ICU MEDICAL INC/DE Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

The following information should be read in conjunction with the condensed
consolidated financial statements and accompanying notes in this Form 10-Q, as
well as the audited consolidated financial statements and related notes for the
fiscal year ended December 31, 2021 included in our Annual Report on Form 10-K.

When used in this report, the terms “we,” “us,” and “our” refer to ICU
Medical, Inc. (“ICU”) and its subsidiaries included in our condensed
consolidated financial statements unless context requires otherwise.

Business Overview

Recent Developments

On January 6, 2022, we completed the acquisition of Smiths Medical 2020 Limited
(“Smiths Medical”), the holding company of Smiths Group plc’s global medical
device business. See “Acquisitions” below for additional detail regarding the
transaction. Smiths Medical is engaged in the development, manufacture and sale
of syringe and ambulatory infusion devices, vascular access, and vital care
products used in hospital, emergency, home and alternative care settings. Our
acquisition of Smiths Medical was strategic and increases our focus and scale in
infusion therapy globally which we believe will enhance our competitive position
as a leader within the industry.

The combination of ICU and Smiths Medical brings together two highly
complementary product portfolios to create a comprehensive range of offerings
utilized in the infusion therapy care continuum. Our existing product portfolio
includes IV solutions, IV smart pumps with pain management and safety software
technology, dedicated and non-dedicated IV sets and needlefree connectors
designed to help meet clinical, safety and workflow goals. In addition, we
manufacture automated pharmacy IV compounding systems with workflow technology,
closed systems transfer devices for preparing and administering hazardous IV
drugs, and cardiac monitoring systems for critically ill patients. The
acquisition of Smiths Medical broadened our product portfolio to include syringe
and ambulatory pumps, peripheral IV catheters, fluid warming and respiratory
devices, silicone and PVC tracheotomy tubes, among other products.

Following the Smiths Medical acquisition, we are initially presenting the
following product lines in addition to our legacy product lines: Infusion
Systems-Smiths Medical, Vascular Access-Smiths Medical and Vital Care-Smiths
Medical. See “Products” in the remainder of this item for a list of our primary
products included in each line.

Our primary customers are acute care hospitals, wholesalers, ambulatory clinics
and alternate site facilities, such as clinics, home health care providers and
long-term care facilities. With the addition of Smiths Medical we sell our
products in more than 90 countries throughout the world.

The following information is additional to and not a substitute for the Business
section under Part I, Item 1 of our Annual Report on Form 10-K for the year
ended December 31, 2021 and should be read in conjunction with that filing:

Manufacturing Changes

With the acquisition of the Smiths Medical business, we now operate additional
manufacturing facilities including five facilities in the United States
(“U.S.”), two facilities in Mexico and two in the UK, and one facility in each
of the Czech Republic, Italy and China.

Service Centers

With the acquisition of the Smiths Medical business, we now operate additional
service and repair facilities in the U.S., Canada, two locations in Europe and
four locations in Asia.

Distribution Changes

Following the Smiths Medical acquisition, we operate two additional main
distribution centers, one in the U.S. supporting the Americas and International
and one in the Netherlands mainly supporting EMEA. We have eleven additional
smaller distribution centers globally three of which are in the U.S., two in
each of EMEA and China, and one in each of Canada, the U.K., Japan and India.

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Competition Changes

The Infusion Systems product line of Smiths Medical competes with many of the
same competitors as those referenced in Part I, Item 1. “Business” of our 2021
Annual Report on Form 10-K as well as additional competitors such as Moog
Medical and Fresenius.

The Vascular Access product line of Smiths Medical competes with many of the
same competitors as those referenced in Part I, Item 1. “Business” of our 2021
Annual Report on Form 10-K as well as additional competitors such Angio
Dynamics, Greiner Bio-One, and Teleflex Incorporated. Our ability to remain
competitive in this market will depend on our ability to focus on demonstrable
patient outcomes by differentiating our products by improving device
functionality and by providing successful customer training programs on the use
and maintenance of our products.

