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
•
Needlefree connector products
◦
MicroClave
®
and MicroClave Clear
®
◦
Neutron
®
◦
NanoClave
®
◦
Clave
®
◦
SwabCap
®
•
Custom infusion sets
•
Tego
®
needlefree hemodialysis connector
Critical Care
•
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
|
|
2016
|
|
2015
|
|
2014
|
Infusion therapy
|
|
72
|
%
|
|
72
|
%
|
|
70
|
%
|
Critical care
|
|
14
|
%
|
|
16
|
%
|
|
18
|
%
|
Oncology
|
|
14
|
%
|
|
12
|
%
|
|
12
|
%
|
|
|
100
|
%
|
|
100
|
%
|
|
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."
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.
Acquisitions
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.
Consolidated Results of Operations
We present summarized income statement data in Item 6. Selected Financial Data. The following table shows, for the three most recent years, the percentages of each income statement caption in relation to total revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Revenues
|
|
|
2016
|
|
2015
|
|
2014
|
Revenue
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Other
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Total revenues
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Gross margin
|
|
53
|
%
|
|
53
|
%
|
|
49
|
%
|
Selling, general and administrative expenses
|
|
24
|
%
|
|
24
|
%
|
|
29
|
%
|
Research and development expenses
|
|
3
|
%
|
|
5
|
%
|
|
6
|
%
|
Restructuring and transaction expense
|
|
4
|
%
|
|
2
|
%
|
|
1
|
%
|
Gain on sale of building
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Legal settlements
|
|
—
|
%
|
|
1
|
%
|
|
—
|
%
|
Impairment of assets held for sale
|
|
—
|
%
|
|
1
|
%
|
|
—
|
%
|
Total operating expenses
|
|
31
|
%
|
|
33
|
%
|
|
36
|
%
|
Income from operations
|
|
22
|
%
|
|
20
|
%
|
|
13
|
%
|
Bargain Purchase Gain
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Other income, net
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Income before income taxes
|
|
22
|
%
|
|
20
|
%
|
|
13
|
%
|
Income taxes
|
|
6
|
%
|
|
7
|
%
|
|
4
|
%
|
Net income
|
|
16
|
%
|
|
13
|
%
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
% increase (decrease) 2016 over 2015
|
|
% increase 2015 over 2014
|
|
2016
|
|
2015
|
|
2014
|
|
|
Direct
|
$
|
162.5
|
|
|
$
|
132.6
|
|
|
$
|
114.7
|
|
|
22.5
|
%
|
|
15.6
|
%
|
OEM
|
110.1
|
|
|
112.1
|
|
|
101.6
|
|
|
(1.8
|
)%
|
|
10.3
|
%
|
Total Infusion Therapy Revenue
|
$
|
272.6
|
|
|
$
|
244.7
|
|
|
$
|
216.3
|
|
|
11.4
|
%
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
% (decrease) increase 2016 over 2015
|
|
% decrease 2015 over 2014
|
|
2016
|
|
2015
|
|
2014
|
|
|
Direct
|
$
|
53.5
|
|
|
$
|
54.3
|
|
|
$
|
55.0
|
|
|
(1.5
|
)%
|
|
(1.3
|
)%
|
OEM
|
0.1
|
|
|
—
|
|
|
—
|
|
|
100.0
|
%
|
|
—
|
%
|
Total Critical Care Revenue
|
$
|
53.6
|
|
|
$
|
54.3
|
|
|
$
|
55.0
|
|
|
(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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
% increase 2016 over 2015
|
|
% increase 2015 over 2014
|
|
2016
|
|
2015
|
|
2014
|
|
|
Direct
|
$
|
37.6
|
|
|
$
|
26.9
|
|
|
$
|
24.0
|
|
|
39.8
|
%
|
|
12.1
|
%
|
OEM
|
14.7
|
|
|
14.6
|
|
|
12.7
|
|
|
0.7
|
%
|
|
15.0
|
%
|
Total Oncology Revenue
|
$
|
52.3
|
|
|
$
|
41.5
|
|
|
$
|
36.7
|
|
|
26.0
|
%
|
|
13.1
|
%
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
% increase 2016 over 2015
|
|
% decrease 2015 over 2014
|
|
2016
|
|
2015
|
|
2014
|
|
|
SG&A
|
$
|
89.4
|
|
|
$
|
83.2
|
|
|
$
|
88.9
|
|
|
7.5
|
%
|
|
(6.4
|
)%
|
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.
Research and Development ("R&D") Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
% decrease 2016 over 2015
|
|
% decrease 2015 over 2014
|
|
2016
|
|
2015
|
|
2014
|
|
|
R&D
|
$
|
13.0
|
|
|
$
|
15.7
|
|
|
$
|
18.3
|
|
|
(17.2
|
)%
|
|
(14.2
|
)%
|
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 Cogent
TM
2-in-1 hemodynamic monitoring system, which received FDA 510(k) clearance during 2016.
Restructuring and Strategic Transaction Expenses
Restructuring and strategic transaction expenses were
$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.
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
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
|
|
$
|
(23,361
|
)
|
|
$
|
(12,984
|
)
|
|
$
|
(16,604
|
)
|
|
$
|
(10,377
|
)
|
|
$
|
3,620
|
|
(1)
|
Proceeds from sale of assets
|
|
—
|
|
|
3,592
|
|
|
5
|
|
|
(3,592
|
)
|
|
3,587
|
|
(2)
|
Proceeds from the disposal of assets held-for-sale, net
|
|
3,268
|
|
|
—
|
|
|
—
|
|
|
3,268
|
|
|
—
|
|
(3)
|
Intangible asset additions
|
|
(1,192
|
)
|
|
(951
|
)
|
|
(989
|
)
|
|
(241
|
)
|
|
38
|
|
|
Business acquisitions, net of cash acquired
|
|
(2,584
|
)
|
|
(56,786
|
)
|
|
—
|
|
|
54,202
|
|
|
(56,786
|
)
|
(4)
|
Proceeds from sale of assets acquired in a business combination
|
|
—
|
|
|
28,970
|
|
|
—
|
|
|
(28,970
|
)
|
|
28,970
|
|
(5)
|
Purchases of investment securities
|
|
(118,384
|
)
|
|
(56,137
|
)
|
|
(93,588
|
)
|
|
(62,247
|
)
|
|
37,451
|
|
(6)
|
Proceeds from sale of investment securities
|
|
158,534
|
|
|
83,054
|
|
|
89,426
|
|
|
75,480
|
|
|
(6,372
|
)
|
(7)
|
Net cash provided by (used in) investing activities
|
|
$
|
16,281
|
|
|
$
|
(11,242
|
)
|
|
$
|
(21,750
|
)
|
|
$
|
27,523
|
|
|
$
|
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.
