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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: June 30, 2023
 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 33-0022692
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
951 Calle Amanecer,San Clemente,California92673
(Address of principal executive offices)(Zip Code)
 (949) 366-2183
(Registrant’s telephone number including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common stock, par value $0.10 per shareICUIThe Nasdaq Stock Market LLC
(Global Select Market)
 
Indicate by check mark whether the 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 the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filerx Accelerated filer
Non-accelerated filer Smaller reporting company
 Emerging growth company
 If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):  Yes  No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 



Class Outstanding at July 31, 2023
Common 24,135,869




ICU MEDICAL, INC. AND SUBSIDIARIES
Form 10-Q
June 30, 2023

Table of Contents
 Page Number
PART I.  
Item 1.  
 
 
   
 
   
 
 
   
 
   
Item 2. 
   
Item 3. 
   
Item 4. 
   
PART II.  
Item 1. 
   
Item1A. 
   
Item 2. 
Item 5.
   
Item 6. 
 
2



Forward-Looking Statements

Various portions of this Quarterly Report on Form 10-Q, including Part 1. Item 2 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 may identify them by using words such as anticipate,” believe,” expect,” estimate,” intend,” plan,” will,” continue,” could,” may,” and by similar expressions and statements about aims, goals and plans. The forward-looking statements are based on the 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:

our future growth; future operating results and financial condition (including, among other things, anticipated sales; accruals for restructuring charges, production costs; gross margins; litigation expense; future SG&A and R&D expenses; manufacturing expenses; our expectations regarding liquidity and capital resources over the next twelve months; capital expenditures; 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; use of treasury stock; realizable value of our investment securities; future investment alternatives; foreign currency denominated financial instruments; and income taxes;

factors affecting operating results, such as the impact of an increase in shipping costs; loss of a strategic relationship; change in demand for our products; domestic and international sales; expansion in international markets, 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, 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;

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 outcome of our strategic initiatives; regulatory approvals and compliance; including the work necessary to achieve regulatory compliance with respect to the Smiths Medical Warning Letter; 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; foreign exchange risk; commodity price risk; plans to convert existing space; acquisitions of other businesses or product lines, and

the impact of acquisitions and the integration of acquired businesses and product lines (including the Smiths Medical business).

The forward looking statements in this Quarterly Report on Form 10-Q are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including without limitation, the following:

our dependence on single and limited source third-party suppliers, which subjects our business and results of operations to risks of supplier business interruptions, and a loss or degradation in performance in our suppliers;

3


damage to any of our manufacturing facilities or disruption to our supply chain network;

prolonged periods of inflation, rising interest rates and the impact of foreign currency exchange rates as a result of the current global macroeconomic and geopolitical conditions;

the impact of the COVID-19 pandemic on the way we, our suppliers and our customers operate and the duration, and the extent to which this will impact our business, future results of operations, liquidity and overall financial performance;

significant sales through our distributors;

our failure to achieve expected operating efficiencies or expense reductions associated with cost reduction and restructuring efforts;

our failure to compete successfully with our competitors and maintain market share;

our inability to fund substantial investment in product development and recover such investment through commercial product sales;

significant decline in demand for our products;

continuing pressures to reduce healthcare costs and inadequate coverage and reimbursement;

failure to protect our information technology systems against security breaches, service interruptions, or misappropriation of data;

disruptions at the FDA, other government agencies or notified bodies caused by funding shortages or global health concerns;

actual or perceived failures to comply with foreign, federal, and state data privacy and security laws, regulations and standards, or certain fraud and abuse and transparency laws;

our failure to defend and enforce our patents or other proprietary rights and the cost of enforcing and of defending patent claims or claims of other proprietary rights; and expiration of our patents;

our exposure to risks related to foreign currency exchange rates;

any significant changes in U.S. trade, tax or other policies that restrict imports or increase import tariffs;

additional risks from international sales, related to competition with larger international companies and established local companies and our possibly higher cost structure;

our failure to effectively manage our growth and change to our business resulting from the Smiths Medical acquisition or any other future acquisitions;

the actual impact of the Smiths Medical acquisition on our financial results and our use of a significant portion of our cash on hand and incurrence of a substantial amount of debt to finance the Smiths Medical acquisition, which could adversely affect our business, including by restricting our ability to engage in additional transactions or incur additional indebtedness.

For a more detailed discussion of these factors, see the information under the sections entitled “Summary Risk Factors,” Part I. Item 1A. “Risk Factors” and Part II. Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report on Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”), and the sections in this Quarterly Report on Form 10-Q entitled Part II. Item 1A “Risk Factors” and Part I. Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case as updated by our periodic filings with the SEC.

Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or
4


occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
5


PART I - FINANCIAL INFORMATION
Item1.Financial Statements (Unaudited)

