2016 Annual Report
to Shareholders
and Form 10-K
Clinicians Around the World
Count on ICU Medical
to provide them with clinically proven, cost-effective
products and innovative patient safety solutions.
Infusion Therapy
Standardize your clinical practice with our industry-leading needlefree IV connector
technology, chosen by clinicians and infection control professionals worldwide
more often than any other technology.
Oncology
Help keep pharmacists, nurses, and patients safe with the only needlefree
closed system transfer devices and drug compounding systems for safely
handling hazardous drugs. Easy-to-use, safe, effective, and affordable.
Critical Care
Optimize patient fluid levels and maximize blood and oxygen delivery with our
advanced hemodynamic monitoring systems, helping you improve outcomes,
shorten lengths of stay, and reduce the cost of care.
April 10, 2017
Dear Shareholder:
Fiscal 2016 was a great year for ICU Medical. We again delivered record revenues, cash flow, and earnings, but most importantly we announced the
acquisition of the Hospira Infusion Systems (HIS) business from Pfizer, which solved our main strategic challenge and creates a company that can
continue to sustain and build shareholder value.
In mid-2014 we laid out a plan that focused on generating free cash flow to allow us to pursue multiple scenarios that could position the company for
value creation. We began a process to add key individuals and skill sets to the management team, streamline our manufacturing operations, and
dramatically increase our commercial intensity and execution. These moves allowed us to grow organic revenues and improve our operating margins
substantially, more than double our annual free cash flow, and build our cash balance. As a result, we were able to solve the big strategic overhang
we had of relying on a single customer by acquiring HIS after exploring all other options and assessing the viability of the HIS relationship over the
next few years.
The HIS acquisition allows us to create a leading pure-play infusion company with a complementary full-line product portfolio, the ability to unify our
distribution channels globally, and provides compelling economics to stakeholders over time. While the transaction will help us to play offense,
defensively it addressed several key issues limiting our overall valuation and investment attractiveness.
We believe offering the full product suite—from pumps to consumables to solutions—gives us an opportunity to become a large player where we had
been the smallest player in a category dominated by multinationals. Even though we executed well over the last few years, it was getting harder to
compete against the larger players. We saw the benefit of providing enhanced value to customers by vertically integrating our combined product
offerings and eliminating the supplier/customer relationship between ICU and HIS that added cost to the end-user. This transaction also gives us an
opportunity to globalize our business in a scaled manner, something that is difficult for a smaller player to do quickly. And we felt we could create
shareholder returns based on our team’s collective experiences and the skills we have sharpened over the last few years.
From an intrinsic value standpoint, we are creating a pure-play asset in a category with a good industry structure where we have an opportunity to
improve the performance of a business that has been under-managed. We believe with just some basic operational rigor we can improve
performance in the medium term by first enhancing margins and eventually improving overall growth. In the best case, we will have better execution
to improve our top line performance over time, drive operational improvements, and improve cash conversions and returns. In the worst case, we
continue to fight headwinds on the top line, but we can still drive operational improvements and generate solid cash returns.
We have been very transparent with investors on our plans over the last few years and cautious with our own expectations and we want to continue
that into 2017. Short-term outperformance is not likely with this transaction and it is important for our shareholders to understand that. The first few
quarters under our ownership will not be predictable and will be subject to all the expected difficulties of a corporate carve-out. The predictability that
ICU has offered in recent years will be difficult to repeat over the near-term, but when we get it right, returns could be generated quickly.
In closing, we believe that this was a logical evolution for both businesses. We feel we have been able to put together a sensible transaction that
offers solid value creation for investors. On behalf of our management team and board of directors, I thank you for your confidence in ICU Medical
over the last few years and look forward to updating you on our business in the months and years to come.
Respectfully,
Vivek Jain
Chief Executive Officer and Chairman
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 001-34634
ICU MEDICAL, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
951 Calle Amanecer
San Clemente, California
(Address of principal executive offices)
33-0022692
(I.R.S. Employer
Identification No.)
92673
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
Registrant’s Telephone Number, Including Area Code: (949) 366-2183
Title of each class
Common stock, par value $0.10 per share
Preferred Stock Purchase Rights
Name of each exchange on which registered
The NASDAQ Stock Market LLC
(Global Select Market)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes
No
Indicate by check mark whether registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act (Check one):
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Small reporting company
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
The aggregate market value of the voting stock held by non-affiliates of registrant as of June 30, 2016, the last business day of
registrant’s most recently completed second fiscal quarter, was $1,643,877,298*.
The number of shares outstanding of registrant’s common stock, $.10 par value, as of January 31, 2017 was 16,338,132.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for registrant’s 2017 Annual Meeting of Stockholders filed or to be filed pursuant to Regulation 14A
within 120 days following registrant’s fiscal year ended December 31, 2016, are incorporated by reference into Part III of this Report.
____________________________
* Without acknowledging that any person other than Dr. George A. Lopez is an affiliate, all directors and executive officers have been
included as affiliates solely for purposes of this computation.
ICU Medical, Inc.
Form 10-K
For the Year Ended December 31, 2016
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases
of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Signatures
Page
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15
27
27
27
27
27
30
32
44
45
46
77
77
79
79
79
79
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85
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
Item 1. Business.
PART I
First person pronouns used in this Report, such as “we,” “us,” and “our,” refer to ICU Medical, Inc. ("ICU") and its
subsidiaries unless context requires otherwise.
Overview
We are a leader in the development, manufacture and sale of innovative medical devices used in infusion therapy,
critical care and oncology applications. Our product line includes needlefree connection devices, custom infusion sets, closed
system transfer devices ("CSTD") for the handling of hazardous drugs, advanced sensor catheters, closed blood sampling
systems, and hemodynamic monitoring systems. Our headquarters are in San Clemente, California.
Our products are used in acute care hospitals and ambulatory clinics in more than 65 countries throughout the world.
We categorize our products into three main market segments: Infusion Therapy, Critical Care and Oncology. Our primary
products include:
Infusion Therapy
•
•
•
Critical Care
Needlefree connector products
MicroClave® and MicroClave Clear®
Neutron®
NanoClave®
Clave®
SwabCap®
Custom infusion sets
Tego® needlefree hemodialysis connector
•
•
•
•
Hemodynamic Monitoring Systems
Closed Blood Sampling and Conservation Systems
Consumable Blood Pressure Transducers
Other Critical Care Products and Accessories
Oncology
•
•
•
ChemoLock® CSTD and components
ChemoClave® CSTD and components
Diana® Hazardous Drug Compounding System
We sell the majority of our products through our direct sales force and through independent distributors. Additionally,
we sell our products on an original equipment manufacturer ("OEM") basis to other medical device manufacturers.
Total revenues for 2016, 2015 and 2014 were $379.4 million, $341.7 million and $309.3 million, respectively.
Income from operations was $82.9 million, $68.6 million and $39.0 million in 2016, 2015 and 2014, respectively. Total assets
were $704.7 million, $626.8 million and $541.1 million in 2016, 2015 and 2014, respectively.
Our largest OEM customer has historically been Hospira, Inc., a subsidiary of Pfizer, Inc. ("Pfizer"). We began our
relationship with Pfizer and its predecessor companies in 1995. Sales to Pfizer accounted for 30%, 36% and 36% of our
worldwide revenues in 2016, 2015 and 2014, respectively.
In October 2016, we entered into a Stock and Asset Purchase Agreement to acquire Pfizer’s Hospira Infusion Systems
("HIS") business. The original purchase agreement was subsequently amended and restated on January 5, 2017 and the
acquisition closed on February 3, 2017 for a purchase price of 3.2 million newly issued shares of common stock of the
Company and approximately $275.0 million in cash. We believe combining HIS with our current infusion therapy business
will create a pure-play infusion business enabling us to offer customers a full suite of intravenous ("IV") therapy devices and
solutions. The combination unifies a split distribution channel which we believe in the long-term will reduce costs and improve
efficiencies. We believe that the acquisition significantly expands our footprint allowing us to potentially compete more
successfully on a global scale and eliminates our single customer concentration risk that clouded our strategic value. Following
the acquisition, we will report the combined revenue of ICU and HIS by the following four market segments: (1) pumps, which
3
includes the infusion pump hardware, service revenue, dedicated consumable pump sets and software; (2) consumables, which
includes our legacy IV therapy and oncology segments, non-dedicated sets, oncology and accessories; (3) IV solutions; and (4)
Critical Care.
Company Background
ICU was founded in 1984 and our initial public offering was in 1992. In 1993, we launched the Clave, an innovative
one-piece needlefree IV connection device. In 1998, we developed a computerized manufacturing process called SetMaker that
enables us to design a custom infusion set to a customer's exact specifications and commence production in less than one day
from receiving the order. Since the late 1990's, we have expanded our product offerings by introducing internally developed
products and systems and from acquisitions. Key developments have included the Tego needlefree connector for use in
hemodialysis, products for handling hazardous drugs including the ChemoClave and ChemoLock CSTDs, the Diana hazardous
drug compounding system, the Neutron, a catheter patency device and NanoClave, a series of MicroClave Clear derivatives
which are uniquely designed for incorporation into custom manifolds and sets. In August 2009, we purchased all commercial
rights and physical assets from Hospira's critical care product line, which provided us control over all aspects of our critical
care product line. In October 2015, we acquired Excelsior Medical Corporation’s SwabCap disinfecting cap for needlefree IV
connectors to enhance our direct and OEM infusion therapy product offerings and to open new customer opportunities globally.
Our website address is http://www.icumed.com. We make available our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to those reports free of charge on our website as
soon as reasonably practicable after filing them with the Securities and Exchange Commission ("SEC"). We also have our code
of ethics posted on our website (http://www.icumed.com). The information on our website is not incorporated into this Annual
Report.
The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F
Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically with the SEC on its website (http://www.sec.gov).
Products
Infusion Therapy
Infusion therapy lines, used in hospitals and ambulatory clinics, consist of a tube running from a bottle or plastic bag
containing a solution to a catheter inserted in a patient’s vein. The tube typically has several injection ports or Y-sites
(conventionally, entry tubes covered by rubber caps) to which a secondary infusion line can be connected to permit constant IV
administration of medications, fluids and nutrients, and to allow instantaneous IV administration of medication.
Clave Needlefree Technology
Prior to the introduction of needle-safe connectors, a conventional infusion line terminated with a male luer connector
to which a hollow-bore needle would be attached to penetrate an injection port to make a primary or secondary connection.
With the Clave technology, instead of attaching a hollow-bore needle to the male luer, the male luer without a needle is simply
attached directly to the needlefree Clave port.
All types of medications can be administered through the Clave by using a standard syringe or various types of
administration sets. The Clave can be used with any conventional peripheral or central vascular access device, both for venous
and arterial applications. The resilience of the silicone compression seal permits repeated connections and disconnections
without replacing the Clave. The Clave contains no natural rubber latex.
The MicroClave is smaller than the standard Clave but is functionally similar. The MicroClave has a feature where
upon disconnection of an infusion set or syringe, there is a neutral displacement of fluid. This allows clinicians to utilize known
protocols without the risk of device failure and a saline flush regimen which reduces cost and exposure to the drug heparin. The
MicroClave is intended for use on all peripheral and central catheters, which allows it to be used throughout the hospital and
reduces line items that the hospital may need to carry and the educational burden of having multiple devices. The MicroClave
Clear is functionally identical to the MicroClave, and has a clear housing so that clinicians can visualize the fluid path.
The NanoClave is a derivative of the MicroClave, where it is incorporated into custom manifolds and components to
be used in highly customized applications generally found in neonatal and pediatric patient populations. The NanoClave is also
4
a neutral displacement connector with a clear housing, allowing clinicians to flush the connector clear of medications and blood
with minimal flush volumes.
Neutron
The Neutron catheter patency device also features Clave technology, but includes a bi-directional silicone bellows that
helps prevent blood reflux into a catheter to minimize the incidence of occlusion, or blocking of the catheter due to a blood
clot. The Neutron was specifically designed to be used on patients receiving longer indwelling central venous catheters.
Tego
The Tego is a needlefree hemodialysis connector that creates a mechanically and microbiologically closed system
when attached to the hub of a catheter, eliminating open catheter hubs and lowering the chance of bacterial contamination and
infection.
SwabCap
SwabCap is a consumable cap designed to disinfect needlefree connectors with 70% isopropyl alcohol. The SwabCap
product line complements the Clave family of needlefree connectors, as both work together to deliver the critical elements of
safety, protection and maintenance of IV catheters.
Custom Infusion Sets
We have developed innovative software systems and manufacturing processes known as SetMaker and iFactory that
permit us to design a custom infusion set to a hospital’s or clinician’s exact specifications, commence production within less
than a day after we receive the customer order and ship smaller orders of the custom infusion sets to the customer within three
days of receipt. While we are capable of meeting customer demand on this accelerated three-day schedule, in normal
circumstances we ship within twenty-one to thirty days of receipt of the customers’ order. This is a fraction of the time required
by other custom set manufacturers.
We serve as the exclusive manufacturer for certain custom IV products that are sold by a subsidiary of Pfizer. These
products are promoted under the name SetSource.
Infusion Therapy sales accounted for $272.6 million, or 72%, of our revenue in 2016, $244.7 million, or 72%, of our
revenue in 2015 and $216.3 million, or 70%, of our revenue in 2014. Additional information regarding infusion therapy sales
over the last three years is discussed in Part II, Item 7 of this Annual Report on Form 10-K.
Critical Care Products
Critical care products are used to monitor vital signs as well as specific physiological functions of key organ systems.
We manufacture hemodynamic monitoring systems, vascular and cardiac catheters and monitoring systems and custom and
interventional radiology kits that are used to monitor cardiac function and blood oxygen levels in critically ill patients. They
include all components of the invasive monitoring system. Most of our critical care products can be sold in custom systems
containing specific components to meet the individual needs of the customer, and in some cases, custom made or acquired
components.
The primary critical care products we manufacture are the following:
Hemodynamic Monitoring Systems: Q2 Plus™ CCO/SvO2 (continuous cardiac output/oximetry) computer providing
advanced hemodynamic monitoring with unparalleled accuracy and reliability; and Cogent™ 2-in-1 hemodynamic monitoring
system providing minimally invasive and invasive hemodynamic monitoring technologies in a single, lightweight system with
wireless communication. In addition, we are the exclusive United States distributor of the LiDCO® LXi noninvasive
hemodynamic monitoring system under license from LiDCO Group Plc.
SafeSet® Closed Blood Sampling and Conservation System: Blood sampling systems that provide the clinician with a
convenient, needlefree method to obtain a patient’s blood sample and to administer IV fluids or drugs in conjunction with blood
pressure monitoring devices. They are designed to protect the clinician from exposure to blood borne pathogens, reduce the
risk of IV line contamination and reduce blood waste for the patient.
5
Transpac® Consumable Blood Pressure Transducers: Transpac transducers provide clinicians with accurate real-time
access to their patient's blood pressure status in surgical and intensive care settings.
Other Critical Care Products: Venous oximetry and advanced sensing catheters, Lopez Valve® and cables and
accessories for hemodynamic monitoring.
Critical care sales accounted for $53.6 million, or 14%, of our revenue in 2016, $54.3 million, or 16%, of our revenue
in 2015 and $55.0 million, or 18%, of our revenue in 2014. Additional information regarding critical care sales over the last
three years is discussed in Part II, Item 7 of this Annual Report on Form 10-K.
Oncology
Oncology products, known as CSTDs are used to prepare and deliver hazardous medications such as those used in
chemotherapy, which, if released, can have harmful effects to the healthcare worker and environment. In 2007, we introduced
the ChemoClave CSTD, which incorporates Clave technology, and in 2013, we introduced the ChemoLock CSTD.
The preparation of hazardous drugs typically takes place in a pharmacy location where drugs are removed from vials
and prepared for delivery to a patient. Those prepared drugs are then transferred to a nursing unit where the chemotherapy is
administered via an infusion pump set to a patient. Components of the ChemoClave and ChemoLock product lines are used
both in Pharmacy and on the nursing floors for the preparation and administration of hazardous drugs. Custom design
capability allows for a specialized product mix within the ChemoClave and ChemoLock systems to best adapt to the existing
hazardous drug handling workflow.
The primary oncology products we manufacture are the following:
• ChemoLock Needlefree CSTD: ChemoLock was the first CSTD to receive Food and Drug Administration ("FDA") 510
(k) clearance for both pharmacy (ONB) and patient administration (FPA) applications. ChemoLock prevents the escape
of hazardous drug or vapor concentrations, blocks the transfer of environmental contaminants into the system, and
eliminates the risk of needlestick injury.
• ChemoClave Needlefree CSTD: ChemoClave utilizes standard ISO luer locking connections, making it compatible with
all brands of needlefree connectors and pump delivery systems. ChemoClave also prevents the escape of hazardous drug
or vapor concentrations, blocks the transfer of environmental contaminants into the system, and eliminates the risk of
needlestick injury.
• Diana Hazardous Drug Compounding System: Diana is an automated sterile compounding system that incorporates
ChemoClave and ChemoLock consumables for the accurate, safe, and efficient preparation of hazardous drugs. It is a
user-controlled automated system that provides repeatable accuracy of drug mixes, minimizes clinician exposure to
hazardous drugs and reduces the risk of repetitive motion stresses for the clinician while helping to maintain the sterility
of the drugs being mixed.
Oncology sales accounted for $52.3 million, or 14%, of our revenue in 2016, $41.5 million, or 12%, of our revenue in
2015 and $36.7 million, or 12%, of our revenue in 2014. Additional information regarding oncology sales over the last three
years is discussed in Part II, Item 7 of this Annual Report on Form 10-K.
Other Revenues
We have a significant number of patents on the technology in our products and methods used to manufacture them.
We have continuing royalty and revenue share income from our technology and from time to time may receive license fees or
royalties from other entities for the use of our technology.
Sales, Marketing and Customer Support
As of December 31, 2016, we employed 153 people worldwide in sales, marketing and customer support. Our sales
administrative operations are in San Clemente, California, Roncanova, Italy, Houten, Netherlands, Bella Vista, NSW Australia,
Ludenscheid, Germany and Johannesburg, South Africa. We ship around the world with the majority of our sales denominated
in U.S. dollars and Euro.
6
Domestic Sales
Domestic sales include direct and OEM U.S. sales. Total domestic sales were $266.0 million, $241.9 million and
$212.7 million in 2016, 2015 and 2014, respectively.
Direct
Direct domestic sales includes sales both to our distributors and directly to the end user of our products. Direct
domestic sales accounted for 43%, 39%, and 38% of our worldwide revenue in 2016, 2015, and 2014, respectively.
Distributors purchase and stock our products for resale to healthcare providers. One distributor accounted for 8% and two
distributors accounted for 7% each of revenue in 2016. All other distributors accounted for less than 5% of revenue in 2016.
Although the loss of one or more of our larger distributors could have an adverse effect on our business, we believe we could
readily locate other distributors in the same territories who could continue to distribute our products to the same customers.
OEM
We also distribute our products on an OEM basis to other medical device manufacturers. OEM domestic sales
accounted for 28%, 32%, and 31% of our worldwide revenue in 2016, 2015, and 2014, respectively. Pfizer has been a major
supplier of infusion pumps and IV solutions, and has helped us achieve market share where they have multiple products under
contract with a customer or broader international distribution channels than we would have been able to have on our own. Our
agreements with Pfizer, which terminated upon acquisition of Pfizer's HIS business, provided them with conditional rights to
distribute certain of our Clave and other products to certain categories of customers both in the United States and foreign
countries. Depending on the product and category of customer, these rights may have been exclusive or nonexclusive. We also
served as the exclusive manufacturer for certain custom IV products that are sold by a subsidiary of Pfizer. These products are
promoted under the name SetSource®. The loss of Pfizer as a customer would have had a significant adverse effect on our
business and operating results; as such our decision to acquire HIS was in part to protect against this significant earnings
exposure, accordingly this concentration risk will be eliminated going forward.
In 2015, we signed an exclusive agreement with Medline to supply them with SwabCaps for their SwabFlush syringe
product used in infusion therapy.
International Sales
In 2016, we started to report our revenue based on distribution channel within our market segments with both Terumo-
related geographies in Asia and sales to Medline in our OEM business, and no longer in Direct. As such, prior year results have
been reported in the same manner for comparative purposes.
In 2015, we had entered into a long-term supply agreement with Terumo Corporation of Japan for Japan and certain
smaller Asian countries. In accordance with the agreement, Terumo distributes our entire product portfolio, including IV
therapy and CSTD product lines. Japan and Asia remains a valuable growth market.
International sales were $113.4 million, $99.8 million and $96.6 million in 2016, 2015 and 2014, respectively.
International sales through our direct channels, including distributors and directly to the end customer, were $92.8
million, $81.3 million and $76.9 million in 2016, 2015, and 2014, respectively. International sales as an OEM supplier were
$20.6 million, $18.5 million and 19.7 million in 2015, 2014 and 2013, respectively.
In 2016, customers in Europe were served by our facilities in Slovakia, Netherlands, Italy, France and Germany. We
serve the rest of the world from our facilities in the United States and Mexico. In 2015, we made the decision to begin shutting
down our manufacturing facility in Slovakia and to move those products to our facility in Mexico. We completed the closure of
those facilities in the second half of 2016. As of December 31, 2016, we had 20 sales and sales support personnel serving
Europe and 27 serving Asia Pacific, Southeast Asia, Latin America, South Africa, the Middle East and Canada.
7
Manufacturing
Manufacturing of our products involves injection molding of plastic and silicone parts, manual and automated
assembly of the molded plastic parts and other components, quality control inspection, packaging and sterilization. We mold
most of our proprietary components, and perform all assembly, quality control, inspection, packaging, labeling and shipping of
our products. Our manufacturing operations function as a separate group, producing products for the marketing and sales
groups.
We own a fully integrated medical device manufacturing facility in Salt Lake City, Utah with approximately 450,000
square feet of state-of-the art manufacturing space. This building includes approximately 109,500 square feet of class 100,000
clean room area, approximately 36,000 square feet of other manufacturing space, approximately 77,000 square feet of
warehouse space and approximately 155,000 square feet of office space.
Our state-of-the-art injection molding technology and highly automated assembly systems are designed to maintain a
high level of product quality and achieve high volume production at low unit manufacturing costs. To achieve these advantages
and to gain greater control over raw material and finished product delivery times, we mold the majority of our proprietary
molded components. The raw materials for our molding operation are principally resins and silicones, and these materials are
available from several sources. Our exposure to commodity price changes relates primarily to certain manufacturing operations
that use resin. We manage our exposure to changes in those prices through our procurement and supply chain management
practices.
Most of our manual assembly during 2016 was done at our facilities in Ensenada, Mexico. Our Vrable, Slovakia
facilities were closed during 2016. Our Mexico facilities were recently expanded to approximately 308,000 square feet, which
has an electron beam ("e-beam") sterilizer and has approximately 125,000 square feet and 62,000 square feet, respectively, of
space for production and warehousing. Principal products assembled manually in Mexico are used in conjunction with infusion
therapy systems (which includes oncology) and critical care systems.
The majority of the infusion and oncology products we manufacture are sterilized in processes which use e-beam
radiation. Most critical care products and other certain products are currently sterilized in processes using gamma radiation or
ethylene oxide gas (“EO”). We have our own sterilization facilities at our plant in Mexico which is used to sterilize most of the
products assembled in that plant. All other sterilization is done by independent contractors.
We also assemble compounders in our leased facility in Ludenscheid, Germany and Salt Lake City, Utah.
Government Regulation
Our products and operations are subject to extensive and rigorous regulation by the FDA and other federal, state and
local authorities, as well as foreign regulatory authorities. The FDA regulates, among other things, the research, development,
testing, manufacturing, approval, labeling, storage, recordkeeping, advertising, promotion and marketing, distribution, post
approval monitoring and reporting and import and export of medical devices and combination drug/device products in the
United States to assure the safety and effectiveness of medical products for their intended use. The Federal Trade Commission
also regulates the advertising of our products. Further, we are subject to laws directed at preventing fraud and abuse, which
subject our sales and marketing, training and other practices to government scrutiny.
U.S. Device Classification and Clearance
Unless an exemption applies, each new or significantly modified medical device we seek to commercially distribute in
the United States will require either a premarket notification to the FDA requesting permission for commercial distribution
under Section 510(k) of the Federal Food, Drug and Cosmetic Act ("FDC Act") also referred to as a 510(k) clearance, or
approval from the FDA of a pre-market approval ("PMA") application. Both the 510(k) clearance and PMA processes can be
expensive, and lengthy, and require payment of significant user fees, unless an exemption is available.
Under the FDC Act, medical devices are classified into one of three classes-Class I, Class II or Class III-depending on
the degree of risk associated with each medical device and the extent of control needed to provide reasonable assurances with
respect to safety and effectiveness.
Class I devices are those for which safety and effectiveness can be reasonably assured by adherence to a set of
regulations, referred to as General Controls, which require compliance with the applicable portions of the FDA's Quality
System Regulation ("QSR") facility registration and product listing, reporting of adverse events and malfunctions, and
8
appropriate, truthful and non-misleading labeling and promotional materials. Some Class I devices, also called Class I reserved
devices, also require premarket clearance by the FDA through the 510(k) premarket notification process described below. Most
Class I products are exempt from the premarket notification requirements.
Class II devices are those that are subject to the General Controls, as well as Special Controls, which can include
performance standards, guidelines and postmarket surveillance. Most Class II devices are subject to premarket review and
clearance by the FDA. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k)
premarket notification process. Under the 510(k) process, the manufacturer must submit to the FDA a premarket notification,
demonstrating that the device is "substantially equivalent," as defined in the statute, to a legally marketed "predicate" device.
To be "substantially equivalent," the proposed device must have the same intended use as the predicate device, and
either have the same technological characteristics as the predicate device or have different technological characteristics and not
raise different questions of safety or effectiveness than the predicate device. Clinical data is sometimes required to support
substantial equivalence. Although many 510(k) premarket notifications are cleared without clinical data, the FDA may require
further information, including clinical data, to make a determination regarding substantial equivalence, which may significantly
prolong the review process. If the FDA agrees that the device is substantially equivalent, it will grant clearance to commercially
market the device.
If the FDA determines that the device is not "substantially equivalent" to a predicate device, or if the device is
classified into Class III, the device sponsor must then fulfill the much more rigorous premarketing requirements of the PMA
approval process, or seek reclassification of the device through the de novo process.
Class III devices include devices deemed by the FDA to pose the greatest risk such as life-supporting or life-sustaining
devices, or implantable devices, in addition to those deemed not substantially equivalent following the 510(k) process. Such
devices are subject to the PMA application process, which is generally more costly and time consuming than the 510(k)
process. Through the PMA application process, the applicant must submit data and information demonstrating reasonable
assurance of the safety and effectiveness of the device for its intended use to the FDA's satisfaction. Accordingly, a PMA
application typically includes, but is not limited to, extensive technical information regarding device design and development,
pre-clinical and clinical trial data, manufacturing information, labeling and financial disclosure information for the clinical
investigators in device studies. The PMA application must provide valid scientific evidence that demonstrates to the FDA's
satisfaction reasonable assurance of the safety and effectiveness of the device for its intended use.