(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
|
|
$
|
17,346
|
|
|
$
|
15,042
|
|
|
$
|
16,998
|
|
|
$
|
2,304
|
|
|
$
|
(1,956
|
)
|
(1)
|
Proceeds from employee stock purchase plan
|
|
2,361
|
|
|
2,162
|
|
|
2,485
|
|
|
199
|
|
|
(323
|
)
|
|
Purchase of treasury stock
|
|
(17,235
|
)
|
|
(1,523
|
)
|
|
(5,836
|
)
|
|
(15,712
|
)
|
|
4,313
|
|
(2)
|
Net cash provided by financing activities
|
|
$
|
2,472
|
|
|
$
|
15,681
|
|
|
$
|
13,647
|
|
|
$
|
(13,209
|
)
|
|
$
|
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.
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
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Contractual Obligations
|
|
Total
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
Operating leases
|
|
$
|
1,737
|
|
|
$
|
554
|
|
|
$
|
337
|
|
|
$
|
333
|
|
|
$
|
338
|
|
|
$
|
175
|
|
Warehouse service agreements
|
|
4,373
|
|
|
1,573
|
|
|
1,568
|
|
|
1,232
|
|
|
—
|
|
|
—
|
|
Purchase obligations
|
|
4,829
|
|
|
4,829
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other contractual obligations
|
|
3
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
10,942
|
|
|
$
|
6,959
|
|
|
$
|
1,905
|
|
|
$
|
1,565
|
|
|
$
|
338
|
|
|
$
|
175
|
|
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.
|
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;
|
|
|
•
|
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 8. Financial Statements and Supplementary Data.
[THE REMAINDER OF THIS PAGE IS INTENIONALLY LEFT BLANK]
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
|
|
ICU MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value data)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
ASSETS
|
|
|
|
CURRENT ASSETS:
|
|
|
|
Cash and cash equivalents
|
$
|
445,082
|
|
|
$
|
336,164
|
|
Short-term investment securities
|
—
|
|
|
41,233
|
|
TOTAL CASH, CASH EQUIVALENTS AND INVESTMENT SECURITIES
|
445,082
|
|
|
377,397
|
|
Accounts receivable, net of allowance for doubtful accounts of $1,073 and $1,101 at December 31, 2016 and 2015, respectively
|
56,161
|
|
|
57,847
|
|
Inventories
|
49,264
|
|
|
43,632
|
|
Prepaid income taxes
|
11,235
|
|
|
14,366
|
|
Prepaid expenses and other current assets
|
7,355
|
|
|
7,631
|
|
Assets held-for-sale
|
—
|
|
|
4,134
|
|
TOTAL CURRENT ASSETS
|
569,097
|
|
|
505,007
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, net
|
85,696
|
|
|
74,320
|
|
GOODWILL
|
5,577
|
|
|
6,463
|
|
INTANGIBLE ASSETS, net
|
22,383
|
|
|
23,936
|
|
DEFERRED INCOME TAXES
|
21,935
|
|
|
17,099
|
|
TOTAL ASSETS
|
$
|
704,688
|
|
|
$
|
626,825
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
Accounts payable
|
$
|
14,641
|
|
|
$
|
13,670
|
|
Accrued liabilities
|
25,896
|
|
|
28,948
|
|
TOTAL CURRENT LIABILITIES
|
40,537
|
|
|
42,618
|
|
|
|
|
|
LONG-TERM LIABILITIES
|
1,107
|
|
|
1,476
|
|
DEFERRED INCOME TAXES
|
1,370
|
|
|
1,372
|
|
INCOME TAX LIABILITY
|
1,519
|
|
|
1,488
|
|
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
|
1,633
|
|
|
1,608
|
|
Additional paid-in capital
|
162,828
|
|
|
145,125
|
|
Treasury stock, at cost
|
(14
|
)
|
|
—
|
|
Retained earnings
|
516,980
|
|
|
453,896
|
|
Accumulated other comprehensive loss
|
(21,272
|
)
|
|
(20,758
|
)
|
TOTAL STOCKHOLDERS' EQUITY
|
660,155
|
|
|
579,871
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
704,688
|
|
|
$
|
626,825
|
|
The accompanying notes are an integral part of these consolidated financial statements.
