Note 1: General and Summary of Significant Accounting Policies

a. Description of Business/Basis of Presentation

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, oncology and critical care 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, Slovakia and Mexico. 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 balances and transactions have been eliminated.

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

Certain prior period amounts have been reclassified to conform to the current period presentation. Beginning in 2012, our Canada sales, previously classified as domestic sales, are classified as international sales.

b. Cash and Cash Equivalents

Cash equivalents are investments with an original maturity of three months or less.

c. 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.

d. 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:



	2012		2011
Raw material	$	20,808	$	25,227
Work in process	3,013		2,901
Finished goods	12,512		12,295
Total	$	36,333	$	40,423

e. Property and Equipment

Property and equipment consist of the following at December 31:



	2012			2011
Machinery and equipment	$	78,332		$	73,390
Land, building and building improvements	61,521			60,334
Molds	27,704			24,133
Computer equipment and software	19,611			17,518
Furniture and fixtures	3,339			2,298
Construction in progress	8,266			5,277
Total property and equipment, cost	198,773			182,950
Accumulated depreciation	(112,836		)	(99,902		)
Net property and equipment	$	85,937		$	83,048

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 $16.4 million, $15.6 million and $14.6 million in the years ended December 31, 2012, 2011 and 2010, respectively.

The cost of property and equipment are presented net of government incentive reimbursements we received from the Slovakian government for building a manufacturing plant in their country. Government incentives recorded in property and equipment were $3.5 million at December 31, 2012 and December 31, 2011.

f. 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 goodwill additions or impairment charges in the years ended December 31, 2012 and 2011.

g. Intangible Assets

Intangible assets, carried at cost less accumulated amortization and amortized on a straight-lined basis, were as follows:



	Weighted Average	December 31, 2012
	Amortization Life in Years	Cost		Accumulated Amortization		Net
Patents	9	$	10,287	$	5,350	$	4,937
MCDA contract *	10	8,571		6,571		2,000
Customer contracts	9	5,319		2,317		3,002
Trademarks	4	425		412		13
Total		$	24,602	$	14,650	$	9,952



	Weighted Average	December 31, 2011
	Amortization Life in Years	Cost		Accumulated Amortization		Net
Patents	9	$	9,142	$	4,335	$	4,807
MCDA contract *	10	8,571		5,714		2,857
Customer contracts	9	5,319		1,684		3,635
Trademarks	4	425		305		120
Total		$	23,457	$	12,038	$	11,419

*MCDA contract: Manufacturing, Commercialization and Development Agreement with Hospira, Inc. (“Hospira”), dated May 1, 2005 (the "MCDA”).

Amortization expense in 2012, 2011 and 2010 was $2.6 million, $2.7 million and $2.8 million, respectively. Estimated annual amortization for each of the next five years is approximately $2.5 million for 2013, $2.3 million for 2014, $1.6 million for 2015, $1.0 million for 2016 and $0.9 million for 2017.

h. 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.

i. 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 and 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.

j. 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. The direct tax benefits of share based compensation are recorded through additional-paid-in capital.

k. Foreign Currency

We have operations in Europe where the functional currency is the Euro. 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 less than $0.1 million in 2012, 2011 and 2010.

l. Revenue Recognition

All of our product sales are FOB 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.

m. Shipping Costs

Costs to ship finished goods to our customers are included in cost of goods sold on the consolidated statements of income.

n. Advertising Expenses

Advertising expenses are expensed as incurred and were $0.2 million in 2012, $0.1 million in 2011 and $0.1 million in 2010.

o. 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 for employees. Our contributions to the plan were approximately $1.3 million in 2012, $1.2 million in 2011 and $1.1 million in 2010.

p. Research and Development

Research and development costs are expensed as incurred.

q. 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 because their exercise price exceeded the average market price of the common stock for the period approximated 7,000 shares in 2012, 217,000 shares in 2011 and 524,000 shares in 2010.

The following table presents the calculation of net earnings per common share (“EPS”) — basic and diluted.



	Year ended December 31, (in thousands, except per share data)
	2012		2011		2010
Net income	$	41,281	$	44,669	$	29,923
Weighted average number of common shares outstanding (basic)	14,223		13,835		13,611
Dilutive securities	502		326		244
Weighted average common and common equivalent shares outstanding (diluted)	14,725		14,161		13,855
EPS - basic	$	2.90	$	3.23	$	2.20
EPS - diluted	$	2.80	$	3.15	$	2.16

r. Accounting Estimates

Preparing financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts 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.

s. New Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update number 2011-05, Comprehensive Income (Topic 220) — Presentation of Comprehensive Income ("ASU 2011-05"), to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05 ("ASU 2011-12"), which defers the effective date of those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. We adopted these ASUs using two consecutive statements beginning in 2012 and have applied prospectively for all periods presented.