Post-Approval Regulation
Even after a device has been approved by the FDA for sale, the FDA may require that certain post-approval requirements
be satisfied, including the conduct of additional clinical studies. If such post-approval conditions are not satisfied, the FDA may
withdraw its approval of the drug or device. After the FDA permits a device to enter commercial distribution, numerous
regulatory requirements continue to apply. These include, but are not limited to:
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the registration and listing regulation, which requires manufacturers to register all manufacturing facilities and list all
medical devices placed into commercial distribution;
the FDA’s current QSR, which requires manufacturers, including third-party manufacturers, to follow elaborate
design, testing, production, control, supplier/contractor selection, complaint handling, documentation and other quality
assurance procedures during the manufacturing process;
labeling regulations and unique device identification requirements;
advertising and promotion requirements;
restrictions on sale, distribution or use of a device;
annual reporting requirements;
the FDA's general prohibition against promoting products for unapproved or "off-label" uses;
the Medical Device Reporting, or MDR, regulation, which requires that manufacturers report to the FDA if their
device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause
or contribute to a death or serious injury if it were to reoccur;
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• medical device correction and removal reporting regulations, which require that manufacturers report to the FDA field
corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a
violation of the FDC Act that may present a risk to health;
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recall requirements, including a mandatory recall if there is a reasonable probability that the drug or device would
cause serious adverse health consequences or death;
an order of repair, replacement or refund;
device tracking requirements; and
post-approval study and postmarket surveillance requirements.
The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market.
Drugs or devices may be promoted only for the approved indications and in accordance with the provisions of the approved
label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a
company that is found to have improperly promoted off-label uses may be subject to significant liability.
Manufacturing Regulation
We must also comply with FDA, International Organization for Standardization (“ISO”) and European Council Directive
93/42/EEC (“Medical Device Directive”) regulations governing medical device manufacturing practices. The FDA, state,
foreign agencies and ISO require manufacturers to register and subject manufacturers to periodic FDA, state, foreign agencies
and ISO inspections of their manufacturing facilities. We are a FDA and ISO registered medical device manufacturer, and must
demonstrate that we and our contract manufacturers comply with the FDA’s QSR and current Good Manufacturing Practices
("cGMPs"). Under these regulations, the manufacturing process must be regulated and controlled by the use of written
procedures and the ability to produce devices that meet the manufacturer’s specifications must be validated by extensive and
detailed testing of every critical aspect of the process. They also require investigation of any deficiencies in the manufacturing
process or in the products produced and detailed record keeping. Further, the FDA and ISO’s interpretation and enforcement of
these requirements has been increasingly strict in recent years and seems likely to be even more stringent in the future. Failure
to adhere to QSR, applicable cGMPs and ISO standards would cause the products produced to be considered in violation of the
applicable law and subject to enforcement action. The FDA and ISO monitor compliance with these requirements by requiring
manufacturers to register with the FDA and ISO, and by subjecting them to periodic FDA and ISO inspections of
manufacturing facilities. If an FDA or ISO inspector observes conditions that might be violative, the manufacturer must correct
those conditions or explain them satisfactorily, or face potential regulatory action that might include physical removal of the
product from the marketplace.
We believe that our products and procedures are in compliance with all applicable FDA and ISO regulations. There is
no assurance, however, that other products we are developing or products that we may develop in the future will be cleared by
the FDA and classified as Class II products, or that additional regulations restricting the sale of our present or proposed
products will not be promulgated by the FDA, ISO or agencies in other jurisdictions. In addition, changes in FDA, ISO or
other federal or state health, environmental or safety regulations or their applications could adversely affect our business.
To market our products in the European Community (“EC”), we must conform to additional requirements of the EC
and demonstrate conformance to established quality standards and applicable directives. As a manufacturer that designs,
manufactures and markets its own devices, we must comply with the quality management standards of EN ISO 13485. Those
quality standards are similar to the QSR regulations.
Manufacturers of medical devices must also conform to EC Directives such as Council Directive 93/42/EEC and their
applicable annexes. Those regulations assure that medical devices are both safe and effective and meet all applicable
established standards prior to being marketed in the EC. Once a manufacturer and its devices are in conformance with the
Medical Device Directive, the “CE” Mark may be affixed to its devices. The CE Mark gives devices unobstructed entry to all
the member countries of the EC.
We have demonstrated conformity to the regulation of EN ISO 13485 and the Medical Device Directive and we affix
the CE Mark to our device labeling for product sold in member countries of the EC.
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We believe our products and systems are in compliance with all EC requirements. There can be no assurance,
however, that other products we are developing or products that we may develop in the future will conform or that additional
regulations restricting the sale of our present or proposed products will not be promulgated by the EC.
Other Healthcare Laws
We are subject to additional healthcare regulation and enforcement by the federal government and by authorities in the
states and foreign jurisdictions in which we conduct our business. These laws include:
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the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully
soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the
referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may
be made under federal healthcare programs, such as the Medicare and Medicaid programs. A person or entity does not
need to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it to have committed a
violation. In addition, the government may assert that a claim including items or services resulting from a violation of
the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act;
federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or
causing to be presented, claims for payment from Medicare, Medicaid or other federal third-party payors that are false
or fraudulent;
the federal Civil Monetary Penalties Law, which prohibits, among other things, offering or transferring remuneration
to a federal healthcare beneficiary that a person knows or should know is likely to influence the beneficiary’s decision
to order or receive items or services reimbursable by the government from a particular provider or supplier;
federal criminal laws that prohibit executing a scheme to defraud any federal healthcare benefit program or making
false statements relating to healthcare matters;
the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information
Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare
transactions and protects the security and privacy of protected health information;
the federal Physician Payment Sunshine Act, which requires manufacturers of drugs, devices, biologics and medical
supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with
certain exceptions) to report annually to the Centers for Medicare & Medicaid Services (“CMS”) information related
to payments or other “transfers of value” made to physicians (defined to include doctors, dentists, optometrists,
podiatrists and chiropractors) and teaching hospitals and ownership and investment interests held by the physicians
described above and their immediate family members, and payments or other “transfers of value” to such physician
owners; and
analogous state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims
laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers; state
laws that require pharmaceutical and device companies to comply with the industry’s voluntary compliance guidelines
and the applicable compliance guidance promulgated by the federal government or otherwise restrict payments that
may be made to healthcare providers and other potential referral sources; state laws that require device manufacturers
to track and report information related to payments and other “transfers of value” to physicians and other healthcare
providers or pricing, marketing expenditures and information; and state laws governing the privacy and security of
health information in certain circumstances, many of which differ from each other in significant ways and may not
have the same effect, thus complicating compliance efforts.
Due to the breadth of these laws, the absence of guidance in the form of regulations or court decisions, and the
potential for additional legal or regulatory change in this area, it is possible that our sales and marketing practices and/or our
relationships with physicians and other healthcare providers might be challenged under such laws. If our operations are found
to violate any of the laws described above or any other laws and regulations that apply to us, we may be subject to penalties,
including civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, the exclusion from our
participation in federal and state healthcare programs and imprisonment, any of which could adversely affect our ability to
market our products and materially adversely affect our business, results of operations and financial condition. Any action
against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal
expenses and divert our management’s attention from the operation of our business.
Coverage and Reimbursement; Cost Containment
Our profitability and operations are subject to changes in legislative, regulatory and reimbursement policies and
decisions as well as changes in private payer reimbursement coverage and payment decisions and policies. Our products are
purchased by hospitals, physicians and other healthcare providers that typically bill various third-party payors, such as
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governmental programs, private insurance plans and managed care plans, for the healthcare services and products provided to
their patients. The ability of our customers to obtain appropriate coverage and reimbursement for healthcare services and
products from third-party payors is critical because it affects which products customer purchase and the prices they are willing
to pay. Third-party payors are increasingly reducing coverage and reimbursement for certain healthcare services and products
and challenging prices charged for healthcare services and products.
In addition, the U.S. government, state legislatures and foreign governments have continued implementing cost
containment programs, including price controls, restrictions on reimbursement and coverage. Adoption of price controls and
cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could
further limit our net revenue and results. In the United States, there has been an increase in political support for controlling
significant price increases of drug products, in particular due to high-profile cases that have gained national attention and
triggered Congressional inquiries. Implementation of further legislative or administrative reforms in the reimbursement system
in the U.S. and abroad or adverse decisions relating to coverage or reimbursement could have an impact on acceptance of and
demand for our products and the prices that our customers are willing to pay for them.
Competition
The market for infusion therapy, critical care and oncology products is intensely competitive. We believe that our
ability to compete depends upon our continued innovation and the quality, convenience, reliability, patent protection and
pricing of our products, in addition to access to distribution channels. We encounter significant competition in these markets
both from global, large, established medical device manufacturers and from smaller companies. Our ability to compete
effectively depends on our ability to differentiate our products based on innovation, safety, product quality, cost effectiveness,
ease of use and convenience, as well as our ability to perceive and respond to changing customer needs. In the long term, we
expect that our ability to compete will continue to be enhanced by our ability to reduce unit-manufacturing costs through
improved production processes and higher volume production.
In the infusion therapy market, we currently hold the market leading position for needlefree infusion devices,
including the original Clave, the MicroClave and the MicroClave Clear. These products compete with, and currently
contemplated new products will likely compete with, needlefree infusion devices and systems marketed by Baxter Healthcare
Corporation (“Baxter”), B. Braun Medical, Inc. (“B. Braun”), Becton Dickinson and Company ("Becton Dickinson"), Fresenius
Kabi ("Fresenius"), Pfizer in certain non-exclusive markets and others. Although we believe that our needlefree infusion
devices and custom set manufacturing capabilities have distinct advantages over competing systems, there is no assurance that
they will be able to compete successfully with these products.
In the oncology market, we compete with other manufacturers of CSTDs for the safe handling of oncology drugs,
most notably Becton Dickinson, and B. Braun. We believe that our current product offering provides benefits over these
competing systems in several areas related to safety, ease of use, and cost; however, on-going innovation in this market space
will be required, and there is no assurance that these innovations will be able to sustain continued growth.
The market for our critical care devices is highly competitive and our success in this area has historically been based
on competitive pricing, customer service and differentiated product features such as customization. The overall market for
critical care products has been shifting in recent years from the invasive pulmonary artery catheter segment to less invasive
technologies to deliver patient hemodynamic status data. In 2016, we received FDA 510(k) clearance for the Cogent 2-in-1
Hemodynamic Monitoring System, which will combine invasive and minimally invasive technologies in a single monitor.
Manufacturers of products with which we currently compete, or might compete with in the future, include large
companies with an established presence in the healthcare products market and substantially greater financial, marketing and
distribution, managerial and other resources. In particular, Baxter, Becton Dickinson (which acquired CareFusion), Fresenius
and B. Braun are leading distributors of infusion and oncology systems, Edwards Life Sciences Corporation has a significant
share of the critical care hemodynamic monitoring market, while Navilyst Medical, Inc., and Merit Medical Systems, Inc., are
competitors in the angiography kit market. Several of these competitors have broad product lines and have been successful in
obtaining contracts with a significant number of hospitals to supply substantially all of their product requirements in these
areas. In order to achieve greater market penetration or maintain our existing market position, we have established strategic
relationships with OEM customers such as Terumo, and Medline.
We believe the success of our market-leading needlefree connector line has and will continue to motivate others to
develop needlefree connectors, which may incorporate many of the same functional and physical characteristics as ours. We
are aware of a number of such products. We believe some of those products were developed by companies who currently have
the distribution or financial capabilities equivalent to or greater than those that we have, and by other companies that we
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believe do not have similar capabilities, although some of those products may be distributed in the future by larger companies
that do have such capabilities. We believe these products have had a moderate impact on our needlefree connector business to
date, but there is no assurance that our current or future products will be able to successfully compete with these or future
products developed by others.
We believe the success of our CSTD products has and will continue to motivate others to develop competing systems.
Our ability to compete in the area of oncology will be particularly affected by clinical differentiation and quality of our
products. While we believe we have advantages in these areas, there is no assurance that other companies will not be able to
compete successfully with our CSTD products.
We believe that our ability to compete in the custom products market depends upon the same factors affecting our
existing products, but will be particularly affected by clinical differentiation, quality and delivery times to the customer. While
we believe we have advantages in these areas, there is no assurance that other companies will not be able to compete
successfully with our custom products.
Patents
We have United States and/or certain foreign patents relating to the technologies found in the Clave / MicroClave
Connector, MicroClave Clear Connector, Neutron Connector, CLC2000 Connector, Tego Connector, ChemoClave
Technologies, ChemoLock Technologies, Click Lock Technology, SwabCaps, Custom Set Design and Manufacturing Methods,
and Diana Hazardous Drug Compounding System. We have applications pending for additional United States and/or foreign
patents on MicroClave Connector, Neutron Connector, Tego Connector, Y-Clave Connector with Integral Check Valve,
ChemoClave Technologies, ChemoLock Technologies, and Diana Hazardous Drug Compounding System.
Within the last two years, ICU has received three U.S. patents covering our MicroClave Clear connector. As customer
preference continues to migrate toward clear connectors, these patents will protect the market for our MicroClave Clear
connector through 2032. We also have multiple continuation patent applications pending for a number of our products, which
may issue in the future.
Our success may depend in part on our ability to obtain patent protection for our products and to operate without
infringing the proprietary rights of third parties. While we have obtained certain patents and applied for additional United
States and foreign patents covering certain of our products, there is no assurance that any additional patents will be issued, that
the scope of any patent protection will prevent competitors from introducing similar devices or that any of our patents will be
held valid if subsequently challenged. Our patents are important in preventing others from introducing competing products that
are as effective as our products. The loss of patent protection on Clave/MicroClave, Neutron, ChemoClave and ChemoLock
technologies, Custom Set Design and Manufacturing Systems could adversely affect our ability to exclude other manufacturers
from producing effective competitive products and could have an adverse impact on our financial results.
The fact that a patent is issued to us does not eliminate the possibility that patents owned by others may contain claims
that are infringed by our products.
There has been substantial litigation regarding patent and other intellectual property rights in the medical device
industry. Litigation, which would result in substantial cost to us and in diversion of our resources, may be necessary to defend
us against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of
others. Adverse determinations in such litigation could subject us to significant liabilities to third parties or could require us to
seek licenses from third parties and could prevent us from manufacturing, selling or using our products, any of which could
have a material adverse effect on our business. In addition, we have initiated litigation, and may continue to initiate litigation
in the future, to enforce our intellectual property rights against those we believe to be infringing on our patents. Such litigation
could result in substantial cost and diversion of resources.
Seasonality/Quarterly Results
The healthcare business in the United States is subject to quarterly fluctuations due to frequency of illness during the
seasons, elective procedures, and over the last few years, the economy. In Europe, the healthcare business generally slows
down in the summer months due to vacations resulting in fewer elective surgeries. In addition, we can experience fluctuations
in net sales as a result of variations in the ordering patterns of our largest customers, which may be driven more by production
scheduling and their inventory levels, and less by seasonality. Our expenses often do not fluctuate in the same manner as net
sales, which may cause fluctuations in operating income that are disproportionate to fluctuations in our revenue.
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Research and Development
Our research and development costs include personnel costs and expenses related to the development of new products.
Research and development costs were $13.0 million in 2016, $15.7 million in 2015 and $18.3 million in 2014.
Employees
At December 31, 2016, we had 2,803 full-time employees, consisting of 317 engaged in sales, marketing and
administration and 2,486 in manufacturing, molding, product development and quality control, including 1,954 in Mexico.
Geographic Data
Information regarding financial data by geography is set forth in Part II, Item 8 of this Form 10-K in the Notes to
Consolidated Financial Statements in Note 12.
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Item 1A. Risk Factors.
In evaluating an investment in our common stock, investors should consider carefully, among other things, the
following risk factors, as well as the other information contained in this Annual Report and our other reports and registration
statements filed with the SEC. Any of the following risks, as well as additional risks and uncertainties not currently known to
us or that we currently deem immaterial, could materially and adversely affect our results of operations or financial condition.
We may not realize the anticipated benefits of the HIS acquisition, which could adversely impact our business and our
operating results.
The HIS acquisition that closed on February 3, 2017 was a significant transaction for us and the HIS business was one
in which we did not operate directly prior to the closing of the transaction. The success of our business will depend, in part, on
our ability to realize our anticipated benefits, opportunities and synergies from combining the businesses of our company and
the HIS business. We can provide no assurance that the anticipated benefits of the HIS transaction will be fully realized in the
time frame anticipated or at all. We have limited prior history of integrating acquired companies or businesses into our
operations, much less one of this size and complexity. Integrating the operations of the HIS business with that of our own will
be a complex, costly and time-consuming process and the nature of a carve out acquisition makes it inherently more difficult to
assume operations on closing day as well as to integrate activities, as certain systems, processes and people may not all have
transferred with the acquired business to support such activities. In connection with the consummation of the acquisition, we
entered into a number of arrangements with Pfizer, including a transitional services agreement, pursuant to which Pfizer agreed
to provide us with certain significant and essential human resource, commercial, regulatory, finance, research and development
and operational services on an interim basis, for a duration generally not to exceed eighteen (18) months from the date of the
closing of the transaction, with respect to our operation of the HIS business. The integration process may disrupt the businesses
and, if implemented ineffectively, would restrict the realization of the full expected benefits. The failure to meet the challenges
involved in integrating the two businesses could cause an interruption of, or a loss of momentum in, the activities of the
combined businesses and could adversely affect the results of operations of the combined businesses. Potential difficulties that
may be encountered in the integration process include the following:
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challenges in preserving important strategic customer and other third-party relationships of both businesses;
the diversion of management’s attention to integration matters;
challenges in maintaining employee morale and retaining or attracting key employees;
potential incompatibility of corporate cultures;
costs, delays and other difficulties (i) consolidating corporate and administrative infrastructures and information
systems, (ii) implementing common systems and procedures including, in particular, our internal controls over
financial reporting, and (iii) implementing the transitional services, manufacturing and other arrangements with Pfizer
entered into at the closing of the HIS transaction; and
coordinating and integrating a geographically dispersed organization, including operations in jurisdictions we did not
operate in prior to the HIS transaction.
Any one or all of these factors may increase operating costs or lower anticipated financial performance. Additionally,
any failure by Pfizer to deliver the services to be provided under our arrangements with Pfizer could have a material adverse
effect on our business, financial condition and results of operations. Achieving the anticipated benefits and the potential
benefits underlying our reasons for the HIS business acquisition will depend on successful integration of the businesses.
Because of the significance of the HIS business acquisition to us, our failure to successfully integrate the HIS business with that
of our own could have a material adverse impact on our business, financial condition and results of operations.
The actual impact of the HIS acquisition on our financial results may be worse than the assumptions we have used.
We have made certain assumptions relating to the impact on our financial results of the HIS acquisition. These
assumptions relate to numerous matters, including the acquisition costs, including transaction and integration costs, and other
financial and strategic risks of the acquisition. If one or more of these assumptions are incorrect, it could have an adverse
effect on our business and operating results, and the perceived benefits from the acquisition may not be realized.
We are increasingly dependent on manufacturing in Mexico, and could be adversely affected by increased labor costs and any
economic, social or political disruptions.
We continue to expand our production in Mexico. Most of the material we use in manufacturing is imported into
Mexico, and substantially all of the products we manufacture in Mexico are exported.
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As of December 31, 2016, we employed 1,954 people in operations and product development in our plant in
Ensenada, Mexico. Business activity in the Ensenada area has expanded significantly, providing increased employment
opportunities. This could have an adverse effect on our ability to hire or retain necessary personnel and result in an increase in
labor rates. We continue to take steps to compete for labor through attractive employment conditions and benefits, but there is
no assurance that these steps will continue to be successful or that we will not face increasing labor costs in the future.
Any political or economic disruption in Mexico or a change in the local economies could have an adverse effect on
our operations. We depend on our ability to move goods across borders quickly, and any disruption in the free flow of goods
across national borders could have an adverse effect on our business. Additionally, political and social instability resulting
from violence in certain areas of Mexico has raised concerns about the safety of our personnel. These concerns may hinder our
ability to send domestic personnel abroad and to hire and retain local personnel. Such concerns may require us to conduct
more operations from the United States rather than Mexico, which may negatively impact our operations and result in higher
costs and inefficiencies.
Our operating results may be adversely affected by unfavorable economic conditions that affect our customers’ ability to buy
our products and could affect our relationships with our suppliers.
Disruptions in financial markets worldwide and other worldwide macro-economic challenges may cause our
customers and suppliers to experience cash flow concerns. If job losses and the resulting loss of health insurance and personal
savings cause individuals to forgo or postpone treatment, the resulting decreased hospital use could affect the demand for our
products. As a result, customers may modify, delay or cancel plans to purchase our products and suppliers may increase their
prices, reduce their output or change terms of sales. Additionally, if customers’ or suppliers’ operating and financial
performance deteriorates, or if they are unable to make scheduled payments or obtain credit, customers may not be able to pay,
or may delay payment of, accounts receivable owed to us and suppliers may impose different payment terms. Any inability of
current and/or potential customers to pay us for our products or any demands by suppliers for different payment terms may
adversely affect our earnings and cash flow.
Healthcare regulation and reform measures could adversely affect our revenue and financial condition.
The healthcare industry is highly regulated and in recent years, there have been numerous changes in initiatives, laws
and regulations. The federal government and all states and jurisdictions in which we currently operate regulate various aspects
of our business. Changes in law or new interpretation of existing laws can have a material effect on our permissible activities
and the relative costs associated with doing business. The laws and regulations that may affect our ability to operate include,
without limitation, anti-kickback laws that prohibit payments or other remuneration that could be considered to induce
hospitals, physicians or other potential purchasers of our products either to refer patients or to purchase, lease or order, or
arrange for or recommend the purchase, lease or order, of healthcare products or services for which payment may be made
under federal and state healthcare programs as well as false claims laws that prohibit filing of false or improper claims for
payment. Federal laws apply to federal and state healthcare programs, such as Medicare and Medicaid, and several states have
similar laws that may apply more broadly to all payors. Although we would not submit claims directly to government payors,
manufacturers can be held liable under the federal and state false claim act if they are deemed to “cause” the submission of
false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers, price reporting, or
promoting a product off-label. In addition, our activities relating to the reporting of wholesaler or estimated retail prices for our
products, the reporting of prices used to calculate Medicaid rebate information and other information affecting federal, state,
and third-party reimbursement for our products, and the sale and marketing of our products, are subject to scrutiny under this
federal and state false claims laws. As a manufacturer of U.S. FDA-approved products reimbursable by federal healthcare
programs, we are subject to the Physician Payments Sunshine Act, which requires us to annually report certain payments and
other transfers of value we make to U.S.-licensed physicians or U.S. teaching hospitals and any ownership or investment
interests held by physicians and their immediate family members. These laws may affect our sales, marketing and other
promotional activities by limiting the kinds of financial arrangements we may have with hospitals, physicians and other
potential purchasers of our products. These laws are broadly written and are subject to evolving interpretations, and it is often
difficult to determine how these laws will be applied to specific circumstances. In addition, any action against us for violation
of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our
management’s attention from the operation of our business. If our operations are found to be in violation of any of the laws
described above or any other governmental laws or regulations that apply to us, we may be subject to penalties, including civil
and criminal penalties, damages, fines, the exclusion from participation in federal and state healthcare programs, imprisonment,
or the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and
our financial results.
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Our profitability and operations are subject to risks relating to changes in government and private reimbursement
programs and policies and changes in legal requirements in the U.S. and in the world. There have been, and we expect there
will continue to be, a number of legislative and regulatory changes to the healthcare system that could affect our future
revenues and profitability in the U.S. and abroad. Federal and state lawmakers regularly propose and, at times, enact
legislation that results in significant changes to the healthcare system, some of which are intended to contain or reduce the costs
of medical products and services. For example, in 2010, the Patient Protection and Affordable Care Act and the Health Care
and Education Reconciliation Act (“Affordable Care Act”) were signed into law introducing comprehensive health insurance
and healthcare reforms in the United States. Among the provisions of such legislation that may have an adverse impact on us is
a 2.3% excise tax imposed on medical device manufacturers for the sale of certain medical devices to United States customers.
The excise tax, which became effective January 1, 2013, resulted in additional expense of $2.0 million in 2015 and $1.9 million
in 2014 recorded in Selling, General and Administrative expenses. Congress has temporarily suspended this medical device
excise tax for two years commencing January 2016. Unless Congress changes the current law, we expect this tax to resume
beginning in 2018.
We expect that the new Presidential Administration and U.S. Congress will seek to modify, repeal, or otherwise
invalidate all, or certain provisions of, the Affordable Care Act. The House and Senate have recently passed a budget resolution
that authorizes congressional committees to draft legislation to repeal all or portions of the Affordable Care Act and permits
such legislation to pass with a majority vote in the Senate. President Trump has also recently issued an executive order in
which he stated that it is his Administration’s policy to seek the prompt repeal of the Affordable Care Act and directed
executive departments and federal agencies to waive, defer, grant exemptions from, or delay the implementation of burdensome
provisions of the Affordable Care Act to the maximum extent permitted by law. There is still uncertainty with respect to the
impact President Trump’s administration and the U.S. Congress may have, if any, and any changes will likely take time to
unfold, and could have an impact on coverage and reimbursement for healthcare items and services covered by plans that were
authorized by the Affordable Care Act. In addition, other legislative changes have been proposed and adopted in the United
States since the Affordable Care Act was enacted that reduced payments to Medicare providers. Recently, there has also been
heightened governmental scrutiny over the manner in which drug manufacturers set prices for their marketed products, which
has resulted in several Congressional inquiries and proposed bills designed to, among other things, bring more transparency to
product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program
reimbursement methodologies for drug products. The ultimate implementation of any healthcare reform legislation and any
new laws and regulations, and its impact on us, is impossible to predict. Any significant reforms made to the healthcare system
in the United States, or in other jurisdictions, may have an adverse effect on our financial condition and results of operations.
Continuing pressures to reduce healthcare costs and inadequate coverage and reimbursement may adversely affect our prices.
If we cannot reduce manufacturing costs of existing and new products, our sales may not grow and our profitability may
decline.
Increasing awareness of healthcare costs, public interest in healthcare reform and continuing pressure from Medicare,
Medicaid, group purchasing organizations and other payers to reduce costs in the healthcare industry, as well as increasing
competition from other protective products, could make it more difficult for us to sell our products at current prices. Our
products are purchased by hospitals, physicians and other healthcare providers that typically bill various third-party payors,
such as governmental programs, private insurance plans and managed care plans, for the healthcare services and products
provided to their patients. The ability of our customers to obtain appropriate coverage and reimbursement for healthcare
services and products from third-party payors is critical because it affects which products customers purchase and the prices
they are willing to pay. Implementation of further legislative or administrative reforms in the reimbursement system in the U.S.
and abroad or adverse decisions relating to coverage or reimbursement could have an impact on acceptance of and demand for
our products and the prices that our customers are willing to pay for them. In the event that the market will not accept current
prices for our products, our sales and profits could be adversely affected. We believe that our ability to increase our market
share and operate profitably in the long term may depend in part on our ability to reduce manufacturing costs on a per unit basis
through high volume production using highly automated molding and assembly systems. If we are unable to reduce unit
manufacturing costs, we may be unable to increase our market share for Clave products or may lose market share to alternative
products, including competitors’ products. Similarly, if we cannot reduce unit manufacturing costs of new products as
production volumes increase, we may not be able to sell new products profitably or gain any meaningful market share. Any of
these results would adversely affect our future results of operations.