ICU MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
REVENUES:
|
|
|
|
|
|
|
|
Net sales
|
$
|
379,339
|
|
|
$
|
341,254
|
|
|
$
|
308,770
|
|
Other
|
33
|
|
|
414
|
|
|
490
|
|
TOTAL REVENUE
|
379,372
|
|
|
341,668
|
|
|
309,260
|
|
COST OF GOODS SOLD
|
177,974
|
|
|
160,871
|
|
|
157,859
|
|
GROSS PROFIT
|
201,398
|
|
|
180,797
|
|
|
151,401
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
Selling, general and administrative
|
89,426
|
|
|
83,216
|
|
|
88,939
|
|
Research and development
|
12,955
|
|
|
15,714
|
|
|
18,332
|
|
Restructuring and strategic transaction
|
15,348
|
|
|
8,451
|
|
|
5,093
|
|
Gain on sale of building
|
—
|
|
|
(1,086
|
)
|
|
—
|
|
Legal settlements, net
|
—
|
|
|
1,798
|
|
|
—
|
|
Impairment of assets held for sale
|
728
|
|
|
4,139
|
|
|
—
|
|
TOTAL OPERATING EXPENSES
|
118,457
|
|
|
112,232
|
|
|
112,364
|
|
INCOME FROM OPERATIONS
|
82,941
|
|
|
68,565
|
|
|
39,037
|
|
BARGAIN PURCHASE GAIN
|
1,456
|
|
|
—
|
|
|
—
|
|
OTHER INCOME, NET
|
767
|
|
|
1,134
|
|
|
755
|
|
INCOME BEFORE INCOME TAXES
|
85,164
|
|
|
69,699
|
|
|
39,792
|
|
PROVISION FOR INCOME TAXES
|
(22,080
|
)
|
|
(24,714
|
)
|
|
(13,457
|
)
|
NET INCOME
|
$
|
63,084
|
|
|
$
|
44,985
|
|
|
$
|
26,335
|
|
NET INCOME PER SHARE
|
|
|
|
|
|
|
|
Basic
|
$
|
3.90
|
|
|
$
|
2.84
|
|
|
$
|
1.72
|
|
Diluted
|
$
|
3.66
|
|
|
$
|
2.73
|
|
|
$
|
1.68
|
|
WEIGHTED AVERAGE NUMBER OF SHARES
|
|
|
|
|
|
|
|
Basic
|
16,168
|
|
|
15,848
|
|
|
15,282
|
|
Diluted
|
17,254
|
|
|
16,496
|
|
|
15,647
|
|
The accompanying notes are an integral part of these consolidated financial statements.
ICU MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Net income
|
$
|
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
|
(514
|
)
|
|
(11,204
|
)
|
|
(11,747
|
)
|
Comprehensive income
|
$
|
62,570
|
|
|
$
|
33,781
|
|
|
$
|
14,588
|
|
The accompanying notes are an integral part of these consolidated financial statements.
ICU MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
Shares
|
|
Amount
|
|
Paid-In
Capital
|
|
Treasury
Stock
|
|
Retained
Earnings
|
|
Comprehensive
Income (Loss)
|
|
Total
|
Balance, December 31, 2013
|
|
15,102
|
|
|
$
|
1,510
|
|
|
$
|
78,495
|
|
|
$
|
(49
|
)
|
|
$
|
382,576
|
|
|
$
|
2,193
|
|
|
$
|
464,725
|
|
Issuance of restricted stock and exercise of stock options, including excess income tax benefits of $5,700
|
|
544
|
|
|
48
|
|
|
18,528
|
|
|
4,122
|
|
|
—
|
|
|
—
|
|
|
22,698
|
|
Purchase of treasury stock, treasury stock acquired in lieu of cash payment on stock option exercises and income tax withholding obligations
|
|
(98
|
)
|
|
—
|
|
|
285
|
|
|
(6,121
|
)
|
|
—
|
|
|
—
|
|
|
(5,836
|
)
|
Proceeds from employee stock purchase plan
|
|
47
|
|
|
1
|
|
|
436
|
|
|
2,048
|
|
|
—
|
|
|
—
|
|
|
2,485
|
|
Stock compensation
|
|
—
|
|
|
—
|
|
|
9,592
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,592
|
|
Foreign currency translation adjustment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,747
|
)
|
|
(11,747
|
)
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26,335
|
|
|
—
|
|
|
26,335
|
|
Balance, December 31, 2014
|
|
15,595
|
|
|
1,559
|
|
|
107,336
|
|
|
—
|
|
|
408,911
|
|
|
(9,554
|
)
|
|
508,252
|
|
Issuance of restricted stock and exercise of stock options, including excess income tax benefits of $9,330
|
|
475
|
|
|
46
|
|
|
22,715
|
|
|
1,611
|
|
|
—
|
|
|
—
|
|
|
24,372
|
|
Purchase of treasury stock, treasury stock acquired in lieu of cash payment on stock option exercises and income tax withholding obligations
|
|
(18
|
)
|
|
—
|
|
|
88
|
|
|
(1,611
|
)
|
|
|
|
|
|
|
|
(1,523
|
)
|
Proceeds from employee stock purchase plan
|
|
34
|
|
|
3
|
|
|
2,159
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,162
|
|
Stock compensation
|
|
—
|
|
|
—
|
|
|
12,827
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,827
|
|
Foreign currency translation adjustment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,204
|
)
|
|
(11,204
|
)
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
44,985
|
|
|
—
|
|
|
44,985
|
|
Balance, December 31, 2015
|
|
16,086
|
|
|
1,608
|
|
|
145,125
|
|
|
—
|
|
|
453,896
|
|
|
(20,758
|
)
|
|
579,871
|
|
Issuance of restricted stock and exercise of stock options
|
|
416
|
|
|
22
|
|
|
103
|
|
|
17,221
|
|
|
—
|
|
|
—
|
|
|
17,346
|
|
Purchase of treasury stock, treasury stock acquired in lieu of cash payment on stock option exercises and income tax withholding obligations
|
|
(195
|
)
|
|
—
|
|
|
—
|
|
|
(17,235
|
)
|
|
|
|
|
|
(17,235
|
)
|
Proceeds from employee stock purchase plan
|
|
31
|
|
|
3
|
|
|
2,358
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,361
|
|
Stock compensation
|
|
—
|
|
|
—
|
|
|
15,242
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,242
|
|
Foreign currency translation adjustment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(514
|
)
|
|
(514
|
)
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
63,084
|
|
|
—
|
|
|
63,084
|
|
Balance, December 31, 2016
|
|
16,338
|
|
|
$
|
1,633
|
|
|
$
|
162,828
|
|
|
$
|
(14
|
)
|
|
$
|
516,980
|
|
|
$
|
(21,272
|
)
|
|
$
|
660,155
|
|
The accompanying notes are an integral part of these consolidated financial statements.