ICU MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value data and treasury shares) 
 June 30,
2023
December 31,
2022
 (Unaudited)(1)
ASSETS  
CURRENT ASSETS:  
Cash and cash equivalents$195,887 $208,784 
Short-term investment securities1,812 4,224 
TOTAL CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENT SECURITIES197,699 213,008 
Accounts receivable, net of allowance for doubtful accounts $10,028 at June 30, 2023 and $8,530 at December 31, 2022
162,225 221,719 
Inventories775,269 696,009 
Prepaid income taxes13,766 15,528 
Prepaid expenses and other current assets95,783 88,932 
TOTAL CURRENT ASSETS1,244,742 1,235,196 
PROPERTY, PLANT AND EQUIPMENT, net616,540 636,113 
OPERATING LEASE RIGHT-OF-USE ASSETS76,028 74,864 
LONG-TERM INVESTMENT SECURITIES 516 
GOODWILL1,464,478 1,449,258 
INTANGIBLE ASSETS, net929,830 982,766 
DEFERRED INCOME TAXES31,466 31,466 
OTHER ASSETS99,960 105,462 
TOTAL ASSETS$4,463,044 $4,515,641 
LIABILITIES AND STOCKHOLDERS’ EQUITY  
CURRENT LIABILITIES:  
Accounts payable$167,054 $215,902 
Accrued liabilities254,508 242,769 
Current portion of long-term debt40,375 29,688 
Income tax payable19,954 6,200 
Contingent earn-out liability1,989  
TOTAL CURRENT LIABILITIES483,880 494,559 
CONTINGENT EARN-OUT LIABILITY26,944 25,572 
LONG-TERM DEBT1,600,720 1,623,675 
OTHER LONG-TERM LIABILITIES109,858 114,104 
DEFERRED INCOME TAXES89,684 126,007 
INCOME TAX LIABILITY37,140 41,796 
COMMITMENTS AND CONTINGENCIES (Note 19)  
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 — 24,114 shares at June 30, 2023 and 23,995 shares at December 31, 2022; and outstanding — 24,104 shares at June 30, 2023 and 23,993 shares at December 31, 2022
2,411 2,399 
Additional paid-in capital1,345,057 1,331,249 
Treasury stock, at cost (10,048 and 1,633 shares, respectively)
(1,611)(243)
Retained earnings817,755 837,501 
Accumulated other comprehensive loss(48,794)(80,978)
TOTAL STOCKHOLDERS' EQUITY2,114,818 2,089,928 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$4,463,044 $4,515,641 
______________________________________________________
(1) December 31, 2022 balances were derived from audited consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
6

ICU MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
 
 Three months ended
June 30,
Six months ended
June 30,
 2023202220232022
TOTAL REVENUES$549,310 $561,004 $1,117,959 $1,104,126 
COST OF GOODS SOLD356,983 393,411 733,591 767,706 
GROSS PROFIT192,327 167,593 384,368 336,420 
OPERATING EXPENSES:  
Selling, general and administrative150,895 158,748 303,467 311,960 
Research and development22,302 22,562 42,063 46,433 
Restructuring, strategic transaction and integration12,354 13,525 23,367 47,430 
Change in fair value of contingent earn-out4,016 (27,194)3,316 (27,194)
TOTAL OPERATING EXPENSES189,567 167,641 372,213 378,629 
INCOME (LOSS) FROM OPERATIONS2,760 (48)12,155 (42,209)
INTEREST EXPENSE, net(24,121)(15,440)(46,636)(28,495)
OTHER EXPENSE, net(1,502)(1,366)(1,771)(951)
LOSS BEFORE INCOME TAXES(22,863)(16,854)(36,252)(71,655)
BENEFIT FOR INCOME TAXES12,929 9,380 16,506 26,113 
NET LOSS$(9,934)$(7,474)$(19,746)$(45,542)
NET LOSS PER SHARE  
Basic$(0.41)$(0.31)$(0.82)$(1.91)
Diluted$(0.41)$(0.31)$(0.82)$(1.91)
WEIGHTED AVERAGE NUMBER OF SHARES  
Basic24,075 23,897 24,045 23,787 
Diluted24,075 23,897 24,045 23,787 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
7

ICU MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(In thousands)
 
 Three months ended
June 30,
Six months ended
June 30,
 2023202220232022
NET LOSS$(9,934)$(7,474)$(19,746)$(45,542)
Other comprehensive income (loss), net of tax:
Cash flow hedge adjustments, net of tax of $1,687 and $4,730 for the three months ended June 30, 2023 and 2022, respectively, and $(57) and $11,681 for the six months ended June 30, 2023 and 2022, respectively.
5,274 8,144 (303)31,716 
Foreign currency translation adjustment, net of tax of $0 for all periods
7,569 (99,805)32,552 (104,751)
Other adjustments, net of tax of $0 for all periods
(34)14 (65)29 
Other comprehensive income (loss), net of tax12,809 (91,647)32,184 (73,006)
COMPREHENSIVE INCOME (LOSS)$2,875 $(99,121)$12,438 $(118,548)
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

8

ICU MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
(Amounts in thousands)


Common StockAdditional
Paid-in
Capital
Treasury
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss) Income
SharesAmountTotal
Balance, January 1, 202323,995 $2,399 $1,331,249 $(243)$837,501 $(80,978)$2,089,928 
Issuance of restricted stock and exercise of stock options172 12 (503)662 — — 171 
Tax withholding payments related to net share settlement of equity awards(53)— — (8,425)— — (8,425)
Stock compensation— — 9,158 — — — 9,158 
Other comprehensive income, net of tax— — 4 — — 19,375 19,379 
Net loss— — — — (9,812)— (9,812)
Balance, March 31, 202324,114 $2,411 $1,339,908 $(8,006)$827,689 $(61,603)$2,100,399 
Issuance of restricted stock and exercise of stock options2  (4,626)6,688 — — 2,062 
Tax withholding payments related to net share settlement of equity awards(2)— — (293)— — (293)
Stock compensation— — 9,773 — — — 9,773 
Other comprehensive income, net of tax— — 2 — — 12,809 12,811 
Net loss— — — — (9,934)— (9,934)
Balance, June 30, 202324,114 $2,411 $1,345,057 $(1,611)$817,755 $(48,794)$2,114,818 



 Common StockAdditional
Paid-in
Capital
Treasury
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss) Income
SharesAmountTotal
Balance, January 1, 202221,280 $2,128 $721,412 $(27)$911,787 $(19,269)$1,616,031 
Issuance of restricted stock and exercise of stock options154 12 (2,965)5,927 — — 2,974 
Tax withholding payments related to net share settlement of equity awards(37)— — (8,743)— — (8,743)
Issuance of common stock for acquisitions2,500 250 575,725 — — — 575,975 
Stock compensation— — 12,092 — — — 12,092 
Other comprehensive income, net of tax— — — — — 18,641 18,641 
Net loss— — — — (38,068)— (38,068)
Balance, March 31, 202223,897 $2,390 $1,306,264 $(2,843)$873,719 $(628)$2,178,902 
Issuance of restricted stock and exercise of stock options10  (4,428)4,446 — — 18 
Tax withholding payments related to net share settlement of equity awards(8)— — (1,695)— — (1,695)
Stock compensation— — 7,762 — — — 7,762 
Other comprehensive loss, net of tax— — — — — (91,647)(91,647)
Net loss— — — — (7,474)— (7,474)
Balance, June 30, 202223,899 $2,390 $1,309,598 $(92)$866,245 $(92,275)$2,085,866 
9