Increased competition in our critical care product line resulted in management's decision to decrease our average
selling prices on all critical care products. The price reductions went into effect in the middle of 2011 with the goal of retaining
existing customers and attracting new customers. We can provide no assurances that customers will purchase products from us.
Continued price pressures could reduce our ability to effectively compete in this market.
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Failure to protect our information systems against security breaches, service interruptions, or misappropriation of data could
disrupt operations, compromise sensitive data, and expose us to liability, possibly causing our business and reputation to suffer.
We depend heavily on information technology infrastructure and systems to achieve our business objectives. Any
incident that impairs or compromises this infrastructure, including security breaches, malicious attacks or more general service
interruptions, could impede our ability to process orders, manufacture and ship product in a timely manner, protect sensitive
data and otherwise carry on business in the normal course. Any such events could result in the loss of customers, revenue, or
both, and could require us to incur significant expense to remediate, including legal claims or proceedings. Further, as cyber
security related incidents continue to evolve, and regulatory focus on these issues continues to expand, additional investment in
protective measures, and vulnerability remediation, may be required.
If we are unable to effectively manage our internal growth or growth through acquisitions of companies, assets or products, our
financial performance may be adversely affected.
We intend to continue to expand our marketing and distribution capability, which may include external expansion
through acquisitions both in the United States and foreign markets. We may also consider expanding our product offerings
through acquisitions of companies or product lines. We can provide no assurance that we will be able to identify, acquire,
develop or profitably manage additional companies or operations or successfully integrate such companies or operations into
our existing operations without substantial costs, delays or other problems. We recently acquired the HIS business, which
includes IV pumps, solutions, and devices in order to create a leading pure-play infusion therapy company, but we have
significant integration efforts to achieve the anticipated benefits. See “—We may not realize the anticipated benefits of the HIS
transaction, which could adversely impact our business and our operating results.”
We have built additional production facilities outside the United States, to reduce labor costs. The expansion of our
marketing, distribution and product offerings both internally and through acquisitions or by contract may place substantial
burdens on our management resources and financial controls. Decentralization of assembly and manufacturing could place
further burdens on management to manage those operations and maintain efficiencies and quality control.
The increasing burdens on our management resources and financial controls resulting from internal growth and
acquisitions could adversely affect our operating results. In addition, acquisitions may involve a number of special risks in
addition to the difficulty of integrating cultures and operations and the diversion of management’s attention, including adverse
short-term effects on our reported operating results, dependence on retention, hiring and training of key personnel, risks
associated with unanticipated problems or legal liabilities and amortization of acquired intangible assets, some or all of which
could materially and adversely affect our operations and financial performance.
Our business could be materially and adversely affected if we fail to defend and enforce our patents, if our products are found
to infringe patents owned by others or if the cost of patent litigation becomes excessive or as our key patents expire.
We rely on a combination of patents, trademarks, copyrights, trade secrets, business methods, software and
nondisclosure agreements to protect our proprietary intellectual property. Our efforts to protect our intellectual proprietary and
proprietary rights may not be sufficient. Further, there is no assurance that patents pending will issue or that the protection
from patents which have issued or may issue in the future will be broad enough to prevent competitors from introducing similar
devices, that such patents, if challenged, will be upheld by the courts or that we will be able to prove infringement and damages
in litigation.
We generally have multiple patents covering various features of a product, and as each patent expires, the protection
afforded by that patent is no longer available to us, even though protection of features that are covered by other unexpired
patents may continue to be available to us. The loss of patent protection on certain features of our products may make it
possible for others to manufacture and sell products with features similar to ours, which could adversely affect our business. In
addition, our ability to enforce and protect our intellectual property rights may be limited in certain countries outside of the
United States, which could make it easier for competitors to obtain market position in such countries by utilizing technologies
that are similar to those developed by us.
If others choose to manufacture and sell products similar to or substantially the same as our products, it could have a
material adverse effect on our business through loss of unit volume or price erosion, or both, and could adversely affect our
ability to secure new business.
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In the past, we have faced patent infringement claims related to the Clave, the CLC2000 and Tego. We believe these
claims had no merit, and all have been settled or dismissed. We may also face claims in the future. Any adverse determination
on these claims related to our products, if any, could have a material adverse effect on our business.
From time to time we become aware of newly issued patents on medical devices, which we review to evaluate any
infringement risk. We are aware of a number of patents for infusion connection systems that have been issued to others. While
we believe these patents will not affect our ability to market our products, there is no assurance that these or other issued or
pending patents might not interfere with our right or ability to manufacture and sell our products.
There has been substantial litigation regarding patent and other intellectual property rights in the medical device
industry. Patent infringement litigation, which may be necessary to enforce patents issued to us or to defend ourselves against
claimed infringement of the rights of others, can be expensive and may involve a substantial commitment of our resources
which may divert resources from other uses. Adverse determinations in litigation or settlements could subject us to significant
liabilities to third parties, could require us to seek licenses from third parties, could prevent us from manufacturing and selling
our products or could fail to prevent competitors from manufacturing products similar to ours. Any of these results could
materially and adversely affect our business.
Expiring patents may affect our future sales.
Most of our products are covered by patents that, if valid, give us a degree of market exclusivity during the term of the
patent. Our patents will expire at various dates through 2032. Upon patent expiration, our competitors may introduce products
using the same technology. As a result of this possible increase in competition, we may need to reduce our prices to maintain
sales of our products, which would make them less profitable. If we fail to develop and successfully launch new products prior
to the expiration of patents for our existing products, our sales and profits with respect to those products could decline
significantly. We may not be able to develop and successfully launch more advanced replacement products before these and
other patents expire.
Damage to any of our manufacturing facilities could impair our ability to produce our products.
A severe weather event, other natural or man-made disaster, or any other significant disruption affecting one of our
manufacturing facilities could materially and adversely impact our business, financial condition and results of operations.
We have a single manufacturing facility for our Clave products located in Salt Lake City, Utah. Our Salt Lake City
facility also produces other components on which our manufacturing operations in Mexico rely.
Damage to any of our facilities could render us unable to manufacture our products or require us to reduce the output
of products at the damaged facility.
We are dependent on single and limited source suppliers, which subjects our business and results of operations to risks of
supplier business interruptions.
Although we have risk mitigation plans in place with key suppliers, we have materials (such as resins) that are critical
to our ability to manufacture our products, the supply of which is currently from a sole supplier. We cannot be certain that our
current suppliers will continue to provide us with the quantities of materials that we require or satisfy our anticipated
specifications and quality requirements. Any supply interruption in limited or sole sourced raw materials could materially harm
our ability to manufacture our products until a new source of supply, if any, could be identified and qualified. Although we
believe there are other suppliers of these raw materials, we may be unable to find a sufficient alternative supply channel in a
reasonable time or on commercially reasonable terms. Additionally, we are subject to FDA regulations, which could further
delay our ability to obtain a qualified alternative supplier. Any performance failure on the part of our suppliers could delay the
development and manufacture of our products, which could have a material adverse effect on our business. Due to the highly
competitive nature of the healthcare industry and the cost controls of our customers and third party payors, we may be unable
to pass along cost increases for any key components or raw materials increases through higher prices to our customers. If the
cost of key components or raw materials increases and we are unable fully to recover those increased costs through price
increases or offset these increases through other cost reductions, we could experience an adverse effect on our financial
condition.
Expansion of our manufacturing facilities may result in inefficiencies that could have an adverse effect on our operations and
financial results.
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In the fourth quarter of 2006, we experienced significant production inefficiencies following a large increase in
production volume in Mexico and the transfer of San Clemente production to Salt Lake City. In 2007, we expanded our
Mexico facility and, anticipating further increases in volume at that facility, increased the workforce. An additional expansion
of our Mexico facility was completed in January 2011. Turnover among new employees was unusually high in Mexico, and the
additional time spent in classroom training and on the job training could create production inefficiencies in Mexico in the
future. The addition of new products will require additional molding in Salt Lake City and manual assembly work in Mexico.
Expansions of our production capacity will require significant management attention to avoid inefficiencies of the type
experienced in 2006, and the effect of any inefficiencies can be particularly expensive in Salt Lake City because of the high
fixed costs in this highly automated facility.
Because we are dependent on Clave products for a significant portion of our sales, any decline in sales of Clave products could
result in a significant reduction in our sales and profits.
We depend heavily on sales of Clave products, which have decreased in previous years. Most of our sales of Clave
products are in the United States. Future sales increases for Clave products may depend on increases in sales of custom infusion
systems, expansion in the international markets or acquisition of new customers in the United States. We cannot give any
assurance that sales of Clave products will increase or that we can sustain current profit margins on Clave products indefinitely.
We believe that the success of the Clave has motivated, and will continue to motivate, competitors to develop one
piece needleless connectors. If other manufacturers successfully develop and market effective products that are competitive
with Clave products, Clave sales could decline, we could lose market share, and we could encounter sustained price and profit
margin erosion.
We are subject to risks associated with doing business outside of the United States.
We operate in a global market and global operations are subject to a number of risks. Sales to customers outside of the
United States made up approximately 30% of our revenue in 2016 and as our operations and sales located in Europe and other
areas outside the United States increase, we may face new challenges and uncertainties, although we can give no assurance that
such operations and sales will increase. The risks associated with our operations outside the United States include:
healthcare reform legislation;
changes in medical reimbursement policies and programs;
changes in non-United States government programs;
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manufacture and sell our products;
possible failure to comply with anti-bribery laws such as the U.S. Foreign Corrupt Practices Act and similar anti-
bribery laws in other jurisdictions;
different local medical practices, product preferences and product requirements;
possible failure to comply with trade protection and restriction measures and import or export licensing requirements;
difficulty in establishing, staffing and managing non-United States operations;
different labor regulations or work stoppages or strikes;
changes in environmental, health and safety laws;
potentially negative consequences from changes in or interpretations of tax laws, including changes regarding taxation
of income earned outside the United States;
political instability and actual or anticipated military or political conflicts;
economic instability, including the European financial crisis or other economic instability in other parts of the world
and the impact on interest rates, inflation and the credit worthiness of our customers;
uncertainties regarding judicial systems and procedures;
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imposition of government controls; and
regulatory changes that may place our products at a disadvantage.
These risks, individually or in the aggregate, could have an adverse effect on our results of operations and financial
condition. The occurrence or allegation of these types of risks may adversely affect our business, performance, prospects,
value, financial condition, and results of operations.
Any significant changes in U.S trade, tax or other policies that restrict imports or increase import tariffs could have a material
adverse effect on our results of operations.
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A significant amount of our products are manufactured outside of the United States. The new Presidential administration
has called for substantial changes to U.S. trade and tax policies, which may include import restrictions or increased import tariffs.
Restrictions on imports could prevent or make it difficult for us to obtain the components needed for new products which would
affect our sales. Increased tariffs would require us to increase our prices which likely would decrease customer and consumer
demand for our products. Other countries might retaliate through the imposition of their own restrictions and or increased tariffs
which would affect our ability to export products and therefore adversely affect our sales. Any significant changes in current U.S.
trade, tax or other policies could have a material adverse effect upon our results of operations.
International sales pose additional risks related to competition with larger international companies and established local
companies and our possibly higher cost structure.
We have undertaken an initiative to increase our international sales, and have distribution arrangements in all the
principal countries in Western Europe, the Pacific Rim, Middle East, Latin America, Canada and South Africa. We plan to sell
in most other areas of the world. We export most of our products sold internationally from the United States and Mexico. Our
principal competitors in international markets consist of much larger companies as well as smaller companies already
established in the countries into which we sell our products. Our cost structure is often higher than that of our competitors
because of the relatively high cost of transporting product to some local markets as well as our competitors’ lower local labor
costs in some markets.
Our international sales are subject to higher credit risks than sales in the United States. Many of our distributors are
small and may not be well capitalized. Payment terms are relatively long. The European hospitals tend to be significantly
slower in payment which has resulted in an increase to our days sales outstanding from previous years. Our prices to our
international distributors, outside of Europe, for product shipped to the customers from the United States or Mexico are
generally denominated in U.S. dollars, but their resale prices are set in their local currency. A decline in the value of the local
currency in relation to the U.S. dollar may adversely affect their ability to profitably sell in their market the products they buy
from us, and may adversely affect their ability to make payment to us for the products they purchase. Legal recourse for non-
payment of indebtedness may be uncertain. These factors all contribute to a potential for credit losses.
Our operations may be adversely impacted by our exposure to risks related to foreign currency exchange rates.
We market our products in certain foreign markets through our subsidiaries and other international distributors. The
related sales agreements may provide for payments in a foreign currency. Accordingly, our operating results are subject to
fluctuations in foreign currency exchange rates. When the U.S. dollar weakens against these currencies, the dollar value of
foreign-currency denominated revenue and expense increases, and when the dollar strengthens against these currencies, the
dollar value of foreign-currency denominated revenue and expense decreases. We are exposed to foreign currency risk on
outstanding foreign currency denominated receivables and payables. Changes in exchange rates may adversely affect our
results of operations. Our primary foreign currency exchange rate exposures are currently with the Euro and Mexican Peso
against the U.S. dollar.
We currently do not hedge against our foreign currency exchange rate risks and therefore believe our exposure to these
risks may be higher than if we entered into hedging transactions, including forward exchange contracts or similar instruments.
If we decide in the future to enter into forward foreign exchange contracts to attempt to reduce the risk related to foreign
currency exchange rates, these contracts may not mitigate the potential adverse impact on our financial results due to the
variability of timing and amount of payments under these contracts. In addition, these types of contracts may themselves cause
financial harm to us and have inherent levels of counter-party risk over which we would have no control.
If we are unable to compete successfully on the basis of product innovation, quality, convenience, price and rapid delivery with
larger companies that have substantially greater resources and larger distribution networks than us, we may be unable to
maintain market share, in which case our sales may not grow and our profitability may be adversely affected.
The consumable medical device segment of the health care industry and in particular the infusion products market is
intensely competitive and is experiencing both horizontal and vertical consolidation. We believe that our ability to compete
depends upon continued product innovation, the quality, convenience and reliability of our products, access to distribution
channels, patent protection and pricing. The ability to compete effectively depends on our ability to differentiate our products
based on safety features, product quality, cost effectiveness, ease of use and convenience, as well as our ability to perceive and
respond to changing customer needs. We encounter significant competition in our markets both from large established medical
device manufacturers and from smaller companies. Many of these companies have introduced competitive products with
features not provided by the conventional products and methods they are intended to replace. Most of our current and
prospective competitors have economic and other resources substantially greater than ours and are well established in the
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healthcare industry. Several large, established competitors offer broad product lines and have been successful in obtaining full-
line contracts with a significant number of hospitals and group purchasing organizations to supply all of their infusion product
requirements. Due to the highly competitive nature of the group purchasing organizations (“GPOs”) or integrated delivery
networks (“IDNs”) contracting processes, we may not be able to obtain or maintain contract positions with major GPOs and
IDNs across our products portfolio. Furthermore, the increasing leverage of organizing buy-in groups may reduce market
prices for our products thereby affecting our profitability. While having a contract with a GPO or IDN can facilitate sales to
members of that GPO or IDN, it is no assurance that sales volume of those products will be maintained. The members of such
groups may choose to purchase from our competitors due to the price or quality offered by such competitors, which could result
in a decline in our sales and profitability. In addition, distributors of our products may begin to negotiate terms of sale more
aggressively in an effort to increase their profitability. Failure to negotiate distribution arrangements having advantageous
pricing or other terms of sale could adversely affect our results of operations and financial condition. In addition, if we fail to
implement distribution arrangements successfully, it could cause us to lose market share to our competitors. Moreover, there is
no assurance that our competitors will not substantially increase resources devoted to the development, manufacture and
marketing of products competitive with our products. The successful implementation of such a strategy by one or more of our
competitors could materially and adversely affect us.
If we do not successfully develop and commercialize enhanced or new products that remain competitive with new products or
alternative technologies developed by others, we could lose revenue opportunities and customers, and our ability to grow our
business would be impaired.
The medical device industry is characterized by rapid product development and technological advances, which places
our products at risk of obsolescence. Our long-term success and profit margins depend upon the development and successful
commercialization of new products, new or improved technologies and additional applications of our technology. The research
and development process is time-consuming and costly, and may not result in products or applications that we can successfully
commercialize. We can give no assurance that any such new products will be successful or that they will be accepted in the
marketplace.
Product development requires substantial investment that may be difficult for us to fund and may be challenging to
recover through commercial product sales.
Innovations generally require a substantial investment in product development before we can determine their commercial
viability, and we may not have the financial resources necessary to fund these innovations. Even if we succeed in creating new
product candidates from these innovations, those innovations still may fail to result in commercially successful products. The
success of new product offerings for device products depends on several factors, including our ability to anticipate and meet
customers'/patients’ needs, obtain timely regulatory approvals or clearances, and manufacture quality products in an economic
and timely manner. Even if we are able to develop successfully new products or enhancements, we may not produce sales
exceeding the costs of development, and we may not avoid infringing the proprietary rights of third parties. Further, those new
or enhanced products may be quickly rendered obsolete by changing customer preferences or the introduction by competitors
of products embodying new technologies or features. Moreover, innovations may not be successful due to difficulties
encountered in achieving positive clinical outcomes, meeting safety, efficacy or other regulatory requirements of government
agencies, or obtaining favorable pricing on those products. Finally, innovations may not be accepted quickly in the
marketplace because of, among other things, entrenched patterns of clinical practice and uncertainty over third-party
reimbursement.
If demand for our products were to decline significantly, we might not be able to recover the cost of our expensive automated
molding and assembly equipment and tooling, which could have an adverse effect on our results of operations.
Our production tooling is relatively expensive, with each “module,” which consists of an automated assembly machine
and the molds and molding machines that mold the components, costing several million dollars. Most of the modules are for
the Clave product family. If the demand for these products changes significantly, which could happen with the loss of a
customer or a change in product mix, it may be necessary for us to recognize an impairment charge for the value of the
production tooling because its cost may not be recovered through production of saleable product, which could adversely affect
our financial condition.
We have been and will be ordering production molds and equipment for our new products. We expect to order semi-
automated or fully automated assembly machines for other new products in 2017. If we do not achieve significant sales of
these new products, it might be necessary for us to recognize an impairment charge for the value of the production tooling
because its costs may not be recovered through production of saleable product, which could adversely affect our financial
condition.
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If we cannot obtain additional custom tooling and equipment on a timely basis to enable us to meet demand for our products,
we might be unable to increase our sales or might lose customers, in which case our sales could decline.
We expanded our manufacturing capacity substantially in recent years, and we expect that continued expansion may
be necessary. Molds and automated assembly machines generally have a long lead-time with vendors, often nine months or
longer. Inability to secure such tooling in a timely manner, or unexpected increases in production demands, could cause us to be
unable to meet customer orders. Such inability could cause customers to seek alternatives to our products.
Increases in the cost of petroleum-based and natural gas-based products or loss of supply could have an adverse effect on our
profitability.
Most of the materials used in our products are resins, plastics and other material that depend upon oil or natural gas as
their raw material. Crude oil markets are affected by political uncertainty in the Middle East, and there is no assurance that
crude oil supplies will not be interrupted in the future. Any such interruption could have an adverse effect on our ability to
produce, or the cost to produce, our products. Also, crude oil and natural gas prices have been volatile in recent years. Our
suppliers have historically passed some of their cost increases on to us, and if such prices are sustained or increase further, our
suppliers may pass further cost increases on to us. In addition to the effect on resin prices, transportation costs have increased
because of the effect of higher crude oil prices, and we believe most of these costs have been passed on to us. Our ability to
recover these increased costs may depend upon our ability to raise prices on our products. In the past, we have rarely raised
prices and it is uncertain that we would be able to raise them to recover higher prices from our suppliers. Our inability to raise
prices in those circumstances, or to otherwise recover these costs, could have an adverse effect on our profitability.
Our business could suffer if we lose the services of key personnel.
We are dependent upon the management and leadership of our executive team, as well as other members of our senior
management team. If one or more of these individuals were unable or unwilling to continue in his or her present position, our
business would be disrupted and we might not be able to find replacements on a timely basis or with the same level of skill and
experience, which could have an adverse effect on our business. We do not have "key person" life insurance policies on any of
our employees.
Our ability to market our products in the United States and other countries may be adversely affected if our products fail to
comply with the applicable standards of the FDA and regulatory agencies in other countries.
Government regulation is a significant factor in the development, marketing and manufacturing of our products. For
example, our device products are subject to clearance by the United States Food and Drug Administration (“FDA”) under a
number of statutes including the Food Drug and Cosmetics Act (“FDC Act”). In the United States, before we can market a new
medical device, or a new use of, new claim for, or significant modification to, an existing product, we must first receive either
clearance under Section 510(k) of the FDC Act or approval of a premarket approval, or PMA, application from the FDA, unless
an exemption applies. Under the 510(k) process, the manufacturer must submit to the FDA a premarket notification,
demonstrating that the device is "substantially equivalent," as defined in the statute, to a legally marketed predicate device. To
be "substantially equivalent," the proposed device must have the same intended use as the predicate device, and either have the
same technological characteristics as the predicate device or have different technological characteristics and not raise different
questions of safety or effectiveness than the predicate device. If the manufacturer is unable to demonstrate substantial
equivalence to FDA’s satisfaction, or if there is no available predicate device, then the manufacturer may be required to seek
approval through the PMA application process, which is generally more costly and time consuming than the 510(k) process.
Through the PMA application process, the applicant must submit data and information demonstrating reasonable assurance of
the safety and effectiveness of the device for its intended use to the FDA's satisfaction. Accordingly, a PMA application
typically includes, but is not limited to, extensive technical information regarding device design and development, pre-clinical
and clinical trial data, manufacturing information, labeling and financial disclosure information for the clinical investigators in
device studies.
Each of our current products has qualified, and we anticipate that any new products we are likely to market will
qualify for clearance under the FDA’s expedited pre-market notification procedure pursuant to Section 510(k) of the FDC Act.
However, certain of our new products may require a longer time for clearance than we have experienced in the past and there
can be no assurance that a PMA application will not be required. Further, there is no assurance that other new products
developed by us or any manufacturers that we might acquire will qualify for expedited clearance rather than a more time
consuming pre-market approval procedure or that, in any case, they will receive clearance from the FDA. FDA regulatory
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processes are time consuming and expensive. Uncertainties as to the time required to obtain FDA clearances or approvals could
adversely affect the timing and expense of new product introductions.
The regulations to which we are subject are complex and have become more stringent over time. Regulatory changes
could result in restrictions on our ability to continue or expand our operations, higher than anticipated costs, or lower than
anticipated sales. Even after we have obtained the proper regulatory clearance or approval to market a product, we have
ongoing responsibilities under FDA regulations and applicable foreign laws and regulations. The FDA, state and foreign
regulatory authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could
result in enforcement action by the FDA, state or foreign regulatory authorities which may include any of the following
sanctions:
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untitled letters or warning letters;
fines, injunctions, consent decrees and civil penalties;
recalls, termination of distribution, administrative detention, or seizure of our products;
customer notifications or repair, replacement or refunds;
operating restrictions or partial suspension or total shutdown of production;
delays in or refusal to grant our requests for future 510(k) clearances, PMA approvals or foreign regulatory approvals
of new products, new intended uses, or modifications to existing products;
• withdrawals or suspensions of current 510(k) clearances or PMAs or foreign regulatory approvals, resulting in
prohibitions on sales of our products;
FDA refusal to issue certificates to foreign governments needed to export products for sale in other countries; and
criminal prosecution.
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The FDA’s and other regulatory authorities’ policies may change and additional government regulations may be
enacted that could prevent, limit or delay regulatory approval of our product candidates. We cannot predict the likelihood,
nature or extent of government regulation that may arise from future legislation or administrative action, either in the United
States or abroad. For example, certain policies of the Trump administration may impact our business and industry. Namely, the
Trump administration has taken several executive actions, including the issuance of a number of Executive Orders, that could
impose significant burdens on, or otherwise materially delay, FDA’s ability to engage in routine regulatory and oversight
activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing
applications. Notably, on January 23, 2017, President Trump ordered a hiring freeze for all executive departments and
agencies, including the FDA, which prohibits the FDA from filling employee vacancies or creating new positions. Under the
terms of the order, the freeze will remain in effect until implementation of a plan to be recommended by the Director for the
Office of Management and Budget, or OMB, in consultation with the Director of the Office of Personnel Management, to
reduce the size of the federal workforce through attrition. An under-staffed FDA could result in delays in FDA’s responsiveness
or in its ability to review submissions or applications, issue regulations or guidance, or implement or enforce regulatory
requirements in a timely fashion or at all. Moreover, on January 30, 2017, President Trump issued an Executive Order,
applicable to all executive agencies, including the FDA, that requires that for each notice of proposed rulemaking or final
regulation to be issued in fiscal year 2017, the agency shall identify at least two existing regulations to be repealed, unless
prohibited by law. These requirements are referred to as the “two-for-one” provisions. This Executive Order includes a budget
neutrality provision that requires the total incremental cost of all new regulations in the 2017 fiscal year, including repealed
regulations, to be no greater than zero, except in limited circumstances. For fiscal years 2018 and beyond, the Executive Order
requires agencies to identify regulations to offset any incremental cost of a new regulation. In interim guidance issued by the
Office of Information and Regulatory Affairs within OMB on February 2, 2017, the administration indicates that the “two-for-
one” provisions may apply not only to agency regulations, but also to significant agency guidance documents. It is difficult to
predict how these requirement will be implemented, and the extent to which they will impact the FDA’s ability to exercise its
regulatory authority. If these executive actions impose constraints on FDA’s ability to engage in oversight and implementation
activities in the normal course, our business may be negatively impacted.
If we or our component manufacturers fail to comply with the FDA's Quality System Regulation or Good Manufacturing
Practice regulations, our manufacturing operations could be interrupted, and our product sales and operating results could
suffer.
We and some of our component manufacturers are required to comply with regulatory requirements known as the
FDA's Quality System Regulation, or QSR, which covers the procedures and documentation of the design, testing, production,
control, quality assurance, inspection, complaint handling, recordkeeping, management review, labeling, packaging,
sterilization, storage and shipping of our device products. The FDA's current Good Manufacturing Practices, or cGMPs apply
to the manufacture of medical device components and finished medical devices. The FDA audits compliance with these
regulatory requirements through periodic announced and unannounced inspections of manufacturing and other facilities. The
24
FDA may conduct inspections or audits at any time, and we and some of our component suppliers are subject to such
inspections. Although we believe our manufacturing facilities and those of our critical component suppliers are in compliance
with the QSR requirements, and with applicable cGMPs for our products, we cannot provide assurance that any future
inspection will not result in adverse findings. If our manufacturing facilities or those of any of our component suppliers are
found to be in violation of applicable laws and regulations, or we or our suppliers have significant noncompliance issues or fail
to timely and adequately respond to any adverse inspectional observations or product safety issues, or if any corrective action
plan that we or our suppliers propose in response to observed deficiencies is not sufficient, the FDA could take enforcement
action, including any of the following sanctions:
untitled letters or warning letters;
fines, injunctions, consent decrees and civil penalties;
customer notifications or repair, replacement, refunds, recall, detention or seizure of our products;
operating restrictions or partial suspension or total shutdown of production;
refusing or delaying our requests for clearance or approval of new products or modified products;
•
•
•
•
•
• withdrawing clearances or approvals that have already been granted;
•
•
refusal to grant export approval for our products; or
criminal prosecution.