ICU MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net income
|
$
|
63,084
|
|
|
$
|
44,985
|
|
|
$
|
26,335
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
19,050
|
|
|
18,073
|
|
|
19,447
|
|
Provision for doubtful accounts
|
—
|
|
|
54
|
|
|
34
|
|
Provision for warranty and returns
|
559
|
|
|
52
|
|
|
(360
|
)
|
Stock compensation
|
15,242
|
|
|
12,827
|
|
|
9,592
|
|
Loss (gain) on disposal of property and equipment
|
59
|
|
|
(1,106
|
)
|
|
8
|
|
Bond premium amortization
|
1,355
|
|
|
1,670
|
|
|
2,188
|
|
Impairment of assets held-for-sale
|
728
|
|
|
4,139
|
|
|
—
|
|
Bargain purchase gain
|
(1,456
|
)
|
|
—
|
|
|
—
|
|
Other
|
75
|
|
|
—
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
744
|
|
|
(20,515
|
)
|
|
4,912
|
|
Inventories
|
(5,501
|
)
|
|
(8,337
|
)
|
|
(3,836
|
)
|
Prepaid expenses and other assets
|
(3,028
|
)
|
|
(1,832
|
)
|
|
1,970
|
|
Accounts payable
|
(463
|
)
|
|
3,118
|
|
|
(621
|
)
|
Accrued liabilities
|
(1,221
|
)
|
|
9,454
|
|
|
2,344
|
|
Income taxes, including excess tax benefits and deferred income taxes
|
714
|
|
|
1,613
|
|
|
4,327
|
|
Net cash provided by operating activities
|
89,941
|
|
|
64,195
|
|
|
66,340
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
(23,361
|
)
|
|
(12,984
|
)
|
|
(16,604
|
)
|
Proceeds from sale of assets
|
—
|
|
|
3,592
|
|
|
5
|
|
Proceeds from the disposal of assets held-for-sale, net
|
3,268
|
|
|
—
|
|
|
—
|
|
Intangible asset additions
|
(1,192
|
)
|
|
(951
|
)
|
|
(989
|
)
|
Business acquisitions, net of cash acquired
|
(2,584
|
)
|
|
(56,786
|
)
|
|
—
|
|
Proceeds from sale of assets acquired in a business acquisition
|
—
|
|
|
28,970
|
|
|
—
|
|
Purchases of investment securities
|
(118,384
|
)
|
|
(56,137
|
)
|
|
(93,588
|
)
|
Proceeds from sale of investment securities
|
158,534
|
|
|
83,054
|
|
|
89,426
|
|
Net cash provided by (used in) investing activities
|
16,281
|
|
|
(11,242
|
)
|
|
(21,750
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
17,346
|
|
|
15,042
|
|
|
16,998
|
|
Proceeds from employee stock purchase plan
|
2,361
|
|
|
2,162
|
|
|
2,485
|
|
Purchase of treasury stock
|
(17,235
|
)
|
|
(1,523
|
)
|
|
(5,836
|
)
|
Net cash provided by financing activities
|
2,472
|
|
|
15,681
|
|
|
13,647
|
|
Effect of exchange rate changes on cash
|
224
|
|
|
(8,282
|
)
|
|
(8,447
|
)
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
108,918
|
|
|
60,352
|
|
|
49,790
|
|
CASH AND CASH EQUIVALENTS, beginning of period
|
336,164
|
|
|
275,812
|
|
|
226,022
|
|
CASH AND CASH EQUIVALENTS, end of period
|
$
|
445,082
|
|
|
$
|
336,164
|
|
|
$
|
275,812
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
Cash paid during the year for income taxes
|
$
|
21,101
|
|
|
$
|
22,998
|
|
|
$
|
8,668
|
|
The accompanying notes are an integral part of these consolidated financial statements.
ICU MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
|
|
|
|
|
|
Accrued liabilities for property and equipment
|
$
|
1,566
|
|
|
$
|
182
|
|
|
$
|
789
|
|
|
|
|
|
|
|
Detail of acquisitions:
|
|
|
|
|
|
Fair value of assets acquired
|
$
|
3,306
|
|
|
$
|
60,693
|
|
|
$
|
—
|
|
Cash paid for acquisitions, net of cash acquired
|
(2,584
|
)
|
|
(56,786
|
)
|
|
—
|
|
Bargain purchase gain
|
(1,456
|
)
|
|
—
|
|
|
—
|
|
Liabilities assumed
|
$
|
734
|
|
|
$
|
(3,907
|
)
|
|
$
|
—
|
|
The accompanying notes are an integral part of these consolidated financial statements.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1:
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):
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Raw material
|
$
|
28,435
|
|
|
$
|
24,681
|
|
Work in process
|
4,415
|
|
|
4,282
|
|
Finished goods
|
16,414
|
|
|
14,669
|
|
Total
|
$
|
49,264
|
|
|
$
|
43,632
|
|
Property and Equipment
Property and equipment consist of the following at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Machinery and equipment
|
$
|
96,536
|
|
|
$
|
96,909
|
|
Land, building and building improvements
|
63,524
|
|
|
56,716
|
|
Molds
|
39,014
|
|
|
36,436
|
|
Computer equipment and software
|
26,458
|
|
|
23,346
|
|
Furniture and fixtures
|
3,243
|
|
|
3,638
|
|
Construction in progress
|
15,180
|
|
|
6,003
|
|
Total property and equipment, cost
|
243,955
|
|
|
223,048
|
|
Accumulated depreciation
|
(158,259
|
)
|
|
(148,728
|
)
|
Net property and equipment
|
$
|
85,696
|
|
|
$
|
74,320
|
|
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
|
15 - 30 years
|
Building improvements
|
15 years
|
Machinery and equipment
|
2 - 10 years
|
Furniture, fixtures and molds
|
2 - 5 years
|
Computer equipment and software
|
3 - 5 years
|
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):
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
Total
|
Balance as of December 31, 2014
|
|
$
|
1,478
|
|
Goodwill acquired
|
|
4,985
|
|
Other
|
|
—
|
|
Balance as of December 31, 2015
|
|
6,463
|
|
Goodwill acquired
|
|
—
|
|
Other
(1)
|
|
(886
|
)
|
Balance as of December 31, 2016
|
|
$
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
December 31, 2016
|
|
|
Amortization
Life in Years