ICU MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands) 

 Six months ended
June 30,
 20232022
CASH FLOWS FROM OPERATING ACTIVITIES:  
Net loss$(19,746)$(45,542)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: 
Depreciation and amortization113,244 119,697 
Amortization of inventory step-up 22,676 
Noncash lease expense11,110 10,888 
Provision for doubtful accounts399 (99)
Provision for warranty, returns and field action7,070 1,483 
Stock compensation18,931 19,854 
Loss on disposal of property, plant and equipment and other assets1,019 267 
Bond premium amortization8 211 
Debt issuance costs amortization3,404 3,495 
Change in fair value of contingent earn-out liability3,316 (27,194)
Usage of spare parts10,056 5,229 
Other2,909 (2,807)
Changes in operating assets and liabilities, net of amounts acquired: 
Accounts receivable46,796 (1,090)
Inventories(76,040)(100,024)
Prepaid expenses and other current assets2,983 4,710 
Other assets(12,698)(17,323)
Accounts payable(46,864)22,149 
Accrued liabilities(104)(33,509)
Income taxes, including excess tax benefits and deferred income taxes(26,022)(45,798)
Net cash provided by (used in) operating activities39,771 (62,727)
CASH FLOWS FROM INVESTING ACTIVITIES:  
Purchases of property, plant and equipment(32,489)(48,039)
Proceeds from sale of assets1,431 900 
Business acquisitions, net of cash acquired (1,844,164)
Intangible asset additions(4,651)(4,440)
Purchases of investment securities (3,397)
Proceeds from sale and maturities of investment securities2,920 26,198 
Net cash used in investing activities(32,789)(1,872,942)
CASH FLOWS FROM FINANCING ACTIVITIES:  
Proceeds from issuance of long-term debt, net of lender debt issuance costs 1,672,631 
Principal repayments of long-term debt(14,813)(18,125)
Payment of third-party debt issuance costs (1,852)
Proceeds from exercise of stock options2,233 2,992 
Payments on finance leases(436)(321)
Tax withholding payments related to net share settlement of equity awards(8,718)(10,438)
Net cash (used in) provided by financing activities(21,734)1,644,887 
Effect of exchange rate changes on cash1,855 (6,347)
NET DECREASE IN CASH AND CASH EQUIVALENTS(12,897)(297,129)
CASH AND CASH EQUIVALENTS, beginning of period208,784 552,827 
CASH AND CASH EQUIVALENTS, end of period$195,887 $255,698 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


10


ICU MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - CONTINUED
(In thousands)

Six months ended
June 30,
20232022
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Accounts payable for property, plant and equipment$2,362 $5,539 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Detail of assets acquired and liabilities assumed in acquisitions:
Fair value of assets acquired$1,658,692 
Cash paid for acquisitions, net of cash acquired(1,844,164)
Issuance of common stock for acquisitions(575,975)
Contingent consideration(55,158)
Goodwill, acquired/adjusted during period1,437,811 
Liabilities assumed/Adjustments to liabilities assumed$(621,206)

The accompanying notes are an integral part of these condensed consolidated financial statements.
11

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



Note 1:Basis of Presentation
 
The accompanying unaudited interim condensed consolidated financial statements of ICU Medical, Inc., ("ICU" or the "Company"), a Delaware corporation, have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S.") and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and reflect all adjustments, consisting of only normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the consolidated results for the interim periods presented. Results for the interim period are not necessarily indicative of results for the full year. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K of ICU for the year ended December 31, 2022.
 
We develop, manufacture and sell innovative medical products used in infusion therapy, vascular access, and vital care applications. ICU's product portfolio includes ambulatory, syringe, and large volume IV pumps and safety software; dedicated and non-dedicated IV sets, needlefree IV connectors, peripheral IV catheters, and sterile IV solutions; closed system transfer devices and pharmacy compounding systems; as well as a range of respiratory, anesthesia, patient monitoring, and temperature management products. We sell the majority of our products through our direct sales force and through independent distributors throughout the U.S. and internationally. We also sell certain products on an original equipment manufacturer basis to other medical device manufacturers. All subsidiaries are wholly owned and are included in the condensed consolidated financial statements. All intercompany balances and transactions have been eliminated.

Certain reclassifications have been made to the prior year financial statements and footnotes to conform to the presentation used in the current year. In the statements of operations we reclassified interest income to interest expense, net from other expense, net and in Note 5: Revenues, certain reclassifications were made to revenues disaggregated by product line and by geography. Also, in Note 9: Fair Value Measurements the table indicating the Level inputs for the assets and liabilities measured at fair value on a recurring basis was updated to correct the Level input identified for the hedge assets and liabilities. These reclassifications had no impact on total revenues, net loss, shareholder's equity or cash flows as previously reported.