Any of these sanctions could adversely affect our business, financial conditions and operating results.
To market our products in the European Community (“EC”), we must conform to additional requirements of the EC
and demonstrate conformance to established quality standards and applicable directives. As a manufacturer that designs,
manufactures and markets its own devices, we must comply with the quality management standards of ISO 13485 (2012).
Those quality standards are similar to the FDA’s Quality System Regulations. Manufacturers of medical devices must also be in
conformance with EC Directives such as Council Directive 93/42/EEC (“Medical Device Directive”) and their applicable
annexes. Those regulations assure that medical devices are both safe and effective and meet all applicable established standards
prior to being marketed in the EC. Once a manufacturer and its devices are in conformance with the Medical Device Directive,
the “CE” Mark maybe affixed to its devices. The CE Mark gives devices an unobstructed entry to all the member countries of
the EC. There is no assurance that we will continue to meet the requirements for distribution of our products in Europe.
Distribution of our products in other countries may be subject to regulation in those countries, and there is no
assurance that we will obtain necessary approvals in countries in which we want to introduce our products.
Product liability claims could be costly to defend and could expose us to loss.
The use of our products exposes us to an inherent risk of product liability. Patients, healthcare workers or healthcare
providers who claim that our products have resulted in injury could initiate product liability litigation seeking large damage
awards against us. Costs of the defense of such litigation, even if successful, could be substantial. We maintain insurance
against product liability and defense costs in the amount of $10,000,000 per occurrence. There is no assurance that we will
successfully defend claims, if any, arising with respect to products or that the insurance we carry will be sufficient. A successful
claim against us in excess of insurance coverage could materially and adversely affect us. Furthermore, there is no assurance
that product liability insurance will continue to be available to us on acceptable terms.
We may incur costs or losses relating to other litigation.
We may from time to time be involved in litigation. Legal proceedings are inherently unpredictable, and the outcome
can result in judgements that affect how we operate our business, or we may enter into settlements of claims for monetary
damages that exceed our insurance coverage, if any is available. Any such proceedings, regardless of merits, may result in
substantial costs, the diversion of management's attention from other business concerns and additional restrictions on our
business, which could disrupt our business and have an adverse effect on our financial condition.
We may be required to implement a costly product recall.
In the event that any of our products proves to be defective, we can voluntarily recall, or the FDA or other regulatory
agencies could require us to redesign or implement a recall of, any of our products. We believe that any recall could result in
significant costs to us and significant adverse publicity, which could harm our ability to market our products in the future.
Though it may not be possible to quantify the economic impact of a recall, it could have a material adverse effect on our
business, financial condition and results of operations.
25
We generally offer a limited warranty for product returns which are due to defects in quality and workmanship. We
attempt to estimate our potential liability for future product returns and establish reserves on our financial statements in
amounts that we believe will be sufficient to address our warranty obligations; however, our actual liability for product returns
may significantly exceed the amount of our reserves. If we underestimate our potential liability for future product returns, or if
unanticipated events result in returns that exceed our historical experience, our financial condition and operating results could
be materially and adversely affected.
We may be unable to realize any benefit from our cost reduction and restructuring efforts and our profitability may be hurt or
our business otherwise might be adversely affected.
We have engaged in restructuring activities in the past and may engage in other restructuring activities in the future.
These types of cost reduction and restructuring activities are complex. If we do not successfully manage our current
restructuring activities, or any other restructuring activities that we may take in the future, any expected efficiencies and
benefits might be delayed or not realized, and our operations and business could be disrupted. In addition, the costs associated
with implementing restructuring activities might exceed expectations, which could result in additional future charges.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and other worldwide anti-bribery laws.
The Foreign Corrupt Practices Act and anti-bribery laws in other jurisdictions generally prohibit companies and their
intermediaries from making improper payments for the purpose of obtaining or retaining business or other commercial
advantage. Our policies mandate compliance with these anti-bribery laws, which often carry substantial penalties, including
criminal and civil fines, potential loss of export licenses, possible suspension of the ability to do business with the federal
government, denial of government reimbursement for products and exclusion from participation in government healthcare
programs. We operate in jurisdictions that have experienced governmental and private sector corruption to some degree, and, in
certain circumstances, strict compliance with anti-bribery laws may conflict with certain local customs and practices. We
cannot assure that our internal control policies and procedures always will protect us from reckless or other inappropriate acts
committed by our affiliates, employees, distributors or other agents. Violations of these laws, or allegations of such violations,
could have a material adverse effect on our business, financial position and results of operations.
Our Stockholder Rights Plan, provisions in our charter documents and Delaware law could prevent or delay a change in
control, which could reduce the market price of our common stock.
On July 15, 1997, our Board of Directors adopted a Stockholder Rights Plan (the “Plan”) and, pursuant to the Plan,
declared a dividend distribution of one Right for each outstanding share of our common stock to stockholders of record at the
close of business on July 28, 1997. The Plan expired in 2007 and our Board of Directors adopted an Amended and Restated
Rights Agreement in July 2007. Under its current provisions, each Right entitles the registered holder to purchase from us one
one-hundredth of a share of Series A Junior participating Preferred Stock, no par value, at a purchase price of $225 per one one-
hundredth of a share, subject to adjustment. The Plan is designed to afford the Board of Directors a great deal of flexibility in
dealing with any takeover attempts and is designed to cause persons interested in acquiring us to deal directly with the Board of
Directors, giving it an opportunity to negotiate a transaction that maximizes stockholder values. The Plan may, however, have
the effect of discouraging persons from attempting to acquire us.
Investors should refer to the description of the Plan in our 2007 10-K filed with the Securities and Exchange
Commission.
Our Certificate of Incorporation and Bylaws include provisions that may discourage or prevent certain types of
transactions involving an actual or potential change of control, including transactions in which the stockholders might
otherwise receive a premium for their shares over then current market prices. In addition, the Board of Directors has the
authority to issue shares of Preferred Stock and fix the rights and preferences thereof, which could have the effect of delaying
or preventing a change of control otherwise desired by the stockholders. In addition, certain provisions of Delaware law may
discourage, delay or prevent someone from acquiring or merging with us.
The price of our common stock has been and may continue to be highly volatile due to many factors.
The market for small and mid-market capitalization companies can be highly volatile, and we have experienced
significant volatility in the price of our common stock in the past. From January 2014 through December 2016, our trading
price ranged from a high of $154.80 per share to a low of $54.00 per share. We believe that factors such as quarter-to-quarter
fluctuations in financial results, differences between stock analysts’ expectations and actual quarterly and annual results, new
26
product introductions by us or our competitors, acquisitions or divestitures, changing regulatory environments, litigation,
changes in healthcare reimbursement policies, sales or the perception in the market of possible sales of common stock by
insiders, market rumors and substantial product orders could contribute to the volatility in the price of our common stock.
General economic trends unrelated to our performance such as recessionary cycles and changing interest rates may also
adversely affect the market price of our common stock; the recent macroeconomic downturn could depress our stock price for
some time.
Most of our common stock is held by, or included in accounts managed by, institutional investors or managers. Several
of those institutions own or manage a significant percentage of our outstanding shares, with the ten largest interests accounting
for 41% of our outstanding shares at the end of 2016. If one or more of the institutions or if our other large stockholders should
decide to reduce or eliminate their position in our common stock, it could cause a significant decrease in the price of our
common stock.
Item 1B. Unresolved Staff Comments.
None
Item 2. Properties.
We own a 39,000 square foot building in San Clemente, California; a 450,000 square foot building in Salt Lake City,
Utah; a 308,000 square foot building on approximately 94 acres of land in Ensenada, Baja California, Mexico; and a 23,000
square foot building in Roncanova, Italy. We lease a building in San Clemente, California, San Diego, California; Houten,
Netherlands; Ludenscheid, Germany; Bella Vista, NSW Australia; and in Johannesburg, South Africa.
Item 3. Legal Proceedings.
We are from time to time involved in various legal proceedings, either as a defendant or plaintiff, most of which are
routine litigation in the normal course of business. We believe that the resolution of the legal proceedings in which we are
involved will not have a material adverse effect on our financial position or results of operations.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities.
Our common stock has been traded on the NASDAQ Global Select Market under the symbol “ICUI” since our initial
public offering on March 31, 1992. The following table sets forth, for the quarters indicated, the high and low sales prices for
our common stock quoted by NASDAQ:
2016
First quarter
Second quarter
Third quarter
Fourth quarter
2015
First quarter
Second quarter
Third quarter
Fourth quarter
$
$
High
Low
$
110.89
113.24
128.93
154.80
85.56
98.10
108.51
124.85
High
Low
$
94.00
98.95
124.69
122.98
79.44
84.02
95.13
102.06
27
We have never paid dividends and do not anticipate paying dividends in the foreseeable future as the Board of
Directors intends to retain future earnings for use in our business or to purchase our shares. Any future determination as to
payment of dividends or purchase of our shares will depend upon our financial condition, results of operations and such other
factors as the Board of Directors deems relevant.
As of January 31, 2017, we had 65 stockholders of record. This does not include persons whose stock is in nominee or
“street name” accounts through brokers.
Securities authorized for issuance under equity compensation plans are discussed in Part III, Item 12 of this Annual
Report on Form 10-K.
Issuer Repurchase of Equity Securities
The following is a summary of our stock repurchasing activity during the fourth quarter of 2016:
Period
10/01/2016 - 10/31/2016
11/01/2016 - 11/30/2016
12/01/2016 - 12/31/2016
Fourth quarter 2016 total
____________________________
Shares
purchased
Average
price paid
per share
— $
— $
— $
— $
—
—
—
—
Shares
purchased
as part of a
publicly
announced
program
Approximate
dollar value that
may yet be
purchased
under the
program(1)
— $
—
—
— $
7,169,000
7,169,000
7,169,000
7,169,000
(1) Our common stock purchase plan, which authorized the repurchase of up to $40.0 million of our common stock, was authorized by our
Board of Directors and publicly announced on July 19, 2010. This plan has no expiration date. We are not obligated to make any
purchases under our stock purchase program. Subject to applicable state and federal corporate and securities laws, purchases under a
stock purchase program may be made at such times and in such amounts as we deem appropriate. Purchases made under our stock
purchase program can be discontinued at any time we feel additional purchases are not warranted.
28
COMPARISON OF CUMULATIVE TOTAL RETURN FROM JANUARY 1, 2012 TO DECEMBER 31, 2016 OF ICU
MEDICAL, INC., NASDAQ AND NASDAQ MEDICAL SUPPLIES INDEX
The following graph shows the total stockholder return on our common stock based on the market price of the
common stock from December 31, 2011 to December 31, 2016 and the total returns of the NASDAQ U.S. Index and NASDAQ
Medical Supplies Index for the same period.
12/31/2011
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
ICU Medical, Inc.
NASDAQ U.S. Index
NASDAQ Medical Supplies
Index
$
$
$
100.00
100.00
100.00
$
$
$
135.40
116.43
123.05
$
$
$
141.58
155.41
150.66
$
$
$
182.00
174.78
181.04
$
$
$
250.62
175.62
200.19
$
$
$
327.44
198.47
213.83
Assumes $100 invested on December 31, 2011 in ICU Medical Inc.’s common stock, the NASDAQ U.S. Index and
the NASDAQ Medical Supplies Index and that all dividends, if any, were reinvested.
29
Item 6. Selected Financial Data.
ICU MEDICAL, INC.
SELECTED FINANCIAL DATA
INCOME DATA:
REVENUE
Net sales
Other
TOTAL REVENUE
COST OF GOODS SOLD
GROSS PROFIT
Selling, general and administrative expenses
Research and development expenses
Restructuring and strategic transaction
Gain on sale of assets
Legal settlements
Impairment of assets held for sale
TOTAL OPERATING EXPENSES
INCOME FROM OPERATIONS
BARGAIN PURCHASE GAIN
OTHER INCOME, net
INCOME BEFORE INCOME TAXES
PROVISION FOR INCOME TAXES
NET INCOME
NET INCOME PER SHARE
Basic
Diluted
WEIGHTED AVERAGE NUMBER OF
SHARES
Basic
Diluted
Cash dividends per share
CASH FLOW DATA:
Total cash flows from operations(1)
$
$
$
$
$
$
Year ended December 31,
(in thousands, except per share data)
2014
2013
2015
341,254
414
341,668
160,871
180,797
83,216
15,714
8,451
(1,086)
1,798
4,139
112,232
68,565
—
1,134
69,699
(24,714)
44,985
2.84
2.73
$
$
$
$
308,770
490
309,260
157,859
151,401
88,939
18,332
5,093
—
—
—
112,364
39,037
—
755
39,792
(13,457)
26,335
1.72
1.68
$
$
$
$
313,056
660
313,716
158,984
154,732
89,006
12,407
1,370
—
—
—
102,783
51,949
—
765
52,714
(12,296)
40,418
2.75
2.65
$
$
$
$
2016
379,339
33
379,372
177,974
201,398
89,426
12,955
15,348
—
—
728
118,457
82,941
1,456
767
85,164
(22,080)
63,084
3.90
3.66
$
$
$
$
16,168
17,254
15,848
16,496
15,282
15,647
14,688
15,274
— $
— $
— $
— $
2012
316,322
547
316,869
160,359
156,510
84,604
10,630
—
—
—
—
95,234
61,276
—
563
61,839
(20,558)
41,281
2.90
2.80
14,223
14,725
—
89,941
$
64,195
$
66,340
$
72,692
$
70,838
____________________________
(1) Total cash flows from operations for Years 2012 through 2015 have been retrospectively adjusted to reflect the reclassification of the tax
benefits from exercise of stock options from financing activities to operating activities as permitted by Accounting Standard Update ("ASU")
2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which was
adopted early during 2016 (see Note 1 of the Consolidated Financial Statements in this Annual Report on Form 10-K for additional detail).
30
BALANCE SHEET DATA:
Cash, cash equivalents and investment
securities
Working capital
Total assets
Stockholders’ equity
2016
2015
As of December 31,
(in thousands)
2014
2013
2012
$
$
$
$
445,082
528,560
704,688
660,155
$
$
$
$
377,397
462,389
626,825
579,871
$
$
$
$
346,764
403,801
541,102
508,252
$
$
$
$
296,891
367,410
499,643
464,725
$
$
$
$
226,159
296,385
428,512
390,857
31
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Business Overview and Highlights
We are a leader in the development, manufacture and sale of innovative medical devices used in infusion therapy,
critical care and oncology applications. Our product line include needlefree connection devices, custom infusion sets, CSTD
for the handling of hazardous drugs, advanced sensor catheters, closed blood sampling systems and innovative hemodynamic
monitoring systems.
Our products are used in acute care hospitals and ambulatory clinics in more than 65 countries throughout the world.
We categorize our products into three main market segments: Infusion Therapy, Critical Care and Oncology. Our primary
products include:
Infusion Therapy
•
•
•
Critical Care
Needlefree connector products
MicroClave® and MicroClave Clear®
Neutron®
NanoClave®
Clave®
SwabCap®
Custom infusion sets
Tego® needlefree hemodialysis connector
•
•
•
•
Hemodynamic Monitoring Systems
Closed Blood Sampling and Conservation Systems
Consumable Blood Pressure Transducers
Other Critical Care Products and Accessories
Oncology
•
•
•
ChemoLock® CSTD and components
ChemoClave® CSTD and components
Diana® Hazardous Drug Compounding System
The following table sets forth, for the periods indicated, total revenues by market segment and its major product
groups as a percentage of total revenues:
Product line
Infusion therapy
Critical care
Oncology
2016
2015
2014
72%
14%
14%
100%
72%
16%
12%
100%
70%
18%
12%
100%
We currently sell our products through direct channels, which include distributors and the end users of our products
and as an OEM supplier.
Our largest customer has been Hospira, Inc., a subsidiary of Pfizer, to which we distributed our products as an OEM
supplier. Pfizer accounted for 30% of our worldwide revenues in 2016 and 36% of our worldwide revenues in both 2015 and
2014. Pfizer has been a major supplier of infusion pumps and IV solutions, and has helped us achieve market share where they
have multiple products under contract with a customer or broader international distribution channels than we would have been
able to have on our own. Our agreements with Pfizer, which were terminated upon our acquisition of Pfizer's HIS business,
provided them with conditional rights to distribute certain of our Clave and other products to certain categories of customers
both in the United States and foreign countries. Depending on the product and category of customer, these rights may have
been exclusive or nonexclusive. Our relationship with Pfizer has been important for our growth but we have had significant
earnings exposure to a single customer. Eliminating this concentration risk was an important factor in making the decision to
acquire Pfizer's HIS business, see "Acquisitions."
32
We believe that as healthcare providers continue to either consolidate or join major buying organizations, the success
of our products will depend, in part, on our ability, either independently or through strategic relationships, to secure long-term
contracts with large healthcare providers and major buying organizations. As a result of this marketing and distribution
strategy we derive most of our revenues from a relatively small number of distributors and manufacturers. The loss of a
strategic relationship with a customer or a decline in demand for a manufacturing customer’s products could have a material
adverse effect on our operating results.
We believe that achievement of our growth objectives worldwide will require increased efforts by us in sales and
marketing and product development; however, there is no assurance that we will be successful in implementing our growth
strategy. Product development or acquisition efforts may not succeed, and even if we do develop or acquire additional
products, there is no assurance that we will achieve profitable sales of such products. Increased expenditures for sales and
marketing and product acquisition and development may not yield desired results when expected, or at all. While we have
taken steps to control these risks, there are certain risks that may be outside of our control, and there is no assurance that steps
we have taken will succeed.
Seasonality/Quarterly Results
The healthcare business in the United States is subject to quarterly fluctuations due to frequency of illness during the
seasons, elective procedures, and over the last few years, the economy. In Europe, the healthcare business generally slows
down in the summer months due to vacations resulting in fewer elective surgeries. In addition, we can experience fluctuations
in net sales as a result of variations in the ordering patterns of our largest customers, which may be driven more by production
scheduling and their inventory levels, and less by seasonality. Our expenses often do not fluctuate in the same manner as net
sales, which may cause fluctuations in operating income that are disproportionate to fluctuations in our revenue.
On October 6, 2016, we entered into a Stock and Asset Purchase Agreement (the “Purchase Agreement”) to acquire
Pfizer's HIS business. On January 5, 2017, we amended and restated the original purchase agreement to modify the terms of
the agreement as a result of changes in the performance of HIS that affect expectations for the transaction. The transaction
closed on February 3, 2017. Under the terms of the restated and amended agreement we paid $275 million in cash, which was
financed with existing cash balances and a three-year interest-only seller note of $75 million and we delivered 3.2 million
shares of our common stock to Pfizer. Additionally, Pfizer may be entitled up to an additional $225 million based on
achievement of performance targets for the combined company through December 31, 2019. The aggregate purchase
consideration is subject to certain adjustments, based on working capital, cash and indebtedness of the HIS business at closing.
We believe that the acquisition of the HIS business complements our existing business by creating a leading pure-play infusion
company. Strategically the transaction eliminates our reliance on Pfizer, increases our scale and unifies our distribution
channel, which we believe will improve efficiency and allow us to compete more successfully both domestically and globally.
On April 4, 2016, we acquired all of the outstanding shares of Tangent Medical Technologies, Inc. ("Tangent") for $2.6
million in cash. Tangent designs, develops, and commercializes intravenous catheters and associated products for the
improvement of infusion therapy. We believe that Tangent's products enhance our infusion therapy product offering. We do not
expect any significant commercial results from this product line over the next twelve to eighteen months while we make
changes to this product.
33
Consolidated Results of Operations
We present summarized income statement data in Item 6. Selected Financial Data. The following table shows, for the
three most recent years, the percentages of each income statement caption in relation to total revenues.
Revenue
Net sales
Other
Total revenues
Gross margin
Selling, general and administrative expenses
Research and development expenses
Restructuring and transaction expense
Gain on sale of building
Legal settlements
Impairment of assets held for sale
Total operating expenses
Income from operations
Bargain Purchase Gain
Other income, net
Income before income taxes
Income taxes
Net income
Percentage of Revenues
2015
2014
2016
100%
—%
100%
53%
24%
3%
4%
—%
—%
—%
31%
22%
—%
—%
22%
6%
16%
100%
—%
100%
53%
24%
5%
2%
—%
1%
1%
33%
20%
—%
—%
20%
7%
13%
100%
—%
100%
49%
29%
6%
1%
—%
—%
—%
36%
13%
—%
—%
13%
4%
9%
A portion of our sales is conducted in currencies other than the U.S. dollar, particularly the Euro. Significant
fluctuations in foreign currency exchange rates can impact the comparability of our total revenues. When exchange rate
changes significantly impact our revenues, in addition to comparing changes in revenue on a U.S. GAAP basis, we also
compare the changes in revenue from one period to another using constant currency. If significant, we provide constant
currency information to enhance the visibility of underlying business trends, excluding the effects of changes in foreign
currency translation rates. To calculate our constant currency results, we apply the average exchange rate for revenues from the
prior year to the current year results. These results should be considered in addition to, not as a substitute for, results reported in
accordance with GAAP. Results on a constant currency basis, as we present them, may not be comparable to similarly titled
measures used by other companies and are not measures of performance presented in accordance with GAAP.
Foreign currency exchange rate changes did not significantly impact our revenue results for 2016, as compared to
2015, however, they did have significant impact when comparing 2015 revenue results to the comparable 2014 period. As
such, the constant currency comparison is discussed below for 2015, as compared to 2014 period results.
Total revenues for 2016, 2015 and 2014 were $379.4 million, $341.7 million and $309.3 million, respectively.
Beginning in 2016, we reported our revenue based on distribution channel within our market segments with both
Terumo-related geographies in Asia and sales to Medline in our OEM business, and no longer in Direct. As such, prior year
results have been reported in the same manner for comparative purposes.
Infusion Therapy Revenue
The following table summarizes our total infusion therapy revenue by direct and OEM distribution channels (in
millions, except percentages):
34
Direct
OEM
Total Infusion Therapy Revenue
Year Ended December 31,
2016
2015
2014
% increase
(decrease) 2016
over 2015
% increase 2015
over 2014
$
$
162.5
110.1
272.6
$
$
132.6
112.1
244.7
$
$
114.7
101.6
216.3
22.5 %
(1.8)%
11.4 %
15.6%
10.3%
13.1%
Direct infusion therapy revenue increased $29.9 million in 2016, as compared to 2015, primarily due to sales of our
SwabCap product-line, which was acquired through an acquisition in October 2015, and our Clave product-lines as a result of
new customer sales and an increase in sales to existing customers.
OEM infusion therapy sales decreased $2.0 million in 2016, as compared to 2015, due to a decrease in sales of our
Clave product lines to Pfizer partially offset by sales of our OEM SwabCap product.
Direct infusion therapy revenue increased $17.9 million in 2015, as compared to 2014, primarily due to increased unit
sales related to increased utilization and new customers. On a constant currency basis direct infusion therapy revenue would
have increased $22.2 million in 2015, compared to 2014, a $4.3 million unfavorable foreign exchange rate change impact.
OEM infusion therapy sales increased $10.5 million in 2015, as compared to 2014, primarily due to increased unit
sales and increased utilization. On a constant currency basis OEM infusion therapy revenue would have increased $11.3
million in 2015, compared to 2014, a $0.8 million unfavorable foreign exchange rate change impact.
Critical Care Revenue
The following table summarizes our total critical care revenue by direct and OEM distribution channels (in millions,
except percentages):
Direct
OEM
Total Critical Care Revenue
Year Ended December 31,
2015
2014
2016
% (decrease)
increase 2016
over 2015
% decrease
2015 over 2014
$
$
53.5
0.1
53.6
$
$
54.3
—
54.3
$
$
55.0
—
55.0
(1.5)%
100.0 %
(1.3)%
(1.3)%
— %
(1.3)%
Direct critical care revenue decreased $0.8 million in 2016, as compared to 2015, primarily due to an overall decline
of both international and U.S. sales as a result of temporary production constraints in the first part of the year.
Direct critical care revenue decreased $0.7 million in 2015, as compared to 2014, primarily due to the decline in the
exchange rate of the Euro to the U.S. dollar. On a constant currency basis direct critical care revenue would have increased
$0.2 million in 2015, compared to 2014, a $0.9 million unfavorable foreign exchange rate change impact.
OEM critical care sales were flat in 2016, as compared to 2015.
Oncology Revenue
The following table summarizes our total oncology revenue by direct and OEM distribution channels (in millions,
except percentages):
Direct
OEM
Total Oncology Revenue
Year Ended December 31,
2016
2015
2014
% increase 2016
over 2015
% increase 2015
over 2014
$
$
37.6
14.7
52.3
$
$
26.9
14.6
41.5
$
$
24.0
12.7
36.7
39.8%
0.7%
26.0%
12.1%
15.0%
13.1%
35
Direct oncology revenue increased $10.7 million in 2016, as compared to 2015, primarily due to increased U.S. sales.
These increases were a result of new customer sales and an increase in sales to existing customers of our ChemoClave and
ChemoLock products.
OEM oncology sales slightly increased to $0.1 million in 2016, as compared to 2015. Sales growth to Pfizer has been
steadily declining over the last several years.
Direct oncology revenue increased $2.9 million in 2015, as compared to 2014, primarily due to a higher volume of
sales to existing customers. On a constant currency basis direct oncology revenue would have increased $5.0 million in 2015,
compared to 2014, a $2.1 million unfavorable foreign exchange rate change impact.
OEM oncology sales increased $1.9 million in 2015, as compared to 2014, primarily due to a higher volume of sales.
On a constant currency basis OEM oncology revenue would have increased $2.6 million in 2015, compared to 2014, a $0.7
million unfavorable foreign exchange rate change impact.
Gross Margins
Gross margins for 2016, 2015 and 2014 were 53.1%, 52.9%, and 49.0%, respectively.
The 20 basis point increase in gross margin in 2016, as compared to 2015, was primarily due to favorable foreign
exchange rates on our operations expenses due to the decline in the Mexican Peso and favorable product mix partially offset by
the impact of certain manufacturing constraints in the earlier part of the year.
The 390 basis point increase in gross margin in 2015, as compared to 2014, was due to favorable customer and
product mix, operational efficiencies and favorable foreign exchange rates on our operations expenses due to the decline in the
average exchange rate of the Mexican Peso to the U.S. dollar.
Selling, General and Administrative ("SG&A") Expenses
The following table summarizes our SG&A expenses (in millions, except percentages):
SG&A
$
89.4
$
83.2
$
88.9
7.5%
(6.4)%
Year Ended December 31,
2016
2015
2014
% increase 2016
over 2015
% decrease
2015 over 2014
Consolidated SG&A expense increased $6.2 million in 2016, as compared to 2015, primarily due to an increase of
$3.6 million in compensation, $1.5 million in higher dealer fees, $1.3 million in commissions and $0.7 million in depreciation
and amortization partially offset by $1.9 million in lower medical device excise taxes and a $0.6 million decrease in legal fees.