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
Patents
|
|
10
|
|
$
|
14,423
|
|
|
$
|
9,326
|
|
|
$
|
5,097
|
|
MCDA contract *
|
|
10
|
|
8,571
|
|
|
8,571
|
|
|
—
|
|
Customer contracts
|
|
9
|
|
5,319
|
|
|
4,512
|
|
|
807
|
|
Non-contractual customer relationships
|
|
15
|
|
7,080
|
|
|
590
|
|
|
6,490
|
|
Trademarks
|
|
4
|
|
425
|
|
|
425
|
|
|
—
|
|
Trade name
|
|
15
|
|
7,310
|
|
|
609
|
|
|
6,701
|
|
Developed technology
|
|
10
|
|
3,797
|
|
|
509
|
|
|
3,288
|
|
Total
|
|
|
|
$
|
46,925
|
|
|
$
|
24,542
|
|
|
$
|
22,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
December 31, 2015
|
|
|
Amortization
Life in Years
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
Patents
|
|
10
|
|
$
|
13,308
|
|
|
$
|
8,302
|
|
|
$
|
5,006
|
|
MCDA contract *
|
|
10
|
|
8,571
|
|
|
8,571
|
|
|
—
|
|
Customer contracts
|
|
9
|
|
5,319
|
|
|
4,133
|
|
|
1,186
|
|
Non-contractual customer relationships
|
|
15
|
|
7,080
|
|
|
118
|
|
|
6,962
|
|
Trademarks
|
|
4
|
|
425
|
|
|
425
|
|
|
—
|
|
Trade name
|
|
15
|
|
7,310
|
|
|
122
|
|
|
7,188
|
|
Developed technology
|
|
10
|
|
3,686
|
|
|
92
|
|
|
3,594
|
|
Total
|
|
|
|
$
|
45,699
|
|
|
$
|
21,763
|
|
|
$
|
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):
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
2017
|
|
$
|
2,719
|
|
2018
|
|
2,560
|
|
2019
|
|
2,147
|
|
2020
|
|
2,008
|
|
2021
|
|
1,925
|
|
Thereafter
|
|
11,024
|
|
Total
|
|
$
|
22,383
|
|
Long-Lived Assets
We periodically evaluate the recoverability of long-lived assets whenever events and changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. When indicators of impairment are present, the carrying values of the assets are evaluated in relation to the operating performance and future undiscounted cash flows of the underlying business. The net book value of the underlying asset is adjusted to fair value if the sum of the expected discounted cash flows is less than book value. Fair values are based on estimates of market prices and assumptions concerning the amount and timing of estimated future cash flows and discount rates, reflecting varying degrees of perceived risk.
Investment Securities
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.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Foreign Currency
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
ICU MEDICAL, INC. AND SUBSIDIARIES
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
(in thousands, except per share data)
|
|
|
2016
|
|
2015
|
|
2014
|
Net income
|
|
$
|
63,084
|
|
|
$
|
44,985
|
|
|
$
|
26,335
|
|
Weighted average number of common shares outstanding (basic)
|
|
16,168
|
|
|
15,848
|
|
|
15,282
|
|
Dilutive securities
(1)
|
|
1,086
|
|
|
648
|
|
|
365
|
|
Weighted average common and common equivalent shares outstanding (diluted)
|
|
17,254
|
|
|
16,496
|
|
|
15,647
|
|
EPS - basic
|
|
$
|
3.90
|
|
|
$
|
2.84
|
|
|
$
|
1.72
|
|
EPS - diluted
|
|
$
|
3.66
|
|
|
$
|
2.73
|
|
|
$
|
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.
ICU MEDICAL, INC. AND SUBSIDIARIES
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
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
charge of
$4.2 million
for employee termination benefits, government incentive repayments and other associated costs; (ii) an agreement with Dr. Lopez, a member of our Board of Directors and a former employee in our research and development department, pursuant to which we bought out Dr. Lopez's right to employment under his then-existing employment agreement-the
$1.9 million
buy-out, including payroll taxes, will be paid in equal monthly installments until December 2020 and payments that will exceed one year have been accrued under long-term liabilities in our consolidated balance sheet; and (iii) the reorganization of our corporate infrastructure, resulting in one-time employee termination benefits and other associated costs and corporate restructuring actions resulted in a total charge of
$0.6 million
.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Balance December 31, 2014
|
|
Charges incurred
|
|
Payments
|
|
Accrued Balance December 31, 2015
|
|
Charges incurred
|
|
Payments
|
|
Currency Translation
|
|
Other Adjustments
|
|
Accrued Balance December 31, 2016
|
Severance pay and benefits
|
$
|
1,358
|
|
|
$
|
2,582
|
|
|
$
|
(1,435
|
)
|
|
$
|
2,505
|
|
|
$
|
25
|
|
|
$
|
(2,683
|
)
|
|
$
|
77
|
|
|
$
|
129
|
|
|
$
|
53
|
|
Government incentive repayment
|
—
|
|
|
1,884
|
|
|
—
|
|
|
1,884
|
|
|
—
|
|
|
(1,769
|
)
|
|
57
|
|
|
(172
|
)
|
|
—
|
|
Employment agreement buyout
|
—
|
|
|
1,905
|
|
|
(60
|
)
|
|
1,845
|
|
|
—
|
|
|
(368
|
)
|
|
—
|
|
|
—
|
|
|
1,477
|
|
Other corporate restructuring
|
11
|
|
|
305
|
|
|
(11
|
)
|
|
305
|
|
|
168
|
|
|
(468
|
)
|
|
—
|
|
|
(5
|
)
|
|
—
|
|
Retention and closure expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
581
|
|
|
(581
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
1,369
|
|
|
$
|
6,676
|
|
|
$
|
(1,506
|
)
|
|
$
|
6,539
|
|
|
$
|
774
|
|
|
$
|
(5,869
|
)
|
|
$
|
134
|
|
|
$
|
(48
|
)
|
|
$
|
1,530
|
|
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).
