(17,310
|
)
|
|
$
|
1,880
|
|
|
$
|
28
|
|
|
$
|
(15,402
|
)
|
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. COMMITMENTS AND CONTINGENCIES
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, Inc. 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 U.S. manufacturer defendants conspired together to restrict output and artificially fix, raise, maintain and/or stabilize 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 July 5, 2018, the District Court granted defendants’ motion to dismiss the operative complaint for failing to state a valid antitrust claim, but allowed the plaintiffs to file a second amended complaint. On September 6, 2018, plaintiffs filed a second amended complaint adding new allegations in support of their conspiracy claims and adding ICU as a defendant. All defendants have filed a motion to dismiss this second amended complaint. Briefing is complete and we are awaiting the Court's ruling. 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.
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 subpoenas call 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. On December 10, 2018, we were informed by the U.S. Department of Justice, Antitrust Division, that their investigation has been closed.
In April 2018, the U.S. Department of Justice issued a HIPAA subpoena to Hospira, Inc., requesting production of documents and records regarding the manufacturing, production, testing, quality and validation of the Sapphire™ infusion pumps, sets and related accessories distributed by the company. We have coordinated with Pfizer to produce the requested records to the Department of Justice.
In March 2018, a dispute with a product partner resulted in a redefinition of our contractual arrangement and in the rights and remedies determined under such arrangement. In March 2018, the resolution of the dispute resulted in a $28.9 million net charge to the consolidated statement of operations. In addition, during the fourth quarter of 2018, we incurred $12.7 million in additional contract settlement charges related to this arrangement as a result of the write-off of assets and additional expenses associated with the restructuring of products.
From time to time, we are involved in various legal proceedings, most of which are routine litigation, in the normal course of business. Our management does not believe that the resolution of the unsettled legal proceedings that we are involved with will have a material adverse impact on our financial position or results of operations.
Off Balance Sheet Arrangements
In the normal course of business, we have agreed to indemnify our officers and directors to the maximum extent permitted under Delaware law and to indemnify customers as to certain intellectual property matters 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 had a contractual earn-out arrangement in connection with our acquisition of the HIS business that ended on December 31, 2019, whereby Pfizer was entitled up to an additional $225 million in cash upon achievement of performance
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
targets for the company for the three years ending December 31, 2019. We did not meet the performance targets required for payout of this earn-out.
During November 2019, we acquired Pursuit (see Note 2, Acquisitions). Total consideration for the acquisition includes a potential contractual earn-out of up to $50.0 million calculated based upon the achievement of certain performance targets during the earn-out period.
NOTE 16. 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 had entered into an agreement with Pfizer, whereby Pfizer were to 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 paid a monthly service fee for each service provided, and shared 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, were not to exceed $22.0 million. The service fees were 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 were subject to the fee cap, any services provided after expiration of the agreement or services that were not Enabling Function Services were to result in service fees outside the fee cap. The service fees were intended to reasonably approximate Pfizer’s cost of providing the Enabling Function Services. We had also entered into a reverse transitional services agreement, where we provided to Pfizer certain transitional services ranging in term from three to eighteen months. Services included support for real estate, research and development, infrastructure, logistics, quality, site operations, safety, commercial and finance, and regulatory support services. This transitional service agreement with Pfizer ended in 2018.
NOTE 17. SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Mar. 31
|
|
Jun. 30
|
|
Sept. 30
|
|
Dec. 31
|
|
|
(in thousands except per share data)
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
330,932
|
|
|
$
|
312,282
|
|
|
$
|
307,471
|
|
|
$
|
315,523
|
|
Gross profit
|
|
$
|
135,303
|
|
|
$
|
103,869
|
|
|
$
|
118,552
|
|
|
$
|
114,140
|
|
Net income
|
|
$
|
30,998
|
|
|
$
|
22,833
|
|
|
$
|
26,563
|
|
|
$
|
20,641
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.51
|
|
|
$
|
1.11
|
|
|
$
|
1.29
|
|
|
$
|
1.00
|
|
Diluted
|
|
$
|
1.44
|
|
|
$
|
1.06
|
|
|
$
|
1.24
|
|
|
$
|
0.96
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
372,033
|
|
|
$
|
360,460
|
|
|
$
|
327,169
|
|
|
$
|
340,378
|
|
Gross profit
|
|
$
|
149,001
|
|
|
$
|
151,800
|
|
|
$
|
134,587
|
|
|
$
|
134,640
|
|
Net income (loss)
|
|
$
|
4,875
|
|
|
$
|
31,054
|
|
|
$
|
219
|
|
|
$
|
(7,355
|
)
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.24
|
|
|
$
|
1.53
|
|
|
$
|
0.01
|
|
|
$
|
(0.36
|
)
|
Diluted
|
|
$
|
0.23
|
|
|
$
|
1.44
|
|
|
$
|
0.01
|
|
|
$
|
(0.36
|
)
|
______________________________________
Net loss for the quarter ended December 31, 2018 included the impact of $41.1 million in restructuring, strategic transaction and integration expenses. We also incurred an $8.6 million non-cash charge in the quarter ended December 31, 2018 associated
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
with a contract settlement that took place in the quarter ended March 31, 2018, which is included in contract settlement. Management of the Company concluded the contract settlement charge is not material to the three months ended December 31, 2018, or to any previously issued interim financial statements.