The increase in compensation was in part due to filling positions that were open during 2015, additional employees retained as
part of the acquired SwabCap product line, the general hiring and recruitment of new employees and increases in stock-based
compensation issued to attract these employees. The increases in dealer fees and commissions were related to an increase in
revenue on which they are calculated. The increase in depreciation and amortization was primarily driven by amortization of
acquired intangible assets related to our 2015 acquisition of EXC Holding Corp ("EXC"). The decrease in medical device
excise tax expense was due to the elimination of the tax in the current period due to Congress temporarily suspending this tax
for the 2016-2017 two-year period and the decrease in legal expenses were a result of fewer litigations.
Consolidated SG&A expense decreased $5.7 million in 2015, as compared to 2014 primarily due to $5.8 million in
lower sales and marketing compensation and benefits, promotion expenses and travel expenses and $1.8 million lower legal
fees, partially offset by $3.0 million in higher stock compensation expenses. The lower sales and marketing expenses are
primarily due to the restructuring of the U.S. sales organization in the third quarter of 2014 and the decline in the average
exchange rate of the Euro to the U.S. dollar.
36
Research and Development ("R&D") Expenses
R&D
$
13.0
$
15.7
$
18.3
(17.2)%
(14.2)%
Year Ended December 31,
2015
2014
2016
% decrease
2016 over 2015
% decrease
2015 over 2014
In 2016, as compared to 2015, and in 2015, as compared to 2014, R&D expenses declined primarily from decreasing
R&D project expenses related to the development of our CogentTM 2-in-1 hemodynamic monitoring system, which received
FDA 510(k) clearance during 2016.
Restructuring and Strategic Transaction Expenses
Restructuring and strategic transaction expenses were $15.3 million, $8.5 million and $5.1 million in 2016, 2015 and
2014, respectively.
Restructuring Charges
In 2016, restructuring charges were $1.0 million. These charges were primarily related to residual expenses for the
closure of our Slovakian manufacturing facility and we incurred $0.2 million related to other restructuring activities.
In 2015, restructuring charges were $6.7 million. These charges were related to: (i) an agreement with Dr. Lopez, a
member of our Board of Directors and a former employee in our research and development department, pursuant to which we
bought out Dr. Lopez's right to employment under his then-existing employment agreement; (ii) the reorganization of our
corporate infrastructure, resulting in one-time employee termination benefits and other associated costs; and (iii) a commitment
to a plan to sell our Slovakia manufacturing facility.
In 2014, we reorganized our selling and corporate infrastructure, resulting in a reduction in workforce of 69
employees. The $3.5 million restructuring charge related to the reorganization is comprised of employee termination benefits
and other associated costs.
Strategic Transaction Expenses
In 2016, we incurred $14.3 million in strategic transaction expenses related to our acquisition of the HIS business, our
second quarter 2016 acquisition of Tangent and expenses related to our acquisition of EXC.
In 2015, we incurred $1.8 million in strategic transaction expenses related to the acquisition of EXC.
In 2014, we incurred $1.6 million in charges associated with a strategic transaction that did not go forward.
Gain on sale of building
We recognized a gain of $1.1 million in 2015 from the sale of one of our buildings in San Clemente to Dr. Lopez, a
member of our Board of Directors.
Legal Settlements
During 2015, we recorded a net settlement charge of $1.8 million, less than 1% of revenues, due to the following
claims:
An arbitrator ruled on a breach of contract claim between us and a service provider, awarding us a gross settlement of
$8.8 million. Our legal counsel for this matter represented us under a contingency fee agreement. We recorded a settlement
award, net of legal fees and costs, of $5.3 million; and
An arbitrator ruled on a breach of contract claim between us and a customer, Hospira, awarding Hospira a settlement
and that we pay 75% of Hospira's legal fees and expenses, resulting in a $7.1 million legal settlement charge.
37
Impairment of Assets Held-for-Sale
During 2015, our Board of Directors authorized us to close our Vrable, Slovakia manufacturing facility. The closure
was to enable for greater efficiency of our Ensenada, Mexico facility. After receiving the Board of Director's authorization, we
reclassified the assets related to the Slovakia facility as held-for-sale, and recorded the value of those assets at the lower of their
carrying value or their estimated fair value, less costs to sell, which was based on a third party fair market valuation. As the
estimated fair value, less cost to sell was lower than the carrying value of the assets held-for-sale we recorded an impairment
charge of $4.1 million.
During 2016, we completed the closure of our Slovakia manufacturing facility and sold the land and building held-for-
sale for $3.3 million, net of costs to sell, resulting in an additional impairment loss of $0.7 million.
Bargain Purchase Gain
In 2016, we recognized a bargain purchase gain of $1.5 million in connection with the Tangent acquisition. The
bargain purchase gain represented the excess of the estimated fair market value of the identifiable tangible and intangible assets
acquired and liabilities assumed, net of deferred tax assets over the total purchase consideration. The bargain purchase was
driven by our ability to realize acquired deferred tax assets.
Other income
Other income was $0.8 million, $1.1 million and $0.8 million in 2016, 2015 and 2014, respectively.
Income taxes
Income taxes were accrued at an estimated annual effective tax rate of 26%, 35% and 34% in 2016, 2015 and 2014,
respectively.
The effective tax rate for 2016 differs from the federal statutory rate principally because of the effect of foreign and
state income taxes, tax credits, deductions for domestic production activities, and included material discrete tax benefits related
to the adoption of ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-
Based Payment Accounting (see Note 1 of the Consolidated Financial Statements in this Annual Report on Form 10-K).
The 2016 material discrete tax benefit related to the impact of ASU 2016-09, adopted during the second quarter of
2016 was $7.6 million. The income tax benefit was treated as a discrete item when determining the annual estimated effective
tax rate.
Included in the 2015 estimated annual effective tax rate are the effects of foreign and state income taxes, tax credits,
deductions for domestic production activities and discrete tax items related to the conclusion of state tax examinations, one-
time tax effects related to the acquisition of EXC, and tax impact related to the proposed shut down of our Slovakia plant.
Liquidity and Capital Resources
During 2016, our cash, cash equivalents and investment securities increased by $67.7 million from $377.4 million at
December 31, 2015 to $445.1 million at December 31, 2016. As of December 31, 2016, we had liquidated all of our short-term
and long-term investment securities to fund the pending acquisition of HIS.
Cash Flows from Operating Activities:
Our cash provided by operations was $89.9 million in 2016. Net income plus adjustments for non-cash net expenses
contributed $98.7 million to cash provided by operations. Net cash used by operations as a result of changes in operating assets
and liabilities was $8.8 million. The changes in operating assets and liabilities included a $5.5 million increase in inventories, a
$3.0 million increase in prepaid expenses and other assets, a $1.2 million decrease in accrued liabilities, and a $0.5 million
decrease in accounts payable, partially offset by a $0.7 million decrease in accounts receivable and a $0.7 million net change in
prepaid and deferred income taxes. The increase in inventories was primarily due to building finished good safety stock, to
support better customer deliveries, raw materials related to our Slovakia plant closure, and related transfer to our Mexico plant,
and inventory associated with the acquired SwabCap product-line. The increase in prepaid expenses and other assets was
primarily due to repayment of state aid and interest related to the closure of our Slovakian manufacturing facilities. The
38
decrease in accrued liabilities was primarily due to the payment of accrued restructuring charges related to the closure of our
Slovakian manufacturing facility and the payment of acquisition-related accruals from our 2015 EXC acquisition. The
decrease in accounts payable was a result of the timing of disbursements. The decrease in accounts receivable was due to
collection efforts on our past due accounts. The net changes in income taxes was a result of the timing of payments for cash tax
purposes, which includes true-ups for 2015 overpayment and 2016 estimated taxes.
Our cash provided by operations was $64.2 million in 2015, which includes a retrospective adjustment to include $9.3
million in excess tax benefits as an operating item due to the implementation of ASU 2016-09 in 2016 (see Note 1 of the
Consolidated Financial Statements in this Annual Report on Form 10-K for additional detail). Net income plus adjustments for
non-cash net expenses contributed $80.7 million to cash provided by operations. Net cash used by operations as a result of
changes in operating assets and liabilities was $16.5 million, retrospectively adjusted for the impact of the aforementioned
ASU. The changes in operating assets and liabilities included a $20.5 million increase in accounts receivable, an $8.3 million
increase in inventories, and $1.8 million increase in prepaid expenses and other assets, partially offset by a $9.4 million
increase in accrued liabilities, a $3.1 million increase in accounts payable and a $1.6 million net change in prepaid and deferred
income taxes. The increase in accounts receivable was primarily due to higher revenue in the fourth quarter of 2015 compared
to the fourth quarter of 2014 and an increase in days sales outstanding. The increase in inventory was primarily due to an
increase in forecasted sales and inventory from South Africa. The $9.4 million increase in accrued liabilities was primarily due
to restructuring charges accruals, acquisition accruals and accrued compensation and benefits. The increase in accounts
payable and increase in prepaid expenses and other assets were a result of timing of disbursements. The net changes in prepaid
and deferred income taxes was primarily due to the $9.3 million retrospective reclass of excess tax benefits in accordance with
the aforementioned ASU mostly offset by a loss on the sale of assets to Medline and the utilization of an Excelsior net
operating loss carryover.
Cash Flows from Investing Activities
The following table summarizes the changes in our investing cash flows (in thousands):
For the Years Ended December 31,
Variance
2016
2015
2014
2016
2015
Investing Cash Flows:
Purchases of property and equipment
Proceeds from sale of assets
Proceeds from the disposal of assets held-for-sale, net
Intangible asset additions
Business acquisitions, net of cash acquired
Proceeds from sale of assets acquired in a business
combination
Purchases of investment securities
Proceeds from sale of investment securities
$ (23,361) $ (12,984) $ (16,604) $ (10,377) $
—
3,268
(1,192)
(2,584)
—
(118,384)
158,534
3,592
—
(951)
(56,786)
28,970
(56,137)
83,054
5
—
(989)
—
—
(93,588)
89,426
(3,592)
3,268
(241)
54,202
(28,970)
(62,247)
75,480
Net cash provided by (used in) investing activities
$
16,281
$ (11,242) $ (21,750) $
27,523
$
3,620 (1)
3,587 (2)
— (3)
38
(56,786) (4)
28,970 (5)
37,451 (6)
(6,372) (7)
10,508
______________________________
(1) Our purchases of property and equipment will vary from period to period based on additional investments needed to support
new and existing products and expansion of our manufacturing facilities. During 2016, we expanded our Mexico
manufacturing facilities to absorb the production capacity from the closed Slovakian facilities.
(2) In 2015, we sold an office building for $3.6 million.
(3) In 2016, we sold our Slovakian manufacturing facilities for $3.3 million, net of costs to sell of $0.1 million.
(4) Our business acquisitions will vary from period to period based upon our current growth strategy and our ability to execute
on desirable target companies. In 2016, we acquired Tangent for $2.6 million in cash. In 2015, we acquired EXC for $56.8
million in cash.
(5) In 2015, we sold certain assets from the EXC acquisition for $29.0 million in cash to Excelsior Medical, LLC.
39
(6) Our purchases of investment securities will vary from period to period based on current cash needs, planning for known
future transactions and due to changes in our investment strategy. In 2016, we amended our investment policy to allow for the
purchase of securities with final maturities in excess of one year. Accordingly, we adjusted our investment strategy to take
advantage of the higher yields available on these longer term securities. Our longer term securities have maturities up to three
years.
(7) The proceeds from the sale of our investment securities increased significantly during in 2016, as compared to the
comparable prior year periods, due to the liquidation of all of our short-term and long-term investment securities, which were
used to fund the 2017 acquisition of HIS.
While we can provide no assurances, we estimate that our capital expenditures in 2017 related to our legacy business,
not including HIS, will approximate $18 million to $20 million. In January 2017, we completed an expansion of our Mexico
manufacturing plant. We anticipate making additional investments in molds, machinery and equipment in our manufacturing
operations in the United States and Mexico to support new and existing products and in IT to benefit world-wide operations.
We expect to use our cash and investments to fund our capital purchases. Amounts of spending are estimates and actual
spending may substantially differ from those amounts.
Cash Flows from Financing Activities
The following table summarizes the changes in our financing cash flows (in thousands):
For the Years Ended December 31,
Variance
2016
2015
2014
2016
2015
Financing Cash Flows:
Proceeds from exercise of stock options
Proceeds from employee stock purchase plan
Purchase of treasury stock
Net cash provided by financing activities
$
$
17,346
2,361
(17,235)
2,472
$
$
15,042
2,162
(1,523)
15,681
$
$
16,998
2,485
(5,836)
13,647
$
$
2,304
199
(15,712)
$ (13,209) $
(1,956) (1)
(323)
4,313 (2)
2,034
______________________________
(1) Proceeds from the exercise of stock options will vary from period to period based on the volume of options exercised and the
exercise price of the specific options exercised.
(2) In 2016, we purchased 174,885 shares of our common stock under our share purchase plan on the open market for $15.3
million. Additionally in 2016, our employees surrendered 20,261 shares of our common stock from vested restricted stock
awards as consideration for approximately $1.9 million in minimum statutory withholding obligations paid on their behalf.
In 2015, our employees surrendered 17,299 shares of our common stock from vested restricted stock awards as consideration
for approximately $1.5 million in minimum statutory withholding obligations paid on their behalf.
In 2014, we purchased 88,792 shares of our common stock under our share purchase plan on the open market for $ 5.6 million
and our employees surrendered 4,232 shares of our common stock from vested restricted stock awards as consideration for
approximately $0.2 million in minimum statutory withholding obligations paid on their behalf.
Our common stock purchase plan, which authorized the repurchase of up to $40.0 million of our common stock, was
authorized by our Board of Directors and publicly announced on July 19, 2010. To date, we have purchased a total of $32.8
million of our stock from this plan, leaving a balance of $7.2 million available for future purchases. This plan has no expiration
date.
We have a substantial cash position generated from profitable operations and stock sales, principally from the exercise
of employee stock options. We maintain this position to fund our growth, meet increasing working capital requirements, fund
capital expenditures, buy back our common stock on an opportunistic basis and to take advantage of acquisition opportunities
that may arise. Our primary investment goal is capital preservation. In line with the above policy, as of December 31, 2016 we
had liquidated all of our short-term and long-term investment securities to fund the acquisition of HIS.
40
As of December 31, 2016, we have $28.5 million of cash and cash equivalents held in local currency by our foreign
subsidiaries. If these funds were needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes for a
portion of any repatriated funds. However, we expect to permanently reinvest these funds outside of the U.S. and, based on our
current plans, we do not presently anticipate a need to repatriate them to fund our U.S. operations.
Post year end Uses of Capital and Financing
On February 3, 2017 we paid $275 million in cash to acquire HIS, which was financed with existing cash balances and
a three-year interest-only seller note of $75 million. The seller note bears interest at the London interbank offered rate plus (a)
2.25% per annum for the first twelve months after the closing date and (b) 2.5% per annum thereafter. The seller note matures
on February 3, 2020 and the full balance of the note must be paid at that time. Our cash balance after the acquisition was
approximately $270 million.
We believe that our existing cash, cash equivalents along with funds expected to be generated from future operations
will provide us with sufficient funds to finance our current operations for the next twelve months, as well as fund the
acquisition of HIS. In the event that we experience illiquidity in our investment securities, downturns or cyclical fluctuations in
our business that are more severe or longer than anticipated or if we fail to achieve anticipated revenue and expense levels, we
may need to obtain or seek alternative sources of capital or financing, and we can provide no assurances that the terms of such
capital or financing will be available to us on favorable terms, if at all.
Critical Accounting Policies and Estimates
Our significant accounting policies are summarized in Note 1 to the Consolidated Financial Statements. In preparing
our financial statements, we make estimates and assumptions that affect the expected amounts of assets and liabilities and
disclosure of contingent assets and liabilities. We apply our accounting policies on a consistent basis. As circumstances change,
they are considered in our estimates and judgments, and future changes in circumstances could result in changes in amounts at
which assets and liabilities are recorded.
Investment securities: Investment securities consist of certificates of deposits, corporate bonds and tax-exempt state
and municipal government debt which are classified as available-for-sale. See Item 7A, Quantitative and Qualitative
Disclosures about Market Risk. Under our current investment policies, our available for sale securities have no significant
difference between the fair value and amortized cost. If there were to be a significant difference, this amount would be
reflected as a separate component of stockholders’ equity. Unrealized gains and losses on items for which the fair value option
has been elected are reported in earnings at each subsequent reporting date.
Revenue recognition: We record sales and related costs when ownership of the product transfers to the customer,
persuasive evidence of an arrangement exists, collectability is reasonably assured and the sales price is determinable. Under the
terms of all our purchase orders, ownership transfers on shipment. If there are significant doubts at the time of shipment as to
the collectability of the receivable, we defer recognition of the sale in revenue until the receivable is collected. Our customers
are medical product manufacturers, distributors and end-users. Our only post-sale obligations are warranty and certain rebates.
We warrant products against defects and have a policy permitting the return of defective products. We accrue for warranty and
product returns based on historical experience. We accrue rebates as a reduction in revenue based on agreements and historical
experience.
Accounts receivable: Accounts receivable are stated at net realizable value. An allowance is provided for estimated
collection losses based on the age of the receivable or on specific past due accounts for which we consider collection to be
doubtful. We rely on prior payment trends, financial status and other factors to estimate the cash which ultimately will be
received. Such amounts cannot be known with certainty at the financial statement date. We regularly review individual past due
balances for collectability. Loss exposure is principally with international customers for whom normal payment terms are long
in comparison to those of our other customers and, to a lesser extent, domestic distributors. Many of these distributors are
relatively small and we are vulnerable to adverse developments in their businesses that can hinder our collection of amounts
due. If actual collection losses exceed expectations, we could be required to accrue additional bad debt expense, which could
have an adverse effect on our operating results in the period in which the accrual occurs.
Inventories: Inventories are stated at the lower of cost (first in, first out) or market. We need to carry many
components to accommodate our rapid product delivery, and if we mis-estimate demand or if customer requirements change,
we may have components in inventory that we may not be able to use. Most finished products are made only after we receive
orders except for certain standard (non-custom) products which we will carry in inventory in expectation of future orders. For
finished products in inventory, we need to estimate what may not be saleable. We regularly review inventory and reserve for
41
slow moving items, and write off all items that we do not expect to use in manufacturing, and finished products that we do not
expect to sell. If actual usage of components or sales of finished goods inventory is less than our estimates, we could be
required to write off additional inventory, which could have an adverse effect on our operating results in the period in which the
write-off occurs.
Property and equipment/depreciation: Property and equipment is carried at cost and depreciated on the straight-line
method over the estimated useful lives. The estimates of useful lives are significant judgments in accounting for property and
equipment, particularly for molds and automated assembly machines that are custom made for us. We may retire them on an
accelerated basis if we replace them with larger or more technologically advanced tooling. The remaining useful lives of all
property and equipment are reviewed regularly and lives are adjusted or assets written off based on current estimates of future
use. As part of that review, property and equipment is reviewed for other indicators of impairment. An unexpected shortening of
useful lives of property and equipment that significantly increases depreciation provisions, or other circumstances causing us to
record an impairment loss on such assets, could have an adverse effect on our operating results in the period in which the
related charges are recorded.
Income Taxes: We utilize the liability method of accounting for income taxes as set forth in ASC 740. Under the
liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax
basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A
valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. In
determining the need for valuation allowances we consider projected future taxable income and the availability of tax planning
strategies. If in the future we determine that we would not be able to realize our recorded deferred tax assets, an increase in the
valuation allowance would be recorded, decreasing earnings in the period in which such determination is made.
We are subject to income taxes throughout the United States and in numerous foreign jurisdictions. We recognize the
financial statement benefits for uncertain tax positions as set forth in ASC 740 only if it is more-likely-than-not to be sustained
in the event of challenges by relevant taxing authorities based on the technical merit of each tax position. The amounts of
uncertain tax positions recognized are the largest benefits that have a greater than 50 percent likelihood of being realized upon
settlement with the relevant tax authorities.
New Accounting Pronouncements
See Note 1 of the Consolidated Financial Statements in this Annual Report on Form 10-K.
Off Balance Sheet Arrangements
In the normal course of business, we have agreed to indemnify our officers and directors to the maximum extent
permitted under Delaware law and to indemnify customers as to certain intellectual property matters related to sales of our
products. There is no maximum limit on the indemnification that may be required under these agreements. Although we can
provide no assurances, we have never incurred, nor do we expect to incur, any liability for indemnification.
Contractual Obligations
We have contractual obligations, at December 31, 2016, of approximately the amount set forth in the table below. This
amount excludes inventory-related purchase orders for goods and services for current delivery. The majority of our inventory
purchase orders are blanket purchase orders that represent an estimated forecast of goods and services. We do not have a
commitment liability on the blanket purchase orders. Since we do not have the ability to separate out blanket purchase orders
from non-blanket purchase orders for inventory-related goods and services for current delivery, amounts related to such
purchase orders are excluded from the table below. We have excluded from the table below pursuant to ASC 740-10-25
(formerly FIN 48), an interpretation of ASC 740-10 (formerly SFAS 109), a non-current income tax liability of $1.5 million due
to the high degree of uncertainty regarding the timing of future cash outflows associated with the liabilities.
42
Contractual Obligations
Operating leases
Warehouse service agreements
Purchase obligations
Other contractual obligations
Total
2017
2018
2019
2020
2021
$
$
1,737
4,373
4,829
3
10,942
$
$
554
1,573
4,829
3
6,959
$
$
337
1,568
—
—
1,905
$
$
333
1,232
—
—
1,565
$
$
338
—
—
—
338
$
$
175
—
—
—
175
(in thousands)
Forward Looking Statements
Various portions of this Annual Report on Form 10-K, including this Management’s Discussion and Analysis of
Financial Condition and Results of Operations, describe trends in our business and finances that we perceive and state some of
our expectations and beliefs about our future. These statements about the future are “forward looking statements,” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, and we identify them by using words such as “anticipate,” “believe,” “expect,” “estimate,” “intend,” “plan,” “will,”
“continue,” “could,” “may,” and by similar expressions and statements about aims, goals and plans. The forward looking
statements are based on the best information currently available to us and assumptions that we believe are reasonable, but we
do not intend the statements to be representations as to future results. They include, without limitation, statements about:
•
•
•
future growth; future operating results and various elements of operating results, including future expenditures and
effects with respect to sales and marketing and product development and acquisition efforts; future sales and unit
volumes of products; expected increases and decreases in sales; deferred revenue; accruals for restructuring charges,
future license, royalty and revenue share income; production costs; gross margins; litigation expense; future SG&A
and R&D expenses; manufacturing expenses; future costs of expanding our business; income; losses; cash flow;
amortization; source of funds for capital purchases and operations; future tax rates; alternative sources of capital or
financing; changes in working capital items such as receivables and inventory; selling prices; and income taxes;
factors affecting operating results, such as shipments to specific customers; reduced dependence on current proprietary
products; loss of a strategic relationship; change in demand; domestic and international sales; expansion in
international markets, selling prices; future increases or decreases in sales of certain products and in certain markets
and distribution channels; maintaining strategic relationships and securing long-term and multi-product contracts with
large healthcare providers and major buying organizations; increases in systems capabilities; introduction,
development and sales of new products, acquisition and integration of businesses and product lines, including the HIS
business, SwabCap (EXC) and Tangent; benefits of our products over competing systems; qualification of our new
products for the expedited Section 510(k) clearance procedure; possibility of lengthier clearance process for new
products; planned increases in marketing; warranty claims; rebates; product returns; bad debt expense; amortization
expense; inventory requirements; lives of property and equipment; manufacturing efficiencies and cost savings; unit
manufacturing costs; establishment or expansion of production facilities inside or outside of the United States; planned
new orders for semi-automated or fully automated assembly machines for new products; adequacy of production
capacity; results of R&D; our plans to repurchase shares of our common stock; asset impairment losses; relocation of
manufacturing facilities and personnel; effect of expansion of manufacturing facilities on production efficiencies and
resolution of production inefficiencies; the effect of costs to customers and delivery times; business seasonality and
fluctuations in quarterly results; customer ordering patterns and the effects of new accounting pronouncements; and
new or extended contracts with manufacturers and buying organizations; dependence on a small number of customers;
loss of larger distributors and the ability to locate other distributors; the impact of our acquisition of the HIS business;
growth of our Clave products in future years; design features of Clave products; the outcome of our strategic
initiatives; regulatory approvals and compliance; outcome of litigation; patent protection and intellectual property
landscape; patent infringement claims and the impact of newly issued patents on other medical devices; competitive
and market factors, including continuing development of competing products by other manufacturers; improved
production processes and higher volume production; innovation requirements; consolidation of the healthcare provider
market and downward pressure on selling prices; distribution or financial capabilities of competitors; healthcare
reform legislation; use of treasury stock; working capital requirements; liquidity and realizable value of our
investment securities; future investment alternatives; foreign currency denominated financial instruments; foreign
exchange risk; commodity price risk; our expectations regarding liquidity and capital resources over the next twelve
months; capital expenditures; plans to convert existing space; acquisitions of other businesses or product lines,
indemnification liabilities and contractual liabilities.
43
Forward looking statements involve certain risks and uncertainties, which may cause actual results to differ materially
from those discussed in each such statement. First, one should consider the factors and risks described in the statements
themselves or otherwise discussed herein. Those factors are uncertain, and if one or more of them turn out differently than we
currently expect, our operating results may differ materially from our current expectations.
Second, investors should read the forward looking statements in conjunction with the Risk Factors discussed in Item 1A of
this Annual Report on Form 10-K. Also, actual future operating results are subject to other important factors and risks that we
cannot predict or control, including without limitation, the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
general economic and business conditions, both in the United States and internationally;
unexpected changes in our arrangements with our large customers;
outcome of litigation;
fluctuations in foreign exchange rates and other risks of doing business internationally;
increases in labor costs or competition for skilled workers;
increases in costs or availability of the raw materials need to manufacture our products;
the effect of price and safety considerations on the healthcare industry;
competitive factors, such as product innovation, new technologies, marketing and distribution strength and price
erosion;
the successful development and marketing of new products;
unanticipated market shifts and trends;
the impact of legislation affecting government reimbursement of healthcare costs;
changes by our major customers and independent distributors in their strategies that might affect their efforts to market
our products;
the effects of additional governmental regulations;
unanticipated production problems; and
the availability of patent protection and the cost of enforcing and of defending patent claims.
The forward looking statements in this report are subject to additional risks and uncertainties, including those detailed
from time to time in our other filings with the Securities and Exchange Commission. These forward-looking statements are
made only as of the date hereof and, except as required by law, we undertake no obligation to update or revise any of them,
whether as a result of new information, future events or otherwise.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Foreign Exchange Risk
We have foreign currency exchange risk related to foreign-denominated cash, accounts receivable and accounts
payable. In our European operations, our net Euro asset position at December 31, 2016 was approximately €37.7 million. We
also have approximately €8.0 million in an Euro denominated cash account held by our corporate entity. A 10% change in the
conversion of the Euro to the U.S. dollar for our cash, accounts receivable, accounts payable and accrued liabilities from the
December 31, 2016 spot rate would impact our consolidated amounts on these balance sheet items by approximately $4.8
million, or 1.0% of these net assets. We expect that in the future, with the organic growth of our European distribution
operation and from our acquisition of HIS, our net Euro denominated instruments will increase. We currently do not hedge our
foreign currency exposures.