ICU MEDICAL, INC. AND SUBSIDIARIES
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
|
$
|
56,786
|
|
|
|
Allocation of the Purchase Price:
|
|
Net assets sold to Excelsior Medical, LLC
|
$
|
28,970
|
|
Prepaid expenses and other current assets
|
254
|
|
Deferred tax asset/liabilities
|
4,426
|
|
Property and equipment
|
3,982
|
|
Identifiable intangible assets
(1)
|
18,076
|
|
Goodwill
|
4,985
|
|
Assumed liabilities
|
(3,907
|
)
|
Net Assets Acquired
|
$
|
56,786
|
|
______________________________
(1)
Identifiable intangible assets included
$7.1 million
of non-contractual customer relationships,
$3.7 million
of developed technology and
$7.3 million
of trade name. The weighted-average amortization period for the total identifiable intangible assets is approximately fourteen years. The weighted-average amortization period for customer relationships and trade name is fifteen years and the weighted-average amortization period for the developed technology is ten years.
The identifiable intangible assets and other long-lived assets acquired have been valued as Level 3 assets at fair market 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.
ICU MEDICAL, INC. AND SUBSIDIARIES
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.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2014
|
Stock compensation expense
|
|
$
|
15,242
|
|
|
$
|
12,827
|
|
|
$
|
9,592
|
|
Tax benefit from stock-based compensation cost
|
|
$
|
5,682
|
|
|
$
|
4,922
|
|
|
$
|
3,567
|
|
Indirect tax benefit
|
|
$
|
—
|
|
|
$
|
1,997
|
|
|
$
|
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.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock Options
To date, all options granted under the 2014 Plan, 2011 Plan, 2003 Plan and Directors' Plan have been non-statutory stock options. The majority of the time-based outstanding employee option grants vest 25% after one year from the grant date and the balance vests ratably on a monthly basis over 36 months. The 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Number of time-based options granted
|
|
13,405
|
|
|
22,816
|
|
|
492,935
|
|
Grant date fair value of options granted (in thousands)
|
|
$
|
413
|
|
|
$
|
590
|
|
|
$
|
7,311
|
|
Weighted average assumptions for stock option valuation:
|
|
|
|
|
|
|
Expected term (years)
|
|
5.5
|
|
|
5.6
|
|
|
4.7
|
|
Expected stock price volatility
|
|
31.8
|
%
|
|
25.9
|
%
|
|
26.7
|
%
|
Risk-free interest rate
|
|
0.7
|
%
|
|
1.7
|
%
|
|
1.4
|
%
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Weighted average grant price per option
|
|
$
|
101.32
|
|
|
$
|
93.30
|
|
|
$
|
58.92
|
|
Weighted average grant date fair value per option
|
|
$
|
30.78
|
|
|
$
|
25.86
|
|
|
$
|
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.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Number of performance options granted
|
|
|
|
244,825
|
|
|
699,625
|
|
Number of performance options earned
|
|
244,825
|
|
|
349,812
|
|
|
349,813
|
|
Grant date fair value of options granted (in thousands)
|
|
|
|
$
|
6,087
|
|
|
$
|
13,344
|
|
Weighted average assumptions for stock option valuation:
|
|
|
|
|
|
|
Expected term (years)
|
|
|
|
3.0
|
|
|
4.0
|
|
Expected stock price volatility
|
|
|
|
30.86
|
%
|
|
31.7
|
%
|
Risk-free interest rate
|
|
|
|
2.3
|
%
|
|
2.9
|
%
|
Expected dividend yield
|
|
|
|
—
|
%
|
|
—
|
%
|
Weighted average grant price per option
|
|
|
|
$
|
91.88
|
|
|
$
|
58.90
|
|
Weighted average grant date fair value per option
|
|
|
|
$
|
24.86
|
|
|
$
|
19.07
|
|
A summary of our stock option activity as of and for the year ended
December 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Exercise Price Per Share
|
|
Weighted Average Contractual Life (Years)
|
|
Aggregate Intrinsic Value (in thousands)
|
Outstanding at December 31, 2015
|
|
2,379,407
|
|
|
$
|
56.90
|
|
|
|
|
|
Granted
|
|
13,405
|
|
|
$
|
101.32
|
|
|
|
|
|
Exercised
|
|
(366,065
|
)
|
|
$
|
47.38
|
|
|
|
|
|
Forfeited or expired
|
|
(8,457
|
)
|
|
$
|
62.57
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
2,018,290
|
|
|
$
|
58.90
|
|
|
6.4
|
|
$
|
178,521
|
|
Exercisable at December 31, 2016
|
|
1,354,853
|
|
|
$
|
54.44
|
|
|
5.8
|
|
$
|
125,878
|
|
Vested and expected to vest, December 31, 2016
|
|
2,018,290
|
|
|
$
|
58.90
|
|
|
6.4
|
|
$
|
178,521
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2014
|
Intrinsic value of options exercised
|
|
$
|
25,065
|
|
|
$
|
28,071
|
|
|
$
|
18,802
|
|
Cash received from exercise of stock options
|
|
$
|
17,346
|
|
|
$
|
15,042
|
|
|
$
|
16,998
|
|
Tax benefit from stock option exercises
|
|
$
|
7,556
|
|
|
$
|
9,330
|
|
|
$
|
5,700
|
|
Stock Awards
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.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(In thousands except shares and per share amounts)
|
|
2016
|
|
2015
|
|
2014
|
PRSU
|
|
|
|
|
|
|
Shares granted