Note 2:    New Accounting Pronouncements

Recently Issued Accounting Standards

    In March 2020, the Financial Accounting Standards Board issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional guidance for a limited period of time to ease the potential burden for reference rate reform on financial reporting. Due to concerns about structural risks of interbank offered rates and, particularly, the risk of cessation of the London Interbank Offered Rate ("LIBOR"), regulators around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued as a result of reference rate reform. Optional expedients may be applied to contracts that are modified as a result of the reference rate reform. Modifications of contracts within the scope of Topic 470, Debt, should be accounted for by prospectively adjusting the effective interest rate. Modifications of contracts within the scope of ASC 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate (incremental borrowing rate). Exceptions to Topic 815, Derivatives and Hedging, results in not having a dedesignation of a hedging relationship if certain criteria are met. The amendments in this ASU are effective for all entities as of March 12, 2020 through December 31, 2022. ASU No. 2022-06, Reference Rate Reform: Deferral of the Sunset Date of Topic 848 deferred the sunset date to December 31, 2024. In November 2021, we entered into two forward-starting swaps whereby the variable leg of the swap referenced LIBOR. These swaps were amended in early 2022 to transition to an alternative reference rate (see Note 8: Derivatives and Hedging Activities). The amendments in this ASU allow for certain expedients that will allow us to assume that our hedged interest payments are probable of occurring regardless of any expected modification in their terms related to reference rate reform and will allow us to continue hedge accounting for a cash flow hedge for which the hedged interest rate risk changes if the hedge is highly effective under ASC 815, Derivatives and Hedging, or the optional expedient under this ASU is elected. The impact of this ASU on our contracts has not been and is not expected to be material.
        
12

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3:    Acquisitions

2022 Acquisition

On January 6, 2022, we acquired 100.0% of the equity interests in Smiths Medical, the holding company of Smiths Group plc's global medical device business, from Smiths Group International Holdings Limited (“Smiths”). Consistent with our strategic growth plans, the acquisition of Smiths Medical enabled us to broaden our product offerings to include syringe and ambulatory infusion devices, vascular access, and vital care products and to strengthen and expand our global market reach.

Total cash consideration for the acquisition was $1.9 billion, which was financed with existing cash balances and proceeds from the credit agreement entered into on January 6, 2022 (see Note 17: Long-Term Debt). We also issued share consideration to Smiths of 2.5 million shares of our common stock. The fair value of the common shares issued to Smiths was determined based on the opening market price of our common stock on the acquisition date. Smiths may be entitled to an additional $100.0 million in cash consideration contingent on our common stock achieving certain price targets for certain periods after closing in accordance with the terms of the Share Sale and Purchase Agreement (the "Purchase Agreement"). In the event that (a) on or prior to the third anniversary of closing the 30-day volume-weighted average price for our common stock, as defined in the Purchase Agreement, equals or exceeds $300.00 per share or (b) on or prior to the fourth anniversary of closing the 45-day volume-weighted average price for our common stock, as defined in the Purchase Agreement, equals or exceeds $300.00 per share (each a "Price Target"), and provided Smiths beneficially owns at least 50.0% of the shares of common stock issued at closing at the time the Price Target is achieved, then Smiths will be entitled to receive the additional $100.0 million in cash consideration. The fair value of the contingent consideration was determined using an option pricing model, specifically the Monte Carlo Simulation. In the analysis, the determinants of payout are simulated in a risk neutral framework over a large number of simulation paths. The fair value of the contingent consideration is then calculated as the average present value across all simulated paths.

Smiths became a related party to us when we issued 2.5 million shares of our common stock as partial consideration for the acquisition of Smiths Medical. Additionally, we entered into a transition services agreement ("TSA") with certain members of Smiths Group, plc. The TSA includes certain information technology, human resource and tax support services for an initial term of twelve months with the option to extend up to 24 months. During the three and six months ended June 30, 2023, we expensed $3.9 million and $7.9 million, respectively, for services provided under the TSA. As of June 30, 2023, we have $1.0 million in open payables related to the services received under the TSA.

Final Purchase Price Allocation

The following table summarizes the final purchase price and the final allocation of the purchase price related to the assets acquired and liabilities assumed (in thousands):
13

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Cash consideration for acquired assets$1,922,955 
Fair value of contingent consideration payable to Smiths53,520 
Issuance of ICU Medical, Inc. common shares:
Number of shares issued to Smiths2,500 
Price per share (ICU's opening market price on the acquisition date)$230.39 
Fair value of ICU shares issued to Smiths$575,975 
Total Consideration$2,552,450 
Purchase Price Allocation:
Cash and cash equivalents$78,791 
Accounts receivable106,132 
Inventories228,919 
Prepaid expenses and other current assets53,554 
Property, plant and equipment206,333 
Operating lease right-of-use assets55,161 
Intangible assets(1)
945,000 
Other assets379 
Accounts payable(105,291)
Accrued liabilities(2)
(173,151)
Income tax payable(40,312)
Other long-term liabilities(85,490)
Deferred income taxes(187,455)
Total identifiable net assets acquired$1,082,570 
Goodwill - not tax deductible1,469,880 
Estimated Purchase Consideration$2,552,450 
_______________________________
(1)    Identifiable intangible assets include $510.0 million of customer relationships, $400.0 million of developed technology, $30.0 million of internally developed software, and $5.0 million of trademark. The estimated weighted-average amortization period for the total identifiable intangible assets is approximately nine years, and, for each identifiable intangible asset is estimated as follows: eight years for customer relationships, ten years for developed technology, five years for internally developed software, and six months for the trademark.
(2)    Accrued liabilities includes, among other things, accrued warranty reserves, accrued restructuring initiatives, accrued salaries and related benefits, deferred revenue and accrued sales and use taxes.

The identifiable intangible assets and other long-lived assets acquired have been valued utilizing Level 3 inputs as defined in Note 9: Fair Value Measurements. The fair value of identifiable intangible assets was generally developed using the income approach and are based on critical estimates, judgments and assumptions derived from: analysis of market conditions; discount rate; discounted cash flows; royalty rates; customer retention rates; and/or estimated useful lives. Certain other intangible assets were valued using a cost to replace method, estimating the labor and non-labor costs required to replace the asset under the premise that it was not part of the transaction. Property, plant and equipment was valued with the consideration of remaining economic lives. The raw materials inventory was valued at historical cost and adjusted for any obsolescence which we estimate to approximate replacement cost, the work in process inventory was valued at estimated sales proceeds less costs to complete and costs to sell, and finished goods inventory was valued at estimated sales proceeds less costs to sell. The prepaid expenses and other current assets and assumed liabilities were recorded at their carrying values as of the date of the acquisition, as their carrying values approximated their fair values due to their short-term nature.