The Vital Care product line of Smiths Medical competes with numerous competitors
due to its wide range of business. Those include multinational competitors such
as Medtronic and Philips Healthcare as well as smaller more focused competitors
such as Belmont and Intersurgical plc. Our ability to compete in this market
will depend on our ability to continue to make technological advances to our
products, thereby increasing customer efficiency and by providing product
support that improves clinical decision-making that ultimately enhances patient
safety.

Products

As of September 30, 2022, our primary product offerings by product line are
listed below. We have presented our financial results in accordance with these
product lines:

Infusion Consumables

Infusion therapy sets, used in hospitals and ambulatory clinics, consist of a
tube running from a bottle or plastic bag containing a solution to a catheter
inserted in a patient’s vein, that may or may not be used with an IV pump. Our
primary Infusion Consumable products are:

•Clave™ needlefree products, including the MicroClave, MicroClave Clear, and
NanoClave™ brand of connectors, accessories, extension and administration sets
used for the administration of IV fluids and medications and the Neutron
catheter patency device, used to help maintain patency of central venous
catheters;

•SwabCap and SwabTip disinfecting caps, used to protect and disinfect any
needlefree connector, including competitive brands of connectors, and male
luers;

•ClearGuard HD antimicrobial barrier caps for hemodialysis catheters; and

•TegoTM hemodialysis connector used to cap and protect hemodialysis central
venous catheter hubs.

Closed System Transfer Devices (“CSTD”) and hazardous drug compounding systems
are used to prepare and deliver hazardous IV medications such as those used in
chemotherapy, which, if released, can have harmful effects on the healthcare
worker and environment. Our products are:

•ChemoLockTM CSTD, which utilizes a proprietary needlefree connection method, is
used for the preparation and administration of hazardous drugs. ChemoLock is
used to limit the escape of hazardous drug or vapor concentrations, block the
transfer of environmental contaminants into the system, and eliminates the risk
of needlestick injury;

•ChemoClaveTM, an ISO Connection standard and universally compatible CSTD used
for the preparation and administration of hazardous drugs. ChemoClave utilizes
standard ISO luer locking connections, making it compatible with all brands of
needlefree connectors and pump delivery systems. ChemoClave also is used to
limit the escape of hazardous drug or vapor concentrations, block the transfer
of environmental contaminants into the system, and eliminate the risk of
needlestick injury; and

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•DianaTM hazardous drug compounding system, an automated sterile compounding
system that incorporates ChemoClave and ChemoLock CSTD consumables and IV
workflow technology for the accurate, safe, and efficient preparation of
hazardous drugs. It is a user-controlled automated system that provides
repeatable accuracy of drug mixes and minimizes clinician exposure to hazardous
drugs while helping to maintain the sterility of the drugs being mixed.

The preparation of hazardous drugs typically takes place in a pharmacy where
drugs are removed from vials and prepared for delivery to a patient. Those
prepared drugs are then transferred to a nursing unit where the chemotherapy is
administered via an infusion pump set to a patient. Components of the ChemoClave
and ChemoLock product lines are used both in pharmacies and on the nursing
floors for the preparation and administration of hazardous drugs.

Infusion Systems

We offer a wide range of infusion pumps, dedicated IV sets, software and
professional services. Our primary Infusion System products are dedicated IV
sets and the following:

Infusion Pump Hardware:

•Plum 360™: The Plum 360™ infusion pump is an ICU Medical MedNet™ ready large
volume infusion pump with an extensive drug library and wireless capability.
Plum 360 was named the 2018, 2019 and 2020 Best in KLAS winner as top-performing
IV smart pump and was the first medical device to be awarded UL Cybersecurity
Assurance Program Certification. Also, in 2021 and 2022, the Plum 360 won the
award as the top-performing Smart Pump EMR-Integrated; and

•LifeCare PCA™: The LifeCare PCA infusion pump is an ICU Medical MedNet™ ready
patient-controlled analgesia pump (“PCA”), providing complete IV Electronic
Health Record (“IV-EHR”) interoperability since 2016.