|
|
36,370
|
|
|
—
|
|
|
—
|
|
Shares earned
|
|
—
|
|
|
—
|
|
|
—
|
|
Grant date fair value per share
|
|
$
|
86.47
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Grant date fair value
|
|
$
|
3,145
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Intrinsic value vested
|
|
$
|
—
|
|
|
$
|
787
|
|
|
$
|
659
|
|
|
|
|
|
|
|
|
RSU
|
|
|
|
|
|
|
Shares granted
|
|
60,377
|
|
|
67,745
|
|
|
76,618
|
|
Grant date fair value per share
|
|
$
|
87.47
|
|
|
$
|
93.52
|
|
|
$
|
58.89
|
|
Grant date fair value
|
|
$
|
5,281
|
|
|
$
|
6,336
|
|
|
$
|
4,512
|
|
Intrinsic value vested
|
|
$
|
4,680
|
|
|
$
|
2,754
|
|
|
$
|
292
|
|
The table below provides a summary of our PRSU and RSU activity as of and for the year ended
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Units
|
|
Grant Date Fair Value Per Share
|
|
Weighted Average Contractual Life (Years)
|
|
Aggregate Intrinsic Value
|
Non-vested at December 31, 2015
|
|
113,649
|
|
|
$
|
78.84
|
|
|
|
|
|
Granted
|
|
96,747
|
|
|
$
|
87.09
|
|
|
|
|
|
Vested
|
|
(49,386
|
)
|
|
$
|
75.71
|
|
|
|
|
|
Forfeited
|
|
(1,571
|
)
|
|
$
|
92.53
|
|
|
|
|
|
Non-vested and expected to vest at December 31, 2016
|
|
159,439
|
|
|
$
|
84.68
|
|
|
1.1
|
|
$
|
23,493
|
|
ESPP
We have an ESPP under which U.S. employees may purchase up to $25,000 annually of common stock at 85% of its fair market value at the beginning or the end of a six-month offering period, whichever is lower. There are
750,000
shares of common stock reserved for issuance under the ESPP, which is subject to an annual increase of the least of
300,000
shares, two percent of the shares outstanding or such a number as determined by the Board. To date, there have been no increases. As of
December 31, 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.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
ESPP shares purchased by employees
|
|
31,227
|
|
|
34,299
|
|
|
47,466
|
|
Intrinsic value of ESPP purchases (in thousands)
|
|
$
|
955
|
|
|
$
|
1,382
|
|
|
$
|
476
|
|
Weighted average assumptions for ESPP valuation:
|
|
|
|
|
|
|
Expected term (in years)
|
|
0.5
|
|
|
0.5
|
|
|
0.5
|
|
Expected stock price volatility
|
|
32.5
|
%
|
|
27.0
|
%
|
|
20.8
|
%
|
Risk-free interest rate
|
|
0.3
|
%
|
|
0.6
|
%
|
|
1.1
|
%
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Note 8: Fair Value Measurement
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at December 31, 2015 using
|
|
Total carrying
value
|
|
Quoted prices
in active
markets for
identical
assets (level 1)
|
|
Significant
other
observable
inputs (level 2)
|
|
Significant
unobservable
inputs (level 3)
|
Short-term available for sale securities
|
$
|
41,233
|
|
|
$
|
8,785
|
|
|
$
|
32,448
|
|
|
$
|
—
|
|
Total available for sale securities
|
$
|
41,233
|
|
|
$
|
8,785
|
|
|
$
|
32,448
|
|
|
$
|
—
|
|
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).
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):
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
Federal and municipal tax-exempt debt securities
|
|
|
$
|
4,951
|
|
Corporate bonds
|
|
|
25,400
|
|
U.S. Treasury securities
|
|
|
7,537
|
|
Commercial paper
|
|
|
2,097
|
|
Certificates of deposit
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Salaries and benefits
|
|
$
|
5,702
|
|
|
$
|
6,875
|
|
Incentive compensation
|
|
7,912
|
|
|
8,302
|
|
Legal accrual
|
|
4,177
|
|
|
394
|
|
Value Added Tax accrual
|
|
1,472
|
|
|
993
|
|
Restructuring accrual
|
|
423
|
|
|
6,539
|
|
Acquisition-related accrual
|
|
2,750
|
|
|
1,604
|
|
Outside commissions
|
|
1,141
|
|
|
1,023
|
|
Other
|
|
2,319
|
|
|
3,218
|
|
|
|
$
|
25,896
|
|
|
$
|
28,948
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
United States
|
|
$
|
80,714
|
|
|
$
|
74,288
|
|
|
$
|
33,508
|
|
Foreign
|
|
4,450
|
|
|
(4,589
|
)
|
|
6,284
|
|
|
|
$
|
85,164
|
|
|
$
|
69,699
|
|
|
$
|
39,792
|
|
The provision (benefit) for income taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
21,123
|
|
|
$
|
18,601
|
|
|
$
|
13,860
|
|
State
|
|
2,347
|
|
|
745
|
|
|
(1,305
|
)
|
Foreign
|
|
1,118
|
|
|
1,426
|
|
|
2,100
|
|
|
|
24,588
|
|
|
20,772
|
|
|
14,655
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(2,045
|
)
|
|
$
|
4,524
|
|
|
$
|
(2,325
|
)
|
State
|
|
(767
|
)
|
|
(960
|
)
|
|
988
|
|
Foreign
|
|
304
|
|
|
378
|
|
|
139
|
|
|
|
(2,508
|
)
|
|
3,942
|
|
|
(1,198
|
)
|
|
|
$
|
22,080
|
|
|
$
|
24,714
|
|
|
$
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
Federal tax at the expected statutory rate
|
|
$
|
29,807
|
|
|
35.0
|
%
|
|
$
|
24,395
|
|
|
35.0
|
%
|
|
$
|
13,927
|
|
|
35.0
|
%
|
State income tax, net of federal effect
|
|
1,795
|
|
|
2.1
|
%
|
|
2,661
|
|
|
3.9
|
%
|
|
981
|
|
|
2.5
|
%
|
Tax credits
|
|
(1,014
|
)
|
|
(1.2
|
)%
|
|
(5,861
|
)
|
|
(8.4
|
)%
|
|
(1,591
|
)
|
|
(4.0
|
)%
|
Domestic production activities/other
|
|
(653
|
)
|