Unaudited Pro Forma Information

Smiths Medical is included in our consolidated results beginning on January 7, 2022. Total revenues and net loss attributable to Smiths Medical for the period from January 7, 2022 to June 30, 2022 were estimated to be $437.8 million and
14

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$65.5 million, respectively, and for the three months ended June 30, 2022 were estimated to be $222.9 million and $26.0 million, respectively. The following unaudited pro forma financial information presents the combined results of operations of ICU and Smiths Medical as if the acquisition had occurred on January 1, 2022. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on the date indicated or of results that may occur in the future.
(In thousands)Three months ended June 30, 2022Six months ended June 30, 2022
Revenues$561,004 $1,124,823 
Net Loss$(7,474)$(59,425)

The unaudited pro forma results presented above include the impact of the following adjustments: incremental amortization expense on intangible assets acquired of $1.3 million and $55.5 million for the three and six months ended June 30, 2022, incremental interest expense, including amortization of debt discount and debt issuance costs on the Senior Secured Credit Facilities (as defined in Note 17: Long-Term Debt) of $0.8 million and $25.4 million for the three and six months ended June 30, 2022. The unaudited pro forma results include IFRS to U.S. GAAP adjustments for Smiths Medical's historical results and adjustments for accounting policy alignment, which were materially similar to the Company. Any differences in accounting policies were adjusted to reflect the accounting policies of the Company in the unaudited pro forma results presented.

Note 4: Restructuring, Strategic Transaction and Integration

    Restructuring, strategic transaction and integration expenses were $12.4 million and $13.5 million for the three months ended June 30, 2023 and 2022, respectively and $23.4 million and $47.4 million for the six months ended June 30, 2023 and 2022, respectively.

Restructuring

    During the three and six months ended June 30, 2023, restructuring charges were $1.3 million and $4.0 million, respectively, as compared to $1.7 million and $4.9 million, respectively, for the three and six months ended June 30, 2022 and were primarily related to severance costs for all periods.     
    
The following table summarizes the activity in our restructuring-related accrual by major type of cost (in thousands):
Severance Pay and BenefitsRetention and Facility Closure CostsTotal
Accrued balance, January 1, 2023$4,416 $1,507 $5,923 
Charges incurred2,732  2,732 
Payments(1,284) (1,284)
Other(1)
(291)(620)(911)
Currency translation70 16 86 
Accrued balance, March 31, 2023$5,643 $903 $6,546 
Charges incurred1,290 20 1,310 
Payments(3,302)(27)(3,329)
Currency translation227 17 244 
Accrued balance, June 30, 2023$3,858 $913 $4,771 
__________________________
(1) Other, primarily relates to prior year accrued restructuring charges for estimated facility closure costs that were reversed during the three months ended March 31, 2023.

Strategic Transaction and Integration Expenses

    We incurred and expensed $11.1 million and $11.8 million in strategic transaction and integration expenses during the three months ended June 30, 2023 and 2022, respectively, and we incurred and expensed $19.4 million and $42.5 million in strategic transaction and integration expenses during the six months ended June 30, 2023 and 2022, respectively, which are
15

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
included in restructuring, strategic transaction and integration expenses in our condensed consolidated statements of operations. The strategic transaction and integration expenses during the three and six months ended June 30, 2023 were primarily related to consulting expenses and employee costs incurred to integrate our Smiths Medical business acquired in 2022. The strategic transaction and integration expenses for the three and six months ended June 30, 2022 were primarily related to transaction and integration expenses associated with our acquisition of Smiths Medical on January 6, 2022 (see Note 3: Acquisitions) which primarily included legal expenses, bank fees, and employee costs. The six months ended June 30, 2022 also included a United Kingdom stamp tax.

Note 5: Revenue

Revenue Recognition

    As part of the integration of our acquisition of Smiths Medical, we have now migrated to our new business unit structure of Consumables, Infusion Systems and Vital Care. The vast majority of our sales of products within these business units are made on a stand-alone basis to hospitals and distributors. Our revenues are recorded at the net sales price, which includes an estimate for variable consideration related to rebates, chargebacks and product returns. Revenue is typically recognized upon transfer of control of the products, which we deem to be at point of shipment. However, for purposes of revenue recognition for our software licenses and renewals, we consider the control of these products to be transferred to a customer at a certain point in time; therefore, we recognize revenue at the start of the applicable license term.

    Payment is typically due in full within 30 days of delivery or the start of the contract term. Revenue is recorded in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We offer certain volume-based rebates to our distribution customers, which we record as variable consideration when calculating the transaction price. Rebates are offered on both a fixed and tiered/variable basis. In both cases, we use information available at the time and our historical experience with each customer to estimate the most likely rebate amount. We also provide chargebacks to distributors that sell to end customers at prices determined under a contract between us and the end customer. Chargebacks are the difference between the prices we charge our distribution customers and the contracted prices we have with the end customer which are processed as credits to our distribution customers. In estimating the expected value of chargeback amounts in order to determine the transaction price, we use information available at the time, including our historical experience.

    We also warranty products against defects and have a policy permitting the return of defective products, for which we accrue and expense at the time of sale using information available at that time and our historical experience. We also provide for extended service-type warranties, which we consider to be separate performance obligations. We allocate a portion of the transaction price to the extended service-type warranty based on its estimated relative stand-alone selling price, and recognize revenue over the period the warranty service is provided.

