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):



	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):



	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

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⁽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):



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.

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

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

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⁽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.

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 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.