|
(0.8
|
)%
|
|
107
|
|
|
0.1
|
%
|
|
101
|
|
|
0.2
|
%
|
Foreign income tax
|
|
(135
|
)
|
|
(0.1
|
)%
|
|
3,412
|
|
|
4.9
|
%
|
|
39
|
|
|
0.1
|
%
|
Stock compensation - ASU 2016-09
|
|
(7,720
|
)
|
|
(9.1
|
)%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
|
$
|
22,080
|
|
|
25.9
|
%
|
|
$
|
24,714
|
|
|
35.5
|
%
|
|
$
|
13,457
|
|
|
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):
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Allowance for doubtful accounts
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4
|
|
Inventory reserves
|
|
(162
|
)
|
|
284
|
|
|
(488
|
)
|
Accruals
|
|
(2,599
|
)
|
|
(2,977
|
)
|
|
(1,326
|
)
|
State income taxes
|
|
61
|
|
|
502
|
|
|
(4
|
)
|
Acquired future tax deductions
|
|
1,520
|
|
|
3,139
|
|
|
96
|
|
Depreciation and amortization
|
|
(2,544
|
)
|
|
1,080
|
|
|
(780
|
)
|
Net operating loss
|
|
(2,256
|
)
|
|
195
|
|
|
62
|
|
Tax credits
|
|
(873
|
)
|
|
(635
|
)
|
|
1,238
|
|
Valuation allowance
|
|
4,345
|
|
|
2,354
|
|
|
—
|
|
|
|
$
|
(2,508
|
)
|
|
$
|
3,942
|
|
|
$
|
(1,198
|
)
|
The components of our deferred income tax assets (liabilities) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Deferred tax asset:
|
|
|
|
|
|
|
State income taxes
|
|
$
|
(1,708
|
)
|
|
$
|
(1,647
|
)
|
Foreign
|
|
1,223
|
|
|
3,881
|
|
Accruals/other
|
|
857
|
|
|
1,432
|
|
Depreciation and amortization
|
|
(10,027
|
)
|
|
(11,735
|
)
|
Acquired future tax deductions
|
|
6,473
|
|
|
5,778
|
|
Stock-based compensation
|
|
11,089
|
|
|
8,864
|
|
Foreign currency translation adjustments
|
|
5,175
|
|
|
5,360
|
|
Tax credits state
|
|
6,764
|
|
|
5,887
|
|
Inventory reserves
|
|
1,938
|
|
|
1,633
|
|
Allowance for doubtful accounts
|
|
151
|
|
|
—
|
|
Valuation allowance
|
|
—
|
|
|
(2,354
|
)
|
|
|
$
|
21,935
|
|
|
17,099
|
|
Deferred tax liability:
|
|
|
|
|
|
|
Foreign
|
|
$
|
1,370
|
|
|
$
|
1,372
|
|
|
|
$
|
1,370
|
|
|
$
|
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.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Beginning balance
|
|
$
|
1,772
|
|
|
$
|
4,115
|
|
|
$
|
5,544
|
|
Increases to prior year tax positions
|
|
77
|
|
|
25
|
|
|
217
|
|
Increases to current year tax positions
|
|
345
|
|
|
345
|
|
|
661
|
|
Decreases to prior year tax positions
|
|
(46
|
)
|
|
(2,399
|
)
|
|
—
|
|
Decrease related to settlements
|
|
—
|
|
|
(314
|
)
|
|
(2,113
|
)
|
Decrease related to lapse of statute of limitations
|
|
(148
|
)
|
|
—
|
|
|
(194
|
)
|
Ending balance
|
|
$
|
2,000
|
|
|
$
|
1,772
|
|
|
$
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Infusion therapy
|
|
$
|
272.6
|
|
|
$
|
244.7
|
|
|
$
|
216.3
|
|
Critical care
|
|
53.6
|
|
|
54.3
|
|
|
55.0
|
|
Oncology
|
|
52.3
|
|
|
41.5
|
|
|
36.7
|
|
Other
|
|
0.9
|
|
|
1.2
|
|
|
1.3
|
|
|
|
$
|
379.4
|
|
|
$
|
341.7
|
|
|
$
|
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.
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):
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2016
|
|
2015
|
Mexico
|
|
$
|
57,971
|
|
|
53,462
|
|
Slovakia
(1)
|
|
—
|
|
|
5,480
|
|
Italy
|
|
4,320
|
|
|
4,418
|
|
Germany
|
|
686
|
|
|
671
|
|
Netherlands
|
|
278
|
|
|
49
|
|
Australia
|
|
41
|
|
|
35
|
|
France
|
|
2
|
|
|
—
|
|
Total foreign
|
|
$
|
63,298
|
|
|
$
|
64,115
|
|
United States
|
|
180,657
|
|
|
158,933
|
|
Worldwide total
|
|
$
|
243,955
|
|
|
$
|
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
|
|
$
|
554
|
|
2018
|
|
337
|
|
2019
|
|
333
|
|
2020
|
|
338
|
|
2021
|
|
175
|
|
Total
|
|
$
|
1,737
|
|
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.
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 17: Quarterly Financial Data - Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Mar. 31
(1)
|
|
Jun. 30
|
|
Sept. 30
|
|
Dec. 31
|
|
|
(in thousands except per share data)
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
89,855
|
|
|
$
|
96,721
|
|
|
$
|
97,108
|
|
|
$
|
95,688
|
|
Gross profit
|
|
$
|
49,233
|
|
|
$
|
50,132
|
|
|
$
|
51,273
|
|
|
$
|
50,760
|
|
Net income
|
|
$
|
18,160
|
|
|
$
|
16,606
|
|
|
$
|
18,806
|
|
|
$
|
9,512
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.13
|
|
|
$
|
1.03
|
|
|
$
|
1.16
|
|
|
$
|
0.58
|
|
Diluted
|
|
$
|
1.08
|
|
|
$
|
0.98
|
|
|
$
|
1.09
|
|
|
$
|
0.54
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
81,484
|
|
|
$
|
83,781
|
|
|
$
|
86,016
|
|
|
$
|
90,387
|
|
Gross profit
|
|
$
|
42,514
|
|
|
$
|
43,761
|
|
|
$
|
46,265
|
|
|
$
|
48,257
|
|
Net income
|
|
$
|
9,686
|
|
|
$
|
13,570
|
|
|
$
|
16,266
|
|
|
$
|
5,463
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.62
|
|
|
$
|
0.86
|
|
|
$
|
1.02
|
|
|
$
|
0.34
|
|
Diluted
|
|
$
|
0.60
|
|
|
$
|
0.83
|
|
|
$
|
0.98
|
|
|
$
|
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
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Planned Restructuring
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.