Revenue disaggregated

The following table represents our revenues disaggregated by product line (in thousands):

Three months ended
June 30,
Six months ended
June 30,
Product line2023202220232022
Consumables$236,976 $240,995 $473,098 $481,184 
Infusion Systems153,142 148,644 314,855 286,871 
Vital Care159,192 171,365 330,006 336,071 
Total Revenues$549,310 $561,004 $1,117,959 $1,104,126 

For the three and six months ended June 30, 2023 and 2022, net sales to Medline made up approximately 15% of total revenues.

The following table represents our revenues disaggregated by geography (in thousands):
16

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three months ended
June 30,
Six months ended
June 30,
Geography2023202220232022
United States$347,866 $363,866 $707,053 $711,657 
Europe, the Middle East and Africa89,994 87,415 188,980 173,619 
APAC60,031 60,447 118,655 125,278 
Other Foreign51,419 49,276 103,271 93,572 
Total Revenues$549,310 $561,004 $1,117,959 $1,104,126 
    
Contract balances

    The following table presents the changes in our contract balances for the six months ended June 30, 2023 and 2022 (in thousands):
Contract Liabilities
Beginning balance, January 1, 2023$(45,866)
Equipment revenue recognized16,793 
Equipment revenue deferred(16,625)
Software revenue recognized9,041 
Software revenue deferred(8,875)
Government grant deferred income(944)
Government grant recognized*647 
Other deferred revenue(688)
Other deferred revenue recognized3,514 
Ending balance, June 30, 2023$(43,003)
Beginning balance, January 1, 2022$(7,461)
Fair value of acquired deferred revenue(51,245)
Equipment revenue recognized14,606 
Equipment revenue deferred(7,349)
Software revenue recognized8,737 
Software revenue deferred(9,067)
Government grant deferred income(2,972)
Government grant recognized*232 
Other deferred revenue(1,005)
Other deferred revenue recognized2,458 
Ending balance, June 30, 2022$(53,066)
____________________________
*The government grant deferred income is amortized over the life of the related depreciable asset as a reduction to depreciation expense.
Our contract liabilities are included in accrued liabilities or other long-term liabilities in our condensed consolidated balance sheet based on the expected timing of payments.    

As of June 30, 2023, revenue from remaining performance obligations is as follows:

17

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recognition Timing
(in millions)< 12 Months> 12 Months
Equipment deferred revenue$(15,605)$(790)
Software deferred revenue(8,001)(699)
Government grant deferred income*(1,451)(13,064)
Other deferred revenue**(2,591)(802)
Total $(27,648)$(15,355)
_________________________________
*The government grant deferred income is amortized over the life of the related depreciable asset as a reduction to depreciation expense.
**Other deferred revenue includes pump development programs, purchased training and extended warranty.
Note 6: Leases
    
    We determine if an arrangement is a lease at inception. Our operating lease assets are separately stated in operating lease right-of-use ("ROU") assets and our financing lease assets are included in other assets on our condensed consolidated balance sheets. Our lease liabilities are included in accrued liabilities and other long-term liabilities on our condensed consolidated balance sheets. We have elected not to recognize an ROU asset and lease liability for leases with terms of twelve months or less.

    Lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Most of our leases do not provide an implicit rate, therefore we use our incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term based on the information available at commencement date. Our lease ROU assets exclude lease incentives and initial direct costs incurred. Our lease terms include options to extend when it is reasonably certain that we will exercise that option. All of our leases have stated lease payments, which may include fixed rental increases. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
    
    Our leases are for corporate, research and development and sales and support offices, distribution facilities, device service centers and certain equipment. Our leases have original lease terms of one year to fifteen years, some of which include options to extend the leases for up to an additional five years. For all of our leases, we do not include optional periods of extension in our current lease terms because we determine the exercise of options to extend is not reasonably certain.
    
The following table presents the components of our lease cost (in thousands):
Three months ended
June 30,
Six months ended
June 30,
2023202220232022
Operating lease cost$6,043 $5,475 $12,193 $10,653 
Finance lease cost — interest31 28 60 57 
Finance lease cost — reduction of ROU asset254 170 479 340 
Short-term lease cost13 3 26 6 
Total lease cost $6,341 $5,676 $12,758 $11,056 
    
Interest expense on our finance leases is included in interest expense, net in our condensed consolidated statements of operations. The reduction of the operating and finance ROU assets is included as noncash lease expense in selling, general and administrative expenses in our condensed consolidated statements of operations.    

The following table presents the supplemental cash flow information related to our leases (in thousands):
18

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Six months ended
June 30,
20232022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$12,336 $12,887 
Operating cash flows from finance leases$60 $57 
Right-of-use assets obtained in exchange for lease obligations:
Operating leases$10,153 $3,829 
Finance leases$804 $38 
    
The following table presents the supplemental balance sheet information related to our operating leases (in thousands, except lease term and discount rate):
As of
June 30, 2023December 31, 2022
Operating leases
Operating lease right-of-use assets$76,028$74,864
Accrued liabilities$19,187$18,169
Other long-term liabilities59,87560,916
Total operating lease liabilities$79,062$79,085
Weighted-Average Remaining Lease Term
Operating leases5.9 years6.1 years
Weighted-Average Discount Rate
Operating leases4.32 %4.34 %
    
The following table presents the supplemental balance sheet information related to our finance leases (in thousands, except lease term and discount rate):
As of
June 30, 2023December 31, 2022
Finance leases
Finance lease right-of-use assets$3,019$2,598
Accrued liabilities$979$816
Other long-term liabilities2,1341,855
Total finance lease liabilities$3,113$2,671
Weighted-Average Remaining Lease Term
Finance leases4.3 years4.8 years
Weighted-Average Discount Rate
Finance leases4.77 %4.23 %
        
    
19

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of June 30, 2023, the maturities of our operating and finance lease liabilities for each of the next five years are approximately (in thousands):
Operating LeasesFinance Leases
Remainder of 2023$11,523 $601 
202420,540 907 
202515,225 686 
202613,451 563 
20279,831 248 
202814,452 189 
Thereafter3,868 236 
Total Lease Payments88,890 3,430 
Less imputed interest(9,828)(317)
Total$79,062 $3,113 

Note 7:    Net Loss Per Share
 
Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period plus dilutive securities. Dilutive securities include outstanding common stock options and unvested restricted stock units, less the number of shares that could have been purchased with the proceeds from the exercise of the options, using the treasury stock method. Options and restricted stock units that are anti-dilutive are not included in the treasury stock method calculation. Due to the net loss for the three and six months ended June 30, 2023 and 2022, any potentially dilutive common shares were not included in the computation of diluted earnings per share as they would have had an anti-dilutive effect; therefore, basic and diluted net loss per share are equal for each of the three and six months ended June 30, 2023 and 2022.