Sales from the United States to foreign distributors are denominated in U.S. dollars. We have manufacturing, sales and
distribution facilities in several countries and we conduct business transactions denominated in various foreign currencies,
although principally the Euro and Mexican Peso. A 10% change in the conversion of the Mexican Peso to the U.S. dollar from
the average exchange rate we experienced in 2016 and our manufacturing spending from 2016 would have impacted our cost of
goods sold by approximately $2.4 million. To date, the change in the conversion of the Euro to U.S. dollar has not had a
material impact to our operating earnings.
44
Item 8. Financial Statements and Supplementary Data.
[THE REMAINDER OF THIS PAGE IS INTENIONALLY LEFT BLANK]
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
ICU Medical, Inc.
San Clemente, CA
We have audited the accompanying consolidated balance sheets of ICU Medical, Inc. and subsidiaries (the “Company”) as of
December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial
statement schedule listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company's internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 1, 2017 expressed an unqualified opinion on the Company's internal control over financial
reporting.
/s/ Deloitte & Touche LLP
Costa Mesa, California
March 1, 2017
46
ICU MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value data)
CURRENT ASSETS:
Cash and cash equivalents
Short-term investment securities
ASSETS
TOTAL CASH, CASH EQUIVALENTS AND INVESTMENT SECURITIES
Accounts receivable, net of allowance for doubtful accounts of $1,073 and $1,101 at
December 31, 2016 and 2015, respectively
Inventories
Prepaid income taxes
Prepaid expenses and other current assets
Assets held-for-sale
TOTAL CURRENT ASSETS
PROPERTY AND EQUIPMENT, net
GOODWILL
INTANGIBLE ASSETS, net
DEFERRED INCOME TAXES
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable
Accrued liabilities
TOTAL CURRENT LIABILITIES
LONG-TERM LIABILITIES
DEFERRED INCOME TAXES
INCOME TAX LIABILITY
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Convertible preferred stock, $1.00 par value Authorized—500 shares; Issued and
outstanding— none
Common stock, $0.10 par value — Authorized—80,000 shares; Issued and outstanding,
16,338 shares at December 31, 2016 and 16,086 shares at December 31, 2015
Additional paid-in capital
Treasury stock, at cost
Retained earnings
Accumulated other comprehensive loss
TOTAL STOCKHOLDERS' EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
2016
2015
$
$
$
445,082
—
445,082
56,161
49,264
11,235
7,355
—
569,097
85,696
5,577
22,383
21,935
704,688
14,641
25,896
40,537
1,107
1,370
1,519
—
336,164
41,233
377,397
57,847
43,632
14,366
7,631
4,134
505,007
74,320
6,463
23,936
17,099
626,825
13,670
28,948
42,618
1,476
1,372
1,488
—
—
—
1,633
162,828
(14)
516,980
(21,272)
660,155
704,688
$
1,608
145,125
—
453,896
(20,758)
579,871
626,825
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
47
ICU MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
REVENUES:
Net sales
Other
TOTAL REVENUE
COST OF GOODS SOLD
GROSS PROFIT
OPERATING EXPENSES:
Selling, general and administrative
Research and development
Restructuring and strategic transaction
Gain on sale of building
Legal settlements, net
Impairment of assets held for sale
TOTAL OPERATING EXPENSES
INCOME FROM OPERATIONS
BARGAIN PURCHASE GAIN
OTHER INCOME, NET
INCOME BEFORE INCOME TAXES
PROVISION FOR INCOME TAXES
NET INCOME
NET INCOME PER SHARE
Basic
Diluted
WEIGHTED AVERAGE NUMBER OF SHARES
Basic
Diluted
Year ended December 31,
2015
2014
2016
$
379,339
$
341,254
$
308,770
33
379,372
177,974
201,398
89,426
12,955
15,348
—
—
728
118,457
82,941
1,456
767
85,164
(22,080)
63,084
3.90
3.66
16,168
17,254
$
$
$
414
341,668
160,871
180,797
83,216
15,714
8,451
(1,086)
1,798
4,139
112,232
68,565
—
1,134
69,699
(24,714)
44,985
2.84
2.73
15,848
16,496
$
$
$
490
309,260
157,859
151,401
88,939
18,332
5,093
—
—
—
112,364
39,037
—
755
39,792
(13,457)
26,335
1.72
1.68
15,282
15,647
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
48
ICU MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Net income
Year ended December 31,
2015
2014
2016
$
63,084
$
44,985
$
26,335
Other comprehensive loss, net of tax of $185, ($2,680) and ($3,129) for the
years ended December 31, 2016, 2015 and 2014, respectively:
Foreign currency translation adjustment
Comprehensive income
(514)
62,570
$
(11,204)
33,781
$
(11,747)
14,588
$
The accompanying notes are an integral part of these consolidated financial statements.
49
ICU MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Amounts in thousands)
Balance, December 31, 2013
Issuance of restricted stock and exercise of stock options, including excess income tax
benefits of $5,700
Purchase of treasury stock, treasury stock acquired in lieu of cash payment on stock
option exercises and income tax withholding obligations
Proceeds from employee stock purchase plan
Stock compensation
Foreign currency translation adjustment
Net income
Balance, December 31, 2014
Issuance of restricted stock and exercise of stock options, including excess income tax
benefits of $9,330
Purchase of treasury stock, treasury stock acquired in lieu of cash payment on stock
option exercises and income tax withholding obligations
Proceeds from employee stock purchase plan
Stock compensation
Foreign currency translation adjustment
Net income
Balance, December 31, 2015
Issuance of restricted stock and exercise of stock options
Purchase of treasury stock, treasury stock acquired in lieu of cash payment on stock
option exercises and income tax withholding obligations
Proceeds from employee stock purchase plan
Stock compensation
Foreign currency translation adjustment
Net income
Balance, December 31, 2016
Common Stock
Shares
15,102
Amount
$ 1,510
Additional
Paid-In
Capital
$
78,495
$
Treasury
Stock
Retained
Earnings
(49) $382,576
Accumulated
Other
Comprehensive
Income (Loss)
2,193
$
Total
$464,725
544
48
18,528
4,122
—
—
22,698
(98)
47
—
—
—
15,595
—
1
—
—
—
1,559
285
436
9,592
—
—
107,336
—
(6,121)
—
2,048
—
—
—
—
26,335
—
— 408,911
—
—
—
(11,747)
—
(9,554)
(5,836)
2,485
9,592
(11,747)
26,335
508,252
475
46
22,715
1,611
—
—
24,372
(18)
34
—
—
—
16,086
416
(195)
31
—
—
—
16,338
—
3
—
—
—
1,608
22
—
3
—
—
—
$ 1,633
$
88
2,159
12,827
—
—
145,125
103
(1,611)
—
—
—
—
—
—
—
44,985
— 453,896
—
17,221
— (17,235)
—
—
—
—
—
—
—
63,084
(14) $516,980
2,358
15,242
—
—
162,828
$
—
—
(11,204)
—
(20,758)
—
(1,523)
2,162
12,827
(11,204)
44,985
579,871
17,346
(17,235)
2,361
15,242
(514)
63,084
(21,272) $660,155
—
—
(514)
—
$
The accompanying notes are an integral part of these consolidated financial statements.
50
ICU MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Provision for doubtful accounts
Provision for warranty and returns
Stock compensation
Loss (gain) on disposal of property and equipment
Bond premium amortization
Impairment of assets held-for-sale
Bargain purchase gain
Other
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued liabilities
Income taxes, including excess tax benefits and deferred income taxes
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment
Proceeds from sale of assets
Proceeds from the disposal of assets held-for-sale, net
Intangible asset additions
Business acquisitions, net of cash acquired
Proceeds from sale of assets acquired in a business acquisition
Purchases of investment securities
Proceeds from sale of investment securities
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options
Proceeds from employee stock purchase plan
Purchase of treasury stock
Net cash provided by financing activities
Effect of exchange rate changes on cash
NET INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period
CASH AND CASH EQUIVALENTS, end of period
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for income taxes
Year ended December 31,
2015
2014
2016
$
63,084
$
44,985
$
26,335
19,050
18,073
19,447
—
559
15,242
59
1,355
728
(1,456)
75
744
(5,501)
(3,028)
(463)
(1,221)
714
89,941
54
52
12,827
(1,106)
1,670
4,139
—
—
(20,515)
(8,337)
(1,832)
3,118
9,454
1,613
64,195
34
(360)
9,592
8
2,188
—
—
—
4,912
(3,836)
1,970
(621)
2,344
4,327
66,340
(23,361)
(12,984)
(16,604)
—
3,268
(1,192)
(2,584)
—
(118,384)
158,534
16,281
17,346
2,361
(17,235)
2,472
224
108,918
336,164
3,592
—
(951)
(56,786)
28,970
(56,137)
83,054
(11,242)
15,042
2,162
(1,523)
15,681
(8,282)
60,352
275,812
445,082
$
336,164
$
5
—
(989)
—
—
(93,588)
89,426
(21,750)
16,998
2,485
(5,836)
13,647
(8,447)
49,790
226,022
275,812
21,101
$
22,998
$
8,668
$
$
The accompanying notes are an integral part of these consolidated financial statements.
51
ICU MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Amounts in thousands)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Accrued liabilities for property and equipment
Detail of acquisitions:
Fair value of assets acquired
Cash paid for acquisitions, net of cash acquired
Bargain purchase gain
Liabilities assumed
Year ended December 31,
2016
2015
2014
1,566
$
182
$
789
3,306
$
60,693
$
(2,584)
(1,456)
(56,786)
—
734
$
(3,907) $
—
—
—
—
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
52
Table of Contents
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: General and Summary of Significant Accounting Policies
Basis of Presentation and Preparation
ICU Medical, Inc., a Delaware corporation, operates in one business segment engaged in the development,
manufacturing and sale of innovative medical technologies used in infusion therapy, critical care and oncology applications.
Our devices are sold directly or to distributors and medical product manufacturers throughout the United States and
internationally. The manufacturing for all product groups occurs in Salt Lake City and Mexico. Our Slovakian manufacturing
facilities were closed during the second half of 2016. Assets and operating expenses are not allocated to individual product
groups.
All subsidiaries are wholly owned and are included in the consolidated financial statements. All intercompany
accounts and transactions have been eliminated.
In our opinion, the consolidated financial statements reflect all adjustments, which are normal and recurring in nature,
necessary for fair financial statement presentation. These consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States of America ("GAAP"). Preparing financial statements in
conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.
In the second quarter of 2016, we adopted Accounting Standard Update ("ASU") No. 2016-09, Compensation - Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This update requires excess tax
benefits or deficiencies to be recognized in income tax expense instead of to additional paid in capital. Also, the assumed
proceeds from applying the treasury stock method when computing earnings per share no longer includes the amount of excess
tax benefits or deficiencies. The update also requires that the excess tax benefits or deficiencies be classified as an operating
cash flow line item instead of a financing cash flow line item in our consolidated statement of cash flows. The requirements of
the update were to be reflected as of the beginning of the fiscal year regardless of in which interim period it was actually
adopted. Accordingly certain line-items in our Note 17: Quarterly Financial Data for the three months ended March 31, 2016
have been adjusted from previously reported amounts. March 31, 2016 net income was adjusted to $18.2 million, basic
earnings per share was adjusted to $1.13 and diluted earnings per share was adjusted to $1.08. Additionally, the update gave the
option to retroactively reclassify the excess tax benefits from a financing cash flow to an operating cash flow in the prior year's
consolidated cash flow statements presented; accordingly, the presentation of $9.3 million and $5.7 million, respectively, in
excess tax benefits in the December 31, 2015 and 2014 consolidated statement of cash flows were reclassified from financing
cash flows to operating cash flows to conform to the new accounting standard.
Cash and Cash Equivalents
Cash equivalents are short-term, highly liquid investments with an original maturity of three months or less.
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 market with cost determined using the first-in, first-out method. Inventory
costs include material, labor and overhead related to the manufacturing of medical devices.
Inventories consist of the following at December 31 (in thousands):
53
Table of Contents
Raw material
Work in process
Finished goods
Total
Property and Equipment
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2016
2015
$
$
28,435
$
4,415
16,414
49,264
$
24,681
4,282
14,669
43,632
2016
2015
$
96,536
$
63,524
39,014
26,458
3,243
15,180
96,909
56,716
36,436
23,346
3,638
6,003
243,955
(158,259)
85,696
$
223,048
(148,728)
74,320
$
Property and equipment consist of the following at December 31 (in thousands):
Machinery and equipment
Land, building and building improvements
Molds
Computer equipment and software
Furniture and fixtures
Construction in progress
Total property and equipment, cost
Accumulated depreciation
Net property and equipment
All property and equipment are stated at cost. We use the straight-line method for depreciating property and
equipment over their estimated useful lives. Estimated useful lives are:
Buildings
Building improvements
Machinery and equipment
Furniture, fixtures and molds
Computer equipment and software
15 - 30 years
15 years
2 - 10 years
2 - 5 years
3 - 5 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 and equipment sold or retired are removed
from the accounts and any gain or loss is reflected in the statements of income at the time of disposal. Depreciation expense
was $16.3 million, $15.9 million and $17.0 million in the years ended December 31, 2016, 2015 and 2014, 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, 2016 and 2015.
The following table presents the changes in the carrying amount of our goodwill for 2016 and 2015 (in thousands):
54
Table of Contents
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Balance as of December 31, 2014
Goodwill acquired
Other
Balance as of December 31, 2015
Goodwill acquired
Other (1)
Balance as of December 31, 2016
______________________________
Total
1,478
4,985
—
6,463
—
(886)
5,577
$
$
(1) In 2016, "other" relates to measurement period adjustments on the net assets of our 2015 acquisition of EXC Holding Corp.
("EXC").
Intangible Assets
Intangible assets, carried at cost less accumulated amortization and amortized on a straight-lined basis, were as follows
(in thousands):
Patents
MCDA contract *
Customer contracts
Non-contractual customer relationships
Trademarks
Trade name
Developed technology
Total
Patents
MCDA contract *
Customer contracts
Non-contractual customer relationships
Trademarks
Trade name
Developed technology
Total
Weighted
Average
Amortization
Life in Years
10
10
9
15
4
15
10
Weighted
Average
Amortization
Life in Years
10
10
9
15
4
15
10
$
$
$
$
December 31, 2016
Accumulated
Amortization
9,326
8,571
4,512
590
425
609
509
24,542
$
$
Cost
14,423
8,571
5,319
7,080
425
7,310
3,797
46,925
December 31, 2015
Accumulated
Amortization
8,302
8,571
4,133
118
425
122
92
21,763
$
$
Cost
13,308
8,571
5,319
7,080
425
7,310
3,686
45,699
$
$
$
$
Net
5,097
—
807
6,490
—
6,701
3,288
22,383
Net
5,006
—
1,186
6,962
—
7,188
3,594
23,936
*MCDA contract: Manufacturing, Commercialization and Development Agreement with Hospira, Inc., dated May 1,
2005 (the "MCDA”).
Amortization expense in 2016, 2015 and 2014 was $2.8 million, $2.2 million and $2.4 million, respectively.
As of December 31, 2016 estimated annual amortization for our intangible assets for each of the next five years is
approximately (in thousands):
55
Table of Contents
2017
2018
2019
2020
2021
Thereafter
Total
Long-Lived Assets
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$
$
2,719
2,560
2,147
2,008
1,925
11,024
22,383
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
Our investment securities, which are carried at fair market value and are considered available-for-sale, consist
principally of certificates of deposits, corporate bonds, U.S. Treasury securities, commercial paper and federal tax-exempt state
and municipal government debt. Available-for-sale securities are recorded at fair value, and unrealized holding gains and losses
are recorded, net of tax, as a component of accumulated other comprehensive income. Unrealized losses on available-for-sale
securities are charged against net earnings when a decline in fair value is determined to 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.
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.
The deduction we receive from indirect tax benefits from the exercise of stock options, such as those recognized for
research and development credits and domestic production activities deductions, is recorded as a reduction to the tax provision.
With the adoption of a new accounting standard during 2016 (see Note 1: General and Summary of Significant Accounting
Policies), the direct tax benefits of share based compensation are also recorded as a reduction to the tax provision and not
through additional paid in capital as in the prior years.
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Foreign Currency
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We have operations in Europe where the functional currency is the Euro, operations in Australia where the functional
currency is the Australian dollar and operations in South Africa where the functional currency is the Rand. Assets and liabilities
are translated 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. Translation adjustments are recorded as a component of accumulated other
comprehensive income, a separate component of stockholders' equity on our consolidated balance sheets and the effect of
exchange rate changes on cash and cash equivalents are reflected on our consolidated statements of cash flows. Gains and
losses for transactions denominated in a currency other than the functional currency of the entity are included in our statements
of operations. Foreign currency transaction gains and losses were $0.3 million in 2016, $0.2 million in 2015 and less than $0.1
million in 2014.
Revenue Recognition
Most of our product sales are free on board shipping point and ownership of the product transfers to the customer on
shipment. We record sales and related costs when ownership of the product transfers to the customer, persuasive evidence of an
arrangement exists, collectability is reasonably assured and the sales price is determinable. Our customers are distributors,
medical product manufacturers and end-users. Our only post-sale obligations are warranty and certain rebates. We warrant
products against defects and have a policy permitting the return of defective products. We reserve for warranty and returns
based on historical experience. We accrue rebates based on agreements and on historical experience as a reduction in revenue
at the time of sale.
Other revenue consists of license, royalty and revenue sharing payments. Payments expected to be received are
estimated and recorded in the period earned and adjusted to actual amounts when reports are received from payers; if there is
insufficient data to make such estimates, payments are not recorded until reported by the payers.
Shipping Costs
Costs to ship finished goods to our customers are included in cost of goods sold on the consolidated statements of
income.
Advertising Expenses
Advertising expenses are expensed as incurred and reflected in selling, general and administrative expenses in our
consolidated statements of income and were $0.1 million in 2016, $0.2 million in 2015 and $0.1 million in 2014.
Post-retirement and Post-employment Benefits
We do not provide retirement or post-employment benefits to employees other than our Section 401(k) retirement plan
("plan") for employees. Our contributions to the plan were approximately $1.5 million in 2016, $1.3 million in 2015 and $1.3
million in 2014.
Research and Development
Research and development costs are expensed as incurred. Research and development costs include salaries and
related benefits, consulting fees, production supplies, samples, travel costs, utilities and other miscellaneous administrative
costs.
Net Income Per Share
Net income per share is computed by dividing net income by the weighted average number of common shares
outstanding. Diluted net income per share is computed by dividing net income by the weighted average number of common
shares outstanding plus dilutive securities. Dilutive securities are outstanding common stock options (excluding stock options
with an exercise price in excess of the average market value for the period), 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
because their exercise price exceeded the average market price of the common stock for the period approximated 16,000 shares
in 2014. There were no anti-dilutive options in 2016 or 2015.
The following table presents the calculation of net earnings per common share (“EPS”) — basic and diluted (in
thousands except per share data):
Net income
Weighted average number of common shares outstanding (basic)
Dilutive securities (1)
Weighted average common and common equivalent shares
outstanding (diluted)
EPS - basic
EPS - diluted
Year ended December 31,
(in thousands, except per share data)
2016
2015
2014
$
63,084
$
44,985
$
16,168
1,086
15,848
648
26,335
15,282
365
17,254
16,496
15,647
$
$
3.90
3.66
$
$
2.84
2.73
$
$
1.72
1.68
______________________________
(1) During the second quarter of 2016, we early adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting. Under this ASU, the change to the treasury stock method
impacted weighted average common and common equivalent shares outstanding by 413,000 shares for the year ended
December 31, 2016 (see other sections of this note for further information on the changes required by ASU 2016-09).
On February 3, 2017, as part of the purchase price for the acquisition of Pfizer Inc.'s ("Pfizer") Hospira Infusion
Systems ("HIS") business, we delivered to Pfizer 3.2 million newly issued common shares (see Note 3: Acquisitions and
Strategic Transaction Expenses).
New Accounting Pronouncements
Recently Adopted Accounting Standards
In December 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-19, Technical
Corrections and Improvements. The amendments in this Update represent changes to clarify, correct errors, or make minor
improvements to the Accounting Standards Codification. The amendments make the Accounting Standards Codification easier
to understand and easier to apply by eliminating inconsistencies and providing clarifications. Most of the amendments in this
Update do not require transition guidance and are effective upon issuance of this Update. Six amendments in this Update
clarify guidance or correct references in the Accounting Standards Codification that could potentially result in changes in
current practice because of either misapplication or misunderstanding of current guidance, these include: an amendment to
Subtopic 350-40, Intangibles—Goodwill and Other— Internal-Use Software; an amendment to Subtopic 360-20, Property,
Plant, and Equipment— Real Estate Sales; an amendment to Topic 820, Fair Value Measurement; an amendment to Subtopic
405-40, Liabilities—Obligations Resulting from Joint and Several Liability Arrangements; an amendment to Subtopic 860-20,
Transfers and Servicing—Sales of Financial Assets; and an amendment to Subtopic 860-50, Transfers and Servicing—
Servicing Assets and Liabilities. Early adoption is permitted for the six amendment topics listed above that require transition
guidance. In December 2016, we early adopted this ASU, which did not have a material impact on our consolidated financial
statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements
to Employee Share-Based Payment Accounting. The amendments address several aspects of the accounting for share-based
payment award transactions, including income tax accounting consequences, classification of awards as either equity or
liabilities and classification on the statement of cash flows. The amendments in this update are effective for annual periods
beginning after December 15, 2016. Early adoption is permitted for an entity in any interim or annual period. An entity that
elects early adoption must adopt all of the amendments in the same period and any adjustments should be reflected as of the
beginning of the fiscal year that includes that interim period. We early adopted this standard during the second quarter ended
June 30, 2016. During 2016, in accordance with the changes required by this ASU, we have recognized $7.6 million in tax
benefits as a discrete item. We elect to account for forfeitures as they occur.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the
Accounting for Measurement-Period Adjustments. ASU 2015-16 requires that an acquirer recognize adjustments to provisional
amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are
determined, including the cumulative effect of the change in provisional amount as if the accounting had been completed at the
acquisition date. The adjustments related to previous reporting periods since the acquisition date must be disclosed by income
statement line item either on the face of the income statement or in the notes. The amendments are effective prospectively for
the fiscal years, and interim reporting periods within those years, beginning on or after December 15, 2015. We adopted this
ASU on January 1, 2016 and the adoption did not have a material impact on our consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for
Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite
Service Period. ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the
requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in
estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in
the period in which it becomes probable that the performance target will be achieved and should represent the compensation
cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in ASU 2014-12
are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Entities
may apply the amendments in ASU 2014-12 either: (a) prospectively to all awards granted or modified after the effective date;
or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual
period presented in the financial statements and to all new or modified awards thereafter. On January 1, 2016, we adopted this
ASU on a prospective basis. The adoption did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Standards
In October 2016, the FASB issued No. ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets
Other Than Inventory. Current generally accepted accounting principles prohibits the recognition of current and deferred
income taxes for an intra-entity asset transfer until after the asset has been sold to an outside party. The amendments in ASU
2016-16 eliminates this prohibition. Accordingly, an entity should recognize the income tax consequences of an intra-entity
transfer of an asset other than inventory when the transfer occurs. Amendments in this update are effective for annual reporting
periods beginning after December 15, 2017. Early adoption is permitted in the first interim period of an annual reporting
period. The amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to
retained earnings as of the beginning of the period of adoption. We are currently evaluating the impact of this ASU on the
consolidated financial statements and related disclosures.
In August 2016, the FASB issued No. ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments. ASU 2016-15 provides specific guidance on eight cash flow issues where current guidance
is unclear or does not include any specifics on classification. The eight specific cash flow issues are: debt prepayment or debt
extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with zero coupon interest rates that
are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a
business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life
insurance policies, including bank-owned policies; distributions received from equity method investees; beneficial interests in
securitization transactions; and separately identifiable cash flows and application of the predominance principle. The
amendments in ASU 2016-15 are effective for annual periods and interim periods within those annual periods beginning after
December 15, 2017. Early adoption is permitted. If adopted in an interim period, any adjustments should be reflected as of the
beginning of the fiscal year that includes the interim period. Amendments should be applied using a retrospective transition
method to each period presented. We are currently evaluating the impact of this ASU on the consolidated financial statements
and related disclosures.
In June 2016, the FASB issued No. ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments. This update amends the FASB's guidance on the impairment of financial instruments
by requiring timelier recording of credit losses on loans and other financial instruments. The ASU adds an impairment model
that is based on expected losses rather than incurred losses. The ASU also amends the accounting for credit losses on available-
for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this update will be effective
for fiscal years beginning after December 15, 2019. Early adoption is permitted as of the fiscal years beginning after December
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15, 2018. The updated guidance requires a modified retrospective adoption. We are currently evaluating the impact of this ASU
on the consolidated financial statements and related disclosures.
In February 2016, the FASB issued No. ASU 2016-02, Leases (Topic 842). The amendments in this update require an
entity to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition,
measurement and presentation of expenses will depend on classification as finance or operating lease. The amendments also
require certain quantitative and qualitative disclosures about leasing arrangements. The amendments in this update will be
effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. The updated guidance requires a
modified retrospective adoption. We are currently evaluating the impact of this ASU on the consolidated financial statements
and related disclosures.
In January 2016, the FASB issued No. ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition
and Measurement of Financial Assets and Financial Liabilities, which amends certain aspects of recognition, measurement,
presentation and disclosure of financial instruments. This amendment requires all equity investments to be measured at fair
value with changes in the fair value recognized through net income (other than those accounted for under the equity method of
accounting or those that result in the consolidation of the investee). The amendments in this update will be effective for fiscal
years beginning after December 15, 2017. Early adoption of the amendments is not permitted with the exception of the
provision requiring the recognition in other comprehensive income the fair value change from instrument-specific credit risk
measured using the fair value option for financial instruments. We are currently evaluating the impact of this ASU on the
consolidated financial statements and related disclosures.
In July 2015, the FASB issued No. ASU No. 2015-11 Inventory (Topic 330): Simplifying the Measurement of
Inventory. ASU 2015-11 changes the measurement of inventory from lower of cost or market to lower of cost and net
realizable value. The amendments are effective prospectively for the fiscal years, and interim reporting periods within those
years, beginning on or after December 15, 2016. We do not anticipate a material impact on our consolidated financial
statements from the adoption of this ASU.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU
2014-09 removes inconsistencies and weaknesses in revenue requirements; provides a more robust framework for addressing
revenue issues; improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital
markets; provides more useful information to users of financial statements through improved disclosure requirements; and
simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. This
guidance requires that an entity depict the consideration by applying a five-step analysis in determining when and how revenue
is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. On April 1,
2015, the FASB voted for a one-year deferral of the effective date of the new revenue recognition standard, ASU 2014-09. On
July 15, 2015, the FASB affirmed these changes, which requires public entities to apply the amendments in ASU 2014-09 for
annual reporting beginning after December 15, 2017. Early adoption is permitted beginning after December 31, 2016, the
original effective date in ASU 2014-09. Subsequent to the issuance of this ASU, the FASB issued three amendments: ASU No.