IV Medication Safety Software:

•ICU Medical MedNet™: ICU Medical MedNet is an enterprise-class medication
management platform for any sized healthcare system that can help reduce
medication errors, improve quality of care, streamline workflows and maximize
revenue capture. ICU Medical MedNet connects our industry-leading smart pumps to
a hospital’s EHR, asset tracking systems, and alarm notification platforms with
the largest array of integration partners.

Professional Services:

•In addition to the products above, our teams of clinical, information
technology, and professional services experts work with customers to develop and
deliver safe and efficient infusion systems, providing customized and
personalized configuration, implementation, and data analytics services to
complement our infusion hardware and software.

IV Solutions

We provide a broad portfolio of IV solutions to meet our customers’ clinical
needs, providing a consistent supply of IV solutions, irrigation, and
nutritionals to help provide safe and effective patient care. Our primary IV
Solutions products are:

IV Therapy and Diluents:

•Including Sodium Chloride, Dextrose, Balanced Electrolyte Solutions, Lactated
Ringer’s, Ringer’s, Mannitol, Sodium Chloride/Dextrose and Sterile Water.

Irrigation:

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•Including Sodium Chloride Irrigation, Sterile Water Irrigation, Physiologic
Solutions, Ringer’s Irrigation, Acetic Acid Irrigation, Glycine Irrigation,
Sorbitol-Mannitol Irrigation, Flexible Containers and Pour Bottle Options.

Critical Care

Our Critical Care products help clinicians get accurate real-time access to
patients’ hemodynamic and cardiac status with an extensive portfolio of
monitoring systems and advanced sensors & catheters. Measurements provided by
our systems help clinicians determine how well the heart is pumping blood and
how efficiently oxygen from the blood is being used by the tissues. Our primary
Critical Care products are:

•Cogent™ 2-in-1 hemodynamic monitoring system;
•CardioFlo™ hemodynamic monitoring system;
•TDQ™ and OptiQ™ cardiac output monitoring catheters;
•TriOxTM venous oximetry catheters;
•Transpac™ blood pressure transducers; and
•SafeSet™ closed blood sampling and conservation system.

Infusion Systems-Smiths Medical

We offer a wide range of infusion pumps, disposables and safety software for use
in both hospital and home settings. These products participate in adjacent
categories to the legacy ICU Medical Infusion Systems product line. The primary
Infusion Systems-Smith Medical products are:

Ambulatory Infusion Hardware:

•CADD® ambulatory infusion pumps and disposables, including administration sets
and medication cassette reservoirs, support a variety of IV pain management
therapies across clinical care areas from hospital to outpatient treatment.

Syringe Infusion Hardware:

•MedfusionTM syringe infusion pumps are designed for the administration of
fluids and medication requiring precisely controlled infusion rates from a
variety of syringe sizes in acute care settings.

Infusion Software:

•PharmGuard® Medication Safety Software for MedfusionTM 4000 syringe and CADD™
Solis pumps allows for customized drug libraries to support the standardization
of protocols for medication administration throughout the facility.

Vascular Access-Smiths Medical

Our Vascular Access-Smiths Medical products allow clinicians to safely access
the patients’ bloodstream to deliver fluids and medication or to obtain blood
samples. Vascular Access products are often used in conjunction with Consumables
and Infusion Systems devices. Our primary Vascular Access products are:

•Jelco® safety and conventional peripheral IV catheters, sharps safety devices
for hypodermic injection, and venipuncture blood collection and peripheral IV
catheters designed to help prevent needlestick injury and to reduce the risks
associated with blood exposure and contamination while reducing patients’ risk
of infection;

•DELTEC® implantable ports and GRIPPER® non-coring needles for portal access;

•Portex® arterial blood sampling syringes, anesthesia trays and kits for pain
management;

•Powerwand® midline catheters; and

•MEDEX® LogiCal® Pressure Monitoring System and components.

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Vital Care-Smiths Medical

We offer a range of devices and systems to maintain patients’ airways and
maintain body temperature before, during and after surgery. Our primary Vital
Care products are:

•Level 1® temperature management systems used in perioperative and critical care
settings to help monitor and regulate patient temperature through rapid
infusion, routine blood and fluid warming, irrigation warming and convective
warming.