    The following table presents the calculation of net earnings per common share (“EPS”) — basic and diluted (in thousands, except per share data): 
 Three months ended
June 30,
Six months ended
June 30,
 2023202220232022
Net loss$(9,934)$(7,474)$(19,746)$(45,542)
Weighted-average number of common shares outstanding (basic)24,075 23,897 24,045 23,787 
Dilutive securities(1)
    
Weighted-average common and common equivalent shares outstanding (diluted)24,075 23,897 24,045 23,787 
EPS — basic$(0.41)$(0.31)$(0.82)$(1.91)
EPS — diluted$(0.41)$(0.31)$(0.82)$(1.91)
_______________________________
(1)    Due to the net loss for the three and six months ended June 30, 2023 and 2022, there are no potentially dilutive common shares included in the computation of diluted earnings per share.

Note 8:    Derivatives and Hedging Activities

Hedge Accounting and Hedging Program

     The purposes of our cash flow hedging programs are to manage the foreign currency exchange rate risk on forecasted revenues and expenses denominated in currencies other than the functional currency of the operating unit, and to manage floating interest rate risk associated with future interest payments on the variable-rate term loans issued in January 2022. We do not issue derivatives for trading or speculative purposes.
20

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

    To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. The derivative instruments we utilize, including various foreign exchange contracts and interest rate swaps, are designated and qualify as cash flow hedges. Our derivative instruments are recorded at fair value on the condensed consolidated balance sheets and are classified based on the instrument's maturity date. We record gains or losses from changes in the fair values of the derivative instruments as a component of other comprehensive income (loss) and we reclassify those gains or losses into earnings in the same line item associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. If the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related derivative instrument from accumulated other comprehensive loss into earnings immediately.

Foreign Currency Exchange Rate Risk

Foreign Exchange Forward Contracts

We enter into foreign exchange forward contracts to hedge a portion of our forecasted foreign currency-denominated revenues and expenses to minimize the effect of foreign exchange rate movements on the related cash flows. These contracts are agreements to buy or sell a quantity of a currency at a predetermined future date and at a predetermined exchange rate. Our foreign exchange forward contracts hedge exposures principally denominated in Mexican Pesos ("MXN"), Euros, Czech Koruna ("CZK"), Japanese Yen ("JPY"), Swedish Krona ("SEK"), Danish Krone ("DKK"), Chinese Renminbi ("CNH"), Canadian Dollar ("CAD"), U.S. Dollar ("USD") and Australian Dollar ("AUD") and have varying maturities with an average term of approximately eleven months. The total notional amount of these outstanding derivative contracts as of June 30, 2023 was $176.7 million, which included the notional equivalent of $45.9 million in MXN, $30.4 million in Euros, $8.6 million in CZK, $18.4 million in JPY, $7.9 million in CNH, $18.0 million in CAD, $13.2 million in AUD, $30.3 million in USD and $4.1 million in other foreign currencies, with terms currently through January 2025.

Cross-currency Par Forward Contracts

We have entered into cross-currency par forward contracts to hedge a portion of our Mexico forecasted expenses denominated in MXN. These contracts are agreements to exchange cash flows from one currency to another at specified intervals over the contract term with all exchanges occurring at the same predetermined rate. In November 2021, we entered into a one-year cross-currency par forward contract with a term from December 1, 2021 to December 1, 2022. The total notional amount of this outstanding derivative as of June 30, 2022 was approximately 208.2 million MXN. This derivative instrument matured in equal monthly amounts at a fixed forward rate of 21.60 MXN/USD.

Floating Interest Rate Risk

In November 2021, in anticipation of entering into the new senior secured credit facilities in January 2022, which includes a variable-rate term loan A and a variable-rate term loan B (see Note 17: Long-Term Debt), we entered into two forward-starting interest rate swaps. In February 2022, certain terms under the agreements were amended to reflect the transition from LIBOR to the Secured Overnight Financing Rate ("SOFR"), an alternative reference rate. Under the interest rate swap agreements, we exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount. Effective March 30, 2022, the term loan A swap, as amended, has an initial notional amount of $300.0 million, reducing to $150.0 million evenly on a quarterly basis excluding its final maturity on March 30, 2027. We will pay a fixed rate of 1.32% and will receive the greater of 3-months USD SOFR or (0.15)%. Effective March 30, 2022, the term loan B swap, as amended, has an initial notional amount of $750.0 million, reducing to $46.9 million evenly on a quarterly basis excluding its final maturity on March 30, 2026. We will pay a fixed rate of 1.17% and will receive the greater of 3-months USD SOFR or 0.35%.

In June 2023, we entered into an additional interest rate swap that hedges both term loan A and term loan B interest payments. The total notional amount of the swap is $300 million. The hedge matures on June 30, 2028. We will pay a fixed rate of 3.88% and will receive 3-months USD SOFR.

These swaps effectively convert the relevant portion of the floating-rate term loans to fixed rates.
    