2016-08 which clarifies principal versus agent considerations; ASU 2016-10 which clarifies guidance related to identifying
performance obligations and licensing implementation; and ASU 2016-12 which provides narrow-scope improvements and
practical expedients. All of the amendments have the same effective dates mentioned above. We previously disclosed that we
did not anticipate a material impact on our consolidated financial statements from adoption of any of the above ASUs related to
Topic 606; we will reassess these ASUs with consideration to their impact on Hospira Infusion Systems ("HIS"). We expect to
adopt the full retrospective transition method when adopting this ASU.
Note 2: Restructuring Charges
In 2016, we incurred an additional $0.8 million related to the closure of the Slovakian manufacturing facility,
described below. Additionally, we incurred $0.2 million related to a one-time charge unrelated to the events disclosed in the
table below.
In 2015, we incurred $6.7 million in total restructuring charges related to: (i) a commitment to a plan to sell our
Slovakia manufacturing facility, which was sold during 2016 the plan to sell the facility resulted in a pre-tax restructuring
charge of $4.2 million for employee termination benefits, government incentive repayments and other associated costs; (ii) an
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
agreement with Dr. Lopez, a member of our Board of Directors and a former employee in our research and development
department, pursuant to which we bought out Dr. Lopez's right to employment under his then-existing employment agreement-
the $1.9 million buy-out, including payroll taxes, will be paid in equal monthly installments until December 2020 and payments
that will exceed one year have been accrued under long-term liabilities in our consolidated balance sheet; and (iii) the
reorganization of our corporate infrastructure, resulting in one-time employee termination benefits and other associated costs
and corporate restructuring actions resulted in a total charge of $0.6 million.
In 2014, we reorganized our selling and corporate infrastructure, resulting in a reduction in workforce of 69
employees. The $3.5 million restructuring charge, which is presented as a separate line item on our consolidated statements of
income, is combined with strategic transaction expenses. The restructuring charge is comprised of employee termination
benefits and other associated costs.
The following table summarizes the activity for the restructuring-related charges discussed above and related accrual
(in thousands):
Severance pay and benefits $
Government incentive
repayment
Employment agreement
buyout
Other corporate
restructuring
Retention and closure
expenses
Accrued
Balance
December 31,
2014
Charges
incurred
Payments
Accrued
Balance
December 31,
2015
Charges
incurred
1,358
$2,582
$(1,435) $
2,505
$
25
Currency
Translation
Payments
$(2,683) $
— 1,884
— 1,905
11
—
305
—
—
(60)
(11)
—
1,884
— (1,769)
1,845
—
(368)
305
—
168
581
(468)
(581)
$(5,869) $
Other
Adjustments
Accrued
Balance
December 31,
2016
77
$
129
$
57
—
—
—
134
$
(172)
—
(5)
—
(48) $
53
—
1,477
—
—
1,530
$
1,369
$6,676
$(1,506) $
6,539
$ 774
Note 3: Acquisitions and Strategic Transaction Expenses
Acquisition of Hospira Infusion Systems
On October 6, 2016, we entered into a Stock and Asset Purchase Agreement to acquire Pfizer’s HIS business. On
January 5, 2017, we amended and restated the original purchase agreement to modify the terms of the agreement as a result of
changes in the performance of HIS that affect expectations for the transaction ("the "Purchase Agreement"). The transaction
closed on February 3, 2017. Under the terms of the Purchase Agreement, we paid $275 million in cash, which was financed
with existing cash balances and a three-year interest-only seller note of $75 million and we delivered 3.2 million shares of our
common stock to Pfizer. Additionally, Pfizer also may be entitled up to an additional $225 million in cash based on
achievement of performance targets for the combined company for the three years ending December 31, 2019 ("Earnout
Periodt"). In the event that the sum of our Adjusted EBITDA (as defined by the Purchase Agreement) for each of the three years
in the Earnout Period (the "Cumulative Adjusted EBITDA") is equal to or exceeds approximately $1.0 billion ("the "Earnout
Target"), then Pfizer will be entitled to receive the full amount of the earnout. In the event that the Cumulative Adjusted
EBITDA is equal to or greater than 85% of the Earnout Target (but less than the Earnout Target), Pfizer will be entitled to
receive the corresponding percentage of the earnout. In the event that the Cumulative Adjusted EBITDA is less than 85% of the
Earnout Target, then no earnout amount will be earned by Pfizer. The aggregate purchase consideration is subject to certain
adjustments, based on working capital, cash and indebtedness of the HIS business at closing.
Due to the close proximity of the acquisition date and the filing of this annual report on Form 10-K for the year ended
December 31, 2016, the initial accounting for the business combination is incomplete, and therefore we are unable to fully
disclose the information required by ASC 805, Business Combinations. Such information will be included in our subsequent
Form 10-Q (see Note 18: Subsequent Events).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We believe that the acquisition of the HIS business complements our existing business by creating a company that has
a complete intravenous therapy product portfolio. We also believe that the acquisition also significantly enhances our global
footprint and platform for continued competitiveness and growth.
Other Acquisitions During the Reporting Period
On April 4, 2016, we acquired all of the outstanding shares of Tangent Medical Technologies, Inc. ("Tangent") for $2.6
million in cash. Tangent designs, develops, and commercializes intravenous catheters and associated products for the
improvement of infusion therapy. Tangent's products enhance our infusion therapy product offering. For the year ended
December 31, 2016, we recognized a $1.5 million bargain purchase gain related to the acquisition, which is separately stated in
our consolidated statements of income. The bargain purchase gain represents the excess of the estimated fair market value of
the identifiable tangible and intangible assets acquired, liabilities assumed and deferred tax assets over the total purchase
consideration. The bargain purchase was driven by our ability to realize acquired deferred tax assets. The purchase price
allocation is final.
On October 6, 2015, we acquired 100% of the outstanding shares of EXC, for approximately $59.5 million in cash.
Immediately following the completion of the acquisition of EXC, we sold certain assets to Excelsior Medical, LLC for a final
purchase price including working capital adjustments of $29.0 million in cash. We retained all of the assets related to the
business of manufacturing and selling the needleless connector disinfection cap. The acquisition of EXC's SwabCap business
enhances our infusion therapy product offering across our existing direct and original equipment manufacturer ("OEM")
business lines. The goodwill recognized for this acquisition is attributable to the benefits expected to be derived from product
line expansion, new customers and operational synergies. The goodwill is nondeductible for income tax purposes. The
following table summarizes the final purchase price and the allocation of the purchase price related to the assets and liabilities
retained (in thousands):
Fair Value of Consideration:
Cash, net of cash acquired
Allocation of the Purchase Price:
Net assets sold to Excelsior Medical, LLC
Prepaid expenses and other current assets
Deferred tax asset/liabilities
Property and equipment
Identifiable intangible assets(1)
Goodwill
Assumed liabilities
Net Assets Acquired
______________________________
$
$
56,786
28,970
254
4,426
3,982
18,076
4,985
(3,907)
$
56,786
(1) Identifiable intangible assets included $7.1 million of non-contractual customer relationships, $3.7 million of developed
technology and $7.3 million of trade name. The weighted-average amortization period for the total identifiable intangible
assets is approximately fourteen years. The weighted-average amortization period for customer relationships and trade name is
fifteen years and the weighted-average amortization period for the developed technology is ten years.
The identifiable intangible assets and other long-lived assets acquired have been valued as Level 3 assets at fair market
value by an independent financial valuation and advisory services firm. The estimated fair value of identifiable intangible
assets was developed using the income approach and is based on critical estimates, judgments and assumptions derived from:
analysis of market conditions; discount rate; discounted cash flows; royalty rates; customer retention rates; and estimated useful
lives. The prepaid expenses and other current assets and assumed liabilities were recorded at their carrying values as of the date
of the acquisition, as their carrying values approximated their fair values due to their short-term nature.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Strategic Transaction Expenses
In 2016, we incurred $14.3 million in transaction costs related to our pending acquisition of HIS, our acquisition of
Tangent and our acquisition of EXC. In 2015, we incurred $1.8 million in charges primarily associated with the acquisition of
EXC. In 2014, we incurred $1.6 million in charges associated with strategic transactions that did not go forward. Transaction
expenses are presented on a separate line item on our statements of income and are combined with restructuring charges.
Note 4: Gain on Sale of Building
During 2015, we sold an office building in our San Clemente location to George A. Lopez, M.D., a member of our
Board of Directors. The building was sold for $3.6 million, its fair market value as determined by a third party. The net book
value of the land and building was $2.5 million, resulting in a gain on the sale of the land and building of $1.1 million.
Note 5: Legal Settlements
During 2015, we recorded a net settlement charge of $1.8 million due to the following claims:
An arbitrator ruled on a breach of contract claim between us and a service provider, awarding us a gross settlement of
$8.8 million. Our legal counsel for this matter represented us under a contingency fee agreement. We recorded a settlement
award, net of legal fees and costs, of $5.3 million; and
An arbitrator ruled on a breach of contract claim between us and a customer, Hospira, Inc., awarding Hospira $8.2
million Canadian dollars ($6.5 million U.S. dollars). The arbitrator also ruled that we pay 75% of Hospira's legal fees and
expenses, which were $0.7 million U.S. dollars. We made a $7.5 million U.S. dollars settlement payment during 2015, which
includes a foreign exchange transaction adjustment to Canadian dollars at the time of payment.
Note 6: Impairment on Asset Held-for-Sale
During 2015, our Board of Directors authorized us to close our Vrable, Slovakia manufacturing facility. The closure
was to enable for greater efficiency of our Ensenada, Mexico facility. After receiving the Board of Director's authorization, we
reclassified the land and building related to the Slovakia facility as held-for-sale, and recorded the value of those assets at the
lower of their carrying value or their estimated fair value less costs to sell, which was based on a third party fair market
valuation. As the estimated fair value less cost to sell was lower than the carrying value of the assets held-for-sale, we recorded
an impairment charge of $4.1 million in 2015.
During 2016, we completed the closure of our Slovakia manufacturing facility and sold the land and building held-for-
sale for $3.3 million, net of costs to sell, resulting in an additional $0.7 million impairment charge on those assets.
The impairment charges are separately stated in our consolidated statements of income above income from operations.
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Note 7: Share Based Awards
We have a stock incentive plan for employees and directors and an employee stock purchase plan. Shares to be issued
under these plans will be issued either from authorized but unissued shares or from treasury shares.
We incur stock compensation expense for stock options, restricted stock units ("RSU"), performance restricted stock
units ("PRSU") and stock purchased under our employee stock purchase plan ("ESPP"). We receive a tax benefit on stock
compensation expense and direct tax benefits from the exercise of stock options, which with the implementation of ASU
2016-09 during 2016, those benefits are prospectively recorded as a reduction of income tax expense (see Note 1: General and
Summary of Significant Accounting Policies). We also have indirect tax benefits upon exercise of stock options related to
research and development tax credits which are also recorded as a reduction of income tax expense. The table below
summarizes compensation costs and related tax benefits (in thousands):
(In thousands)
Stock compensation expense
Tax benefit from stock-based compensation cost
Indirect tax benefit
Year ended December 31,
2015
2014
2016
$
$
$
15,242
5,682
$
$
— $
12,827
4,922
1,997
$
$
$
9,592
3,567
209
As of December 31, 2016, we had $16.8 million of unamortized stock compensation cost which we will recognize as
an expense over approximately 0.7 years.
Stock Incentive and Stock Option Plans
Our 2011 Stock Incentive Plan ("2011 Plan") replaced our 2003 Stock Option Plan (“2003 Plan”). Our 2011 Plan
initially had 650,000 shares available for issuance, plus the remaining available shares for grant from the 2003 Plan. In 2012
and 2014, our stockholders approved amendments to the 2011 plan that increased the shares available for issuance by
1,850,000, bringing the initial shares available for issuance to 2,500,000, plus the remaining 248,700 shares that remained
available for grant from the 2003 Plan. In addition, any forfeited, terminated or expired shares that would otherwise return to
the 2003 Plan are available under the 2011 Plan. As of December 31, 2016, the 2011 Plan has 2,763,300 shares of common
stock reserved for issuance to employees, which includes 263,300 shares that transferred from the 2003 Plan. Shares issued as
options or stock appreciation rights ("SARs") are charged against the 2011 Plan's share reserve as one share for one share
issued. Shares subject to awards other than options and SARs are charged against the 2011 Plan's share reserve as 2.09 shares
for 1 share issued. Options may be granted with exercise prices at no less than fair market value at date of grant. Options
granted under the 2011 Plan may be “non-statutory stock options” which expire no more than ten years from date of grant or
“incentive stock options” as defined in Section 422 of the Internal Revenue Code of 1986, as amended. Upon exercise of non-
statutory stock options, we are generally entitled to a tax deduction on the exercise of the option for an amount equal to the
excess over the exercise price of the fair market value of the shares at the date of exercise; we are generally not entitled to any
tax deduction on the exercise of an incentive stock option. The 2011 Plan includes conditions whereby unvested options are
cancelled if employment is terminated.
In 2014, our Compensation Committee of the Board of Directors awarded our 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.
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Stock Options
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 2015 performance based stock option grants vest ratably
at 33% per year over three years. The 2014 performance based stock option grants vest ratably at 25% per year over four years.
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):
Number of time-based options granted
Grant date fair value of options granted (in thousands)
Weighted average assumptions for stock option valuation:
Expected term (years)
Expected stock price volatility
Risk-free interest rate
Expected dividend yield
Weighted average grant price per option
Weighted average grant date fair value per option
Year ended December 31,
2016
13,405
413
2015
22,816
590
2014
492,935
7,311
$
$
5.5
31.8%
0.7%
—%
5.6
25.9%
1.7%
—%
4.7
26.7%
1.4%
—%
101.32
30.78
$
$
93.30
25.86
$
$
58.92
14.83
$
$
$
The 2015 and 2014 performance stock option grants are exercisable if the common stock price condition and the time-
based vesting have been met. For the 2015 grants, the vested performance stock options became exercisable when the closing
price of our common stock was equal to or more than 130% of the exercise price for 30 consecutive trading days during the
term of the grant. For the 2014 grants, fifty percent of the vested performance stock options became exercisable when the
closing price of our common stock was equal to or more than 125% of the exercise price for 30 consecutive trading days during
the term of the grant. The remaining 50% of the vested performance stock options became exercisable when the closing price
of our common stock was equal to or more than 150% of the exercise price for 30 consecutive trading days during the term of
the grant. All of the 2015 and 2014 performance stock option grant's stock price conditions have been met.
The fair value of performance option grants is calculated using the Monte Carlo Simulation. The expected term of the
performance option grants is based on the expected number of years to achieve the exercisable goal trigger and assumes that the
vested option will be immediately exercised or cancelled, if underwater. We estimate the volatility of our common stock at the
date of grant based on the historical volatility of our common stock over a 10-year period.
The table below summarizes the performance stock options granted, the total valuation and the weighted average
assumptions (dollars in thousands). There were no performance option grants in 2016.
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ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2016
244,825
Number of performance options granted
Number of performance options earned
Grant date fair value of options granted (in thousands)
Weighted average assumptions for stock option valuation:
Expected term (years)
Expected stock price volatility
Risk-free interest rate
Expected dividend yield
Weighted average grant price per option
Weighted average grant date fair value per option
Year ended December 31,
2015
244,825
349,812
6,087
$
$
3.0
30.86%
2.3%
—%
91.88
24.86
$
$
2014
699,625
349,813
13,344
4.0
31.7%
2.9%
—%
$
$
58.90
19.07
A summary of our stock option activity as of and for the year ended December 31, 2016 is as follows:
Outstanding at December 31, 2015
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2016
Exercisable at December 31, 2016
Vested and expected to vest, December 31, 2016
Weighted
Average
Exercise Price
Per Share
Weighted
Average
Contractual
Life (Years)
Aggregate
Intrinsic Value
(in thousands)
56.90
101.32
47.38
62.57
58.90
54.44
58.90
6.4 $
5.8 $
6.4 $
178,521
125,878
178,521
Shares
2,379,407
$
13,405
$
(366,065) $
(8,457) $
$
2,018,290
1,354,853
2,018,290
$
$
The intrinsic values for options exercisable, outstanding and vested or expected to vest at December 31, 2016 is based
on our closing stock price of $147.35 at December 31, 2016 and are before applicable taxes.
(In thousands)
Intrinsic value of options exercised
Cash received from exercise of stock options
Tax benefit from stock option exercises
Stock Awards
Year ended December 31,
2016
2015
2014
$
$
$
25,065
17,346
7,556
$
$
$
28,071
15,042
9,330
$
$
$
18,802
16,998
5,700
In 2016, we granted performance restricted stock units ("PRSU") to our executive officers. The PRSUs will vest, if at
all, upon the achievement of a minimum specified compound annual growth rate ("CAGR") in EBITDA, subject to a three-year
cliff vesting ending on December 31, 2018. If at that date, our adjusted EBITDA CAGR is at least 8% but less than 10%, 100%
of the awarded units will vest. If our adjusted EBITDA CAGR is at least 10% but less than 12%, 200% of the awarded units
will vest. If our adjusted EBITDA CAGR is greater than 12%, 300% of the awarded units will vest.
Restricted stock units ("RSU") are granted annually to our Board of Directors and vest on the first anniversary of the
grant date.
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ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In 2016 and 2015, we granted RSUs to certain employees that vest ratably on the anniversary of the grant over three
years. Additionally in 2015, we granted RSUs to certain new hire employees that vest ratably on the anniversary of the grant
over two years.
In 2014, we granted RSUs to our Chief Executive Officer that vest ratably on the anniversary of the grant over three
years and to certain other employees that vest ratably on the anniversary of the grant over two years. The fair value of the RSUs
is based on the price of the common stock on the grant date.
The table below summarizes our restricted stock award activity (dollars in thousands):
(In thousands except shares and per share amounts)
PRSU
Shares granted
Shares earned
Grant date fair value per share
Grant date fair value
Intrinsic value vested
RSU
Shares granted
Grant date fair value per share
Grant date fair value
Intrinsic value vested
Year ended December 31,
2015
2016
2014
36,370
—
86.47
3,145
$
$
— $
—
—
— $
— $
$
787
—
—
—
—
659
60,377
87.47
5,281
4,680
$
$
$
67,745
93.52
6,336
2,754
$
$
$
76,618
58.89
4,512
292
$
$
$
$
$
$
The table below provides a summary of our PRSU and RSU activity as of and for the year ended December 31, 2016.
Non-vested at December 31, 2015
Granted
Vested
Forfeited
Non-vested and expected to vest at December 31, 2016
ESPP
Number of
Units
113,649
Grant Date Fair
Value Per Share
78.84
$
96,747
$
(49,386) $
(1,571) $
$
159,439
87.09
75.71
92.53
84.68
Weighted
Average
Contractual
Life (Years)
Aggregate
Intrinsic Value
1.1
$
23,493
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, 2016, there were 156,913 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. As of December 31, 2016, we had $0.1
million of unamortized stock compensation expense from the ESPP, which will be recognized in the first quarter of 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 2016, 2015 and 2014 purchase periods.
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ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ESPP shares purchased by employees
Intrinsic value of ESPP purchases (in thousands)
Weighted average assumptions for ESPP valuation:
Expected term (in years)
Expected stock price volatility
Risk-free interest rate
Expected dividend yield
Note 8: Fair Value Measurement
Year ended December 31,
2016
31,227
955
$
2015
34,299
1,382
2014
47,466
476
$
$
0.5
32.5%
0.3%
—%
0.5
27.0%
0.6%
—%
0.5
20.8%
1.1%
—%
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.
As of December 31, 2016, we had liquidated all of our short-term and long-term investment securities to fund the
2017 acquisition of HIS (see Note 3: Acquisitions and Strategic Transaction Expenses).
As of December 31, 2015, we had investments measured using quoted prices in active markets or Level 1 inputs,
which consisted of certificates of deposits and U.S Treasury securities, and we had investments measured using observable
market based inputs such as quoted prices, interest rates and yield curves or Level 2 inputs, which consisted of pre-refunded
municipal securities, non-pre-refunded municipal securities, commercial paper and corporate bonds.
There were no transfers between levels in 2015 or 2016.
Our assets measured at fair value for the year ended December 31, 2015 on a recurring basis consisted of the following
(Level 1, 2 and 3 inputs as defined above) (in thousands):
Short-term available for sale securities
Total available for sale securities
Fair value measurements at December 31, 2015 using
Quoted prices
in active
markets for
identical
assets (level 1)
8,785
$
8,785
$
Significant
other
observable
inputs (level 2)
32,448
$
32,448
$
Significant
unobservable
inputs (level 3)
—
$
—
$
Total carrying
value
$
$
41,233
41,233
Our assets-held-for-sale whose fair market value was measured on a nonrecurring basis were sold during 2016 (see
Note 6: Impairment on Asset Held-For-Sale).
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ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9: Investment Securities
Our investment securities consist of certificates of deposit, corporate bonds, U.S. Treasury securities, commercial
paper and federal-tax-exempt state and municipal government debt. All investment securities are considered available-for-sale
and are “investment grade,” carried at fair value and there have been no gains or losses on their disposal. Unrealized gains and
losses on available-for-sale securities, net of tax, are included in accumulated other comprehensive income in the stockholders'
equity section of our consolidated balance sheets. We have no gross unrealized gains or losses on available-for-sale securities at
December 31, 2016 or 2015. The amortized cost of debt securities in this category is adjusted for amortization of premiums
and accretion of discounts to maturity computed under the effective interest method. Such amortization is included in
investment income in other income on our consolidated statements of income.
As of December 31, 2016, we had liquidated all of our short-term and long-term investment securities to fund the 2017
acquisition of HIS (see Note 3: Acquisitions and Strategic Transaction Expenses).
Our investment securities consist of the following (in thousands):
Federal and municipal tax-exempt debt securities
Corporate bonds
U.S. Treasury securities
Commercial paper
Certificates of deposit
December 31,
2015
$
$
4,951
25,400
7,537
2,097
1,248
41,233
During 2016, we amended our investment policy to allow for the purchase of securities whose final maturities are in
excess of one year. The amended policy continues to adhere to a low risk tolerance in regard to capital preservation while
allowing for the achievement of higher available yields.
Investment income, reflected in other income in our consolidated statements of income, was $0.9 million, $0.5 million
and $0.4 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Note 10: Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
Salaries and benefits
Incentive compensation
Legal accrual
Value Added Tax accrual
Restructuring accrual
Acquisition-related accrual
Outside commissions
Other
69
December 31,
2016
2015
$
$
5,702
7,912
4,177
1,472
423
2,750
1,141
2,319
25,896
$
$
6,875
8,302
394
993
6,539
1,604
1,023
3,218
28,948
Table of Contents
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11: Income Taxes
Income from continuing operations before taxes consisted of the following (in thousands):
United States
Foreign
Year Ended December 31,
2015
2014
2016
$
$
80,714
4,450
85,164
$
$
74,288
(4,589)
69,699
$
$
33,508
6,284
39,792
The provision (benefit) for income taxes consisted of the following (in thousands):
Current:
Deferred:
Federal
State
Foreign
Federal
State
Foreign
Year Ended December 31,
2015
2014
2016
$
$
$
$
21,123
2,347
1,118
24,588
(2,045) $
(767)
304
(2,508)
22,080
$
18,601
745
1,426
20,772
4,524
(960)
378
3,942
24,714
$
$
$
13,860
(1,305)
2,100
14,655
(2,325)
988
139
(1,198)
13,457
Current income taxes payable were reduced from the amounts in the above table by $9.3 million and $5.7 million in
2015 and 2014, respectively, equal to the direct tax benefit that we receive upon exercise of stock options by employees and
directors. We have accrued for tax contingencies for potential tax assessments, and in 2016 we recognized a $0.2 million net
increase, most of which related to various federal and state tax reserves.
A reconciliation of the provision for income taxes at the statutory rate to our effective tax rate is as follows (dollars in
thousands):
Federal tax at the expected statutory rate
State income tax, net of federal effect
Tax credits
Domestic production activities/other
Foreign income tax
Stock compensation - ASU 2016-09
2016
Year Ended December 31,
2015
2014
Amount
Percent
Amount
Percent
Amount
Percent
$
$
29,807
1,795
(1,014)
(653)
(135)
(7,720)
22,080
35.0 % $
2.1 %
(1.2)%
(0.8)%
(0.1)%
(9.1)%
25.9 % $
24,395
2,661
(5,861)
107
3,412
—
24,714
35.0 % $
3.9 %
(8.4)%
0.1 %
4.9 %
— %
35.5 % $
13,927
981
(1,591)
101
39
—
13,457
35.0 %
2.5 %
(4.0)%
0.2 %
0.1 %
— %
33.8 %
Tax credits in 2016, 2015 and 2014 consist principally of research and developmental tax credits. Prior to the adoption
of ASU 2016-09 in 2016, the indirect effect of non-statutory stock options exercised on research and development tax credits
and other tax credits were recorded as reductions of the effective tax provision.
The components of our deferred income tax provision are as follows (in thousands):
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ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Allowance for doubtful accounts
Inventory reserves
Accruals
State income taxes
Acquired future tax deductions
Depreciation and amortization
Net operating loss
Tax credits
Valuation allowance
Year Ended December 31,
2015
2014
2016
$
$
— $
(162)
(2,599)
61
1,520
(2,544)
(2,256)
(873)
4,345
(2,508) $
— $
284
(2,977)
502
3,139
1,080
195
(635)
2,354
3,942
$
4
(488)
(1,326)
(4)
96
(780)
62
1,238
—
(1,198)
The components of our deferred income tax assets (liabilities) are as follows (in thousands):
Deferred tax asset:
State income taxes
Foreign
Accruals/other
Depreciation and amortization
Acquired future tax deductions
Stock-based compensation
Foreign currency translation adjustments
Tax credits state
Inventory reserves
Allowance for doubtful accounts
Valuation allowance
Deferred tax liability:
Foreign
December 31,
2016
2015
(1,708) $
1,223
857
(10,027)
6,473
11,089
5,175
6,764
1,938
151
—
21,935
(1,647)
3,881
1,432
(11,735)
5,778
8,864
5,360
5,887
1,633
—
(2,354)
17,099
1,370
1,370
$
$
1,372
1,372
$
$
$
$
Acquired future tax deductions are the tax benefits included in our consolidated income tax returns originating in Bio-
Plexus, Inc., an entity purchased in 2002, prior to when we acquired the entity, and those originating from EXC acquired in
2015. They consist of: (a) the net tax benefit of items expensed for financial statement purposes but capitalized and amortized
for tax purposes, (b) the tax benefited portion of Bio-Plexus’s federal net operating loss ("NOL") carry-forward of $1.2 million
which will be realized in approximately equal amounts over the next 7 years, and (c) the tax benefited portion of EXC's NOL
carryforward of $4.1 million which is expected to be realized in approximately 4 years, and will expire in 17 years. Under
Section 382 of the Internal Revenue Code, certain ownership changes limit the utilization of the NOL carry-forwards, and the
amount of federal NOL carry-forwards recorded is the net federal benefit available.
Foreign currency translation adjustments, and related tax effects, are an element of “other comprehensive income” and
are not included in net income.