•Portex® acapella® bronchial hygiene products used to mobilize pulmonary
secretions to facilitate the opening of airways in patients with chronic
respiratory diseases such as chronic obstructive pulmonary disease, or COPD,
asthma and cystic fibrosis.

•Portex® Bivona® tracheostomy tubes in PVC and silicone construction that
provide a secure airway for both surgical and percutaneous procedures. Our
silicone tracheostomy tubes are customizable to accommodate unique patient
requirements.

In the U.S. a substantial amount of our products are sold to group purchasing
organization member hospitals. We believe that as healthcare providers continue
to either consolidate or join major buying organizations, the success of our
products will depend, in part, on our ability, either independently or through
strategic relationships, to secure long-term contracts with large healthcare
providers and major buying organizations. Although we believe that we are not
dependent on any single distributor, large healthcare provider or major buying
organization for distribution of our products, the loss of a strategic
relationship with any one of these organizations or a decline in the demand for
our 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 acquisition and
development; however, there is no assurance that we will be successful in
implementing our growth strategy. Product development or acquisition efforts may
not succeed, and even if we do develop or acquire additional products, there is
no assurance that we will achieve profitable sales of such products. Increased
expenditures for sales and marketing and product acquisition and development may
not yield desired results when expected, or at all. While we have taken steps to
control these risks, there are certain risks that may be outside of our control,
and there is no assurance that steps we have taken will succeed.

Seasonality/Quarterly Results

There are no significant seasonal aspects to our business. We can experience
fluctuations in net sales as a result of variations in the ordering patterns of
our largest customers, which may be driven more by the novel coronavirus and its
variants (“COVID-19”) pandemic surges and its impact on hospital admissions and
procedure volumes along with production scheduling and customer inventory
levels, and less by seasonality. Our expenses often do not fluctuate in the same
manner as net sales, which may cause fluctuations in operating income that are
disproportionate to fluctuations in our revenue.

Acquisition

On January 6, 2022, we acquired 100% of the equity interests in Smiths Medical
from Smiths Group International Holdings Limited (“Smiths”) for cash
consideration of $1.9 billion and the issuance of 2.5 million shares of our
common stock valued at $576.0 million. We funded the cash portion of the
consideration paid with a combination of proceeds from a Credit Agreement dated
January 6, 2022 (the “Credit Agreement”) and our cash and cash equivalents. The
fair value of the common shares issued to Smiths was determined based on the
opening market price of our common stock on the acquisition date. Smiths may be
entitled to a potential contingent earn-out payment of $100.0 million based on
our common stock achieving certain price targets on or prior to the third or
fourth anniversary of closing. See Note 3, Acquisitions in our accompanying
condensed consolidated financial statements for further details on the
acquisition. See “Liquidity and Capital Resources” in the remainder of this item
and Note 17 in our accompanying condensed consolidated financial statements for
additional information regarding the Credit Agreement.

COVID-19 Pandemic and other Macroeconomic and Global Geopolitical Events

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Our business operations have been, and we expect will continue to be, impacted
by the novel coronavirus and its variants (“COVID-19”) and by the continuing
conflict between Russia and Ukraine. These events have resulted in global
economic challenges, such as rising inflation, especially with respect to
freight costs driven by the higher fuel prices, global supply chain disruption,
and foreign currency exchange rate impact as a result of the strengthening of
the U.S. dollar. All of these factors have negatively impacted our gross profit
margin during 2022.

While we continually monitor the ongoing and evolving impacts of the pandemic,
macroeconomic conditions and geopolitical events on our operations the extent of
such impacts are based on factors that cannot be fully predicted at this time.
Accordingly, the impact on our overall financial performance remains uncertain
and cannot as yet be quantified. For a discussion of the risks and uncertainties
we face as a result of the COVID-19 pandemic and other market and external
factors, see Part I, Item 1A. “Risk Factors” of our 2021 Annual Report on Form
10-K.

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