The following table presents the fair values of our derivative instruments included within the Condensed Consolidated Balance Sheets (in thousands):
21

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Derivatives Designated as Cash Flow Hedging Instruments
Condensed Consolidated Balance Sheet LocationForeign Exchange ContractsInterest Rate SwapsGross Derivatives
As of June 30, 2023
Prepaid expenses and other current assets$11,533 $31,702 $43,235 
Other assets897 17,229 18,126 
Total assets$12,430 $48,931 $61,361 
Accrued liabilities$3,806 $ $3,806 
Other long-term liabilities105  105 
Total liabilities$3,911 $ $3,911 
As of December 31, 2022
Prepaid expenses and other current assets$4,860 $28,431 $33,291 
Other assets94 26,753 26,847 
Total assets$4,954 $55,184 $60,138 
Accrued liabilities$1,847 $ $1,847 
Other long-term liabilities167  167 
Total liabilities$2,014 $ $2,014 


We recognized the following gains on our derivative instruments designated as cash flow hedges in other comprehensive income before reclassifications to net loss (in thousands):

Gain Recognized in Other Comprehensive Income
Three months ended
June 30,
Six months ended
June 30,
2023202220232022
Derivatives designated as cash flow hedging instruments:
Foreign exchange contracts$6,051 $5,225 $8,503 $8,337 
Interest rate swaps11,324 9,146 8,740 39,197 
Total derivatives designated as cash flow hedging instruments$17,375 $14,371 $17,243 $47,534 

The following table presents the effects of our derivative instruments designated as cash flow hedges on the Condensed Consolidated Statements of Operations (in thousands):
22

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Gain (Loss) Reclassified From Accumulated Other Comprehensive Loss into Income
Three months ended
June 30,
Six months ended
June 30,
Location of Gain (Loss) Recognized in Income2023202220232022
Derivatives designated as cash flow hedging instruments:
Foreign exchange contractsTotal revenues$473 $1,813 $(1,448)$4,356 
Foreign exchange contractsCost of goods sold2,316 1,563 3,816 1,049 
Foreign exchange contractsOther expense, net(1)  229  
Foreign exchange contractsInterest expense(2) 5 13 255 
Interest rate swapsInterest expense7,625 (1,524)14,993 (1,524)
Total derivatives designated as cash flow hedging instruments$10,414 $1,857 $17,603 $4,136 
_______________________________
(1)    Represents location of gain reclassified from accumulated other comprehensive loss into income as a result of ineffectiveness.
(2)    Represents location of gain reclassified from accumulated other comprehensive loss into income as a result of forecasted transactions no longer probable of occurring.

As of June 30, 2023, we expect an estimated $7.7 million in deferred gains on the outstanding foreign exchange contracts and an estimated $32.7 million in deferred gains on the interest rate swaps will be reclassified from accumulated other comprehensive loss to net income during the next 12 months concurrent with the underlying hedged transactions also being reported in net income.    

Note 9:    Fair Value Measurements
 
    Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There are three levels of inputs that may be used to measure fair value:

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.

Contingent Earn-out Liabilities

On January 6, 2022, we acquired Smiths Medical with a combination of cash consideration and share consideration issued at closing. Total consideration for the acquisition includes a potential earn-out payment of $100.0 million in cash contingent on our common stock achieving certain Price Targets from the closing date to either the third or fourth anniversary of closing (see Note 3: Acquisitions for additional information) and provided Smiths beneficially owns at least 50.0% of the shares of common stock issued at closing at the time the Price Target is achieved. The initial estimated fair value of the earn-out was determined to be $53.5 million. The initial fair value of the earn-out was determined using a Monte Carlo simulation model. The model utilized several assumptions including volatility and the risk-free interest rate. The assumed volatility is based on the average of the historical volatility of our common stock price and the implied volatility of certain at-the-money traded options. The risk-free interest rate is equal to the yield on U.S. Treasury securities at constant maturity for the period commensurate with the term of the earn-out. At each reporting date subsequent to the acquisition, we remeasure the earn-out liability and recognize any changes in its fair value in our consolidated statements of operations. If the probability of achieving the Price Targets during their respective measurement periods is significantly greater than initially anticipated, the realization of an additional liability and related expense will have a significant impact on our consolidated financial statements in the period recognized. As of June 30, 2023, the estimated fair value of the contingent earn-out is $22.6 million.

23

ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In November 2021, we acquired a small foreign infusion systems supplier. Total consideration for the acquisition included a potential earn-out payment of up to $2.5 million, consisting of (i) a cash payment of $1.0 million contingent on the achievement of certain revenue targets for the annual period ending December 31, 2022 and, separately, (ii) a cash payment of $1.5 million contingent on certain product-related regulatory certifications obtained by May 26, 2024. As of December 31, 2022, the measurement period related to (i) above ended, and based on the actual revenue achieved during the measurement period we determined that the fair value of the contingent earn-out was zero as the minimum threshold for earning the earn-out was not met. As of June 30, 2023, the estimated fair value for the contingent earn-out related to certain product-related regulatory certifications was estimated to be $1.5 million.

In August 2021, we entered into an agreement with one of our international distributors whereby that distributor would not compete with us in a specific territory for a three-year period that will end in September 2024. The terms of the agreement include a contingent earn-out payment. The contingent earn-out payment shall not exceed $6.0 million, which will be earned based on certain revenue targets over a twelve-month measurement period determined by the highest four consecutive quarters commencing over a two-year period starting on the closing date of the agreement and provided that the distributor is in compliance with its obligations under the agreement. As of June 30, 2023, the estimated fair value of the contingent earn-out is $4.3 million. The estimated fair value of the contingent earn-out is calculated using a probability-weighted cash flow model based on historical revenue streams and the likelihood that the revenue targets will be met.

    Our contingent earn-out liabilities are separately stated on our condensed consolidated balance sheets.

The following tables provide a reconciliation of the Level 3 earn-out liabilities measured at estimated fair value (in thousands):
Earn-out Liability
Accrued balance, January 1, 2023$25,572 
Change in fair value of earn-out (included in income from operations as a separate line item)(1)
(700)
Currency translation