Our estimate of undistributed earnings of our foreign subsidiaries for which no federal or state liability has been
recorded cumulatively was $10.8 million at December 31, 2016 and $17.8 million at December 31, 2015. These undistributed
earnings are considered to be indefinitely reinvested. However, if unanticipated distribution of those earnings were to occur in
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ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the form of dividends or otherwise, some portion of the distribution would be subject to both foreign withholding taxes and
U.S. income taxes. In the event that our position in this regard changes, determining the potential amount of unrecognized
deferred federal and state income tax liability and foreign withholding taxes is not practicable because of the complexities
associated with its hypothetical calculation. However, unrecognized foreign tax credits would be available to reduce some
portion of the federal liability.
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 2013 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, 2016 was $2.0 million which, if recognized, would impact the
effective tax rate.
The following table summarizes our cumulative gross unrecognized tax benefits (in thousands):
Beginning balance
Increases to prior year tax positions
Increases to current year tax positions
Decreases to prior year tax positions
Decrease related to settlements
Decrease related to lapse of statute of limitations
Ending balance
Year Ended December 31,
2015
2014
2016
1,772
77
345
(46)
—
(148)
2,000
$
$
4,115
25
345
(2,399)
(314)
—
1,772
$
$
5,544
217
661
—
(2,113)
(194)
4,115
$
$
Note 12: Products, Major Customers and Concentrations of Credit Risks
Our primary product groups are infusion therapy, critical care and oncology. The breakdown by market segment are
as follows (in millions):
Infusion therapy
Critical care
Oncology
Other
Year Ended December 31,
2015
2014
2016
$
$
272.6
53.6
52.3
0.9
379.4
$
$
244.7
54.3
41.5
1.2
341.7
$
$
216.3
55.0
36.7
1.3
309.3
We sell products worldwide, on credit terms on an unsecured basis, as an OEM supplier, to independent medical
supply distributors and directly to the end customer. The manufacturers and distributors, in turn, sell our products to healthcare
providers. For the years ended December 31, 2016, 2015 and 2014, we had worldwide sales to one manufacturer, Pfizer, of
30%, 36% and 36%, respectively, of consolidated revenue. As of December 31, 2016, and 2015, we had accounts receivable
from Pfizer of 23% and 40%, respectively, of consolidated accounts receivable.
In February 2017, we completed the acquisition of Pfizer's HIS business, which we acquired in part to protect against
the significant earnings exposure indicated above (see Note 3: Acquisitions and Strategic Transaction Expenses).
Domestic sales accounted for 70%, 71% and 69% of total revenue in 2016, 2015 and 2014, respectively. International
sales, which are determined by the destination of the product shipment, accounted for 30%, 29% and 31% of total revenue in
2016, 2015 and 2014, respectively.
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ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below presents our gross long-lived assets, consisting of property, plant and equipment, by country (in
thousands):
Mexico
Slovakia(1)
Italy
Germany
Netherlands
Australia
France
Total foreign
United States
Worldwide total
As of December 31,
2016
2015
$
$
$
57,971
—
4,320
686
278
41
2
63,298
180,657
243,955
$
$
53,462
5,480
4,418
671
49
35
—
64,115
158,933
223,048
____________________________
(1) The decrease in Slovakia long-lived assets relates to the 2016 closure of those facilities and the increase in Mexico is due to
expansion to absorb the production capacity of the closed Slovakian facilities.
Note 13: Operating Leases
We lease various facilities including: a building in San Clemente, United States, which expires in May 2021; an office
space in Johannesburg, South Africa, which expires in March 2018; a building in Ludenscheid, Germany which expires in
December 2017; an office space in Houten, Netherlands, which expires in November 2021; and an office space in Bella Vista,
NSW Australia, which expires in December 2017.
We also lease various office equipment, which all expire during 2017.
Our lease expense was $0.6 million in 2016, $0.4 million in 2015 and $0.2 million in 2014.
Future minimum lease payments under our noncancelable operating leases as of December 31, 2016, are as follows (in
millions):
2017
2018
2019
2020
2021
Total
$
$
554
337
333
338
175
1,737
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ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14: Treasury Stock
In July 2010, our Board of Directors approved a common stock purchase plan to purchase up to $40.0 million of our
common stock. This plan has no expiration date and we have $7.2 million remaining on this purchase plan. During 2016 and
2014, we purchased $15.4 million and $5.6 million, respectively of our common stock. We did not purchase any of our
common stock under our purchase plan in 2015. We used the treasury stock to issue shares for stock option exercises, restricted
stock grants and employee stock purchase plan stock purchases.
In 2016, we withheld 20,261 shares of our common stock from employee vested restricted stock units in consideration
for $1.9 million in payments for the employee's share award income tax withholding obligations. We have 93 shares remaining
in treasury at December 31, 2016.
In 2015, we withheld 17,299 shares of our common stock from employee vested restricted stock units in consideration
for $1.5 million in payments for the employee's share award income tax withholding obligations. We also withheld 823 shares
of our common stock from option exercises with shares remitted back to us in lieu of $0.1 million in cash payments for the
option exercises.
Note 15: Stockholder Rights Plan
In July 1997, our Board of Directors adopted a Stockholder Rights Plan. This plan expired in 2007 and in July 2007,
our Board of Directors adopted an Amended and Restated Rights Agreement. We distributed a Preferred Share Purchase Right
(a “Right”) for each share of our Common Stock outstanding. The Rights generally will not be exercisable until a person or
group has acquired 15% or more of our Common Stock in a transaction that is not approved in advance by the Board of
Directors or ten days after the commencement of a tender offer, which could result in a person or group owning 15% or more of
our Common Stock.
On exercise, each Right entitles the holder to buy one share of Common Stock at an exercise price of $225. In the
event a third party or group were to acquire 15% or more of our outstanding Common Stock without the prior approval of the
Board of Directors, each Right will entitle the holder, other than the acquirer, to buy Common Stock with a market value of
twice the exercise price, for the Right’s then current exercise price. In addition, if we were to be acquired in a merger after
such an acquisition, shareholders with unexercised Rights could purchase common stock of the acquirer with a value of twice
the exercise price of the Rights.
Our Board of Directors may redeem the Rights for a nominal amount at any time prior to the tenth business day
following an event that causes the Rights to become exercisable. The Rights will expire unless previously redeemed or
exercised on August 8, 2017.
Note 16: Commitments and Contingencies
From time to time, we are involved in various other legal proceedings, most of which are routine litigation, in the
normal course of business. Our management does not believe that the resolution of the other legal proceedings that we are
involved with will have a material adverse impact on our financial position or results of operations.
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.
74
Table of Contents
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 17: Quarterly Financial Data - Unaudited
2016
Total revenue
Gross profit
Net income
Net income per share:
Basic
Diluted
2015
Total revenue
Gross profit
Net income
Net income per share:
Basic
Diluted
Quarter Ended
Mar. 31 (1)
Jun. 30
Sept. 30
Dec. 31
(in thousands except per share data)
$
$
$
$
$
$
$
$
$
$
89,855
49,233
18,160
1.13
1.08
81,484
42,514
9,686
0.62
0.60
$
$
$
$
$
$
$
$
$
$
96,721
50,132
16,606
1.03
0.98
83,781
43,761
13,570
0.86
0.83
$
$
$
$
$
$
$
$
$
$
97,108
51,273
18,806
1.16
1.09
86,016
46,265
16,266
1.02
0.98
$
$
$
$
$
$
$
$
$
$
95,688
50,760
9,512
0.58
0.54
90,387
48,257
5,463
0.34
0.33
______________________________
(1) In the second quarter of 2016, we early adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting (see Note 1: General and Summary of Significant Accounting
Policies). Based on the adoption of this guidance, net income for the quarter ended March 31, 2016 was restated to reflect a
$2.3 million adjustment to the income tax provision impacting net income by the same amount. In addition, for the three
months ended March 31, 2016, weighted average common and common equivalent shares outstanding increased by
314,000 shares, which along with the impact of the adjustment to the income tax provision resulted in a net restatement of
basic earnings per share to $1.13 from 0.99; and diluted earnings per share to $1.08 from 0.96.
Note 18: Subsequent Events
Acquisition of HIS
On February 3, 2017, we completed the acquisition of Pfizer's HIS business. The acquired HIS business includes IV
pumps, solutions, and devices, that we believe when combined with our existing IV business, will create a leading pure-play
infusion therapy business. We acquired HIS for consideration of $275 million in cash, which was financed with existing cash
balances and a three-year interest-only seller note of $75 million and 3.2 million shares of our common stock. Additionally,
Pfizer also may be entitled up to an additional $225 million based on achievement of performance targets for the combined
company for the three years ending December 31, 2019 ("Earnout Period"). In the event that the sum of our Adjusted EBITDA
(as defined by the Purchase Agreement) for each of the three years in the Earnout Period (the "Cumulative Adjusted EBITDA")
is equal to or exceeds approximately $1.0 billion ("the "Earnout Target"), then Pfizer will be entitled to receive the full amount
of the earnout. In the event that the Cumulative Adjusted EBITDA is equal to or greater than 85% of the Earnout Target (but
less than the Earnout Target), Pfizer will be entitled to receive the corresponding percentage of the earnout. In the event that the
Cumulative Adjusted EBITDA is less than 85% of the Earnout Target, then no earnout amount will be earned by Pfizer. The
aggregate purchase consideration is subject to certain adjustments, based on working capital, cash and indebtedness of the HIS
business at closing.
We expect to account for the HIS acquisition as a business combination, however we have not completed the purchase
accounting. We are unable to provide preliminary estimates of asset and liability values as as we have not received a
preliminary closing balance sheet and the valuation of the assets acquired and liabilities assumed is in progress. We plan to file
the required historical financial statements and the required pro forma financial statements of the combined results of ICU and
HIS in a Form 8-K/A to amend the Current Report on Form 8-K filed on February 9, 2017 by April 21, 2017.
75
Table of Contents
Planned Restructuring
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We intend to reduce our workforce in order to optimize our business operations in alignment with current and future
market opportunities and to remove duplicative activities created as a result of the acquisition of HIS.
In connection with the restructuring, we estimate that we will incur total charges of approximately $3.8 million to $4.2
million, which will be recorded in the first half of 2017. These charges primarily consist of severance and other benefits to
terminated employees, most of which are expected to be paid out by the end of the third quarter of 2017.
76
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Our principal executive officer and principal financial officer have concluded, based on their evaluation of our
disclosure controls and procedures (as defined in Regulations 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of
1934) as of the end of the period covered by this Report, that our disclosure controls and procedures are effective to ensure that
the information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure and that such information is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the Securities Exchange Commission.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter
that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate control over the Company’s
financial reporting.
Management has used the criteria in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of its internal control over financial
reporting.
Based on this evaluation, management of the Company has concluded that the Company has maintained effective
internal control over its financial reporting as of December 31, 2016 based on the criteria in Internal Control — Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Our independent registered public accounting firm that audited the December 31, 2016 financial statements included
in this Annual Report on Form 10-K has independently assessed the effectiveness of our internal control over financial
reporting and its report is below.
77
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
ICU Medical, Inc.
San Clemente, CA
We have audited the internal control over financial reporting of ICU Medical, Inc. and subsidiaries (the “Company”) as of
December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's
principal executive and principal financial officers, or persons performing similar functions, and effected by the company's
board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that
could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2016 of the
Company and our report dated March 1, 2017 expressed an unqualified opinion on those consolidated financial statements and
financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 1, 2017
78
Item 9B. Other Information.
None
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information required by this item is set forth under the captions Executive Officers, Election of Directors, Audit
Committee and Compliance with Section 16(a) Beneficial Ownership Reporting Compliance in our definitive Proxy Statement
to be filed in connection with our 2017 Annual Meeting of Stockholders, and such information is incorporated herein by
reference.
We have a Code of Business Conduct and Ethics for Directors and Officers. A copy is available on our website,
www.icumed.com. We will disclose any future amendments to, or waivers from, the Code of Business Conduct and Ethics for
Directors and Officers on our website.
Item 11. Executive Compensation.
The information required by this item is set forth under the caption Executive Officer and Director Compensation,
Compensation Committee and Compensation Committee Interlocks and Insider Participation in our definitive Proxy Statement
to be filed in connection with our 2017 Annual Meeting of Stockholders, and such information is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item is set forth under the caption Security Ownership of Certain Beneficial Owners
and Management and Equity Compensation Plan Information in our definitive Proxy Statement to be filed in connection with
our 2017 Annual Meeting of Stockholders, and such information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is set forth under the caption Transactions with Related Persons, Policies and
Procedures Regarding Transactions with Related Persons and Director Independence in our definitive Proxy Statement to be
filed in connection with our 2017 Annual Meeting of Stockholders, and such information is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required by this item is set forth under the caption Ratification of Auditors in our definitive Proxy
Statement to be filed in connection with our 2017 Annual Meeting of Stockholders, and such information is incorporated herein
by reference.
79
Item 15. Exhibits, Financial Statement Schedules.
PART IV
(a) The following documents are filed as part of this report:
The financial statements listed below are set forth in Item 8 of this Annual Report.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2016 and 2015
Consolidated Statements of Income for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016, 2015
and 2014
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2016, 2015
and 2014
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
(b) Exhibits
(c) Financial Statement Schedules
The Financial Statement Schedules required to be filed as a part of this Report are:
Schedule II — Valuation and Qualifying Accounts
Exhibits required to be filed as part of this Report are:
Form 10-K
Page No.
46
47
48
49
50
51
53
83
83
Exhibit
Number
2.1
2.2
2.3
3.1
3.2
10.1
Stock Purchase Agreement dated as of October 5, 2015, by and among Registrant, Medline Industries, Inc.,
Roundtable Healthcare Partners, L.P., Roundtable Healthcare Investors, L.P. and certain other sellers party thereto.
Filed as an Exhibit to Registrant's Current Report on Form 8-K filed October 6, 2015, and incorporated herein by
reference.
Description
Asset Purchase Agreement made as of October 5, 2015, by and among Registrant, Excelsior Medical, LLC and
Medline Industries, Inc. Filed as an Exhibit to Registrant's Current Report on Form 8-K filed October 6, 2015, and
incorporated herein by reference.
Amended and Restated Stock and Asset Purchase Agreement, dated as of January 5, 2017, by and between Pfizer
Inc., a Delaware corporation, and ICU Medical, Inc., a Delaware corporation. Filed as Exhibit 2.1 to Registrant’s
Current Report on Form 8-K filed January 5, 2017, and incorporated herein by reference.
Registrant's Certificate of Incorporation, as amended and restated. Filed as an exhibit to Registrant's Current
Report on Form 8-K filed on June 10, 2014, and incorporated herein by reference.
Registrant's Bylaws, as amended and restated. Filed as an Exhibit to Registrant's Current Report on Form 8-K filed
August 3, 2016, and incorporated herein by reference.
Form of Indemnification Agreement with Directors and Executive Officers. Filed as an Exhibit to Registrant's
Quarterly Report on Form 10-Q for the Quarter ended September 30, 2010, and incorporated herein by reference.
80
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
Manufacture and Supply Agreement dated September 13, 1993 between Registrant and B. Braun, Inc. relating to
the Protected Needle product. Filed as an Exhibit to Registrant's Quarterly Report on Form 10-Q for the Quarter
ended September 30, 1993, and incorporated herein by reference.
Supply and Distribution Agreement dated April 3, 1995 between Registrant and Abbott Laboratories, Inc. relating
to the Clave product. Filed as an Exhibit to Registrant's Quarterly Report on Form 10-Q for the Quarter ended
March 31, 1995, and incorporated herein by reference.
Amended and Restated Rights Agreement dated October 18, 2007 between Registrant and American Stock
Transfer & Trust Company as Rights Agent. Filed as an Exhibit to Registrant's Registration Statement on Form 8-
A/A dated October 18, 2007, and incorporated herein by reference.
SafeLine Agreement effective October 1, 1997 by and between Registrant and B. Braun Medical, Inc. Filed as an
Exhibit to Registrant's Current Report on Form 8-K filed June 18, 1998, and incorporated herein by reference.
Amendment to April 3, 1995 Supply and Distribution Agreement, dated January 1, 1999, between Registrant and
Abbott Laboratories. Filed as an Exhibit to Registrant's Current Report on Form 8-K filed February 23, 1999, and
incorporated herein by reference.
Co-Promotion and Distribution Agreement, dated February 27, 2001 between Registrant and Abbott Laboratories.
Filed as an Exhibit to Registrant's Current Report on Form 8-K filed March 7, 2001, and incorporated herein by
reference.
Registrant's 2001 Directors' Stock Option Plan.* Filed as an Exhibit to Registrant's definitive Proxy Statement
filed pursuant to Regulation 14A on April 3, 2002, and incorporated herein by reference.
Registrant's 2002 Employee Stock Purchase Plan.* Filed as an Exhibit to Registrant's definitive Proxy Statement
filed pursuant to Regulation 14A on April 3, 2002, and incorporated herein by reference.
Registrant's 2003 Stock Option Plan.* Filed as an Exhibit to Registrant's definitive Proxy Statement filed pursuant
to Regulation 14A on April 25, 2003, and incorporated herein by reference.
Amendment to April 3, 1995 Supply and Distribution Agreement, dated as of January 14, 2004, between
Registrant and Abbott Laboratories. Filed as an Exhibit to Registrant's Current Report on Form 8-K dated
January 15, 2004, and incorporated herein by reference.
Amendment to February 27, 2001 Co-Promotion and Distribution Agreement, dated as of January 14, 2004,
between Registrant and Abbott Laboratories. Filed as an Exhibit to Registrant's Current Report on Form 8-K dated
January 15, 2004, and incorporated herein by reference.
Manufacturing, Commercialization and Development Agreement between Registrant and Hospira, Inc. effective
May 1, 2005. Filed as an Exhibit to Registrant's Quarterly Report on Form 10-Q for the Quarter ended March 31,
2005, and incorporated herein by reference.
Letter Agreement dated July 8, 2005 between Registrant and Hospira, Inc. re: Manufacturing, Commercialization
and Development Agreement effective May 1, 2005. Filed as an Exhibit to Registrant's Quarterly Report on
Form 10-Q for the Quarter ended June 30, 2005, and incorporated herein by reference.
Settlement and Release Agreement dated as of January 2, 2007 between ICU Medical, Inc. and Fulwider Patton
Lee & Utecht, LLP. Filed as an Exhibit to Registrant's Annual Report on Form 10-K for the year ended
December 31, 2006, and incorporated herein by reference.
10.16
Executive officer compensation.*
10.17
Non-employee director compensation.*
10.18
10.19
2008 Performance-Based Incentive Plan, as amended.* Filed as Annex A to Registrant's proxy statement filed
April 3, 2013, and incorporated herein by reference.
Amendment No. 1 to 2001 Directors' Stock Option Plan.* Filed as an Exhibit to Registrant's Quarterly Report on
Form 10-Q for the Quarter ended September 30, 2009, and incorporated herein by reference.
81
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
14.1
21
23.1
31.1
31.2
Amendment No. 2 to 2001 Directors' Stock Option Plan.* Filed as an Exhibit to Registrant's Quarterly Report on
Form 10-Q for the Quarter ended September 30, 2009, and incorporated herein by reference.
Amendment No. 3 to 2001 Directors' Stock Option Plan.* Filed as an Exhibit to Registrant's Quarterly Report on
Form 10-Q for the Quarter ended September 30, 2009, and incorporated herein by reference.
Amendment 20 to the Supply and Distribution Agreement, effective as of November 30, 2011, between ICU
Medical Sales, Inc. and Hospira, Inc. Filed as an Exhibit to Registrant's Current Report on Form 8-K filed
December 22, 2011, and incorporated herein by reference.
Third Amendment to the Co-Promotion and Distribution Agreement, effective as of November 30, 2011, between
ICU Medical Sales, Inc. and Hospira, Inc. Filed as an Exhibit to Registrant's Current Report on Form 8-K filed
December 22, 2011, and incorporated herein by reference.
ICU Medical, Inc. Amended 2011 Stock Incentive Plan.* Filed as an Exhibit to Registrant's Quarterly Report on
Form 10-Q for the Quarter ended June 30, 2012, and incorporated herein by reference.
Form of Executive Officer Retention Agreement - Tier 1 Employee.* Filed as an Exhibit to Registrant's Current
Report on Form 8-K filed November 21, 2013, and incorporated herein by reference.
Form of Executive Officer Retention Agreement - Tier 2 Employee.* Filed as an Exhibit to Registrant's Current
Report on Form 8-K filed November 21, 2013, and incorporated herein by reference.
2014 Inducement Stock Incentive Plan.* Filed as an Exhibit to Registrant's Current Report on Form 8-K filed
February 26, 2014 and incorporated herein by reference.
Executive Employment Agreement, dated as of February 7, 2014, by and between ICU Medical, Inc. and Vivek
Jain.* Filed as an Exhibit to Registrant's Current Report on Form 8-K filed February 12, 2014, and incorporated
herein by reference.
Amendment to Executive Employment Agreement, dated as of February 12, 2014, by and between ICU Medical,
Inc. and Vivek Jain.* Filed as an Exhibit to Registrant's Current Report on Form 8-K filed February 12, 2014, and
incorporated herein by reference.
Buy-Out Agreement between Registrant and George A. Lopez, M.D. effective September 30, 2015.* Filed as an
Exhibit to Registrant's Current Report on Form 8-K filed October 1, 2015, and incorporated herein by reference.
Form of Shareholder Agreement, by and between a subsidiary of Pfizer Inc. and ICU Medical Inc dated February
3, 2017. Filed as an Exhibit to Registrant’s Current Report on Form 8-K filed October 13, 2016, and incorporated
herein by reference.
ICU Medical, Inc. Executive Severance Plan.* Filed as an Exhibit to Registrant’s Current Report on Form 8-K
filed January 6, 2017, and incorporated herein by reference.
Senior Note issued by ICU Medical, Inc. in favor of Pfizer Inc., dated as of February 3, 2017. Filed as an Exhibit
to Registrant’s Current Report on Form 8-K filed February 9, 2017, and incorporated herein by reference.
Transitional Services Agreement, between ICU Medical, Inc. and Pfizer Inc., dated as of February 3, 2017. Filed
as an Exhibit to Registrant’s Current Report on Form 8-K filed February 9, 2017, and incorporated herein by
reference.
Code of Business Conduct and Ethics for Directors and Officers. Filed as an Exhibit to Registrant's Current Report
on Form 8-K filed February 5, 2009, and incorporated herein by reference.
Subsidiaries of Registrant.
Consent of Deloitte & Touche LLP.
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
82
32
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
__________________________________________
*Executive compensation plan or other arrangement
Exhibit 101.INS
Exhibit 101.SCH
Exhibit 101.CAL
Exhibit 101.LAB
Exhibit 101.PRE
Exhibit 101.DEF
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
(b) The exhibits are set forth in subsection (b) above.
(c) The financial statement schedules are set forth in (c) above.
Exhibit Index
EXHIBIT INDEX
10.18
Executive officer compensation
10.19
Non-employee director compensation
21
Subsidiaries of Registrant.
23.1
Consent of Deloitte & Touche LLP
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 101.INS
Exhibit 101.SCH
Exhibit 101.CAL
Exhibit 101.LAB
Exhibit 101.PRE
Exhibit 101.DEF
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
83
ICU MEDICAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
(Amounts in thousands)
Description
For the year ended December 31, 2014:
Allowance for doubtful accounts
Warranty and return reserve - accounts
receivable
Warranty and return reserve - inventory
Deferred tax asset valuation allowance
For the year ended December 31, 2015:
Allowance for doubtful accounts
Warranty and return reserve - accounts
receivable
Warranty and return reserve - inventory
Deferred tax asset valuation allowance
For the year ended December 31, 2016:
Allowance for doubtful accounts
Warranty and return reserve - accounts
receivable
Warranty and return reserve - inventory
Deferred tax asset valuation allowance
$
$
$
$
$
$
$
$
$
$
$
$
Additions
Balance at
Beginning of
Period
Charged to
Costs and
Expenses
Charged to
Other Accounts
Write-off/
Disposals
Balance
at End
of Period
1,208
$
34
$
(99) $
(16) $
1,127
989
$
(133) $
— $
(508) $
$
148
— $
— $
— $
— $
— $
— $
— $
481
15
—
1,127
$
54
$
55
$
(135) $
1,101
$
481
$
15
— $
102
$
(50) $
$
2,354
— $
— $
— $
— $
— $
— $
583
(35)
2,354
1,101
$
— $
(24) $
(4) $
1,073
583
$
(35) $
$
2,354
$
539
20
$
— $
— $
— $
— $
— $
— $
(2,354) $
1,122
(15)
—
84
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURE
ICU MEDICAL, INC.
By:
/s/ Vivek Jain
Vivek Jain
Chairman of the Board and Chief Executive Officer
Dated: March 1, 2017
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Vivek Jain
Vivek Jain
/s/ Scott E. Lamb
Scott E. Lamb
/s/ Kevin J. McGrody
Kevin J. McGrody
/s/ George A. Lopez, M.D.
George A. Lopez, M.D.
/s/ Joseph R. Saucedo
Joseph R. Saucedo
/s/ Richard H. Sherman, M.D.
Richard H. Sherman, M.D.
/s/ Robert S. Swinney, M.D.
Robert S. Swinney, M.D.
/s/ David C. Greenberg
David C. Greenberg
/s/ Elisha W. Finney
Elisha W. Finney
/s/ Douglas E. Giordano
Douglas E. Giordano
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Controller
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
85
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
Board of Directors
Elisha W. Finney
Douglas E. Giordano
David C. Greenberg
Vivek Jain
George A. Lopez, M.D.
Joseph R. Saucedo
Richard H. Sherman, M.D.
Robert S. Swinney, M.D.
Executive Management
Vivek Jain*
Chairman of the Board and
Chief Executive Officer
Scott Lamb*
Chief Financial Officer
Virginia Sanzone*
Corporate Vice President, General Counsel
and Legal Affairs
Clay Fradd
Corporate Vice President, Human Resources
Alison Burcar*
Corporate Vice President and General Manager,
Infusion Consumables
Krishna Uppugonduri
Corporate Vice President, Quality, Medical,
and Regulatory Affairs
Tom McCall*
Corporate Vice President, Marketing and
Communications and General Manager,
Critical Care
Greg Pratt
Corporate Vice President, Sales
Christian Voigtlander
Corporate Vice President and General Manager,
Infusion Solutions
Dan Woolson
Corporate Vice President and General Manager,
Infusion Systems
Steve Riggs*
Corporate Vice President, Operations
Kevin McGrody*
Corporate Controller
*“Executive Officer” under the Securities Exchange Act of 1934
Auditors
Deloitte & Touche LLP
695 Town Center Drive
Costa Mesa, CA 92626-7188
Transfer Agent and Registrar
American Stock Transfer & Trust Company
59 Maiden Lane
Plaza Level
New York, NY 10038
Phone: 800.937.5449
Local/International: 718.921.8124
Live chat room available for registered shareholder
assistance via “contact us/live help”
Email: investors@amstock.com
Overnight Delivery:
American Stock Transfer & Trust Co.
Operations Center
6201 15th Avenue
Brooklyn, NY 11219
Common Stock
Symbol: ICUI
The Nasdaq Global Select Market
Corporate Headquarters:
951 Calle Amanecer, San Clemente, California 92673
T: 800.824.7890 | F: 949.366.8368
www.icumed.com
©2017 ICU Medical Inc.